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SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549

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# FORM 10-Q

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|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2003

OR

|_| TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(D) OF THESECURITIES EXCHANGE ACT OF 1934

For the transition period from
____________ to ____________

Commission File Number 0-16096

Borland Software Corporation(Exact Name of Registrant as Specified in Its Charter)

|                                |  |                    
|------------------------------- |  | -------------------
|Delaware                        |  | 94-2895440         
|(State or Other Jurisdiction of |  | (I.R.S. Employer   
|Incorporation or Organization)  |  | Identification No.)

100 ENTERPRISE WAYSCOTTS VALLEY, CALIFORNIA95066-3249(Address of
Principal Executive Offices) (Zip Code)

Registrants Telephone Number, Including Area Code: (831) 431-1000

(Former Name, Former Address and Former Fiscal Year, if Changed Since
Last Report)

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the
Exchange Act).  YES |X| NO |_|

The number of shares of the registrants common stock,
par value $0.1 per share, outstanding as of October 31, 2003, the most recent practicable date prior to the filing
of this report, was 80,823,002.

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INDEX

|        |                                                                                                                           |  | PAGE
|------- | ------------------------------------------------------------------------------------------------------------------------- |  | ----
|        |                                                                                                                           |  |     
|PART I  | FINANCIAL INFORMATION                                                                                                     |  |     
|        |                                                                                                                           |  |     
|Item 1. | Financial Statements (unaudited)                                                                                          |  | 1   
|        |                                                                                                                           |  |     
|        | Condensed Consolidated Balance Sheets at September 30, 2003 and December 31, 2002                                         |  | 1   
|        |                                                                                                                           |  |     
|        | Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2003 and 2002           |  | 2   
|        |                                                                                                                           |  |     
|        | Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2003 and 2002 |  | 3   
|        |                                                                                                                           |  |     
|        | Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2003 and 2002                     |  | 4   
|        |                                                                                                                           |  |     
|        | Notes to Condensed Consolidated Financial Statements                                                                      |  | 5   
|        |                                                                                                                           |  |     
|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations                                     |  | 14  
|        |                                                                                                                           |  |     
|Item 3. | Quantitative and Qualitative Disclosures About Market Risk                                                                |  | 33  
|        |                                                                                                                           |  |     
|Item 4. | Controls and Procedures                                                                                                   |  | 34  
|        |                                                                                                                           |  |     
|        |                                                                                                                           |  |     
|PART II | OTHER INFORMATION                                                                                                         |  |     
|        |                                                                                                                           |  |     
|Item 1. | Legal Proceedings                                                                                                         |  | 35  
|        |                                                                                                                           |  |     
|Item 6. | Exhibits and Reports on Form 8-K                                                                                          |  | 35  
|        |                                                                                                                           |  |     
|        | Signatures                                                                                                                |  | 38  

---

| | Table
of Contents | 
| | ----------------- | 

PART IFINANCIAL INFORMATION

| | Item
1. Financial Statements | 
| | ---------------------------- | 

BORLAND SOFTWARE CORPORATIONCONDENSED CONSOLIDATED BALANCE SHEETS(in
thousands, except par value and share amounts)

|                                                                                                                                 | September 30, 2003 |  | December 31, 2002 |         
|-------------------------------------------------------------------------------------------------------------------------------- | ------------------ |  | ----------------- | --------
|
|ASSETS                                                                                                                           |                    |  |                   |         
|Current assets:                                                                                                                  |                    | 
|Cash and cash equivalents                                                                                                        |                    |  | $                 | 201,797 
|Short-term investments                                                                                                           |                    |  |                   | 5,411   
|Accounts receivable, net of allowances of $15,343 and $17,538                                                                    |                    |  |                   | 49,672  
|Other current assets                                                                                                             |                    |  |                   | 16,349  
|                                                                                                                                 |                    |  |                   |         
|Total current assets                                                                                                             |                    |  |                   | 273,229 
|Property and equipment, net                                                                                                      |                    |  |                   | 10,708  
|Property held for sale                                                                                                           |                    |  |                   | 9,935   
|Goodwill                                                                                                                         |                    |  |                   | 185,916 
|Intangible assets                                                                                                                |                    |  |                   | 32,304  
|Other non-current assets                                                                                                         |                    |  |                   | 5,548   
|                                                                                                                                 |                    |  |                   |         
|Total assets                                                                                                                     |                    |  | $                 | 517,640 
|                                                                                                                                 |                    |  |                   |         
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                             |                    | 
|Current liabilities:                                                                                                             |                    | 
|Accounts payable                                                                                                                 |                    |  | $                 | 12,093  
|Accrued expenses                                                                                                                 |                    |  |                   | 54,213  
|Short-term restructuring                                                                                                         |                    |  |                   | 5,261   
|Income taxes payable                                                                                                             |                    |  |                   | 5,918   
|Deferred revenues                                                                                                                |                    |  |                   | 43,964  
|Other current liabilities                                                                                                        |                    |  |                   | 9,758   
|                                                                                                                                 |                    |  |                   |         
|Total current liabilities                                                                                                        |                    |  |                   | 131,207 
|Long-term restructuring                                                                                                          |                    |  |                   | 3,908   
|Other long-term liabilities                                                                                                      |                    |  |                   | 8,000   
|                                                                                                                                 |                    |  |                   |         
|                                                                                                                                 |                    |  |                   | 143,115 
|                                                                                                                                 |                    |  |                   |         
|Commitments and contingencies (Notes 10  and 12)                                                                                 |                    | 
|Minority interest                                                                                                                |                    |  |                   |        
|Stockholders equity:                                                                                                            |                    | 
|Common stock; $0.01 par value; 200,000,000 shares authorized; 81,043,286 and
           72,183,463 shares issued and outstanding |                    |  |                   | 810     
|Additional paid-in capital                                                                                                       |                    |  |                   | 618,390 
|Accumulated deficit                                                                                                              |                    |  |                   | (204,505
|Deferred compensation                                                                                                            |                    |  |                   | (371    
|Cumulative comprehensive income                                                                                                  |                    |  |                   | 8,620   
|                                                                                                                                 |                    |  |                   |         
|                                                                                                                                 |                    |  |                   | 422,944 
|Less common stock in treasury at cost, 7,011,706 and 5,700,600 shares                                                            |                    |  |                   | (48,419 
|                                                                                                                                 |                    |  |                   |         
|                                                                                                                                 |                    |  |                   | 374,525 
|                                                                                                                                 |                    |  |                   |         
|Total liabilities and stockholders equity                                                                                       |                    |  | $                 | 517,640 
|                                                                                                                                 |                    |  |                   |         

See Notes to the Condensed Consolidated Financial Statements.

1

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| | Table
of Contents | 
| | ----------------- | 

BORLAND SOFTWARE CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts, unaudited)

|                                                                                              | Three Months Ended September 30, |  | Nine Months Ended September 30,
|--------------------------------------------------------------------------------------------- | -------------------------------- |  | -------------------------------
|
|Licenses and other revenues                                                                   |                                  |  | $                              
|Service revenues                                                                              |                                  |  |                                
|                                                                                              |                                  |  |                                
|Net revenues                                                                                  |                                  |  |                                
|                                                                                              |                                  |  |                                
|Cost of licenses and other revenues                                                           |                                  |  |                                
|Cost of service revenues                                                                      |                                  |  |                                
|                                                                                              |                                  |  |                                
|Cost of revenues                                                                              |                                  |  |                                
|                                                                                              |                                  |  |                                
|Gross profit                                                                                  |                                  |  |                                
|                                                                                              |                                  |  |                                
|Research and development                                                                      |                                  |  |                                
|Selling, general and administrative                                                           |                                  |  |                                
|Restructuring, amortization of intangibles,    acquisition-related expenses and other charges |                                  |  |                                
|                                                                                              |                                  |  |                                
|Total operating expenses                                                                      |                                  |  |                                
|                                                                                              |                                  |  |                                
|Operating income (loss)                                                                       |                                  |  |                                
|Interest income, net and other                                                                |                                  |  |                                
|                                                                                              |                                  |  |                                
|Income (loss) before income taxes                                                             |                                  |  |                                
|Income tax provision                                                                          |                                  |  |                                
|                                                                                              |                                  |  |                                
|Net income (loss)                                                                             |                                  |  | $                              
|                                                                                              |                                  |  |                                
|Net income (loss) per share:                                                                  |                                  | 
|Income (loss) per sharebasic                                                                 |                                  |  | $                              
|                                                                                              |                                  |  |                                
|Income (loss) per sharediluted                                                               |                                  |  | $                              
|                                                                                              |                                  |  |                                
|Shares used in computing basic income (loss) per share                                        |                                  |  |                                
|                                                                                              |                                  |  |                                
|Shares used in computing diluted income (loss) per share                                      |                                  |  |                                
|                                                                                              |                                  |  |                                

See Notes to the Condensed Consolidated Financial Statements.

2

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| | Table
of Contents | 
| | ----------------- | 

BORLAND SOFTWARE CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands, unaudited)

|                                                               | Three Months Ended September 30, |  | Nine Months Ended September 30,
|-------------------------------------------------------------- | -------------------------------- |  | -------------------------------
|
|Net income (loss)                                              |                                  |  | $                              
|Other comprehensive income (loss):                             |                                  | 
|Foreign currency translation adjustments                       |                                  |  |                                
|Fair market value adjustment for available-for-sale securities |                                  |  |                                
|                                                               |                                  |  |                                
|Comprehensive income (loss)                                    |                                  |  | $                              
|                                                               |                                  |  |                                

See Notes to the Condensed Consolidated Financial Statements.

3

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| | Table
of Contents | 
| | ----------------- | 

BORLAND SOFTWARE CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 
(in thousands, unaudited)

|                                                                                                      | Nine Months Ended September 30, | 
|----------------------------------------------------------------------------------------------------- | ------------------------------- | 
|
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                                 |                                 | 
|Net income (loss)                                                                                     |                                 | 
|Adjustments to reconcile net income (loss) to net cash (used in)    provided by operating activities: |                                 | 
|Depreciation and amortization                                                                         |                                 | 
|Amortization of deferred stock compensation                                                           |                                 | 
|Write-off of loan receivable                                                                          |                                 | 
|Loss on sale of fixed asset                                                                           |                                 | 
|Changes in assets and liabilities, net of acquisitions:                                               |                                 | 
|Accounts receivable                                                                                   |                                 | 
|Other assets                                                                                          |                                 | 
|Accounts payable and accrued expenses                                                                 |                                 | 
|Income taxes payable                                                                                  |                                 | 
|Short-term restructuring                                                                              |                                 | 
|Deferred revenues                                                                                     |                                 | 
|Other                                                                                                 |                                 | 
|                                                                                                      |                                 | 
|Cash (used in) provided by operating activities                                                       |                                 | 
|                                                                                                      |                                 | 
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                                 |                                 | 
|Purchase of property and equipment                                                                    |                                 | 
|Acquisition of VMGear, net of cash acquired                                                           |                                 | 
|Acquisition of Starbase, net of cash acquired                                                         |                                 | 
|Acquisition of TogetherSoft, net of cash acquired                                                     |                                 | 
|Purchases of short-term investments                                                                   |                                 | 
|Sales and maturities of short-term investments                                                        |                                 | 
|                                                                                                      |                                 | 
|Cash used in investing activities                                                                     |                                 | 
|                                                                                                      |                                 | 
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                                 |                                 | 
|Proceeds from issuance of common stock, net                                                           |                                 | 
|Repurchases of common stock                                                                           |                                 | 
|                                                                                                      |                                 | 
|Cash provided by (used in) financing activities                                                       |                                 | 
|                                                                                                      |                                 | 
|Effect of exchange rate changes on cash                                                               |                                 | 
|                                                                                                      |                                 | 
|Net change in cash and cash equivalents                                                               |                                 | 
|Cash and cash equivalents at beginning of period                                                      |                                 | 
|                                                                                                      |                                 | 
|Cash and cash equivalents at end of period                                                            |                                 | 
|                                                                                                      |                                 | 

See Notes to the Condensed Consolidated Financial Statements.

4

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| | Table
of Contents | 
| | ----------------- | 

| | BORLAND
SOFTWARE CORPORATION Notes to Condensed
Consolidated Financial Statements (unaudited) | 
| | --------------------------------------------------------------------------------------------- | 

| | NOTE
1BASIS OF PRESENTATION | 
| | ---------------------------- | 

| | The
accompanying Borland Software Corporation, or Borland, condensed consolidated financial
statements at September 30, 2003 and December 31, 2002 and for the three and nine months
ended September 30, 2003 and 2002 are unaudited and have been prepared in accordance with
generally accepted accounting principles for interim financial information and Rule 10-01
of Regulation S-X. Accordingly, they do not include all financial information and
disclosures required by generally accepted accounting principles for complete financial
statements and certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles have been
condensed or omitted. The unaudited interim condensed consolidated financial statements
have been prepared on the same basis as the annual consolidated financial statements and,
in the opinion of management, reflect all adjustments, which include only normal recurring
adjustments, necessary to present fairly Borlands financial position at September
30, 2003 and December 31, 2002, and its results of operations and cash flows for the three
and nine months ended September 30, 2003 and 2002. Certain amounts in the September 30,
2002 and December 31, 2002 information have been reclassified in order to be consistent
with current financial statement presentation. The preparation of condensed consolidated
financial statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses and the related disclosure of contingent assets and
liabilities. Actual results could differ from those estimates. The results of operations
for interim periods are not necessarily indicative of the results to be expected for any
subsequent quarter or for the full year. The condensed consolidated financial statements
and notes should be read in conjunction with our audited financial statements included in
our Annual Report on Form 10-K for the fiscal year ended December 31, 2002 as filed with
the Securities and Exchange Commission, or the SEC, on March 28, 2003. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

| | NOTE
2STOCK BASED COMPENSATION | 
| | ------------------------------- | 

| | Stock-Based
Compensation Plans | 
| | ------------------------------ | 

| | We
account for stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board, or APB, Opinion No. 25, Accounting for Stock Issued to
Employees, or APB 25, and related interpretations. Under APB 25, compensation
expense is measured as the excess, if any, of the closing market price of our stock at the
date of grant over the exercise price of the option granted. We recognize compensation
cost for stock options, if any, ratably over the vesting period. Generally, we grant
options with an exercise price equal to the closing market price of our stock on the grant
date. We provide additional pro forma disclosures as required under Statement of Financial
Accounting Standards, or SFAS, No. 123, Accounting for Stock-Based
Compensation, or SFAS 123, as amended by SFAS No. 148, Accounting for
Stock-Based Compensation-Transition and Disclosure an amendment of FASB Statement No.
123, or SFAS 148. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

5

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| | Table
of Contents | 
| | ----------------- | 

| | Pro
Forma Net Loss and Net Loss Per Share | 
| | ----------------------------------------- | 

| | Compensation
expense (included in pro forma net income (loss) and net income (loss) per share amounts)
is recognized for the fair value of the awards granted under our stock option and stock
purchase plans using the Black-Scholes option pricing model. The Black-Scholes model, as
well as other currently accepted option valuation models, was developed to estimate the
fair value of freely tradable, fully transferable options without vesting restrictions,
which significantly differ from our stock option and stock purchase plan awards. These
models also require highly subjective assumptions including future stock price volatility
and expected time until exercise, which greatly affect the calculated fair value on the
grant date. The fair value of each stock option award is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted average
assumptions: | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

|                                               | Three Months Ended September 30, |   | Nine Months Ended September 30,
|---------------------------------------------- | -------------------------------- | - | -------------------------------
|
|Expected life (in years)  options             | 4.50                             |   |                                
|Expected life (in years)  stock purchase plan | 1.00                             |   |                                
|Expected volatility                            | 62                               | % |                                
|Risk-free interest rate                        | 3.14                             | % |                                
|Expected dividend rate                         | 0.00                             | % |                                

| | The
weighted average fair value of the stock options granted under our employee stock option
plans and the stock awarded under our employee stock purchase plan (as defined by SFAS
123) was $5.76 and $5.19 for the three months ended September 30, 2003 and 2002,
respectively, and $7.47 and $7.01 for the nine months ended September 30, 2003 and 2002,
respectively. | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Had
we recorded compensation expenses based on the estimated fair value at grant date for
awards granted under our stock option and stock purchase plans (as defined by SFAS 123),
our pro forma net loss and net loss per share for the three and nine months ended
September 30, 2003 and 2002 would have been as follows (amounts in thousands, except per
share data): | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

|                                                | Three Months Ended September 30, |  | Nine Months EndedSeptember 30,
|----------------------------------------------- | -------------------------------- |  | ------------------------------
|
|Net income (loss):                              |                                  |  |                               
|As reported                                     |                                  |  | $                             
|Stock compensation adjustment - intrinsic value |                                  |  |                               
|Stock compensation expense - fair value         |                                  |  |                               
|                                                |                                  |  |                               
|Pro Forma                                       |                                  |  | $                             
|                                                |                                  |  |                               
|                                                |                                  | 
|Net income (loss) per share:                    |                                  | 
|As reported -  basic                            |                                  |  | $                             
|As reported -  diluted                          |                                  |  | $                             
|Pro Forma -  basic                              |                                  |  | $                             
|Pro Forma -  diluted                            |                                  |  | $                             

| | The
pro forma amounts include compensation expenses related to stock option grants and stock
purchase rights for the three and nine months ended September 30, 2003 and 2002. In future
periods, the pro forma compensation expense may increase as a result of the fair value of
stock options and stock purchase rights granted in those future periods. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | We
account for stock options issued to non-employees, excluding non-employee directors, under
SFAS 123 and Emerging Issues Task Force, or EITF, Issue No. 96-18, Accounting for
Equity Instruments with Variable Terms that are Issued for Consideration Other Than
Employee Services under SFAS 123, or EITF 96-18. We record the expense of such
services based upon the estimated fair value of the equity instrument using the
Black-Scholes option pricing model. During the three and nine months ended September 30,
2003 and 2002, there was no expense recorded for options issued to non-employees. | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

6

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| | Table
of Contents | 
| | ----------------- | 

| | NOTE
3NET INCOME (LOSS) PER SHARE | 
| | ---------------------------------- | 

| | We
compute net income (loss) per share in accordance with SFAS No. 128, Earnings per
Share, or SFAS 128. Under the provisions of SFAS 128, basic net income (loss) per
share is computed by dividing the net income (loss) by the weighted average number of
common shares outstanding during the period. Diluted net income (loss) per share is
computed by dividing the net income (loss) for the period by the weighted average number
of common and potentially diluted shares outstanding during the period. Potentially
dilutive shares, which consist of incremental shares issuable upon exercise of stock
options and warrants, are included in diluted net income per share to the extent such
shares are dilutive. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | The
following table sets forth the computation of basic and diluted net income (loss) per
share for the three and nine months ended September 30, 2003 and 2002 (in thousands,
except per share amounts): | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

|                                                                                       | Three Months Ended September 30, |         | Nine Months Ended September 30,
|-------------------------------------------------------------------------------------- | -------------------------------- | ------- | -------------------------------
|
|Numerator:                                                                             |                                  |         |                                
|Net income (loss)                                                                      | $                                | (12,192 | )                              
|Denominator:                                                                          
|Denominator for basic income (loss) per share     weighted average shares outstanding |                                  | 80,858  |                                
|Effect of dilutive securities                                                          |                                  |        |                                
|                                                                                       |                                  |         |                                
|Denominator for dilutive income (loss) per share                                       |                                  | 80,858  |                                
|                                                                                       |                                  |         |                                
|Net income (loss) per share  basic                                                    | $                                | (0.15   | )                              
|                                                                                       |                                  |         |                                
|Net income (loss) per share  diluted                                                  | $                                | (0.15   | )                              
|                                                                                       |                                  |         |                                

| | The
diluted earnings per share calculation for the three and nine months ended September 30,
2003 and 2002 excludes options to purchase approximately 13.5 million and 6.9 million
shares, respectively, because their effect would have been antidilutive. | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | NOTE
4ACQUISITIONS | 
| | ------------------- | 

| | TogetherSoft
Corporation | 
| | ------------------------ | 

| | On
January 14, 2003, we completed the acquisition of TogetherSoft Corporation, or
TogetherSoft, which was a privately-held corporation. TogetherSoft was a provider of
platform-neutral, design-driven development solutions designed to accelerate the software
development process. The consideration consisted of approximately $82.5 million in cash,
9,050,000 shares of Borland common stock and the assumption of certain liabilities and
obligations of TogetherSoft, including those arising under its stock option plans. The
consideration paid was reduced for certain legal expenses paid by TogetherSoft.
Approximately $22.8 million of the total consideration is being held in escrow to
indemnify us against, and reimburse us for, certain events and cover certain liabilities
and transaction costs. Unused funds will be released from escrow at specified times
between 2004 and 2007. We recorded $151.3 million in goodwill for the excess of the
purchase price over the net assets acquired and $37.2 million for acquired technology. | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Of
the purchase price of TogetherSoft, $4.6 million represented acquired in-process research
and development, or IPRD, that had not yet reached technological feasibility and has no
alternative future use. Accordingly, these amounts were immediately charged to expense
upon consummation of the acquisition. Independent third-party sources calculated the value
of IPRD by estimating the expected cash flows from the projects once commercially viable,
discounting the net cash flows back to their present value and then applying a percentage
of completion. In determining the value ultimately assigned to IPRD, we considered the
stage of completion, complexity of work to date, difficulty of completing the remaining
development, costs already incurred and the expected cost to complete the project.
Subsequent to the acquisition of TogetherSoft, there have been no significant developments
related to the current status of the IPRD that would result in material changes to the
assumptions. | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

7

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| | Table
of Contents | 
| | ----------------- | 

| | During
the three and nine months ended September 30, 2003, we recorded approximately $4.1 million
and $11.8 million, respectively, in acquisition-related costs associated with the
amortization of purchased intangibles from the acquisition of TogetherSoft. | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | The
following table summarizes the short-term portion of our restructuring activity related to
the TogetherSoft acquisition, accounted for according to EITF Issue No. 95-3,
Recognition of Liabilities in Connection with a Purchase Business Combination,
or EITF 95-3, for the nine months ended September 30, 2003 (in thousands): | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

|                              | Severance
and Benefits |  | Facilities |        | Other |   | Total 
|----------------------------- | ---------------------- |  | ---------- | ------ | ----- | - | ------
|Accrual at December 31, 2002  |                        |  | $          |       |       | $ |      
|2003 restructuring accrual    |                        |  |            | 3,234  |       |   | 3,109 
|Cash payments and write-offs  |                        |  |            | (3,036 | )     |   | (2,562
|                              |                        |  |            |        |       |   |       
|Accrual at September 30, 2003 |                        |  | $          | 198    |       | $ | 547   
|                              |                        |  |            |        |       |   |       

| | Our
2003 restructuring accrual included $3.2 million resulting from headcount reductions of 76
employees, including 71 in sales, general and administrative and five in research and
development and $3.1 million resulting from reduction of certain facilities leases. In
addition, we recorded a charge of $0.5 million for lease termination costs and other costs
related to facilities in France and Germany. Due to the timing of payments under lease
agreements, we have recorded a portion of these costs as part of long-term restructuring. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Starbase
Corporation | 
| | -------------------- | 

| | On
October 8, 2002, we signed a merger agreement to purchase all of the outstanding shares of
Starbase Corporation, or Starbase, for an aggregate consideration of approximately $24.0
million in cash and $2.0 million in bridge financing that was forgiven upon the
consummation of the transaction. We recorded $31.7 million in goodwill for the excess of
the purchase price over the net assets acquired and $12.0 million for acquired technology.
Starbase is a provider of end-to-end enterprise software lifecycle solutions covering
requirements definition and management, code and content development, and change and
configuration management. | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Pursuant
to the merger agreement, on October 11, 2002, we commenced an all-cash tender offer to
acquire all outstanding shares of Starbase at a price of $2.75 per share. In the initial
tender offer, which expired on November 22, 2002, we purchased approximately 78.9% of the
outstanding shares of Starbase. Upon the completion of the initial tender, we began
consolidating the operating results of Starbase. The initial tender offer was followed by
the merger on January 7, 2003 of Starbase with Galaxy Acquisition Corp., a wholly-owned
subsidiary of Borland formed for the purposed of making the acquisition. In the merger,
holders of the remaining outstanding shares of Starbase common stock at the time of the
merger received the same $2.75 cash price per share paid in the tender offer. As a result
of the merger, Starbase is now a wholly-owned subsidiary of Borland. Accordingly, with the
payment to the remaining stockholders, we eliminated the minority interest in the
consolidated subsidiary during the three months ended March 31, 2003. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | During
the three and nine months ended September 30, 2003, we recorded approximately $1.5 million
and $4.6 million, respectively, in acquisition-related costs associated with the
amortization of purchased intangibles from the acquisition of Starbase. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | The
following table summarizes our restructuring activity related to the Starbase acquisition
accounted for according to EITF 95-3 for the nine months ended September 30, 2003 (in
thousands): | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

|                              | Severance
and Benefits |  | Facilities |        | Other |   | Total 
|----------------------------- | ---------------------- |  | ---------- | ------ | ----- | - | ------
|Accrual at December 31, 2002  |                        |  | $          | 2,350  |       | $ | 3,385 
|2003 restructuring accrual    |                        |  |            | 274    |       |   | 13    
|Cash payments and write-offs  |                        |  |            | (2,548 | )     |   | (3,199
|                              |                        |  |            |        |       |   |       
|Accrual at September 30, 2003 |                        |  | $          | 76     |       | $ | 199   
|                              |                        |  |            |        |       |   |       

| | Our
2003 restructuring accrual included $0.3 million resulting from headcount reductions. | 
| | ----------------------------------------------------------------------------------------- | 

8

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| | Table
of Contents | 
| | ----------------- | 

| | Supplemental
pro forma information reflecting the acquisitions of TogetherSoft and Starbase as if they
occurred on December 31, 2001 is as follows for the three and nine months ended September
30, 2003 and 2002 (in thousands, unaudited): | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

|                   | Three Months Ended September 30, |  | Nine Months Ended September 30,
|------------------ | -------------------------------- |  | -------------------------------
|
|Total net revenues |                                  |  | $                              
|Net loss           |                                  |  | $                              
|Net loss per share |                                  |  | $                              

| | Such
information is not necessarily representative of the actual results that would have
occurred for those periods. | 
| | -------------------------------------------------------------------------------------------------------------------- | 

| | VMGear | 
| | ------ | 

| | On
January 18, 2002, we completed our acquisition of Redline Software, Inc., or VMGear, which
was a provider of performance assurance and testing solutions for Java developers. The
transaction was accounted for as a purchase. Total fixed consideration of $2.0 million was
paid upon the close of the transaction and acquisition-related costs were $0.2 million.
Additional contingent consideration related to the transaction includes retention payments
of $6.0 million to be earned through the continued employment of certain individuals and
additional earnout payments of up to $10.0 million contingent upon future revenues derived
from the sale of VMGear products. Contingent consideration, if any, will be earned and
paid over a three-year period. We recorded this earnout as a component of restructuring,
amortization of intangibles and acquisition-related expenses based upon our estimate of
the total earnout on a straight-line basis. The results of operations for this acquisition
were not material to our financial statements and, accordingly, pro forma results have not
been presented. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

| | In
accordance with the provisions of SFAS No. 142, Goodwill and Other Intangible
Assets, or SFAS 142, we did not amortize the excess of the purchase price over net
assets acquired. The contingent consideration will be expensed when it is deemed probable
that such payments will be made. For the three and nine months ended September 30, 2003,
we expensed $3.3 million and $7.8 million, respectively, in contingent consideration
related to the VMGear acquisition. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | NOTE
5GOODWILL AND INTANGIBLE ASSETS | 
| | ------------------------------------- | 

| | The
changes in the carrying amount of goodwill for the nine months ended September 30, 2003
are as follows (in thousands): | 
| | -------------------------------------------------------------------------------------------------------------------------- | 

|                                 | Total
|-------------------------------- | -----
|Balance as of December 31, 2002  |      
|Acquisitions                     |      
|                                 |      
|Balance as of September 30, 2003 |      
|                                 |      

| | We
performed a transitional impairment test of our goodwill and intangible assets as of
January 1, 2002. At the time of the test, no impairment of our goodwill or intangible
assets was noted. We performed our annual assessment of goodwill in September 2003 and
concluded that there was no additional impairment. Due to the adoption of SFAS 142 on
January 1, 2002, we ceased amortizing goodwill. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | The
following tables summarize our intangible assets, net (in thousands): | 
| | ------------------------------------------------------------------------- | 

|                                          | September 30, 2003
|----------------------------------------- | ------------------
|
|Acquired technology                       |                   
|Maintenance contracts                     |                   
|Trademarks, trade names and service marks |                   
|Other                                     |                   
|                                          |                   
|                                          |                   
|                                          |                   

9

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| | Table
of Contents | 
| | ----------------- | 

|                                          | December 31, 2002
|----------------------------------------- | -----------------
|
|Acquired technology                       |                  
|Maintenance contracts                     |                  
|Trademarks, trade names and service marks |                  
|Other                                     |                  
|                                          |                  
|                                          |                  
|                                          |                  

| | The
intangible assets are all amortizable and have original estimated useful lives as follows:
acquired technology  2 to 3 years; maintenance contracts  1 year; trademarks,
trade names and service marks 3 years; other1 to 3 years. Based on the current
amount of intangibles subject to amortization, the estimated amortization expense for the
remainder of 2003 and the succeeding four years is as follows: remainder of 2003: $5.9
million; 2004: $14.2 million; 2005: $12.1 million; 2006: $0.1 million; and 2007: $0
million. | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | NOTE
6RESTRUCTURING | 
| | -------------------- | 

| | Prior
to January 1, 2003, we accounted for our restructuring and acquisition-related activity
according to EITF Issue No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring), or EITF 94-3. The following table summarizes our short-term
restructuring and acquisition-related activity accounted for according to EITF 94-3 and
SFAS No. 146, Accounting for Costs Associated with Exit or Disposal
Activities, or SFAS 146, for the nine months ended September 30, 2003 (amounts in
thousands): | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

|                                              | Severance
and Benefits |        | Facilities |   | Other  |   | Total
|--------------------------------------------- | ---------------------- | ------ | ---------- | - | ------ | - | -----
|Accrual at December 31, 2002                  | $                      | 149    |            | $ | 678    |   | $    
|March 2003 restructuring                      |                        | 961    |            |   | 2,024  |   |      
|September 2003 restructuring                  |                        | 2,419  |            |   | 1,063  |   |      
|Cash paid and write-offs during 2003          |                        | (1,668 | )          |   | (2,554 | ) |      
|Reclassification from long-term restructuring |                        |       |            |   | 604    |   |      
|                                              |                        |        |            |   |        |   |      
|Accrual at September 30, 2003                 | $                      | 1,861  |            | $ | 1,815  |   | $    
|                                              |                        |        |            |   |        |   |      

| | Our
March 2003 restructuring accrual included $1.0 million resulting from headcount reductions
of 28 employees, including 19 in sales and general and administrative and 9 in research
and development, and $2.0 million resulting from reduction of certain facilities
leases. This amount represents our remaining lease payments less anticipated sublease
income plus the write-off of leasehold improvements and is recorded in current
liabilities. | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Our
September 2003 restructuring accrual included $2.4 million resulting from headcount
reductions of 110 employees, including 75 in sales and general and administrative and 35
in research and development, and $1.1 million resulting from reduction of certain
facilities leases. This amount represents our remaining lease payments less anticipated
sublease income plus the write-off of leasehold improvements and is recorded in current
liabilities. | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | In
addition, we recorded a charge of $2.4 million during the nine months ended September 30,
2003 for a change in estimated lease termination costs related to two facilities in the
United Kingdom. Due to the timing of payments under the lease agreements, we have recorded
these costs as a part of long-term restructuring. The total long-term lease termination
obligation as of September 30, 2003 was $3.9 million. | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | NOTE
7LEASES | 
| | ------------- | 

| | We
lease certain of our office and operating facilities and certain furniture and equipment
under various operating leases. Remaining lease terms range from one to ten years. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

10

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| | Table
of Contents | 
| | ----------------- | 

| | Minimum
annual lease commitments at September 30, 2003 is as follows, amounts in thousands: | 
| | ------------------------------------------------------------------------------------------- | 

|Calendar Year                        | Operating
Leases
|------------------------------------ | ----------------
|Three months ended December 31, 2003 | $               
|2004                                 |                 
|2005                                 |                 
|2006                                 |                 
|2007                                 |                 
|2008                                 |                 
|Thereafter                           |                 
|                                     |                 
|                                     | $               
|                                     |                 

| | Rent
expense for all operating leases were approximately $3.0 million and $2.0 million for the
three months ended September 30, 2003 and 2002, respectively, and $9.2 million and $5.7
million for the nine months ended September 30, 2003 and 2002, respectively. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | NOTE
8INCOME TAXES | 
| | ------------------- | 

| | For
the three months ended September 30, 2003 and 2002, we recorded an income tax expense of
$1.3 million and $1.4 million, respectively. For the nine months ended September 30,
2003 and 2002, we recorded an income tax expense of $4.0 million and $4.0 million,
respectively. Our tax provisions for the three-month and nine-month periods ended
September 30, 2003 were not based on our expected annual rate, as we incurred non-U.S.
withholding taxes in a number of foreign jurisdictions, regardless of our profitability,
as well as non-U.S. income taxes for certain profitable foreign operations. As these tax
liabilities were incurred in foreign jurisdictions, they were not offset by the benefits
of prior U.S. net operating loss and tax credit carryforwards. | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | NOTE
9REPURCHASES OF COMMON STOCK | 
| | ---------------------------------- | 

| | In
September 2001, our Board of Directors authorized repurchases of up to $30.0 million of
our outstanding common stock. In August 2003, our Board of Directors authorized an
additional repurchase of up to $15.0 million in Borland common stock. As a part of this
program, we repurchased 616,305 shares of our common stock for an average price of $9.24
per share for a total consideration of $5.7 million during the three months ended
September 30, 2003. We repurchased 1,311,305 shares of our common stock for an average
price of $9.53 per share for a total consideration of $12.5 million during the nine months
ended September 30, 2003. We repurchased 462,000 shares of our common stock for an average
price of $8.45 per share for a total consideration of $3.9 million during the three months
ended September 30, 2002. We repurchased 821,700 shares of our common stock for an average
price of $8.94 per share for a total consideration of $7.3 million during the nine months
ended September 30, 2002. This authorization is still in effect, and $22.0 million remains
authorized for future repurchases. We expect to continue to repurchase shares under our
repurchase program from time to time depending on market conditions, share price and
availability, and other factors at our discretion. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | NOTE
10LITIGATION | 
| | ------------------ | 

| | On
November 27, 2002, a stockholder class action and derivative lawsuit, Dieterich v. Harrer,
et al., Case No. 02CC00350, was filed against Starbase Corporation and five former
directors of Starbase in the Superior Court of the State of California for Orange County,
claiming that the former directors had breached fiduciary duties owed to Starbase and
stockholders of Starbase. Borland is paying the costs of defending this litigation
pursuant to indemnification obligations under the merger agreement relating to the
acquisition of Starbase by Borland. Following a series of motions, the case was dismissed
without prejudice on August 20, 2003. We previously reported these legal proceedings in
our Annual Report on Form 10-K for the fiscal year ended December 31, 2002 and our
Quarterly Report on Form 10-Q for the quarterly periods ended March 31 and June 30, 2003.
On October 28, 2003, a stockholder class action, Dieterich v. Harrer, et al, Case No.
024-N, was filed against the former directors of Starbase in Chancery Court of the State
of Delaware, alleging breach of fiduciary duties by the former directors of Starbase,
Borland, Dale L. Fuller, Keith E. Gottfried, Frederick A. Ball, and Doug Barre. The
company is currently reviewing the case and intends to defend itself vigorously. There is
no indication at present whether the lawsuit will have a material effect on Borlands
financial condition, results of operations or liquidity. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

11

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| | Table
of Contents | 
| | ----------------- | 

| | In
the ordinary course of business, we are involved in other lawsuits, claims,
investigations, proceedings, and threats of litigation consisting of intellectual
property, commercial, employment and other matters. In accordance with SFAS No. 5,
Accounting for Contingencies, we make a provision for a liability
when it is both probable that a liability has been incurred and the amount of the loss can
be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to
reflect the impacts of negotiations, settlements, rulings, advice of legal counsel and
other information and events pertaining to a particular case. Litigation is inherently
unpredictable. However, we believe that we have valid defenses with respect to the legal
matters pending against us, as well as adequate provisions for any probable and estimable
losses. If an unfavorable ruling were to occur in any specific period, there exists the
possibility of a material adverse impact on the results of operations for that period. We
believe that, given our current liquidity and cash and investment balances, even were we
to receive an adverse judgment with respect to litigation that we are currently a party
to, it is likely that such a judgment would not have a material impact on our financial
condition, results of operations or liquidity. | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | NOTE
11LOAN RECEIVABLE WRITE-OFF | 
| | --------------------------------- | 

| | At
December 31, 2002, we had a loan receivable with a book value of $2.2 million related to a
loan to AltoWeb, Inc., or AltoWeb, a provider of J2EE applications. In April 2003, AltoWeb
informed us that it had ceased substantially all of its operations. We recorded the
write-off of this loan receivable of $2.2 million during the three months ended March 31,
2003. Since our investment in AltoWeb was related to AltoWebs attempt to extend
their product development efforts for the Borland platform, we have included these
expenses in research and development. This charge is reflected in the nine-month period
ended September 30, 2003. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

| | In
July 2003, we recovered $0.5 million from AppForge, Inc. in consideration for a loan
receivable. Due to concerns about collectibility of the loan receivable, we had written
off the loan in 2002. We recorded a gain of $0.5 million in interest income, net and
other for the three months ended September 30, 2003. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | NOTE
12INDEMNIFICATIONS AND GUARANTEES | 
| | --------------------------------------- | 

| | As
permitted under our Restated Certificate of Incorporation, Amended and Restated Bylaws and
the Delaware General Corporation Law, we have entered into agreements whereby we indemnify
our officers, directors and certain employees for certain events or occurrences while the
officer, director or employee is, or was, serving at our request in such capacity. | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | We
have entered into an agreement for the outsourcing of our order fulfillment. As a
component of this agreement, we guarantee that in the event we terminate the fulfillment
agreement, we will purchase all inventory held by the vendor at the time of termination.
We estimate and accrue reserves for excess inventory held by the fulfillment vendor. As of
September 30, 2003, we had inventory in excess of the reserves of approximately
$0.5 million, which represents the potential obligation relating to this guarantee. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

| | We
undertake indemnification obligations in our ordinary course of business in connection
with, among other things, the licensing of our products and the provision by us of
consulting services. Pursuant to these agreements, we may indemnify the other party for
certain losses suffered or incurred by the indemnified party, generally our business
partners or customers, in connection with various types of claims, which may include,
without limitation, claims of intellectual property infringement, certain tax liabilities,
negligence and intentional acts in the performance of services and violations of laws. The
term of these indemnification obligations is generally perpetual. In general, we attempt
to limit the maximum potential amount of future payments we could be required to make
under these indemnification obligations to the purchase price paid, but in some cases the
obligation may not be so limited. In addition, we may, in certain situations, warrant
that, for a certain period of time from the date of delivery, our software products will
be free from defects in media or workmanship. From time to time, we may also warrant that
our professional services will be performed in a good and workmanlike manner. In addition,
it is our standard policy to seek to disclaim most warranties, including any implied or
statutory warranties such as warranties of merchantability, fitness for a particular
purpose, quality and non-infringement, as well as any liability with respect to
incidental, consequential, special, exemplary, punitive or similar damages. In some
states, such disclaimers may not be enforceable. If necessary, we would provide for the
estimated cost of product and service | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

12

---

| | Table
of Contents | 
| | ----------------- | 

| | warranties
based on specific warranty claims and claim history. In the recent past, we have not been
subject to any significant claims for such losses and have not incurred any material
costs in defending or settling claims related to these indemnification obligations.
Accordingly, we believe the estimated fair value of these agreements is not material. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | During
the nine months ended September 30, 2003, we entered into an operating lease for our U.S.
regional sales headquarters in Cupertino, California. In the event that we do not exercise
our option to extend the term of the lease, we guarantee certain costs to restore the
property to certain conditions in place at the time the lease commenced. We are accruing
the estimated lease restoration costs over the lease term. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | NOTE
13RECENT ACCOUNTING PRONOUNCEMENTS | 
| | ---------------------------------------- | 

| | In
May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity, or SFAS 150. SFAS 150
establishes standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. It requires an issuer to
classify a financial instrument that is within its scope as a liability (or an asset in
some circumstances). SFAS 150 is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003. It is to be implemented by reporting the
cumulative effect of a change in an accounting principle for financial instruments created
before the issuance date of SFAS 150 and still existing at the beginning of the interim
period of adoption. Restatement is not permitted. We do not expect the adoption of SFAS
150 to have a material impact upon our financial condition, cash flows or results of
operations. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | In
April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative
Instruments and Hedging Activities, or SFAS 149, which amends SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, or SFAS 133, for
certain decisions made by the FASB Derivatives Implementation Group. In particular, SFAS
149 (1) clarifies under what circumstances a contract with an initial net investment meets
the characteristic of a derivative, (2) clarifies when a derivative contains a financing
component, (3) amends the definition of an underlying to conform it to
language used in term because it is within the scope of FASB Interpretation, or FIN, No.
45, Guarantors Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others, or FIN 45, and (4) amends
certain other existing pronouncements. SFAS 149 is effective for contracts entered into or
modified after June 30, 2003, and for hedging relationships designated after June 30,
2003. In addition, most provisions of SFAS 149 are to be applied prospectively. We do not
expect the adoption of SFAS 149 to have a material impact upon our financial condition,
cash flows or results of operations. | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | In
January 2003, the FASB issued FIN No. 46, Consolidation of Variable Interest
Entities, or FIN 46. Until this interpretation, a company generally included another
entity in its consolidated financial statements only if it controlled the entity through
voting interests. FIN 46 requires a variable interest entity to be consolidated by a
company if that company is subject to a majority of the risk of loss from the variable
interest entitys activities or entitled to receive a majority of the entitys
residual returns. FIN 46 is effective for interests held by public entities in variable
interest entities or potential variable interest entities created before February 1, 2003
for financial statement periods ending after December 15, 2003, and otherwise is effective
after June 15, 2003. We do not expect the adoption of FIN 46 to have a material impact
upon our financial condition, cash flows or results of operations. | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | In
November 2002, the EITF reached a consensus on Issue No. 00-21, Revenue Arrangements
with Multiple Deliverables, or EITF 00-21. EITF 00-21 provides guidance on how to
account for arrangements that involve the delivery or performance of multiple products,
services and/or rights to use assets. The provisions of EITF 00-21 apply to revenue
arrangements entered into in fiscal periods beginning after June 15, 2003. We do not
believe the adoption of EITF 00-21 will have a material impact on our financial condition
or results of operations. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | In
November 2002, the FASB issued FIN 45. FIN 45 elaborates on the existing disclosure
requirements for most guarantees, including loan guarantees. It also clarifies that at the
time a company issues a guarantee, the company must recognize an initial liability for the
fair value, or market value, of the obligations it assumes under that guarantee. However,
the provisions related to recognizing a liability at inception of the guarantee for the
fair value of the guarantors obligations does not apply to product warranties or to
guarantees accounted for as derivatives. The initial recognition and initial measurement
provisions apply on a prospective basis to guarantees issued or modified after December
31, 2002. The disclosure requirements of FIN 45 are effective for financial statements of
interim or annual periods ending after December 15, 2002. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

13

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| | Table
of Contents | 
| | ----------------- | 

| | Item
2.  Managements Discussion and Analysis of Financial Condition and Results of
Operations | 
| | ---------------------------------------------------------------------------------------------- | 

| | Forward-Looking
Statements | 
| | -------------------------- | 

| | The
statements made throughout this Quarterly Report on Form 10-Q that are not historical
facts are forward-looking statements and, accordingly, involve estimates, projections,
goals, forecasts, assumptions and uncertainties that could cause actual results or
outcomes to differ materially from those expressed or implied in the forward-looking
statements. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | These
forward-looking statements may relate to, without limitation, future capital expenditures,
acquisitions, timing of the integration of acquired businesses, the ultimate cost of
acquired businesses, revenue pipeline, revenues, including revenues from
recently acquired businesses, cash flows, earnings, margins, costs, strategy, demand for
our products, market and technological trends in the software industry, effective tax
rates, interest rates, foreign currency exchange rates and inflation and various economic
and business trends. Generally, you can identify forward-looking statements by the use of
words such as expect, estimate, project,
budget, forecast, anticipate, goal,
intend, plan, may, will,
could, should, believes, predicts,
potential, continue and similar expressions or the negative or
other variations thereof. These forward-looking statements involve substantial risks and
uncertainties. Examples of such risks and uncertainties are described under Factors
That May Affect Future Results and Market Price of Stock and elsewhere in this
report, as well as in our other filings with the SEC or in materials incorporated by
reference herein or therein. You should be aware that the occurrence of any of these risks
and uncertainties may cause our actual results to differ materially from those anticipated
in our forward-looking statements and have a material and adverse effect on our business,
results of operations and financial condition. New factors may emerge from time to time,
and it is not possible for us to predict new factors, nor can we assess the potential
effect of any new factors on us. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | These
forward-looking statements are found at various places throughout this Form 10-Q. We
caution you not to place undue reliance on these forward-looking statements, which, unless
otherwise indicated, speak only as of the date they were made. We do not undertake any
obligation to update or release publicly any revisions to these forward-looking statements
to reflect events or circumstances after the date of this Form 10-Q, except as required by
law. | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | General | 
| | ------- | 

| | We
are a leading provider of software development and deployment solutions. We provide our
customers with comprehensive solutions designed to improve software quality, accelerate
the delivery of software, lower the cost of ownership and reduce the risk of errors by
offering products that address the definition, design, development, testing and deployment
phases of the application development lifecycle and products that help customers manage
software development projects from beginning to end. We also provide training, consulting
and support services through our dedicated professional services organization. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Recently, we have begun transforming the company from one focused on selling individual development
tools to one focused on selling multi-product enterprise solutions that span the full software application
development lifecycle. As part of this transformation, we recently acquired two companies and certain other
technologies to fill out our product portfolio, and are currently in the process of integrating and bundling
our products into solution suites, upgrading our marketing and selling efforts to address enterprise
opportunities, and realigning our management and organization to support the strategic direction of the
company. In addition, we have also restructured many of our operations and conducted reductions in force in an
effort to improve organizational efficiencies, control our expense structure and drive to a more profitable
long-term financial model. We expect to continue all of these activities over the next several quarters, and
doing so may put pressure on our financial results and operations as we go through this transformation. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

14

---

| | Table
of Contents | 
| | ----------------- | 

| | Overview
of the Consolidated Statements of Operations | 
| | ----------------------------------------------------- | 

| | The
following table presents our Consolidated Statements of Operations data and the related
percentage of revenues for the three and nine months ended September 30, 2003 and 2002 (in
thousands): | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

|                                                                                               | Three Months Ended September 30, | Nine Months Ended September 30,
|---------------------------------------------------------------------------------------------- | -------------------------------- | -------------------------------
|                                                                                               | 2003                             | 2002                           
|Licenses and other revenues                                                                    |                                  |                                
|Service revenues                                                                               |                                  |                                
|                                                                                               |                                  |                                
|Net revenues                                                                                   |                                  |                                
|                                                                                               |                                  |                                
|Cost of licenses and other revenues                                                            |                                  |                                
|Cost of service revenues                                                                       |                                  |                                
|                                                                                               |                                  |                                
|Cost of revenues                                                                               |                                  |                                
|                                                                                               |                                  |                                
|Gross profit                                                                                   |                                  |                                
|                                                                                               |                                  |                                
|Research and development                                                                       |                                  |                                
|Selling, general and administrative                                                            |                                  |                                
|Restructuring, amortization of   intangibles, acquisition-related   expenses and other charges |                                  |                                
|                                                                                               |                                  |                                
|Total operating expenses                                                                       |                                  |                                
|                                                                                               |                                  |                                
|Operating income (loss)                                                                        |                                  |                                
|Interest income, net and other                                                                 |                                  |                                
|                                                                                               |                                  |                                
|Income (loss) before income taxes                                                              |                                  |                                
|                                                                                               |                                  |                                
|Income tax provision                                                                           |                                  |                                
|                                                                                               |                                  |                                
|Net income (loss)                                                                              |                                  |                                
|                                                                                               |                                  |                                

| | Overview
of the Results of Operations for the Three and Nine Months ended September 30, 2003 | 
| | -------------------------------------------------------------------------------------------- | 

| | During
the three months and nine months ended September 30, 2003, we continued to focus on
transforming our operations to sell our application lifecycle management, or ALM,
solutions to enterprise customers, improving our sales execution, and improving our
operating model. As a result of these efforts and the addition of Starbase and
TogetherSoft to our operations, we achieved the following financial results during the
three and nine months ended September 30, 2003: | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| |  | For
the three months ended September 30, 2003, net revenues grew 16% to $70.6 million,
including $17.1 million in revenue associated with the operations we assumed in our
acquisitions of Starbase and TogetherSoft, from $60.7 million for the three months ended
September 30, 2002. For the nine months ended September 30, 2003, net revenues grew 25%
to $221.2 million, including $54.3 million in revenues associated with the operations we
assumed in our acquisitions of Starbase and TogetherSoft, from $177.5 million for the
nine months ended September 30, 2002. | 
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| |  | Licenses
and other revenues increased 2% to $51.5 million for the three months ended September 30,
2003 from $50.3 million for the three months ended September 30, 2002. Licenses and other
revenues increased 11% to $165.0 million for the nine months ended September 30, 2003
from $148.1 million for the nine months ended September 30, 2002. | 
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| |  | Service
revenues increased 83% from $10.4 to $19.0 million and 91% from $29.5 million to $56.3 million
for the three and nine months ended September 30, 2003, respectively, over the same
periods in 2002. | 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| |  | Gross
margins increased to 85% for the three months ended September 30, 2003 from 84% for the
three months ended September 30, 2002. Gross margins increased to 86% for the nine months
ended September 30, 2003 from 85% for the nine months ended September 30, 2002. | 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| |  | Operating
expenses increased 53% to $71.9 million for the three months ended September 30, 2003
from $46.8 million for the three months ended September 30, 2002. Operating expenses
increased 63% to $224.6 million for the nine months ended September 30, 2003 from $137.7
million for the nine months ended September 30, 2002. | 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

15

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| | Table
of Contents | 
| | ----------------- | 

| |  | We
had a net loss of $12.2 million for the three months ended September 30, 2003, compared
to net income of $5.0 million for the three months ended September 30, 2002. We had a net
loss of $34.9 million for the nine months ended September 30, 2003, compared to net
income of $14.2 million for the nine months ended September 30, 2002. | 
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| |  | Expenses
from the amortization of intangible assets increased to $5.8 million and $17.0 million
for the three and nine months ended September 30, 2003, respectively, from $0.2 million
and $0.7 million for the three and nine months ended September 30, 2002, respectively. | 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

| |  | Cash,
cash equivalents and short-term investments decreased $88.9 million to $207.2 million as
of September 30, 2003 from $296.2 million as of December 31, 2002. The decrease is
primarily attributable to cash expended in connection with the acquisitions of Starbase
and TogetherSoft. | 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| |  | During
the three months ended September 30, 2003, we had 87 customers with cumulative sales of
$100,000 or more, which was down from 102 such customers during the three months ended
June 30, 2003. In addition, 40 of these customers purchased multiple products during the
three months ended September 30, 2003. | 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| |  | We
repurchased 616,000 shares of our stock under our stock repurchase program for a total
cost of $5.6 million during the three months ended September 30, 2003. This brings
the total purchased under our stock repurchase program during the nine months ended
September 30, 2003 to 1.3 million shares for a total cost of $12.5 million. | 
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | For
a more in-depth discussion of our business, including a discussion of our critical
accounting policies and estimates, please read our Annual Report on Form 10-K for the year
ended December 31, 2002 as filed with the SEC on March 28, 2003. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Net
Revenues | 
| | ------------ | 

| | We
derive revenue from licenses of our software and the sale of related services, which
include assistance in implementation and integration, post-contract customer support,
training and consulting. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

| | We
recognize license fees on contracts that do not involve significant implementation or
integration essential to functionality of our products upon delivery when there is
persuasive evidence of an arrangement, the fee is fixed or determinable and collection of
the receivable is probable. We recognized license and service revenues associated with
contracts involving significant implementation or integration only as the services are
completed, either on a percentage of completion basis or a completed contract basis
depending on whether or not we can obtain reliable estimates of the costs to complete the
work. For arrangements with multiple elements, we determine the value for the different
elements based upon vendor specific objective evidence, or VSOE, and recognize revenue
when we have established the VSOE of all undelivered elements and as the elements are
delivered. Other service revenues from consulting and training services are recognized as
such services are performed. Service revenues from post-contract customer support are
recognized ratably over the support period, generally one year. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

| | We
recognize revenues from reseller arrangements upon shipment to the reseller, with
allowances for estimated future returns and exchanges provided based upon our return
history. We maintain allowances for product returns from customers based upon historical
return rates of end user customers, current economic trends, changes in customer demand
and acceptance of our products and the type and quantity of inventory held by channel
customers. Significant management judgments and estimates must be made and used in
connection with establishing the sales returns and rebate reserves in any accounting
period. Material differences may have resulted in the amount and timing of our revenues
for any period if management made different judgments or utilized different estimates. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | The
following table presents our net revenues for the three and nine months ended September
30, 2003 and 2002 (in thousands): | 
| | ----------------------------------------------------------------------------------------------------------------------------- | 

|                            | Three Months Ended September 30, |        | Nine Months Ended September 30,
|--------------------------- | -------------------------------- | ------ | -------------------------------
|
|Licenses and other revenues | $                                | 51,531 |                                
|Service revenues            |                                  | 19,042 |                                
|                            |                                  |        |                                
|Net revenues                | $                                | 70,573 |                                
|                            |                                  |        |                                

16

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| | Table
of Contents | 
| | ----------------- | 

| | Licenses
and Other Revenues | 
| | --------------------------- | 

| | With
the integration of the acquisitions of TogetherSoft and Starbase, we have aligned our
presentation of licenses and other revenues to better reflect our ALM strategy.
Specifically, we see three major product categories: Design, Develop and Deploy. Design
includes the products from our recent acquisitions of TogetherSoft and Starbase: StarTeam,
CaliberRM, Together and other related design and management products. Develop includes two
major categories: Java, which includes JBuilder, Java Studio and Optimizeit, and .NET,
which includes Delphi, C#Builder, C++Builder, Kylix and C++ Mobile Edition. Deploy is
comprised of our Borland Enterprise Server products, InterBase, Janeva and other
enterprise products. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Compared
to our reporting prior to the second quarter of 2003, Design is a new category, Develop
encompasses our former Java and RAD product lines, and Deploy encompasses the products
that we previously described as the Enterprise product group. We have sought to provide
comparability between historic product groups while updating our nomenclature to reflect
new platforms and our emphasis on the application development lifecycle. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Licenses
and other revenues represent amounts for license fees and royalties earned for granting
customers the right to use our software products. Licenses and other revenues were $51.5
million and $50.3 million for the three months ended September 30, 2003 and 2002,
respectively, and represented 73% and 83% of net revenues for the three months ended
September 30, 2003 and 2002, respectively. Licenses and other revenues were $165.0 million
and $148.1 million for the nine months ended September 30, 2003 and 2002, respectively,
and represented 75% and 83% of net revenues for the nine months ended September 30, 2003
and 2002, respectively. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | The
following table presents our licenses and other revenues by product category for the three
and nine months ended September 30, 2003 and 2002 (in thousands): | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

|                                | Three Months Ended September 30, |        | Nine Months Ended September 30,
|------------------------------- | -------------------------------- | ------ | -------------------------------
|
|Design                          | $                                | 11,430 |                                
|Develop                         |                                  | 28,185 |                                
|Deploy                          |                                  | 11,916 |                                
|                                |                                  |        |                                
|Net licenses and other revenues | $                                | 51,531 |                                
|                                |                                  |        |                                

| | Design.  Licenses
and other revenues from our Design product group for the three and nine months ended
September 30, 2003 consisted of approximately $11.4 million and $37.6 million,
respectively. There were no licenses and other revenues from our Design product group in
the three or nine months ended September 30, 2002, as we completed the acquisitions of
TogetherSoft and Starbase and began consolidating their results in January 2003 and
December 2002, respectively. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Develop.  Licenses
and other revenues from our Develop product group included licenses and other revenues of
$17.0 million and $21.2 million in the three months ended September 30, 2003 and 2002,
respectively, from our Java product lines. Licenses and other revenues from our Develop
product group included licenses and other revenues of $60.2 million and $68.5 million in
the nine months ended September 30, 2003 and 2002, respectively, from our Java product
lines. The decrease in licenses and other revenues in our Java product lines during the
three and nine months ended September 30, 2003 was due to lower revenues from our
JBuilder product line partially offset by growth in our Optimizeit product line. We
believe the growth of the market for Java development tools has slowed and consequently
our sales of JBuilder have slowed. Additionally, as more of our customers purchase
maintenance contracts that provide them with upgrades, and as the product matures, the
incentives to upgrade to the next release decrease. Therefore, we believe that the growth
in licenses and other revenues from JBuilder will continue to slow. Licenses and other
revenues from our Develop products group included licenses and other revenues of $11.1
million and $18.9 million in the three months ended September 30, 2003 and 2002,
respectively, from our .NET product lines. This decrease was primarily due to lower
licenses and other revenues generated from our RAD products. Licenses and other revenues
from our Develop products group included licenses and other revenues of $35.7 million and
$46.8 million in the nine months ended September 30, 2003 and 2002, respectively, from
our .NET product lines. This decrease during the three and nine months ended September
30, 2003 was primarily attributable to the lack of a major product version release during
the nine months ended September 30, 2003 compared to the three and nine months ended
September 30, 2002, which included the releases of Delphi 7 in the third quarter of 2002
and C++Builder 6 in the first quarter of 2002. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

17

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| | Table
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| | ----------------- | 

| | Deploy.  Licenses
and other revenues from our Deploy product group were $11.9 million and $10.2 million in
the three months ended September 30, 2003 and 2002, respectively. Licenses and other
revenues from our Deploy product group were $31.2 million and $32.8 million in the nine
months ended September 30, 2003 and 2002, respectively. The increase for the three months
ended September 30, 2003 as compared with September 30, 2002 was due to higher revenue
from our VisiBroker and application server products, particularly in our Asia Pacific
region. The decrease in licenses and other revenues for the nine months ended September
30, 2003 as compared with the same period in 2002 was due to lower revenues generated
from our VisiBroker and application server products, due primarily to a lower volume of
sales in the Americas. We believe that this reduction in licenses and other revenues from
our Deploy products was a result of general economic weakness and geopolitical
uncertainty. Revenue growth from our Deploy products category will depend upon the
recovery in corporate spending for deployment solutions, our ability to provide
compelling technical solutions for software deployment to differentiate ourselves from
our competitors and our ability to integrate our Deploy products with our Design and
Develop products. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

| | Service
Revenues | 
| | ---------------- | 

| | Service
revenues represent amounts earned for technical support, consulting and training services
for our software products. Net service revenues were $19.0 million and $10.4 million for
the three months ended September 30, 2003 and 2002, respectively, representing 27% and 17%
of net revenues for those periods, respectively. Service revenues increased $8.6 million
in the three months ended September 30, 2003 from the three months ended September
30, 2002 primarily as a result of an increase in technical support revenues and, to a
lesser extent, an increase in consulting revenue. Technical support revenues were $13.2
million and $6.3 million in the three months ended September 30, 2003 and 2002,
respectively, representing 70% and 60% of total service revenues in the three months ended
September 30, 2003 and 2002, respectively. The growth in the technical support revenues in
the three months ended September 30, 2003 from the three months ended September 30, 2002
was due to the increase in support revenues associated with our assumption of the support
obligations from the acquisitions of TogetherSoft and Starbase. Consulting revenues were
$4.2 million and $2.8 million in the three months ended September 30, 2003 and 2002,
respectively, representing 22% and 27% of total service revenues in the three months ended
September 30, 2003 and 2002, respectively. The increase in the consulting revenue for the
three months ended September 30, 2003 when compared with the same period in the prior year
was due to an increased emphasis on products with a greater process focus (our Design
products) and approximately $1.2 million in consulting revenue recognized from large
development projects with two technology partners. Based upon our progress to date on
these projects, we expect consulting revenues from the development projects to remain
consistent in the fourth quarter and decrease to substantially lower levels in following
quarters. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Net
service revenues were $56.3 million and $29.5 million for the nine months ended September
30, 2003 and 2002, respectively, representing 25% and 17% of net revenues for those
periods, respectively. Service revenues increased $26.8 million in the nine months ended
September 30, 2003 from the nine months ended September 30, 2002 primarily as a result of
an increase in technical support revenues and, to a lesser extent, an increase in
consulting revenues. Technical support revenues were $38.1 million and $18.7 million in
the nine months ended September 30, 2003 and 2002, respectively, representing 68% and 64%
of total service revenues in the nine months ended September 30, 2003 and 2002,
respectively. The growth in the technical support revenues in the nine months ended
September 30, 2003 from the nine months ended September 30, 2002 was due to the increase
in support revenues associated with our assumption of the support obligations from the
acquisitions of TogetherSoft and Starbase. Consulting revenues increased from
$6.7 million for the nine months ended September 30, 2002 to $13.3 million for the
nine months ended September 30, 2003. The increase in the consulting revenues for the nine
months ended September 30, 2003 when compared with the same period in the prior year was
due to an increased emphasis on products with a greater process focus (our Design
products) and approximately $5.2 million in consulting revenue recognized from large
development projects with three technology partners. Over the longer term, we expect
growth, if any, in our support revenues and our consulting revenues to depend on our
success in selling our solutions into larger enterprises with greater frequency. Our
service revenues may also grow as our new enterprise solution offerings increase in
complexity and include more services as a component of larger sales contracts. We may
experience decreases in our consulting revenue on a quarter-to-quarter basis as we
complete large consulting engagements if we are unsuccessful in expanding or finding new
engagements. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | International
Net Revenues | 
| | -------------------------- | 

| | Revenues
from sources outside the United States, or non-U.S. revenues, represented approximately
57% and 66% of net revenues for the three months ended September 30, 2003 and 2002,
respectively. Non-U.S. revenues | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

18

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| | Table
of Contents | 
| | ----------------- | 

| | represented
approximately 56% and 64% of net revenues for the nine months ended September 30, 2003
and 2002, respectively. The decrease in the percentage of non-U.S. revenues for the three
and nine months ended September 30, 2003, as compared to the same periods in 2002, was
principally due to net revenues generated from our newly-acquired Design products in
2003, which generate more sales in the U.S. than internationally. We expect non-U.S.
revenues to continue to be a significant portion of our net revenues in future periods,
though the U.S. percentage is expected to be higher in 2003 as compared with 2002 due to
the acquisitions of Starbase and TogetherSoft, each of which had sales channels with a
greater U.S. focus. | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Fluctuations
in foreign currency exchange rates did not have a material impact on our net revenues or
operating results for the three or nine months period ended September 30, 2003 and 2002.
However, our non-U.S. revenues would be harmed if the U.S. dollar were to strengthen
against major foreign currencies, including the Japanese Yen, Euro and United Kingdom
Pound Sterling. The following table presents our net revenues by region (in thousands): | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

|                                      | Three Months Ended September 30, |  | Nine Months Ended September 30,
|------------------------------------- | -------------------------------- |  | -------------------------------
|
|Americas                              |                                  |  | $                              
|Europe, Middle East & Africa (EMEA) |                                  |  |                                
|Asia Pacific                          |                                  |  |                                
|                                      |                                  |  |                                
|Net revenues                          |                                  |  | $                              
|                                      |                                  |  |                                

| | Cost
of Revenues | 
| | ---------------- | 

| | Cost
of Licenses and Other Revenues | 
| | ----------------------------------- | 

| | Cost
of licenses and other revenues consists primarily of production costs, product packaging
costs and royalties paid to third-party vendors. Cost of licenses and other revenues were
$3.4 million and $4.2 million for the three months ended September 30, 2003 and 2002,
respectively, representing 7% and 8% of total licenses and other revenues in the three
months ended September 30, 2003 and 2002, respectively. Cost of licenses and other
revenues were $9.5 million and $11.3 million for the nine months ended September 30, 2003
and 2002, respectively, representing 6% and 8% of total licenses and other revenues in the
nine months ended September 30, 2003 and 2002, respectively. The reduction in the cost of
licenses and other revenues was principally attributable to a reduction in direct
production costs as we had a larger percentage of our licenses and other revenues
generated from large corporate contracts. Typically, large enterprise and corporate
licenses are delivered electronically or represent additional licenses of software that
have already been delivered. This has the impact of reducing our overall production costs.
Royalty costs were 2% and 3% of licenses and other revenues for the three months ended
September 30, 2003 and 2002, respectively. Royalty costs were 2% of licenses and other
revenues for the nine months ended September 30, 2003 and 2002. The level of royalty costs
in future periods will depend on our ability to obtain favorable licensing terms for our
products that include third-party technology and the extent to which we include such
third-party technology in our product offerings. | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Cost
of Service Revenues | 
| | ------------------------ | 

| | Cost
of service revenues consists primarily of salaries and benefits, third-party contractor
costs and related expenses incurred in providing customer support, consulting and
training. Cost of service revenues were $7.0 million and $5.2 million for the three
months ended September 30, 2003 and 2002, respectively, representing 37% and 50% of
service revenues in the three months ended September 30, 2003 and 2002, respectively. Cost
of technical support revenues represented 22% and 27% of the cost of service revenues for
the three months ended September 30, 2003 and 2002, respectively, while cost of consulting
and training revenues represented 78% and 73%, respectively, of the cost of service
revenues for the same periods. Service revenues gross margins were 63% and 50% in the
three months ended September 30, 2003 and 2002, respectively. Cost of service revenues
were $20.9 million and $15.6 million for the nine months ended September 30, 2003 and
2002, respectively, representing 37% and 53% of service revenues in the nine months ended
September 30, 2003 and 2002, respectively. Cost of technical support revenues represented
24% and 29% of the cost of service revenues for the nine months ended September 30, 2003
and 2002, respectively, while cost of consulting and training revenues represented 76% and
71%, respectively, of the cost of service revenues for the same periods. Service revenues
gross margins were 63% and 47% in the nine months ended September 30, 2003 and 2002,
respectively. The increase in gross margins for the three and nine month periods ended
September 30, 2003 when compared with the three and nine month periods ended September 30,
2002 was due to an increase in support revenues resulting from the assumed support
obligations from the | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

19

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| | Table
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| | ----------------- | 

| | acquisitions
of TogetherSoft and Starbase. In future periods, we expect increases in our cost of
service revenues as our service revenues grow and the consulting and training revenues
become a larger component of service revenues. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Operating
Expenses | 
| | ------------------ | 

| | Research
and Development | 
| | ------------------------ | 

| | Research
and development expenses for the three months ended September 30, 2003 and 2002 were
$15.6 million and $12.7 million, respectively, representing 22% and 21% of net
revenues for the three months ended September 30, 2003 and 2002, respectively. Research
and development expenses for the nine months ended September 30, 2003 and 2002 were $49.0
million and $37.4 million, respectively, representing 22% and 21% of net revenues for the
nine months ended September 30, 2003 and 2002, respectively. The increase in research and
development expenses was principally attributable to an increase in our research and
development employee-related expenses of 29% and 34% for the three and nine months ended
September 30, 2003, respectively, as compared with the same periods in 2002, primarily as
a result of an increase in our research and development headcount of approximately 215
employees at September 30, 2003 when compared to September 30, 2002 following the
acquisitions of TogetherSoft and Starbase. In addition, we recorded research and
development charges of $2.2 million during the nine months ended September 30, 2003,
resulting from the write-off of the loan receivable from AltoWeb. There were no comparable
charges during the three months ended September 30, 2003 or for the three and nine months
ended September 30, 2002. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Selling,
General and Administrative | 
| | ----------------------------------- | 

| | Selling,
general and administrative expenses were $43.4 million and $32.7 million for the three
months ended September 30, 2003 and 2002, respectively, representing 62% and 54% of net
revenues for the three months ended September 30, 2003 and 2002, respectively. Selling,
general and administrative expenses were $136.3 million and $95.8 million for the
nine months ended September 30, 2003 and 2002, respectively, representing 62% and 54% of
net revenues for the nine months ended September 30, 2003 and 2002, respectively. The
increase in selling, general and administrative expenses was principally attributable to
an increase in our employee-related expenses of 36% and 44% for the three and nine months
ended September 30, 2003, respectively, as compared with the same periods in 2002. This
was primarily due to an increase in headcount of approximately 220 employees at September
30, 2003 when compared to September 30, 2002, which was mostly a result of the
acquisitions of TogetherSoft and Starbase. In addition, our facilities cost increased 44%
for the three-month period ended September 30, 2003 and 43% for the nine-month period
ended September 30, 2003 as compared with the same periods in 2002 as we assumed the lease
obligations of TogetherSoft and Starbase. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Restructuring,
Amortization of Intangibles, Acquisition-Related Expenses and Other Charges | 
| | ------------------------------------------------------------------------------------------ | 

| | The
following table summarizes our restructuring, amortization of intangibles,
acquisition-related expenses and in-process research and development activity for the
three and nine months ended September 30, 2003 and 2002 (in thousands): | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

|                                    | Three Months EndedSeptember 30, |  | Nine Months EndedSeptember 30,
|----------------------------------- | ------------------------------- |  | ------------------------------
|
|Restructuring                       |                                 |  | $                             
|Amortization of intangibles         |                                 |  |                               
|Acquisition-related expenses        |                                 |  |                               
|In-process research and development |                                 |  |                               
|                                    |                                 |  |                               
|Total                               |                                 |  | $                             
|                                    |                                 |  |                               

| | During
the three months ended September 30, 2003, we recorded $5.8 million in amortization from
purchased intangibles from the TogetherSoft, Starbase, VMGear, Bedouin, Boldsoft and
Highlander acquisitions, and $3.4 million in acquisition-related expenses, which is
principally associated with the earn-out provision of the VMGear acquisition. During the
nine months ended September 30, 2003, we recorded $9.0 million in restructuring costs from
redundancies as a result of the TogetherSoft and Starbase acquisitions and excess
facilities in the United Kingdom, $17.0 million in amortization from purchased intangibles
from the TogetherSoft, Starbase, VMGear, Bedouin, Boldsoft and Highlander acquisitions,
$8.7 million in acquisition-related expenses, which is principally | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

20

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| | Table
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| | ----------------- | 

| | associated
with the earn-out provision of the VMGear acquisition, and a $4.6 million charge for
in-process research and development from the TogetherSoft acquisition. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | During
the three months ended September 30, 2002, we recorded restructuring, amortization of
intangibles and acquisition-related expenses in the amount of $1.4 million, which
consisted primarily of $1.1 million in acquisition-related expense associated with an
earn-out provision in the VMGear acquisition. During the nine months ended September 30,
2002, we recorded restructuring, amortization of intangibles and acquisition-related
expenses in the amount of $4.5 million, which consisted primarily of $3.4 million in
acquisition-related expense associated with an earn-out provision in the VMGear
acquisition. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

| | The
following table summarizes our restructuring activity under EITF 94-3 and SFAS 146 for the
nine months ended September 30, 2003 (in thousands): | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------- | 

|                                              | Severance
and Benefits |        | Facilities |   | Other  |   | Total
|--------------------------------------------- | ---------------------- | ------ | ---------- | - | ------ | - | -----
|Accrual at December 31, 2002                  | $                      | 149    |            | $ | 678    |   | $    
|March 2003 restructuring                      |                        | 961    |            |   | 2,024  |   |      
|September 2003 restructuring                  |                        | 2,419  |            |   | 1,063  |   |      
|Cash paid and write-offs during 2003          |                        | (1,668 | )          |   | (2,554 | ) |      
|Reclassification from long-term restructuring |                        |       |            |   | 604    |   |      
|                                              |                        |        |            |   |        |   |      
|Accrual at September 30, 2003                 | $                      | 1,861  |            | $ | 1,815  |   | $    
|                                              |                        |        |            |   |        |   |      

| | Our
March 2003 restructuring accrual included $1.0 million resulting from headcount reductions
of 28 employees, including 19 in sales, general and administrative and 9 in research and
development, and $2.0 million resulting from reduction of certain facilities leases.
This amount represents our remaining lease payments less anticipated sublease income plus
the write-off of leasehold improvements and is recorded in current liabilities. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

| | Our
September 2003 restructuring accrual included $2.4 million resulting from headcount
reductions of 110 employees, including 75 in sales, general and administrative and 35 in
research and development, and $1.1 million resulting from reduction of certain
facilities leases. This amount represents our remaining lease payments less anticipated
sublease income plus the write-off of leasehold improvements and is recorded in current
liabilities. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

| | In
addition, we recorded a charge of $2.4 million during the nine months ended September 30,
2003 for a change in estimated lease termination costs related to two facilities in the
United Kingdom. Due to the timing of payments under the lease agreements, we have recorded
these costs as a part of long-term restructuring. The total long-term lease termination
obligation as of September 30, 2003 was $3.9 million. | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Interest
Income, Net and Other | 
| | ------------------------------ | 

| | Interest
income, net and other was $0.8 million and $1.9 million for the three months ended
September 30, 2003 and 2002, respectively. Interest income, net and other was $2.9 million
and $5.3 million for the nine months ended September 30, 2003 and 2002, respectively. The
decline in interest income, net and other during these periods when compared to the same
periods in 2002 reflects a decrease in interest income of $1.7 million and $3.9 million
for the three and nine months ended September 30, 2003, respectively, due to decreases in
average cash balances and lower prevailing interest rates. Other income also decreased due
to a decrease in rental income from our property on Green Hills Road, Scotts Valley,
California of $0.2 million and $0.8 million for the three and nine months ended September
30, 2003, respectively, when compared to the three and nine months ended September 30,
2002. These declines were offset by the impact of changes in foreign currency gains and
losses. Foreign currency losses were $0.2 million and $0.5 million for the three months
ended September 30, 2003 and 2002, respectively, a decrease of $0.3 million. There was a
foreign currency gain of $0.3 million and a foreign currency loss of $1.5 million for
the nine months ended September 30, 2003 and 2002, respectively, a net change of $1.8
million. Currency losses recorded for the three and nine months ended September 30, 2002
were due primarily to a gain in the U.S. dollar against the Brazilian Real, the Australian
dollar and the Euro. In July 2003, we recovered $0.5 million from AppForge, Inc. in
consideration for a loan receivable. Due to concerns about collectibility of the loan
receivable, we had written off the loan in 2002. We recorded a gain of $0.5 million for
the three months ended September 30, 2003 in interest income, net and other related to
this repayment. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

21

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| | Table
of Contents | 
| | ----------------- | 

| | Income
Taxes | 
| | ------------ | 

| | For
the three months ended September 30, 2003 and 2002, we recorded an income tax expense of
$1.3 million and $1.4 million, respectively. For the nine months ended September 30,
2003 and 2002, we recorded an income tax expense of $4.0 million and $4.0 million,
respectively. Our tax provisions for the three-month and nine-month periods ended
September 30, 2003 were not based on our expected annual rate as we incurred non-U.S.
withholding taxes in a number of foreign jurisdictions, regardless of our profitability,
as well as non-U.S. income taxes for certain profitable foreign operations. As these tax
liabilities were incurred in foreign jurisdictions, they were not offset by the benefits
of prior U.S. net operating loss and tax credit carryforwards. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | The
expected rate is a combination of U.S. alternative minimum taxes, U.S. state taxes,
non-U.S. withholding and income taxes. Our effective tax rate will continue to depend on
the amount and location of our profits, the ability to utilize our net operating loss and
tax credit carryforwards in certain jurisdictions, mostly in the U.S., and the amount of
non-U.S. withholding taxes. | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Liquidity
and Capital Resources | 
| | ------------------------------- | 

| | As
of September 30, 2003, cash, cash equivalents and short-term investments totaled $207.2
million, a decrease of $88.9 million from $296.2 million at December 31, 2002. Working
capital decreased from $246.7 million at December 31, 2002 to $142.0 million at
September 30, 2003. Working capital decreased $104.7 million during the nine months
ended September 30, 2003 principally due to $76.9 million in cash used to purchase
TogetherSoft and Starbase, $7.7 million in negative working capital assumed in the
acquisition of TogetherSoft, and $12.5 million used to repurchase common stock. | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Cash
used in operating activities for the nine months ended September 30, 2003 was $9.9
million, consisting of $34.9 million in net loss and an increase in non-cash working
capital, excluding the change in short-term restructuring and accounts receivable, of $3.0
million, offset by $22.6 million in depreciation and amortization, a decrease in accounts
receivable net of acquisitions of $11.2 million, a decrease in short-term restructuring of
$9.1 million, and a $2.2 million loss on a write-off of a loan receivable. Cash
provided by operating activities for the nine months ended September 30, 2002 was $20.8
million, consisting of $14.2 million in net income and $5.2 million in depreciation
and amortization and an increase in non-cash working capital of $0.9 million. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

| | Cash
used in investing activities for the nine months ended September 30, 2003 included $71.6
million and $5.3 million used for the acquisitions of TogetherSoft and Starbase,
respectively, discussed in Note 4 to the Condensed Consolidated Financial Statements,
$24.7 million for purchases of short-term investments and $5.5 million in cash used
for the purchase of property and equipment, offset by $75.6 million in sales and
maturities of short-term investments. Cash used in investing activities for the nine
months ended September 30, 2002 included $2.2 million used for the acquisition of VMGear
discussed in Note 4 to the Condensed Consolidated Financial Statements, $2.7 million in
cash used for the purchase of property and equipment, and net purchases of short-term
investments of $93.4 million. | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Cash
provided by financing activities was $0.4 million for the nine months ended September 30,
2003 and principally consisted of proceeds of $13.1 million from the issuance of common
stock to employees under our employee stock option and employee stock purchase plans
offset by $12.5 million in repurchases of common stock. Cash used in financing activities
was $1.3 million for the nine months ended September 30, 2002, which principally consisted
of $7.3 million in repurchases of common stock offset by $6.0 million from the issuance of
common stock to employees under our employee stock option and employee stock purchase
plans. In August 2003, our Board of Directors authorized an additional repurchase of up to
$15.0 million of our common stock. A total of $22.0 million remains authorized for future
repurchases under the repurchase program. We expect to continue to repurchase shares under
our repurchase program from time to depending on market conditions, share price and availability, and other
factors at our discretion. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

| | Currency
fluctuations did not have a significant impact on our cash position during the nine months
ended September 30, 2003. Although we partially hedge our foreign currency exchange rate
risk, strengthening of the U.S. dollar against the Euro, United Kingdom Pound Sterling,
Australian and Singapore dollars or the Japanese Yen would harm our business. We cannot
predict currency exchange rate fluctuations and there can be no assurance that foreign
currency exchange rates will not have a material adverse impact on our future cash flows
and operating results. See further discussion of foreign currency risk in Item 3,
Quantitative and Qualitative Disclosures About Market Risk. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

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of Contents | 
| | ----------------- | 

| | As
of September 30, 2003, we have no long-term debt, and we have other long-term liabilities
of approximately $11.9 million, which consisted principally of deferred tax liabilities
and non-current restructuring accruals. At September 30, 2003, we had operating lease
commitments of approximately $57.3 million. These contractual lease payments will be
paid over the following period (amounts in thousands): | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

|Calendar Year                        | Operating
Leases
|------------------------------------ | ----------------
|Three months ended December 31, 2003 | $               
|2004                                 |                 
|2005                                 |                 
|2006                                 |                 
|2007                                 |                 
|2008                                 |                 
|Thereafter                           |                 
|                                     |                 
|                                     | $               
|                                     |                 

| | We
anticipate that operating expenses and planned capital expenditures will continue to
constitute a material use of our cash resources. We expect our capital expenditures in
2003 to be greater than in 2002, however, there are currently no significant capital
commitments. In addition, we may utilize cash resources to fund acquisitions or
investments in other businesses, technologies or products lines. We believe that our
available cash and cash equivalents, together with our anticipated future cash provided by
operating activities, will be sufficient to meet our working capital and operating expense
requirements for at least the next twelve months. At some point in the future we may seek
additional funds to support our working capital and operating expense requirements or for
other purposes and may seek to raise the additional funds through public or private debt
or equity financings. If we seek additional financing, there is no assurance that this
additional financing will be available, or if available, will be on reasonable terms and
not dilutive to our stockholders. | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

23

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| | Table
of Contents | 
| | ----------------- | 

| | FACTORS
THAT MAY AFFECT FUTURE RESULTS AND MARKET PRICE OF STOCK | 
| | ---------------------------------------------------------------- | 

| | We
operate in a rapidly changing environment that involves many risks, some of which are
beyond our control. The following is a discussion that highlights some of these risks.
Additional risks and uncertainties not presently known to us or that we currently deem
immaterial also may impair our business operations or results. If any of these risks
actually occur, our business operations or results could be harmed. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | We
are in the process of transforming the company from one that focuses on the development
and distribution of point solutions to the development and distribution of comprehensive
solutions. If we are unable to complete this transformation quickly and smoothly, our
operating results could be harmed. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

| | We
are undergoing a transformation from a company that focuses on the development and
distribution of discrete development tools to the development and distribution of
comprehensive development solutions. This transformation has taken many forms (each of
which involves substantial risks), including: | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

| |  | Changes in go-to-market strategy.  To achieve increased sales force productivity,
we must complete more high-revenue, multi-product sales of our application lifecycle
management, or ALM, solutions. To do so, we must coordinate the efforts of our marketing,
sales, and services organizations to focus on the needs of large enterprises. If we fail
to coordinate these efforts, we will not satisfy the demands of the large enterprise
customers that we are targeting and will not achieve our anticipated revenues. | 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| |  | Changes
in the make-up of our executive management.  Several members of our executive
management team, including our chief operating officer, our general counsel, and our
senior vice president of worldwide sales, recently joined us. As a result, the executive
team has a very short history working together, and it is unclear whether they will be
able to manage the company effectively. If they are unable to work together effectively,
our business will suffer. | 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| |  | Changes
in our sales organization.  We have recently focused our sales effort on enterprise
customers. As a part of this effort to transform our sales organization, we have
re-allocated the territories in which our sales force operates and terminated a number of
sales professionals. In addition, to improve upon our sales execution, we recently
installed a new sales leadership team. We expect to continue to make changes in our sales
organization to focus more effort on enterprise customers. These efforts risk
precipitating the departure of other sales executives, may prove unsuccessful in
increasing our sales to enterprise customers, and may prove unsuccessful in increasing
our revenues. | 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| |  | Reductions
in force.  In an effort to streamline our organization, we recently reduced the
number of employees in the company from 1,618 to 1,530 including a reduction of 29
employees in our research and development operations. Given the substantial cuts that we
made, there is a risk that we will not be able to ship new products or product upgrades
at the times that we originally planned. If we experience delays in the shipment of new
products or product upgrades, we may lose customers or may not achieve anticipated sales
during a particular period. | 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| |  | Changes
in product mix.  We now offer a wider array of products that focus on the software
development needs of large enterprises. Sales to large organizations often are
accompanied by long sales cycles. Given our relative inexperience in serving this market,
we may be unable to accurately forecast revenues derived from these customers. If we fail
to accurately forecast revenues, we may not achieve the net income that we anticipate,
which could harm our stock price. | 
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| |  | International
operations.  We now have research facilities in Singapore, Russia and the Czech
Republic, and we have a direct sales force in place in 26 countries around the world. We
may experience difficulty in making the necessary changes quickly and in managing our
geographically dispersed organization. As a result, our results of operations may suffer. | 
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | While
we believe that transforming the organization to focus on the development and delivery of
comprehensive solutions to enterprise customers is critical to achieving higher operating
margins, we may be unable to complete this transformation smoothly and quickly. If we are
unable to achieve those higher operating margins, our business will be harmed. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

| | We
are relatively new to selling comprehensive solutions for the application development
lifecycle, and we may not be able to successfully compete in that broader market. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | The
application development lifecycle market has been evolving, as customers are increasingly
demanding development solutions that address each stage of the application development
lifecycle. While we believe we | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

24

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| | Table
of Contents | 
| | ----------------- | 

| | maintain
strong relationships with the IT organizations in large enterprises through our developer
network, we do not have extensive experience selling comprehensive development solutions.
Historically, we have focused on selling particular products for particular segments of
the development process, most notably the sale of development tools. We believe our
comprehensive product solutions are attractive to large enterprises. However, we have
little history of selling these comprehensive solutions, and we may be unable to
transition to effectively selling these solutions to large enterprises. To compete
successfully in the application development lifecycle market, we believe we will need to: | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| |  | develop
stronger relationships with systems integrators and other strategic partners with access
to enterprise accounts and executive-level decision makers; | 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

| |  | coordinate the activities of our various product organizations to provide fully
integrated products, including synchronizing release cycles; | 
| | - | -------------------------------------------------------------------------------------------------------------------------------------------- | 

| |  | successfully and efficiently educate our existing marketing, direct sales and
indirect sales teams on selling comprehensive solutions; and | 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------ | 

| |  | compete with several very large and well-established companies with more experience in
these markets. | 
| | - | ----------------------------------------------------------------------------------------------------- | 

| | If
we are unable to do any of the foregoing, our operating results will suffer. | 
| | ------------------------------------------------------------------------------- | 

| | Our
increasing focus on enterprise customers may lengthen our sales cycles and increase
fluctuations in our financial results. | 
| | ------------------------------------------------------------------------------------------------------------------------------ | 

| | As
we increasingly seek to license software products directly to large enterprises, we have
experienced sales cycles that are substantially more lengthy and uncertain than those
associated with our traditional business of licensing software through indirect and retail
channels. As we focus on large transactions that involve multiple elements, including
licenses for development and deployment products, technical support, maintenance,
consulting and training services, enterprise customers generally commit significant time
and resources to evaluating our software, and they require us to expend substantial time,
effort and money in establishing the relationship and in educating them about our
solutions. Also, sales to enterprise customers generally require an extensive sales effort
throughout the customers organization and often require final approval by the
customers chief information officer or other senior executive employee. In
particular, we believe that purchase decisions on software development technology often
involve more senior-level employees than sales of the development products that we have
traditionally sold. These factors substantially extend the sales cycle and increase the
uncertainty of whether a sale will be made in any particular quarter, or at all. We have
experienced and expect to continue to experience delays and uncertainty in our sales cycle
as well as increased up-front expenses in connection with enterprise sales. The timing of
the execution of enterprise volume licenses, or their nonrenewal by large customers, could
cause our results of operations to vary significantly from quarter to quarter. | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | We
may not be able to successfully compete against current and potential competitors. | 
| | ------------------------------------------------------------------------------------- | 

| | Our
markets are intensely competitive. Rapid change, new and emerging technologies, and fierce
competition characterize these markets. Below is a table of our chief competitors for each
of our product lines: | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

|                       |                                                                                                         
|---------------------- | --------------------------------------------------------------------------------------------------------
|Product                | Competitive Products                                                                                    
|CaliberRM              | IBMs Rational Requisite Pro and Telelogics DOORS                                                      
|Together ControlCenter | IBMs Rational Rose and Rational XDE, and Embarcaderos Describe                                        
|JBuilder               | IBMs WebSphere Studio Application Developer, Oracles JDeveloper and JetBrains IntelliJ               
|Delphi/C++             | Microsofts Visual Studio and Visual Basic                                                              
|Optimizeit             | IBMs Rational Purify Plus and Quests JProbe                                                           
|StarTeam               | Telelogics CM Synergy, Merants PVCS, IBMs Rational ClearCase and ClearQuest and MKS Source Integrity

25

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| | ----------------- | 

|                                              |                                                                               
|--------------------------------------------- | ------------------------------------------------------------------------------
|Product                                       | Competitive Products                                                          
|Borland Enterprise Server, VisiBroker Edition | Ionas Orbix                                                                  
|Borland Enterprise Server, AppServer Edition  | BEA Systems WebLogic, IBMs WebSphere, Oracle 9i and Sun Microsystems Sun ONE

| | We
attempt to differentiate our products from our competitors products based on
interoperability, cost of ownership, performance and reliability. In the future, we may be
unable to successfully differentiate our products from those of our competitors. Many of
our competitors have substantially greater financial, management, marketing and technical
resources than we have. In addition, many of our competitors have well established
relationships with our current and potential customers, extensive knowledge of the market,
substantial experience in selling enterprise solutions, and extensive product development,
sales and marketing resources. As a result of their greater resources and established
relationships, these competitors may be more successful than we are at developing and
marketing products in our markets. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

| | Bundling
arrangements or product give-aways by our competitors, including freely available
development technologies, may diminish demand for our products or pressure us to
reduce our prices. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Some
of our competitors, particularly those that are primarily hardware vendors or platform
providers, generate a substantially greater proportion of their sales in markets in which
we do not directly compete. We believe a number of these competitors view sales of
software development technologies as important for enhancing the functionality of, and
demand for, their core products. As a result, some companies may bundle software
development products that compete with our offerings with their other products, such as
application servers, work stations, personal computers, operating systems and databases.
When competitors do so, the effective price for software development products that compete
with our development products may be heavily discounted or offered at no charge. This
could require us to reduce the price of our products and related services, diminish our
revenues and harm our profitability. Similarly, industry alliances and arrangements exist
or may be formed in the future under which our competitors ally with companies in markets
in which we do not compete to bundle products. These arrangements may result in lower
effective prices for our competitors products than our products, putting pressure on
our business and diminishing our competitive position. | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | In
addition to bundled offerings and bundling arrangements, some competitors make available
to their customers for no charge products that compete with our software development
solutions, including solutions such as JBuilder. While we believe that products made
available at minimal or no cost are not able to compete with our offerings on the basis of
quality, performance and reliability, freely available competitive technologies are a risk
to our business. At a minimum, technologies offered at no charge increase pricing pressure
and threaten revenue potential. For example, IBM recently donated some of its proprietary
software to the open source Eclipse initiative. Eclipse has created an open source toolkit
in which customers can access and create development technologies at no charge. Wide
adoption of this model may reduce demand for some of our products. | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | A
number of factors affecting our revenues makes our future results for a particular period
difficult to predict, and therefore we may not meet expectations for a particular
period. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | We
believe that our revenues have the potential to vary significantly from time to time.
These variations could cause our stock price to fluctuate significantly. We believe that
these variations may result from many factors, including, but not limited to: | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| |  | timing, and any delay in the introduction, of upgrades to existing products or
releases of new products; | 
| | - | -------------------------------------------------------------------------------------------------------- | 

| |  | our limited experience in consistently forecasting revenues across all of our
business units and across our geographic regions; | 
| | - | ------------------------------------------------------------------------------------------------------------------------------- | 

| |  | the mix of channels through which we sell our products; | 
| | - | ------------------------------------------------------- | 

| |  | the relative mix of demand for our various products and services; | 
| | - | ----------------------------------------------------------------- | 

| |  | the size and timing of significant orders and their fulfillment; | 
| | - | ---------------------------------------------------------------- | 

| |  | changes in pricing policies by us or our competitors; | 
| | - | ----------------------------------------------------- | 

| |  | customer order deferrals; and | 
| | - | ----------------------------- | 

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| | ----------------- | 

| |  | product defects that may be discovered from time to time and other product quality
problems. | 
| | - | -------------------------------------------------------------------------------------------- | 

| | From
time to time, we announce when we expect to introduce a new product. We also attempt to
maintain a consistent release schedule for upgrades of existing products. In the past,
some of our products have shipped later, sometimes substantially later, than when we
originally expected. Due to the uncertainties inherent in software development, it is
likely that delays in the introduction of new products will materialize from time to time
in the future. If we experience delays in the shipment of new products or product
upgrades, we may lose customers or may not achieve anticipated sales during a particular
period. As a result, we may not achieve the financial results that we anticipate. | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | A
significant portion of our customers, particularly enterprise customers, tend to place
orders toward the end of a given quarter. Therefore, revenues may be difficult to predict,
and any shortfall in revenues for a quarterly period may not be known until late in the
quarter. Additionally, our costs, while based on projected revenues, are relatively fixed
in the short term. Therefore, if our revenue levels fall below projections, net income may
be significantly reduced or result in losses. As a result, we believe that quarterly
revenues and operating results will continue to be difficult to forecast, and
period-to-period comparisons of our results of operations are not necessarily meaningful
and should not be relied upon as indications of trends or our future performance. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | We
depend on technologies licensed to us by third parties, particularly those of Sun
Microsystems and Microsoft, and the loss of or inability to maintain these licenses
could prevent or delay sales or shipments of certain of our products. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | We
are dependent on licenses from third-party suppliers for some elements of our products
such as various file libraries. In particular, we are dependent on technology licenses
from Sun Microsystems for our Java products and we are dependent on licenses from
Microsoft for our Delphi, C++Builder, C#Builder and Janeva products. If any of these
licenses were terminated or were not renewed, or if these third parties failed to notify
us in a timely manner of any new or updated technology, we might not be able to ship such
products or provide support for such products, including upgrades. We would then have to
seek an alternative to the third partys technology and, in some cases, an
alternative may not exist. This could result in delays in releasing and/or shipping our
products, increased costs or reduced functionality of our products which in turn could
substantially reduce our revenues. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Consolidation
in our industry may impede our ability to compete effectively. | 
| | ---------------------------------------------------------------------------- | 

| | Consolidation
continues to occur among companies that compete in our markets as firms seek to offer more
extensive suites of software products and to take advantage of efficiencies and economies
of scale. Additionally, a number of major hardware companies have sought to expand their
software and services offerings through acquisitions. Recently, IBM acquired Rational
Software, a competitor of ours. Changes resulting from this and other consolidations may
harm our competitive position, particularly as certain products, when offered as part of a
bundled suite, are offered for free or are given away to sell more hardware or
infrastructure components. In addition, as the trend toward consolidation continues, we
may encounter increased competition for attractive acquisition targets and may have to pay
higher prices for those businesses or technologies we seek to acquire. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | If
we fail to effectively manage our growth, our infrastructure, management and resources
could be strained, our ability to effectively manage our businesses could be
diminished and our operating results could suffer. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Our
future success depends on growing our company. Failure to manage growth effectively could
strain our resources, which would impede our ability to increase revenues. During the past
two years, we have increased the number of product releases we make each year and have
introduced a number of new products and services. In addition, we have undertaken a number
of acquisitions in the last year, diversified our product offerings and increased our
international operations. There is a risk that we will be unable to manage the growth that
we have recently experienced and that we will be unable to manage our substantially larger
company, including our international operations. If we fail to manage these risks, our
operating results could suffer. | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | As
we expand and diversify our product and customer base, we may be required to increase our
selling, general and administrative expenses. We also may be required to increase staffing
and other expenditures in order to meet the anticipated demands of our customers. However,
given that our customers do not commit to license our software for more than a short time
in advance, any increase in expenses in anticipation of future orders that do not
materialize could reduce our net income. If we are unable to match our increased staffing
and other expenditures with similarly increased revenue, our profitability would be
harmed. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

27

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| | Table
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| | ----------------- | 

| | Our
historical financial results are based on sales of development applications for currently
adopted languages. As the markets for our products in these currently adopted
languages mature, our revenues could be harmed. | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Our
historical financial information relating to a number of our software development
technologies is based on sales of software designed to develop applications for currently
adopted platforms and languages (e.g., Windows, C++ and Java) as well as traditional
computer hardware platforms (e.g., mainframes, work stations, applications servers,
desktop personal computers, notebook computers). For example, many of our most popular
products are focused on the Java language and platform, and we continue to invest heavily
in software solutions for the Java platform as it evolves, including enterprise-focused
standards such as Java 2 Platform, Enterprise Edition, or J2EE, and Enterprise JavaBeans,
or EJB. Recently, the growth of the market for our Java solutions has slowed. Similarly,
our deployment products, including Borland Enterprise Server, are based on Common Object
Request Broker Architecture, or CORBA, a standard for communicating across large
enterprise networks. CORBA provides a way to execute software programs written in
different programming languages running on different platforms no matter where they reside
in the network. While we believe that CORBA has achieved widespread acceptance, critics
contend that its penetration tends to be narrow and deep, resulting in large investments
by relatively few enterprises. As a result, while we continue to enhance the functionality
of these products and expect sales of these technologies to continue to generate a
significant percentage of our revenues, we believe these markets are maturing. If Java and
CORBA do not sustain the level of adoption that we anticipate, our expected revenues would
diminish. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

| | If
our development products for Microsofts .NET Framework are not successful, our
business would be harmed. | 
| | ------------------------------------------------------------------------------------------------------------ | 

| | We
are currently investing resources in our research and development efforts for the .NET
Framework, Microsofts new operating environment for software applications. While we
have and will continue to release development products that support the .NET Framework,
our business would be harmed if our development product for the .NET Framework fails to
address the needs of our customers, or if our competitors, particularly Microsoft, develop
more effective or efficient products. In addition, despite our efforts to provide
effective and compatible development products for the .NET Framework, customers may still
elect to use an all-Microsoft development platform. Furthermore, the success of our .NET
products is dependent upon Microsoft gaining market acceptance of its .NET Framework. If
Microsofts .NET Framework does not gain market acceptance or gains acceptance more
slowly than we anticipate, our investments in .NET compatible products may not generate
their anticipated return. In conjunction with the .NET Framework, Microsoft has a new
development language, C#. An alternative to Java, C# is an object-oriented programming
language and is based on C++. We believe that C# is gaining in market acceptance. If
certain emerging programming languages, such as Microsofts C#, gain significantly in
popularity and we do not offer a development technology to facilitate development in such
languages, our competitiveness could be diminished. | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | If
we are unable to meet rapid changes in technology and introduce competitive products, our
existing products could become technologically obsolete. | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | The
market for our products is characterized by continuous technological advancement, evolving
industry standards and changing customer requirements. While we believe that to date we
have successfully developed products that incorporate the latest technologies and
standards, we cannot be certain that we will successfully design and market new products
and upgrades of our current products that are competitive and work with existing and new
computer platforms and operating environments. This is especially true regarding the
development of comprehensive solutions for the .NET Framework. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Additionally,
we face a number of competitive risks in the software market, including, but not limited
to, the following: | 
| | ------------------------------------------------------------------------------------------------------------------------- | 

| |  | we may introduce products later than competitors introductions; | 
| | - | ---------------------------------------------------------------- | 

| |  | competitors may introduce competing products at lower prices or potentially at no
cost; | 
| | - | --------------------------------------------------------------------------------------- | 

| |  | our products may not meet customers expectations regarding features and
performance; | 
| | - | ------------------------------------------------------------------------------------- | 

| |  | competitors products based on new technologies or new industry standards may
quickly render our existing products obsolete; | 
| | - | ---------------------------------------------------------------------------------------------------------------------------- | 

| |  | the free availability of certain core new technologies may lower barriers to entry
in our target markets; and | 
| | - | ------------------------------------------------------------------------------------------------------------- | 

| |  | in
order to match actions by competitors, we may need to provide product upgrades at lower
prices, which may result in lower margins and decreased operating results. | 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

28

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| | Table
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| | ----------------- | 

| | If
we do not successfully address these risks, our business may be harmed. | 
| | -------------------------------------------------------------------------- | 

| | If
our products do not operate with the wide variety of hardware, software, operating
systems, environments and programming languages used by our customers, our revenues
would be harmed. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

| | Our
customers use a wide variety of constantly changing hardware, software and operating
platforms. We invest and will continue to invest significant resources to develop products
for new or emerging software and hardware platforms in the server, desktop, personal
digital assistant, mobile, wireless and other environments that may develop from time to
time. However, there is a risk that a new hardware or software platform for which we do
not provide products could rapidly grow in popularity. In particular, we believe that this
risk is substantial for particular proprietary platforms and languages for which we may
not be given economically feasible access or access at all. As a result, we may not be in
a position to develop products for such platforms or may be late in doing so. If we fail
to introduce new products that address the needs of emerging market segments or if our new
products do not achieve market acceptance as a result of delays in development or other
factors, our future growth and revenue opportunity could suffer. | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | We
rely on independent software vendors, value-added resellers, system integrators and other
channel partners to complement our direct sales. If we cease doing business with one or
more of these parties, our revenues could suffer. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | We
rely on independent software vendors, or ISVs, value-added resellers, or VARs, systems
integrators and other channel partners to complement our direct sales. A part of our
strategy is to bundle our software in the products offered by VARs. The pricing, terms and
conditions of our agreements with these parties are individually negotiated and vary. A
majority of these agreements are non-exclusive. Many of our agreements do not require our
customers to make a minimum number of purchases, and we have virtually no control over the
shipping dates or volumes of systems shipped by our channel partners. Although we believe
our relationships with our channel partners have been successful to date, we cannot
guarantee that these relationships will continue to be successful or grow or that the
channel partners will continue to purchase our products at the anticipated levels in the
future. If we do not maintain good relations with our channel partners or if we are unable
to secure arrangements with these parties on favorable terms, our business may suffer. | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | In
addition, we depend on a small number of distributors for a significant portion of our
revenue, and we expect that a small number of distributors will continue to account for a
significant portion of our revenues for the foreseeable future. Presently, some software
distributors are experiencing financial weakness. If we lose a major distributor, such as
Ingram Micro, or if we fail to increase the number of our distributors, our ability to
maintain or increase our market share could be significantly harmed. As a result, our
revenues could drop quickly and unexpectedly. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Failure
to expand or grow our professional services offerings and enlist others to provide
services for our products could harm our ability to sell comprehensive solutions to
enterprise customers. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | We
believe that growth in our licenses and other revenues will depend on our ability to
provide our customers with comprehensive professional services and to enlist other parties
to provide similar services, including systems integrators, distributors and other channel
partners. These professional services include maintenance, architectural consulting,
training, education and project management. If we fail to attract, train and retain
skilled personnel to deliver professional services, our ability to sell comprehensive
solutions to enterprise customers could be seriously harmed. Competition for qualified
professional services personnel is intense, and we may be unable to attract, train and
retain the number of highly qualified professional services personnel that we need. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Our
strategic relationships may not achieve their objectives, and the failure to do so could
impede our growth. | 
| | --------------------------------------------------------------------------------------------------------------- | 

| | We
currently maintain a number of important strategic alliances and technology relationships
with industry leaders such as BEA Systems, Mercury Interactive, Microsoft, Nokia and Sun
Microsystems. Our current technology relationships give us, among other things, early
access to emerging technologies, additional resources to market our products, and an entry
point to contact potential customers. Similarly, our strategic relationships with systems
integrators, such as Accenture, and resellers provide additional expertise to our
customers and bolster our service capabilities. In the future, we anticipate exploring
additional strategic alliances, technology relationships and other arrangements designed
to further all of these goals. Our current or prospective strategic alliances and
technology relationships may not achieve their intended objectives, however, and parties
to our strategic alliances and technology relationships may not perform as contemplated.
Additionally, our allies may choose to terminate | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

29

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| | Table
of Contents | 
| | ----------------- | 

| | their
arrangements with us where no binding contractual arrangements exist. The failure to
develop or maintain our strategic alliances and technology relationships or our allies inability
to perform or to opt out of their arrangements with us may impede our ability to
introduce new products or enter new markets, and consequently harm our revenue prospects. | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Failure
to manage our international operations could harm our financial results. | 
| | -------------------------------------------------------------------------------- | 

| | A
substantial portion of our revenues is from international sales. International sales
accounted for approximately 57% and 56% of our revenues in the three and nine months ended
September 30, 2003, respectively. In addition, following our acquisition of TogetherSoft,
an increasing portion of our operations consists of activities outside the United States.
We now have research facilities in Singapore, Russia and the Czech Republic. Given our
increasing presence in international markets and the potential for sales of our products
in international markets, our business is increasingly subject to risks inherent in doing
business internationally, including: | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

| |  | the difficulty of staffing and managing an organization spread over various
countries and continents; | 
| | - | ----------------------------------------------------------------------------------------------------- | 

| |  | potentially reduced or less certain protection for intellectual property rights
than is available under the laws of the United States; | 
| | - | -------------------------------------------------------------------------------------------------------------------------------------- | 

| |  | seasonal reductions in business activity during the summer months in Europe and
other parts of the world; | 
| | - | --------------------------------------------------------------------------------------------------------- | 

| |  | longer payment cycles in some countries and greater difficulty in collecting
accounts receivable; | 
| | - | ------------------------------------------------------------------------------------------------- | 

| |  | fluctuations in foreign currency exchange rates; | 
| | - | ------------------------------------------------ | 

| |  | restrictions on the expatriation of currency from a particular country; | 
| | - | ----------------------------------------------------------------------- | 

| |  | export restrictions, tariffs, duties and other trade barriers; | 
| | - | -------------------------------------------------------------- | 

| |  | changes in regulatory requirements and resulting costs; | 
| | - | ------------------------------------------------------- | 

| |  | compliance with various conflicting laws and regulations, including employment
laws, and resulting costs; | 
| | - | --------------------------------------------------------------------------------------------------------- | 

| |  | terrorist activity; | 
| | - | ------------------- | 

| |  | war and threats of war; and | 
| | - | --------------------------- | 

| |  | political or economic instability in certain parts of the world. | 
| | - | ---------------------------------------------------------------- | 

| | One
or more of these risks could harm our future research operations and international sales.
If we are unable to manage these risks of doing business internationally, our results of
operations could suffer. | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Because
competition for qualified personnel is intense, we may not be able to recruit or retain
qualified personnel, which could harm the development and licensing of our products. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

| | We
believe that our ability to successfully grow and manage our business and to develop new
products will depend, in large part, on our ability to recruit and retain qualified
employees, particularly highly skilled software engineers and management personnel. In the
past, some of our competitors have utilized their greater resources to provide substantial
signing bonuses and other inducements to lure key personnel away from us. We are not
certain that these efforts will succeed in retaining our key employees, and our failure to
attract and retain key personnel could significantly harm our business. | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | We
may incur future impairment losses related to intangible assets from prior acquisitions
that could harm our future operating results. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------- | 

| | We
have recently acquired significant assets and businesses. If the assets and businesses do
not perform as expected, substantial quantities of intangible assets may need to be
amortized or written off. To the extent the assets cannot be amortized, we may be required
to take impairment charges related to the intangible assets from these acquisitions. Such
charges could harm our operating results. | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

30

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| | Table
of Contents | 
| | ----------------- | 

| | We
have net operating loss and tax credit carryforwards that may change our effective tax
rate and in turn have a material effect on our income. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------ | 

| | Our
effective tax rate is primarily dependent on the location of our taxable profits, if any,
due to our net operating loss carryforwards in certain, but not all, jurisdictions, and
the imposition of withholding taxes on revenues regardless of our profitability. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | We
have significant U.S. federal and state income tax net operating losses. For U.S. federal
and state income tax purposes, we had net operating loss carryforwards of approximately
$186 million and $6 million at December 31, 2002, respectively. We also had available U.S.
federal and state tax credit carryforwards of approximately $19 million and $11 million,
respectively. These loss and credit carryforwards expire between 2005 and 2021, if not
utilized. Utilization of federal and state net operating loss and tax credit carryforwards
may be subject to a substantial annual limitation due to the ownership change limitations
provided by the Internal Revenue Code of 1986, as amended, and similar state provisions.
The annual limitation may result in the expiration of net operating loss and tax credit
carryforwards before full utilization. We also have approximately $27 million of net
operating loss carryforwards in various foreign jurisdictions. Certain of these loss
carryforwards will expire in 2003. To the extent we are unable to utilize these loss and
credit carryforwards, our effective tax rate will rise. A higher effective tax rate may
harm our future after tax income. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | In
January, 2003, we completed the acquisitions of Starbase and TogetherSoft. As a result, we
succeeded to the pre-acquisition federal and state net operating loss and tax credit
carryforwards of both companies. Utilization of these federal and state net operating loss
and tax credit carryforwards will be subject to a similar annual limitation as discussed
above. | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Our
products may contain unknown defects that could result in a loss of revenues, decreased
market acceptance, injury to our reputation and product liability claims. | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Software
products occasionally contain errors or defects, especially when they are first introduced
or when new versions are released. We have not experienced any substantial problems to
date from potential defects and errors, but we cannot assure you that our products are or
in the future will be completely free of defects and errors. The discovery of a defect or
error in a new version or product may result in the following consequences, among others: | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

| |  | delayed shipping of the product; | 
| | - | -------------------------------- | 

| |  | delay in market acceptance; | 
| | - | --------------------------- | 

| |  | diversion of development resources; | 
| | - | ----------------------------------- | 

| |  | damage to our reputation; and | 
| | - | ----------------------------- | 

| |  | increased service and warranty costs. | 
| | - | ------------------------------------- | 

| | In
addition, as we transition to selling larger, comprehensive solutions, there is the risk
that our current products will not prove scalable without substantial effort. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | If
we are unable to protect our intellectual property, we may lose valuable assets. | 
| | ----------------------------------------------------------------------------------- | 

| | As
a software company, our intellectual property rights are among our most valuable assets.
We rely on a combination of patent, copyright, trademark, trade secret laws, domain name
registrations, confidentiality agreements and other contractual arrangements and other
methods to protect our intellectual property rights, but these measures may provide only
limited protection. The protective steps we have taken may be inadequate to deter
misappropriations of our intellectual property rights. In addition, it may be possible for
an unauthorized third party to reverse-engineer or decompile our software products. We may
be unable to detect the unauthorized use of, or take appropriate steps to enforce, our
intellectual property rights, particularly in certain international markets, making
misappropriation of our intellectual property more likely. Litigation may be necessary to
protect our intellectual property rights, and such litigation can be time consuming and
expensive. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Third
party claims of intellectual property infringement may subject us to costly litigation or
settlement terms or limited sales of our products. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | From
time to time, we have received notices claiming that we have infringed a third
partys patent or other intellectual property right. We expect that software products
in general will increasingly be subject to these claims | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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of Contents | 
| | ----------------- | 

| | as
the number of products and competitors increase, the functionality of products overlap
and as the patenting of software functionality becomes more widespread. Further, the
receipt of a notice alleging infringement may require in some situations that a costly
opinion of counsel be obtained to prevent an allegation of intentional infringement.
Regardless of its merits, responding to any claim can be time consuming and costly and
divert the efforts of our technical and management personnel from productive tasks. In
the event of a successful claim against us, we may be required to pay significant
monetary damages, including treble damages if we are held to have willfully infringed,
discontinue use and sale of the infringing products, expend significant resources to
develop non-infringing technology and/or enter into royalty and licensing agreements that
might not be offered or be available on acceptable terms. If a successful claim were made
against us and we failed to commercially develop or license a substitute technology, our
business could be harmed. In addition, we may not have insurance coverage for these types
of claims or our insurance coverage for these types of claims may not be adequate. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Intentional
efforts to harm or disrupt the functioning of our software could harm our reputation and
result in significant unexpected costs. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Our
products or services may be the target of intentional disruptions, such as software
viruses specifically designed to impede the performance of our products. Similarly,
experienced computer programmers or hackers may attempt to penetrate our network security
and misappropriate proprietary information. If these efforts were successful, our
activities could be substantially disrupted, and our reputation and future sales could be
harmed. | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Our
stockholder rights plan, charter documents and Delaware law could discourage an
acquisition of our company, even if an acquisition might be viewed as beneficial to
our stockholders. | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Our
stockholder rights plan and certain provisions in each of our Restated Certificate of
Incorporation, Amended and Restated Bylaws and the Delaware General Corporation Law may
discourage, delay or prevent an actual or potential change in control of our company even
if that change in control could be beneficial to and in the best interests of our
stockholders. This could limit our stockholders ability to approve a transaction
that they may deem to be in their best interests. In addition, our Board of Directors has
the authority, without stockholder approval, to fix the rights and preferences of, and
issue shares of one or more series of preferred stock. | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | In
October 2001, we adopted a new stockholder rights plan, which replaced an existing plan
that expired in December 2001, to protect our stockholders in the event of a proposed
takeover that has not been recommended or approved by our Board of Directors. Under our
current stockholder rights plan, each share of our outstanding common stock has attached
to it one preferred share purchase right. Each preferred share purchase right entitles the
holder, other than the acquiring person or entity, under certain circumstances, to
purchase shares of our common stock at a 50% discount from its then-current market price. | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

32

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| | Table
of Contents | 
| | ----------------- | 

| | Item
3.Quantitative and Qualitative Disclosures About Market Risk | 
| | ----------------------------------------------------------------- | 

| | Market
risks relating to our operations result primarily from changes in interest rates and
foreign currency exchange rates, as well as credit risk concentrations. To address the
foreign currency exchange rate risk we enter into various hedging transactions as
described below. We do not use financial instruments for trading purposes. | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Foreign
Currency Risk | 
| | --------------------- | 

| | We
transact business in various foreign countries and have established a foreign currency
hedging program utilizing foreign currency forward exchange contracts to hedge
intercompany balances and other monetary assets denominated in foreign currencies. The
goal of the hedging program is to offset the earnings impact of foreign
currency-denominated balances by entering into contracts to sell or buy foreign currency
at the time a foreign currency receivable or payable is generated. We do not use foreign
currency forward exchange contracts for trading purposes. At month-end, foreign
currency-denominated balances and the forward exchange contracts are marked-to-market and
unrealized gains and losses are included in current period net income. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | During
the three months ended September 30, 2003, we recorded net foreign exchange losses of
$0.3 million. The foreign exchange losses were generated primarily due to the
strengthening of the dollar relative to the South Korean Won, the United Kingdom Pound
Sterling, the Australian Dollar and the Euro offset against foreign exchange losses due to
the strength of the dollar against the Brazilian Real. It is uncertain whether these
currency trends will continue. If the U.S. dollar strengthens against these or other major
currencies, we will experience foreign exchange losses on our intercompany receivables to
the extent that we have not hedged the exposure with foreign currency forward exchange
contracts. Such foreign exchange losses could have a material adverse effect on our
operating results and cash flows. | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | During
the three months and nine months ended September 30, 2003, we recorded a foreign currency
gain of approximately $0.7 million and $2.5 million, respectively, as part of other
comprehensive income due to foreign currency movements on our long-term intercompany
balances. As of September 30, 2003, we had $11.6 million and $2.9 million in long-term
intercompany balances that are denominated in Australian dollars and Singapore
dollars, respectively. We also have a U.S. dollar denominated long-term intercompany
receivable with our Brazilian subsidiary of $1.8 million. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | The
table below provides information about our derivative financial instruments, comprised of
foreign currency forward exchange contracts as of September 30, 2003. The information is
provided in U.S. dollar equivalent amounts, as presented in our financial statements. For
foreign currency forward exchange contracts, the table presents the notional amounts (at
the contract exchange rates), the weighted average contractual foreign currency exchange
rates and the net fair value as of September 30, 2003. All forward contracts in the table
below are net amounts and represent contracts to sell the currencies listed. These
contracts were entered into at the end of the quarter and have no net fair value. These
instruments mature within twelve months (dollar amounts in thousands). | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

|                                             | (USD) Notional
Amount |        | Average
Contract Rate
|-------------------------------------------- | --------------------- | ------ | ---------------------
|Foreign currency forward exchange contracts: |                       |        |                      
|Australian Dollar                            | $                     | 4,000  |                      
|Euro                                         |                       | 3,000  |                      
|New Zealand Dollar                           |                       | 400    |                      
|United Kingdom Pound Sterling                |                       | 2,600  |                      
|Swedish Krona                                |                       | 600    |                      
|Singapore Dollar                             |                       | 4,000  |                      
|Japanese Yen                                 |                       | 1,250  |                      
|South Korean Won                             |                       | 900    |                      
|                                             |                      
|Total                                        | $                     | 16,750
|                                             |                      

| | Interest
Rate Risk | 
| | ------------------ | 

| | Our
exposure to market risk for changes in interest rates relates primarily to our investment
portfolio. We do not use derivative financial instruments in our investment portfolio. We
place our cash equivalents and short-term | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

33

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| | Table
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| | ----------------- | 

| | investments
in a variety of financial instruments such as commercial paper. By corporate policy, we
limit the amount of our credit exposure to $5.0 million to any one commercial issuer. | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | We
mitigate default risk by investing in securities rated at least A2/P2 as published by
Standard and Poors and Moodys, and by positioning our portfolio to respond
appropriately to a significant reduction in the credit rating of any investment issuer. To
ensure portfolio liquidity, our portfolio includes only marketable securities with active
secondary and resale markets. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | The
table below presents principal (or notional) amounts and related weighted average interest
rates by year of maturity for our investment portfolio as of September 30, 2003 (dollar
amounts in thousands). | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

|                       | 2003 |         | 2004 |  | 2005 |  | 2006 |  | 2007 |  | There-after |  | Total
|---------------------- | ---- | ------- | ---- |  | ---- |  | ---- |  | ---- |  | ----------- |  | -----
|Cash equivalents       |      |         |      |  |      |  |      |  |      |  |             |  |      
|Fixed rate             | $    | 201,797 |      |  |     |  |     |  |     |  |            |  |     
|Average interest rate  |      | 0.87%   |      |  |     |  |     |  |     |  |            |  |     
|Short-term investments |     
|Fixed rate             | $    | 5,411   |      |  |     |  |     |  |     |  |            |  |     
|Average interest rate  |      | 1.34%   |      |  |     |  |     |  |     |  |            |  |     

| | Credit
Risks | 
| | ------------ | 

| | Our
financial instruments that are exposed to concentrations of credit risk consist primarily
of cash equivalents, short-term investments and trade receivables. Our cash equivalents
and short-term investments are in high quality securities placed with major banks and
financial institutions and commercial paper. Concentrations of credit risk with respect to
receivables are limited due to the large number of customers and their dispersion across
geographic areas. We perform periodic credit evaluations of our customers financial
condition and generally do not require collateral. As of September 30, 2003, no single
group or customer represents greater than 10% of total accounts receivable. | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Item
4. Controls and Procedures | 
| | ------------------------------- | 

| | (a)  Disclosure
Controls and Procedures. Our Chief Executive Officer and Chief Financial
Officer (our principal executive officer and principal financial officer,
respectively) have evaluated the effectiveness of our disclosure controls and
procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the Exchange Act)) as
of September 30, 2003 (the Evaluation Date). Based on such
evaluation, such officers have concluded that, as of the Evaluation Date, our
disclosure controls and procedures are effective in ensuring that information
required to be disclosed by us in the reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SECs rules and forms, and is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding required
disclosure. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | (b)  Changes
in Internal Control Over Financial Reporting. During the three months ended
September 30, 2003, there were no changes in our internal control over
financial reporting that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

34

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| | Table
of Contents | 
| | ----------------- | 

| | PART
IIOTHER INFORMATION | 
| | ------------------------ | 

| | Item
1. Legal Proceedings | 
| | ------------------------- | 

| | On
November 27, 2002, a stockholder class action and derivative lawsuit, Dieterich v. Harrer,
et al., Case No. 02CC00350, was filed against Starbase Corporation and five former
directors of Starbase in the Superior Court of the State of California for Orange County,
claiming that the former directors had breached fiduciary duties owed to Starbase and
stockholders of Starbase. Borland is paying the costs of defending this litigation
pursuant to indemnification obligations under the merger agreement relating to the
acquisition of Starbase by Borland. Following a series of motions, the case was dismissed
without prejudice on August 20, 2003. We previously reported these legal proceedings in
our Annual Report on Form 10-K for the fiscal year ended December 31, 2002 and our
Quarterly Report on Form 10-Q for the quarterly periods ended March 31 and June 30, 2003.
On October 28, 2003, a stockholder class action, Dieterich v. Harrer, et al, Case No.
024-N, was filed against the former directors of Starbase in Chancery Court of the State
of Delaware, alleging breach of fiduciary duties by the former directors of Starbase,
Borland, Dale L. Fuller, Keith E. Gottfried, Frederick A. Ball, and Doug Barre. The
company is currently reviewing the case and intends to defend itself vigorously. There is
no indication at present whether the lawsuit will have a material effect on Borlands
financial condition, results of operations or liquidity. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | In
the ordinary course of business, we are involved in other lawsuits, claims,
investigations, proceedings, and threats of litigation consisting of intellectual
property, commercial, employment and other matters. In accordance with Statement of
Financial Accounting Standards No. 5, Accounting for Contingencies,
we make a provision for a liability when it is both probable that a liability has been
incurred and the amount of the loss can be reasonably estimated. These provisions are
reviewed at least quarterly and adjusted to reflect the impacts of negotiations,
settlements, rulings, advice of legal counsel and other information and events pertaining
to a particular case. Litigation is inherently unpredictable. However, we believe that we
have valid defenses with respect to the legal matters pending against us, as well as
adequate provisions for any probable and estimable losses. If an unfavorable ruling were
to occur in any specific period, there exists the possibility of a material adverse impact
on the results of operations for that period. We believe that, given our current liquidity
and cash and investment balances, even were we to receive an adverse judgment with respect
to litigation that we are currently a party to, it is likely that such a judgment would
not have a material impact on our financial condition, results of operations or liquidity. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

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

| | (a)  Exhibits | 
| | ------------- | 

| | Except
as so indicated in Exhibits 32.1 and 32.2, the following exhibits are filed as part of, or
incorporated by reference into, this Quarterly Report. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Exhibit No. | Description of Exhibit | 
| | ----------- | ---------------------- | 

| | 2.1 | Agreement
and Plan of Merger and Reorganization by and among Borland Software Corporation, Targa
Acquisition Corp. I, Targa Acquisition Corp. II, TogetherSoft
Corporation, Peter Coad, as Primary Stockholders Agent, and Kurt
Jaggers, as Secondary Stockholders Agent, dated as of October 29, 2002
(previously filed with the Commission on November 1, 2002 as an exhibit to Borlands
Current Report on Form 8-K and incorporated herein by reference). | 
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | 2.2 | Agreement
and Plan of Merger among Borland Software Corporation, Galaxy Acquisition Corp. and
Starbase Corporation, dated as of October 8, 2002 (previously filed
with the Commission on October 10, 2002 as an exhibit to Borlands
Current Report on Form 8-K and incorporated herein by reference). | 
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

| | 3.1 | Restated
Certificate of Incorporation of Borland Software Corporation.* | 
| | --- | ----------------------------------------------------------------------- | 

| | 3.2 | Amended
and Restated Bylaws(previously filed with the Commission on May 14, 2003 as an exhibit
to Borlands Quarterly Report on Form 10-Q for the quarter ended
March 31, 2003 and incorporated herein by reference). | 
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | 3.3 | Certificate of Elimination of the Series C Convertible Preferred Stock of Borland
Software Corporation.* | 
| | --- | -------------------------------------------------------------------------------------------------------- | 

35

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| | Table
of Contents | 
| | ----------------- | 

| | Exhibit No. | Description of Exhibit | 
| | ----------- | ---------------------- | 

| | 4.1 | Stockholder
Rights Agreement, dated as of October 26, 2001, between Borland Software Corporation
and Mellon Investor Services, L.L.C. (previously filed with the
Commission on October 31, 2001 as an exhibit to Borlands
Registration Statement on Form 8A and incorporated herein by reference). | 
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | 4.2 | Specimen
Stock Certificate of Borland Software Corporation (previously filed with the Commission
on May 13, 2002 as an exhibit to Borlands Quarterly Report on
Form 10-Q for the quarter ended March 30, 2002 and incorporated herein
by reference). | 
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | 4.3 | Stockholder
Lock-up Agreement between Borland Software Corporation and Object International,
Inc., dated as of January 14, 2003 (previously filed with the
Commission on March 28, 2003 as an exhibit to Borlands Annual
Report of Form 10-K for the year ended December 31, 2002 and
incorporated herein by reference). | 
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | 4.4 | Stockholder
Lock-up Agreement between Borland Software Corporation and Dietrich Charisius, dated
as of January 14, 2003 (previously filed with the Commission on March
28, 2003 as an exhibit to Borlands Annual Report of Form 10-K for
the fiscal year ended December 31, 2002 and incorporated herein by
reference). | 
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

| | 10.1 | 1999 Employee Stock Purchase Plan, as amended.*+ | 
| | ---- | ------------------------------------------------ | 

| | 10.2 | 2003 Supplemental Stock Option Plan, as amended.*+ | 
| | ---- | -------------------------------------------------- | 

| | 10.3 | Amendment to Employment Agreement between Borland Software
Corporation and Dale L. Fuller, dated July 1, 2003.*+ | 
| | ---- | ---------------------------------------------------------------------------------------------------------------- | 

| | 10.4 | Employment Agreementbetween Borland Software Corporation
and Scott Arnold, dated October 2, 2003.*+ | 
| | ---- | --------------------------------------------------------------------------------------------------- | 

| | 10.5 | Employment Agreement between Borland Software Corporation and
Timothy J. Stevens, dated September 17, 2003.*+ | 
| | ---- | ------------------------------------------------------------------------------------------------------------- | 

| | 10.6 | Employment Agreement between Borland Software Corporation and
Matthew Thompson, dated October 1, 2003.*+ | 
| | ---- | -------------------------------------------------------------------------------------------------------- | 

| | 31.1 | Certification
of Dale L. Fuller, Chief Executive Officer of Borland Software Corporation
pursuant to Rule 13a-14(a).* | 
| | ---- | --------------------------------------------------------------------------------------------------------------------- | 

| | 31.2 | Certification
of Kenneth R. Hahn, Chief Financial Officer of Borland Software Corporation,
pursuant to Rule 13a-14(a).* | 
| | ---- | ----------------------------------------------------------------------------------------------------------------------- | 

| | 32.1 | Certification
of Dale L. Fuller, Chief Executive Officer of Borland Software Corporation,
pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350.* | 
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | 32.2 | Certification
of Kenneth R. Hahn, Chief Financial Officer of Borland Software Corporation,
pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350.* | 
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------- | 

| |  | 
| |  | 

| | * | Filed herewith. | 
| | - | --------------- | 

| | + | Management contract or compensatory plan or arrangement. | 
| | - | -------------------------------------------------------- | 

| | A
copy of any exhibit will be furnished (at a reasonable cost) to any stockholder of Borland
upon receipt of a written request. Such request should be sent to Borland Software
Corporation, 100 Enterprise Way, Scotts Valley, California 95066-3249, Attention: Investor
Relations. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | (b)  Reports
on Form 8-K | 
| | ------------------------ | 

| | During
the three months ended September 30, 2003, Borland filed the following Current Reports on
Form 8-K with the Securities and Exchange Commission: | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------ | 

| | Form
8-K filed on July 11, 2003 announcing the retirement of Frederick A. Ball as Executive
Vice President of Corporate Development and Mergers & Acquisitions. | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Form
8-K filed on July 24, 2003 announcing the financial results for the quarter ended June 30,
2003. | 
| | ----------------------------------------------------------------------------------------------------- | 

36

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| | Table
of Contents | 
| | ----------------- | 

| | Form
8-K filed on August 7, 2003 announcing the authorization of an additional $15 million, or
a maximum of 1 million shares, of Borland common stock to be repurchased in accordance
with a written plan adopted pursuant to Rule 10b5-1 under the Securities Exchange Act of
1934. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

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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. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | BORLAND
SOFTWARE CORPORATION(Registrant)
| | ----------------------------------------

| | Date:
November 13, 2003 | 
| | ----------------------- | 

| | / s / KENNETH R. HAHN                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                            
| | Kenneth R. Hahn Senior Vice President and Chief Financial
Officer (Principal Financial Officer and Duly Authorized Officer)

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EXHIBIT INDEX

| | Exhibit No. | Description of Exhibit | 
| | ----------- | ---------------------- | 

| | 2.1 | Agreement
and Plan of Merger and Reorganization by and among Borland Software Corporation, Targa
Acquisition Corp. I, Targa Acquisition Corp. II, TogetherSoft
Corporation, Peter Coad, as Primary Stockholders Agent, and Kurt
Jaggers, as Secondary Stockholders Agent, dated as of October 29, 2002
(previously filed with the Commission on November 1, 2002 as an exhibit to Borlands
Current Report on Form 8-K and incorporated herein by reference). | 
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | 2.2 | Agreement
and Plan of Merger among Borland Software Corporation, Galaxy Acquisition Corp. and
Starbase Corporation, dated as of October 8, 2002 (previously filed
with the Commission on October 10, 2002 as an exhibit to Borlands
Current Report on Form 8-K and incorporated herein by reference). | 
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

| | 3.1 | Restated
Certificate of Incorporation of Borland Software Corporation.* | 
| | --- | ----------------------------------------------------------------------- | 

| | 3.2 | Amended
and Restated Bylaws(previously filed with the Commission on May 14, 2003 as an exhibit
to Borlands Quarterly Report on Form 10-Q for the quarter ended
March 31, 2003 and incorporated herein by reference). | 
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | 3.3 | Certificate of Elimination of the Series C Convertible Preferred Stock of Borland
Software Corporation.* | 
| | --- | -------------------------------------------------------------------------------------------------------- | 

| | 4.1 | Stockholder
Rights Agreement, dated as of October 26, 2001, between Borland Software Corporation
and Mellon Investor Services, L.L.C. (previously filed with the
Commission on October 31, 2001 as an exhibit to Borlands
Registration Statement on Form 8A and incorporated herein by reference). | 
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | 4.2 | Specimen
Stock Certificate of Borland Software Corporation (previously filed with the Commission
on May 13, 2002 as an exhibit to Borlands Quarterly Report on
Form 10-Q for the quarter ended March 30, 2002 and incorporated herein
by reference). | 
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | 4.3 | Stockholder
Lock-up Agreement between Borland Software Corporation and Object International,
Inc., dated as of January 14, 2003 (previously filed with the
Commission on March 28, 2003 as an exhibit to Borlands Annual
Report of Form 10-K for the year ended December 31, 2002 and
incorporated herein by reference). | 
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | 4.4 | Stockholder
Lock-up Agreement between Borland Software Corporation and Dietrich Charisius, dated
as of January 14, 2003 (previously filed with the Commission on March
28, 2003 as an exhibit to Borlands Annual Report of Form 10-K for
the fiscal year ended December 31, 2002 and incorporated herein by
reference). | 
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

| | 10.1 | 1999 Employee Stock Purchase Plan, as amended.*+ | 
| | ---- | ------------------------------------------------ | 

| | 10.2 | 2003 Supplemental Stock Option Plan, as amended.*+ | 
| | ---- | -------------------------------------------------- | 

| | 10.3 | Amendment to Employment Agreement between Borland Software
Corporation and Dale L. Fuller, dated July 1, 2003.*+ | 
| | ---- | ---------------------------------------------------------------------------------------------------------------- | 

| | 10.4 | Employment Agreementbetween Borland Software Corporation
and Scott Arnold, dated October 2, 2003.*+ | 
| | ---- | --------------------------------------------------------------------------------------------------- | 

| | 10.5 | Employment Agreement between Borland Software Corporation and
Timothy J. Stevens, dated September 17, 2003.*+ | 
| | ---- | ------------------------------------------------------------------------------------------------------------- | 

| | 10.6 | Employment Agreement between Borland Software Corporation and
Matthew Thompson, dated October 1, 2003.*+ | 
| | ---- | -------------------------------------------------------------------------------------------------------- | 

| | 31.1 | Certification
of Dale L. Fuller, Chief Executive Officer of Borland Software Corporation
pursuant to Rule 13a-14(a).* | 
| | ---- | --------------------------------------------------------------------------------------------------------------------- | 

| | 31.2 | Certification
of Kenneth R. Hahn, Chief Financial Officer of Borland Software Corporation,
pursuant to Rule 13a-14(a).* | 
| | ---- | ----------------------------------------------------------------------------------------------------------------------- | 

| | 32.1 | Certification
of Dale L. Fuller, Chief Executive Officer of Borland Software Corporation,
pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350.* | 
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------- | 

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| | Exhibit No. | Description of Exhibit | 
| | ----------- | ---------------------- | 

| | 32.2 | Certification
of Kenneth R. Hahn, Chief Financial Officer of Borland Software Corporation,
pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350.* | 
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------- | 

| |  | 
| |  | 

| | * | Filed herewith. | 
| | - | --------------- | 

| | + | Management contract or compensatory plan or arrangement. | 
| | - | -------------------------------------------------------- | 

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