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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 June 30, 2002

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 |_|

The number of shares of common stock
outstanding as of July 31, 2002, the most recent practicable date prior to the filing of this report,
was 71,527,689.

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INDEX

|        |                                                                                                                           |  | PAGE
|------- | ------------------------------------------------------------------------------------------------------------------------- |  | ----
|        |                                                                                                                           |  |     
|PART I  | FINANCIAL INFORMATION                                                                                                     |  |     
|        |                                                                                                                           |  |     
|Item 1. | Financial Statements                                                                                                      |  | 1   
|        |                                                                                                                           |  |     
|        | Condensed Consolidated Balance Sheets at June 30, 2002 and December 31, 2001                                              |  | 1   
|        |                                                                                                                           |  |     
|        | Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2002 and 2001                 |  | 2   
|        |                                                                                                                           |  |     
|        | Condensed Consolidated Statements of Other Comprehensive Income for the three and six months ended June 30, 2002 and 2001 |  | 3   
|        |                                                                                                                           |  |     
|        | Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2002 and 2001                           |  | 4   
|        |                                                                                                                           |  |     
|        | Notes to Condensed Consolidated Financial Statements                                                                      |  | 5   
|        |                                                                                                                           |  |     
|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations                                     |  | 8   
|        |                                                                                                                           |  |     
|Item 3. | Quantitative and Qualitative Disclosures About Market Risk                                                                |  | 34  
|        |                                                                                                                           |  |     
|        |                                                                                                                           |  |     
|PART II | OTHER INFORMATION                                                                                                         |  |     
|        |                                                                                                                           |  |     
|Item 1. | Legal Proceedings                                                                                                         |  | 36  
|        |                                                                                                                           |  |     
|Item 2. | Changes in Securities and Use of Proceeds                                                                                 |  | 36  
|        |                                                                                                                           |  |     
|Item 4. | Submission of Matters to a Vote of Security Holders                                                                       |  | 36  
|        |                                                                                                                           |  |     
|Item 6. | Exhibits and Reports on Form 8-K                                                                                          |  | 37  
|        |                                                                                                                           |  |     
|        | Signatures                                                                                                                |  | 38  

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

PART IFINANCIAL INFORMATION

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

BORLAND SOFTWARE CORPORATIONCONDENSED CONSOLIDATED BALANCE SHEETS(In
Thousands, Except Par Value and Share Amounts)

|                                                              | June 30, 2002 |            | December 31, 2001
|------------------------------------------------------------- | ------------- | ---------- | -----------------
|                                                              | (Unaudited)   |            |                  
|ASSETS                                                        |               |            |                  
|Current assets:                                               |              
|Cash and cash equivalents                                     |               | $ 244,537  |                  
|Short-term investments                                        |               | 61,316     |                  
|Accounts receivable, net                                      |               | 44,221     |                  
|Other current assets                                          |               | 13,752     |                  
|                                                              |               |            |                  
|Total current assets                                          |               | 363,826    |                  
|                                                             
|Property and equipment, net                                   |               | 18,559     |                  
|Other non-current assets                                      |               | 11,337     |                  
|                                                              |               |            |                  
|                                                              |               | $ 393,722  |                  
|                                                              |               |            |                  
|LIABILITIES AND STOCKHOLDERS EQUITY                          |              
|Current liabilities:                                          |              
|Accounts payable and accrued expenses                         |               | $   48,572 |                  
|Income taxes payable                                          |               | 7,908      |                  
|Deferred revenues                                             |               | 26,754     |                  
|Other current liabilities                                     |               | 9,540      |                  
|                                                              |               |            |                  
|Total current liabilities                                     |               | 92,774     |                  
|                                                             
|Long-term liabilities                                         |               | 10,511     |                  
|                                                              |               |            |                  
|                                                              |               | 103,285    |                  
|                                                              |               |            |                  
|Stockholders equity:                                         |              
|Preferred stock: $.01 par value; 1,000,000 shares authorized; |              
|115 and 285 shares issued and outstanding                     |               |           |                  
|Common stock: $.01 par value; 200,000,000 shares authorized;  |              
|70,400,454 and 68,028,526 shares issued and outstanding       |               | 704        |                  
|Additional paid-in capital                                    |               | 494,425    |                  
|Accumulated deficit                                           |               | (177,746   | )                
|Deferred compensation                                         |               | (888       | )                
|Cumulative comprehensive income                               |               | 5,558      |                  
|                                                              |               |            |                  
|Less common stock in treasury, at cost                        |              
|5,195,600 and 4,835,900 shares                                |               | (31,616    | )                
|                                                              |               |            |                  
|                                                              |               | 290,437    |                  
|                                                              |               |            |                  
|Total liabilities and stockholders equity                    |               | $ 393,722  |                  
|                                                              |               |            |                  

See Notes to the Condensed Consolidated Financial Statements.

1

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

BORLAND SOFTWARE CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS(In Thousands, Except Per Share Amounts, Unaudited)

|                                                            | Three MonthsEnded June 30, |  | Six MonthsEnded June 30,
|----------------------------------------------------------- | -------------------------- |  | ------------------------
|                                                            | 2002                       |  | 2001                    
|                                                            |                            |  |                         
|Licenses and other revenues                                 | $ 50,095                   |  | $ 47,538                
|Service revenues                                            | 9,627                      |  | 8,474                   
|                                                            |                            |  |                         
|Net revenues                                                | 59,722                     |  | 56,012                  
|                                                            |                            |  |                         
|Cost of licenses and other revenues                         | 3,557                      |  | 3,460                   
|Cost of service revenues                                    | 5,355                      |  | 6,019                   
|                                                            |                            |  |                         
|Cost of revenues                                            | 8,912                      |  | 9,479                   
|                                                            |                            |  |                         
|Gross profit                                                | 50,810                     |  | 46,533                  
|                                                            |                            |  |                         
|Research and development                                    | 12,711                     |  | 11,178                  
|Selling, general and administrative                         | 32,102                     |  | 30,115                  
|Amortization of intangibles and acquisition-related charges | 1,564                      |  | 351                     
|                                                            |                            |  |                         
|Total operating expenses                                    | 46,377                     |  | 41,644                  
|                                                            |                            |  |                         
|Operating income                                            | 4,433                      |  | 4,889                   
|Interest income, net, and other                             | 1,700                      |  | 3,160                   
|                                                            |                            |  |                         
|Income before income taxes                                  | 6,133                      |  | 8,049                   
|Income tax provision                                        | 1,464                      |  | 1,635                   
|                                                            |                            |  |                         
|Net income                                                  | $  4,669                   |  | $  6,414                
|                                                            |                            |  |                         
|Net income per share:                                      
|Basic                                                       | $    0.07                  |  | $    0.10               
|                                                            |                            |  |                         
|Diluted                                                     | $    0.06                  |  | $    0.09               
|                                                            |                            |  |                         
|Weighted average number of common shares outstanding:      
|Basic                                                       | 70,406                     |  | 62,577                  
|                                                            |                            |  |                         
|Diluted                                                     | 74,632                     |  | 73,879                  
|                                                            |                            |  |                         

See Notes to the Condensed Consolidated Financial Statements.

2

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

BORLAND SOFTWARE CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF OTHER
COMPREHENSIVE INCOME(In Thousands, Unaudited)

|                                         | Three Months EndedJune 30, |  | Six Months EndedJune 30, |  
|---------------------------------------- | -------------------------- |  | ------------------------ | -
|                                         | 2002                       |  | 2001                     |  
|                                         |                            |  |                          |  
|Net income                               | $ 4,669                    |  | $ 6,414                  |  
|Other comprehensive income (loss):      
|Foreign currency translation adjustments | 2,491                      |  | (675                     | )
|Fair market value adjustment            
|for available for sale securities        |                           |  | 122                      |  
|                                         |                            |  |                          |  
|Other comprehensive income               | $ 7,160                    |  | $ 5,861                  |  
|                                         |                            |  |                          |  

See Notes to the Condensed Consolidated Financial Statements.

3

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

BORLAND SOFTWARE CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS(In Thousands, Unaudited)

|                                                                                      | Six Months EndedJune 30, |           
|------------------------------------------------------------------------------------- | ------------------------ | ----------
|                                                                                      |                          | 2002      
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                 |                          |           
|Net income                                                                            |                          | $    9,266
|Adjustments to reconcile net income to net cash provided
    by operating activities: |                         
|Depreciation and amortization                                                         |                          | 3,373     
|(Gain) loss on sale of fixed asset                                                    |                          | 57        
|CHANGES IN ASSETS AND LIABILITIES:                                                    |                         
|Accounts receivable                                                                   |                          | (2,960    
|Other assets                                                                          |                          | 1,180     
|Accounts payable and accrued expenses                                                 |                          | 535       
|Income taxes payable                                                                  |                          | (503      
|Deferred revenues                                                                     |                          | 1,777     
|Other                                                                                 |                          | (502      
|                                                                                      |                          |           
|Cash provided by operating activities                                                 |                          | 12,223    
|                                                                                      |                          |           
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                 |                         
|Purchase of property and equipment                                                    |                          | (2,346    
|Acquisition of Redline Software, Inc. (VMGear)                                        |                          | (2,193    
|Proceeds from sale of property                                                        |                          |          
|Purchases of short-term investments                                                   |                          | (77,846   
|Sales and maturities of short-term investments                                        |                          | 30,433    
|                                                                                      |                          |           
|Cash (used in) provided by investing activities                                       |                          | (51,952   
|                                                                                      |                          |           
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                 |                         
|Proceeds from issuance of common stock, net                                           |                          | 5,706     
|Repurchase of common stock                                                            |                          | (3,425    
|Repayment of capital lease obligations and other debt activity                        |                         |           
|                                                                                      |                          |           
|Cash provided by financing activities                                                 |                          | 2,281     
|                                                                                      |                          |           
|Effect of exchange rate changes on cash                                               |                          | 1,518     
|                                                                                      |                          |           
|Net change in cash and cash equivalents                                               |                          | (35,930   
|Cash and cash equivalents at beginning of period                                      |                          | 280,467   
|                                                                                      |                          |           
|Cash and cash equivalents at end of period                                            |                          | $ 244,537 
|                                                                                      |                          |           

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 (Borland) condensed consolidated
financial statements at June 30, 2002 and December 31, 2001 and for the three and six
months ended June 30, 2002 and June 30, 2001 are unaudited and have been prepared in
accordance with accounting principles generally accepted in the United States of America
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 June 30, 2002 and December 31, 2002; its
results of operations for the three and six months ended June 30, 2002 and June 30, 2001;
and its cash flows for the six months ended June 30, 2002 and June 30, 2001. 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 and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and reported amounts of revenues
and expenses during the reporting period. 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 our full fiscal 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, 2001 as
filed with the United States Securities and Exchange Commission (the SEC) on
March 29, 2002. | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | NOTE
2NET INCOME PER SHARE | 
| | --------------------------- | 

| | We
compute net income per share in accordance with Statement of Financial Accounting
Standards Earnings per Share (FAS No. 128). Under the provisions
of SFAS No. 128, basic net income per share is computed by dividing the net income
available to common stockholders for the period by the weighted average number of common
shares outstanding during the period. Diluted net income per share is computed by dividing
the net income for the period by the weighted average number of common and potentially
diluted shares outstanding during the period. Potentially diluted shares, which consist of
incremental shares issuable upon exercise of stock options and warrants and upon
conversion of the issued and outstanding shares of Series C Convertible Preferred Stock,
are included in diluted net income per share to the extent such shares are dilutive.
(See Note 7 for conversion of Series C Convertible Preferred Stock.) | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

5

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

| | The
following table sets forth the computation of basic and diluted net income per share for
the periods indicated (in thousands, except per share amounts): | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

|                                          | Three MonthsEnded June 30, |           | Six MonthsEnded June 30,
|----------------------------------------- | -------------------------- | --------- | ------------------------
|                                          | 2002                       |           | 2001                    
|                                          |                            |           |                         
|Numerator:                                |                            |           |                         
|Net income before accretion charges       |                            | $  4,669  |                         
|Accretion charges to preferred stock      |                            |          |                         
|                                          |                            |           |                         
|Income available to common stockholders  
|for basic earnings per share              |                            | $  4,669  |                         
|                                          |                            |           |                         
|Denominator:                              |                           
|Denominator for basic income per share  
|weighted average shares                   |                            | 70,406    |                         
|Effect of dilutive securities             |                            | 4,226     |                         
|                                          |                            |           |                         
|Denominator for dilutive income per share | 74,632                     |           | 73,879                  
|                                          |                            |           |                         
|Net income per share  basic              |                            | $    0.07 |                         
|                                          |                            |           |                         
|Net income per share  diluted            |                            | $    0.06 |                         
|                                          |                            |           |                         

| | NOTE
3RESTRUCTURING | 
| | -------------------- | 

| | The
following table summarizes costs incurred during the six months ended June 30, 2002
associated with prior period restructuring activities (in thousands): | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

|                             | Severanceand Benefits |   | Facilities |   | Other   |   | Total   |  
|---------------------------- | --------------------- | - | ---------- | - | ------- | - | ------- | -
|Accrual at December 31, 2001 | $   329               |   | $   279    |   | $   293 |   | $   901 |  
|Additions                    | 49                    |   | 468        |   |        |   | 517     |  
|Cash Payments                | (229                  | ) | (404       | ) | (13     | ) | (646    | )
|                             |                       |   |            |   |         |   |         |  
|Accrual at June 30, 2002     | $   149               |   | $   343    |   | $   280 |   | $   772 |  
|                             |                       |   |            |   |         |   |         |  

| | During
the six months ended June 30, 2002, we recorded a provision of approximately $0.5 million
associated with leases in the United States and United Kingdom. During the same period,
we made payments totaling approximately $0.4 million for
obligations under these leases. We have recorded a restructure
reserve associated with certain leases in the United
Kingdom in the amount of $2.4 million as of each of June 30, 2002 and December 31, 2001.
This amount represents the excess of our contractual obligation over the anticipated
minimum income under the current and future sublease arrangements. Under these lease
arrangements, we are obligated to pay approximately $7.8 million over the lease terms. The
leases terminate at various dates beginning in 2010 and ending in 2012. We have
contractual commitments from our sublease tenants to receive $0.6 million during the
sublease terms which end on various dates in 2003. If our existing tenants are not able to
pay the contractual amount due under the sublease arrangements or we are not able to lease
the properties on favorable financial terms in the future, we will be required to take
additional charges for the minimum contractual lease payments. Due to the timing of the
contractual payments, this amount has been included in other long-term liabilities.
Subsequent to June 30, 2002, there have not been any significant changes to our estimate
of the total costs of prior restructuring activities. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | NOTE
4PRESENTATION OF OPERATING EXPENSES | 
| | ----------------------------------------- | 

| | To
provide presentation consistent with the current year, research and development expenses
for the three and six months ended June 30, 2001 in the amount of $0.2 million and $0.4
million, respectively, have been shown separately within the caption Amortization of
Intangibles and Acquisition-Related Expenses. These acquisition-related expenses are
associated with the acquisition of Bedouin Software, Inc. Selling, general and
administrative expenses for the three and six months ended June 30, 2001 in the amount of
$0.1 million and | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

6

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

| | $0.3
million, respectively, have been shown separately within the caption Amortization of
Intangibles and Acquisition-Related Expenses.These acquisition-related expenses are
associated with the acquisition of Engine Informatica, LTD. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | NOTE
5REPURCHASE OF COMMON STOCK | 
| | --------------------------------- | 

| | On September 17, 2001, our Board of Directors authorized the repurchase of up to $30 million of our outstanding common
stock. During the three months ended June 30, 2002, we repurchased 359,700 shares of common stock for an average price of $9.50 per
share for a total consideration of $3.4 million. The shares repurchased during the three months ended June 30, 2002 were placed in
treasury. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | NOTE
6ACQUISITIONS | 
| | ------------------- | 

| | Highlander
Engineering, Inc. | 
| | ---------------------------- | 

| | On
May 23, 2002, we acquired certain assets of privately held Highlander Engineering, Inc., a
provider of software solutions for the embedded systems market. The assets were exchanged
for cash earnout commitments not to exceed $2.0 million over a two-year period contingent
upon the financial performance of acquired software products and services. We do not
expect this acquisition to have a material impact on revenues or net income for 2002. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

| | Redline
Software, Inc. (VMGear) | 
| | ------------------------------- | 

| | On
January 18, 2002, we completed our acquisition of Redline Software, Inc.
(Redline), a privately held software firm located in San Jose, California.
Redline develops and markets 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. The contingent consideration includes retention payments of $6.0 million to
be earned through the continued employment of certain individuals and additional earnout
payments contingent upon future revenues derived from the sale of Redline products and the
retention of certain employees of Redline. Contingent consideration, if any, will be
earned and paid over a three-year period. We recorded goodwill for the excess of the
purchase price over the net assets acquired of $1.6 million and $0.6 million for acquired
technology which will be amortized over the estimated useful life of 18 months. In
accordance with the provision of Statement of Accounting Statements No. 142,
Goodwill and Other Intangibles, we did not amortize the excess of the purchase
price over net assets acquired during the three months ended June 30, 2002. The contingent
consideration will be expensed when it is deemed probable that such payments will be made. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

| | SFAS
142 Goodwill and Other Intangibles requires disclosure of what reported net
income would have been in all periods presented exclusive of amortization expense
recognized in those periods related to goodwill, intangible assets that are no longer
being amortized, any deferred credit related to an excess over cost, equity method
goodwill, and changes in amortization periods for intangible assets that will continue to
be amortized. We have considered such requirements and have determined that the
adjustments to prior years earnings as required by SFAS 142 were not material. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | NOTE
7SUBSEQUENT EVENT | 
| | ----------------------- | 

| | In
1999, we sold an aggregate of 625 shares of Series C Convertible Preferred Stock
(Series C Stock) to Microsoft Corporation for $25 million. Each share of
Series C Stock was convertible, at the option of the holder, into fully paid and
non-assessable shares of our common stock base upon a fixed conversion ratio. Prior to
June 30, 2002, 510 shares of Series C Stock were converted into 5,483,871 shares of our
common stock. On July 9, 2002, the remaining 115 shares of Series C Stock were converted
into 1,236,559 shares of our common stock. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

| | NOTE
8RECENT ACCOUNTING PRONOUNCEMENTS | 
| | --------------------------------------- | 

| | In
June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or
Disposal Activities. SFAS No. 146 requires that a liability for a cost associated with an
exit or disposal activity be recognized when the liability is incurred. SFAS No. 146
eliminates the definition and requirement for | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

7

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

| | recognition
of exit costs in Emerging Issues Task Force Issue No. 94-3 where a liability for an exit
cost was recognized at the date of an entitys commitment to an exit plan. This
statement is effective for exit or disposal activities initiated after December 31, 2002.
Management does not believe that the adoption of this statement will have a material
impact on its results of operations, financial position or cash flows. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

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

| | Safe
Harbor | 
| | ----------- | 

| | 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, but are not limited to, future capital
expenditures, acquisitions, future revenues, earnings, margins, costs, demand for our
products, market and technological trends in the software industry, interest rates and
inflation and various economic and business trends. You can generally identify
forward-looking statements by the use of words such as expect,
estimate, project, budget, forecast,
anticipate, 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
Securities and Exchange Commission or in materials incorporated by reference. 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,
which could 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
were incorporated in California in 1983 and reincorporated in Delaware in 1989. We
maintain our executive offices at 100 Enterprise Way, Scotts Valley, California
95066-3249, and our main telephone number at that location is 831-431-1000. We also
maintain a Web site on the Internet at www.borland.com and a community site at
http://community.borland.com. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | All
Borland brand and product names are trademarks or registered trademarks of Borland
Software Corporation, in the United States and other countries. This Form 10-Q also
contains additional trade names, trademarks and service marks of other companies. We do
not intend our use or display of other parties trademarks, trade names or service
marks to imply a relationship with, or endorsement or sponsorship of, us by these other
parties. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

| | Overview
of the Operations | 
| | -------------------------- | 

| | As
a leading global provider of technology for the development, deployment, integration and
management of software applications, our goal is to enable enterprises to realize the
profitability-enhancing potential of innovation. By delivering comprehensive technology
solutions dedicated to interoperability, our products are designed to allow enterprises of
all sizes to move into Web-based computing while leveraging their legacy systems. From
Fortune 1000 companies to the Borland Developer Network comprised of millions of
developers around the world, we provide our customers the freedom to develop applications,
deploy them on most major platforms, and integrate and manage them across the enterprise.
Our solutions, including those for Java, Linux, Web Services and wireless technologies,
are designed to enable organizations to increase productivity and deliver higher
performance projects faster and on budget, while lowering total cost of ownership. | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

8

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

| | Our
customers are enterprises of many sizes, including individual developers, small
independent software and services firms, as well as prominent companies worldwide,
including leading companies in high technology, telecommunications and financial services.
Many of our customers use Borland technology so that they themselves can create and ship
software and system products conforming to high performance specifications. We have
strategic relationships and/or technology partnerships with leading technology companies
such as Apple, Ericsson, Hitachi, IBM, Intel, Macromedia, Microsoft, Nokia, Rational, Red
Hat, Siemens, Sun Microsystems and Sybase. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | The
key strengths and benefits of our products and services include: | 
| | -------------------------------------------------------------------- | 

| | Comprehensive Solution.  With products and services for the various dimensions of
the software application lifecycledevelopment, deployment, integration and
managementwe give customers the ability to implement applications critical to their
businesses rapidly and effectively, as well as access to one vendor to resolve issues
across underlying technologies. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

| | Performance Leadership.  When a Borland product is installed, we believe it
provides for a user experience that is as good or better than anything available in the
marketplace. Our products have won numerous awards and maintain a large and dedicated
customer base. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

| | Freedom of Choice.  Borland products eliminate lock-in, which is
prevalent with solutions from major system vendors. Borland products do not promote one
software platform over another; they are designed to enable all major technology
platforms for productive implementation. One key reason our products eliminate lock-in is
that we provide interoperability between competing technologies. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Standards-Based.  We aggressively adopt standards whenever possible. As a result,
Borland products are standards-based when standards exist or are emerging. Standards
promote interoperability and mass adoption of technologies. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Simplicity and Control.  Borland products are designed to simplify the process of
developing and deploying applications, improving efficiency and productivity and speeding
time to market. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Low Cost of Ownership.  Borland products are designed to lower cost of ownership
because they promote productivity and reduce computing infrastructure investment wherever
possible. Our small foot-print, highly optimized products also help to accomplish this. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

| | Our
goal is to become the dominant provider of technology solutions for the rapid and
effective implementation of software applications, particularly in areas such as Java and
J2EE, .NET, Web Services, Linux, wireless and mobile computing. Key elements of our
strategy to achieve this goal include: | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Widening our lead in Java products; | 
| | ----------------------------------- | 

| | Promoting platform independence and interoperability, including through Web Services; | 
| | ------------------------------------------------------------------------------------- | 

| | Leveraging our strategic alliances and technology partnerships, including in critical
areas such as wireless and mobile application development; | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------ | 

| | Targeting
large enterprises with our comprehensive application lifecycle management solutions; | 
| | ---------------------------------------------------------------------------------------------- | 

| | Focusing on the needs of our installed base, e.g., the Borland Developer Network; | 
| | --------------------------------------------------------------------------------- | 

| | Capitalizing on the strength of the Borland brand, with new product and
service offerings and through international expansion; and | 
| | ------------------------------------------------------------------------------------------------------------------------------------ | 

| | Undertaking
selective strategic acquisitions, including those that extend the breadth of our
application lifecycle management solutions. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------- | 

| | To
achieve this goal, we offer products and services for addressing various dimensions of the
software implementation processdevelopment, deployment, integration and management.
Innovation, quality, performance, ease of use and interoperability are the hallmarks of
our products. Our products provide critical tools for enterprises to implement
applications critical to their business rapidly and effectively. For the development
phase, we offer our JBuilder, Delphi, Kylix and C++Builder integrated development
environments (IDEs), as well as our hosted TeamSource DSP service and
Optimizeit, our Java performance and testing solution. Our deployment and integration
products include our Borland Enterprise Server line of application | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

9

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

| | servers, including Borland Enterprise Server, AppServer Edition for high end EJB
deployments, VisiBroker Edition to facilitate legacy integration and our recently
introduced Web Edition for JavaServer Pages (JSP)/Servlet-based application deployments.
Our deployment products also include JDataStore, an embedded database for web and mobile
applications, and InterBase, our high-performance embedded SQL database. To manage
applications, we offer Borland AppCenter, a visual distributed application management
solution. Our efforts in sales and marketing include a sales model that combines indirect and direct
sales efforts. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | We
also provide training, consulting and support services through our dedicated
professional services organization. In addition, we provide service and support for
software developers worldwide through an online developer community and an e-commerce
site, http://community.borland.com, which offers a range of technical information,
value-added services and third-party products. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Critical
Accounting Policies | 
| | ---------------------------- | 

| | 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 as filed
with the SEC on March 29, 2002. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Overview
of the Results for the Three Months and Six Months Ended June 30, 2002 | 
| | ------------------------------------------------------------------------------- | 

| | Despite
challenging economic conditions for the software and information technology industry, the
second quarter of 2002 was our ninth consecutive quarter of profitability and tenth
consecutive quarter of positive cash flow from operations. We market software development
and application infrastructure technologies to businesses of all sizes worldwide. When
customers curtail their information technology budgets, elect to purchase less or delay
such purchases, our businesslike that of competitors and software industry
peersnaturally suffers. In addition, the prolonged downturn in the financial markets
during the first six months of 2002, combined with larger structural problems in
industries such as telecommunications, appear to have further dampened IT capital
expenditures in excess of the anticipated effects of more typical economic cyclicality.
Despite these challenges, several features of our model and strategy provided a foundation
for growth during the first half of 2002: | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | We market and sell products that our customers can implement with their existing IT
infrastructure, permitting us to communicate a clear return on investment, or ROI,
message to our customers. With many customers having invested significantly in computing
hardware and network infrastructure in recent years, we believe software development
products such as ours are now particularly compelling because they can be used to
facilitate the efficient production and/or migration of software for systems currently in
place. The Java programming language, moreover, is designed to run on multiple existing
operating systems and hardware platforms, and we believe that Java continues to grow and
sustain momentum in the marketplace in part on the basis of this advantage. Sales of our
Java development products grew 42% compared with the second quarter of 2001. | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | We market and sell our products through both direct and indirect channels. While many
software industry competitors rely more heavily upon big ticket direct sales
to large public companies, our sales efforts and the nature of our products have allowed
us to be successful at growing through smaller transactions to compensate for the fact
that enterprises have been reluctant to enter into larger sales in the current
environment. We have also continued to sell meaningfully to consumers and small software
development companies via our distributors and channel partners. | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | We market and sell products worldwide, and we believe that our brand recognition in the
software development and IT community is strong both in the U.S. and abroad. As a result,
we are positioned to benefit from pockets of economic strength worldwide. In the second
quarter of 2002, the Americas region (principally U.S. and Canada) accounted for less than
half45%of our total revenue, while our EMEA region (principally Europe)
represented 35% and Asia/Pacific represented 20%. This breakdown was largely consistent
with the same quarter last year where Americas accounted for 48% of total revenue, EMEA
36% and Asia/Pacific 16%. We believe that international diversification will continue to
benefit the company, and could be favorable in an environment
of more synchronized global recovery. We have also recently begun to add resources to our
international operations and entered several new international markets. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | In
order to continue to strengthen our business model, we focused on several key goals during
the first six months of 2002. We sought to maximize sales and profitability in a
challenging economic environment, as | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

10

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

| | well as position Borland to achieve sustained and
consistent sales and profitability growth when corporate IT and software spending returns
to healthier levels. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Leadership Across Platforms.  We continue to believe that our success hinges in
large part on the continued quality and reputation of our products, including both our
development and infrastructure products. As a result, research and development continues
to be a high priority, particularly in the areas of Java, Linux, .NET, Web Services and
wireless in which we focus our product efforts. Several new products were launched during
the first two quarters of 2002, including JBuilder 7, Borland Enterprise Studio for Java
4, JBuilder MobileSet 3 and C++Builder 6. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

| | Sales and Marketing Strength.  We continue to view incremental investments in our
sales and marketing infrastructure as critical to enabling us to drive revenue growth
and, in particular, be positioned for success when and if increased IT spending resumes.
Furthermore, we believe that our continued execution in a weaker market for IT
investment, including our indirect channel, enables us to selectively make such
investments, even while a number of competitors are forced to downsize. Strategic
investments in sales and marketing during the first half of 2002 included the hiring of
our new Chief Marketing Officer, Scott Langmack, a branding expert. | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Cost Control and Financial Discipline.  We continue to pay close attention to our
cost structure in order to maintain and grow operating cash flow and profitability. While
operating expenses increased year over year due in large part to our selective new
investments in sales and marketing, our general and administrative expenses decreased
over the same period, consistent with our goal to leverage existing infrastructure over a
larger revenue base. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Continued International Expansion.  We continue to view careful international
expansion as critical for maintaining diverse revenue streams in an uncertain environment
and for driving future growth. We believe our international opportunity is compelling.
Borland products, particularly development technologies, may serve as important products
for both emerging technology companies worldwide as well as countries seeking to build
high technology industries. Efforts in the first half of 2002 included continued
enhancement of our operations in China and Hong Kong, the hiring of a seasoned Country Manager to lead an expansion into Mexico
and the relocation of our Asia Pacific headquarters to Singapore, along with the
acquisition of ATC Ltda., a Brazilian IT services company. | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Selective Acquisitions.  We continue to pursue acquisitions that we believe better
position us to grow revenues and serve our customers needs. We successfully
completed the acquisitions of Redline Software (VMGear) and ATC Ltda. as well as the
acquisition of certain assets of Highlander Engineering, Inc. during the first half of 2002.
Borlands Optimizeit performance assurance solution, obtained as part of our
acquisition of Redline Software, contributed to our Java business performance in the
second quarter of 2002. We continue to evaluate reasonably priced, integratable
acquisitions that add meaningfully to our business. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Strategic Relationships.  We continue to view strategic relationships as an
important avenue to gaining access to new customers and new technologies. In addition,
Borlands cross platform strategy provides us with the ability to partner with
a range of technology leaders, many of whom view Borland technology as important for
enhancing development of their platforms and technologies. During the first half of 2002,
we entered into new relationships with Sprint PCS, Sybase and Mercury Interactive, among
others, along with deepening relationships with a number of existing partners. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Balance Sheet Strength.  We continue to believe that our balance sheet strengthparticularly
in a weak capital markets environmentis a key factor that enables us to
successfully and effectively pursue our other major objectives, including acquisitions,
sustained research and development, and investments in sales and marketing. We finished
the second quarter of 2002 with approximately $306 million in cash and cash equivalents
and short-term investments with no long-term debt. We used a portion of our cash position
to repurchase shares, including 359,700 shares for a total cost of $3.4 million during
the first six months of 2002. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

11

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

| | We
achieved the following financial results during the first half of 2002: | 
| | -------------------------------------------------------------------------- | 

| | Revenues increased 7% to $59.7 million for the second quarter of 2002, from $56.0 million
for the second quarter of 2001. For the first six months of 2002, total revenues
increased 8% to $116.8 million from $107.7 million for the same period in 2001. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Licenses and other revenues rose 5% to $50.1 million for the second quarter of 2002 from
$47.5 million for the second quarter of 2001. For the first six months of 2002, licenses
and other revenues rose 9% to $97.8 million, from $89.9 million for the same period in
2001. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

| | Due to additional investments in sales and marketing, operating expenses increased 11% to
$46.4 million in the 2002 second quarter, from $41.6 million in the second quarter of
2001. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Gross margins improved to 85% in the second quarter of 2002, compared to 83% in the same
period in 2001. For the first six months of 2002, gross margin was 85%, relative to 84%
for the same period in 2001. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Operating income was $4.4 million in the second quarter of 2002, compared to $4.9 million
in the year ago period. For the first six months of 2002, operating income included
acquisition related costs of $8.5 million compared to $8.8 million in the year ago
period. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

| | Net income was $4.7 million, or $0.06 per diluted share, compared with net income of $6.4
million, or $0.09 per diluted share for the second quarter in 2001. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | For the six month period in 2002, cash flow from operations was $12.2 million, compared
to $10.4 million in the year ago six month period. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------ | 

| | Consistent
with our efforts to serve our customers effectively, we take our obligation to provide
timely, meaningful and clear financial information very seriously. We follow careful
controls to ensure the quality and accuracy of this information. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Results
of Operations for the Three Months and Six Months Ended June 30, 2002 and 2001 | 
| | -------------------------------------------------------------------------------------- | 

| | Revenues | 
| | -------- | 

| | Our
revenues are derived from software licenses and sales of related services, which include
assistance in implementation and integration, as well as post-contract customer support,
training and consulting services. Net revenues were $59.7 million and $56.0 million for
the three months ended June 30, 2002 and 2001, respectively. The growth in net revenues
was principally attributable to the increase in net revenues from our Java business. Our
Java business grew 42% during the three months ended June 30, 2002 when compared with the
three months ended June 30, 2001. The growth in our Java business was offset by a decline
in our RAD business which declined 28% from a year ago. Our Enterprise business remained
relatively flat during the three months ended June 30, 2002 when compared with the three
months ended June 30, 2001. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Net
revenues were $116.8 million and $107.7 million for the six months ended June 30, 2002 and
2001, respectively. Our Java business grew 41% during the six months ended June 30, 2002
when compared with the six months ended June 30, 2001. The growth in our Java business was
offset by a decline in our RAD and Enterprise businesses. Our RAD and Enterprise
businesses decreased 9% and 13%, respectively, during the six months ended June 30, 2002
when compared with the six months ended June 30, 2001. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | While
we believe there continues to be compelling opportunities to market and deploy our
products, particularly our Java products, the ongoing softening of the market for IT
investment, particularly for large enterprise-wide software deployments, will continue to
present challenges to our efforts to sustain revenue growth, particularly with respect to
our products typically deployed on a wide scale. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

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

| | Licenses
and other revenues represent amounts earned from granting customers licenses to use our
software products. Licenses and other revenues totaled $50.1 million for the three months
ended June 30, 2002, compared to $47.5 million from the same period a year ago. Licenses
and other revenues were 84% and 85% of total net revenues for the three months ended June
30, 2002 and 2001, respectively. Licenses and other revenues | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

12

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

| | from our Java, RAD, and Enterprise businesses represented, 52%, 26%, and 22%,
respectively, of total licenses and other revenues for the three months ended June 30,
2002. This is compared to 38%, 38%, and 24%, respectively, for the three months ended
June 30, 2001. Licenses and other revenues during the three months ended June 30, 2002
were favorably affected by the release of our latest version of our Java development
product, JBuilder 7, our Java studio product, Borland Enterprise Studio for Java 4 in the
second quarter of 2002, and the initial release of our Java performance and testing
solution, Optimizeit, during the first quarter of 2002. Licenses and other revenues from
our RAD business, which includes the Borland Delphi, C++Builder and Kylix product lines,
decreased 28% from the same quarter in 2001. Lower revenues in our RAD business were
principally attributable to the lower revenues from our Delphi product line when compared
with the year ago period in which Delphi 6 was released. Licenses and other revenues from
our C++Builder product line increased during the three months ending June 30, 2002 when
compared with the three month ended June 30, 2001 due to continued demand for the latest
version of the product, C++Builder 6, released during the three months ended March 31,
2002. Licenses and other revenues from our Enterprise business during the three months
ended June 30, 2002, including VisiBroker, Borland AppServer, Borland AppCenter,
JDataStore and InterBase product lines, remained relatively flat compared to the same
period a year ago. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Licenses
and other revenues totaled $97.8 million for the six months ended June 30, 2002, compared
to $89.9 million from the same period a year ago. Licenses and other revenues were 84% of
total net revenues for each of the six months ended June 30, 2002 and 2001. Licenses and
other revenues from our Java, RAD, and Enterprise businesses represented, 48%, 29%, and
23%, respectively, of total licenses and other revenues for the six months ended June 30,
2002. This is compared to 37%, 34%, and 29%, respectively, for the six months ended June
30, 2001. Licenses and other revenues during the six months ended June 30, 2002 from our
Java business were favorably affected by the release of our latest version of our Java
development product, JBuilder 7, our Java studio product, Borland Enterprise Studio for
Java 4 in the second quarter of 2002, and the initial release of our Java performance and
testing solution, Optimizeit, during the first quarter of 2002. Lower revenues in our RAD
business were principally attributable to the lower revenues from our Delphi product line
during the three months ended June 30, 2002 when compared with the year ago period in
which Delphi 6 was released. The decline in revenues from these RAD products were
partially offset by the increase in revenues from our C++Builder product with the release
of the latest version, C++Builder 6, during the quarter ended March 31, 2002. Licenses
and other revenues from our Enterprise business decreased 13% in the six months ended June
30, 2002 compared to the six months ended June 30, 2001 due to lower demand from our
Original Equipment Manufacturers, or OEM, customers. We believe that this behavior is due
to concerns about the current economic climate, particularly in the United States.
Continued concerns around the United States and world economy could continue to impact the
buying patterns of our OEM customers and further negatively impact our Enterprise
business. | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

| | Service
revenues represent amounts earned from technical support, training and consulting services
related to our software license arrangements, and accordingly, are largely dependent on
the growth of our software license revenues. Service revenues increased to $9.6 million
for the three months ended June 30, 2002, compared to $8.5 million for the three months
ended June 30, 2001. Service revenues were 16% and 15% of total net revenues for the three
months ended June 30, 2002 and 2001, respectively. Technical support revenues represented
63% and 64% of the total service revenues for the three months ended June 30, 2002 and
2001, respectively, while consulting and training revenues represented 37% and 36% of the
total service revenues for the same periods, respectively. The growth of our technical
support revenues is due to the increase in the number of enterprise-level support
contracts and this trend is dependent on our success in licensing software to a larger
number of enterprise customers. Consulting and training revenues increased due to the
timing of the completion of certain consulting and training engagements and is not
indicative of a trend of increasing consulting and training revenues. We believe that
future growth in service revenues is dependent on the impact of the current economic
climate which in turn may have an impact on our customers spending behavior. Continued
concerns around the United States and world economy could impact the demand for such
services. Service revenues increased to $19.0 million for the six months ended June 30,
2002, compared to $17.8 million for the six months ended June 30, 2001. Service revenues
were 16% of total net revenues for each of the six months ended June 30, 2002 and 2001.
Technical support revenues represented 65% and 62% of the total service revenues for the
six months ended June 30, 2002 and 2001, respectively, while consulting and training
revenues represented 35% and 38% of the total service revenues for the same periods,
respectively. The growth of our technical support revenues is due to the increase in the
number of enterprise-level support contracts and this trend is dependent on | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

13

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

| | our success in licensing software to a
larger number of enterprise customers. Consulting and training revenues for the six
months ended June 30, 2002 remained relatively flat when compared with the same period in
2001. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

| | International
net revenues represented 62% of our total net revenues for the three months ended June 30,
2002 compared to 57% for the three months ended June 30, 2001. The increase in the
percentage of non-U.S. net revenues for the three months ended June 30, 2002, as compared
to the three months ended June 30, 2001, was principally due to the growing adoption of the
Java language in Europe and the Asia/Pacific region resulting in an increase in sales of
our Java development products. We expect non-U.S. revenues to continue to be a significant
percentage of total net revenues in future periods. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Fluctuations
in foreign currency exchange rates did not have a material impact on our total net
revenues or operating results for the three months ended June 30, 2002. However, our
non-U.S. revenues would be adversely affected if the U.S. dollar were to strengthen
against major foreign currencies including the Japanese Yen, United Kingdom Pound Sterling
and the Euro. | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | The
following table presents our total revenues by region: | 
| | ---------------------------------------------------------- | 

|                                      | Three Months EndedJune 30, |           | Six Months EndedJune 30,
|------------------------------------- | -------------------------- | --------- | ------------------------
|                                      | 2002                       |           | 2001                    
|                                      |                            |           |                         
|Americas                              |                            | $  26,786 |                         
|Europe, Middle East & Africa (EMEA) |                            | 20,934    |                         
|Asia Pacific                          |                            | 12,002    |                         
|                                      |                            |           |                         
|Net revenues                          |                            | $  59,722 |                         
|                                      |                            |           |                         

| | Amounts
reported for our Americas region represent revenues generated from our operations located
in the United States, Canada and Brazil. Amounts reported for our EMEA region represent
revenues generated from our operations located in the Netherlands, Germany, France, United
Kingdom, Sweden, Italy, Russia and Spain. Amounts reported for our Asia Pacific region
represent revenues generated from our operations located in Singapore, Japan, South Korea,
Hong Kong, Taiwan, Australia, New Zealand, China and India. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

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

| | Cost
of licenses and other revenues consist primarily of production costs, product packaging,
and royalties paid to third-party vendors. Cost of licenses and other revenues were $3.6
million and $3.5 million for the three months ended June 30, 2002 and 2001, respectively.
Cost of licenses and other revenues were $7.1 million and $6.4 million for the six months
ended June 30, 2002 and 2001, respectively. The increase in cost of licenses and other
revenues for the three and six months ended June 30, 2002 when compared with the three and
six months ended June 30, 2001 was principally due to an increase in royalty costs payable
to third-party vendors. The level of royalty costs in future periods will be dependent
upon our ability to obtain favorable licensing terms for our products that include
third-party technology. | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | 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 was $5.4 million and $6.0 million for the three months
ended June 30, 2002 and 2001, respectively. Cost of technical support revenues represented
29% and 23% of the total cost of service revenues for the three months ended June 30, 2002
and 2001, respectively, while cost of consulting and training revenues represented 71% and
77% of the cost of service revenues for the same periods, respectively. Cost of service
revenues was $10.4 million and $11.1 million for the six months ended June 30, 2002 and
2001, respectively. Cost of technical support revenues represented 29% and 24% of the
total cost of service revenues for the six months ended June 30, 2002 and 2001,
respectively, while cost of consulting and training revenues represented 71% and 76% of
the cost of service revenues for the same periods, respectively. The increase in cost of
technical support revenues for the three and | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

14

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

| | six months ended June 30, 2002 when compared
with the three and six months ended June 30, 2001 is due to additional headcount and
other resources deployed to manage higher support activity. The decrease in consulting
and training costs during the three and six months ended June 30, 2002 when compared with
the same periods a year ago was due to a reduction in spending on outside resources with
fewer consulting and training engagements. In future periods, we expect increases in our
cost of service revenues only as a function of our ability to grow our service revenues. | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Gross
Margins | 
| | ------------- | 

| | Gross
margins were 85% and 83% for the three months ended June 30, 2002 and 2001, respectively.
Gross margins on licenses and other revenues were 93% for each of the three months ended
June 30, 2002 and 2001. Gross margins from service revenues were 44% and 29% for the three
months ended June 30, 2002 and 2001, respectively. Gross margins were 85% and 84% for the
six months ended June 30, 2002 and 2001, respectively. Gross margins on licenses and other
revenues were 93% for each of the six months ended June 30, 2002 and 2001. Gross margins
from service revenues were 45% and 38% for the six months ended June 30, 2002 and 2001,
respectively. Gross margins from service revenues for the three and six months ended June
30, 2002 when compared with the same periods in prior years increased due to an increase in our
service revenues and a reduction in costs in our consulting and training organization
leading to better utilization of our consulting and training resources. While we would
expect our total gross margins to remain consistent with these levels, the future gross
margins will be a function of our future net revenues, the level of third-party
royalty-bearing technology licensed with our product offerings, our ability to control our
manufacturing costs and our utilization of our professional services group. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

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

| | Research
and development (R&D) expenses consist primarily of salaries and other
personnel-related expenses, facilities costs and fees and expenses of third-party
consultants. R&D expenses for the three months ended June 30, 2002 increased to $12.7
million from $11.2 million for the three months ended June 30, 2001. R&D expenses were
21% and 20% of revenues for the three months ended June 30, 2002 and 2001, respectively.
R&D expenses for the six months ended June 30, 2002 increased to $24.7 million from
$22.2 million for the six months ended June 30, 2001. R&D expenses were 21% of
revenues for each of the six months ended June 30, 2002 and 2001. The increase in R&D
expenses for the three and six months ended June 30, 2002 when compared with the three and
six months ended June 30, 2001 was due to additional employee-related expenses with the
increase in our R&D headcount. While we expect total dollars spent on R&D to
increase in 2002 when compared with 2001, we expect our R&D expenses to remain
relatively consistent as a percentage of net revenues. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Sales,
General and Administrative | 
| | --------------------------------- | 

| | Sales,
general and administrative (SG&A) expenses consist primarily of salaries,
benefits, sales commissions, the cost of product marketing programs, legal, facility
and information system costs. SG&A expenses for the three months ended June 30, 2002
increased to $32.1 million from $30.1 million for the three months ended June 30, 2001.
SG&A expenses were 54% of revenues for each of the three month periods ended June 30,
2002 and 2001. SG&A expenses for the six months ended June 30, 2002 increased to $63.1
million from $58.5 million for the six months ended June 30, 2001. SG&A expenses were
54% of revenues for each of the six months ended June 30, 2002 and 2001. The increase in
SG&A expenses was principally due to increased employee costs as a result of increased
headcount in our direct sales force. We expect the future expansion of our sales
organization to be dependent on our ability to generate future meaningful revenue growth.
To the extent net revenues from our direct sales force increase, we expect the sales
commission component of SG&A expenses to proportionally increase as a result of
variable compensation from our sale commission plans. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Amortization
of Intangibles and Acquisition-Related Expenses | 
| | ------------------------------------------------------------ | 

| | Operating
expenses during the three and six months ended June 30, 2002 include approximately $1.6
million and $3.1 million, respectively, in acquisition-related expenses associated with
the acquisitions of Redline Software, Inc. (VMGear) and Bedouin Software, Inc. Operating
expenses for the three and six months ended | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

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

| | June
30, 2001 include approximately $0.4 million and $0.8 million, respectively, in
acquisition-related expenses associated with the acquisition of Bedouin Software, Inc.
and Engine Informatica, LTD. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Restructuring
Charges | 
| | --------------------- | 

| | The
following table summarizes our restructuring activity for the six months ended June 30,
2002 (in thousands): | 
| | ---------------------------------------------------------------------------------------------------------------- | 

|                             | Severanceand Benefits |   | Facilities |   | Other   |   | Total   |  
|---------------------------- | --------------------- | - | ---------- | - | ------- | - | ------- | -
|Accrual at December 31, 2001 | $   329               |   | $   279    |   | $   293 |   | $   901 |  
|Additions                    | 49                    |   | 468        |   |        |   | 517     |  
|Cash Payments                | (229                  | ) | (404       | ) | (13     | ) | (646    | )
|                             |                       |   |            |   |         |   |         |  
|Accrual at June 30, 2002     | $   149               |   | $   343    |   | $   280 |   | $   772 |  
|                             |                       |   |            |   |         |   |         |  

| | During
the six months ended June 30, 2002, we recorded a provision of approximately
$0.5 million associated with leases in the United States and United Kingdom.
During the same period, we made payments totaling approximately $0.4 million for
obligations under these leases. We have recorded a restructure reserve associated
with certain leases in the United Kingdom in the amount of $2.4 million as of
each of June 30, 2002 and December 31, 2001. This amount represents the excess
of our contractual obligation over the anticipated minimum income under the
current and future sublease arrangements. Under these lease arrangements, we are
obligated to pay approximately $7.8 million over the lease terms. The leases
terminate at various dates beginning in 2010 and ending in 2012. We have
contractual commitments from our sublease tenants to receive $0.6 million during
the sublease terms which end on various dates in 2003. If our existing tenants
are not able to pay the contractual amount due under the sublease arrangements
or we are not able to lease the properties on favorable financial terms in the
future, we will be required to take additional charges for the minimum
contractual lease payments. Due to the timing of the contractual payments, this
amount has been included in other long-term liabilities. Subsequent to June 30,
2002, there have not been any significant changes to our estimate of the total
costs of prior restructuring activities. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

| | Interest
income, net and other decreased from $3.2 million during the three months ended June 30,
2001 to $1.7 million during the three months ended June 30, 2002. Interest income, net and
other decreased from $6.6 million during the three months ended June 30, 2001 to $3.4
million during the six months ended June 30, 2002. The decline in interest income, net and
other for the three and six months ended June 30, 2002 when compared with the three and
six months ended June 30, 2001 principally reflects the decrease in interest income of
$1.1 million and $3.1 million, respectively, despite higher cash balances, due to a
decline in prevailing interest rates. Changes in interest rates will continue to impact
our interest income performance in future periods. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

| | We
recorded income tax expense of $1.5 million and $2.6 million for the three and
six months ended June 30, 2002, respectively. This compares to income tax
expense of $1.6 million and $3.1 million for the three and six months ended June
30, 2001, respectively. We have significant net operating loss and tax credit
carryforwards principally in the U.S. and certain other non-U.S. jurisdictions
in which we conduct business. These loss and credit carryforwards are used to
offset our tax liability as allowed by law. In addition, we incur withholding
taxes in a number of non-U.S. jurisdictions that are imposed regardless of the
profitability of Borland in that jurisdiction. Based on our most recent
forecasts of taxable profits, tax loss and credit carryforward utilization and
non-U.S. withholding taxes, we now expect our effective tax rate for 2002 to be
22%. This is a revised percentage up from 20% based on our previous forecast
of anticipated greater profits in the U.S. Similar to 2001, our expected
effective tax rate for 2002 is a combination of U.S. state taxes, non-U.S.
income taxes and withholding taxes. We expect our 2002 effective tax rate to
increase from the rate in 2001 due to the rising relative performance of our
non-U.S. operations. Our effective tax rate will continue to be dependent on the
amount and location of our taxable profits, ability to utilize our net operating
loss and credit carryforwards in certain jurisdictions and the amount of our
non-U.S. withholding taxes. | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

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

| | As
of June 30, 2002, cash, cash equivalents and short-term investments totaled $305.9
million; an increase of $11.5 million from $294.4 million at December 31, 2001. Working
capital increased from $258.6 million at December 31, 2001 to $271.1 million at June 30,
2002. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Cash
provided by operating activities for the six months ended June 30, 2002 was $12.3 million,
consisting of $9.3 million in net income and $3.4 million in depreciation and amortization
offset by an increase in non-cash working capital of $0.5 million. Cash provided by
operating activities during the six months ended June 30, 2001 was $10.4 million,
consisting of $12.3 million in net income and $4.0 million in depreciation and
amortization offset by an increase in non-cash working capital of $5.9 million, primarily
due to an increase in our trade receivables due to growth in our business. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Cash
used in investing activities for the six months ended June 30, 2002 included $2.2 million
used for the acquisition of Redline Software, Inc. during the three months ended March 31,
2002 and $2.3 million in cash used for the purchase of property and equipment. Cash used
in investing activities for the six months ended June 30, 2001 included $3.3 million for
the purchase of property and equipment. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Cash
provided by financing activity was $2.3 million and $5.6 million for the six months ended
June 30, 2002 and 2001, respectively, and principally consisted of proceeds from the
issuance of common stock to employees under our Employee Stock Option and Stock Purchase
Plans of $5.7 million for both six month periods. Cash from issuance of stock for the six
months ended June 30, 2002 was offset by common stock repurchased under the companys
stock buyback program of $3.4 million. | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | During
the six months ended June 30, 2002 and 2001, the impact of changes in foreign currency
exchange rates on our non-U.S. dollar cash balances was $1.5 million and ($0.8) million,
respectively. 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 and 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. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | We
enter into contracts from time to time, such as acquisition agreements, that have forward
cash commitments due to earnouts that may form all or part of the purchase price. As of
June 30, 2002, we are contractually committed to make certain cash payments under our
acquisition agreements with the former shareholders of Highlander Engineering, Inc. and
Redline Software, Inc. A portion of these payments are contingent upon meeting certain
financial performance requirements. The contingent payments for these two transactions
are not to exceed $18.0 million and will be paid, if earned, over a three-year
period. | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | For
the remainder of 2002, we expect that operating expenses will increase slightly as a
percentage of revenue when compared with 2001. 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 2002 to be greater than fiscal year 2001.
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. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | We
Disclose Pro Forma Financial Information | 
| | ------------------------------------------- | 

| | We
prepare and release quarterly unaudited financial statements prepared in accordance with
generally accepted accounting principles (GAAP). We also disclose and discuss
certain pro forma financial information in the related earnings release and investor
conference call. Our pro forma financial information excludes unusual or non-recurring
events or transactions, restructuring and other charges, acquisition-related expenses,
acquired in-process research and development, amortization of goodwill and purchased
intangibles, or gains and losses on investments in equity securities. We believe the
disclosure of the pro forma financial information helps | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

| | investors
more meaningfully evaluate the results of our ongoing operations. However, we urge
investors to carefully review the GAAP financial information included as part of our
Quarterly Reports on Form 10-Q, our Annual Report on Form 10-K, and our
quarterly earnings releases and compare the GAAP financial information with the pro forma
financial results disclosed in our quarterly earnings releases and investor calls, as
well as in some of our other reports. Our presentation of pro forma information may not
be consistent with those of other companies. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

| | The
following table shows our pro forma results reconciled to the GAAP Condensed Consolidated
Statements of Income for the three and six months ended June 30, 2002 and 2001. Our pro
forma results for fiscal 2002 and fiscal 2001 exclude restructuring and other charges,
acquisition-related expenses and amortization of goodwill and purchased intangibles. | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

|                                                                                 | Three Months EndedJune 30,            |   | Six Months EndedJune 30, |  
|-------------------------------------------------------------------------------- | ------------------------------------- | - | ------------------------ | -
|                                                                                 | 2002                                  |   | 2001                     |  
|                                                                                 |                                       |   |                          |  
|                                                                                 | (in thousands, except per share data)
|                                                                                
|GAAP net income                                                                  | $   4,669                             |   | $   6,414                |  
|Restructuring, amortization of intangibles and      acquisition-related expenses | 1,564                                 |   | 351                      |  
|Adjustment to provision for income taxes                                         | (373                                  | ) | (71                      | )
|                                                                                 |                                       |   |                          |  
|Pro forma net income                                                             | $   5,860                             |   | $   6,694                |  
|                                                                                 |                                       |   |                          |  
|Basic pro forma net income per share                                             | $     0.08                            |   | $     0.10               |  
|                                                                                 |                                       |   |                          |  
|Shares used in computing basic net income per share                              | 70,406                                |   | 62,577                   |  
|                                                                                 |                                       |   |                          |  
|Diluted net income per share                                                     | $     0.08                            |   | $     0.09               |  
|                                                                                 |                                       |   |                          |  
|Shares used in computing diluted net income per share                            | 74,632                                |   | 73,879                   |  
|                                                                                 |                                       |   |                          |  

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

| | Our
success is dependent on the broad adoption of certain programming languages and
standards, particularly Java. | 
| | ----------------------------------------------------------------------------------------------------------------- | 

| | Many
of our most popular products are focused on Java, and we continue to invest heavily in
Java and Java standards, including enterprise-focused standards such as Java 2 Platform,
Enterprise Edition, or J2EE, and Enterprise JavaBeans, or EJB, to enhance the performance
and functionality of these products. Java, however, is a relatively new language and was
developed primarily for the Internet and corporate Intranet applications. While we believe
that Java is making significant inroads with respect to its adoption for enterprise
applications, it is still too early to determine whether Java will achieve widespread
acceptance as a programming language and platform for enterprise applications. For
example, EJB and J2EE implementations have not yet been widely adopted and in particular
are only sparingly and partially used in enterprise class processing environments, and our
deployment and management products are principally focused on these standards.
Additionally, several of the distinguishing features of JBuilder, our integrated
development environment, or IDE, for Java, are geared for J2EE and EJB development. If
Java, including EJB and J2EE, does not become widely adopted, our business could be
adversely impacted. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | In
addition, our infrastructure products, including Borland Enterprise Server, are based on
Common Object Request Broker Architecture, or CORBA, in addition to EJB and J2EE. CORBA is
a standard from the Object Management Group (OMG) for communicating between distributed
objects (objects are self-contained software modules). CORBA provides a way to execute
programs (objects) 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 as a software-based communications interface through which
objects are located and accessed, critics contend that it is a highly complex technology
requiring significant | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

| | investments
to implement, as well as support and train users. If CORBA is displaced or its popularity
diminished, our business would be negatively impacted. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

| | If
we are unable to maintain our license to Java technology, we may not be able to license
our Java products to third parties, which will harm our business. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

| | Our
Java products require proprietary technology made available by Sun Microsystems in order
to operate. Pursuant to license agreements with Sun Microsystems, we license the Java 2
Platform, Standard Edition specification, the Java 2 Platform, Enterprise Edition
specification and the Java 2 Platform, Micro Edition specification. The principal
agreement provides for a five-year term and will terminate on December 28, 2005. While we
would expect to renew this agreement, Sun is not obligated to do so. Upon expiration of
this license, we will continue to have the right to distribute our software products
containing the version of Java technology incorporated at the time of expiration. However,
if the agreement is terminated by Sun Microsystems due to material breach of the terms of the license
or upon an action for infringement of intellectual property rights relating to the Java
technology by us against Sun Microsystems or any of its other licensees, we are required
to return or destroy all copies of the Java technology, including derivative works. If Sun
Microsystems fails to renew the license agreement or otherwise stops making this
proprietary technology available on commercially reasonable terms, and we are unable to
develop or otherwise identify effective alternatives to licensing this technology, our
business will be harmed. Alternatively, if Sun Microsystems makes significant changes to
the Java language or its proprietary technology, or fails to correct defects and
limitations in these products, our ability to continue improving and shipping our products
could be impaired. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | The
relative immaturity of Java could negatively impact our growth and operating results. | 
| | ----------------------------------------------------------------------------------------- | 

| | Because
Java is, in part, a relatively new programming language and still evolving in
functionality, we believe that the demand for development technologies, particularly for
upgrades that facilitate the tailoring of applications to the latest Java standards, is
currently strong. However, should Java and Java standards stop evolving, the need for new,
upgraded development technologies may weaken and our ability to sell upgrades of our Java
development technologies may be impacted. Since our operating results are dependent, in
part, on selling upgrades to our existing customer base, our operating results would be
adversely affected. In addition, in the event that Java matures to the extent that vendors
are able to have success selling broadly applicable packaged Java software without fear of
obsolescence, the need for extensive in-house Java development could be curtailed. If
in-house development is curtailed, the need for our development technologies will be
impacted and our operating results would be adversely affected. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | We
are relatively new to the software application infrastructure market, and may not be able
to successfully compete in that market. | 
| | ------------------------------------------------------------------------------------------------------------------------------------ | 

| | The
software application infrastructure market is relatively new and evolving. While we
believe we maintain strong relationships with the information technology, or IT,
organizations in large enterprises through our developer network, we do not have extensive
experience in this market. For example, we entered this market for the first time as the
result of our acquisition of Visigenic in 1997 and are now marketing comprehensive
implementation solutions to enterprises including development and infrastructure products.
There can be no assurance that the software application infrastructure market will grow or
that we will be able to compete successfully in it. To compete successfully in the
software application infrastructure market we believe we will need to: | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | successfully select the operating platforms, database management systems and server
software which ultimately achieve market acceptance; | 
| | ---------------------------------------------------------------------------------------------------------------------------------------- | 

| | successfully and efficiently invest significant resources in direct sales, marketing and
product development; | 
| | ------------------------------------------------------------------------------------------------------------- | 

| | compete with several very large and well-established companies with significant mindshare, as
well as a number of smaller successful companies, that are already competing in these
markets; | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | develop stronger relationships with systems integrators and other strategic partners with
access to enterprise accounts and C-level decision-makers on software application
infrastructure products; and | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

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

| | We
have a relatively new direct sales force and our limited experience in managing them may
impair our ability to expand sales and generate increased revenue, particularly with
regard to our application infrastructure products. | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Because
a significant percentage of our sales force are relatively new to our company, there is a
limited history on which to evaluate their performance. There can be no assurance that our
expanded sales force will succeed in increasing or sustaining our revenue or improving our
competitive position or that our newly-hired employees will achieve desired levels of
productivity. In addition, while we have experienced sales management personnel, our
company has limited experience in managing a large, geographically-dispersed sales force.
For example, we may experience difficulty in integrating the new members of our sales team
into our operations. Our failure to successfully manage our sales force may impair our
ability to increase sales and grow our revenue. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | If
our efforts to motivate and train our sales and technical personnel are unsuccessful or
are not cost-effective, our operating results would be harmed. | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | We
need to extensively train and motivate our sales personnel, invest additional resources in
our sales efforts and effectively educate our authorized resellers. Our software products
and services require a sophisticated sales effort, including efforts targeted at the
senior management and information technology departments of our prospective customers. In
addition, we believe our products, including both our development and application
infrastructure products, compare well against our competitions products on the basis
of our products technical and performance benefits, increasing our particular need
to have well trained, technically savvy sales personnel in order to communicate these
advantages to prospective customers. We have made significant investments in training our
direct sales force and implemented new sales compensation programs for 2002 in an effort
to improve and motivate our sales force and increase sales. There can be no assurance,
however, that these programs will be successful in achieving this result in the long term,
and such changes and additional investments could significantly increase our sales-related
expenses and negatively impact operating results. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

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

| | As
we increasingly seek to license software products directly to our customers,
particularly 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.
We believe that a significant percentage of our future revenue will be from
enterprise customers. These transactions typically contain multiple elements,
including licenses for development and deployment products, technical support,
maintenance, consulting and training services. As a result, these 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
enterprise relationship and in educating them about our software products and
solutions, which can sometimes result in lower operating margins. Also, sales to
these types of 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 C-level
employee. In particular, while our strategy includes leveraging the loyalty of
our developer network to sell our software application infrastructure products
within their enterprises, we believe that purchase decisions on software
application infrastructure technology often involve more senior level employees
than sales of development products. All of 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 the 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 or reregistration
by large customers, could cause our results of operations to vary significantly
from quarter to quarter and could have a material adverse impact on our results
of operations. In addition, the continued weakness in the market for IT
investment, particularly for wide-scale enterprise-wide deployments, has
lengthened, and may continue to lengthen our sales cycle, as prospective
customers defer significant investments in IT infrastructure until the market
for IT investment improves. | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

20

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

| | Our
international operations and sales could be harmed by factors outside our control. | 
| | -------------------------------------------------------------------------------------- | 

| | A
substantial portion of our revenue is from international sales. International sales
accounted for approximately 62% of our revenues in the three months ended June 30, 2002.
Given our focus on international markets and the market potential for our products in such
markets, we anticipate increased international sales going forward. However, there are
inherent risks 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; | 
| | --------------------------------------------------------------------------------------------------------- | 

| | shipping delays of new product releases; | 
| | ---------------------------------------- | 

| | 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; | 
| | ----------------------------------- | 

| | compliance with various conflicting laws and regulations; | 
| | --------------------------------------------------------- | 

| | overlap of different tax structures; and | 
| | ---------------------------------------- | 

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

| | One
or more of these risk factors could have a material adverse effect on our future
international operations and sales and, consequently, on our business, operating results
and financial condition. In addition, our subsidiaries generally operate in local
currencies, and their results are translated monthly into U.S. dollars. If the value of
the U.S. dollar increases significantly relative to foreign currencies, there could be a
material adverse effect on our business, operating results and financial condition. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

| | Our
business may suffer if international trade is hindered, disrupted, or economically
disadvantaged. | 
| | ----------------------------------------------------------------------------------------------------- | 

| | Political
and economic conditions abroad may adversely affect international sales of our products.
Protectionist trade legislation in either the United States or foreign countries, such as
a change in the current tariff structures, export or import compliance laws, or other
trade policies, could adversely affect our ability to sell our software products and
services in foreign markets. Changes in policies by the U.S. or foreign governments
resulting in, among other things, higher taxation, currency conversion limitations,
restrictions on the transfer of funds or the expropriation of private enterprises also
could have a material adverse effect on us. Any actions by countries in which we conduct
business to reverse policies that encourage foreign investment or foreign trade also could
adversely affect our operating results. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

| | The
success of our Linux-based products is dependent upon increased future adoption of Linux. | 
| | --------------------------------------------------------------------------------------------- | 

| | We
are investing time and resources in developing products, such as Kylix, for the Linux
operating system. Linux is a relatively new operating system that runs on a variety of
hardware platforms. Linux has yet to be adopted on a widespread basis, though major
hardware vendors like IBM and Sun Microsystems are supporting it. If Linux is not adopted,
or is adopted more slowly than we anticipate, our investments in Linux- compatible
products may not generate their anticipated return. | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | The
success of our Web Services enabled products is dependent upon the adoption of Web
Services. | 
| | ------------------------------------------------------------------------------------------------ | 

| | We
have recently enhanced our existing products with Web Services capabilities, including
providing for the development of Web Services-enabled components and the integration of
Web Services-enabled components. We believe that the popularity of using and making
available Web Services for software development could be substantial. However, the Web
Services-based development market is young and only | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

21

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

| | now
emerging, and we cannot predict whether this market will develop as we anticipate or if
at all. If the market does not develop as we anticipate, our growth may not be as strong
as we expect. In particular, we are anticipating a significant market opportunity to
bridge the Microsoft .NET and Java platforms through Web Services. If the Web Services
market does not develop as we anticipate or if one of these platforms achieves
significantly greater market acceptance than the other, the opportunity to bridge the two
platforms through Web Services may not be as significant as we expect and we will not be
able to benefit from this opportunity through our development and deployment products.
Alternatively, if we are unable to enhance our products to remain current with
technological advances in the respective platforms, we will not be in a position to
capitalize on this cross-platform Web Services opportunity. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | 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. The pace of change has accelerated due to the
emergence of the Internet, and related programming platforms and languages, including Sun
Microsystems Java and Microsofts .NET and C#, as well as new operating systems
such as Linux. | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | With
respect to our JBuilder product, we compete primarily with the Java IDEs offered by IBM,
IntelliJ, Sun Microsystems, Oracle and WebGain. With respect to our integrated Java
performance assurance tools such as Optimizeit, we compete with Rational Software and
Sitraka. With respect to our Delphi and C++Builder products, we compete primarily with
Microsoft. With respect to our TeamSource DSP service, our potential competitors may
include Merant, Microsoft, Oracle and Rational Software. With respect to our Borland
Enterprise Server, AppServer Edition, we compete primarily with BEA and IBM. With respect
to our Borland Enterprise Server, VisiBroker Edition and our VisiBroker middleware
product, we compete primarily with Iona. With respect to Borland Enterprise Server, Web
Edition, we compete primarily with Microsoft. At this time we have no significant
competitors to our Borland AppCenter and Kylix products. In the markets for our
development products, we also compete with platform vendors such as Microsoft, Sun
Microsystems, Hewlett-Packard, IBM, Red Hat and Apple Computer. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | We
differentiate our products from our competitors products based on scalability,
functionality, interoperability, cost of ownership, performance and reliability as well as
their effectiveness in addressing our customers needs. There can be no assurance
that we will be able to successfully differentiate our products from those of our
competitors in the future or be able to continue to enhance our product lines to meet the
needs of our customers. In addition, many of our competitors have substantially greater
financial, management, marketing and technical resources than we have. Many of our
competitors have well established relationships with our current and potential customers,
extensive knowledge of the market and extensive product development, sales and marketing
resources. These competitors may be more successful than us at developing and marketing
products in our markets. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Because
there are relatively low barriers to entry in a number of our markets, we also can expect
additional new competition from other established and emerging companies. Increased
competition in our markets, including from companies with substantial resources, could
result in price reductions, fewer customer orders, reduced gross margins and loss of
market share. Any one of these results could adversely affect our business. For example,
given the growth and adoption of Java, we are observing increased attention on the market
for Java development technologies, and expect additional new entrants. Certain vendors,
for example, which have previously not focused significant resources on the Java
development market, have altered their product strategies to incorporate Java development
offerings. Similarly, the market for development technologies to enable Web Services is
receiving increased attention. Because we are dependent on the market for Java development
for a substantial portion of our revenue, going forward, increased competition in this
market could damage our competitive position and significantly affect our operating
results. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

| | Certain
of our competitors, such as 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. In addition, we believe a number of such competitors view
sales of products such as development technologies as important for enhancing the
functionality of their core products, as well as the demand for such products. As a | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

22

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

| | result,
certain such companies may offer products that compete with our offerings bundled with
their other products, such as application servers, work stations, personal computers,
operating systems and databases. In such event, the effective price for products that
compete with our products may be heavily discounted or offered at no charge. Such
competitive pressures could require us to reduce the price of our products and related
services and adversely affect our operating results. Similarly, certain industry
alliances and arrangements exist or may be formed in the future under which companies in
markets in which we do not compete ally with companies in our markets to bundle products
in order to help increase respective market shares. Such arrangements may result in lower
effective prices for products that compete with our offerings than our own prices,
putting pressure on us and diminishing our competitive position. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | In
addition to bundled offerings and bundling arrangements, certain competitors make
available or have begun making available for no charge to their customers products that
compete with our products, including our development technologies 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, reliability and cost of ownership,
among other things, freely available competitive technologies are a risk to our business.
At a minimum, technologies offered at no charge increase pricing pressure and threaten to
impact our results. IBMs open source Eclipse initiative, for example, is an example
of a model under which products that are competitive with our offerings may eventually
become available at minimal or no cost. IBM Eclipse is attempting to create an open source
toolkit in which customers can access and create development technologies at no charge. If
this type of model is widely adopted, our business will be harmed. | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | 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 highly competitive and 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. | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | 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 we expect or 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 and
minimize our competitive advantages on the basis of price and performance; 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. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | We
may not successfully address these risks. If we do not successfully address these risks,
our business and operating results could be seriously harmed. | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Our
strategic relationships and partnerships 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 partnerships
with industry leaders such as Microsoft, Sun Microsystems and Nokia. Our current
technology partners give us, among other things, early access to emerging technologies,
additional resources to market our products, as well as an entry point to meet potential
customers. Our relationships with systems integrators and resellers also provide
additional expertise to our customers and bolster our service capabilities, among other
things. In the future, we anticipate exploring additional strategic alliances, technology
partnerships and other arrangements designed to further all of these goals. Our current or
prospective strategic alliances and technology partnerships | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

23

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

| | may
not achieve their intended objectives however, and parties to our strategic alliances and
technology partnerships may not perform as contemplated. Additionally, our partners may
choose to terminate their arrangements with us where no binding contractual arrangements
exist. Under our relationship with Nokia, for instance, Nokia is currently recommending
JBuilder as its preferred IDE for Java development to its customers and/or vendors of
ancillary products. This arrangement is not binding however, and Nokia may choose not to
recommend JBuilder at some future date or to recommend a competitors products. The
failure to develop or maintain our strategic alliances and technology partnerships, or
our partnersinability to perform or decision not to perform or to opt out of their
arrangements with us, may impede our ability to introduce new products or enter new
markets. As a result, our operating results could be materially affected. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | If
the wireless and mobile application market does not develop as anticipated our growth may
be negatively impacted. | 
| | -------------------------------------------------------------------------------------------------------------------- | 

| | We
have recently introduced new Java-based products targeted for development applications for
mobile and wireless devices, including JBuilder MobileSet and JDataStore 6. We have also
entered into strategic relationships or technology partnerships with wireless device
manufacturers, including Nokia, in order to enhance our position in this market. If the
market for mobile and wireless applications does not develop as we anticipate or as
quickly as we anticipate, the demand for our wireless products will be adversely impacted.
The failure of the wireless market to develop as we expect, or our failure to penetrate
this market, will impede our anticipated sales growth and could result in substantially
reduced earnings from those we anticipate. | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | The
growth in the market for mobile and wireless applications will depend on a number of
factors, any of which may impact our ability to derive substantial revenue from this
market in the future. These factors include: | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | rate of adoption of mobile devices by enterprises and consumers, including personal
digital assistants, handheld computers, smart phones, pagers and other mobile devices; | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | rate of adoption of wireless applications and services available on such devices by
enterprises and consumers; | 
| | -------------------------------------------------------------------------------------------------------------- | 

| | aggressive and successful marketing of wireless applications and services by a limited
number of communication service providers, including pricing; | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | the rate of build-out of and upgrades to existing wireless networks, including, but not limited to:
availability of rights to cell and switch sites as well as zoning variances and other
approvals for network construction; completion of cell site design, frequency planning
and network optimization; completion of fixed network implementation; expansion of
customer care, network management and billing systems; and vendor equipment availability; | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | availability of additional spectrum capacity to enable service providers to expand
existing wireless data services and develop third generation services; and | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | health issues, including as they relate to radio frequency emissions or the use of
devices while driving automobiles, and potential legal restrictions and/or litigation in
conjunction therewith. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | If
our products for the wireless or mobile market are not widely accepted our growth may be
negatively impacted. | 
| | ---------------------------------------------------------------------------------------------------------------- | 

| | In
addition to the development and growth of the market itself, our ability to generate
significant revenue in the wireless application implementation market will depend on our
ability to adapt to the rapid technological shifts in this market to keep our products
viable and competitive. Technological factors that may impact our ability to generate
substantial revenue in the wireless market include: | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | failure of Java to gain in popularity as a programming platform for wireless and mobile
application development; | 
| | ---------------------------------------------------------------------------------------------------------------- | 

| | emergence of a dominant programming language or platform or operating system for mobile
and wireless devices and our corresponding ability to develop technologies that
facilitate software development and deployment for such technologies; | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

24

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

| | failure of a dominant platform or operating system to emerge and our corresponding
ability to develop technologies that facilitate software development and deployment
across the range of such technologies or a significant subset thereof; | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | increasing proliferation of mobile or wireless devices with varying technical
specifications and form factors, and our corresponding ability to develop products
capable of facilitating development and deployment to the range of devices with such varying requirements; | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | evolving standards and other technological changes; and | 
| | ------------------------------------------------------- | 

| | pace of overall technological change in the mobile and wireless markets. | 
| | ------------------------------------------------------------------------ | 

| | If
the wireless and mobile market does not develop as we anticipate or if we are unable to
respond to technological shifts in the market, our anticipated sales and operating results
could be adversely impacted. In addition, even if the wireless market does develop and we
have competitive products, our failure to market and sell these products to our customers
will impact our anticipated sales and operating results. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Because
competition for qualified personnel is intense, we may not be able to recruit or retain
qualified personnel, which could negatively impact 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. Over
the last few years, we have increased compensation, bonuses, stock options and other
fringe benefits in order to attract and retain key 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. As a result, we may be required
to further increase compensation and benefits. 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. Even if we succeed in attracting and
retaining key personnel, these increased compensation costs may not be offset through
either improved productivity or higher revenue. | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Furthermore,
we do not maintain key person insurance on any of our employees or management team
members, including Dale L. Fuller, our President and Chief Executive Officer. If we lose
one or more of the members of our management team, including Mr. Fuller or other key
employees, we will not receive insurance or other proceeds to help offset the loss to us
of unique skills and talents or the potentially high cost of replacement personnel, and
our business and operating results could be seriously harmed. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | If
our products do not operate with the wide variety of hardware, software and operating
platforms, 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 a significant amount 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 that we do not
provide products for could rapidly grow in popularity. In particular, we believe that this
risk is substantial with regard to particular proprietary platforms and languages for
which we may not be given
preferential access or access at all. As a result, we may not be in 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 profitability could suffer. In addition, we may incur significant
expenditures to develop products for emerging platforms that do not ultimately become
large or profitable market segments. | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | For
example, Microsoft has introduced a new operating environment for Web-based applications
called Microsoft .NET. While we are releasing development products that support the .NET
environment, our business would be harmed if we are unable to develop an effective
development product for the .NET environment that addresses the needs of our customers, or
if our competitors, particularly Microsoft, develop such products more effectively than we
do. Similarly, 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 and our
results adversely impacted. An alternative to Java, C# is an object-oriented programming
language that was recently introduced by Microsoft and is based on C++. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

25

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

| | We believe that C#
is gaining in market acceptance. We do not, however, currently offer a development product
for the C# programming language. In addition, it is possible that certain platforms may
emerge for which Java implementations are not possible or feasible on a cost-effective
basis. Because we are focused on Java products, we could lose customers if this happens. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Our
research and development efforts may be costly and may not produce successful new
products and product upgrades. | 
| | -------------------------------------------------------------------------------------------------------------------- | 

| | Our
future success will depend upon our ability to enhance our current products and develop
and introduce new products on a timely basis, particularly if new technology or new
industry standards render any existing products obsolete. We believe that we will need to
incur significant research and development expenditures to remain competitive,
particularly since many of our competitors have substantially greater resources. The
products that we are currently developing or may develop in the future may not be
technologically successful or may not be accepted in our market. In addition, the length
of our product development cycle may be greater than we expect. If the resulting products
are not introduced in a timely manner, or do not compete effectively with products of our
competitors, our business will be harmed. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

| | Delays
in the introduction of new products may cause us to lose customers to our competitors or
harm our reputation. | 
| | -------------------------------------------------------------------------------------------------------------------- | 

| | 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. The loss of key employees may increase the risk of these delays. Some
of our products are based on technology licensed from third parties. We have limited
control over when and whether these technologies are upgraded. The failure to receive
adequate notice of, the delay in release of, or the inadequacy of enhancements to
technology licensed from third parties could have a material adverse effect on our ability
to develop and enhance our products. Due to these uncertainties inherent in software
development, it is likely that these risks will materialize from time to time in the
future. We could lose customers as a result of substantial delays in the shipment of new
products or product upgrades. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | We
depend on technologies licensed to us by third parties, particularly that of Sun
Microsystems and Microsoft, and the loss 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 with respect to our Java products and we are dependent on licenses
from Microsoft with respect to our Delphi and C++Builder products. If any of these
licenses were terminated or were not renewed, or if these third parties failed to develop
new technology products or 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, it is possible that 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 have a material and
adverse effect on our business, operating results and financial condition. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

| | Open
source technologies lower the barrier to entry in our markets and have the potential to
harm our ability to sell our products and services on profitable terms. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | The
free availability of technology, such as Linux, may allow competitors to enter our markets
more easily and at lower cost. For example, our ability to enhance our development
technologies is based on access to technologies we obtain through costly licenses with Sun
Microsystems and Microsoft, among others, providing a potential barrier to entry in our
markets. If key technologies are made freely available, the advantages we derive from our
industry relationships and financial position could be diminished. In turn, our
competitive position, our revenues and growth could be negatively impacted. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

| | Our
historical financial information relating to a number of our development technologies is
based on sales of development applications for legacy languages and traditional hardware
platforms, and as such may not be indicative of our future performance in developing and
marketing software for emerging languages and emerging hardware platforms. | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Our
historical financial information relating to a number of our development technologies is
based on sales of software designed to develop applications for legacy platforms (e.g.,
Windows and C++) as well as traditional computer hardware platforms (e.g., mainframes,
work stations, applications servers, desktop personal computers, notebook computers,
etc.). 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 revenue, we
expect to derive an increasing percentage of our revenue from sales of our development
technologies for emerging platforms such as Java and .NET, as well as emerging hardware
platforms such as wireless and mobile computing devices. Relative to our traditional
business, we do not have a lengthy operating history in these markets upon which to
evaluate our prospects, which may make it difficult to predict our actual results in
future periods. Accordingly, actual results of our future operations may differ materially
from our anticipated results. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | The
customers for our application infrastructure products are, and we expect our customers
will continue to be, highly concentrated in a small number of vertical markets, so a
continued economic downturn in these markets would significantly harm our revenues. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | A
large portion of our revenue with respect to our application infrastructure products is
derived from customers in a small number of vertical markets such as the technology,
telecommunications and financial markets. While we believe that customers in these markets
are attracted to the performance advantages of our products, continuation or deepening of
the current economic downturn in any of these markets could have a significant impact on
our revenues with respect to our application infrastructure products. Our infrastructure
business was adversely affected in 2001 and in the first half of 2002 by the economic
downturn in these markets, particularly the telecommunications market. Our failure to
broaden our base of customers outside these vertical markets would reduce our future
revenues with respect to our application infrastructure products if the extended downturn
in our targeted vertical markets continues. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

| | If
we cannot increase market awareness of our products and services our business could be
harmed. | 
| | ------------------------------------------------------------------------------------------------- | 

| | We
continue to expand our marketing operations to increase market awareness of our products
and services, enhance the goodwill associated with the Borland brand, market
our products and services to a greater number of customers and generate increased revenue.
Our products and services increasingly require strong marketing efforts to address the
various departments of an enterprise, as well as the developer community at large, and our
inability to effectively market our products could impede our ability to compete
effectively. In addition, the need to engage in these marketing efforts could result in a
significant increase in our operating expenses. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | The
number of factors that affect 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 fluctuations could cause our stock price to fluctuate significantly. We believe that
these variations may result from many factors including: | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

| | 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; | 
| | ---------------------------------------------------------------- | 

| | the number, timing and significance of product upgrades and new product announcements by
us and our competitors; | 
| | ---------------------------------------------------------------------------------------------------------------- | 

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

27

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

| | customer
order deferrals in anticipation of upgrades or new products offered by us or our
competitors; | 
| | ------------------------------------------------------------------------------------------------------ | 

| | product release cycles for our products and those of our competitors; | 
| | --------------------------------------------------------------------- | 

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

| | general domestic and international economic and political conditions; and | 
| | ------------------------------------------------------------------------- | 

| | information technology budgets and overall capital expenditure budgets of our customers
and prospective customers. | 
| | ------------------------------------------------------------------------------------------------------------------ | 

| | A
significant portion of our customers, particularly enterprise-level customers, place orders toward
the end of a given quarter. Revenue may also fluctuate
based on our customers fiscal year budgeting cycles. Therefore, revenues may be
difficult to predict, and any revenue shortfall for a quarterly period may not be known
until late in the quarter. Additionally, our costs are based on projected revenues and are
relatively fixed in the short term. Therefore, if our revenue levels fall below
projections, net income may be significantly reduced, and, accordingly, we may experience
a loss. 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 a small number of distributors like Ingram Micro for a significant portion of
our revenue; if we lose one or any of our major distributors our revenue could suffer. | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Ingram
Micro, one of our major distributors, accounted for approximately 13% and 12% of our total
revenue for the three and six months ended June 30, 2002, respectively. Ingram Micro
accounted for approximately 13% of our total revenue during the year ended December 31,
2001 and 12% of total revenue during the year ended December 31, 2000. We expect that
Ingram Micro will continue to be a significant distributor and a small number of
distributors will continue to account for a significant portion of our revenue for the
foreseeable future. Our inability to increase the number of our distributors or the loss
of any one major distributor like Ingram Micro could limit our ability to maintain or
increase our market share, or could cause our revenue to drop quickly and unexpectedly. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

| | We
rely on independent software vendors, value-added resellers, systems integrators and other
channel partners to compliment our direct sales. A part of our strategy is also to bundle
our software in the products offered by value-added resellers, or VARs, or independent
software vendors, or ISVs. The pricing, terms and conditions of our agreements with these
partners are individually negotiated and vary among partners. A majority of these
agreements are non-exclusive. Many of our agreements do not require our customers
to make a minimum number of purchases. We have virtually no control over the shipping
dates or volumes of systems shipped by our customers. 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 to grow or that the channel
partners will continue to purchase our products in the future. If we do not continue to
get referrals from third parties or if we are unable to secure license agreements with
these parties on profitable terms, our business may suffer. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | We
are dependent upon certain retail distribution channels. | 
| | ----------------------------------------------------------- | 

| | A
portion of our sales are made through retail distribution channels, which are
subject to events that cause unpredictability in customer demand. Our retail distributors
also carry the products of our competitors. Some of our retail distributors have limited
shelf space and limited capital to invest in inventory. Their decision to purchase our
products is based on a combination of demand for our products, our pricing, the terms and
special promotions we offer and other factors that we do not control and cannot predict.
Our agreements with retail distributors are generally nonexclusive and may be terminated
by them or us without cause. Accordingly, there can be no assurance that our distributors
will continue to carry our products. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

| | Failure
to expand or grow our professional services offerings and enlist others to provide
services for our products could harm our business and results of operations. | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | We
believe that growth in our license revenue will depend on our ability to provide our
customers with comprehensive professional services and to enlist other parties to provide
similar services, including independent software vendors, 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 business
and operating results could be seriously harmed. We expect a modest increase in the number
of our professional services personnel to meet these needs over the remainder of 2002.However, 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. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | As
part of our growth strategy, we have also embarked on an effort to utilize our
professional services more aggressively, including using them as a means to market our
products or to obtain feedback which we can then incorporate into our product plans. A
decline in the price of or demand for our professional services offerings may harm our
business and operating results and negatively impact our growth strategy. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | 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 broader arrays of software solutions and 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. Changes resulting from this consolidation may negatively impact our
competitive condition, particularly as certain products, when offered as part of a bundled
suite, are offered for free or are given away to sell more hardware components. In
addition, as we seek to expand our product lines, skills and capacity through
acquisitions, a trend toward consolidation may result in our encountering increased
competition for attractive targets, and having to pay higher prices for those targets. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | We
may not be able to successfully complete business combinations or integrate combined
businesses into our existing business. | 
| | ------------------------------------------------------------------------------------------------------------------------------ | 

| | As
a part of our business strategy, we may make acquisitions of businesses, products or
technologies in the future. However, there may not be suitable businesses, products or
technologies available for acquisition on terms acceptable to us. There may be substantial
costs associated with acquisitions including the potential dilution to our earnings per
share, the incurrence or assumption of debt, the assumption of contingent liabilities, the
amortization of expenses related to intangible assets and the legal and other fees
associated with the negotiation and consummation of the acquisition. Acquisitions entail
numerous risks, including the difficulty in the integration of operations, technologies,
products and personnel, as well as difficulties and uncertainties in our ability to
maintain key business relationships that the business entities have established.
Acquisitions also divert the attention of management from other business concerns. We may
make acquisitions in
new markets where we have limited or no prior experience. Further, there is no guarantee
that any acquisition we complete will result in earnings accretion, cost efficiencies or
synergies. We may expend resources to acquire products and technologies that we are not
ultimately able to commercialize. Furthermore, acquired businesses may bring with them
unanticipated or undisclosed liabilities and risks. Any one of these risks, if realized,
could negatively affect our business, financial condition and operating results. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | If
our encryption technology does not satisfy our potential customers needs for the
confidential transfer of information, sales of certain of our application infrastructure
products could suffer. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | We
use and will continue to use encryption technology licensed by third parties in some of
our products, such as in Borland Enterprise Server, VisiBroker Edition, to provide
security for the exchange of our customers confidential information. Encryption
technologies have been breached in the past. There can be no assurance that there will not
be a compromise or breach of our security technology. If such a breach were to occur, it
could have a material adverse effect on our reputation and sales of our application
infrastructure products. | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

29

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

| | If
the license of our products that contain encryption technology is delayed by export
regulations, revenues from licensing our application infrastructure products in foreign
markets could be harmed. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | There
are numerous regulations regarding the export of encryption technology from the United
States. In the past, some of our sales have been delayed while we have awaited regulatory
clearance to export our encryption technology, especially to countries outside the
European Union. Similar delays in the future would negatively impact our revenues. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

| | 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. Errors in our software may be
caused by defects in third-party software incorporated into our software. If so, we may be
unable to fix these defects without the cooperation of these software providers. Because
these defects may not be as significant to our software providers as they are to us, we
may not receive the full and timely cooperation that we may require. In addition, we may
not have the contractual right to access the source code of third-party software and, even
if we access the source code, we may be unable to detect and fix the defect. 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; | 
| | -------------------------------- | 

| | immediate loss of revenue; | 
| | -------------------------- | 

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

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

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

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

| | These
consequences could materially and adversely affect our business, operating results and
financial condition. | 
| | ----------------------------------------------------------------------------------------------------------------- | 

| | Our
products also interoperate with many components of complicated computer system
implementations, such as mainframes, application servers, personal computers, application
software, databases, operating systems and data transformation software. Failure of any
one of these components could cause all or large portions of computer systems to fail. In
such circumstances, it may be difficult to determine which software or hardware component
failed, and it is likely that customers would bring a lawsuit against several companies,
including us. Regardless of its merits, responding to any claim can be time consuming and
costly and divert the efforts of our technical and management personnel. 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. | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Many
of our license agreements contain provisions designed to limit our liability for potential
product liability claims. It is possible, however, that these provisions may not protect
us because of existing or future federal, state, local or foreign laws or ordinances or
judicial decisions. A successful product liability claim for large damages brought against
us could have a material adverse effect on our business, operating results and financial
condition. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Intentional
efforts to harm or disrupt the functioning of our software or web site 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
or the security of our web site and misappropriate proprietary information or cause
interruptions to the delivery of our services or products. Our activities could be
substantially disrupted, and our reputation and future sales could be harmed if these
efforts were successful. | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

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

| | Our
future success is dependent on growing our company. The failure to manage our 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. We plan to
continue to expand further the number and diversity of our software solutions and their
use in the future. Our ability to manage our planned growth effectively will require us
to: | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | successfully hire, train, retain and motivate our employees; | 
| | ------------------------------------------------------------ | 

| | enhance our operational, financial and management systems; and | 
| | -------------------------------------------------------------- | 

| | expand our research and development capacity. | 
| | --------------------------------------------- | 

| | 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. Our
customers, however, 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
would adversely affect our profitability. If we cannot manage our growth effectively, our
business and results of operations could be negatively impacted. | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | The
price of our common stock could fluctuate significantly. | 
| | ------------------------------------------------------------ | 

| | Like
the publicly-traded securities of other high technology companies, the market price of our
common stock has experienced significant fluctuations and may continue to fluctuate
significantly. During the period from June 30, 2001 to June 30, 2002, the price of our
common stock has ranged from a low of $6.75 on September 27, 2001 to a high of $18.40 on
January 11, 2002. On August 13, 2002, the most recent practicable date prior to the filing
of this Form 10-Q, the closing price of a share of our common stock on The Nasdaq Stock
Market was $9.17. From time to time, the market price of our common stock may be
significantly affected by a number of factors, including, but not limited to, the
following: | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

| | announcements of new products or product upgrades by us or our competitors; | 
| | --------------------------------------------------------------------------- | 

| | technological innovation by us or our competitors; | 
| | -------------------------------------------------- | 

| | quarterly variations in our results of operations or those of our competitors; | 
| | ------------------------------------------------------------------------------ | 

| | changes in the prices of our products or those of our competitors; | 
| | ------------------------------------------------------------------ | 

| | changes in actual or projected revenue and revenue growth rates for us as a whole or for
specific geographic areas, business units, products or product categories; | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | changes in the price-to-earnings, price-to-sales and other multiples used to value
companies in the software industry; | 
| | ---------------------------------------------------------------------------------------------------------------------- | 

| | changes in revenue, earnings or other estimates by research analysts who cover our stock; | 
| | ----------------------------------------------------------------------------------------- | 

| | actual or anticipated changes in information technology spending; | 
| | ----------------------------------------------------------------- | 

| | a decision by a research analyst to initiate or drop coverage on our stock or
upgrade or downgrade our stock; | 
| | ------------------------------------------------------------------------------------------------------------- | 

| | speculation by the press, product analysts or research analysts about us and our
products, revenues and/or earnings including the growth rate of each; | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------ | 

| | the trading volume in our stock; | 
| | -------------------------------- | 

| | stock sales from time to time by our executive officers and members of our board of
directors; | 
| | ---------------------------------------------------------------------------------------------- | 

| | actual or anticipated changes in interest rates; and | 
| | ---------------------------------------------------- | 

| | general market conditions or market conditions specific to the software industry. | 
| | --------------------------------------------------------------------------------- | 

31

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

| | Sales
of our common stock by significant stockholders may cause the price of our common stock
to decrease. | 
| | ---------------------------------------------------------------------------------------------------------- | 

| | Several
outside investors in Borland own significant portions of our common stock though, to our
knowledge, based on Schedule 13G filings made with the SEC, none individually own in
excess of 8% of our common stock, as of August 7, 2002, the most recent practicable date
prior to the filing of this Form 10-Q. If these stockholders were to sell significant
amounts of their Borland stock, then the market price of our stock could be negatively
impacted. Moreover, because of current levels of liquidity in our stock, the effect of
such sales, or of significant portions of our stock being offered or made available for
sale, could result in particularly strong downward pressure on our stock. Investors should
be aware that they could experience significant short-term volatility in our stock if such
stockholders decide to sell a substantial amount of their Borland stock at once or within
a short period of time. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | We
may become subject to costly and time-consuming class action litigation following
significant changes in our stock price. | 
| | ---------------------------------------------------------------------------------------------------------------------------- | 

| | In
the past, following periods of volatility in the market price of a companys
securities, securities class action litigation has often been instituted against such
companies. Were such litigation to be commenced against us, we would incur substantial
costs and there would be diversion of our managements attention and resources, which
could materially adversely affect our business, results of operations and financial
condition. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

| | 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 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. Litigation may be necessary to protect our intellectual property
rights, and such litigation can be time consuming and expensive. We have 98
issued U.S. patents, 10 issued foreign patents and additional pending
applications for U.S. and foreign patents. It is possible that some or all of
our patents may be challenged, invalidated or circumvented. It is also possible
that our pending patent applications may never result in issued patents, and if
they do result in issued patents, those patents may be invalidated. In addition,
effective protection of intellectual property rights is unavailable or limited
in some foreign countries, making the possibility of misappropriation of our
intellectual property more likely. Current laws in the United States that
prohibit copying give us only limited practical protection from software
pirates, and the laws of many other countries provide very little
protection. Policing unauthorized use of our products is difficult, expensive
and time consuming and we expect that software piracy will be a persistent
problem for our software products. In addition, the unique technology of the
Internet may tend to increase, and provide new methods for, illegal copying.
Accordingly, we cannot be certain that we will be able to protect our
intellectual property rights against unauthorized third-party copying or use.
This could materially and adversely affect our competitive position. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | We
may incur substantial expenses and divert management resources in prosecuting others for
their unauthorized use of our intellectual property rights. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | In
the future, we may need to file lawsuits to enforce our intellectual property rights, to
protect our trade secrets, or to determine the validity and scope of the proprietary
rights of others. This litigation, whether successful or unsuccessful, could result in
substantial costs and diversion of resources, which could have a material adverse effect
on our business, financial condition and results of operations. In addition, should any of
our competitors file patent applications or obtain patents that claim inventions also
claimed by us, we may choose to participate in an interference proceeding to determine the
right to a patent for these inventions. Even if the outcome is favorable, this proceeding
could result in substantial cost to us and disrupt our business. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

| | 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 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 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 materially 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. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Increasing
regulation of the Internet, imposition of sales and other taxes on products sold or
distributed over the Internet and privacy concerns relating to the Internet could harm
our business. | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | We
intend to expand our business through, among other channels, electronic commerce on the
Internet. The electronic commerce market on the Internet is relatively new and rapidly
evolving. While this is an evolving area of the law in the United States and overseas,
currently there are relatively few laws or regulations that directly apply to commerce on
the Internet. Changes in laws or regulations governing the Internet and electronic
commerce, including, without limitation, those governing an individuals privacy
rights, pricing, content, encryption, security, acceptable payment methods and quality of
products or services could have a material adverse effect on our business, operating
results and financial condition. Taxation of Internet commerce, or other charges imposed
by government agencies or by private organizations may also be imposed. Laws and
regulations applying to the solicitation, collection and processing of personal or
consumer information could also be enacted. Any of these regulations could result in a
decline in the use or popularity of the Internet as a medium for commerce, which could
have an adverse effect on our future sales and revenue growth. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Our
future sales and any future profits will be substantially dependent upon the continued
widespread acceptance and use of the Internet by consumers and businesses as an effective
medium for exchanging information and conducting business. To be successful, consumers and
businesses that historically have used traditional means of commerce to transact business
must continue to accept and utilize the Internet as a medium for conducting business and
exchanging information. Consumers and businesses may eventually reject the Internet as a
viable commercial medium for a number of reasons, including potentially inadequate network
infrastructure, slow development of enabling technologies such as broadband or other
technologies that enable rapid download of purchased products, insufficient commercial
support and privacy and security concerns. In addition, delays in the development or
adoption of new standards and protocols required to handle increased levels of Internet
activity could cause the Internet to lose its viability as a commercial medium. | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Our
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 would 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 | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

33

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

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

| | 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 and liabilities denominated in currencies
other than the functional currency of the reporting entity. The goal of the hedging program is to offset the
earnings impact of foreign denominated balances. We do not use foreign currency forward
exchange contracts for trading purposes. At month-end, foreign denominated balances and
the forward exchange contracts are marked-to-market and unrealized gains and losses are
included in current period net income. Unrealized gains and losses on long term foreign
denominated intercompany balances are reported as part of cumulative other comprehensive
income. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

| | During
the three months and six months ended June 30, 2002, we have recorded net foreign exchange
losses of $0.7 million and $1.0 million, respectively. The foreign exchange losses were
generated primarily due to the weakness of the dollar relative to the Euro and the
strength of the dollar against the Brazilian Real. It is uncertain whether these currency
trends will continue. If these currency trends continue, we will continue to experience
foreign exchange losses on our intercompany receivables and trade receivables and payables
denominated in currency other than the functional currency of the reporting entity 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 six months ended June 30, 2002, we recorded a foreign currency gain
of approximately $0.3 million and $0.7 million, respectively, as part of other
comprehensive income due to foreign currency movements on our long-term intercompany
balances. As of June 30, 2002, we had $9.0 million, $2.9 million and $1.8 million in
long-term intercompany balances that will be denominated in Australian dollars, Singapore
dollars and Brazilian Real, respectively. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | The
table below provides information about our derivative financial instruments, comprised of
foreign currency forward exchange contracts. 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 estimated
fair value as of June 30, 2002. All instruments mature within twelve months (dollar
amounts in thousands). | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

|                                             | NotionalAmount |  | AverageContractRate |        | June 30, 2002Net Fair Value
|-------------------------------------------- | -------------- |  | ------------------- | ------ | ---------------------------
|Foreign currency forward exchange contracts: |               
|Euro                                         | 4,126          |  |                     | 0.9824 |                            
|Australian Dollar                            | 2,522          |  |                     | 0.5604 |                            
|New Zealand Dollar                           | 828            |  |                     | 0.4873 |                            
|Singapore Dollar                             | 4,808          |  |                     | 0.5656 |                            
|Korean Won                                   | 1,856          |  |                     | 0.0008 |                            
|Hong Kong Dollar                             | 6,540          |  |                     | 0.1282 |                            
|New Taiwan Dollar                            | 864            |  |                     | 0.0298 |                            
|Indian Rupee                                 | 558            |  |                     | 0.0203 |                            
|                                             |                |  |                     |        |                            
|Total                                        | 22,102         |  |                     |        |                            
|                                             |                |  |                     |        |                            

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

| | 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 investments in a variety of financial
instruments such as commercial paper. By corporate policy, we limit the amount of our
credit exposure to $10.0 million to any one commercial issuer. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | We
mitigate default risk by investing in securities rated of at least A2/P2 as published by
Standard and Poors and Moodys and by constantly positioning our portfolio to respond
appropriately to a significant changes in the credit rating of any investment issuer. Our
portfolio includes only marketable securities with active secondary and resale markets to
ensure portfolio liquidity. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

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

|                       | 2002 |                | 2003 |          | 2004 |   | 2005 |   | 2006 |   | There-after |   | Total
|---------------------- | ---- | -------------- | ---- | -------- | ---- | - | ---- | - | ---- | - | ----------- | - | -----
|                       |      | (in thousands)
|Cash equivalents       |      |                |      |          |      |   |      |   |      |   |             |   |      
|Fixed rate             | $    | 244,537        |      |         |      |  |      |  |      |  |             |  |      
|Average interest rate  |      | 1.94%          |      |         |      |  |      |  |      |  |             |  |      
|Short-term investments |     
|Fixed rate             | $    | 17,483         |      | $ 43,833 |      |  |      |  |      |  |             |  |      
|Average interest rate  |      | 2.27%          |      | 2.64%    |      |  |      |  |      |  |             |  |      

| | 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. 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. At June 30, 2002, one customer, a U.S. based
distributor, accounted for approximately 10% of total accounts receivable. As of June 30,
2002, no other group or single customer represents greater than 10% of total accounts
receivable. | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

| | PART II | 
| | ------- | 

| | OTHER INFORMATION | 
| | ----------------- | 

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

| | We
are currently party to various legal proceedings. Although litigation is subject to
inherent uncertainties, management does not believe that the ultimate outcome of these
legal proceedings will have a material adverse effect on our financial position or overall
trends in results of operations. However, 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 of that period. Management believes that, given our current liquidity and
cash and investment balances, even an adverse judgment would not have a material impact on
cash and investments or liquidity. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Under
the terms of a settlement agreement dated as of July 17, 2002, WebGain, Inc. agreed to
dismiss its suit against Borland which had sought a ruling from the Court that their
Visual Café and Structure Builder products did not infringe six Borland patents and
which sought to invalidate such patents. As a part of the settlement, we have agreed to
dismiss our counterclaim against WebGain, which alleged that WebGains Visual
Café and Structure Builder products infringed seven Borland patents. While both
dismissals were without prejudice, each of the parties agreed that, prior to July 1, 2006,
it will not initiate any legal proceedings against the other relating to the infringement,
validity or enforceability of the seven patents in dispute. This non-assertion covenant
terminates prior to July 1, 2006 if a number of events occur including, without
limitation, a change in control of WebGain. Pursuant to the settlement agreement, neither
party will receive any damages or reimbursement of costs or fees from the other. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Item
2. Changes in Securities and Use of Proceeds | 
| | ------------------------------------------------- | 

| | In
1999, we sold an aggregate of 625 shares of Series C Convertible Preferred Stock
(Series C Stock) to Microsoft Corporation for $25 million, in a private
placement exempt from the registration requirements of the Securities Act of 1933, as
amended (the Act) pursuant to an exemption under Section 4(2) of the Act. Each
share of Series C Stock was convertible, at the option of the holder, into fully paid and
non-assessable shares of our common stock base upon a fixed conversion ratio. Prior to
June 30, 2002, 510 shares of Series C Stock were converted into 5,483,871 shares of our
common stock. On July 9, 2002, the remaining 115 shares of Series C Stock were converted
into 1,236,559 shares of our common stock. The issuance of the common stock upon
conversion of the Series C Stock was exempt from the registration requirements of the Act
pursuant to an exemption under Section 3(a)(9) of the Act. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

| | At
the annual meeting of Borland stockholders held on May 16, 2002 at our corporate
headquarters located at 100 Enterprise Way, Scotts Valley, California (the Annual
Meeting) the following matters were voted upon: | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | 1) The following individuals were elected to serve as Class I directors on our Board of
Directors for a term of three years: | 
| | ---------------------------------------------------------------------------------------------------------------------------- | 

| | Nominee:         | For        |  | Withheld  | 
| | ---------------- | ---------- |  | --------- | 
| |                  |            |  |           | 
| | Robert H. Kohn   | 55,588,509 |  | 6,225,569 | 
| | Robert Dickerson | 55,626,852 |  | 6,187,226 | 

| | The following individual was elected to serve as Class III director on our Board of
Directors for a term of two years: | 
| | ---------------------------------------------------------------------------------------------------------------------- | 

| | Nominee:       | For        |  | Withheld  | 
| | -------------- | ---------- |  | --------- | 
| |                |            |  |           | 
| | Laura S. Unger | 55,502,044 |  | 6,312,034 | 

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

| | The
following additional proposals were considered at the Annual Meeting and were approved by
the vote of the stockholders, in accordance with the tabulation shown below. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | 2)
Approval of our 2002 Stock Incentive Plan. | 
| | --------------------------------------------- | 

| |            | 
| | ---------- | 
| | For        | 
| |            | 
| | 38,147,354 | 

| | 3)
Approval of an amendment to our 1999 Employee Stock Purchase Plan to authorize the
issuance of an additional 900,000 shares of common stock. | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------- | 

| |            | 
| | ---------- | 
| | For        | 
| |            | 
| | 58,554,238 | 

| | 4)
Ratified the selection of PricewaterhouseCoopers LLP as our independent auditors for the
fiscal year ending December 31, 2002. | 
| | --------------------------------------------------------------------------------------------------------------------------------- | 

| |            | 
| | ---------- | 
| | For        | 
| |            | 
| | 61,414,345 | 

| | There
were no broker non-votes at the Annual Meeting. | 
| | ----------------------------------------------------- | 

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

| | A.
Exhibits | 
| | ----------- | 

| | The
following exhibits are filed as part of, or incorporated by reference into, this Form
10-Q. | 
| | ----------------------------------------------------------------------------------------------- | 

| | Exhibit No. | Description of Exhibit                                                                                                                                                   | 
| | ----------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 
| |             |                                                                                                                                                                          | 
| | 3.1         | Amended and Restated Bylaws of Borland Software Corporation.*                                                                                                            | 
| | 99.1        | Statement Under Oath of Dale L. Fuller, Chief Executive Officer of Borland Software Corporation, Regarding Facts and
Circumstances Relating to Exchange Act Filings.*    | 
| | 99.2        | Statement Under Oath of Frederick A. Ball, Chief Financial Officer of Borland Software Corporation, Regarding Facts and
Circumstances Relating to Exchange Act Filings.* | 

| |  | 
| |  | 

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

| | A
copy of any exhibit referenced above 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: Lynne
Farris, Director of Investor Relations. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | B.  Reports on Form 8-K | 
| | ----------------------- | 

| | During
the quarter ended June 30, 2002, Borland filed the following Current Report on Form 8-K
with the Securities and Exchange Commission: | 
| | ------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Form
8-K filed on May 29, 2002 announcing that Borland had acquired substantially all of the
assets of Highlander Engineering, Inc., a Florida corporation, pursuant to an Asset
Purchase Agreement. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

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:
August 14, 2002 | 
| | --------------------- | 

| | / s / Frederick A. Ball                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                 
| | Frederick A. Ball Executive Vice President and Chief Financial
Officer (Principal Financial Officer and Duly Authorized Officer)

38

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