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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q/A



Amendment No. 1



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



For the quarterly period ended September 30, 2005



OR



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



For the transition period from  to



001-10824

(Commission File Number)



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Borland Software Corporation

(Exact Name of Registrant as Specified in its
Charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 94-2895440                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)



20450 STEVENS CREEK
BOULEVARD, SUITE 800

CUPERTINO, CALIFORNIA 95014

(Address of Principal Executive Offices) (Zip Code)



Registrants Telephone Number, Including Area Code: (408) 863-2800



Not Applicable

(Former Address, if Changed Since Last Report)



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



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



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     YES ̈NO  x



The number of shares of the registrants common stock, par value $0.01 per share, outstanding as of October 31, 2005, was 76,220,969.



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EXPLANATORY NOTE



This quarterly report on Form 10-Q/A constitutes Amendment No. 1 to the quarterly report on Form 10-Q filed by Borland
Software Corporation (the Company) originally filed with the Securities and Exchange Commission (the SEC) on November 8, 2005, for the quarterly period ended September 30, 2005. This Amendment No. 1 is being
filed solely for the following purposes:



| |  |  | Revising Item 1.    Financial Statements
| | - |  | ----------------------------------------



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



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



Our management is responsible is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined
in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended (the Exchange Act). Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, has
assessed the effectiveness of our internal control over financial reporting as of December 31, 2005 based on the criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO).



In connection with
managements assessment of internal control over financial reporting as of December 31, 2005, management identified material weaknesses insofar as we did not maintain effective controls over third-party contractor invoices and contracts and we
did not maintain an effective control environment based on the criteria established in the COSO framework with respect to senior managements role in promoting compliance with policies and procedures and the prevention or detection of the
override of our controls. A material weakness is a control deficiency, or combination of control deficiencies, that results in a more than remote likelihood that a material misstatement of the annual or interim financial statements will not be
prevented or detected. See Item 9A, Controls and Procedures, in our Annual Report on Form 10-K filed with the SEC on May 2, 2006 for a discussion of managements assessment of the effectiveness of our internal control over financial
reporting as of December 31, 2005.



Specifically, with respect
to the quarter ended September 30, 2005, management determined that effective controls were not in place in our services organization to ensure that invoices from three third-party contractors were completely and accurately recorded. In addition,
effective controls were not in place over the authorization of work performed by a third-party contractor. As of result of the control deficiency, an employee was able to override controls and have contractor invoices sent directly to the services
organization and further failed to forward those invoices to the accounts payable department in a timely fashion.



As a consequence, these invoices were not reflected in our financial statements for the three and nine month periods ended September 30, 2005, and
our cost of service revenue was understated by $446,000. As a result, we have corrected certain items in our previously reported results of operations for the quarter ended September 30, 2005, as reflected in Note 2 Restatement of
Condensed Consolidated Financial Statements of the Notes to Condensed Consolidated Financial Statements and discussed in Part 1, Item 2, Managements Discussion and Analysis of Financial Condition and Results of
Operations. Specifically, we have



| |  |  | reduced previously reported net income by $446,000 for the three and nine months ended September 30, 2005;
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | reduced our previously reported retained earnings as of September 30, 2005 by $446,000;
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | increased our previously reported accrued expenses as of September 30, 2005 by $446,000; and
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | increased our net loss per share for the three month period ended September 30, 2005 to $0.07 from $0.06, and the nine month period ended September 30, 2005 to $0.25 from
$0.24.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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The corrected numbers restate the results previously reported in our quarterly report on Form 10-Q for
the quarter ended September 30, 2005.



In addition, we are
revising Part I, Item 4, Controls and Procedures, in this Amendment No. 1 to disclose that we believe that our controls and procedures were not effective as of the end of the period covered by this report resulting in the
restatements to our financial statements as discussed above.



In addition, in accordance with applicable SEC rules, this Amendment No. 1 includes updated certifications from our Chief Executive Officer and Chief Financial Officer as Exhibits 31.1, 31.2, 32.1 and 32.2.



Unaffected items have not been repeated in this Amendment No. 1. This
Amendment No. 1 should be read in conjunction with our filings made with the SEC subsequent to the original filing date of the Form 10-Q for the quarter ended September 30, 2005, including but not limited to our Annual Report on Form 10-K
filed with the SEC on May 2, 2006.



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##### Table of Contents

INDEX





|        |  |                                                                                                                                              |  |     
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|        |  |                                                                                                                                              |  | PAGE
|PART I  |  | FINANCIAL INFORMATION                                                                                                                        |  |     
|        |  |                                                                                                                                             
|Item 1. |  | Financial Statements (unaudited)                                                                                                             |  | 1   
|        |  |                                                                                                                                             
|        |  | Condensed Consolidated Balance Sheetsat September 30, 2005 and December 31, 2004, as restated                                                |  | 1   
|        |  |                                                                                                                                             
|        |  | Condensed Consolidated Statements of Operationsfor the three and nine months ended September 30, 2005 and 2004, as restated                  |  | 2   
|        |  |                                                                                                                                             
|        |  | Condensed Consolidated Statements of Comprehensive Income (Loss)for the three and nine months ended September 30, 2005 and 2004, as restated |  | 3   
|        |  |                                                                                                                                             
|        |  | Condensed Consolidated Statements of Cash Flowsfor the nine months ended September 30, 2005 and 2004, as restated                            |  | 4   
|        |  |                                                                                                                                             
|        |  | Notes to Condensed Consolidated Financial Statements, as restated                                                                            |  | 5   
|        |  |                                                                                                                                             
|Item 2. |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                                        |  | 22  
|        |  |                                                                                                                                             
|Item 4. |  | Controls and Procedures                                                                                                                      |  | 34  
|        |  |                                                                                                                                             
|PART II |  | OTHER INFORMATION                                                                                                                            |  |     
|        |  |                                                                                                                                             
|Item 6. |  | Exhibits                                                                                                                                     |  | 37  
|        |  |                                                                                                                                             
|        |  | Signature                                                                                                                                    |  | 38  



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##### Table of Contents

PART I

FINANCIAL INFORMATION



Item 1. Financial Statements



BORLAND SOFTWARE CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value and share amounts, unaudited)



|                                                                                                                     |  |                    |          |   |                  |   |          |  
|-------------------------------------------------------------------------------------------------------------------- |  | ------------------ | -------- | - | ---------------- | - | -------- | -
|                                                                                                                     |  | September 30, 2005 |          |   | December 31,2004 |  
|                                                                                                                     |  | (as restated)(1)   |          |   |                  |  
|ASSETS                                                                                                               |  |                    |          |   |                  |   |          |  
|Current assets:                                                                                                      |  |                    |          |   |                  |   |          |  
|Cash and cash equivalents                                                                                            |  | $                  | 62,236   |   |                  | $ | 76,432   |  
|Short-term investments                                                                                               |  |                    | 126,884  |   |                  |   | 144,766  |  
|Accounts receivable, net of allowances of $6,655 and $9,830                                                          |  |                    | 49,197   |   |                  |   | 62,924   |  
|Other current assets                                                                                                 |  |                    | 11,316   |   |                  |   | 12,642   |  
|                                                                                                                     |  |                    |          |   |                  |   |          |  
|Total current assets                                                                                                 |  |                    | 249,633  |   |                  |   | 296,764  |  
|Property and equipment, net                                                                                          |  |                    | 17,943   |   |                  |   | 16,117   |  
|Goodwill                                                                                                             |  |                    | 183,159  |   |                  |   | 182,390  |  
|Intangible assets, net                                                                                               |  |                    | 4,419    |   |                  |   | 12,630   |  
|Other non-current assets                                                                                             |  |                    | 8,306    |   |                  |   | 7,382    |  
|                                                                                                                     |  |                    |          |   |                  |   |          |  
|Total assets                                                                                                         |  | $                  | 463,460  |   |                  | $ | 515,283  |  
|                                                                                                                     |  |                    |          |   |                  |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                 |  |                    |          |   |                  |   |          |  
|Current liabilities:                                                                                                 |  |                    |          |   |                  |   |          |  
|Accounts payable                                                                                                     |  | $                  | 13,806   |   |                  | $ | 10,384   |  
|Accrued expenses                                                                                                     |  |                    | 38,954   |   |                  |   | 45,358   |  
|Income taxes payable                                                                                                 |  |                    | 15,382   |   |                  |   | 16,443   |  
|Deferred revenues                                                                                                    |  |                    | 50,347   |   |                  |   | 51,647   |  
|Short-term restructuring                                                                                             |  |                    | 4,615    |   |                  |   | 1,864    |  
|Other current liabilities                                                                                            |  |                    | 5,161    |   |                  |   | 6,874    |  
|                                                                                                                     |  |                    |          |   |                  |   |          |  
|Total current liabilities                                                                                            |  |                    | 128,265  |   |                  |   | 132,570  |  
|Long-term restructuring                                                                                              |  |                    | 10,502   |   |                  |   | 2,052    |  
|Long-term liabilities                                                                                                |  |                    | 4,415    |   |                  |   | 4,281    |  
|                                                                                                                     |  |                    |          |   |                  |   |          |  
|                                                                                                                     |  |                    | 143,182  |   |                  |   | 138,903  |  
|                                                                                                                     |  |                    |          |   |                  |   |          |  
|Commitments and contingencies (Note 11)                                                                              |  |                    |          |   |                  |   |          |  
|Stockholders equity:                                                                                                |  |                    |          |   |                  |   |          |  
|Preferred stock; $.01 par value; 1,000,000 shares authorized; 0 shares issued and outstanding                        |  |                    |         |   |                  |   |         |  
|Common stock; $.01 par value; 200,000,000 shares authorized; 76,223,011 and 80,936,862 shares issued and outstanding |  |                    | 762      |   |                  |   | 809      |  
|Additional paid-in capital                                                                                           |  |                    | 641,993  |   |                  |   | 638,077  |  
|Accumulated deficit                                                                                                  |  |                    | (218,146 | ) |                  |   | (198,826 | )
|Deferred compensation                                                                                                |  |                    | (1,536   | ) |                  |   | (1,002   | )
|Cumulative other comprehensive income                                                                                |  |                    | 7,673    |   |                  |   | 12,671   |  
|                                                                                                                     |  |                    |          |   |                  |   |          |  
|                                                                                                                     |  |                    | 430,746  |   |                  |   | 451,729  |  
|Less common stock in treasury at cost, 15,400,717 and 9,999,084 shares                                               |  |                    | (110,468 | ) |                  |   | (75,349  | )
|                                                                                                                     |  |                    |          |   |                  |   |          |  
|                                                                                                                     |  |                    | 320,278  |   |                  |   | 376,380  |  
|                                                                                                                     |  |                    |          |   |                  |   |          |  
|Total liabilities and stockholders equity                                                                           |  | $                  | 463,460  |   |                  | $ | 515,283  |  
|                                                                                                                     |  |                    |          |   |                  |   |          |  

---

|(1) | Refer to Note 2 Restatement of Condensed Consolidated Financial Statements of the Notes to Condensed Consolidated Financial Statements.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------



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



1



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BORLAND SOFTWARE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts, unaudited)



|                                                                                  |  |                                  |        |   |                                |   |        |                  |  |   |         |   |  |   |        
|--------------------------------------------------------------------------------- |  | -------------------------------- | ------ | - | ------------------------------ | - | ------ | ---------------- |  | - | ------- | - |  | - | -------
|                                                                                  |  | Three Months Ended September 30, |        |   | Nine Months EndedSeptember 30,
|                                                                                  |  | 2005                             |        |   | 2004                           |   |        | 2005             |  |   | 2004   
|                                                                                  |  | (as restated)(1)                 |        |   |                                |   |        | (as restated)(1) |  |   |        
|License and other revenues                                                        |  | $                                | 39,236 |   |                                | $ | 53,063 |                  |  | $ | 120,959 |   |  | $ | 158,017
|Service revenues                                                                  |  |                                  | 28,614 |   |                                |   | 24,585 |                  |  |   | 84,779  |   |  |   | 69,016 
|                                                                                  |  |                                  |        |   |                                |   |        |                  |  |   |         |   |  |   |        
|Total revenues                                                                    |  |                                  | 67,850 |   |                                |   | 77,648 |                  |  |   | 205,738 |   |  |   | 227,033
|                                                                                  |  |                                  |        |   |                                |   |        |                  |  |   |         |   |  |   |        
|Cost of license and other revenues                                                |  |                                  | 1,515  |   |                                |   | 2,172  |                  |  |   | 6,390   |   |  |   | 6,646  
|Cost of service revenues                                                          |  |                                  | 10,125 |   |                                |   | 6,255  |                  |  |   | 29,084  |   |  |   | 18,058 
|Amortization of acquired intangibles                                              |  |                                  | 2,517  |   |                                |   | 2,388  |                  |  |   | 7,550   |   |  |   | 7,324  
|                                                                                  |  |                                  |        |   |                                |   |        |                  |  |   |         |   |  |   |        
|Cost of revenues                                                                  |  |                                  | 14,157 |   |                                |   | 10,815 |                  |  |   | 43,024  |   |  |   | 32,028 
|                                                                                  |  |                                  |        |   |                                |   |        |                  |  |   |         |   |  |   |        
|Gross profit                                                                      |  |                                  | 53,693 |   |                                |   | 66,833 |                  |  |   | 162,714 |   |  |   | 195,005
|                                                                                  |  |                                  |        |   |                                |   |        |                  |  |   |         |   |  |   |        
|Selling, general and administrative expenses                                      |  |                                  | 43,170 |   |                                |   | 42,502 |                  |  |   | 126,432 |   |  |   | 125,296
|Research and development expenses                                                 |  |                                  | 14,277 |   |                                |   | 17,304 |                  |  |   | 42,975  |   |  |   | 51,290 
|Restructuring, amortization of other intangibles and acquisition-related expenses |  |                                  | 1,646  |   |                                |   | 5,283  |                  |  |   | 19,371  |   |  |   | 8,236  
|                                                                                  |  |                                  |        |   |                                |   |        |                  |  |   |         |   |  |   |        
|Total operating expenses                                                          |  |                                  | 59,093 |   |                                |   | 65,089 |                  |  |   | 188,778 |   |  |   | 184,822
|                                                                                  |  |                                  |        |   |                                |   |        |                  |  |   |         |   |  |   |        
|Operating income (loss)                                                           |  |                                  | (5,400 | ) |                                |   | 1,744  |                  |  |   | (26,064 | ) |  |   | 10,183 
|Gain on sale of investment                                                        |  |                                  |       |   |                                |   |       |                  |  |   | 4,680   |   |  |   |       
|Interest and other income, net                                                    |  |                                  | 1,317  |   |                                |   | 764    |                  |  |   | 3,824   |   |  |   | 787    
|                                                                                  |  |                                  |        |   |                                |   |        |                  |  |   |         |   |  |   |        
|Income (loss) before income taxes                                                 |  |                                  | (4,083 | ) |                                |   | 2,508  |                  |  |   | (17,560 | ) |  |   | 10,970 
|Income tax provision                                                              |  |                                  | 1,185  |   |                                |   | 2,668  |                  |  |   | 1,760   |   |  |   | 7,571  
|                                                                                  |  |                                  |        |   |                                |   |        |                  |  |   |         |   |  |   |        
|Net income (loss)                                                                 |  | $                                | (5,268 | ) |                                | $ | (160   | )                |  | $ | (19,320 | ) |  | $ | 3,399  
|                                                                                  |  |                                  |        |   |                                |   |        |                  |  |   |         |   |  |   |        
|Net income (loss) per share:                                                      |  |                                  |        |   |                                |   |        |                  |  |   |         |   |  |   |        
|Net income (loss) per share  basic                                               |  | $                                | (0.07  | ) |                                | $ | (0.00  | )                |  | $ | (0.25   | ) |  | $ | 0.04   
|Net income (loss) per share  diluted                                             |  | $                                | (0.07  | ) |                                | $ | (0.00  | )                |  | $ | (0.25   | ) |  | $ | 0.04   
|Shares used in computing basic net income (loss) per share                        |  |                                  | 76,017 |   |                                |   | 80,114 |                  |  |   | 77,937  |   |  |   | 80,434 
|Shares used in computing diluted net income (loss) per share                      |  |                                  | 76,017 |   |                                |   | 80,114 |                  |  |   | 77,937  |   |  |   | 81,867 

---

|(1) | Refer to Note 2 Restatement of Condensed Consolidated Financial Statements of the Notes to Condensed Consolidated Financial Statements.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------



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



2



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##### Table of Contents

BORLAND SOFTWARE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands, unaudited)



|                                                                |  |                                  |        |   |                                |   |      |                  |  |   |         |   |  |   |       |  
|--------------------------------------------------------------- |  | -------------------------------- | ------ | - | ------------------------------ | - | ---- | ---------------- |  | - | ------- | - |  | - | ----- | -
|                                                                |  | Three Months Ended September 30, |        |   | Nine Months EndedSeptember 30, |  
|                                                                |  | 2005                             |        |   | 2004                           |   |      | 2005             |  |   | 2004    |  
|                                                                |  | (as restated)(1)                 |        |   |                                |   |      | (as restated)(1) |  |   |         |  
|Net income (loss)                                               |  | $                                | (5,268 | ) |                                | $ | (160 | )                |  | $ | (19,320 | ) |  | $ | 3,399 |  
|Other comprehensive loss:                                       |  |                                  |        |   |                                |   |      |                  |  |   |         |   |  |   |       |  
|Foreign currency translation adjustments                        |  |                                  | (430   | ) |                                |   | 178  |                  |  |   | (4,916  | ) |  |   | (218  | )
|Fair market value adjustment for available-for- sale securities |  |                                  | (82    | ) |                                |   |     |                  |  |   | (82     | ) |  |   |      |  
|                                                                |  |                                  |        |   |                                |   |      |                  |  |   |         |   |  |   |       |  
|Comprehensive income (loss)                                     |  | $                                | (5,780 | ) |                                | $ | 18   |                  |  | $ | (24,318 | ) |  | $ | 3,181 |  
|                                                                |  |                                  |        |   |                                |   |      |                  |  |   |         |   |  |   |       |  

---

|(1) | Refer to Note 2 Restatement of Condensed Consolidated Financial Statements of the Notes to Condensed Consolidated Financial Statements.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------



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



3



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##### Table of Contents

BORLAND SOFTWARE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, unaudited)



|                                                                                         |  |                                |          |   |      |   |         |  
|---------------------------------------------------------------------------------------- |  | ------------------------------ | -------- | - | ---- | - | ------- | -
|                                                                                         |  | Nine Months EndedSeptember 30, |         
|                                                                                         |  | 2005                           |          |   | 2004 |  
|                                                                                         |  | (as restated)(1)               |          |   |      |  
|OPERATING ACTIVITIES:                                                                    |  |                                |          |   |      |   |         |  
|Net income (loss)                                                                        |  | $                              | (19,320  | ) |      | $ | 3,399   |  
|Adjustments to reconcile net income (loss) to net cash provided by operating activities: |  |                                |          |   |      |   |         |  
|Depreciation and amortization                                                            |  |                                | 13,182   |   |      |   | 16,508  |  
|Loss on disposal of fixed assets                                                         |  |                                | (6       | ) |      |   | 13      |  
|Gain on sale of an equity investment                                                     |  |                                | (4,680   | ) |      |   |        |  
|Changes in assets and liabilities, net of effect of business acquisitions:               |  |                                |          |   |      |   |         |  
|Accounts receivable, net                                                                 |  |                                | 12,805   |   |      |   | (432    | )
|Other assets                                                                             |  |                                | 1,232    |   |      |   | 3,311   |  
|Accounts payable and accrued expenses                                                    |  |                                | (2,875   | ) |      |   | (6,237  | )
|Income taxes payable                                                                     |  |                                | (3,229   | ) |      |   | 4,412   |  
|Short-term restructuring                                                                 |  |                                | 2,751    |   |      |   | (2,598  | )
|Deferred revenues                                                                        |  |                                | 749      |   |      |   | 2,502   |  
|Long-term restructuring                                                                  |  |                                | 8,450    |   |      |   | (1,758  | )
|Other                                                                                    |  |                                | 113      |   |      |   | 1,071   |  
|                                                                                         |  |                                |          |   |      |   |         |  
|Net cash provided by operating activities                                                |  |                                | 9,172    |   |      |   | 20,191  |  
|                                                                                         |  |                                |          |   |      |   |         |  
|INVESTING ACTIVITIES:                                                                    |  |                                |          |   |      |   |         |  
|Purchases of property and equipment                                                      |  |                                | (5,790   | ) |      |   | (2,022  | )
|Acquisition of TeraQuest Metrics, Inc., net of cash acquired                             |  |                                | (4,436   | ) |      |   |        |  
|Acquisition of intangible developed technology assets                                    |  |                                |         |   |      |   | (225    | )
|Purchases of short-term investments                                                      |  |                                | (264,378 | ) |      |   | (40,252 | )
|Sales and maturities of short-term investments                                           |  |                                | 282,206  |   |      |   | 34,275  |  
|Proceeds from the sale of an equity investment                                           |  |                                | 4,680    |   |      |   |        |  
|                                                                                         |  |                                |          |   |      |   |         |  
|Net cash provided by (used in) investing activities                                      |  |                                | 12,282   |   |      |   | (8,224  | )
|                                                                                         |  |                                |          |   |      |   |         |  
|FINANCING ACTIVITIES:                                                                    |  |                                |          |   |      |   |         |  
|Proceeds from issuance of common stock, net                                              |  |                                | 3,922    |   |      |   | 7,372   |  
|Repurchase of common stock                                                               |  |                                | (35,172  | ) |      |   | (18,306 | )
|                                                                                         |  |                                |          |   |      |   |         |  
|Net cash used in financing activities                                                    |  |                                | (31,250  | ) |      |   | (10,934 | )
|                                                                                         |  |                                |          |   |      |   |         |  
|Effect of exchange rate changes on cash                                                  |  |                                | (4,400   | ) |      |   | 600     |  
|                                                                                         |  |                                |          |   |      |   |         |  
|Net change in cash and cash equivalents                                                  |  |                                | (14,196  | ) |      |   | 1,633   |  
|Cash and cash equivalents at beginning of period                                         |  |                                | 76,432   |   |      |   | 100,498 |  
|                                                                                         |  |                                |          |   |      |   |         |  
|Cash and cash equivalents at end of period                                               |  | $                              | 62,236   |   |      | $ | 102,131 |  
|                                                                                         |  |                                |          |   |      |   |         |  

---

|(1) | Refer to Note 2 Restatement of Condensed Consolidated Financial Statements of the Notes to Condensed Consolidated Financial Statements.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------



The accompanying notes are an integral part of 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 September 30, 2005 and December 31, 2004 and for the three and nine months ended September 30, 2005 and 2004
are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information and Rule 10-01 of Regulation S-X. Accordingly, they do not include all
financial information and disclosures required by GAAP for complete financial statements and certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP 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 for a fair statement of Borlands financial position at September 30, 2005 and December 31, 2004, its results of operations for the three and nine months ended September 30, 2005 and 2004, and cash flows
for the nine months ended September 30, 2005 and 2004. Certain prior period amounts have been reclassified in order to be consistent with current financial statement presentation, including the reclassification of auction rate securities to
short-term investments from cash and cash equivalents as of September 30, 2004. This reclassification impacted net cash used in investing activities presented in our Condensed Consolidated Statement of Cash Flows for the nine months ended
September 30, 2004.



Reclassifications are as follows (in
thousands):



|                                                      |  |                                              |         |   |                 |   |         |                  |  |   |          |  
|----------------------------------------------------- |  | -------------------------------------------- | ------- | - | --------------- | - | ------- | ---------------- |  | - | -------- | -
|                                                      |  | September 30, 2004                           |        
|                                                      |  | As OriginallyReported                        |         |   | As Reclassified |   |         | Reclassification | 
|Cash and cash equivalents                             |  | $                                            | 207,826 |   |                 | $ | 102,131 |                  |  | $ | (105,695 | )
|Short-term investments                                |  |                                              | 2,430   |   |                 |   | 108,125 |                  |  |   | 105,695  |  
|                                                      |  |                                              |         |   |                 |   |         |                  |  |   |          |  
|Total                                                 |  | $                                            | 210,256 |   |                 | $ | 210,256 |                  |  | $ |         |  
|                                                      |  |                                              |         |   |                 |   |         |                  |  |   |          |  
|                                                      | 
|                                                      |  | For the Nine Months Ended September 30, 2004 |        
|                                                      |  | As OriginallyReported                        |         |   | As Reclassified |   |         | Reclassification | 
|Purchases of short-term investments                   |  | $                                            | (7,379  | ) |                 | $ | (40,252 | )                |  | $ | (32,873  | )
|Sales and maturities of short-term investments        |  |                                              | 10,572  |   |                 |   | 34,275  |                  |  |   | 23,703   |  
|Purchases of property and equipment                   |  |                                              | (2,022  | ) |                 |   | (2,022  | )                |  |   |         |  
|Acquisition of intangible developed technology assets |  |                                              | (225    | ) |                 |   | (225    | )                |  |   |         |  
|                                                      |  |                                              |         |   |                 |   |         |                  |  |   |          |  
|Cash provided by (used in) investing activities       |  | $                                            | 946     |   |                 | $ | (8,224  | )                |  | $ | (9,170   | )
|                                                      |  |                                              |         |   |                 |   |         |                  |  |   |          |  



The preparation of
condensed consolidated financial statements in conformity with GAAP 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 any subsequent quarter or for the full year. The condensed consolidated financial statements and related 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, 2004 as filed with the Securities and Exchange Commission (SEC) on March 25, 2005.



5



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##### Table of Contents

NOTE 2.    RESTATEMENT OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



Our management is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended (the Exchange Act). Our management, under the supervision and with the
participation of our Chief Executive Officer and Chief Financial Officer, has assessed the effectiveness of our internal control over financial reporting as of December 31, 2005 based on the criteria established in Internal Control 
IntegratedFramework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).



In connection with managements assessment of internal control over financial reporting as of December 31, 2005, management identified material
weaknesses insofar as we did not maintain effective controls over third-party contractor invoices and contracts and we did not maintain an effective control environment based on the criteria established in the COSO framework with respect to senior
managements role in promoting compliance with policies and procedures and the prevention or detection of the override of our controls. A material weakness is a control deficiency, or combination of control deficiencies, that results in a more
than remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. See Item 9A, Controls and Procedures, in our Annual Report on Form 10-K filed with the SEC on May 2,
2006 for a discussion of managements assessment of the effectiveness of our internal control over financial reporting as of December 31, 2005.



Specifically, with respect to the quarter ended September 30, 2005, management determined that effective controls were not in place in our services
organization to ensure that invoices from three third-party contractors were completely and accurately recorded. In addition, effective controls were not in place over the authorization of work performed by a third-party contractor. As of result of
the control deficiency, an employee was able to override controls and have contractor invoices sent directly to the services organization and further failed to forward those invoices to the accounts payable department in a timely fashion.



As a consequence, these invoices were not reflected in our
financial statements for the three and nine month periods ended September 30, 2005, and our cost of service revenue was understated by $446,000. As a result, we have corrected certain items in our previously reported results of operations for
the quarter ended September 30, 2005 (the September 2005 Restatement). Specifically, we have



| |  |  | reduced previously reported net income by $446,000 for the three and nine months ended September 30, 2005;
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | reduced our previously reported retained earnings as of September 30, 2005 by $446,000;
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | increased our previously reported accrued expenses as of September 30, 2005 by $446,000; and
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | increased our net loss per share for the three month period ended September 30, 2005 to $0.07 from $0.06 and for the nine month period ended September 30, 2005 to $0.25
from $0.24.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



6



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##### Table of Contents

Impact of the September 2005 Restatement on our Condensed Consolidated Balance Sheets, Statements of Operations and
Statements of Cash Flows



The following table sets
forth the effects of the September 2005 Restatement on certain line items within our Condensed Consolidated Balance Sheet as of September 30, 2005 (in thousands, except par value and share amounts):



|                                                                                                                     |  |                           |          |   |                |   |      |             |  |   |          |  
|-------------------------------------------------------------------------------------------------------------------- |  | ------------------------- | -------- | - | -------------- | - | ---- | ----------- |  | - | -------- | -
|                                                                                                                     |  | September 30, 2005        |         
|                                                                                                                     |  | As OriginallyReported (1) |          |   | Adjustments(2) |   |      | As Restated | 
|ASSETS                                                                                                               |  |                           |          |   |                |   |      |             |  |   |          |  
|Current assets:                                                                                                      |  |                           |          |   |                |   |      |             |  |   |          |  
|Cash and cash equivalents                                                                                            |  | $                         | 62,236   |   |                | $ |     |             |  | $ | 62,236   |  
|Short-term investments                                                                                               |  |                           | 126,884  |   |                |   |     |             |  |   | 126,884  |  
|Accounts receivable, net of allowances of $6,655 and $9,830                                                          |  |                           | 49,197   |   |                |   |     |             |  |   | 49,197   |  
|Other current assets                                                                                                 |  |                           | 11,316   |   |                |   |     |             |  |   | 11,316   |  
|                                                                                                                     |  |                           |          |   |                |   |      |             |  |   |          |  
|Total current assets                                                                                                 |  |                           | 249,633  |   |                |   |     |             |  |   | 249,633  |  
|Property and equipment, net                                                                                          |  |                           | 17,943   |   |                |   |     |             |  |   | 17,943   |  
|Goodwill                                                                                                             |  |                           | 183,159  |   |                |   |     |             |  |   | 183,159  |  
|Intangible assets, net                                                                                               |  |                           | 4,419    |   |                |   |     |             |  |   | 4,419    |  
|Other non-current assets                                                                                             |  |                           | 8,306    |   |                |   |     |             |  |   | 8,306    |  
|                                                                                                                     |  |                           |          |   |                |   |      |             |  |   |          |  
|Total assets                                                                                                         |  | $                         | 463,460  |   |                | $ |     |             |  | $ | 463,460  |  
|                                                                                                                     |  |                           |          |   |                |   |      |             |  |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                 |  |                           |          |   |                |   |      |             |  |   |          |  
|Current liabilities:                                                                                                 |  |                           |          |   |                |   |      |             |  |   |          |  
|Accounts payable                                                                                                     |  | $                         | 13,360   |   |                | $ |     |             |  | $ | 13,360   |  
|Accrued expenses                                                                                                     |  |                           | 38,954   |   |                |   | 446  |             |  |   | 39,400   |  
|Income taxes payable                                                                                                 |  |                           | 15,382   |   |                |   |     |             |  |   | 15,382   |  
|Deferred revenues                                                                                                    |  |                           | 50,347   |   |                |   |     |             |  |   | 50,347   |  
|Short-term restructuring                                                                                             |  |                           | 4,615    |   |                |   |     |             |  |   | 4,615    |  
|Other current liabilities                                                                                            |  |                           | 5,161    |   |                |   |     |             |  |   | 5,161    |  
|                                                                                                                     |  |                           |          |   |                |   |      |             |  |   |          |  
|Total current liabilities                                                                                            |  |                           | 127,819  |   |                |   | 446  |             |  |   | 128,265  |  
|Long-term restructuring                                                                                              |  |                           | 10,502   |   |                |   |     |             |  |   | 10,502   |  
|Long-term liabilities                                                                                                |  |                           | 4,415    |   |                |   |     |             |  |   | 4,415    |  
|                                                                                                                     |  |                           |          |   |                |   |      |             |  |   |          |  
|Total liabilities                                                                                                    |  |                           | 142,736  |   |                |   | 446  |             |  |   | 143,182  |  
|                                                                                                                     |  |                           |          |   |                |   |      |             |  |   |          |  
|Commitments and contingencies (Note 11)                                                                              |  |                           |          |   |                |   |      |             |  |   |          |  
|Stockholders equity:                                                                                                |  |                           |          |   |                |   |      |             |  |   |          |  
|Preferred stock; $.01 par value; 1,000,000 shares authorized; 0 shares issued and outstanding                        |  |                           |         |   |                |   |     |             |  |   |         |  
|Common stock; $.01 par value; 200,000,000 shares authorized; 76,223,011 and 80,936,862 shares issued and outstanding |  |                           | 762      |   |                |   |     |             |  |   | 762      |  
|Additional paid-in capital                                                                                           |  |                           | 641,993  |   |                |   |     |             |  |   | 641,993  |  
|Accumulated deficit                                                                                                  |  |                           | (217,700 | ) |                |   | (446 | )           |  |   | (218,146 | )
|Deferred compensation                                                                                                |  |                           | (1,536   | ) |                |   |     |             |  |   | (1,536   | )
|Cumulative other comprehensive income                                                                                |  |                           | 7,673    |   |                |   |     |             |  |   | 7,673    |  
|                                                                                                                     |  |                           |          |   |                |   |      |             |  |   |          |  
|                                                                                                                     |  |                           | 431,192  |   |                |   | (446 | )           |  |   | 430,746  |  
|Less common stock in treasury at cost, 15,400,717 and 9,999,084 shares                                               |  |                           | (110,468 | ) |                |   |     |             |  |   | (110,468 | )
|                                                                                                                     |  |                           |          |   |                |   |      |             |  |   |          |  
|Total stockholders equity                                                                                           |  |                           | 320,724  |   |                |   | (446 | )           |  |   | 320,278  |  
|                                                                                                                     |  |                           |          |   |                |   |      |             |  |   |          |  
|Total liabilities and stockholders equity                                                                           |  | $                         | 463,460  |   |                | $ |     |             |  | $ | 463,460  |  
|                                                                                                                     |  |                           |          |   |                |   |      |             |  |   |          |  

---

|(1) | These amounts were reported in our Quarterly Report on Form 10-Q filed with the SEC on November 8, 2005.
|--- | --------------------------------------------------------------------------------------------------------

|(2) | Adjustments reflect additional expense related to third party subcontractors in the professional services area.
|--- | ---------------------------------------------------------------------------------------------------------------



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##### Table of Contents

BORLAND SOFTWARE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts, unaudited)



The following table sets forth the effects of the
September 2005 Restatement on certain line items within our Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2005 (in thousands, except per share amounts):



|                                                                                  |  |                                       |        |   |                                      |   |       |             |  |   |                         |   |  |                |         |   |             |   |       |   |  |   |         |  
|--------------------------------------------------------------------------------- |  | ------------------------------------- | ------ | - | ------------------------------------ | - | ----- | ----------- |  | - | ----------------------- | - |  | -------------- | ------- | - | ----------- | - | ----- | - |  | - | ------- | -
|                                                                                  |  | Three Months Ended September 30, 2005 |        |   | Nine Months Ended September 30, 2005 |  
|                                                                                  |  | AsOriginallyReported(1)               |        |   | Adjustments(2)                       |   |       | As Restated |  |   | AsOriginallyReported(1) |   |  | Adjustments(2) |         |   | As Restated |  
|License and other revenues                                                        |  | $                                     | 39,236 |   |                                      | $ |      |             |  | $ | 39,236                  |   |  | $              | 120,959 |   |             | $ |      |   |  | $ | 120,959 |  
|Service revenues                                                                  |  |                                       | 28,614 |   |                                      |   |      |             |  |   | 28,614                  |   |  |                | 84,779  |   |             |   |      |   |  |   | 84,779  |  
|                                                                                  |  |                                       |        |   |                                      |   |       |             |  |   |                         |   |  |                |         |   |             |   |       |   |  |   |         |  
|Total revenues                                                                    |  |                                       | 67,850 |   |                                      |   |      |             |  |   | 67,850                  |   |  |                | 205,738 |   |             |   |      |   |  |   | 205,738 |  
|                                                                                  |  |                                       |        |   |                                      |   |       |             |  |   |                         |   |  |                |         |   |             |   |       |   |  |   |         |  
|Cost of license and other revenues                                                |  |                                       | 1,515  |   |                                      |   |      |             |  |   | 1,515                   |   |  |                | 6,390   |   |             |   |      |   |  |   | 6,390   |  
|Cost of service revenues                                                          |  |                                       | 9,679  |   |                                      |   | 446   |             |  |   | 10,125                  |   |  |                | 28,638  |   |             |   | 446   |   |  |   | 29,084  |  
|Amortization of acquired intangibles                                              |  |                                       | 2,517  |   |                                      |   |      |             |  |   | 2,517                   |   |  |                | 7,550   |   |             |   |      |   |  |   | 7,550   |  
|                                                                                  |  |                                       |        |   |                                      |   |       |             |  |   |                         |   |  |                |         |   |             |   |       |   |  |   |         |  
|Cost of revenues                                                                  |  |                                       | 13,711 |   |                                      |   | 446   |             |  |   | 14,157                  |   |  |                | 42,578  |   |             |   | 446   |   |  |   | 43,024  |  
|                                                                                  |  |                                       |        |   |                                      |   |       |             |  |   |                         |   |  |                |         |   |             |   |       |   |  |   |         |  
|Gross profit                                                                      |  |                                       | 54,139 |   |                                      |   | (446  | )           |  |   | 53,693                  |   |  |                | 163,160 |   |             |   | (446  | ) |  |   | 162,714 |  
|                                                                                  |  |                                       |        |   |                                      |   |       |             |  |   |                         |   |  |                |         |   |             |   |       |   |  |   |         |  
|Selling, general and administrative expenses                                      |  |                                       | 43,170 |   |                                      |   |      |             |  |   | 43,170                  |   |  |                | 126,432 |   |             |   |      |   |  |   | 126,432 |  
|Research and development expenses                                                 |  |                                       | 14,277 |   |                                      |   |      |             |  |   | 14,277                  |   |  |                | 42,975  |   |             |   |      |   |  |   | 42,975  |  
|Restructuring, amortization of other intangibles and acquisition-related expenses |  |                                       | 1,646  |   |                                      |   |      |             |  |   | 1,646                   |   |  |                | 19,371  |   |             |   |      |   |  |   | 19,371  |  
|                                                                                  |  |                                       |        |   |                                      |   |       |             |  |   |                         |   |  |                |         |   |             |   |       |   |  |   |         |  
|Total operating expenses                                                          |  |                                       | 59,093 |   |                                      |   |      |             |  |   | 59,093                  |   |  |                | 188,778 |   |             |   |      |   |  |   | 188,778 |  
|                                                                                  |  |                                       |        |   |                                      |   |       |             |  |   |                         |   |  |                |         |   |             |   |       |   |  |   |         |  
|Operating income (loss)                                                           |  |                                       | (4,954 | ) |                                      |   | (446  | )           |  |   | (5,400                  | ) |  |                | (25,618 | ) |             |   | (446  | ) |  |   | (26,064 | )
|Gain on sale of investment                                                        |  |                                       |       |   |                                      |   |      |             |  |   |                        |   |  |                | 4,680   |   |             |   |      |   |  |   | 4,680   |  
|Interest and other income, net                                                    |  |                                       | 1,317  |   |                                      |   |      |             |  |   | 1,317                   |   |  |                | 3,824   |   |             |   |      |   |  |   | 3,824   |  
|                                                                                  |  |                                       |        |   |                                      |   |       |             |  |   |                         |   |  |                |         |   |             |   |       |   |  |   |         |  
|Income (loss) before income taxes                                                 |  |                                       | (3,637 | ) |                                      |   | (446  | )           |  |   | (4,083                  | ) |  |                | (17,114 | ) |             |   | (446  | ) |  |   | (17,560 | )
|Income tax provision                                                              |  |                                       | 1,185  |   |                                      |   |      |             |  |   | 1,185                   |   |  |                | 1,760   |   |             |   |      |   |  |   | 1,760   |  
|                                                                                  |  |                                       |        |   |                                      |   |       |             |  |   |                         |   |  |                |         |   |             |   |       |   |  |   |         |  
|Net income (loss)                                                                 |  | $                                     | (4,822 | ) |                                      | $ | (446  | )           |  | $ | (5,268                  | ) |  | $              | (18,874 | ) |             | $ | (446  | ) |  | $ | (19,320 | )
|                                                                                  |  |                                       |        |   |                                      |   |       |             |  |   |                         |   |  |                |         |   |             |   |       |   |  |   |         |  
|Net income (loss) per share:                                                      |  |                                       |        |   |                                      |   |       |             |  |   |                         |   |  |                |         |   |             |   |       |   |  |   |         |  
|Net income (loss) per share  basic                                               |  | $                                     | (0.06  | ) |                                      | $ | (0.01 | )           |  | $ | (0.07                   | ) |  | $              | (0.24   | ) |             | $ | (0.01 | ) |  | $ | (0.25   | )
|Net income (loss) per share  diluted                                             |  | $                                     | (0.06  | ) |                                      | $ | (0.01 | )           |  | $ | (0.07                   | ) |  | $              | (0.24   | ) |             | $ | (0.01 | ) |  | $ | (0.25   | )
|Shares used in computing basic net income (loss) per share                        |  |                                       | 76,017 |   |                                      |   |      |             |  |   | 76,017                  |   |  |                | 77,937  |   |             |   |      |   |  |   | 77,937  |  
|Shares used in computing diluted net income (loss) per share                      |  |                                       | 76,017 |   |                                      |   |      |             |  |   | 76,017                  |   |  |                | 77,937  |   |             |   |      |   |  |   | 77,937  |  

---

|(1) | These amounts were reported in our Quarterly Report on Form 10-Q filed with the SEC on November 8, 2005.
|--- | --------------------------------------------------------------------------------------------------------

|(2) | Adjustments reflect additional expense related to third party subcontractors in the professional services area.
|--- | ---------------------------------------------------------------------------------------------------------------



8



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##### Table of Contents

BORLAND SOFTWARE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, unaudited)



The following table sets forth the effects of the September 2005 Restatement on certain line items within our Condensed Consolidated Statements of Cash
Flows for the nine months ended September 30, 2005 (in thousands):



|                                                                                         |  |                                      |          |   |                |   |      |             |  |   |          |  
|---------------------------------------------------------------------------------------- |  | ------------------------------------ | -------- | - | -------------- | - | ---- | ----------- |  | - | -------- | -
|                                                                                         |  | Nine Months Ended September 30, 2005 |         
|                                                                                         |  | As OriginallyReported (2)            |          |   | Adjustments(1) |   |      | As Restated | 
|OPERATING ACTIVITIES:                                                                    |  |                                      |          |   |                |   |      |             |  |   |          |  
|Net income (loss)                                                                        |  | $                                    | (18,874  | ) |                | $ | (446 | )           |  | $ | (19,320  | )
|Adjustments to reconcile net income (loss) to net cash provided by operating activities: |  |                                      |          |   |                |   |      |             |  |   |          |  
|Depreciation and amortization                                                            |  |                                      | 13,182   |   |                |   |     |             |  |   | 13,182   |  
|Loss on disposal of fixed assets                                                         |  |                                      | (6       | ) |                |   |     |             |  |   | (6       | )
|Gain on sale of an equity investment                                                     |  |                                      | (4,680   | ) |                |   |     |             |  |   | (4,680   | )
|Changes in assets and liabilities, net of effect of business acquisitions:               |  |                                      |          |   |                |   |      |             |  |   |          |  
|Accounts receivable, net                                                                 |  |                                      | 12,805   |   |                |   |     |             |  |   | 12,805   |  
|Other assets                                                                             |  |                                      | 1,232    |   |                |   |     |             |  |   | 1,232    |  
|Accounts payable and accrued expenses                                                    |  |                                      | (3,321   | ) |                |   | 446  |             |  |   | (2,875   | )
|Income taxes payable                                                                     |  |                                      | (3,229   | ) |                |   |     |             |  |   | (3,229   | )
|Short-term restructuring                                                                 |  |                                      | 2,751    |   |                |   |     |             |  |   | 2,751    |  
|Deferred revenues                                                                        |  |                                      | 749      |   |                |   |     |             |  |   | 749      |  
|Long-term restructuring                                                                  |  |                                      | 8,450    |   |                |   |     |             |  |   | 8,450    |  
|Other                                                                                    |  |                                      | 113      |   |                |   |     |             |  |   | 113      |  
|                                                                                         |  |                                      |          |   |                |   |      |             |  |   |          |  
|Net cash provided by operating activities                                                |  |                                      | 9,172    |   |                |   |     |             |  |   | 9,172    |  
|                                                                                         |  |                                      |          |   |                |   |      |             |  |   |          |  
|INVESTING ACTIVITIES:                                                                    |  |                                      |          |   |                |   |      |             |  |   |          |  
|Purchases of property and equipment                                                      |  |                                      | (5,790   | ) |                |   |     |             |  |   | (5,790   | )
|Acquisition of TeraQuest Metrics, Inc., net of cash acquired                             |  |                                      | (4,436   | ) |                |   |     |             |  |   | (4,436   | )
|Purchases of short-term investments                                                      |  |                                      | (264,378 | ) |                |   |     |             |  |   | (264,378 | )
|Sales and maturities of short-term investments                                           |  |                                      | 282,206  |   |                |   |     |             |  |   | 282,206  |  
|Proceeds from the sale of an equity investment                                           |  |                                      | 4,680    |   |                |   |     |             |  |   | 4,680    |  
|                                                                                         |  |                                      |          |   |                |   |      |             |  |   |          |  
|Net cash provided by (used in) investing activities                                      |  |                                      | 12,282   |   |                |   |     |             |  |   | 12,282   |  
|                                                                                         |  |                                      |          |   |                |   |      |             |  |   |          |  
|FINANCING ACTIVITIES:                                                                    |  |                                      |          |   |                |   |      |             |  |   |          |  
|Proceeds from issuance of common stock, net                                              |  |                                      | 3,922    |   |                |   |     |             |  |   | 3,922    |  
|Repurchase of common stock                                                               |  |                                      | (35,172  | ) |                |   |     |             |  |   | (35,172  | )
|                                                                                         |  |                                      |          |   |                |   |      |             |  |   |          |  
|Net cash used in financing activities                                                    |  |                                      | (31,250  | ) |                |   |     |             |  |   | (31,250  | )
|                                                                                         |  |                                      |          |   |                |   |      |             |  |   |          |  
|Effect of exchange rate changes on cash                                                  |  |                                      | (4,400   | ) |                |   |     |             |  |   | (4,400   | )
|                                                                                         |  |                                      |          |   |                |   |      |             |  |   |          |  
|Net change in cash and cash equivalents                                                  |  |                                      | (14,196  | ) |                |   |     |             |  |   | (14,196  | )
|Cash and cash equivalents at beginning of period                                         |  |                                      | 76,432   |   |                |   |     |             |  |   | 76,432   |  
|                                                                                         |  |                                      |          |   |                |   |      |             |  |   |          |  
|Cash and cash equivalents at end of period                                               |  | $                                    | 62,236   |   |                | $ |     |             |  | $ | 62,236   |  
|                                                                                         |  |                                      |          |   |                |   |      |             |  |   |          |  

---

|(1) | These amounts were reported in our Quarterly Report on Form 10-Q filed with the SEC on November 8, 2005.
|--- | --------------------------------------------------------------------------------------------------------

|(2) | Adjustments reflect additional expense related to third party subcontractors in the professional services area.
|--- | ---------------------------------------------------------------------------------------------------------------



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NOTE 3.     STOCK-BASED COMPENSATION



Stock-Based Compensation Plans



We account for stock-based compensation using the intrinsic value method
prescribed in Accounting Principles Board Opinion 25, Accounting for Stock Issued to Employees (APB 25) and related Interpretations. Under APB 25, compensation cost is measured as the excess, if any, of the closing
market price of our stock at the date of grant over the exercise price of the option granted. We recognize compensation cost for stock options, if any, ratably over the vesting period. Generally, we grant options with an exercise price equal to the
closing market price of our stock on the grant date.



Our
Employee Stock Purchase Plan (ESPP) allows participants to purchase shares at 85% of the lower of the fair value of the common stock at the beginning of the offering period or the fair value on the purchase date.



We have also granted restricted stock to certain employees with a cash
purchase price less than the closing market price of the underlying stock on the date of grant. Our restricted common stock awards generally vest over two to five years from the date of grant based on continued service. We record as deferred
compensation, the aggregate amount by which the closing price of our common stock on the date of grant exceeds the cash purchase price of the restricted common stock, within stockholders equity. Deferred compensation associated with these
grants is amortized to operating expenses over the respective vesting term. We provide additional pro forma disclosures as required under Statement of Financial Accounting Standards (SFAS) 123, Accounting for Stock-Based
Compensation (SFAS 123), as amended by SFAS 148, Accounting for Stock-Based Compensation-Transition and Disclosure-an amendment of FASB Statement No. 123.



Pro Forma Net Income (Loss) and Net Income (Loss) Per Share



Compensation expense included in pro forma net income (loss) and net income
(loss) per share for the awards granted under our stock option and ESPP programs is determined using the fair value recognition provisions of SFAS 123 employing the Black-Scholes pricing model. The fair value of each stock option is estimated on the
date of grant using the Black-Scholes pricing model with the following weighted average assumptions:



|                        |  |                                  |   |  |                                 |   |  |            |   |  |            |  
|----------------------- |  | -------------------------------- | - |  | ------------------------------- | - |  | ---------- | - |  | ---------- | -
|                        |  | Three Months Ended September 30, |   |  | Nine Months Ended September 30, |  
|                        |  | 2005                             |   |  | 2004                            |   |  | 2005       |   |  | 2004       |  
|Expected life           |  | 4.02 years                       |   |  | 4.03 years                      |   |  | 4.02 years |   |  | 4.03 years |  
|Risk-free interest rate |  | 4.04                             | % |  | 3.51                            | % |  | 3.93       | % |  | 3.41       | %
|Volatility              |  | 54.0                             | % |  | 43.0                            | % |  | 54.0       | % |  | 43.0       | %
|Dividend yield          |  | 0.00                             | % |  | 0.00                            | % |  | 0.00       | % |  | 0.00       | %



The fair value of each
ESPP award is estimated using the Black-Scholes pricing model with the following weighted average assumptions:



|                        |  |                                  |   |  |                                 |   |  |          |   |  |          |  
|----------------------- |  | -------------------------------- | - |  | ------------------------------- | - |  | -------- | - |  | -------- | -
|                        |  | Three Months Ended September 30, |   |  | Nine Months Ended September 30, |  
|                        |  | 2005                             |   |  | 2004                            |   |  | 2005     |   |  | 2004     |  
|Expected life           |  | 6 months                         |   |  | 6 months                        |   |  | 6 months |   |  | 6 months |  
|Risk-free interest rate |  | 3.44                             | % |  | 1.24                            | % |  | 3.30     | % |  | 1.24     | %
|Volatility              |  | 46.0                             | % |  | 52.0                            | % |  | 46.0     | % |  | 52.0     | %
|Dividend yield          |  | 0.00                             | % |  | 0.00                            | % |  | 0.00     | % |  | 0.00     | %



The weighted average
fair value of the stock options granted under our employee stock option plans and the stock awarded under our ESPP during the three months ended September 30, 2005 and 2004, as defined by SFAS 123, was $3.62 and $3.52 per share, respectively,
and was $4.10 and $4.12 per share for the nine months ended September 30, 2005 and 2004, respectively.



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Had we recorded compensation expenses based on the estimated fair value on the grant dates of our stock
options and ESPP awards as defined by SFAS 123, our pro forma net income (loss) and net income (loss) per share for the three and nine ended September 30, 2005 and 2004, would have been as follows (in thousands, except per share amounts):



|                                                           |  |                                  |        |   |                                 |   |        |               |  |   |         |   |  |   |        |  
|---------------------------------------------------------- |  | -------------------------------- | ------ | - | ------------------------------- | - | ------ | ------------- |  | - | ------- | - |  | - | ------ | -
|                                                           |  | Three Months Ended September 30, |        |   | Nine Months Ended September 30, |  
|                                                           |  | 2005                             |        |   | 2004                            |   |        | 2005          |  |   | 2004    |  
|                                                           |  | (as restated)                    |        |   |                                 |   |        | (as restated) |  |   |         |  
|Net income (loss):                                         |  |                                  |        |   |                                 |   |        |               |  |   |         |   |  |   |        |  
|As reported                                                |  | $                                | (5,268 | ) |                                 | $ | (160   | )             |  | $ | (19,320 | ) |  | $ | 3,399  |  
|Stock compensation adjustment  intrinsic value            |  |                                  | 140    |   |                                 |   | 9      |               |  |   | 428     |   |  |   | 18     |  
|Stock compensation expense  fair value, net of tax effect |  |                                  | (3,295 | ) |                                 |   | (3,646 | )             |  |   | (12,033 | ) |  |   | (7,144 | )
|                                                           |  |                                  |        |   |                                 |   |        |               |  |   |         |   |  |   |        |  
|Pro forma net loss                                         |  | $                                | (8,423 | ) |                                 | $ | (3,797 | )             |  | $ | (30,925 | ) |  | $ | (3,727 | )
|                                                           |  |                                  |        |   |                                 |   |        |               |  |   |         |   |  |   |        |  
|Net income (loss) per share:                               |  |                                  |        |   |                                 |   |        |               |  |   |         |   |  |   |        |  
|As reported  basic                                        |  | $                                | (0.07  | ) |                                 | $ | (0.00  | )             |  | $ | (0.25   | ) |  | $ | 0.04   |  
|As reported  diluted                                      |  | $                                | (0.07  | ) |                                 | $ | (0.00  | )             |  | $ | (0.25   | ) |  | $ | 0.04   |  
|                                                           |  |                                  |        |  
|Pro forma  basic                                          |  | $                                | (0.11  | ) |                                 | $ | (0.05  | )             |  | $ | (0.40   | ) |  | $ | (0.05  | )
|Pro forma  diluted                                        |  | $                                | (0.11  | ) |                                 | $ | (0.05  | )             |  | $ | (0.40   | ) |  | $ | (0.05  | )



The pro forma amounts
include compensation expense related to stock option grants and ESPP awards for the three and nine months ended September 30, 2005 and 2004.



NOTE 4NET INCOME (LOSS) PER SHARE



We compute net income (loss) per share in accordance with SFAS 128, Earnings per Share. Under the provisions of SFAS 128, basic net
income (loss) per share is computed by dividing the net income (loss) by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing the net income (loss) for the period by
the weighted average number of common and potentially dilutive shares outstanding during the period. Potentially dilutive shares, which consist of incremental shares issuable upon exercise of stock options and unvested restricted stock, are included
in diluted net income per share to the extent such shares are dilutive. Diluted net loss per share is the same as basic net loss per share for the three months ended September 30, 2005 and 2004, and the nine months ended September 30,
2005, due to our net loss in each of those periods.



The
following table sets forth the computation of basic and diluted net income (loss) per share for the three and nine months ended September 30, 2005 and 2004 (in thousands, except per share amounts):



|                                                                                    |  |                                  |        |   |                                 |   |        |               |  |   |         |   |  |   |       
|----------------------------------------------------------------------------------- |  | -------------------------------- | ------ | - | ------------------------------- | - | ------ | ------------- |  | - | ------- | - |  | - | ------
|                                                                                    |  | Three Months Ended September 30, |        |   | Nine Months Ended September 30,
|                                                                                    |  | 2005                             |        |   | 2004                            |   |        | 2005          |  |   | 2004   
|                                                                                    |  | (as restated)                    |        |   |                                 |   |        | (as restated) |  |   |        
|Numerator:                                                                          |  |                                  |        |   |                                 |   |        |               |  |   |         |   |  |   |       
|Net income (loss)                                                                   |  | $                                | (5,268 | ) |                                 | $ | (160   | )             |  | $ | (19,320 | ) |  | $ | 3,399 
|Denominator:                                                                        |  |                                  |        |   |                                 |   |        |               |  |   |         |   |  |   |       
|Denominator for basic income (loss) per share  weighted average shares outstanding |  |                                  | 76,017 |   |                                 |   | 80,114 |               |  |   | 77,937  |   |  |   | 80,434
|Effect of dilutive securities                                                       |  |                                  |       |   |                                 |   |       |               |  |   |        |   |  |   | 1,433 
|                                                                                    |  |                                  |        |   |                                 |   |        |               |  |   |         |   |  |   |       
|Denominator for diluted income (loss) per share                                     |  |                                  | 76,017 |   |                                 |   | 80,114 |               |  |   | 77,937  |   |  |   | 81,867
|                                                                                    |  |                                  |        |   |                                 |   |        |               |  |   |         |   |  |   |       
|Net income (loss) per share  basic                                                 |  | $                                | (0.07  | ) |                                 | $ | (0.00  | )             |  | $ | (0.25   | ) |  | $ | 0.04  
|                                                                                    |  |                                  |        |   |                                 |   |        |               |  |   |         |   |  |   |       
|Net income (loss) per share  diluted                                               |  | $                                | (0.07  | ) |                                 | $ | (0.00  | )             |  | $ | (0.25   | ) |  | $ | 0.04  
|                                                                                    |  |                                  |        |   |                                 |   |        |               |  |   |         |   |  |   |       



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The diluted net loss per share calculation for the three months ended September 30, 2005 and 2004,
excludes options to purchase 14.2 million and 12.5 million shares of common stock, respectively, and 248,000 and 180,000 unvested restricted common shares, respectively, due to our net loss in these periods.



The diluted net loss per share calculation for the nine months ended
September 30, 2005 excludes options to purchase 13.9 million shares of common stock and 253,000 unvested restricted common shares due to our net loss in that period. The diluted net income per share calculation for the nine months ended
September 30, 2004 excludes 194,000 unvested restricted common shares and options to purchase 7.8 million shares of common stock because the exercise price of these options was greater than the average market price of a share of common
stock during the respective period and the inclusion of such options would have been antidilutive.



|NOTE 5. | ACQUISITION
|------- | -----------



TeraQuest Metrics, Inc.



On January 7, 2005, we completed the acquisition of privately held TeraQuest Metrics, Inc. (TeraQuest). TeraQuest was a Texas-based consulting firm focusing on software improvement, quality assurance and risk management for
corporate and government software organizations and is now part of our newly created Process Optimization Practice.



The purchase price consisted of fixed consideration of $5.4 million in cash and $523,000 of acquisition-related costs. Contingent consideration
includes cash retention payments of $1.3 million to be earned through the continued employment of certain key employees. This contingent consideration will vest and be paid over a two-year period or earlier under certain circumstances and will
be recognized as compensation expense in the period earned. In addition, $850,000 of restricted stock, which vests over a four-year period, was issued to certain TeraQuest employees upon the closing. Results of operations for TeraQuest have been
included in our consolidated financial statements from the date of acquisition. The acquisition was accounted for as a purchase and the total purchase price was recorded as follows (in thousands):



|                         |  |   |      
|------------------------ |  | - | -----
|Cash paid                |  | $ | 5,391
|Direct transaction costs |  |   | 523  
|                         |  |   |      
|Total purchase price     |  | $ | 5,914
|                         |  |   |      



Based upon the
purchase price of the acquisition, the purchase price allocation was as follows (in thousands):



|                                          |  |   |        |  
|----------------------------------------- |  | - | ------ | -
|Current assets and other tangible assets: |  |   |        |  
|Cash                                      |  | $ | 1,478  |  
|Current assets                            |  |   | 2,049  |  
|Deferred tax assets                       |  |   | 870    |  
|Goodwill                                  |  |   | 2,692  |  
|Customer list                             |  |   | 1,475  |  
|                                          |  |   |        |  
|Total assets acquired                     |  |   | 8,564  |  
|                                          | 
|Liabilities assumed:                      |  |   |        |  
|Current liabilities                       |  |   | (1,780 | )
|Deferred tax liabilities                  |  |   | (870   | )
|                                          |  |   |        |  
|Total purchase price                      |  | $ | 5,914  |  
|                                          |  |   |        |  



The customer list is
being amortized over a three-year life from the date of acquisition.



In accordance with SFAS 109, Accounting for Income Taxes, deferred tax liabilities of $870,000 have been recorded for the tax effect of the amortizable intangible assets as well as other taxable temporary



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differences. We have recorded an offsetting deferred tax asset of $870,000 to reflect future deductible differences that could be allocable to offset future
taxable income. We are releasing a portion of the valuation allowance to the extent the realization of deferred tax assets becomes assured as a result of the additional taxable income generated by the non-deductible amortizable intangible assets and
other taxable temporary differences. Any future release of valuation allowance against deferred tax assets of TeraQuest will be recorded against goodwill.



|NOTE 6. | GOODWILL AND INTANGIBLE ASSETS
|------- | ------------------------------



The changes in the carrying amount of goodwill for the nine months ended September 30, 2005 is as follows (in thousands):



|                                           |  |       |         |  
|------------------------------------------ |  | ----- | ------- | -
|                                           |  | Total |        
|Balance as of December 31, 2004            |  | $     | 182,390 |  
|Adjustments to initial purchase accounting |  |       | (1,923  | )
|Acquisition of TeraQuest                   |  |       | 2,692   |  
|                                           |  |       |         |  
|Balance as of September 30, 2005           |  | $     | 183,159 |  
|                                           |  |       |         |  



The adjustments to
goodwill during the nine months ended September 30, 2005 are primarily related to reversals of accrued expenses and other liabilities originally recorded as part of the purchase accounting for our acquisitions and due to fluctuations in foreign
currency exchange rates, especially the United Kingdom Pound Sterling and the Euro.



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



|                                          |  |                      |        |                          |   |         |                    |  |   |      
|----------------------------------------- |  | -------------------- | ------ | ------------------------ | - | ------- | ------------------ |  | - | -----
|                                          |  | September 30, 2005   |        |                          |  
|                                          |  | Gross carrying value |        | Accumulated amortization |   |         | Net carrying value
|Acquired technology                       |  | $                    | 30,720 |                          | $ | (28,203 | )                  |  | $ | 2,517
|Maintenance contracts                     |  |                      | 8,700  |                          |   | (8,700  | )                  |  |   |     
|Trademarks, trade names and service marks |  |                      | 8,300  |                          |   | (7,504  | )                  |  |   | 796  
|Other                                     |  |                      | 6,522  |                          |   | (5,416  | )                  |  |   | 1,106
|                                          |  |                      |        |                          |   |         |                    |  |   |      
|Total                                     |  | $                    | 54,242 |                          | $ | (49,823 | )                  |  | $ | 4,419
|                                          |  |                      |        |                          |   |         |                    |  |   |      



|                                          |  |                      |        |                          |   |         |                    |  |   |       
|----------------------------------------- |  | -------------------- | ------ | ------------------------ | - | ------- | ------------------ |  | - | ------
|                                          |  | December 31, 2004   
|                                          |  | Gross carrying value |        | Accumulated amortization |   |         | Net carrying value
|Acquired technology                       |  | $                    | 30,720 |                          | $ | (21,022 | )                  |  | $ | 9,698 
|Maintenance contracts                     |  |                      | 8,700  |                          |   | (8,700  | )                  |  |   |      
|Trademarks, trade names and service marks |  |                      | 8,300  |                          |   | (5,430  | )                  |  |   | 2,870 
|Other                                     |  |                      | 5,047  |                          |   | (4,985  | )                  |  |   | 62    
|                                          |  |                      |        |                          |   |         |                    |  |   |       
|Total                                     |  | $                    | 52,767 |                          | $ | (40,137 | )                  |  | $ | 12,630
|                                          |  |                      |        |                          |   |         |                    |  |   |       



Estimated future
amortization expense related to our intangible assets at September 30, 2005 is as follows (in thousands):



|                              |  |                    |      
|----------------------------- |  | ------------------ | -----
|                              |  | September 30, 2005
|2005 (remaining three months) |  | $                  | 2,977
|2006                          |  |                    | 907  
|2007                          |  |                    | 535  
|                              |  |                    |      
|Total                         |  | $                  | 4,419
|                              |  |                    |      



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|NOTE 7. | RESTRUCTURING
|------- | -------------



The following table summarizes our restructuring activities for the nine months ended September 30, 2005, which have been accounted for in accordance
with EITF 94-3 and SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities, SFAS 112, Employers Accounting for Postemployment Benefits-an amendment of FASB Statements 5 and 43, SEC Staff Accounting
Bulletin 100, Restructuring and Impairment Charges and EITF 95-3, Recognition of Liabilities in Connection with a Purchase Business Combination,as applicable (in thousands):



|                              |  |                        |        |   |            |   |        |       |  |   |       |   |  |   |        |  
|----------------------------- |  | ---------------------- | ------ | - | ---------- | - | ------ | ----- |  | - | ----- | - |  | - | ------ | -
|                              |  | Severance and Benefits |        |   | Facilities |   |        | Other |  |   | Total |  
|Accrual at December 31, 2004  |  | $                      | 418    |   |            | $ | 3,190  |       |  | $ | 308   |   |  | $ | 3,916  |  
|March 2005 restructuring      |  |                        | 306    |   |            |   |       |       |  |   |      |   |  |   | 306    |  
|June 2005 restructuring       |  |                        | 2,831  |   |            |   | 12,818 |       |  |   | 38    |   |  |   | 15,687 |  
|September 2005 restructuring  |  |                        | 839    |   |            |   | (114   | )     |  |   |      |   |  |   | 725    |  
|Cash payments and write-offs  |  |                        | (3,598 | ) |            |   | (1,881 | )     |  |   | (38   | ) |  |   | (5,517 | )
|                              |  |                        |        |   |            |   |        |       |  |   |       |   |  |   |        |  
|Accrual at September 30, 2005 |  | $                      | 796    |   |            | $ | 14,013 |       |  | $ | 308   |   |  | $ | 15,117 |  
|                              |  |                        |        |   |            |   |        |       |  |   |       |   |  |   |        |  



Restructuring expenses
recorded in the three months ended September 30, 2005 totaled $725,000 and included $839,000 for severance and benefits partially offset by a facility restructuring expense reversal of $114,000. Severance and benefits expenses related to
headcount reductions of 27 employees, of which 21 were in research and development and 6 were in selling, general and administrative. The facility restructuring reversal was an adjustment to the facility restructuring expense previously recorded for
vacating a portion of a building located in Scotts Valley, California.



During the second quarter of 2005, we undertook restructuring activities to consolidate underutilized facilities in Scotts Valley, California. We also eliminated 51 positions of which 44 were in selling, general and administrative and 7
were in research and development. Additionally, we reversed a previous restructuring charge taken for our Twyford, UK facility in the amount of $303,000. We expect to utilize unused space in this facility as part of a reorganization of our European
operations. Net restructuring costs recorded in the second quarter of 2005 in connection with our June 2005 restructuring activities were $15.7 million, including $13.4 million in the United States and $2.3 million in Europe and Asia. Of the total,
$12.8 million represented facilities-related expenses and $2.9 million was related to severance expenses.



In March 2005, we recorded a cash restructuring charge for $306,000 for severance and benefits expenses resulting from the termination of an employee in
selling, general and administrative.



Substantially all of
these costs have or will require the outlay of cash, although the timing of lease payments relating to leased facilities over the next five years will be unchanged by the restructuring action.



At September 30, 2005, we had $10.5 million in our long-term
restructuring accrual, of which $9.5 million was related to the lease obligation for excess capacity at the Scotts Valley, California facility, $898,000 was related to a lease obligation for excess capacity at a facility in Raleigh, North Carolina
and $131,000 was related to a lease obligation for excess capacity at a facility in Sydney, Australia.



|NOTE 8. | GAIN OF SALE OF INVESTMENT
|------- | --------------------------



In March 2005, we sold an equity investment in a privately held company that was previously determined to be impaired and written-off in December 2002. We
recognized a gain of $4.7 million in the nine months ending September 30, 2005 on this transaction.



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|NOTE 9. | INCOME TAXES
|------- | ------------



For the three months ended September 30, 2005 and 2004, we recorded an income tax expense of $1.2 million and $2.7 million, respectively. For the
nine months ended September 30, 2005 and 2004, we recorded income tax expense of $1.8 million and $7.6 million, respectively. Our income tax provision is based on our operating results for the nine months ended September 30, 2005 and on
foreign income withholding taxes actually incurred.



The
effective tax rates for the three and nine months ended September 30, 2005 and 2004 differ from statutory tax rates principally because we did not fully benefit from the operating losses we incurred in the U.S. and we incurred income tax in a
number of foreign jurisdictions. In the three and nine months ended September 30, 2005, we also recorded a $300,000 tax expense relating to the non-permanently reinvested earnings of a foreign subsidiary. We provide U.S. income taxes on the
earnings of our foreign subsidiaries unless those earnings are considered permanently reinvested. At September 30, 2005, $8.7 million of earnings from our subsidiary in Japan were not considered permanently reinvested, and were subsequently
distributed to the U.S. parent in the form of a dividend. Additionally, we took a $730,000 benefit for the closure of a foreign tax audit and a $540,000 benefit for the refund of a foreign tax payment during the nine months ended September 30,
2005.



Deferred income taxes are recorded in accordance with
SFAS 109, Accounting for Income Taxes, and are determined based on the differences between financial reporting and the tax basis of assets and liabilities using deferred tax rates and laws in effect when the differences are
expected to reverse. SFAS 109 provides for recognition of deferred tax assets if the realization of such assets is more likely than not to occur. With the exception of certain foreign subsidiaries, we have determined that it is more likely than not
that our deferred tax assets in all jurisdictions will not be realized, due to uncertainties related to our ability to utilize deferred tax assets, primarily net operating losses carried forward before they expire. Accordingly, we have recorded
deferred tax assets of $1.1 million for those foreign operations, related to temporary book-tax differences and net operating loss carryforwards, and a full valuation allowance against the remainder of our deferred tax assets at September 30,
2005.



NOTE 10REPURCHASE OF COMMON STOCK



Discretionary Repurchase Program



In September 2001, our Board of Directors authorized the use of up to $30
million to repurchase shares of our outstanding common stock under a discretionary stock repurchase program. In February 2004 and May 2005, our Board of Directors authorized an additional $30 million and $75 million, respectively, under this program
bringing the total discretionary stock repurchase authorizations to $135 million.



We elected not to repurchase any shares of common stock under our discretionary program during the three months ended September 30, 2005. During the nine months ended September 30, 2005, we repurchased
4,971,800 shares of common stock at an average price of $6.62 per share for an aggregate cost of $32.9 million.



During the three months ended September 30, 2004, we repurchased 610,500 shares of common stock at an average price of $8.18 per share for an
aggregate cost of $5.0 million. During the nine months ended September 30, 2004, we repurchased 1,723,200 shares of common stock at an average price of $8.70 per share for an aggregate cost of $15.0 million.



The discretionary program is currently in effect and at September 30,
2005, $59.3 million remains authorized for future repurchases.



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10b5-1 Repurchase Program



In August 2003, our Board of Directors authorized a 10b5-1 stock repurchase program whereby up to 1,000,000 shares or $15
million worth of our outstanding common stock, whichever comes first, may be repurchased with a per day trading limit of 2,000 shares.



During the three months ended September 30, 2005, we repurchased 48,000 common shares at an average price of $6.41 a share for total consideration of
$308,000. During the nine months ended September 30, 2005, we repurchased 298,000 shares at an average price of $7.42 per share for total consideration of $2.2 million.



During the three months ended September 30, 2004, we repurchased 128,000 common shares at an average price of $8.03 a
share for total consideration of $1.0 million. During the nine months ended September 30, 2004, we repurchased 374,000 shares at an average price of $8.85 per share for total consideration of $3.3 million.



The 10b5-1 Program expired during the three months ended September 30,
2005 when the accumulated total number of shares repurchased under the program reached its authorized maximum of 1,000,000 shares.



NOTE 11COMMITMENTS AND CONTINGENCIES



Indemnifications and Guarantees



The following is a summary of our agreements that we have determined are within the scope of Financial Accounting Standards Board (FASB)
Interpretation 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, some of which are specifically grandfathered because the guarantees were in effect
prior to December 31, 2002. Accordingly, we have no liabilities recorded for these agreements as of September 30, 2005, except as noted below.



We have agreements whereby we indemnify our officers and directors for certain events or occurrences while the officer or director is, or was serving, in
such capacity. The term of the indemnification period is for the officers or directors lifetime. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited; however,
we have a director and officer insurance policy that in certain circumstances enables us to recover a portion of any future amounts paid. As a result of our insurance policy coverage, we believe the estimated fair value of these indemnification
agreements is minimal.



As part of our TeraQuest acquisition in
January 2005 and our Legadero acquisition in October 2005, we entered into retention agreements totaling $1.3 million and $5.4 million, respectively, to be paid over two-year periods from the respective dates of acquisition based upon continued
employment of certain key employees. Refer to Notes 5 and 13 of the Notes to Condensed Consolidated Financial Statements for additional information.



As part of the Starbase and TogetherSoft acquisitions, we entered into agreements whereby we indemnify the officers and directors of the acquired company
for certain events or occurrences while such officers or directors served in such capacity. The term of the indemnification period is for the officers or directors lifetime. The maximum potential amount of future payments we could be
required to make under these indemnification agreements is unlimited; however, we have purchased director and officer insurance policies for Starbase and TogetherSoft, if applicable, through 2009, that in certain circumstances enable us to recover a
portion of any future amounts paid. As a result of our insurance policy coverage, we believe the estimated fair value of these indemnification agreements is minimal.



We entered into an agreement for the outsourcing of inventory fulfillment. We guarantee that in the event we terminate the
fulfillment agreement, we will purchase all inventory held by the vendor at the time of termination. We estimate and accrue reserves for excess inventory at the vendor. As of September 30, 2005, we had inventory in excess of the reserves of
$400,000, which represents the potential charge relating to this guarantee for this period.



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During the year ended December 31, 2003, we entered into a five-year operating lease for our
corporate offices in Cupertino, California. In the event that we do not exercise our option to extend the term of the lease, we guarantee certain costs to restore the property to certain conditions in place at the time the lease commenced. We are
accruing the estimated fair value of the lease restoration costs over the lease term and at September 30, 2005, we had a balance of $1.1 million accrued.



We sell software licenses and services to our customers via a contractual arrangement. As part of that contractual arrangement, we generally provide a
warranty for our software products and services to our customers. Our products are generally warranted to perform substantially as described in the associated product documentation. Our services are generally warranted to be performed in a
professional and workmanlike manner. We have not incurred significant expense under our product or services warranties. As a result, we believe the estimated fair value of these agreements is minimal.



We also enter into standard indemnification agreements in our ordinary course
of business with our customers, suppliers and other third-party providers. With respect to our customer license agreements, each contract generally includes certain provisions for indemnifying the customer against losses, damages, expenses and
liabilities incurred by the customer in the event our software is found to infringe upon certain intellectual property rights of a third party. In our services agreements, we generally agree to indemnify our customers against any acts by our
employees or agents that cause property damage or personal injury. In our technology license agreements, we also generally agree to indemnify our technology suppliers against any losses, damages, expenses and liabilities incurred by the suppliers in
connection with certain intellectual property right infringement claims by any third party with respect to our products. Finally, from time to time we enter into other industry-standard indemnification agreements with third party providers. The
maximum potential amount of future payments we could be required to make under any of these indemnification agreements is presently unknown. To date, we have not incurred significant expense to defend lawsuits or settle claims related to these
indemnification agreements. As a result, we believe the estimated fair value of these agreements is minimal.



We also have arrangements with certain vendors whereby we guarantee the expenses incurred by the vendor. The term is from execution of the arrangement
until cancellation and payment of any outstanding amounts. We would be required to pay any unsettled expenses upon notification from the vendor. The maximum potential amount of future payments we could be required to make under these indemnification
agreements is insignificant. As a result, we believe the estimated fair value of these agreements is minimal.



Leases



We lease
certain of our office and operating facilities and certain furniture and equipment under various operating leases. Our remaining operating lease terms extend through 2016 and as of September 30, 2005, future minimum lease payments under
noncancelable operating leases were as follows, (in thousands):



|                              |  |                 |       |      |   |        |  |      |       |      |   |            |  |       |       |  |   |       |  |   |       
|----------------------------- |  | --------------- | ----- | ---- | - | ------ |  | ---- | ----- | ---- | - | ---------- |  | ----- | ----- |  | - | ----- |  | - | ------
|                              |  | 2005 (3 months) |       | 2006 |   | 2007   |  | 2008 |       | 2009 |   | Thereafter |  | Total
|Operating leases              |  | $               | 2,702 |      | $ | 7,336  |  | $    | 5,876 |      | $ | 3,087      |  | $     | 2,895 |  | $ | 4,929 |  | $ | 26,825
|Restructured operating leases |  |                 | 935   |      |   | 3,753  |  |      | 3,294 |      |   | 2,946      |  |       | 2,585 |  |   | 646   |  |   | 14,159
|                              |  |                 |       |      |   |        |  |      |       |      |   |            |  |       |       |  |   |       |  |   |       
|Total commitments             |  | $               | 3,637 |      | $ | 11,089 |  | $    | 9,170 |      | $ | 6,033      |  | $     | 5,480 |  | $ | 5,575 |  | $ | 40,984
|                              |  |                 |       |      |   |        |  |      |       |      |   |            |  |       |       |  |   |       |  |   |       



Rent expense, net, for
all operating leases was $2.4 million and $8.5 million for the three and nine months ended September 30, 2005, respectively, and was $3.0 million and $9.1 million for the three and nine months ended September 30, 2004, respectively. In
addition, in December 2003, we entered into a five year lease for a facility in Tokyo, Japan, which is classified as a capital lease in accordance with SFAS No. 13 Accounting for Leases.This capital lease is not included in
the operating lease table presented above.



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Litigation



On November 27, 2002, a stockholder class action and derivative lawsuit, Dieterich v. Harrer, et al., Case No. 02CC00350, was filed against
Starbase Corporation, or Starbase, and five former directors of Starbase in the Superior Court of the State of California for Orange County, claiming that the former directors had breached fiduciary duties owed to Starbase and stockholders of
Starbase. We are paying the costs of defending this litigation pursuant to indemnification obligations under the merger agreement relating to our acquisition of Starbase. Following a series of motions, the case was dismissed without prejudice on
August 20, 2003. On October 28, 2003, a stockholder class action relating to the same matter, Dieterich v. Harrer, et al, Case No. 024-N, was filed against the former directors of Starbase in Chancery Court of the State of Delaware,
alleging breach of fiduciary duties by the former directors of Starbase. The lawsuit also named as defendants Borland, and the following four former executive officers of Borland: Dale Fuller, Keith Gottfried, Frederick Ball, and Doug Barre.
Defendants moved to dismiss and in August 2004, the Chancery Court granted in part and denied in part the motion to dismiss. Discovery has commenced and there is no date set for trial. We intend to defend ourselves vigorously.



There is no indication at present whether the lawsuit will have a material
effect on our financial condition, results of operations or liquidity.



From time to time, we may be involved in other lawsuits, claims, investigations and proceedings, consisting of intellectual property, commercial, employment and other matters, which arise in the ordinary course of business. In accordance
with SFAS 5, Accounting for Contingencies we record a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These accruals are reviewed at least quarterly and
adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular case. Litigation is inherently unpredictable; however, we believe that we have valid defenses
with respect to the legal matters pending against us, as well as adequate accruals for any probable and estimable losses. If an unfavorable ruling or other development were to occur in any specific period, there exists the possibility of a material
adverse impact on the results of operations for that period. We believe that, except as described above, given our current liquidity and cash and investment balances, even were we to receive an adverse judgment with respect to litigation that we are
currently a party to, it is likely that such a judgment would not have a material impact on our financial condition, results of operations or liquidity.



From time to time we receive notices from third parties claiming infringement by our products of third party patent, trademark and other intellectual
property rights, disputing royalties, or disputing other commercial arrangements. Regardless of the merit of any such claim, responding to these claims could be time consuming and expensive, and may require us to enter into licensing or royalty
agreements which may not be offered or available on terms acceptable to us. If a successful claim is made against us, our business could be materially and adversely affected. We expect that our software products will increasingly be subject to such
claims as the number of products and competitors in our industry segment increases, the functionality of products overlap and industry participants become more aggressive in using patents offensively.



Service Commitments



We have commitments regarding an outsourcing arrangement for portions of our
information technology operations. The committed expenditures are an average of $5.2 million per year through November 2014. We can terminate this contract with or without cause upon payment of a termination fee, the maximum amount of which is $2.1
million in 2005 declining to $500,000 in the final year of the contract.



NOTE 12RECENT ACCOUNTING PRONOUNCEMENTS



In May 2005 the FASB issued SFAS 154, Accounting Changes and Error Corrections. This statement replaces APB 20 and SFAS 3 and changes the requirements for the accounting for and reporting of a change in



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accounting principle. APB 20 previously required that most voluntary changes in accounting principle be recognized by including in net income (loss) of the
period of the change the cumulative effect of changing to the new accounting principle. SFAS 154 requires retrospective application to prior periods financial statements of changes in accounting principle, unless it is impracticable to
determine either the period-specific effects or the cumulative effect of the change. SFAS 154 is effective for accounting changes made in fiscal years beginning after December 15, 2005.



In December 2004, the FASB issued SFAS 123R, Share-Based
Payment,which requires companies to expense the estimated fair value of employee stock options and similar awards. In March 2005, the SEC issued Staff Accounting Bulletin (SAB) 107, providing supplemental implementation
guidance for SFAS 123R. On April 14, 2005, the SEC adopted a new rule amending the compliance dates for SFAS 123R. In accordance with the new rule, the accounting provisions of SFAS 123R will be effective for us beginning in fiscal 2006. The
pro forma disclosures previously permitted under SFAS 123 will no longer be an alternative to financial statement recognition. On October 27, 2005 we accelerated the vesting of all unvested options held by employees to enable us to avoid
recognizing future compensation expense associated with these options upon adoption of SFAS 123R. Refer to Note 13 Subsequent Events for additional information. We expect the adoption of SFAS 123R and SAB 107 will have a material adverse
impact on our net income (loss) and net income (loss) per share. Refer to Note 3 Stock-Based Compensation for the pro forma net income (loss) and net income (loss) per share amounts for the three and nine months ended September 30,
2005 and 2004, as if we had used a fair-value-based method similar to the methods required under SFAS 123R to measure compensation expense for employee stock awards.



In December 2004, the FASB issued Staff Position FAS 109-2, Accounting and Disclosure Guidance for the Foreign
Earnings Repatriation Provision within the American Jobs Creation Act of 2004. The American Jobs Creation Act of 2004 introduces a limited time 85% dividends received deduction on the repatriation of certain foreign earnings to a U.S.
taxpayer (repatriation provision), provided certain criteria are met. FAS 109-2 provides accounting and disclosure guidance for the repatriation provision. We did not repatriate any foreign earnings under the provisions of the American Jobs Creation
Act of 2004.



In December 2004, the FASB issued SFAS 153,
Exchanges of Nonmonetary Assets, which eliminates the exception for non-monetary exchanges of similar productive assets and replaces it with a general exception for exchanges of non-monetary assets that do not have commercial
substance. SFAS 153 will be effective for non-monetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The adoption of SFAS 153 did not have a material impact on our consolidated financial position, results of
operations or cash flows.



NOTE 13SUBSEQUENT EVENTS



On October 3, 2005, we completed the acquisition of privately held
Legadero Software, Inc., or Legadero. Legadero is a Texas-based provider of IT management and governance solutions for software development and delivery. The purchase price consisted of fixed consideration of approximately $7.5 million in cash
plus contingent consideration of $5.4 million for retention payments to be earned through the continued employment of certain key employees. This contingent consideration will vest and be paid over a two-year period or earlier under certain
circumstances and will be recognized as compensation expense in the period earned. In addition, we expect to incur approximately $150,000 of acquisition-related costs. Options to purchase 378,000 shares of common stock pursuant to our 2003
Supplemental Stock Option Plan were issued to certain Legadero key employees who are now our employees. These options will vest over a four-year period. Cash acquired in the acquisition was approximately $100,000. Results of operations for Legadero
will be included in our consolidated financial statements from the date of acquisition.



On October 27, 2005, the Compensation Committee of the Borland Board of Directors approved accelerating the vesting of all unvested stock options granted under our stock option plans granted on or prior to
September 30, 2005 having an exercise price higher than the closing price of our common stock on November 4,



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2005, which was $5.67 per share. Unvested stock options held by members of the Board of Directors were excluded from the vesting acceleration. The primary
purpose of the accelerated vesting was to avoid recognizing future compensation expense associated with these options upon adoption of SFAS 123R. SFAS 123R requires that compensation expense associated with stock options be recognized in the
statement of operations, rather than as a footnote disclosure to our consolidated financial statements. We estimate the aggregate future expense that will be eliminated as a result of the acceleration of the vesting of these options is approximately
$13 million, with approximately $8 million eliminated for 2006. We will report approximately $13 million of additional pro forma stock compensation expense under SFAS 123 in the fourth quarter of 2005 due to the acceleration of all unvested stock
options in that quarter.



On October 27, 2005, the
Compensation Committee approved severance benefits for certain Named Executive Officers listed in Borlands 2005 proxy statement, specifically Kenneth R. Hahn, Timothy J. Stevens and Matthew A. Thompson, which supersedes severance provisions
contained in their respective employment agreements (the Severance Agreement). With respect to a termination in connection with a change in control, the Severance Agreement provides for severance benefits under these circumstances
consisting of (i) a severance payment equal to 100% of the executives annual base salary; (ii) continuation of health coverage by having Borland pay the executives COBRA premiums for up to 12 months and (iii) accelerated
vesting of all future equity awards, if any.



On
February 7, 2006, the Board of Directors approved the adoption of certain amendments to Borlands 2003 Supplemental Stock Option Plan (2003 Plan). The amendments to the 2003 Plan (i) increase the number of shares available
for grant by 560,000 shares and (ii) permit the Compensation Committee to have the power to amend or modify the 2003 Plan and any awards granted thereunder. We plan to amend the Registration Statement on Form S-8 for the 2003 Plan in connection
with the share reserve increase. The description of the 2003 Plan is qualified in its entirety by reference to the 2003 Plan attached which was provided with the 8-K dated February 8, 2006. On March 14, 2006, the Board of Directors
approved the adoption of an amendment to the 2003 Plan to increase the number of shares available for grant by an additional 1,100,000 shares.



On February 8, 2006, we issued a press release announcing our plan to seek a buyer for our integrated development environment, or IDE, products
including Borland Developer Studio (Delphi, C++ Builder and C#Builder), JBuilder and Interbase product lines. We have retained Bear, Stearns & Co. Inc. to manage the process of seeking a buyer for our IDE assets. While the specific products
that we divest will not be determined until we enter into an agreement with a selected buyer, we estimate that the disposition will encompass products comprising approximately 30% of our total revenues. We also intend to make operational changes as
a result of this divestiture, whose impact has yet to be quantified.



On March 1, 2006, we entered into a sublease agreement with a lessee to occupy our vacant facility located in Raleigh, North Carolina. We originally exited this facility as part of our September 2004 restructuring activities. We had
been actively seeking a sublessee since we exited the facility in 2004. The sublease agreement commenced on March 1, 2006 and expires on June 30, 2008. Sublease income will amount to approximately $0.4 million in 2006 and 2007, and
approximately $0.2 million in 2008.



During the first quarter
of 2006 we reached a settlement involving the stockholder class action lawsuit, Dieterich v. Harrer, et al., Case No. 024-N. Under the settlement we agreed to pay $475,000 and actual costs to administer the settlement fund up to a maximum of
$25,000, in exchange for dismissal of the action and a full and general release of all claims relating to or concerning the factual and legal allegations in the complaint (with the sole exception of claims by former Starbase shareholders who contend
they did not receive the full consideration to which they were entitled from the acquisition by Borland). The settlement is conditioned on certification of the plaintiff class, approval by the Delaware Chancery Court and satisfaction of all other
legal requirements. There is no assurance that the conditions will be met or the Court will approve the settlement. In addition, an objecting shareholder could appeal the approval of the settlement. If the settlement does not become final, the
parties could resume litigation or attempt to renegotiate the settlement.



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On April 19, 2006, we completed the acquisition of Segue Software, Inc. pursuant to an Agreement and
Plan of Merger, dated as of February 7, 2006. Segue is now a wholly-owned subsidiary of Borland. Segue is headquartered in Lexington, Massachusetts, and is a provider of global quality and testing solutions. Segue offers solutions that define,
measure, manage and improve software quality throughout the entire application lifecycle. Under the terms of the Agreement and Plan of Merger, we paid $8.67 per share in cash for all outstanding shares of Segue. The transaction was valued at
approximately $105 million and was funded with existing cash on hand. We will incur additional acquisition-related costs and we are currently in the process of determining the aggregated total of such costs. Results of operations for Segue will be
included in our consolidated financial statements from the date of acquisition. For the year ended December 31, 2005, Segue reported net revenue of $36.4 million, up 10% from 2004, and software license revenue of $15.9 million, up 9% from 2004.
Segue also reported net income in 2005 of $2.9 million, as compared to net income in 2004 of $1.7 million.



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



Forward-Looking Statements



The statements made throughout this Quarterly Report on Form 10-Q/A 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, revenues, composition of revenues, cash flows, earnings, margins, costs, expenses, strategy, research and development, customer service and relationships, demand for our products, market and technological trends in the
software industry, licenses, developments in technology, product quality, competition, sales, cash resources, utilization of cash resources, personnel, acquisitions, interest rates, foreign currency exchange rates and various economic and business
trends. Generally, you can identify forward-looking statements by the use of words such as expect, estimate, project, budget, forecast, anticipate, goal,
intend, plan, may, will, could, should, believes, predicts, potential, continue and similar expressions or the negative or other
variations thereof. These forward-looking statements involve substantial risks and uncertainties. Examples of such risks and uncertainties are described under Factors That May Affect Our Future Operating Results And Adversely Affect The Market
Price Of Our Stock and elsewhere in this report, as well as in our other filings with the SEC or in materials incorporated by reference herein or therein. You should be aware that the occurrence of any of these risks and uncertainties may
cause our actual results to differ materially from those anticipated in our forward-looking statements and have a material adverse effect on our business, results of operations and financial condition. New factors may emerge from time to time, and
it may not be 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/A, including the financial statement footnotes. 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/A, except as required by law. In addition, except for section of this Form 10-Q/A entitled Subsequent Events in Note 13 to the Notes to Condensed
Consolidated Financial Statements, as restated, this Form 10-Q/A does not reflect events occurring after the filing of our Quarterly Report of Form 10-Q filed on November 8, 2005 other than the restatement, and we undertake no obligation to
update the forward-looking statements in this Quarterly Report on Form 10-Q/A.



Overview



Borland is a global leader in
Software Delivery Optimization (SDO), the transformation of software development from a series of individual activities into a managed business process. We provide software and services that are designed to align the people, processes
and technology required to maximize the business value of software. By enabling a managed business process for the entire software development and delivery lifecycle, we help customers address the constraints of software development that limit the
effectiveness and efficiency of their efforts.



Increasingly,
enterprises are demanding more speed, more reliability and a higher return on investment from the software that facilitates their business productivity. To this end, existing point products that only address a single aspect of the
application development lifecycle, or broader solutions that are based on only one technology platform, are proving inadequate to meet the software development needs of todays corporate information technology (IT) organizations. We
believe enterprises are increasingly demanding a more disciplined approach to aligning the people, processes and technology that are required to deliver high quality software on time and within budget.



We have been transforming our go-to-market focus over the past several
quarters from selling individual point products to selling multi-product enterprise solutions and services that span the software application



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development lifecycle. As part of this transformation, we continue to focus on revamping and training our worldwide sales force, increasing sales force
productivity, growing our pipeline of sales leads and opportunities, developing stronger alliances with systems integrators and technology partners that have established relationships with enterprise-level customers, and selling our individual
products through our network of channel partners. We have also experienced longer and less predicable sales cycles, which is typical for larger solution sales, and we expect to compete directly and more often with larger companies. We therefore
expect to continue to experience variability in our financial results as we pursue this transformation.



Although the first half of 2005 was challenging for us, we believe our Application Lifecycle Management (ALM) and SDO strategies are beginning
to gain traction. In the third quarter of 2005, we achieved better performance in the Americas region offsetting continued weakness abroad, particularly in Europe and Japan. We will continue our emphasis on accelerating growth of our ALM enterprise
solutions while at the same time managing maturing product lines, which continue to decline. For example, revenues from our Java IDE product line continue to decline in part due to pricing pressures from open source products and represented only 7%
of our total revenues in the third quarter of 2005, down from 15% in the year-ago quarter. Our service revenues, which include technical support and consulting services for software products, continue to grow sequentially and now represent 42% of
total revenues. Technical support revenues have grown as our base of enterprise-level customers has expanded and our consulting services revenues, which are driven by our Process Optimization Practice, have experienced healthy growth since our
acquisition of TeraQuest in January 2005. Our Process Optimization Practice continues to drive interest in higher-level discussions with enterprise customers regarding our ALM solutions.



The following is a summary of our key financial results for the three and nine months ended September 30, 2005:



| |  |  | Total revenues decreased 13% to $68 million from $78 million for the three months ended September 30, 2005 and decreased 9% to $206 million from $227 million for the nine
months ended September 30, 2005.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Licenses and other revenues decreased 26% to $39 million from $53 million for the three months ended September 30, 2005 and decreased 23% to $121 million from $158 million for
the nine months ended September 30, 2005.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Service revenues increased 16% to $29 million from $25 million for the three months ended September 30, 2005 and increased 23% to $85 million from $69 million for the nine
months ended September 30, 2005.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Gross margins decreased to 79% from 86% for the three months ended September 30, 2005 and decreased to 79% from 86% for the nine months ended September 30, 2005.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Operating expenses decreased 9% to $59 million from $65 million for the three months ended September 30, 2005 and increased 2% to $189 million from $185 million for the nine
months ended September 30, 2005.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We recognized a gain of $4.7 million on the sale of an investment in the nine months ended September 30, 2005.
| | - |  | --------------------------------------------------------------------------------------------------------------



| |  |  | Net loss was $5.3 million for the three months ended September 30, 2005 compared to $160,000 for the three months ended September 30, 2004 and net loss was $19.3 million
for the nine months ended September 30, 2005 compared to net income of $3.4 million for the nine months ended September 30, 2004.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Cash, cash equivalents and short-term investments decreased $32 million to $189 million as of September 30, 2005, from $221 million as of December 31, 2004.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We repurchased 48,000 shares and 5,269,800 shares of our common stock for $308,000 and $35 million during the three and nine months ended September 30, 2005, respectively.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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For a more in-depth discussion of our business, including a discussion of our critical accounting
policies and estimates, please read our Annual Report on Form 10-K for the year ended December 31, 2004 as filed with the SEC on March 25, 2005, as amended pursuant to Form 10-K/A filed with the SEC on March 30, 2005.



Results of Operations



The following table presents our Condensed Consolidated Statements of
Operations data and the related percentage of total revenues for the three and nine months ended September 30, 2005 and 2004 (dollars in thousands):



|                                                                                  |  |                                   |        |   |                                  |     |    |      |   |        |      |  |     |    |  |   |         |   |  |     |    |  |   |         |  |     |  
|--------------------------------------------------------------------------------- |  | --------------------------------- | ------ | - | -------------------------------- | --- | -- | ---- | - | ------ | ---- |  | --- | -- |  | - | ------- | - |  | --- | -- |  | - | ------- |  | --- | -
|                                                                                  |  | Three Months Ending September 30, |        |   | Nine Months Ending September 30, |    
|                                                                                  |  | 2005                              |        |   | 2004                             |     |    | 2005 |   |        | 2004 | 
|License and other revenues                                                        |  | $                                 | 39,236 |   |                                  | 58  | %  |      | $ | 53,063 |      |  | 68  | %  |  | $ | 120,959 |   |  | 59  | %  |  | $ | 158,017 |  | 70  | %
|Service revenues                                                                  |  |                                   | 28,614 |   |                                  | 42  |    |      |   | 24,585 |      |  | 32  |    |  |   | 84,779  |   |  | 41  |    |  |   | 69,016  |  | 30  |  
|                                                                                  |  |                                   |        |   |                                  |     |    |      |   |        |      |  |     |    |  |   |         |   |  |     |    |  |   |         |  |     |  
|Total revenues                                                                    |  |                                   | 67,850 |   |                                  | 100 |    |      |   | 77,648 |      |  | 100 |    |  |   | 205,738 |   |  | 100 |    |  |   | 227,033 |  | 100 |  
|                                                                                  |  |                                   |        |   |                                  |     |    |      |   |        |      |  |     |    |  |   |         |   |  |     |    |  |   |         |  |     |  
|Cost of license and other revenues                                                |  |                                   | 1,515  |   |                                  | 2   |    |      |   | 2,172  |      |  | 3   |    |  |   | 6,390   |   |  | 3   |    |  |   | 6,646   |  | 3   |  
|Cost of service revenues                                                          |  |                                   | 10,125 |   |                                  | 15  |    |      |   | 6,255  |      |  | 8   |    |  |   | 29,084  |   |  | 14  |    |  |   | 18,058  |  | 8   |  
|Amortization of acquired intangibles                                              |  |                                   | 2,517  |   |                                  | 4   |    |      |   | 2,388  |      |  | 3   |    |  |   | 7,550   |   |  | 4   |    |  |   | 7,324   |  | 3   |  
|                                                                                  |  |                                   |        |   |                                  |     |    |      |   |        |      |  |     |    |  |   |         |   |  |     |    |  |   |         |  |     |  
|Cost of revenues                                                                  |  |                                   | 14,157 |   |                                  | 21  |    |      |   | 10,815 |      |  | 14  |    |  |   | 43,024  |   |  | 21  |    |  |   | 32,028  |  | 14  |  
|                                                                                  |  |                                   |        |   |                                  |     |    |      |   |        |      |  |     |    |  |   |         |   |  |     |    |  |   |         |  |     |  
|Gross profit                                                                      |  |                                   | 53,693 |   |                                  | 79  |    |      |   | 66,833 |      |  | 86  |    |  |   | 162,714 |   |  | 79  |    |  |   | 195,005 |  | 86  |  
|                                                                                  |  |                                   |        |   |                                  |     |    |      |   |        |      |  |     |    |  |   |         |   |  |     |    |  |   |         |  |     |  
|Selling, general and administrative expenses                                      |  |                                   | 43,170 |   |                                  | 64  |    |      |   | 42,502 |      |  | 55  |    |  |   | 126,432 |   |  | 62  |    |  |   | 125,296 |  | 55  |  
|Research and development expenses                                                 |  |                                   | 14,277 |   |                                  | 21  |    |      |   | 17,304 |      |  | 22  |    |  |   | 42,975  |   |  | 21  |    |  |   | 51,290  |  | 22  |  
|Restructuring, amortization of other intangibles and acquisition-related expenses |  |                                   | 1,646  |   |                                  | 2   |    |      |   | 5,283  |      |  | 7   |    |  |   | 19,371  |   |  | 9   |    |  |   | 8,236   |  | 4   |  
|                                                                                  |  |                                   |        |   |                                  |     |    |      |   |        |      |  |     |    |  |   |         |   |  |     |    |  |   |         |  |     |  
|Total operating expenses                                                          |  |                                   | 59,093 |   |                                  | 87  |    |      |   | 65,089 |      |  | 84  |    |  |   | 188,778 |   |  | 92  |    |  |   | 184,822 |  | 81  |  
|                                                                                  |  |                                   |        |   |                                  |     |    |      |   |        |      |  |     |    |  |   |         |   |  |     |    |  |   |         |  |     |  
|Operating income (loss)                                                           |  |                                   | (5,400 | ) |                                  | (8  | )  |      |   | 1,744  |      |  | 2   |    |  |   | (26,064 | ) |  | (13 | )  |  |   | 10,183  |  | 5   |  
|Gain on sale of investment                                                        |  |                                   |       |   |                                  | 0   |    |      |   |       |      |  | 0   |    |  |   | 4,680   |   |  | 3   |    |  |   |        |  | 0   |  
|Interest and other income, net                                                    |  |                                   | 1,317  |   |                                  | 2   |    |      |   | 764    |      |  | 1   |    |  |   | 3,824   |   |  | 2   |    |  |   | 787     |  | 0   |  
|                                                                                  |  |                                   |        |   |                                  |     |    |      |   |        |      |  |     |    |  |   |         |   |  |     |    |  |   |         |  |     |  
|Income (loss) before income taxes                                                 |  |                                   | (4,083 | ) |                                  | (6  | )  |      |   | 2,508  |      |  | 3   |    |  |   | (17,560 | ) |  | (8  | )  |  |   | 10,970  |  | 5   |  
|Income tax provision                                                              |  |                                   | 1,185  |   |                                  | 2   |    |      |   | 2,668  |      |  | 3   |    |  |   | 1,760   |   |  | 1   |    |  |   | 7,571   |  | 3   |  
|                                                                                  |  |                                   |        |   |                                  |     |    |      |   |        |      |  |     |    |  |   |         |   |  |     |    |  |   |         |  |     |  
|Net income (loss)                                                                 |  | $                                 | (5,268 | ) |                                  | (8  | )% |      | $ | (160   | )    |  | (0  | )% |  | $ | (19,320 | ) |  | (9  | )% |  | $ | 3,399   |  | 2   | %
|                                                                                  |  |                                   |        |   |                                  |     |    |      |   |        |      |  |     |    |  |   |         |   |  |     |    |  |   |         |  |     |  



Total Revenues



The following table presents our total revenues for
the three and nine months ended September 30, 2005 and 2004 and the absolute dollar and percentage change from the comparable prior year period (dollars in thousands):



|               |  |                                  |        |      |                                 |        |  |   |        |   |  |      |        |      |   |         |  |   |         |  |   |         |   |  |    |   
|-------------- |  | -------------------------------- | ------ | ---- | ------------------------------- | ------ |  | - | ------ | - |  | ---- | ------ | ---- | - | ------- |  | - | ------- |  | - | ------- | - |  | -- | --
|               |  | Three Months Ended September 30, |        |      | Nine Months Ended September 30, |       
|               |  |                                  |        |      |                                 | Change |  |   |        |   |  |      | Change |     
|               |  | 2005                             |        | 2004 |                                 | $      |  |   | %      |   |  | 2005 |        | 2004 |   | $       |  |   | %       | 
|Total revenues |  | $                                | 67,850 |      | $                               | 77,648 |  | $ | (9,798 | ) |  | (13  | )%     |      | $ | 205,738 |  | $ | 227,033 |  | $ | (21,295 | ) |  | (9 | )%



We derive revenues
from licenses of our software and the sale of related services. No single group or customer represented more than 10% of our total revenues in the three or nine months ended September 30, 2005 or 2004.



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Licenses and Other Revenues



The following table presents our licenses and other revenues for the three and nine months ended September 30, 2005 and
2004 and the absolute dollar and percentage change from the comparable prior year period (dollars in thousands):



|                                  |  |                                  |        |   |                                 |   |        |        |  |   |         |   |  |      |    |  |        |         |   |   |   |         |   |  |   |         |   |  |     |   
|--------------------------------- |  | -------------------------------- | ------ | - | ------------------------------- | - | ------ | ------ |  | - | ------- | - |  | ---- | -- |  | ------ | ------- | - | - | - | ------- | - |  | - | ------- | - |  | --- | --
|                                  |  | Three Months Ended September 30, |        |   | Nine Months Ended September 30, |  
|                                  |  |                                  |        |   |                                 |   |        | Change |  |   |         |   |  |      |    |  | Change |        
|                                  |  | 2005                             |        |   | 2004                            |   |        | $      |  |   | %       |   |  | 2005 |    |  | 2004   |         |   | $ |   |         | % | 
|License and other revenues        |  | $                                | 39,236 |   |                                 | $ | 53,063 |        |  | $ | (13,827 | ) |  | (26  | )% |  | $      | 120,959 |   |   | $ | 158,017 |   |  | $ | (37,058 | ) |  | (23 | )%
|As a percentage of total revenues |  |                                  | 58     | % |                                 |   | 68     | %      |  |   |         |   |  |      |    |  |        | 59      | % |   |   | 70      | % |  |   |         |   |  |     |   



Licenses and other
revenues represent amounts for license fees and royalties earned for granting customers the right to use and distribute our software products. Licenses and other revenues have declined in the three and nine-month periods ended September 30,
2005 primarily due to a decrease in revenues from our Java IDE products, which declined $6.8 million and $21.0 million in the three and nine months ended September 30, 2005, respectively, due to the continuing commoditization of Java
development tools and associated pricing pressure from open source products. In addition, while we expected a seasonally slower quarter in Europe, the adoption of our ALM enterprise products has been slower than anticipated in that region.
Throughout 2005, we have also experienced longer sales cycles for transactions that involve larger, multi-product purchases. These larger solution sales often require extensive selling efforts throughout many levels within the customers
organization and are often accompanied by a lengthy approval process. Given the complexity of these enterprise-level deals it has been, and will continue to be, difficult to forecast our success in closing these types of transactions.



While revenue recognition for our software licenses may be affected by
numerous aspects of an arrangement, for the majority of our customer contracts we recognize software license revenue upon shipment of product. Our policies are discussed extensively in the Revenue Recognition section above. As of September 30,
2005, we had on-hand sales orders that would have been recognized as period revenue, had those orders been shipped, totaling approximately $7 million of product licenses.



Service Revenues



The following table presents our service revenues for the three and nine months ended September 30, 2005 and 2004 and the absolute dollar and
percentage change from the comparable prior year period (dollars in thousands):



|                                  |  |                                  |        |   |                                 |   |        |        |  |   |       |  |      |   |  |      |        |   |   |   |        |   |  |   |        |  |    |  
|--------------------------------- |  | -------------------------------- | ------ | - | ------------------------------- | - | ------ | ------ |  | - | ----- |  | ---- | - |  | ---- | ------ | - | - | - | ------ | - |  | - | ------ |  | -- | -
|                                  |  | Three Months Ended September 30, |        |   | Nine Months Ended September 30, |  
|                                  |  |                                  |        |   |                                 |   |        | Change |  |   |       |  |      |   |  |      | Change |  
|                                  |  | 2005                             |        |   | 2004                            |   |        | $      |  | % |       |  | 2005 |   |  | 2004 |        |   | $ |   | %      |  
|Service revenues                  |  | $                                | 28,614 |   |                                 | $ | 24,585 |        |  | $ | 4,029 |  | 16   | % |  | $    | 84,779 |   |   | $ | 69,016 |   |  | $ | 15,763 |  | 23 | %
|As a percentage of total revenues |  |                                  | 42     | % |                                 |   | 32     | %      |  |   |       |  |      |   |  |      | 41     | % |   |   | 30     | % |  |   |        |  |    |  



Service revenues
represent amounts earned for technical support (which includes call support, maintenance and upgrades) and consulting and education services for software products. The increases in service revenues in both the three and nine months ended
September 30, 2005 were primarily due to increases in consulting services revenues and technical support revenues. Consulting services revenues increased $3.0 million and $6.6 million in the three and nine months ended September 30, 2005,
respectively, due to the expansion of our consulting services team with the acquisition of TeraQuest in January 2005 and the formation of our Process Optimization Practice. Technical support revenues increased $1.1 million and $8.8 million in the
three and nine months ended September 30, 2005, respectively, due to our expanding base of enterprise-level customers who have purchased multi-product solutions from us. Our technical support revenues have benefited as we have focused our
selling



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efforts on larger enterprise-level customers, who generally purchase support contracts with their software licenses and tend to renew their support contracts
with a higher frequency.



International Revenues



International revenues represented 55% and 61% of total revenues for the
three months ended September 30, 2005 and 2004, respectively, and were 58% and 60% of total revenues for the nine months ended September 30, 2005 and 2004, respectively. The decrease in the percentage of international revenues was
principally due to a decrease in revenues in Europe, especially in the United Kingdom, where IT spending appears to have softened and the sales of our ALM enterprise products has been slower than expected. Additionally, the nine months ended
September 30, 2004 benefited from a particularly large enterprise deal in the United Kingdom. This decrease in international revenues for the three and nine months ended September 30, 2005 was partially mitigated by the weakening of the
U.S. dollar versus the Euro, United Kingdom Pound Sterling, Japanese Yen and other foreign currencies. The weakening of the U.S. dollar had the effect of increasing international revenues by $421,000 and $3.3 million in the three and nine
months ended September 30, 2005, respectively, over the comparable year-ago periods.



The following table presents our total revenues by country and their percentage change for the three and nine months ended September 30, 2005 and 2004 (dollars in thousands):



|                    |  |                                  |        |      |                                 |          |  |     |      |  |      |         |          |   |         |  |     |   
|------------------- |  | -------------------------------- | ------ | ---- | ------------------------------- | -------- |  | --- | ---- |  | ---- | ------- | -------- | - | ------- |  | --- | --
|                    |  | Three Months Ended September 30, |        |      | Nine Months Ended September 30, |         
|                    |  | 2005                             |        | 2004 |                                 | % Change |  |     | 2005 |  | 2004 |         | % Change |  
|United States       |  | $                                | 30,619 |      | $                               | 30,607   |  | 0   | %    |  | $    | 87,171  |          | $ | 89,729  |  | (3  | )%
|Germany             |  |                                  | 7,001  |      |                                 | 8,863    |  | (21 | )%   |  |      | 21,325  |          |   | 24,139  |  | (12 | )%
|United Kingdom      |  |                                  | 5,599  |      |                                 | 8,728    |  | (36 | )%   |  |      | 17,358  |          |   | 27,630  |  | (37 | )%
|All other countries |  |                                  | 24,631 |      |                                 | 29,450   |  | (16 | )%   |  |      | 79,884  |          |   | 85,535  |  | (7  | )%
|                    |  |                                  |        |      |                                 |          |  |     |      |  |      |         |          |   |         |  |     |   
|Total revenues      |  | $                                | 67,850 |      | $                               | 77,648   |  | (13 | )%   |  | $    | 205,738 |          | $ | 227,033 |  | (9  | )%
|                    |  |                                  |        |      |                                 |          |  |     |      |  |      |         |          |   |         |  |     |   



No other single
country accounted for total revenues greater than 10% of total revenues in the three or nine months ended September 30, 2005 or 2004.



Our international revenues are influenced by fluctuations in foreign currencies and would be harmed if the U.S. dollar were to strengthen against major
foreign currencies, including the Euro, the United Kingdom Pound Sterling and the Japanese Yen.



Regional Revenues



The following table presents our total revenues by region and their percentage change for the three and nine months ended September 30, 2005 and 2004 (dollars in thousands):



|                               |  |                                  |        |      |                                 |          |  |     |      |  |      |         |          |   |         |  |     |   
|------------------------------ |  | -------------------------------- | ------ | ---- | ------------------------------- | -------- |  | --- | ---- |  | ---- | ------- | -------- | - | ------- |  | --- | --
|                               |  | Three Months Ended September 30, |        |      | Nine Months Ended September 30, |         
|                               |  | 2005                             |        | 2004 |                                 | % Change |  |     | 2005 |  | 2004 |         | % Change |  
|Americas                       |  | $                                | 34,961 |      | $                               | 36,104   |  | (3  | )%   |  | $    | 101,357 |          | $ | 103,700 |  | (2  | )%
|Europe, Middle East and Africa |  |                                  | 21,924 |      |                                 | 28,916   |  | (24 | )%   |  |      | 71,930  |          |   | 87,559  |  | (18 | )%
|Asia Pacific                   |  |                                  | 10,965 |      |                                 | 12,628   |  | (13 | )%   |  |      | 32,451  |          |   | 35,774  |  | (9  | )%
|                               |  |                                  |        |      |                                 |          |  |     |      |  |      |         |          |   |         |  |     |   
|Total revenues                 |  | $                                | 67,850 |      | $                               | 77,648   |  | (13 | )%   |  | $    | 205,738 |          | $ | 227,033 |  | (9  | )%
|                               |  |                                  |        |      |                                 |          |  |     |      |  |      |         |          |   |         |  |     |   



Our Americas
operations include activities of our parent company located in the United States as well as subsidiaries and branch offices in Brazil and Canada. Our Europe, Middle East and Africa (EMEA) operations include activities of our subsidiaries
and branch offices in Finland, France, Germany, Italy, Netherlands, Russia,



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Spain, Sweden and the United Kingdom. Our Asia Pacific (APAC) operations include activities of our subsidiaries and branch offices in Australia,
China, Hong Kong, India, Japan, Korea, New Zealand, Singapore and Taiwan.



Americas. Revenues in the Americas region decreased in the three and nine months ended September 30, 2005 due to a decline in license revenues. License revenues declined $3.9 million and $11.3 million in
the three and nine months ended September 30, 2005, respectively, due to the continued weakness of our Java IDE product line. Despite a year-over-year decline, we were pleased with the stronger than expected performance in the Americas region
and believe that our ALM enterprise products are beginning to gain traction. Partially offsetting the decline in license revenues was an increase in service revenues of $2.7 million and $8.9 million in the three and nine months ended
September 30, 2005, respectively. Service revenues increased due to an increase in technical support revenues and an increase in consulting revenues related to the acquisition of TeraQuest. The strength in technical support revenues was
attributable to a shift to larger enterprise customers and our operational focus in selling technical support contracts to new customers and renewing existing customers with lapsing contracts.



EMEA.Revenues in the EMEA region decreased in the three and nine
months ended September 30, 2005 due to a decline in license revenues. License revenues declined $7.8 million and $20.9 million in the three and nine months ended September 30, 2005, respectively. The declines were due to a decrease in
revenues in the United Kingdom, the continued weakness of our Java IDE products, the slower than expected adoption of our ALM enterprise products, and what we believe is a softening in IT spending throughout Europe. Revenues in the United Kingdom
benefited in the year-ago quarter from a large enterprise deal for $8.6 million. Partially offsetting the decline in EMEA license revenues was an increase in service revenues of $818,000 and $5.3 million in the three and nine months ended
September 30, 2005, respectively, primarily due to an increase in technical support revenues. Additionally, the weakening of the U.S. dollar versus the Euro and Pound Sterling in 2005 benefited EMEA revenues by $147,000 and $2.2 million in
the three and nine months ended September 30, 2005, respectively.



APAC. Revenues in the APAC region decreased in the three and nine months ended September 30, 2005 due to a decline in license revenues. License revenues declined $2.1 million and $4.9 million in the three and nine months ended
September 30, 2005, respectively. The decline was primarily due to the continued weakness of our Java IDE product line and a slow rate of adoption of our ALM solutions, particularly in Japan. We recently made efforts to reorganize and provide
additional resources to our sales force in Japan including the hiring of a new president to oversee our operations in Japan in May 2005. We have yet to realize the anticipated benefits from these efforts. Partially offsetting the decline in license
revenues was an increase in service revenues of $486,000 and $1.6 million in the three and nine months ended September 30, 2005, respectively. Service revenues increased primarily due to the strength of technical support revenues as we have
focused on selling technical support contracts. Additionally, the weakening of the U.S. dollar versus the Japanese Yen, South Korean Won and other APAC currencies over the past year benefited APAC revenues by $274,000 and $1.1 million in the three
and nine months ended September 30, 2005, respectively.



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##### Table of Contents

Cost of Revenues



The following table presents cost of revenues for the three and nine months ended September 30, 2005 and 2004 and the absolute dollar and
percentage changes from the comparable prior year period (dollars in thousands):



|                                           |  |                                  |        |   |                                 |   |       |        |  |   |       |   |  |      |    |  |        |        |   |  |   |        |   |  |   |        |   |  |    |   
|------------------------------------------ |  | -------------------------------- | ------ | - | ------------------------------- | - | ----- | ------ |  | - | ----- | - |  | ---- | -- |  | ------ | ------ | - |  | - | ------ | - |  | - | ------ | - |  | -- | --
|                                           |  | Three Months Ended September 30, |        |   | Nine Months Ended September 30, |  
|                                           |  | 2005                             |        |   | 2004                            |   |       | Change |  |   | 2005  |   |  | 2004 |    |  | Change |       
|                                           |  |                                  |        | $ |                                 |   | %     |        |  |   |       | $ |  |      | %  | 
|Cost of license and other revenues         |  | $                                | 1,515  |   |                                 | $ | 2,172 |        |  | $ | (657  | ) |  | (30  | )% |  | $      | 6,390  |   |  | $ | 6,646  |   |  | $ | (256   | ) |  | (4 | )%
|As a percent of license and other revenues |  |                                  | 4      | % |                                 |   | 4     | %      |  |   |       |   |  |      |    |  |        | 5      | % |  |   | 4      | % |  |   |        |   |  |    |   
|Cost of service revenues                   |  | $                                | 10,125 |   |                                 | $ | 6,255 |        |  | $ | 3,870 |   |  | 62   | %  |  | $      | 29,084 |   |  | $ | 18,058 |   |  | $ | 11,026 |   |  | 61 | % 
|As a percent of service revenues           |  |                                  | 35     | % |                                 |   | 25    | %      |  |   |       |   |  |      |    |  |        | 34     | % |  |   | 26     | % |  |   |        |   |  |    |   
|Amortization of acquired intangibles       |  | $                                | 2,517  |   |                                 | $ | 2,388 |        |  | $ | 129   |   |  | 5    | %  |  | $      | 7,550  |   |  | $ | 7,324  |   |  | $ | 226    |   |  | 3  | % 
|As a percent of total revenues             |  |                                  | 4      | % |                                 |   | 3     | %      |  |   |       |   |  |      |    |  |        | 4      | % |  |   | 3      | % |  |   |        |   |  |    |   



Cost of Licenses and Other
Revenues



Cost of licenses and other revenues consists
primarily of production costs, product packaging costs and royalties paid to third party vendors. License and other gross margins were 96% in both the three months ended September 30, 2005 and 2004, and were 95% and 96% in the nine months ended
September 30, 2005 and 2004, respectively. Cost of licenses and other revenues tend to fluctuate with changes in product mix. The level of royalty costs in future periods will depend upon our ability to obtain favorable licensing terms for our
products that include third party technology and the extent to which we include such third party technology in our product offerings.



Cost of Service Revenues



Cost of service revenues consists primarily of salaries and benefits, third party contractor costs and related expenses incurred in providing technical
support, maintenance, upgrades, and consulting and education services. Service gross margins were 65% and 75% in the three months ended September 30, 2005 and 2004, respectively, and were 66% and 74% in the nine months ended September 30,
2005 and 2004, respectively. The decrease in gross margins was primarily attributable to an increase in consulting costs as a result of our increased consulting headcount. On an absolute dollar basis, cost of service revenues increased in the three
and nine months ended September 30, 2005 due to the expansion of our consulting services team.



Amortization of Acquired Intangibles



Amortization of acquired intangibles consists of the amortization of purchased technology and maintenance contracts from acquisitions. Amortization of acquired intangibles increased in the three and nine months ended
September 30, 2005 due to amortization expense associated with the acquired intangible customer list related to the acquisition of TeraQuest, which added $123,000 and $369,000 of amortization expense, respectively.



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##### Table of Contents

Operating Expenses



Selling, General and Administrative Expenses



The following table presents our selling, general and administrative expenses for the three and nine months ended
September 30, 2005 and 2004 and the absolute dollar and percentage change from the comparable prior year period (dollars in thousands):



|                                             |  |                                  |        |   |                                 |   |        |        |  |   |     |  |      |   |  |      |         |   |   |   |         |   |  |   |       |  |   |  
|-------------------------------------------- |  | -------------------------------- | ------ | - | ------------------------------- | - | ------ | ------ |  | - | --- |  | ---- | - |  | ---- | ------- | - | - | - | ------- | - |  | - | ----- |  | - | -
|                                             |  | Three Months Ended September 30, |        |   | Nine Months Ended September 30, |  
|                                             |  |                                  |        |   |                                 |   |        | Change |  |   |     |  |      |   |  |      | Change  |  
|                                             |  | 2005                             |        |   | 2004                            |   |        | $      |  | % |     |  | 2005 |   |  | 2004 |         |   | $ |   | %       |  
|Selling, general and administrative expenses |  | $                                | 43,170 |   |                                 | $ | 42,502 |        |  | $ | 668 |  | 2    | % |  | $    | 126,432 |   |   | $ | 125,296 |   |  | $ | 1,136 |  | 1 | %
|As a percent of total revenues               |  |                                  | 64     | % |                                 |   | 55     | %      |  |   |     |  |      |   |  |      | 62      | % |   |   | 55      | % |  |   |       |  |   |  



The increase in
selling, general and administrative expenses in absolute dollars and as a percentage of revenues for the three months ended September 30, 2005 was primarily attributable to an increase in salary, commission and related fringe benefit expenses
of $1.3 million and bad debt expenses of $855,000. Salary, commission and fringe benefit expenses increased primarily due to an increase in higher level employees compared to the year-ago quarter and due to severance compensation paid to our former
chief executive officer in the third quarter of 2005. The reversal of certain allowances for bad debt expense in the year-ago quarter had the effect of reducing bad debt expenses in that quarter as compared to the current quarter. Partially
offsetting these increases was a decrease in incentive compensation expense of $820,000, as we did not accrue a portion of our incentive compensation because it is not expected to be paid. Additionally, marketing expenses decreased $775,000 as we
scaled back certain marketing programs, and facilities related expenses decreased $316,000 primarily due to vacating a portion of an underutilized building located in Scotts Valley, California prior to the three months ended September 30, 2005.



The increase in selling, general and administrative expenses
in absolute dollars and as a percentage of revenues for the nine months ended September 30, 2005 was primarily attributable to an increase in salary, commission and fringe benefit expenses of $3.7 million and due to the severance compensation
paid to our former chief executive officer. In addition, the reversal of certain allowances for bad debt in the year-ago period had the effect of reducing bad debt expenses in that period by approximately $1.3 million as compared to the current
period. Partially offsetting these increases was a decrease in incentive compensation expense of $2.9 million, as we did not pay incentive compensation in the first two quarters of 2005 because we did not meet our financial objectives in those
periods. Additionally, marketing expenses decreased $1.0 million as we reduced our discretionary program spending due to lower than anticipated revenues, and facility related expenses decreased $327,000 primarily due to vacating a portion of the
facility located in Scotts Valley, California.



Research and Development
Expenses



The following table presents our research
and development expenses for the three and nine months ended September 30, 2005 and 2004 and the absolute dollar and percentage change from the comparable prior year period (dollars in thousands):



|                                  |  |                                  |        |   |                                 |   |        |        |  |   |        |   |  |      |    |  |        |        |   |   |   |        |   |  |   |        |   |  |     |   
|--------------------------------- |  | -------------------------------- | ------ | - | ------------------------------- | - | ------ | ------ |  | - | ------ | - |  | ---- | -- |  | ------ | ------ | - | - | - | ------ | - |  | - | ------ | - |  | --- | --
|                                  |  | Three Months Ended September 30, |        |   | Nine Months Ended September 30, |  
|                                  |  |                                  |        |   |                                 |   |        | Change |  |   |        |   |  |      |    |  | Change |       
|                                  |  | 2005                             |        |   | 2004                            |   |        | $      |  |   | %      |   |  | 2005 |    |  | 2004   |        |   | $ |   |        | % | 
|Research and development expenses |  | $                                | 14,277 |   |                                 | $ | 17,304 |        |  | $ | (3,027 | ) |  | (17  | )% |  | $      | 42,975 |   |   | $ | 51,290 |   |  | $ | (8,315 | ) |  | (16 | )%
|As a percent of total revenues    |  |                                  | 21     | % |                                 |   | 22     | %      |  |   |        |   |  |      |    |  |        | 21     | % |   |   | 22     | % |  |   |        |   |  |     |   



The decrease in
research and development expenses in absolute dollars and as a percentage of revenues in the three and nine months ended September 30, 2005 was primarily attributable to a decrease in salary and



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related fringe benefits expenses as we have reduced spending on certain maturing product lines. Salary and fringe benefits expenses decreased $1.5 million
and $4.1 million in the three and nine months ended September 30, 2005, respectively, due to a decrease in our average research and development headcount. We had approximately 43 fewer research and development employees during 2005 compared to
2004. Additionally, incentive compensation expense decreased $564,000 in the three months ended September 30, 2005, as we did not accrue a portion of our incentive compensation because it is not expected to be paid. Incentive compensation
expense decreased $3.3 million in the nine months ended September 30, 2005, primarily due to not meeting our financial objectives in the first half of 2005.



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



The following table summarizes our restructuring, amortization of other
intangibles and acquisition-related expenses for the three and nine months ended September 30, 2005 and 2004 and the absolute dollar and percentage change from the comparable prior year period (dollars in thousands):



|                                  |  |                                  |       |   |                                 |   |       |        |  |   |        |   |  |      |    |  |        |        |   |  |   |       |   |  |   |        |   |  |     |   
|--------------------------------- |  | -------------------------------- | ----- | - | ------------------------------- | - | ----- | ------ |  | - | ------ | - |  | ---- | -- |  | ------ | ------ | - |  | - | ----- | - |  | - | ------ | - |  | --- | --
|                                  |  | Three Months Ended September 30, |       |   | Nine Months Ended September 30, |  
|                                  |  | 2005                             |       |   | 2004                            |   |       | Change |  |   | 2005   |   |  | 2004 |    |  | Change |       
|                                  |  |                                  |       | $ |                                 |   | %     |        |  |   |        | $ |  |      | %  | 
|Restructuring                     |  | $                                | 725   |   |                                 | $ | 3,542 |        |  | $ | (2,817 | ) |  | (8   | )% |  | $      | 16,645 |   |  | $ | 2,865 |   |  | $ | 13,780 |   |  | 481 | % 
|Amortization of other intangibles |  |                                  | 692   |   |                                 |   | 1,163 |        |  |   | (471   | ) |  | (40  | )% |  |        | 2,126  |   |  |   | 3,517 |   |  |   | (1,391 | ) |  | (40 | )%
|Acquisition-related expenses      |  |                                  | 229   |   |                                 |   | 578   |        |  |   | (349   | ) |  | (60  | )% |  |        | 600    |   |  |   | 1,854 |   |  |   | (1,254 | ) |  | (68 | )%
|                                  |  |                                  |       |   |                                 |   |       |        |  |   |        |   |  |      |    |  |        |        |   |  |   |       |   |  |   |        |   |  |     |   
|Total                             |  | $                                | 1,646 |   |                                 | $ | 5,283 |        |  | $ | (3,637 | ) |  | (6   | )% |  | $      | 19,371 |   |  | $ | 8,236 |   |  | $ | 11,135 |   |  | 135 | % 
|                                  |  |                                  |       |   |                                 |   |       |        |  |   |        |   |  |      |    |  |        |        |   |  |   |       |   |  |   |        |   |  |     |   
|As a percent of total revenues    |  |                                  | 2     | % |                                 |   | 7     | %      |  |   |        |   |  |      |    |  |        | 9      | % |  |   | 4     | % |  |   |        |   |  |     |   



Restructuring.
Restructuring expenses recorded in the three months ended September 30, 2005 totaled $725,000 and included $839,000 for severance and benefits partially offset by a facility restructuring expense reversal of $114,000. Severance and benefits
expenses related to headcount reductions of 27 employees, of which 21 were in research and development and 6 were in selling, general and administrative. The facility restructuring reversal was an adjustment to the facility restructuring expense
previously recorded for vacating a portion of a building located in Scotts Valley, California.



Restructuring expenses recorded in the nine months ended September 30, 2005 totaled $16.6 million and included $654,000 for our September 2005 restructuring, $15.7 million for our June 2005 restructuring and
$306,000 for our March 2005 restructuring. Our June 2005 restructuring included facility costs of $12.8 million related to vacating a portion of an underutilized building located in Scotts Valley, California and $2.9 million for non-recurring
severance and benefits expenses resulting from the elimination of 51 positions, including 44 in selling, general and administrative and 7 in research and development. Our March 2005 restructuring included $306,000 for severance and benefits
resulting from the termination of an employee in selling, general and administrative.



Substantially all of our 2005 restructuring expenses will require the outlay of cash. The timing of lease payments relating to our Scotts Valley, California facility will remain unchanged by our restructuring actions
and are expected to run through March 2010. Substantially all amounts related to severance and benefits are expected to be paid prior to December 31, 2005.



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The following table summarizes our restructuring activity for the nine months ended September 30,
2005 (in thousands):



|                              |  |                        |        |   |            |   |        |       |  |   |       |   |  |   |        |  
|----------------------------- |  | ---------------------- | ------ | - | ---------- | - | ------ | ----- |  | - | ----- | - |  | - | ------ | -
|                              |  | Severance and Benefits |        |   | Facilities |   |        | Other |  |   | Total |  
|Accrual at December 31, 2004  |  | $                      | 418    |   |            | $ | 3,190  |       |  | $ | 308   |   |  | $ | 3,916  |  
|March 2005 restructuring      |  |                        | 306    |   |            |   |       |       |  |   |      |   |  |   | 306    |  
|June 2005 restructuring       |  |                        | 2,831  |   |            |   | 12,818 |       |  |   | 38    |   |  |   | 15,687 |  
|September 2005 restructuring  |  |                        | 839    |   |            |   | (114   | )     |  |   |      |   |  |   | 725    |  
|Cash payments and write-offs  |  |                        | (3,598 | ) |            |   | (1,881 | )     |  |   | (38   | ) |  |   | (5,517 | )
|                              |  |                        |        |   |            |   |        |       |  |   |       |   |  |   |        |  
|Accrual at September 30, 2005 |  | $                      | 796    |   |            | $ | 14,013 |       |  | $ | 308   |   |  | $ | 15,117 |  
|                              |  |                        |        |   |            |   |        |       |  |   |       |   |  |   |        |  



At September 30,
2005, we had $10.5 million in our long-term restructuring accrual of which $9.5 million was related to the lease obligation for excess capacity at the Scotts Valley, California facility, $898,000 was related to the lease obligation for excess
capacity at a facility in Raleigh, North Carolina and $131,000 was related to the lease obligation for excess capacity at a facility in Sydney, Australia.



Amortization of other intangibles. In the three months ended September 30, 2005, we incurred $692,000 of amortization expense related to
intangible trade names and non-compete agreements as a result of our acquisitions compared to $1.2 million in the year-ago quarter. We incurred $2.1 million of amortization expense in the nine months ended September 30, 2005 compared to $3.5
million in the year-ago period due to the completion of the amortization of the TogetherSoft non-compete intangible asset.



Acquisition-related expenses. In the three and nine months ended September 30, 2005, we recorded $229,000 and $600,000, respectively, in
acquisition-related expenses, which was primarily contingent consideration payable under the terms of the TeraQuest acquisition agreement. Acquisition-related expenses in the year-ago three and nine month periods primarily consisted of contingent
consideration payable under the terms of the VMGear acquisition agreement of $442,000 and $1.4 million, respectively.



Gain on Sale of Investment



In the nine months ended September 30, 2005 we recognized a gain of $4.7 million on the sale of an equity investment in a privately held company.



Interest and Other Income, Net



The following table presents our interest and other income, net for the
three and nine months ended September 30, 2005 and 2004 and the absolute dollar and percentage change from the comparable prior year period (dollars in thousands):



|                               |  |                                  |       |   |                                 |   |     |        |  |   |      |  |    |      |  |   |        |   |  |   |     |   |  |   |       |  |     |  
|------------------------------ |  | -------------------------------- | ----- | - | ------------------------------- | - | --- | ------ |  | - | ---- |  | -- | ---- |  | - | ------ | - |  | - | --- | - |  | - | ----- |  | --- | -
|                               |  | Three Months Ended September 30, |       |   | Nine Months Ended September 30, |  
|                               |  | 2005                             |       |   | 2004                            |   |     | Change |  |   | 2005 |  |    | 2004 |  |   | Change |  
|                               |  |                                  |       | $ |                                 | % |     |        |  |   | $    |  | %  |     
|Interest and other income, net |  | $                                | 1,317 |   |                                 | $ | 764 |        |  | $ | 553  |  | 72 | %    |  | $ | 3,824  |   |  | $ | 787 |   |  | $ | 3,037 |  | 386 | %
|As a percent of net revenues   |  |                                  | 2     | % |                                 |   | 1   | %      |  |   |      |  |    |      |  |   | 2      | % |  |   | 0   | % |  |   |       |  |     |  



The increase in
interest and other income, net during the three and nine months ended September 30, 2005 was primarily attributable to higher yields earned on our invested capital, which resulted in an increase in interest income during 2005, and a reduction
in realized foreign currency losses due to the effectiveness of our foreign currency risk management program. Fluctuations in the Euro versus the U.S. dollar has accounted for the



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majority of the losses in foreign currency in the recent past. The amount of foreign currency gains or losses we realize is influenced by fluctuations in the
U.S. dollar versus the foreign currencies we conduct business in with respect to our short-term inter-company balances with our international subsidiaries, along with other transactional activities conducted in foreign currencies.



Income Taxes



The following table presents our income taxes for the three and nine months ended September 30, 2005 and 2004 and the
absolute dollar and percentage change from the comparable prior year period (dollars in thousands):



|                             |  |                                  |       |   |                                 |   |       |        |  |   |        |   |  |      |    |  |        |       |   |  |   |       |   |  |   |        |   |  |     |   
|---------------------------- |  | -------------------------------- | ----- | - | ------------------------------- | - | ----- | ------ |  | - | ------ | - |  | ---- | -- |  | ------ | ----- | - |  | - | ----- | - |  | - | ------ | - |  | --- | --
|                             |  | Three Months Ended September 30, |       |   | Nine Months Ended September 30, |  
|                             |  | 2005                             |       |   | 2004                            |   |       | Change |  |   | 2005   |   |  | 2004 |    |  | Change |      
|                             |  |                                  |       | $ |                                 |   | %     |        |  |   |        | $ |  |      | %  | 
|Income tax provision         |  | $                                | 1,185 |   |                                 | $ | 2,668 |        |  | $ | (1,483 | ) |  | (56  | )% |  | $      | 1,760 |   |  | $ | 7,571 |   |  | $ | (5,811 | ) |  | (77 | )%
|As a percent of net revenues |  |                                  | 2     | % |                                 |   | 3     | %      |  |   |        |   |  |      |    |  |        | 1     | % |  |   | 3     | % |  |   |        |   |  |     |   



The decrease in taxes
for the three months ended September 30, 2005 as compared to the year-ago quarter was primarily attributable to a decrease in the profitability of our foreign operations. The decrease in taxes for the nine months ended September 30, 2005
as compared to the year-ago period was primarily due to a decrease in the profitability of our foreign operations and the reversal of certain tax liabilities. Our income tax provision is based on our operating results for the three and nine months
ended September 30, 2005 and on foreign income withholding taxes actually incurred.



The effective tax rates for the three and nine months ended September 30, 2005 and 2004 differ from statutory tax rates principally because we did not fully benefit from the operating losses we incurred in the
United States and we incurred income tax in a number of foreign jurisdictions. In the three and nine months ended September 30, 2005, we also recorded a $300,000 tax expense relating to the non-permanently reinvested earnings of a foreign
subsidiary. We provide U.S. income taxes on the earnings of our foreign subsidiaries unless those earnings are considered permanently reinvested. At September 30, 2005, $8.7 million of earnings from our subsidiary in Japan were not considered
permanently reinvested, and were subsequently distributed to the U.S. parent in the form of a dividend. Additionally, we took a $730,000 benefit for the closure of a foreign tax audit and a $540,000 benefit for the refund of a foreign tax payment
during the nine months ended September 30, 2005.



Liquidity and
Capital Resources



Cash and cash equivalents and
short-term investments. Cash, cash equivalents and short-term investments were $189.1 million at September 30, 2005, a decrease of $32.1 million from a balance of $221.2 million at December 31, 2004. The decrease in cash and cash
equivalents and short-term investments was principally due to the purchase of $35.1 million of treasury stock under our stock repurchase programs during the nine months ended September 30, 2005.



Liabilities and leases. As of September 30, 2005, we had
long-term liabilities of $14.9 million, which consisted of $10.5 million of long-term restructuring accruals and $4.4 million of long-term leases. We lease certain office space and facilities and certain furniture and equipment under various
operating leases.



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Our remaining operating lease terms extend through April 30, 2016 and as of September 30, 2005
future minimum lease payments under noncancelable operating leases were as follows, (in thousands):



|                              |  |                 |       |      |   |        |  |      |       |      |   |            |  |       |       |  |   |       |  |   |       
|----------------------------- |  | --------------- | ----- | ---- | - | ------ |  | ---- | ----- | ---- | - | ---------- |  | ----- | ----- |  | - | ----- |  | - | ------
|                              |  | 2005 (3 months) |       | 2006 |   | 2007   |  | 2008 |       | 2009 |   | Thereafter |  | Total
|Operating leases              |  | $               | 2,702 |      | $ | 7,336  |  | $    | 5,876 |      | $ | 3,087      |  | $     | 2,895 |  | $ | 4,929 |  | $ | 26,825
|Restructured operating leases |  |                 | 935   |      |   | 3,753  |  |      | 3,294 |      |   | 2,946      |  |       | 2,585 |  |   | 646   |  |   | 14,159
|                              |  |                 |       |      |   |        |  |      |       |      |   |            |  |       |       |  |   |       |  |   |       
|Total commitments             |  | $               | 3,637 |      | $ | 11,089 |  | $    | 9,170 |      | $ | 6,033      |  | $     | 5,480 |  | $ | 5,575 |  | $ | 40,984
|                              |  |                 |       |      |   |        |  |      |       |      |   |            |  |       |       |  |   |       |  |   |       



The restructured
operating leases above represent total lease commitments that are not associated with continuing operations. In addition, in December 2003, we entered into a five-year lease for a facility in Tokyo, Japan, which is classified as a capital lease in
accordance with SFAS 13 Accounting for Leases. This capital lease is not included in the operating lease table presented above.



Net cash provided by operating activities. Net cash provided by operating activities during the nine months ended September 30, 2005 was
$9.2 million, comprised of net working capital sources of $20.0 million plus adjustments for depreciation and amortization expenses of $13.2 million, partially offset by a net loss of $19.3 million and an adjustment of $4.7 million for the gain
from the sale of an equity investment in a privately held company. Working capital sources of cash included a decrease in accounts receivable and increases in short and long-term restructuring accruals and deferred revenues. The decrease in accounts
receivable is due to strong collections in Europe and a decline in overall license revenues. Short and long-term restructuring accruals increased primarily due to our June and September 2005 restructuring activities. Deferred revenues increased due
to an increase in support contracts bookings, whose revenues are generally recognized over a twelve month period. Working capital uses of cash included a decrease in accounts payable and accrued expenses due to the timing and magnitude of payments
made to our vendors.



Net cash provided by operating activities
for the nine months ended September 30, 2004 was $20.2 million, consisting of $3.4 million of net income plus adjustments of $16.5 million for depreciation and amortization expenses and net working capital sources of cash of $300,000. Working
capital sources of cash included increases in income taxes payable and deferred revenues. Income taxes payable increased primarily due to an increase in income before taxes in 2004 and deferred revenues increased due to an increase in support
contract bookings. Working capital uses of cash included decreases in accounts payable and accrued expenses and short and long-term restructuring accruals. The decrease in accounts payable and accrued liabilities was due to the timing and magnitude
of payments made to our vendors. Short and long-term restructuring accruals decreased due to payments made on vacated facilities.



Net cash provided by investing activities. Net cash provided by investing activities during the nine months ended September 30, 2005 was $12.3
million, including $17.8 million provided by the sales of short-term investments, net of purchases, and $4.7 million in proceeds from the sale of an equity investment in a privately held company. Partially offsetting these sources was $4.4 million
used in our acquisition of TeraQuest, net of cash acquired. Refer to Note 4 of Notes to Condensed Consolidated Financial Statements for further discussion of this acquisition. Additionally, we used $5.8 million for purchases of property and
equipment.



Net cash used in investing activities for the nine
months ended September 30, 2004 was $8.2 million, including $6.0 million used in the net purchases of short-term investments and $2.2 million used for purchases of property, equipment and intangible developed technology assets.



In October 2005, we used approximately $7.5 million of cash to purchase
Legadero Software, Inc. Refer to Note 12 of Notes to Condensed Consolidated Financial Statements for further discussion of this acquisition. We may utilize cash resources to fund additional acquisitions or investments in other businesses,
technologies or product lines.



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Net cash used in financing activities. Net cash used in financing activities during the nine
months ended September 30, 2005 was $31.3 million and consisted primarily of $35.2 million used to purchase our common shares under our stock repurchase programs, partially offset by $3.9 million received for the issuance of shares of our
common stock from the exercise of stock options and from the purchase of shares by employees under our employee stock purchase plan.



Net cash used in financing activities was $10.9 million during the nine months ended September 30, 2004 and consisted of $18.3 million used to
purchase our common shares under our stock repurchase programs, partially offset by $7.4 million received for the issuance of shares of our common stock from the exercise of stock options and from the purchase of shares by employees under our
employee stock purchase plan.



Currency. Although
we utilize foreign currency forward exchange contracts to reduce our foreign currency exchange rate risk, the strengthening of the U.S. dollar against the Euro, the United Kingdom Pound Sterling, the Australian and Singapore dollars and the
Japanese Yen could 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.
Refer to Item 3. Quantitative and Qualitative Disclosures About Market Risk for additional discussion of foreign currency risk.



Off-Balance Sheet Arrangements. We do not participate in transactions that generate relationships with unconsolidated entities or financial
partnerships, such as entities often referred to as structured finance, variable interest or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or
limited purposes. As of September 30, 2005, we were not involved in any unconsolidated transactions.



Although, we believe that our available cash and cash equivalents 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 require additional funds for either operating or strategic purposes and may seek to raise the additional funds through public or private debt or equity financings. If we ever need to
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.



Item 4. Controls and Procedures



CEO and CFO Certifications



Included as
exhibits to this Quarterly Report on Form 10-Q/A are Certifications of the Chief Executive Officer and the Chief Financial Officer. The first form of certification is required in accordance with Rule 13a-14(a) of the Securities Exchange
Act of 1934, as amended (the Securities Exchange Act). This section of the Quarterly Report contains the information concerning the controls evaluation referred to in Rule 13a-14(a) Certifications and this information should be read in
conjunction with the Rule 13a-14(a) Certifications for a more complete understanding of the topics presented.



Evaluation of Our Disclosure Controls and Procedures



Disclosure controls and procedures are those controls and procedures designed to ensure that information required to be disclosed in our reports filed
under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms, and such information is accumulated and communicated to our management, including the Chief Executive Officer
and Chief Financial Officer, to allow timely decisions regarding required disclosure.



As required by Rule 13a-15(b) under the Exchange Act, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of



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the period covered by this report. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls
and procedures were effective at the reasonable assurance level as of September 30, 2005, as previously reported in our Quarterly Report on Form 10-Q for the period filed with the SEC on November 8, 2005. Subsequent to this determination, our Chief
Executive Officer and Chief Financial Officer concluded that, due to the material weaknesses described below, our disclosure controls and procedures were not effective at the reasonable assurance level as of September 30, 2005.



Managements Report on Internal Control Over Financial Reporting



Our management is responsible for establishing and
maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting is a process designed by, or under the supervision of, our
Chief Executive Officer and Chief Financial Officer, and implemented by our Board of Directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with accounting principles generally accepted in the United States (GAAP). Internal control over financial reporting includes those policies and procedures that:



| |  |  | pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and dispositions of our assets;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures
are being made only in accordance with authorizations of our management and directors; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the
financial statements.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Because of their inherent
limitations, internal control over financial reporting may not prevent or detect misstatements or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the
control system are met. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.



Our management, under the
supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, has assessed the effectiveness of our internal control over financial reporting as of December 31, 2005 based on the criteria established in
Internal Control  Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In connection with managements assessment of internal control over financial reporting as of December
31, 2005, management identified material weaknesses insofar as we did not maintain effective controls over third-party contractor invoices and contracts and we did not maintain an effective control environment based on the criteria established in
the COSO framework with respect to senior managements role in promoting compliance with policies and procedures and the prevention or detection of the override of our controls. A material weakness is a control deficiency, or combination of
control deficiencies, that results in a more than remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. See Item 9A, Controls and Procedures, in our Annual Report on
Form 10-K filed with the SEC on May 2, 2006 for a discussion of managements assessment of the effectiveness of our internal control over financial reporting as of December 31, 2005.



Specifically, with respect to the quarter ended September 30, 2005, management determined that effective controls were not
in place in our services organization to ensure that invoices from three third-party contractors were completely and accurately recorded. In addition, effective controls were not in place over the authorization of work performed by a third-party
contractor. As a result of the control deficiency, an employee was able to override controls and have contractor invoices sent directly to the services organization and, further, failed to



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forward those invoices to the accounts payable department in a timely fashion. As a consequence, these invoices were not reflected in our financial
statements for the three and nine month periods ended September 30, 2005, and our cost of service revenue was understated. This control deficiency resulted in the restatement of our interim consolidated financial statements for the quarter
ended September 30, 2005 to increase cost of service revenues and related accruals by $446,000. Additionally, this control deficiency could result in a misstatement of third-party contractor costs, revenue and deferred revenue that would result
in a material misstatement to our annual or interim consolidated financial statements that would not be prevented or detected. Accordingly, management has determined that this control deficiency constitutes a material weakness.



Material Weakness Remediation



We assign a high priority to the improvement of our internal control over
financial reporting. We currently expect to implement new training courses for senior personnel throughout the company attended by our Chief Executive Officer. In addition, we intend to institute procedures that will require that third-party
contractor hours be tracked in a separate system and reconciled with the time recorded on invoices received. We also intend to require new certifications of our senior personnel concerning invoicing, billing and customer commitments. We intend to
finalize and implement these measures at the earliest practicable date.



Based on the procedures we performed in connection with the preparation of this Quarterly Report on Form 10-Q/A, management believes that the financial statements included in this Quarterly Report on Form 10-Q/A fairly present in all
material respects our financial condition, results of operations and cash flows in accordance with GAAP for the periods presented.



Changes in Internal Control Over Financial Reporting



Other than the events giving rise to the material weaknesses, as described above, there have been no changes in our internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fourth quarter ended September 30, 2005 which our management concluded materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.



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PART II



Item 6. Exhibits



(a) Exhibits



|               |                        |                                                                                                                                                   |      |                           |      |                |        |  |  |  
|-------------- | ---------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------- | ---- | ------------------------- | ---- | -------------- | ------ |  |  | -
|Exhibit Number |                        |                                                                                                                                                   |      | Incorporated by Reference |      | Filed Herewith
|               | Description of Exhibit |                                                                                                                                                   | Form |                           | Date |                | Number | 
|31.1           |                        | Certification of Tod Nielsen, Chief Executive Officer of Borland Software Corporation, pursuant to Rule 13a-14(a).                                |      |                           |      |                |        |  |  | X
|               |                        |                                                                                                                                                   |      |                           |     
|31.2           |                        | Certification of Kenneth R. Hahn, Chief Financial Officer of Borland Software Corporation, pursuant to Rule 13a-14(a).                            |      |                           |      |                |        |  |  | X
|               |                        |                                                                                                                                                   |      |                           |     
|32.1+          |                        | Certification of Tod Nielsen, Chief Executive Officer of Borland Software Corporation, pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350.     |      |                           |      |                |        |  |  | X
|               |                        |                                                                                                                                                   |      |                           |     
|32.2+          |                        | Certification of Kenneth R. Hahn, Chief Financial Officer of Borland Software Corporation, pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350. |      |                           |      |                |        |  |  | X

---

|+ | The certifications attached as Exhibit 32.1 and Exhibit 32.2 that accompany this Quarterly Report on Form 10-Q/A are not deemed filed with the Securities and Exchange Commission and
are not to be incorporated by reference into any filing of Borland Software Corporation under the Securities Act of 1933 or the Securities Exchange Act of 1934 whether made before or after the date of this Form 10 Q/A, regardless of any general
incorporation language contained in such filing.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

SIGNATURE



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 on the 2nd day of May 2006.



BORLAND SOFTWARE CORPORATION(Registrant)/s/ KENNETH R. HAHNKenneth R. HahnSenior Vice President and Chief Financial Officer(Principal Financial Officer and Duly Authorized Officer)




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##### Table of Contents

EXHIBIT INDEX



|               |                        |                                                                                                                                                   |      |                           |      |                |        |  |  |  
|-------------- | ---------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------- | ---- | ------------------------- | ---- | -------------- | ------ |  |  | -
|Exhibit Number |                        |                                                                                                                                                   |      | Incorporated by Reference |      | Filed Herewith
|               | Description of Exhibit |                                                                                                                                                   | Form |                           | Date |                | Number | 
|31.1           |                        | Certification of Tod Neilsen, Chief Executive Officer of Borland Software Corporation, pursuant to Rule 13a-14(a).                                |      |                           |      |                |        |  |  | X
|               |                        |                                                                                                                                                   |      |                           |     
|31.2           |                        | Certification of Kenneth R. Hahn, Chief Financial Officer of Borland Software Corporation, pursuant to Rule 13a-14(a).                            |      |                           |      |                |        |  |  | X
|               |                        |                                                                                                                                                   |      |                           |     
|32.1+          |                        | Certification of Tod Neilsen, Chief Executive Officer of Borland Software Corporation, pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350.     |      |                           |      |                |        |  |  | X
|               |                        |                                                                                                                                                   |      |                           |     
|32.2+          |                        | Certification of Kenneth R. Hahn, Chief Financial Officer of Borland Software Corporation, pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350. |      |                           |      |                |        |  |  | X

---

|+ | The certifications attached as Exhibit 32.1 and Exhibit 32.2 that accompany this Quarterly Report on Form 10-Q/A are not deemed filed with the Securities and Exchange Commission and
are not to be incorporated by reference into any filing of Borland Software Corporation under the Securities Act of 1933 or the Securities Exchange Act of 1934 whether made before or after the date of this Form 10 Q/A, regardless of any general
incorporation language contained in such filing.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



39