---

SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549

---

# FORM 10-Q

---

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

For the quarterly period ended September 30, 2002

OR

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

For the transition period from
____________ to ____________

Commission File Number 0-16096

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

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

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

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

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

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

The number of shares of common stock
outstanding as of October 31, 2002, the most recent practicable date prior to the filing of this report,
was 71,289,373.

---

INDEX

|        |                                                                                                                                 |  | PAGE
|------- | ------------------------------------------------------------------------------------------------------------------------------- |  | ----
|        |                                                                                                                                 |  |     
|PART I  | FINANCIAL INFORMATION                                                                                                           |  |     
|        |                                                                                                                                 |  |     
|Item 1. | Financial Statements                                                                                                            |  | 1   
|        |                                                                                                                                 |  |     
|        | Condensed Consolidated Balance Sheets at September 30, 2002 and December 31, 2001                                               |  | 1   
|        |                                                                                                                                 |  |     
|        | Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2002 and 2001                 |  | 2   
|        |                                                                                                                                 |  |     
|        | Condensed Consolidated Statements of Other Comprehensive Income for the three and nine months ended September 30, 2002 and 2001 |  | 3   
|        |                                                                                                                                 |  |     
|        | Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2002 and 2001                           |  | 4   
|        |                                                                                                                                 |  |     
|        | Notes to Condensed Consolidated Financial Statements                                                                            |  | 5   
|        |                                                                                                                                 |  |     
|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations                                           |  | 10  
|        |                                                                                                                                 |  |     
|Item 3. | Quantitative and Qualitative Disclosures About Market Risk                                                                      |  | 37  
|        |                                                                                                                                 |  |     
|Item 4. | Controls and Procedures                                                                                                         |  | 39  
|        |                                                                                                                                 |  |     
|        |                                                                                                                                 |  |     
|PART II | OTHER INFORMATION                                                                                                               |  |     
|        |                                                                                                                                 |  |     
|Item 1. | Legal Proceedings                                                                                                               |  | 40  
|        |                                                                                                                                 |  |     
|Item 5. | Other Information                                                                                                               |  | 40  
|        |                                                                                                                                 |  |     
|Item 6. | Exhibits and Reports on Form 8-K                                                                                                |  | 42  
|        |                                                                                                                                 |  |     
|        | Signatures                                                                                                                      |  | 43  
|        |                                                                                                                                 |  |     
|        | Certifications                                                                                                                  |  | 44  

---

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

PART IFINANCIAL INFORMATION

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

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

|                                                              | September 30,2002 |   | December 31,2001
|------------------------------------------------------------- | ----------------- | - | ----------------
|                                                              | (Unaudited)       |   | (Audited)       
|ASSETS                                                        |                   |   |                 
|Current assets:                                              
|Cash and cash equivalents                                     | $ 202,038         |   | $ 280,467       
|Short-term investments                                        | 107,296           |   | 13,903          
|Accounts receivable, net                                      | 37,295            |   | 38,405          
|Other current assets                                          | 15,586            |   | 14,348          
|                                                              |                   |   |                 
|Total current assets                                          | 362,215           |   | 347,123         
|                                                             
|Property and equipment, net                                   | 17,480            |   | 18,994          
|Other non-current assets                                      | 10,739            |   | 9,706           
|                                                              |                   |   |                 
|Total Assets                                                  | $ 390,434         |   | $ 375,823       
|                                                              |                   |   |                 
|LIABILITIES AND STOCKHOLDERS EQUITY                          |                  
|Current liabilities:                                          |                  
|Accounts payable and accrued expenses                         | $   48,557        |   | $   47,079      
|Income taxes payable                                          | 5,909             |   | 8,915           
|Deferred revenue                                              | 25,782            |   | 23,859          
|Other                                                         | 9,114             |   | 8,716           
|                                                              |                   |   |                 
|Total current liabilities                                     | 89,362            |   | 88,569          
|                                                             
|Long-term liabilities                                         | 10,361            |   | 10,469          
|                                                              |                   |   |                 
|                                                              | 99,723            |   | 99,038          
|                                                              |                   |   |                 
|Stockholders equity:                                         |                  
|Preferred stock: $.01 par value; 1,000,000 shares authorized;
|None and 285 shares issued and outstanding                    |                  |   |                
|Common stock: $.01 par value; 200,000,000 shares authorized; 
|71,240,639 and 68,028,526 shares issued and outstanding       | 712               |   | 680             
|Additional paid-in capital                                    | 494,759           |   | 488,744         
|Accumulated deficit                                           | (172,787          | ) | (187,012        
|Deferred compensation                                         | (774              | ) | (1,123          
|Cumulative other comprehensive income                         | 4,335             |   | 3,687           
|                                                              |                   |   |                 
|Less common stock in treasury, at cost                       
|5,657,600 and 4,835,900 shares                                | (35,534           | ) | (28,191         
|                                                              |                   |   |                 
|                                                              | 290,711           |   | 276,785         
|                                                              |                   |   |                 
|Total Liabilities and Stockholders Equity                    | $ 390,434         |   | $ 375,823       
|                                                              |                   |   |                 

See Notes to the Condensed Consolidated Financial Statements.

1

---

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

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

|                                                             | Three MonthsEnded September 30, |  | Nine MonthsEnded September 30,
|------------------------------------------------------------ | ------------------------------- |  | ------------------------------
|                                                             | 2002                            |  | 2001                          
|                                                             |                                 |  |                               
|Licenses and other revenues                                  | $ 50,295                        |  | $ 46,985                      
|Service revenues                                             | 10,425                          |  | 8,048                         
|                                                             |                                 |  |                               
|Net revenues                                                 | 60,720                          |  | 55,033                        
|                                                             |                                 |  |                               
|Cost of licenses and other revenues                          | 4,241                           |  | 3,434                         
|Cost of service revenues                                     | 5,173                           |  | 5,576                         
|                                                             |                                 |  |                               
|Cost of revenues                                             | 9,414                           |  | 9,010                         
|                                                             |                                 |  |                               
|Gross profit                                                 | 51,306                          |  | 46,023                        
|                                                             |                                 |  |                               
|Research and development                                     | 12,732                          |  | 12,091                        
|Sales, general and administrative                            | 32,713                          |  | 30,617                        
|Amortization of intangibles and acquisition-related expenses | 1,386                           |  | 220                           
|                                                             |                                 |  |                               
|Total operating expenses                                     | 46,831                          |  | 42,928                        
|                                                             |                                 |  |                               
|Operating income                                             | 4,475                           |  | 3,095                         
|Interest income, net and other                               | 1,884                           |  | 2,782                         
|                                                             |                                 |  |                               
|Income before income taxes                                   | 6,359                           |  | 5,877                         
|Income tax provision                                         | 1,400                           |  | 1,204                         
|                                                             |                                 |  |                               
|Net income                                                   | $   4,959                       |  | $ 4,673                       
|                                                             |                                 |  |                               
|Net income per share:                                       
|Basic                                                        | $     0.07                      |  | $     0.07                    
|                                                             |                                 |  |                               
|Diluted                                                      | $     0.07                      |  | $     0.06                    
|                                                             |                                 |  |                               
|Weighted average number of common shares outstanding:       
|Basic                                                        | 71,180                          |  | 65,233                        
|                                                             |                                 |  |                               
|Diluted                                                      | 73,462                          |  | 75,093                        
|                                                             |                                 |  |                               

See Notes to the Condensed Consolidated Financial Statements.

2

---

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

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

|                                         | Three Months EndedSeptember 30, |   | Nine Months EndedSeptember 30, | 
|---------------------------------------- | ------------------------------- | - | ------------------------------ | 
|                                         | 2002                            |   | 2001                           | 
|                                         |                                 |   |                                | 
|Net income                               | $  4,959                        |   | $  4,673                       | 
|Other comprehensive income (loss):      
|Foreign currency translation adjustments | (1,223                          | ) | 707                            | 
|Fair market value adjustment            
|for available-for-sale securities        |                                |   | 56                             | 
|                                         |                                 |   |                                | 
|Other comprehensive income               | $  3,736                        |   | $  5,436                       | 
|                                         |                                 |   |                                | 

See Notes to the Condensed Consolidated Financial Statements.

3

---

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

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

|                                                                                      | Nine Months EndedSeptember 30, |           
|------------------------------------------------------------------------------------- | ------------------------------ | ----------
|                                                                                      |                                | 2002      
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                 |                                |           
|Net income                                                                            |                                | $   14,225
|Adjustments to reconcile net income to net cash provided
    by operating activities: |                               
|Depreciation and amortization                                                         |                                | 5,188     
|Gain on sale of long-term investment                                                  |                                |          
|Loss on sale of property and equipment                                                |                                | 60        
|CHANGES IN ASSETS AND LIABILITIES:                                                    |                               
|Accounts receivable                                                                   |                                | 3,483     
|Other assets                                                                          |                                | (347      
|Accounts payable and accrued expenses                                                 |                                | 634       
|Income taxes payable                                                                  |                                | (3,081    
|Deferred revenues                                                                     |                                | 852       
|Other                                                                                 |                                | (263      
|                                                                                      |                                |           
|Cash provided by operating activities                                                 |                                | 20,751    
|                                                                                      |                                |           
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                 |                               
|Purchase of property and equipment                                                    |                                | (2,727    
|Acquisition of Redline Software, Inc. (VMGear)                                        |                                | (2,193    
|Sale of long-term investment                                                          |                                |          
|Purchases of short-term investments                                                   |                                | (136,902  
|Sales and maturities of short-term investments                                        |                                | 43,509    
|                                                                                      |                                |           
|Cash provided by (used in) investing activities                                       |                                | (98,313   
|                                                                                      |                                |           
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                 |                               
|Proceeds from issuance of common stock, net                                           |                                | 6,047     
|Repurchase of common stock                                                            |                                | (7,343    
|Repayment of long-term debt                                                           |                               |           
|                                                                                      |                                |           
|Cash used in financing activities                                                     |                                | (1,296    
|                                                                                      |                                |           
|Effect of exchange rate changes on cash                                               |                                | 429       
|                                                                                      |                                |           
|Net change in cash and cash equivalents                                               |                                | (78,429   
|Cash and cash equivalents at beginning of period                                      |                                | 280,467   
|                                                                                      |                                |           
|Cash and cash equivalents at end of period                                            |                                | $ 202,038 
|                                                                                      |                                |           

See Notes to the Condensed Consolidated Financial Statements.

4

---

| | 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, 2002 and December 31, 2001 and for the three and
nine months ended September 30, 2002 and September 30, 2001 are unaudited and have been
prepared in accordance with accounting principles generally accepted in the United States
of America for interim financial information and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all financial information and disclosures required by
generally accepted accounting principles for complete financial statements and certain
information and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or omitted.
The unaudited interim condensed consolidated financial statements have been prepared on
the same basis as the annual consolidated financial statements and, in the opinion of
management, reflect all adjustments, which include only normal recurring adjustments,
necessary to present fairly Borlands financial position at September 30, 2002 and
December 31, 2001; its results of operations for the three and nine months ended September
30, 2002 and September 30, 2001; and its cash flows for the nine months ended September
30, 2002 and September 30, 2001. The preparation of condensed consolidated financial
statements in conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those estimates.
The results of operations for interim periods are not necessarily indicative of the
results to be expected for our full fiscal year. The condensed consolidated financial
statements and notes should be read in conjunction with our audited financial statements
included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2001 as
filed with the United States Securities and Exchange Commission (the SEC) on
March 29, 2002. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

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

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

5

---

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

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

|                                          | Three MonthsEnded September 30, |           | Nine MonthsEnded September 30,
|----------------------------------------- | ------------------------------- | --------- | ------------------------------
|                                          | 2002                            |           | 2001                          
|                                          |                                 |           |                               
|Numerator:                                |                                 |           |                               
|Net income before accretion charges       |                                 | $  4,959  |                               
|Accretion charges to preferred stock      |                                 |          |                               
|                                          |                                 |           |                               
|Income available to common stockholders  
|for basic earnings per share              |                                 | $  4,959  |                               
|                                          |                                 |           |                               
|Denominator:                              |                                
|Denominator for basic income per share  
|weighted average shares                   |                                 | 71,180    |                               
|Effect of dilutive securities             |                                 | 2,282     |                               
|                                          |                                 |           |                               
|Denominator for dilutive income per share | 73,462                          |           | 75,093                        
|                                          |                                 |           |                               
|                                         
|Net income per share  basic              |                                 | $    0.07 |                               
|                                          |                                 |           |                               
|Net income per share  diluted            |                                 | $    0.07 |                               
|                                          |                                 |           |                               

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

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

|                              | Severanceand Benefits |   | Facilities |   | Other    |   | Total    |  
|----------------------------- | --------------------- | - | ---------- | - | -------- | - | -------- | -
|Accrual at December 31, 2001  | $    329              |   | $    279   |   | $    293 |   | $    901 |  
|Cash payments                 | (229                  | ) | (559       | ) |         |   | (788     | )
|Additions                     | 49                    |   | 489        |   | (121     | ) | 417      |  
|                              |                       |   |            |   |          |   |          |  
|Accrual at September 30, 2002 | $    149              |   | $    209   |   | $    172 |   | $    530 |  
|                              |                       |   |            |   |          |   |          |  

| | During
the nine months ended September 30, 2002, we recorded a provision of approximately $0.5
million associated with leases in the United States and United Kingdom. During the same
period, we made payments totaling approximately $0.6 million for obligations under these
leases. We have recorded a restructuring reserve associated with certain leases in the
United Kingdom in the amount of $2.4 million as of September 30, 2002 and December 31,
2001. This amount represents the excess of our contractual obligation over the anticipated
income under the current and future sublease arrangements. Under these lease arrangements,
we are obligated to pay approximately $7.4 million over the lease terms. The leases
terminate at various dates beginning in 2010 and ending in 2012. We have contractual
commitments from our sublease tenants to receive $0.5 million during the sublease terms
which end on various dates in 2003. If our existing tenants are not able to pay the
contractual amount due under the sublease arrangements or we are not able to lease the
properties on favorable financial terms in the future, we will be required to take
additional charges for the minimum contractual lease payments. Due to the timing of the
contractual payments, this amount has been included in other long-term liabilities.
Subsequent to September 30, 2002, there have not been any significant changes to our
estimate of the total costs of prior restructuring activities. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

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

| | To
provide presentation consistent with the current year, research and development expenses
for the three and nine months ended September 30, 2001 in the amount of $0.2 million and
$0.7 million, respectively, have been | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

6

---

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

| | shown
separately within the caption Amortization of Intangibles and Acquisition-Related
Expenses. These acquisition-related expenses are associated with the acquisition of
Bedouin Software, Inc. Selling, general and administrative expenses for the nine months
ended September 30, 2001 in the amount of $0.3 million have been shown separately within
the caption Amortization of Intangibles and Acquisition-Related Expenses. These
acquisition-related expenses are associated with the acquisition of Engine Informatica,
LTD. | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

| | On
September 17, 2001, our Board of Directors authorized the repurchase of up to $30 million
of our outstanding common stock. During the three months ended September 30, 2002, we
repurchased 462,000 shares of common stock for an average price of $8.45 per share for
total consideration of $3.9 million. For the nine months ended September 30, 2002 we have
repurchased 821,700 shares of common stock for an average price of $8.94 per share for a
total consideration of $7.3 million. The shares repurchased during the three and nine
months ended September 30, 2002 were placed in treasury. | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

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

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

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

| | On
January 18, 2002, we completed our acquisition of Redline Software, Inc.
(Redline), a provider of performance assurance and testing solutions for
Java developers. The transaction was accounted for as a purchase. Total fixed
consideration of $2.0 million was paid upon the close of the transaction and
acquisition-related costs were $0.2 million. The contingent consideration includes
retention payments of $6.0 million to be earned through the continued employment of
certain individuals and additional earnout payments of up to $10 million contingent upon future revenues
derived from the sale of Redline products and the retention of certain employees of
Redline. Contingent consideration, if any, will be earned and paid over a three-year
period. We recorded goodwill for the excess of the purchase price over the net assets
acquired of $1.6 million and $0.6 million for acquired technology. Acquired technology
will be amortized over the estimated useful life of 18 months. In accordance with the
provision of Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangibles (SFAS 142), we did not amortize the excess of the purchase
price over net assets acquired during the three months ended September 30, 2002. The
contingent consideration will be expensed when it is deemed probable that such payments
will be made. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

| | NOTE
7CONVERSION OF SERIES C PREFERRED STOCK | 
| | --------------------------------------------- | 

| | In
1999, we sold an aggregate of 625 shares of Series C Convertible Preferred Stock
(Series C Stock) to Microsoft Corporation for $25 million. Each share of
Series C Stock was convertible, at the option of the holder, into fully-paid and
non-assessable shares of our common stock based upon a fixed conversion ratio. As of
September 30, 2002, all Series C Stock has been converted into shares of our common stock. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

7

---

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

| | NOTE
8  EXPIRATION OF WARRANTS | 
| | ------------------------------- | 

| | On
July 27, 2002, all the remaining warrants issued in conjunction with our Series B
Preferred Stock expired unexercised. | 
| | ------------------------------------------------------------------------------------------------------------------------- | 

| | NOTE 9RECENT
ACCOUNTING PRONOUNCEMENTS | 
| | --------------------------------------- | 

| | In
June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit
or Disposal Activities. SFAS No. 146 requires that a liability for a cost associated
with an exit or disposal activity be recognized when the liability is incurred. SFAS No.
146 eliminates the definition and requirement for recognition of exit costs in Emerging
Issues Task Force Issue No. 94-3 where a liability for an exit cost was recognized at the
date of an entitys commitment to an exit plan. This statement is effective for exit
or disposal activities initiated after December 31, 2002. Management does not believe that
the adoption of this statement will have a material impact on its results of operations,
financial position or cash flows. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

| | NOTE
10SUBSEQUENT EVENTS | 
| | ------------------------- | 

| | Sale
of Property | 
| | ---------------- | 

| | On
September 30, 2002, we entered into a definitive agreement to sell our remaining
commercial real estate in Scotts Valley, California for $14.0 million in cash, subject to
certain closing conditions. On November 1, 2002, the prospective buyer elected not to
close on the purchase and the agreement was terminated. | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | The
property consists of two office buildings, which formerly served as Borlands
headquarters, located at 1700-1800 Green Hills Road. The buildings are comprised of
approximately 135,000 square feet of space and were constructed in 1988. We have not
occupied any of these buildings for a number of years and had been leasing the space to
third parties. | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | BoldSoft
MDE Aktiebolag | 
| | ----------------------- | 

| | On
October 4, 2002, we acquired assets of privately-held BoldSoft MDE Aktiebolag,
headquartered in Stockholm, Sweden, a provider of next-generation, Model Driven
Architecture (MDA) technology designed to accelerate the application
development lifecycle. The purchase price was $0.7 million in cash for the purchase by
Borland of all of the intellectual property assets of BoldSoft and the purchase by Borland
B.V. of all assets other than intellectual property. We do not expect this acquisition to
have a material impact on revenues or net income for 2002. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

| | On
October 8, 2002, we entered into an Agreement and Plan of Merger with Starbase
Corporation, a Delaware corporation, and Galaxy Acquisition Corp. (Galaxy), a
Delaware corporation and wholly-owned subsidiary of Borland. Starbase provides software
configuration and requirements management tools to assist in managing development projects
from inception to deployment and maintenance. Pursuant to the merger agreement, on October
11, 2002, we commenced a tender offer for all outstanding shares of Starbases common
stock at a price of $2.75 per share for total consideration of approximately $24.0 million
in cash, subject to certain conditions, including the tender, without withdrawal prior to
the expiration of the offer, of at least a majority of Starbases outstanding shares
of common stock, including shares subject to Starbase stock options with an exercise price
per share less than $2.75. We expect to incur between $7.0 million and $12.0 million in
acquisition and transaction costs. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | In
connection with the merger agreement, we also agreed to make available to Starbase bridge
financing of $2.0 million to fund its operations until the transaction is completed. As of
November 12, 2002, $750,000 has been loaned by us to Starbase. Subject to certain
exceptions, the bridge financing will mature upon the earliest of 1) the date the merger
agreement is terminated, 2) the date on which an event of default occurs as defined by the
bridge financing documents (including a breach by Starbase of the merger agreement) or 3)
December 15, 2002. Upon the consummation of the merger of Galaxy with and into Starbase
pursuant to the merger agreement, the obligations under the bridge financing shall be
deemed satisfied in full. The bridge loan bears an annual interest rate of eight | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

8

---

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

| | percent
and is secured by substantially all the assets of Starbase, including without limitation
its intellectual property. | 
| | --------------------------------------------------------------------------------------------------------------------------- | 

| | Simultaneous
with the execution of the merger agreement, all of the directors and certain of the
executive officers of Starbase entered into agreements pursuant to which they agreed to
tender shares of Starbase held by them, which represent in the aggregate approximately
0.94% percent of the outstanding shares of Starbases common stock as of October 8,
2002. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Borland
and Galaxy commenced the offer on October 11, 2002. The offer and withdrawal rights were
initially scheduled to expire at 12:00 midnight, EST, on November 8, 2002. In accordance
with applicable law and the merger agreement, Borland has extended the offer and the offer
is currently scheduled to expire at 12:00 midnight, EST, on November 22, 2002, unless
further extended. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | The
merger agreement also provides that following consummation of the offer and the
satisfaction or waiver of certain conditions, Galaxy will be merged with and into Starbase
with Starbase surviving the merger as a wholly-owned subsidiary of Borland, and all
remaining outstanding publicly-held shares of Starbase common stock (other than shares
held by Starbase stockholders who properly exercise their appraisal rights under
applicable law) will be converted into the right to receive $2.75 per share in cash. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | For
further information refer to our Tender Offer Statement on Schedule TO filed with the
Securities and Exchange Commission on October 11, 2002, as amended. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

| | On
October 29, 2002, we entered into an Agreement and Plan of Merger and Reorganization with
TogetherSoft Corporation, a Delaware corporation, Targa Acquisition Corp. I, Targa
Acquisition Corp. II, and certain stockholders of TogetherSoft as stockholders
agents. TogetherSoft is a leading provider of design-driven development solutions designed
to accelerate the software development process. Pursuant to the merger agreement, Targa
Acquisition Corp. I will be merged with and into TogetherSoft, immediately followed by the
merger of TogetherSoft with and into Targa Acquisition Corp. II. Following these
transactions, the separate existence of TogetherSoft will cease and Targa Acquisition
Corp. II will continue as the surviving corporation and a wholly-owned subsidiary of
Borland. An aggregate of 9,050,000 shares of Borland common stock will be issued, and
$82.5 million in cash will be paid, to TogetherSoft stockholders on a fully-diluted basis
in connection with the merger, subject to potential reduction for certain expenses. We
expect to incur between $12.0 and $15.0 million in acquisition- and transaction-related
expenses. Consideration having a value of $26 million at closing will be held in escrow
subject to certain indemnification provisions. This consideration will be released to the
stockholders at various times beginning eighteen months after the close of the transaction
and ending on the fifth anniversary of the closing date. The foregoing description of
these transactions does not purport to be complete and is qualified in its entirety by
reference to the complete text of the merger agreement, which is included as Exhibit 2.2
hereto. | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | In
connection with the merger agreement, the directors, the executive officers and certain
other TogetherSoft stockholders have entered into agreements pursuant to which such
stockholders have agreed to vote all shares of TogetherSoft held by them in favor of the
adoption of the merger agreement. As of October 29, 2002, shares subject to such voting
agreements represent in the aggregate approximately 67.5% of the outstanding shares of
TogetherSofts capital stock, which represent more than the number of shares of
capital stock necessary to adopt the merger agreement under applicable law and take such
other actions necessary to consummate the transactions contemplated thereby. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

| | The
transaction is subject to regulatory approvals, including the approval by the California
Commissioner of Corporations after a fairness hearing, and the expiration or termination
of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act and any
applicable foreign antitrust laws, and certain other customary closing conditions. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Changes
to Management Team | 
| | -------------------------- | 

| | On
October 24, 2002, we announced the promotion of Frederick A. Ball from Executive Vice
President and Chief Financial Officer to the newly-created position of Executive Vice
President of Corporate Development and Mergers and Acquisitions. We also announced the
appointment of Kenneth R. Hahn as our Senior Vice President and Chief Financial Officer. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

9

---

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

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

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

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

| | These
forward-looking statements may relate to, but are not limited to, future capital
expenditures, acquisitions, future revenues, earnings, margins, costs, demand for our
products, market and technological trends in the software industry, interest rates and
inflation and various economic and business trends. You can generally identify
forward-looking statements by the use of words such as expect,
estimate, project, budget, forecast,
anticipate, intend, plan, may,
will, could, should, believes,
predicts, potential, continue and similar expressions
or the negative or other variations thereof. These forward-looking statements involve
substantial risks and uncertainties. Examples of such risks and uncertainties are
described under Factors That May Affect Future Results and Market Price of
Stock and elsewhere in this report, as well as in our other filings with the
Securities and Exchange Commission or in materials incorporated by reference. You should
be aware that the occurrence of any of these risks and uncertainties may cause our actual
results to differ materially from those anticipated in our forward-looking statements,
which could have a material and adverse effect on our business, results of operations and
financial condition. New factors may emerge from time to time, and it is not possible for
us to predict new factors, nor can we assess the potential effect of any new factors on
us. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

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

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

| | We
were incorporated in California in 1983 and reincorporated in Delaware in 1989. We
maintain our executive offices at 100 Enterprise Way, Scotts Valley, California
95066-3249, and our main telephone number at that location is 831-431-1000. We also
maintain a Web site on the Internet at www.borland.com and a community site at
http://bdn.borland.com. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

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

| | As
a leading global provider of technology for the development, deployment, integration and
management of software applications, our goal is to enable enterprises to gain competitive
advantage by accelerating time-to-market and to realize the profitability-enhancing
potential of innovation through software development. By delivering integrated technology
solutions that are designed to bridge the technical gaps between development functions, we
seek to enable our customers development team to work in an iterative, collaborative
style. Since our technology solutions are dedicated to interoperability, our products are
designed to allow enterprises of all sizes to move into Web-based computing while
leveraging their legacy systems, thus enabling our customers to move into the future without
abandoning the past. From Fortune 1000 companies to the Borland Developer Network
comprised of millions of developers around the world, we provide our customers the freedom
to develop applications, deploy them on most major platforms, and integrate and manage
them across the enterprise. Our solutions, including those for Java, Linux, .NET, Web
Services and wireless technologies, are designed to enable organizations to increase
productivity and deliver higher performance projects faster and on budget, while lowering
total cost of ownership. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

| | Our
customers are enterprises of many sizes, including individual developers, small
independent software and services firms, as well as prominent companies worldwide,
including leading companies in high technology, | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

10

---

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

| | telecommunications
and financial services. Many of our customers use Borland technology so that they can
create and ship software and system products conforming to high performance
specifications. We have strategic relationships and/or technology partnerships with
leading technology companies such as Apple, BEA, Ericsson, Hitachi, IBM, Intel,
Macromedia, Microsoft, Nokia, Red Hat, Siemens, Sun Microsystems and Sybase. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

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

| | Accelerating Application Development.  Borland products, individually and
collectively, are designed to help make the process of creating software applications
faster. We use our nearly 20 years of experience to develop tools designed to speed the
process of application development and thereby help our customers deliver results faster. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

11

---

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

| | Edition
for high-end EJB deployments, VisiBroker Edition to facilitate legacy integration and our
Web Edition for JavaServer Pages (JSP)/Servlet-based application deployments. Our
deployment products also include JDataStore, an embedded database for web and mobile
applications, and InterBase, our high-performance embedded SQL database. Our efforts in
sales and marketing include a sales model that combines indirect and direct sales efforts. | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

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

| | For
a more in-depth discussion of our business, including a discussion of our critical
accounting policies and estimates, please read our Annual Report on Form 10-K as filed
with the SEC on March 29, 2002. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Overview
of the Results for the Three Months and Nine Months Ended September 30, 2002 | 
| | ------------------------------------------------------------------------------------- | 

| | Despite
challenging economic conditions for the software and information technology industry, the
three months ended September 30, 2002 was our tenth consecutive quarter of profitability
and eleventh consecutive quarter of positive cash flow from operations. We market software
development and application infrastructure technologies to businesses of all sizes
worldwide. When customers curtail their information technology budgets, elect to purchase
less or delay such purchases, our businesslike that of competitors and software
industry peersnaturally suffers. In addition, the prolonged downturn in the
financial markets during the first nine months of 2002, combined with larger structural
problems in industries such as telecommunications, appear to have further dampened IT
capital expenditures in excess of the anticipated effects of more typical economic
cyclicality. Despite these challenges, several features of our model and strategy provided
a foundation for growth during the first nine months of 2002: | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | We market and sell products that our customers can implement with their existing IT
infrastructure, permitting us to communicate a clear return on investment, or ROI,
message to our customers. With many customers having invested significantly in computing
hardware and network infrastructure in recent years, we believe software development
products such as ours are now particularly compelling because they can be used to
facilitate the efficient production and/or migration of software for systems currently in
place. The Java programming language, moreover, is designed to run on multiple existing
operating systems and hardware platforms, and we believe that the Java language and
platform continues to grow and sustain momentum in the marketplace in part on the basis
of this advantage. For the first nine months of 2002, sales of our Java development
products grew 30% compared with the comparable nine month period of 2001. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

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

| | We market and sell products worldwide, and we believe that our brand recognition in the
software development and IT community is strong both in the U.S. and abroad. As a result,
we are positioned to benefit from pockets of economic strength worldwide. In the three
months ended September 30, 2002, the Americas region (principally U.S., Latin America and
Canada) accounted for less than half41%of our total revenue, while our EMEA
region (principally Europe) represented 38% and Asia/Pacific represented 21%. This
breakdown was largely consistent with the three months ended September 30, 2001 in which
the Americas accounted for 40% of total revenue, EMEA 39% and Asia/Pacific 21%. We
believe that international diversification will continue to benefit the company, and
could be favorable in an environment of more synchronized global recovery. We have also
recently begun to add resources to our international operations and entered several new
international markets, including the establishment of a subsidiary in Mexico in the three
months ended September 30, 2002. | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

12

---

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

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

| | Leadership Across Platforms.  We continue to believe that our success hinges
in large part on the continued quality and leading edge reputation of our products,
including both our development and infrastructure products. As a result, research and
development continues to be a high priority, particularly in the areas of Java, .NET, Web
Services, wireless, and Linux in which we focus our product efforts. Several new products
were launched during the three months ended September 30, 2002, including JDataStore 6,
Delphi 7, Kylix 3 and Borland Enterprise Server 5.1. | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

| | Emphasis on Acquisition Strategy.  We believe that strategic acquisitions
have been and will continue to be a critical component of our overall growth strategy.
Accordingly, we have increased our resources dedicated to the identification and
integration of acquisition targets, including the promotion of Fredrick A. Ball to
Executive Vice President of Corporate Development and Mergers & Acquisitions. During
the first nine months of 2002, we successfully completed the acquisitions of Redline
Software (VMGear) and ATC Ltda. as well as the acquisition of certain assets of
Highlander Engineering, Inc. On October 4, 2002, we acquired assets of BoldSoft MDE
Aktiebolag (BoldSoft), a Swedish corporation, a provider of next-generation,
Model Driven Architecture (MDA) technology designed to accelerate the application
development lifecycle. On October 8, 2002, we entered into an agreement to acquire
Starbase Corporation, a provider of software configuration and requirements management
tools to assist in managing development projects from inception to deployment and
maintenance (Application Lifecycle Management) and facilitating the development of
software solutions and applications in a more efficient manner. On October 29, 2002, we
entered into an agreement to acquire privately-held TogetherSoft Corporation, a provider
of design-driven development solutions designed to accelerate the software development
process. We believe that post-integration, these acquisitions will provide an application
development platform that will enhance our individual product positions. | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

| | Sales and Marketing Strength.  We continue to view incremental investments in
sales and marketing as critical to enabling us to drive revenue growth and, in
particular, be positioned for success when and if increased IT spending resumes.
Furthermore, we believe that our continued execution in a weaker market for IT
investment, including our indirect channel, enables us to selectively make such
investments to grow our market share. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

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

| | Revenues increased 10% to $60.7 million for the three months ended September 30, 2002,
from $55.0 million for the three months ended September 30, 2001. For the first nine
months of 2002, total revenues increased 9% to $177.5 million from $162.7 million for the
first nine months of 2001. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

13

---

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

| | Licenses and other revenues rose 7% to $50.3 million for the three months ended September
30, 2002 from $47.0 million for the three months ended September 30, 2001. For the first
nine months of 2002, licenses and other revenues rose 8% to $148.1 million, from $137.0
million for the first nine months of 2001. | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Due to additional investments in sales and marketing and research and development and an
increase in acquisition-related expenses, operating expenses increased 9% to $46.8
million in the three months ended September 30, 2002, from $42.9 million in the three
months ended September 30, 2001. Operating expenses increased 11% to $137.7 million for
the first nine months of 2002 compared to $124.4 million for the first nine months of
2001. | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Gross margins were 84% in each of the three months ended September 30, 2002 and 2001. For the
first nine months of 2002, gross margin were 85%, compared to 84% for the first nine
months of 2001. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Operating income was $4.5 million in the three months ended September 30, 2002, compared
to $3.1 million in the three months ended September 30, 2001. For the first nine months
of 2002, operating income increased to $12.9 million compared to $11.9 million for the
first nine months of 2001. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Net income for the three months ended September 30, 2002 was $5.0 million, or $0.07 per
diluted share, compared with net income of $4.7 million, or $0.06 per diluted share for
the three months ended September 30, 2001. Net income for the first nine months of 2002
was $14.2 million, or $0.19 per diluted share, compared with net income of $16.9 million,
or $0.23 per diluted share for the first nine months of 2001. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | For the first nine months in 2002, cash flow from operations was $20.8 million, compared
to $26.1 million for the first nine months of 2001. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------- | 

| | During the three months ended September 30, 2002 and 2001, our day sales outstanding were
56 days and 55 days, respectively. We quantify the day sales outstanding in our current
trade receivable balance as the product of (1) the trade receivable balance as of the
latest balance sheet date net of related reserves for return, rebates and bad debts
divided by the net revenues for the preceding accounting period and (2) the number of
days within the preceding accounting period. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Operations
for the Three Months and Nine Months Ended September 30, 2002 and 2001 | 
| | --------------------------------------------------------------------------------- | 

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

| | Our
revenues are derived from software licenses and sales of related services, which include
assistance in implementation and integration, as well as post-contract customer support,
training and consulting services. Net revenues were $60.7 million and $55.0 million for
the three months ended September 30, 2002 and 2001, respectively. The growth in net
revenues was principally attributable to the increase in net revenues from our Java and
RAD business. Our Java and RAD businesses each grew 12% during the three months ended
September 30, 2002 when compared with the three months ended September 30, 2001. Our
Enterprise business declined 8% during the three months ended September 30, 2002 when
compared with the three months ended September 30, 2001. | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Net
revenues were $177.5 million and $162.7 million for the nine months ended September 30,
2002 and 2001, respectively. Our Java business grew 30% during the nine months ended
September 30, 2002 when compared with the nine months ended September 30, 2001. The growth
in our Java business was offset by a decline in our RAD and Enterprise businesses. Our RAD
and Enterprise businesses decreased 1% and 10%, respectively, during the nine months ended
September 30, 2002 when compared with the nine months ended September 30, 2001. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

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

| | Licenses
and other revenues represent amounts earned from granting customers licenses to use our
software products. Licenses and other revenues totaled $50.3 million for the three months
ended September 30, 2002, compared to $47.0 million for the three months ended September
30, 2001. Licenses and other revenues were 83% | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

14

---

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

| | and
85% of total net revenues for the three months ended September 30, 2002 and 2001,
respectively. Licenses and other revenues from our Java, RAD, and Enterprise businesses
represented 42%, 38%, and 20%, respectively, of total licenses and other revenues for the
three months ended September 30, 2002. This is compared to 40%, 36%, and 24%,
respectively, for the three months ended September 30, 2001. License and other revenues
from our Java business, which includes Borland JBuilder, Borland Enterprise Studio for
Java, and Optimizeit, increased 12% during the three months ended September 30, 2002 when
compared to the three months ended September 30, 2001. The increase in revenues from our
Java business was due to the continued strength of revenues from JBuilder 7, which was
released in the second quarter of 2002, and our initial release of Optimizeit during the
first quarter of 2002. Licenses and other revenues from our RAD business, which includes
the Borland Delphi, C++Builder and Kylix product lines, increased 12% in the three months
ended September 2002 as compared to the three months ended September 30, 2001. Higher
revenues in our RAD business were principally attributable to the release of Delphi 7
during the three months ended September 30, 2002. Licenses and other revenues from our
Enterprise business during the three months ended September 30, 2002, including
VisiBroker, Borland AppServer, Borland AppCenter, JDataStore and InterBase product lines,
declined 8% compared to the three months ended September 30, 2001. The decline in
revenues from our Enterprise products was principally due to lower revenues from our
InterBase product line when compared with the prior year in which we signed a significant
contract. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

| | Licenses
and other revenues totaled $148.1 million for the nine months ended September 30, 2002,
compared to $136.9 million for the nine months ended September 30, 2001. Licenses and
other revenues were 83% and 84% of total net revenues for the nine months ended September
30, 2002 and 2001, respectively. Licenses and other revenues from our Java, RAD, and
Enterprise businesses represented, 46%, 32%, and 22%, respectively, of total licenses and
other revenues for the nine months ended September 30, 2002. This is compared to 38%, 35%,
and 27%, respectively, for the nine months ended September 30, 2001. Licenses and other
revenues during the nine months ended September 30, 2002 from our Java business increased
30% when compared to the same period in 2001. Revenues from our Java business were
favorably affected by the release of our latest version of our Java development product,
JBuilder 7, our Java studio product, Borland Enterprise Studio for Java 4 in the second
quarter of 2002, and the initial release of our Java performance and testing solution,
Optimizeit, during the first quarter of 2002. Revenues from our RAD business declined 1%
during the nine months ended September 30, 2002, when compared with the same period in
2001. Lower revenues in our RAD business were principally attributable to a decline in
revenues from our Kylix product. The decline in Kylix was partially offset by the increase
in revenues from our C++Builder product with the release of the latest version, C++Builder
6, during the three months ended March 31, 2002. Licenses and other revenues from our
Enterprise business decreased 11% in the nine months ended September 30, 2002 compared to
the nine months ended September 30, 2001 due to reduced demand from our Original Equipment
Manufacturers, or OEM, customers and a significant InterBase contract signed in the prior
year. We believe that the reduced demand from our OEM customers is due to concerns about
the current economic climate, particularly in the United States. Continued concerns around
the United States and world economy could continue to impact the buying patterns of our
OEM customers and further negatively impact our Enterprise business. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

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

| | Service
revenues represent amounts earned from technical support, training and consulting services
related to our software license arrangements, and accordingly, are largely dependent on
the growth of our software license revenues. Service revenues increased to $10.4 million
for the three months ended September 30, 2002, compared to $8.0 million for the three
months ended September 30, 2001. Service revenues were 17% and 15% of total net revenues
for the three months ended September 30, 2002 and 2001, respectively. Technical support
revenues represented 60% and 70% of the total service revenues for the three months ended
September 30, 2002 and 2001, respectively, while consulting and training revenues
represented 40% and 30% of the total service revenues for the same periods, respectively.
The absolute dollar growth of our technical support revenues is due to the increase in the
number of enterprise-level support contracts. This trend is dependent on our success in
licensing software to a larger number of enterprise customers.Consulting and
training revenues increased due to the timing of the completion of certain consulting and
training engagements and is not indicative of a trend of increasing consulting and
training revenues. We believe that future growth in service revenues is dependent on the
impact of the current economic climate which in turn may have an impact on our customers
spending behavior. Continued concerns around the United States and world economy could
impact the demand for such services. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Service
revenues increased to $29.5 million for the nine months ended September 30, 2002, compared
to $25.8 million for the nine months ended September 30, 2001. Service revenues were 17%
and 16% of total net revenues for the nine months ended September 30, 2002 and 2001,
respectively. Technical support revenues | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

15

---

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

| | represented
64% of the total service revenues for each of the nine months ended September 30, 2002
and 2001, while consulting and training revenues represented 36% of the total service
revenues for the same periods. The growth of our technical support revenues is due to the
increase in the number of enterprise-level support contracts and this trend is dependent
on our success in licensing software to a larger number of enterprise customers. The
growth in the consulting and training revenues for the nine months ended September 30,
2002 when compared with the same period in 2001 was principally due to the timing of the
completion of certain consulting engagements and is not indicative of a trend of
increasing consulting and training revenues. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

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

| | International
net revenues represented 66% of our total net revenues for the three months ended
September 30, 2002 compared to 67% for the three months ended September 30, 2001. The
successful launch of Delphi 7 in Europe and the growth in revenues from our Java and
Enterprise products in the AsiaPac region during the three months ended September 30, 2002
had a favorable effect on our international revenues. We expect non-U.S. revenues to
continue to be a significant percentage of total net revenues in future periods. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

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

|                                      | Three Months EndedSeptember 30, |  | Nine Months EndedSeptember 30,
|------------------------------------- | ------------------------------- |  | ------------------------------
|                                      | 2002                            |  | 2001                          
|                                      |                                 |  |                               
|Americas                              | $  25,046                       |  | $  22,196                     
|Europe, Middle East & Africa (EMEA) | 23,283                          |  | 21,216                        
|Asia Pacific                          | 12,391                          |  | 11,621                        
|                                      |                                 |  |                               
|Net revenues                          | $  60,720                       |  | $  55,033                     
|                                      |                                 |  |                               

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

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

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

| | Cost
of licenses and other revenues consist primarily of production costs, product packaging,
and royalties paid to third-party vendors. Cost of licenses and other revenues were $4.2
million and $3.4 million for the three months ended September 30, 2002 and 2001,
respectively. Cost of licenses and other revenues were $11.3 million and $9.9 million for
the nine months ended September 30, 2002 and 2001, respectively. The increase in cost of
licenses and other revenues for the three and nine months ended September 30, 2002 when
compared with the three and nine months ended September 30, 2001 was principally due to an
increase in royalty costs payable to third-party vendors. The level of royalty costs in
future periods will be dependent upon our ability to obtain favorable licensing terms for
our products that include third-party technology and the extent to which we include such
third party technology in our product offerings. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

| | Cost
of service revenues consists primarily of salaries and benefits, third-party contractor
costs, and related expenses incurred in providing customer support, consulting and
training. Cost of service revenues was $5.2 million and $5.6 million for the three months
ended September 30, 2002 and 2001, respectively. Cost of technical support revenues
represented 27% of the total cost of service revenues for each of the three months ended
September 30, | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

16

---

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

| | 2002
and 2001, while cost of consulting and training revenues represented 73% of the cost of
service revenues for the same periods. Cost of service revenues was $15.6 million and
$16.6 million for the nine months ended September 30, 2002 and 2001, respectively. Cost
of technical support revenues represented 29% and 28% of the total cost of service
revenues for the nine months ended September 30, 2002 and 2001, respectively, while cost
of consulting and training revenues represented 71% and 72% of the cost of service
revenues for the same periods, respectively. The increase in cost of technical support
revenues for the nine months ended September 30, 2002 when compared with the nine months
ended September 30, 2001 is due to additional headcount and other resources deployed to
manage higher support activity. The decrease in consulting and training costs during the
three and nine months ended September 30, 2002 when compared with the same periods a year
ago, was due to a reduction in spending on outside resources with fewer consulting and
training engagements. In future periods, we expect increases in our cost of service
revenues only as a function of our ability to grow our service revenues. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

| | Gross
margins were 84% for both the three months ended September 30, 2002 and 2001. Gross
margins on licenses and other revenues were 92% and 93% for the three months ended
September 30, 2002 and 2001, respectively. Gross margins from service revenues were 50%
and 31% for the three months ended September 30, 2002 and 2001, respectively. Gross
margins were 85% and 84% for the nine months ended September 30, 2002 and 2001,
respectively. Gross margins on licenses and other revenues were 92% and 93% for the nine
months ended September 30, 2002 and 2001, respectively. Gross margins from service
revenues were 47% and 36% for the nine months ended September 30, 2002 and 2001,
respectively. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | The
1% decline in our gross margins on licenses and other revenues for the three and nine
months ended September 30, 2002 when compared with the three and nine months ended
September 30, 2001 was principally due to the increase in royalties paid to third party
vendors. Gross margins from service revenues for the three and nine months ended September
30, 2002 when compared with the three and nine months ended September 30, 2001 increased
due to an increase in our service revenues and a reduction in fixed employee costs in our
consulting and training organization leading to better utilization of our consulting and
training resources. While we would expect our total gross margins to remain consistent
with these levels, the future gross margins will be a function of our future net revenues,
the level of third-party royalty-bearing technology licensed with our product offerings,
our ability to control our manufacturing costs and our utilization of our professional
services group. | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

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

| | Research
and development (R&D) expenses consist primarily of salaries and other
personnel-related expenses, facilities costs and fees and expenses of third-party
consultants. R&D expenses for the three months ended September 30, 2002 increased to
$12.7 million from $12.1 million for the three months ended September 30, 2001. R&D
expenses were 21% and 22% of net revenues for the three months ended September 30, 2002
and 2001, respectively. R&D expenses for the nine months ended September 30, 2002
increased to $37.4 million from $34.3 million for the nine months ended September 30,
2001. R&D expenses were 21% of net revenues for each of the nine months ended
September 30, 2002 and 2001. The increase in R&D expenses for the three and nine
months ended September 30, 2002 when compared with the three and nine months ended
September 30, 2001 was principally due to additional employee-related expenses with the
increase in our R&D headcount. We expect total dollars spent on R&D to increase in
2002 when compared with 2001, but we expect our R&D expenses to remain relatively
consistent as a percentage of net revenues. | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

| | Sales,
general and administrative (SG&A) expenses consist primarily of salaries,
benefits, sales commissions, the cost of product marketing programs, legal, finance,
facility and information system costs. SG&A expenses for the three months ended
September 30, 2002 increased to $32.7 million from $30.6 million for the three months
ended September 30, 2001. SG&A expenses were 54% and 56% of revenues for the three
month period ended September 30, 2002 and 2001, respectively. SG&A expenses for the
nine months ended September 30, 2002 increased to $95.8 million from $89.1 million for the
nine months ended September 30, 2001. SG&A expenses were 54% and 55% of net revenues
for the nine months ended September 30, 2002 and 2001, respectively. The increase in
SG&A expenses was principally due to increased employee costs as a result of increased
headcount in our direct | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

17

---

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

| | sales
force. We believe that the future expansion of our sales organization will be dependent
on our ability to generate future meaningful revenue growth. Also, to the extent net
revenues from our direct sales force increase, we expect the sales commission component
of SG&A expenses to proportionally increase as a result of variable compensation from
our sale commission plans. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

| | Operating
expenses during the three and nine months ended September 30, 2002 include approximately
$1.4 million and $4.5 million, respectively, in acquisition-related expenses associated
with the acquisitions of Redline Software, Inc. (VMGear) and Bedouin Software, Inc.
Operating expenses for the three and nine months ended September 30, 2001 include
approximately $0.2 million and $1.0 million, respectively, in acquisition-related expenses
associated with the acquisition of Bedouin Software, Inc. and Engine Informatica, LTD. If
we successfully complete our proposed acquisitions of TogetherSoft and Starbase, we expect
that the amortization of intangibles and acquisition-related expenses will increase in
2003 as compared to 2002. | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

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

|                              | Severanceand Benefits |   | Facilities |   | Other    |   | Total    |  
|----------------------------- | --------------------- | - | ---------- | - | -------- | - | -------- | -
|Accrual at December 31, 2001  | $    329              |   | $    279   |   | $    293 |   | $    901 |  
|Cash payments                 | (229                  | ) | (559       | ) |         |   | (788     | )
|Additions                     | 49                    |   | 489        |   | (121     | ) | 417      |  
|                              |                       |   |            |   |          |   |          |  
|Accrual at September 30, 2002 | $    149              |   | $    209   |   | $    172 |   | $    530 |  
|                              |                       |   |            |   |          |   |          |  

| | During
the nine months ended September 30, 2002, we recorded a provision of approximately $0.5
million associated with leases in the United States and United Kingdom. During the same
period, we made payments totaling approximately $0.6 million for obligations under these
leases. We have recorded a restructure reserve associated with certain leases in the
United Kingdom in the amount of $2.4 million as of September 30, 2002 and December 31,
2001. This amount represents the excess of our contractual obligation over the anticipated
income under the current and future sublease arrangements. Under these lease arrangements,
we are obligated to pay approximately $7.4 million over the lease terms. The leases
terminate at various dates beginning in 2010 and ending in 2012. We have contractual
commitments from our sublease tenants to receive $0.5 million during the sublease term
which end on various dates in 2003. If our existing tenants are not able to pay the
contractual amount due under the sublease arrangements or we are not able to lease the
properties on favorable financial terms in the future, we will be required to take
additional charges for the minimum contractual lease payments. Due to the timing of the
contractual payments, this amount has been included in other long-term liabilities.
Subsequent to September 30, 2002, there have not been any significant changes to our
estimate of the total costs of prior restructuring activities. | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

| | Interest
income, net and other decreased to $1.9 million during the three months ended September
30, 2002 from $2.8 million during the three months ended September 30, 2001. Interest
income, net and other decreased to $5.3 million during the nine months ended September 30,
2002 from $9.4 million during the nine months ended September 30, 2001. Interest income
for the three and nine months ended September 30, 2002 when compared with the three and
nine months ended September 30, 2001 decreased $0.3 million and $3.4 million,
respectively, despite higher cash balances, due to a decline in prevailing interest rates.
Changes in interest rates will continue to impact our interest income performance in
future periods. Net rental income from our Green Hills facilities declined from $0.4
million during the three months ended September 30, 2001 to $0.2 million for the three
months ended September 30, 2002. Also, during the three months ended September 30, 2001,
we recorded a gain from the sale of our investment in Starfish Software, Inc.
(Starfish) of $0.4 million. This gain represented the last distribution
pursuant to the terms of the escrow agreement between the shareholders of Starfish and
Motorola Corporation. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

18

---

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

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

| | We
recorded income tax expense of $1.4 million and $4.0 million for the three and nine months
ended September 30, 2002, respectively. This compares to income tax expense of $1.2
million and $4.3 million for the three and nine months ended September 30, 2001,
respectively. We have significant net operating loss and tax credit carryforwards
principally in the U.S. and certain other non-U.S. jurisdictions in which we conduct
business. These loss and credit carryforwards are used to offset our tax liability as
allowed by law. In addition, we incur withholding taxes in a number of non-U.S.
jurisdictions that are imposed regardless of the profitability of Borland in that
jurisdiction. Based on our most recent forecasts of taxable profits, tax loss and credit
carryforward utilization and non-U.S. withholding taxes, we expect our effective tax rate
for 2002 and 2003 to be 22% and 25%, respectively. The expected 2002 income tax rate was
increased from 20% in 2001 based on our previous forecast of anticipated greater profits
in the U.S. and the improved relative performance of our non-U.S. operations. Our expected
effective tax rate for 2002 is a combination of U.S. state taxes, non-U.S. income taxes
and withholding taxes. Our effective tax rate will continue to be highly dependent on the
amount and location of our taxable profits, ability to utilize our net operating loss and
credit carryforwards in certain jurisdictions and the amount of our non-U.S. withholding
taxes. | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

| | As
of September 30, 2002, cash, cash equivalents and short-term investments totaled $309.3
million; an increase of $14.9 million from $294.4 million at December 31, 2001. Working
capital increased from $258.6 million at December 31, 2001 to $272.9 million at September
30, 2002. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Cash
provided by operating activities for the nine months ended September 30, 2002 was $20.8
million, consisting of $14.2 million in net income and $5.2 million in depreciation and
amortization and a decrease in non-cash working capital of $1.3 million. Cash provided by
operating activities during the nine months ended September 30, 2001 was $26.1 million,
consisting of $16.9 million in net income and $5.8 million in depreciation and
amortization and a decrease in non-cash working capital of $3.8 million, primarily due to
an increase in our deferred revenues and income tax liabilities, offset by $0.4 million in
gain from long-term investment. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Cash
used in investing activities for the nine months ended September 30, 2002 included $136.9
million used to acquire short-term investments, $2.2 million used for the acquisition of
Redline Software, Inc. during the three months ended March 31, 2002 and $2.7 million in
cash used for the purchase of property and equipment offset by $43.5 million from the sale
and maturity of short-term investments. Cash provided by investing activities for the nine
months ended September 30, 2001 included $53.1 million from the sale and maturity of
short-term investments, $0.4 million received from the sale of our investment in Starfish
offset by $18.1 million used to purchase short-term investments and $4.4 million used for
the purchase of property and equipment. We expect cash used in investing activities to
substantially increase in subsequent periods as we complete several recently announced
acquisitions. We believe that we will have sufficient capital to complete these
transactions based upon our existing cash reserves and anticipated future cash generated
from operations. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Cash
used by financing activity was $1.3 million and $2.9 million for the nine months ended
September 30, 2002 and 2001, respectively. Cash used by financing activities for the nine
months ended September 30, 2002 consisted of $7.3 million used for the repurchase of our
common stock offset by $6.0 million received from the issuance of our common stock to our
employees under our Employee Stock Option and Stock Purchase plans. Cash used by financing
activities for the nine months ended September 30, 2001 consisted of $8.8 million used for
the repayment of long-term debt and $3.0 million used to repurchase our common stock
offset by $8.9 million received from the issuance of our common stock to our employees
under our Employee Stock Option and Stock Purchase plans. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | During
the nine months ended September 30, 2002 and 2001, the impact of changes in foreign
currency exchange rates on our non-U.S. dollar cash balances was $0.4 million and ($1.1)
million, respectively. Although we partially hedge our foreign currency exchange rate
risk, strengthening of the U.S. dollar against the Euro, United Kingdom Pound Sterling,
Australian and Singapore dollars and Japanese Yen would harm our business. We cannot
predict currency exchange rate fluctuations and there can be no assurance that foreign
currency exchange rates will not have a material adverse impact on our future cash flows
and operating results. See further discussion of foreign currency risk in Item 3,
Quantitative and Qualitative Disclosures About Market Risk. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

19

---

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

| | We
enter into contracts from time to time, such as acquisition agreements, that have forward
cash commitments due to earnouts that may form all or part of the purchase price. As of
September 30, 2002, we are contractually committed to make certain cash payments under our
acquisition agreements with the former shareholders of Highlander Engineering, Inc. and
Redline Software, Inc. A portion of these payments are contingent upon meeting certain
financial performance requirements. The contingent payments for these two transactions are
not to exceed $20.0 million and will be paid, if earned, over a three-year period. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | On
October 4, 2002, we acquired the assets of BoldSoft MDE Aktiebolag for total cash
consideration of $0.7 million. On October 8, 2002, we entered into an Agreement and Plan
of Merger with Starbase Corporation. Pursuant to the merger agreement, on October 11, 2002
we commenced a tender offer for all the outstanding shares of Starbase at a price of $2.75
per share in cash. Total consideration to be paid for all the shares of Starbase is
approximately $24.0 million. In connection with the merger agreement, we also
agreed to make available to Starbase bridge financing of $2.0 million to fund its
operations until the transaction has been completed. As of November 12, 2002, $750,000 has
been loaned by us to Starbase. On October 29, 2002 we also entered into an Agreement and
Plan of Merger and Reorganization with privately-held TogetherSoft Corporation and two
wholly-owned subsidiaries whereby an aggregate of $82.5 million in cash will be paid to
the stockholders and option holders of TogetherSoft and 9,050,000 shares of Borland common
stock will be issued to such stockholders. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | During
the three months ended September 30, 2002, we engaged several professional service firms
to perform certain accounting, legal and financial advisory services in conjunction with
the proposed acquisitions of TogetherSoft and Starbase. The bulk of these fees for these
services are typically payable when completed. We expect to pay these fees during our
fourth quarter of 2002 or first quarter of 2003 with our existing cash reserves and
anticipated future cash generated from operations. The fees will be capitalized as part of
the purchase accounting for the respective acquisition. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | For
the remainder of 2002, we expect that operating expenses will increase slightly as a
percentage of revenue when compared with 2001. We anticipate that operating expenses and
planned capital expenditures will continue to constitute a material use of our cash
resources. We may continue to utilize cash resources to fund acquisitions or investments
in other businesses, technologies or products lines. We believe that our available cash
and cash equivalents, together with our anticipated future cash provided by operating
activities, will be sufficient to meet our working capital and operating expense
requirements for at least the next twelve months. At some point in the future we may seek
additional funds to support our working capital and operating expense requirements or for
other purposes and may seek to pursue the additional funding through public or private
debt or equity. If we seek additional financing, there is no assurance that this
additional financing will be available, or if available, will be on reasonable terms and
not dilutive to our stockholders. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

| | We
prepare and release quarterly unaudited financial statements prepared in accordance with
accounting principles generally accepted in the United States of America
(GAAP). We also disclose and discuss certain pro forma financial information
in the related earnings release and investor conference call. Our pro forma financial
information excludes unusual or non-recurring events or transactions, restructuring and
other charges, acquisition-related expenses, acquired in-process research and development,
amortization of goodwill and purchased intangibles, or gains and losses on investments in
equity securities. We believe the disclosure of the pro forma financial information helps
investors more meaningfully evaluate the results of our ongoing operations. However, we
urge investors to carefully review the GAAP financial information included as part of our
Quarterly Reports on Form 10-Q, our Annual Report on Form 10-K, and our
quarterly earnings releases and compare the GAAP financial information with the pro forma
financial results disclosed in our quarterly earnings releases and investor calls, as well
as in some of our other reports. Our presentation of pro forma information may not be
consistent with those of other companies. | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

20

---

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

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

|                                                                                 | Three Months EndedSeptember 30,       |   | Nine Months EndedSeptember 30, |  
|-------------------------------------------------------------------------------- | ------------------------------------- | - | ------------------------------ | -
|                                                                                 | 2002                                  |   | 2001                           |  
|                                                                                 |                                       |   |                                |  
|                                                                                 | (in thousands, except per share data)
|                                                                                
|GAAP net income                                                                  | $   4,959                             |   | $   4,673                      |  
|Restructuring, amortization of intangibles and      acquisition-related expenses | 1,386                                 |   | 220                            |  
|Adjustment to provision for income taxes                                         | (305                                  | ) | (45                            | )
|                                                                                 |                                       |   |                                |  
|Pro forma net income                                                             | $   6,040                             |   | $   4,848                      |  
|                                                                                 |                                       |   |                                |  
|Basic pro forma net income per share                                             | $     0.08                            |   | $     0.07                     |  
|                                                                                 |                                       |   |                                |  
|Shares used in computing basic net income per share                              | 71,180                                |   | 65,233                         |  
|                                                                                 |                                       |   |                                |  
|Diluted net income per share                                                     | $     0.08                            |   | $     0.06                     |  
|                                                                                 |                                       |   |                                |  
|Shares used in computing diluted net income per share                            | 73,462                                |   | 75,093                         |  
|                                                                                 |                                       |   |                                |  

| | Approval
of Non-Audit Services | 
| | ------------------------------ | 

| | During
the three months ended September 30, 2002, the Audit Committee of the Board of Directors
approved the following new or recurring engagements to provide non-audit services with
PricewaterhouseCoopers LLP, our independent accountants: (1) accounting advisory services
related to certain acquisitions, (2) certain tax-related services and (3) statutory
audits. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

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

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

| | As
a part of our business strategy, we have recently acquired or are in the process of
acquiring certain businesses, products and technologies. We may continue to make
acquisitions of businesses, products or technologies in the future. However, acquisitions,
including a growth strategy based on completing acquisitions, entail numerous risks. Any
one of these risks, if realized, could negatively affect our business, financial condition
and operating results. These risks include, but are not limited to: | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | there may not be suitable businesses, products or technologies available for acquisition
on terms acceptable to us; | 
| | ------------------------------------------------------------------------------------------------------------------- | 

| | there may be substantial costs associated with acquisitions including the potential
dilution to our earnings per share, the incurrence or assumption of debt, the assumption
of contingent liabilities, the amortization of expenses related to intangible assets and
the legal and other fees associated with the negotiation and consummation of the
acquisition; | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | we
may make acquisitions in markets where we have limited or no prior experience; | 
| | --------------------------------------------------------------------------------- | 

| | there is no guarantee that any acquisition we complete will result in earnings accretion,
cost efficiencies or synergies; | 
| | ------------------------------------------------------------------------------------------------------------------------- | 

| | we may expend resources to acquire products and technologies that we are not ultimately
able to commercialize; | 
| | -------------------------------------------------------------------------------------------------------------- | 

21

---

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

| | acquired businesses may bring with them unanticipated or undisclosed liabilities and
risks; | 
| | ------------------------------------------------------------------------------------------- | 

| | integration and other risks of acquisitions can be more pronounced for larger
transactions or if multiple acquisitions are pursued simultaneously; and | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------ | 

| | if we fail to identify and complete these transactions, we may be required to expend
resources to develop products and technology internally, we may be at a competitive
disadvantage or we may be adversely affected by negative market perceptions, any of which
may have a material effect on our operating results. | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Acquisitions
entail numerous risks, including the difficulty in the integration of operations,
technologies, products and personnel. Acquisition integration issues are complex,
time-consuming and expensive and, without proper planning and implementation, could
significantly disrupt our business. The challenges involved in the integration of acquired
businesses include, but are not limited to: | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | demonstrating to customers that the transaction will not result in adverse changes in
customer service standards or business focus; | 
| | ----------------------------------------------------------------------------------------------------------------------------------- | 

| | consolidating and rationalizing corporate IT infrastructure, including difficulties in
implementing information management and system processes that are sufficient to improve
productivity, lower costs, and support direct sales; | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | combining product offerings and preventing customers from deferring purchasing decisions
or switching to other suppliers due to uncertainty about the direction of our product
offerings and our willingness to support and service existing products, which could
result in incurring additional obligations in order to address customer uncertainty; | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | coordinating sales and marketing efforts to communicate our capabilities effectively; | 
| | ------------------------------------------------------------------------------------- | 

| | coordinating and rationalizing research and development activities to enhance
introduction of new products and technologies with reduced cost; | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------- | 

| | preserving distribution, marketing or other important relationships and resolving
potential conflicts that may arise; | 
| | --------------------------------------------------------------------------------------------------------------------- | 

| | minimizing the diversion of management attention from ongoing business concerns; | 
| | -------------------------------------------------------------------------------- | 

| | persuading employees that business cultures are compatible, maintaining employee morale
and retaining key employees, in particular those in sales and software engineering
positions; | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | coordinating and combining international operations, relationships and facilities, which
may be subject to additional risks and constraints imposed by local laws and regulations;
and | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | managing integration issues with respect to our acquired businesses shortly after,
simultaneously with, or pending the completion of, other acquisitions. | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

| | Many
of our most popular products are focused on the Java language and platform, and we
continue to invest heavily in software solutions for the Java platform as it evolves,
including enterprise-focused standards such as Java 2 Platform, Enterprise Edition, or
J2EE, and Enterprise JavaBeans, or EJB, to enhance the performance and functionality of
these products. Java, however, is a relatively new language and was developed primarily
for the Internet and corporate Intranet applications. We believe that Java is making
significant inroads with respect to its adoption for enterprise applications, but it is
unlikely to be the only major software architecture standard that enterprises will adopt.
For example, it is expected that for the foreseeable future the Java language and platform
will face significant competition in the enterprise market from Microsofts more
recent alternative, namely its C# language and .NET platform. If Java, including EJB and
J2EE, does not become widely adopted, our business could be adversely impacted. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | In
addition, our infrastructure products, including Borland Enterprise Server, are based on
Common Object Request Broker Architecture, or CORBA. CORBA is a standard from the Object
Management Group (OMG) for communicating between distributed objects (objects are
self-contained software modules). CORBA provides a way to execute programs (objects)
written in different programming languages running on different platforms no matter | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

22

---

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

| | where
they reside in the network. While we believe that CORBA has achieved widespread
acceptance as a software-based communications interface through which objects are located
and accessed, critics contend that its penetration tends to be narrow and deep, resulting
in large investments by relatively few enterprises. CORBA is a highly complex technology
requiring significant investments and expertise to implement, as well as support and
train users. If CORBA is displaced or its popularity diminished, our business would be
negatively impacted. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

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

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

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

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

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

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

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

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

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

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

23

---

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

| | Our
failure to broaden our base of customers outside these vertical markets would reduce our
future revenues with respect to our application infrastructure products if the extended
downturn in our targeted vertical markets continues. | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

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

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

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

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

| | As
we increasingly seek to license software products directly to our customers, particularly
large enterprises, we have experienced sales cycles that are substantially more lengthy
and uncertain than those associated with our traditional business of licensing software
through indirect and retail channels. We believe that a significant percentage of our
future revenue will be from enterprise customers. These transactions typically contain
multiple elements, including licenses for development and deployment products, technical
support, maintenance, consulting and training services. As a result, these customers
generally commit significant time and resources to evaluating our software, and they
require us to expend substantial time, effort and money in establishing the enterprise
relationship and in educating them about our software products and solutions, which can
sometimes result in lower operating margins. Also, sales to these types of customers
generally require an extensive sales effort throughout the customers organization
and often require final approval by the customers Chief Information Officer or other
senior C-level employee. In particular, while our strategy includes leveraging
the loyalty of our developer network to sell our software application infrastructure
products within their enterprises, we believe that purchase decisions on software
application infrastructure technology often involve more senior level employees than sales
of development products. All of these factors substantially extend the sales cycle and
increase the uncertainty of whether a sale will be made in any particular quarter, or at
all. We have experienced and expect to continue to experience delays and uncertainty in
the sales cycle as well as increased up-front expenses in connection with enterprise
sales. The timing of the execution of enterprise volume licenses, or their nonrenewal by
large customers, could cause our results of operations to vary significantly from quarter
to quarter and could have a material adverse impact on our results of operations. In
addition, the continued weakness in the market for IT investment, particularly for
wide-scale enterprise-wide deployments, has lengthened, and may continue to lengthen our
sales cycle, as prospective customers defer significant investments in IT infrastructure
until the market for IT investment improves. | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

24

---

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

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

| | We
believe that our revenues have the potential to vary significantly from time to time.
These fluctuations could cause our stock price to fluctuate significantly. We believe that
these variations may result from many factors including: | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

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

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

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

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

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

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

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

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

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

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

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

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

| | A
substantial portion of our revenue is from international sales. International sales
accounted for approximately 66% of our revenues in the three months ended September 30,
2002. In addition, an increasing portion of our operations consist of sales activities
outside the U.S. Given our focus on international markets and the market potential for our
products in such markets, we anticipate increased international sales going forward.
However, there are inherent risks in doing business internationally, including: | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

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

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

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

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

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

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

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

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

| | changes in regulatory requirements; | 
| | ----------------------------------- | 

25

---

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

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

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

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

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

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

| | Political
and economic conditions abroad may adversely affect international sales of our products.
Protectionist trade legislation in either the United States or foreign countries, such as
a change in the current tariff structures, export or import compliance laws, or other
trade policies, could adversely affect our ability to sell our software products and
services in foreign markets. Trade protection measures and import and export licensing
requirements subject us to additional regulation and may prevent us from shipping products
to a particular market, and increase our operating costs. In addition, we could be subject
to regulations, fines and penalties for violations of import and export regulations. Such
violations could result in penalties, including prohibiting us from exporting our products
to one or more countries and restrictions from transacting business with the U.S.
government and instrumentalities thereof, and could adversely affect our business. Changes
in policies by the U.S. or foreign governments resulting in, among other things, higher
taxation, currency conversion limitations, restrictions on the transfer of funds or the
expropriation of private enterprises also could have a material adverse effect on us. Any
actions by countries in which we conduct business to reverse policies that encourage
foreign investment or foreign trade also could adversely affect our operating results. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

| | Our
future success is dependent on growing our company. The failure to manage our growth
effectively could strain our resources, which would impede our ability to increase
revenues. During the past two years, we have increased the number of product releases we
make each year and have introduced a number of new products and services. We plan to
continue to expand further the number and diversity of our software solutions and their
use in the future. Our ability to manage our planned growth effectively will require us
to: | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

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

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

| | As
we expand and diversify our product and customer base, we may be required to increase our
selling, general and administrative expenses. We also may be required to increase staffing
and other expenditures in order to meet the anticipated demands of our customers. Our
customers, however, do not commit to license our software for more than a short time in
advance. Any increase in expenses in anticipation of future orders that do not materialize
would adversely affect our profitability. If we cannot manage our growth effectively, our
business and results of operations could be negatively impacted. | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

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

26

---

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

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

| | We
have recently enhanced our existing products with Web Services capabilities, including
providing for the development of Web Services-enabled components and the integration of
Web Services-enabled components. While we believe that the popularity of using and making
available Web Services for software development could be substantial, the Web
Services-based development market is nascent and only now emerging, and we cannot predict
whether this market will develop as we anticipate or if at all. If the market does not
develop as we anticipate, our growth may be adversely affected. In particular, we are
anticipating a significant market opportunity to bridge the Microsoft .NET and Java
platforms through Web Services. If the Web Services market does not develop as we
anticipate or if one of these platforms achieves significantly greater market acceptance
than the other, the opportunity to bridge the two platforms through Web Services may not
be as significant as we expect and we will not be able to benefit from this opportunity
through our development and deployment products. Alternatively, if we are unable to
enhance our products to remain current with technological advances in the respective
platforms, we will not be in a position to capitalize on this cross-platform Web Services
opportunity. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

| | Our
markets are intensely competitive. Rapid change, new and emerging technologies and fierce
competition characterize these markets. The pace of change has accelerated due to the
emergence of the Internet, and related programming platforms and languages, including Sun
Microsystems Java and Microsofts .NET and C#, as well as new operating systems
such as Linux. | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | With
respect to our JBuilder product, we compete primarily with the Java IDEs offered by IBM,
TogetherSoft, Sun Microsystems, Oracle and JetBrains (formerly IntelliJ). With respect to
our integrated Java performance assurance tools such as our Optimizeit Suite, we compete
with Rational Software and Sitraka (Quest). With respect to our Delphi and C++Builder
products, we compete primarily with Microsoft. With respect to our TeamSource DSP service,
our potential competitors may include Merant, Microsoft, MKS and Rational Software. With
respect to our Borland Enterprise Server, AppServer Edition, we compete primarily with
BEA, IBM, Oracle and Sun Microsystems. With respect to our Borland Enterprise Server,
VisiBroker Edition and our VisiBroker middleware product, we compete primarily with Iona.
With respect to Borland Enterprise Server, Web Edition, we compete primarily with
Microsoft and providers of the Apache Web Server. In the markets for our development
products, we also compete with platform vendors such as Microsoft, Oracle, Sun
Microsystems, Hewlett-Packard, IBM and Red Hat. | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

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

27

---

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

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

| | Certain
of our competitors, such as those that are primarily hardware vendors or platform
providers, generate a substantially greater proportion of their sales in markets in which
we do not directly compete. In addition, we believe a number of such competitors view
sales of products such as development technologies as important for enhancing the
functionality of their core products, as well as the demand for such products. As a
result, certain such companies may offer products that compete with our offerings bundled
with their other products, such as application servers, work stations, personal computers,
operating systems and databases. In such event, the effective price for products that
compete with our products may be heavily discounted or offered at no charge. Such
competitive pressures could require us to reduce the price of our products and related
services and adversely affect our operating results. Similarly, certain industry alliances
and arrangements exist or may be formed in the future under which companies in markets in
which we do not compete ally with companies in our markets to bundle products in order to
help increase respective market shares. Such arrangements may result in lower effective
prices for products that compete with our offerings than our own prices, putting pressure
on our business and diminishing our competitive position. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

| | In
addition to bundled offerings and bundling arrangements, certain competitors make
available or have begun making available for no charge to their customers products that
compete with our products, including our development technologies such as JBuilder. While
we believe that products made available at minimal or no cost are not able to compete with
our offerings on the basis of quality, performance, reliability and cost of ownership,
among other things, freely available competitive technologies are a risk to our business.
At a minimum, technologies offered at no charge increase pricing pressure and threaten to
impact our results. IBMs open source Eclipse initiative, for example, is an example
of a model under which products that are competitive with our offerings may eventually
become available at minimal or no cost. IBM Eclipse is attempting to create an open source
toolkit in which customers can access and create development technologies at no charge. If
this type of model is widely adopted, our business will be harmed. | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

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

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

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

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

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

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

| | the free availability of certain core new technologies may lower barriers to entry and
minimize our competitive advantages on the basis of price and performance; and | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

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

28

---

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

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

| | We
currently maintain a number of important strategic alliances and technology partnerships
with industry leaders such as Microsoft, Sun Microsystems and Nokia. Our current
technology partners give us, among other things, early access to emerging technologies,
additional resources to market our products, as well as an entry point to meet potential
customers. Our relationships with systems integrators and resellers also provide
additional expertise to our customers and bolster our service capabilities, among other
things. In the future, we anticipate exploring additional strategic alliances, technology
partnerships and other arrangements designed to further all of these goals. Our current or
prospective strategic alliances and technology partnerships may not achieve their intended
objectives however, and parties to our strategic alliances and technology partnerships may
not perform as contemplated. Additionally, our partners may choose to terminate their
arrangements with us where no binding contractual arrangements exist. Under our
relationship with Nokia, for instance, Nokia is currently recommending JBuilder as its
preferred IDE for Java development to its customers and/or vendors of ancillary products.
This arrangement is not binding however, and Nokia may choose not to recommend JBuilder at
some future date or to recommend a competitors products. The failure to develop or
maintain our strategic alliances and technology partnerships, or our partners
inability to perform or decision not to perform or to opt out of their arrangements with
us, may impede our ability to introduce new products or enter new markets. As a result,
our operating results could be materially affected. | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

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

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

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

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

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

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

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

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

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

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

29

---

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

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

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

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

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

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

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

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

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

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

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

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

30

---

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

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

| | We
believe that our ability to successfully grow and manage our business and to develop new
products will depend, in large part, on our ability to recruit and retain qualified
employees, particularly highly skilled software engineers and management personnel. Over
the last few years, we have increased compensation, bonuses, stock options and other
fringe benefits in order to attract and retain key personnel. In the past, some of our
competitors have utilized their greater resources to provide substantial signing bonuses
and other inducements to lure key personnel away from us. As a result, we may be required
to further increase compensation and benefits. We are not certain that these efforts will
succeed in retaining our key employees, and our failure to attract and retain key
personnel could significantly harm our business. Even if we succeed in attracting and
retaining key personnel, these increased compensation costs may not be offset through
either improved productivity or higher revenue. | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

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

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

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

| | From
time to time, we announce when we expect to introduce a new product. We also attempt to
maintain a consistent release schedule for upgrades of existing products. In the past,
some of our products have shipped later, sometimes substantially later, than when we
originally expected. The loss of key employees may increase the risk of these delays. Some
of our products are based on technology licensed from third parties. We have limited
control over when and whether these technologies are upgraded. The failure to receive
adequate notice of, the delay in release of, or the inadequacy of enhancements to
technology licensed from third parties could have a material adverse effect on our ability
to develop and enhance our products. Due to these uncertainties inherent in software
development, it is likely that these risks will materialize from time to time in the
future. We could lose customers as a result of substantial delays in the shipment of new
products or product upgrades. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

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

31

---

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

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

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

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

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

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

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

| | We
depend on a small number of distributors like Ingram Micro for a significant portion of
our revenue; if we lose one or any of our major distributors our revenue could suffer. | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Ingram
Micro, one of our major distributors, accounted for approximately 17% and 14% of our total
revenue for the three and nine months ended September 30, 2002, respectively. Ingram Micro
accounted for approximately 13% of our total revenue during the year ended December 31,
2001 and 12% of total revenue during the year ended December 31, 2000. We expect that
Ingram Micro will continue to be a significant distributor and a small number of
distributors will continue to account for a significant portion of our revenue for the
foreseeable future. Our inability to increase the number of our distributors or the loss
of any one major distributor like Ingram Micro could limit our ability to maintain or
increase our market share, or could cause our revenue to drop quickly and unexpectedly. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

| | We
rely on independent software vendors, value-added resellers, systems integrators and other
channel partners to compliment our direct sales. A part of our strategy is also to bundle
our software in the products offered by value-added resellers, or VARs, or independent
software vendors, or ISVs. The pricing, terms and conditions of our agreements with these
partners are individually negotiated and vary among partners. A majority of these
agreements are non-exclusive. Many of our agreements do not require our customers to make
a minimum number of purchases. We have virtually no control over the shipping dates or
volumes of systems shipped by our customers. Although we believe our relationships with
our channel partners have been successful to date, we cannot guarantee | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

32

---

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

| | that
these relationships will continue to be successful or to grow or that the channel
partners will continue to purchase our products in the future. If we do not continue to
get referrals from third parties or if we are unable to secure license agreements with
these parties on profitable terms, our business may suffer. | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

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

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

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

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

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

| | Consolidation
continues to occur among companies that compete in our markets as firms seek to offer more
extensive suites of software products and broader arrays of software solutions and take
advantage of efficiencies and economies of scale. Additionally, a number of major hardware
companies have sought to expand their software and services offerings through
acquisitions. Changes resulting from this consolidation may negatively impact our
competitive condition, particularly as certain products, when offered as part of a bundled
suite, are offered for free or are given away to sell more hardware components. In
addition, as we seek to expand our product lines, skills and capacity through
acquisitions, a trend toward consolidation may result in our encountering increased
competition for attractive targets, and having to pay higher prices for those targets. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

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

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

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

33

---

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

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

| | Software
products occasionally contain errors or defects, especially when they are first introduced
or when new versions are released. We have not experienced any substantial problems to
date from potential defects and errors, but we cannot assure you that our products are or
in the future will be completely free of defects and errors. Errors in our software may be
caused by defects in third-party software incorporated into our software. If so, we may be
unable to fix these defects without the cooperation of these software providers. Because
these defects may not be as significant to our software providers as they are to us, we
may not receive the full and timely cooperation that we may require. In addition, we may
not have the contractual right to access the source code of third-party software and, even
if we access the source code, we may be unable to detect and fix the defect. The discovery
of a defect or error in a new version or product may result in the following consequences,
among others: | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

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

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

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

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

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

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

| | Our
products also interoperate with many components of complicated computer system
implementations, such as mainframes, application servers, personal computers, application
software, databases, operating systems and data transformation software. Failure of any
one of these components could cause all or large portions of computer systems to fail. In
such circumstances, it may be difficult to determine which software or hardware component
failed, and it is likely that customers would bring a lawsuit against several companies,
including us. Regardless of its merits, responding to any claim can be time consuming and
costly and divert the efforts of our technical and management personnel. In addition, we
may not have insurance coverage for these types of claims or our insurance coverage for
these types of claims may not be adequate. | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

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

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

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

| | Like
the publicly-traded securities of other high technology companies, the market price of our
common stock has experienced significant fluctuations and may continue to fluctuate
significantly. During the period from September 30, 2001 to September 30, 2002, the price
of our common stock has ranged from a low of $6.48 on July 12, 2002 to a high of $18.40 on
January 11, 2002. On November 12, 2002, the most recent practicable date prior to the
filing of this Form 10-Q, the closing price of a share of our common stock on The Nasdaq
Stock Market was $12.50. From time to time, the market price of our common stock may be
significantly affected by a number of factors, including, but not limited to, the
following: | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

34

---

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

| | announcements of the acquisition of new products or business; | 
| | ------------------------------------------------------------- | 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

| | Several
outside investors in Borland may own significant portions of our common stock. If these
stockholders were to sell significant amounts of their Borland stock, then the market
price of our stock could be negatively impacted. The effect of such sales, or of
significant portions of our stock being offered or made available for sale, could result
in strong downward pressure on our stock. Investors should be aware that they could
experience significant short-term volatility in our stock if such stockholders decide to
sell a substantial amount of their Borland stock at once or within a short period of time. | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

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

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

| | As
a software company, our intellectual property rights are among our most valuable assets.
We rely on a combination of patent, copyright, trademark, trade secret laws, domain name
registrations, confidentiality agreements and other contractual arrangements, and methods
to protect our intellectual property rights, but these measures may provide only limited
protection. The protective steps we have taken may be inadequate to deter
misappropriations of our intellectual property rights. In addition, it may be possible for
an unauthorized third party to reverse-engineer or decompile our software products. We may
be unable to detect the unauthorized use of, or take appropriate steps to enforce, our
intellectual property rights, particularly in certain international markets. Litigation
may be necessary to protect our intellectual property rights, and such litigation can be
time consuming and expensive. We have 99 issued U.S. patents, 10 issued foreign patents
and additional pending applications for U.S. and foreign patents. It is possible that some
or all of our patents may be challenged, invalidated or circumvented. It is also possible
that our pending patent applications may never result in issued patents, and if they do
result in issued patents, those patents may be invalidated. In addition, effective
protection of intellectual property rights is unavailable or limited in some foreign
countries, making the possibility of misappropriation of our intellectual | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

35

---

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

| | property
more likely. Current laws in the United States that prohibit copying give us only limited
practical protection from software pirates, and the laws of many other
countries provide very little protection. Policing unauthorized use of our products is
difficult, expensive and time consuming and we expect that software piracy will be a
persistent problem for our software products. In addition, the unique technology of the
Internet may tend to increase, and provide new methods for, illegal copying. Accordingly,
we cannot be certain that we will be able to protect our intellectual property rights
against unauthorized third-party copying or use. This could materially and adversely
affect our competitive position. | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

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

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

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

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

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

| | Our
future sales and any future profits will be substantially dependent upon the continued
widespread acceptance and use of the Internet by consumers and businesses as an effective
medium for exchanging information and conducting business. To be successful, consumers and
businesses that historically have used traditional means of commerce to transact business
must continue to accept and utilize the Internet as a medium for conducting business and
exchanging information. Consumers and businesses may eventually reject the Internet as a
viable commercial medium for a number of reasons, including potentially inadequate network
infrastructure, slow development of enabling technologies such as broadband or other
technologies that enable rapid download of | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

36

---

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

| | purchased
products, insufficient commercial support and privacy and security concerns. In addition,
delays in the development or adoption of new standards and protocols required to handle
increased levels of Internet activity could cause the Internet to lose its viability as a
commercial medium. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

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

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

| | Our
corporate headquarters is located in Northern California, which is susceptible to
earthquakes. | 
| | -------------------------------------------------------------------------------------------------- | 

| | Our
corporate headquarters and most of our research and development operations are currently
located in Northern California, an area known for significant seismic activity. Seismic
activity, such as a major earthquake, could have a material adverse effect on our
business, financial condition and operating results. We currently do not have a formal
disaster recovery plan nor do we currently maintain property and casualty insurance
coverage for seismic activity. Additionally, we may not carry sufficient business
interruption insurance to compensate us for any losses that we may sustain as a result of
any seismic activity. | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

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

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

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

| | During
the three months and nine months ended September 30, 2002, we have recorded net foreign
exchange losses of $0.5 million and $1.5 million, respectively. The foreign exchange
losses for the three months ended September 30, 2002 were generated primarily due to the
strength of the dollar against the Brazilian Real. The foreign exchange losses for the
nine months ended September 30, 2002 were generated primarily due to the weakness of the
dollar relative to the Euro and the strength of the dollar against the Brazilian Real. It
is uncertain whether these currency trends will continue. If these currency trends
continue, we will continue to experience foreign exchange losses on our intercompany
receivables and trade receivables and payables denominated in currency other than the
functional currency of the reporting entity to the extent that we have not hedged the
exposure with foreign currency forward exchange contracts. Such foreign exchange losses
could have a material adverse effect on our operating results and cash flows. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

37

---

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

| | During
the three months and nine months ended September 30, 2002, we recorded a foreign currency
gain of approximately $0.6 million and $0.2 million, respectively, as part of other
comprehensive income due to foreign currency movements on our long-term intercompany
balances. As of September 30, 2002, we had $9.3 million, $2.9 million and $1.8 million in
long-term intercompany balances that will be denominated in Australian dollars, Singapore
dollars and Brazilian Real, respectively. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | The
table below provides information about our derivative financial instruments, comprised of
foreign currency forward exchange contracts. The information is provided in U.S. dollar
equivalent amounts, as presented in our financial statements. For foreign currency forward
exchange contracts, the table presents the notional amounts (at the contract exchange
rates), the weighted average contractual foreign currency exchange rates and the estimated
fair value as of September 30, 2002. All instruments mature within twelve months (dollar
amounts in thousands). | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

|                                             | NotionalAmount |  | AverageContractRate |          | September 30, 2002Net Fair Value
|-------------------------------------------- | -------------- |  | ------------------- | -------- | --------------------------------
|Foreign currency forward exchange contracts: |               
|                                            
|Euro                                         | 3,555          |  |                     | 0.9744   |                                 
|Australian Dollar                            | 5,655          |  |                     | 1.8481   |                                 
|New Zealand Dollar                           | 182            |  |                     | 0.4670   |                                 
|Singapore Dollar                             | 1,911          |  |                     | 1.7790   |                                 
|South Korean Won                             | 2,971          |  |                     | 1.2320   |                                 
|Hong Kong Dollar                             | 1,218          |  |                     | 7.8008   |                                 
|Taiwan Dollar                                | 375            |  |                     | 39.9100  |                                 
|Japanese Yen                                 | 445            |  |                     | 121.4100 |                                 
|British Pounds                               | 508            |  |                     | 1.5690   |                                 
|Swedish Krone                                | 134            |  |                     | 9.3127   |                                 
|Chinese Reminbi                              | 833            |  |                     | 8.2786   |                                 
|Brazilian Real                               | 1,725          |  |                     | 3.7400   |                                 
|Indian Rupee                                 | 912            |  |                     | 48.7500  |                                 
|                                             |                |  |                     |          |                                 
|Total                                        | 20,424         |  |                     |          |                                 
|                                             |                |  |                     |          |                                 

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

| | Our
exposure to market risk for changes in interest rates relates primarily to our investment
portfolio. We do not use derivative financial instruments in our investment portfolio. We
place our cash equivalents and short-term investments in a variety of financial
instruments such as commercial paper. By corporate policy, we limit the amount of our
credit exposure to $10.0 million to any one commercial issuer. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

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

|                       | 2002 |                | 2003 |   | 2004   |  | 2005 |  | 2006 |  | There-after |  | Total
|---------------------- | ---- | -------------- | ---- | - | ------ |  | ---- |  | ---- |  | ----------- |  | -----
|                       |      | (in thousands)
|Cash equivalents       |      |                |      |   |        |  |      |  |      |  |             |  |      
|Fixed rate             | $    | 202,038        |      |   |       |  |     |  |     |  |            |  |     
|Average interest rate  |      | 1.98%          |      |   |       |  |     |  |     |  |            |  |     
|Short-term investments |     
|Fixed rate             | $    | 44,467         |      | $ | 62,829 |  |     |  |     |  |            |  |     
|Average interest rate  |      | 2.90%          |      |   | 2.87%  |  |     |  |     |  |            |  |     

38

---

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

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

| | Our
financial instruments that are exposed to concentrations of credit risk consist primarily
of cash equivalents, short-term investments and trade receivables. Our cash equivalents
and short-term investments are in high-quality securities placed with major banks and
financial institutions. Concentrations of credit risk with respect to receivables are
limited due to the large number of customers and their dispersion across geographic areas.
We perform periodic credit evaluations of our customers financial condition and
generally do not require collateral. At September 30, 2002, one customer, a U.S. based
distributor, accounted for approximately 17% of total accounts receivable. As of September
30, 2002, no other group or single customer represents greater than 10% of total accounts
receivable. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

| | (a)
Evaluation of Disclosure Controls and Procedures. Our Chief Executive Officer and Chief
Financial Officer have evaluated the effectiveness of our disclosure controls and
procedures (as such term is defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934, as amended (the Exchange Act)) as of a date within 90
days prior to the filing date of this quarterly report (the Evaluation Date).
Based on such evaluation, such officers have concluded that, as of the Evaluation Date,
our disclosure controls and procedures are effective in alerting them on a timely basis to
material information relating to us (including our consolidated subsidiaries) required to
be included in our reports filed or submitted under the Exchange Act. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | (b)
Changes in Internal Controls. Since the Evaluation Date, there have not been any
significant changes in our internal controls or in other factors that could significantly
affect such controls. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

39

---

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

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

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

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

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

| | Item
5. Other Information | 
| | ------------------------- | 

| | Sale of
Property | 
| | ---------------- | 

| | On
September 30, 2002, we entered into a definitive agreement to sell our remaining
commercial real estate in Scotts Valley, California for $14.0 million in cash, subject to
certain closing conditions. On November 1, 2002, in accordance with the terms of the
agreement, the prospective buyer elected not to close on the purchase and the agreement
was terminated. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | The
property consists of two office buildings, which formerly served as Borlands
headquarters, located at 1700-1800 Green Hills Road. The buildings are comprised of
approximately 135,000 square feet of space and were constructed in 1988. We have not
occupied any of these buildings for a number of years and had been leasing the space to
third parties. | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | BoldSoft
MDE Aktiebolag | 
| | ----------------------- | 

| | On
October 4, 2002, we acquired assets of privately-held BoldSoft MDE Aktiebolag,
headquartered in Stockholm, Sweden, a provider of next-generation, Model Driven
Architecture (MDA) technology designed to accelerate the application
development lifecycle. The purchase price was $0.7 million in cash for the purchase by
Borland of all of the intellectual property assets of BoldSoft and the purchase by Borland
B.V. of all assets other than intellectual property. We do not expect this acquisition to
have a material impact on revenues or net income for 2002. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

| | On
October 8, 2002, we entered into an Agreement and Plan of Merger with Starbase
Corporation, a Delaware corporation, and Galaxy Acquisition Corp. (Galaxy), a
Delaware corporation and wholly owned subsidiary of Borland. Starbase provides software
configuration and requirements management tools to assist in managing development projects
from inception to deployment and maintenance. Pursuant to the merger agreement, on October
11, 2002, we commenced a tender offer for all outstanding shares of Starbases common
stock at a price of $2.75 per share for total consideration of approximately $24.0 million
in cash, subject to certain conditions, including the tender, without withdrawal prior to
the expiration of the offer, of at least a majority of Starbases outstanding shares
of common stock, including shares subject to Starbase stock options with an exercise price
per share less than $2.75. We expect to incur between $7.0 million and $12.0 million in
acquisition and transaction costs. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | In
connection with the merger agreement, we also agreed to make available to Starbase bridge
financing of $2.0 million to fund its operations until the transaction is completed. As of
November 12, 2002, $750,000 has been loaned by us to Starbase. Subject to certain
exceptions, the bridge financing will mature upon the earliest of 1) the date the merger
agreement is terminated, 2) the date on which an event of default occurs as defined by the
bridge financing documents (including a breach by Starbase of the merger agreement) or 3)
December 15, 2002. Upon the consummation of the merger of Galaxy with and into Starbase
pursuant to the merger agreement, the obligations under the bridge financing shall be
deemed satisfied in full. The bridge loan bears an annual interest rate of eight percent
and is secured by substantially all the assets of Starbase, including without limitation
its intellectual property. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

40

---

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

| | Simultaneous
with the execution of the merger agreement, all of the directors and certain of the
executive officers of Starbase entered into agreements pursuant to which they agreed to
tender shares of Starbase held by them, which represent in the aggregate approximately
0.94% percent of the outstanding shares of Starbases common stock as of October 8,
2002. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Borland
and Galaxy commenced the offer on October 11, 2002. The offer and withdrawal rights were
initially scheduled to expire at 12:00 midnight, EST, on November 8, 2002. In accordance
with applicable law and the merger agreement, Borland has extended the offer and the offer
is currently scheduled to expire at 12:00 midnight, EST, on November 22, 2002, unless
further extended. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | The
merger agreement also provides that following consummation of the offer and the
satisfaction or waiver of certain conditions, Galaxy will be merged with and into Starbase
with Starbase surviving the merger as a wholly owned subsidiary of Borland, and all
remaining outstanding publicly-held shares of Starbase common stock (other than shares
held by Starbase stockholders who properly exercise their appraisal rights under
applicable law) will be converted into the right to receive $2.75 per share in cash. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | For
further information refer to our Tender Offer Statement on Schedule TO filed with the
Securities and Exchange Commission on October 11, 2002, as amended. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

| | On
October 29, 2002, we entered into an Agreement and Plan of Merger and Reorganization with
TogetherSoft Corporation, a Delaware corporation, Targa Acquisition Corp. I, Targa
Acquisition Corp. II, and certain stockholders of TogetherSoft as stockholders
agents. TogetherSoft is a leading provider of design-driven development solutions designed
to accelerate the software development process. Pursuant to the merger agreement, Targa
Acquisition Corp. I will be merged with and into TogetherSoft, immediately followed by the
merger of TogetherSoft with and into Targa Acquisition Corp. II. Following these
transactions, the separate existence of TogetherSoft will cease and Targa Acquisition
Corp. II will continue as the surviving corporation and a wholly owned subsidiary of
Borland. An aggregate of 9,050,000 shares of Borland common stock will be issued, and
$82.5 million in cash will be paid, to TogetherSoft stockholders on a fully diluted basis
in connection with the merger, subject to potential reduction for certain expenses. We
expect to incur between $12.0 and $15.0 million in acquisition- and transaction-related
expenses. Consideration having a value of $26 million at closing will be held in escrow
subject to certain indemnification provisions. This consideration will be released to the
stockholders at various times beginning eighteen months after the close of the transaction
and ending on the fifth anniversary of the closing date. The foregoing description of
these transactions does not purport to be complete and is qualified in its entirety by
reference to the complete text of the merger agreement, which is included as Exhibit 2.2
hereto. | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | In
connection with the merger agreement, the directors, the executive officers and certain
other TogetherSoft stockholders have entered into agreements pursuant to which such
stockholders have agreed to vote all shares of TogetherSoft held by them in favor of the
adoption of the merger agreement. As of October 29, 2002, shares subject to such voting
agreements represent in the aggregate approximately 67.5% of the outstanding shares of
TogetherSofts capital stock, which represent more than the number of shares of
capital stock necessary to adopt the merger agreement under applicable law and take such
other actions necessary to consummate the transactions contemplated thereby. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

| | The
transaction is subject to regulatory approvals, including the approval by the California
Commissioner of Corporations after a fairness hearing, and the expiration or termination
of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act and any
applicable foreign antitrust laws, and certain other customary closing conditions. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Changes
to Management Team | 
| | -------------------------- | 

| | On
October 24, 2002, we announced the promotion of Frederick A. Ball from Executive Vice
President and Chief Financial Officer to the newly-created position of Executive Vice
President of Corporate Development and Mergers and Acquisitions. We also announced the
appointment of Kenneth R. Hahn as our Senior Vice President and Chief Financial Officer. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

41

---

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

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

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

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

| | Exhibit No. | Description of Exhibit                                                                                                                                                                                                                                                                                                                                                                        | 
| | ----------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| |             |                                                                                                                                                                                                                                                                                                                                                                                               | 
| | 2.1         | Agreement and Plan of
Merger, dated as of October 8, 2002, by and among Borland Software Corporation,
Galaxy Acquisition Corp. and Starbase Corporation (previously filed with the
Commission on October 11, 2002 as an exhibit to Borlands Tender Offer Statement
on Schedule TO and incorporated herein by reference).                                                                     | 
| | 2.2         | Agreement and Plan of Merger and Reorganization, dated as of October 29, 2002, by and among Borland Software
Corporation, Targa Acquisition Corp. I, Targa Acquisition Corp. II, TogetherSoft
Corporation, Peter Coad and Kurt Jaggers (previously filed with the Commission
on November 1, 2002 as an exhibit to Borlands Current Report on Form 8-K and
incorporated herein by reference). | 
| | 99.1        | Certification of Dale L.
Fuller, Chief Executive Officer of Borland Software Corporation pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.*                                                                                                                                                                                           | 
| | 99.2        | Certification of Kenneth
R. Hahn, Chief Financial Officer of Borland Software Corporation, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.*                                                                                                                                                                                         | 
| | 99.3        | Employment Agreement
between Kenneth R. Hahn and Borland Software Corporation, dated as of August 7,
2002. *++                                                                                                                                                                                                                                                                                | 
| | 99.4        | Amendment to Employment
Agreement between Kenneth R. Hahn and Borland Software Corporation, dated as of
October 22, 2002. *++                                                                                                                                                                                                                                                                 | 

| |  | 
| |  | 

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

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

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

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

| | During
the three months ended September 30, 2002, Borland filed the following Current Reports on
Form 8-K with the Securities and Exchange Commission: | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------ | 

| | 1. | Form 8-K filed on July 29, 2002 announcing the settlement of a patent dispute with
WebGain, Inc. | 
| | -- | ------------------------------------------------------------------------------------------------ | 

| | 2. | Form 8-K filed on August 15, 2002 disclosing under Regulation FD the filing of
certifications of the Companys Chief Executive Officer and Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 as exhibits to its Quarterly
Report on Form 10-Q for the period ended June 30, 2002, as filed with the Securities and
Exchange Commission on August 14, 2002. | 
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

42

---

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

| | SIGNATURES | 
| | ---------- | 

| | Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

| | Date:
November 13, 2002 | 
| | ----------------------- | 

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

43

---

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

| | Certification
of Chief Executive Officer Pursuant toSection 302(a) of the Sarbanes-Oxley Act of 2002 | 
| | ---------------------------------------------------------------------------------------------------- | 

| | I,
Dale L. Fuller, certify that: | 
| | -------------------------------- | 

| | 1. | I
have reviewed this quarterly report on Form 10-Q of Borland Software Corporation
(registrant); | 
| | -- | -------------------------------------------------------------------------------------------------- | 

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

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

| | 4. | The registrants other certifying officers and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have: | 
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| |  | a) | designed such disclosure controls and procedures to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in which this quarterly
report is being prepared; | 
| |  | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| |  | b) | evaluated the effectiveness of the registrants disclosure controls and procedures
as of a date within 90 days prior to the filing date of this quarterly report (the Evaluation
Date); and | 
| |  | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| |  | c) | presented in this quarterly report our conclusions about the effectiveness of the
disclosure controls and procedures based on our evaluation as of the Evaluation Date; | 
| |  | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | 5. | The registrants other certifying officers and I have disclosed, based on our most
recent evaluation, to the registrants auditors and the audit committee of the
registrants board of directors (or persons performing the equivalent functions): | 
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| |  | a) | all significant deficiencies in the design or operation of internal controls which could
adversely affect the registrants ability to record, process, summarize and report
financial data and have identified for the registrants auditors any material
weaknesses in internal controls; and | 
| |  | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| |  | b) | any fraud, whether or not material, that involves management or other employees who have
a significant role in the registrants internal controls; and | 
| |  | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------ | 

| | 6. | The registrants other certifying officers and I have indicated in the quarterly
report whether or not there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date of our
most recent evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses. | 
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Date: 11.13.2002 | 
| | ---------------- | 

| |  | /s/ DALE L. FULLER                  | 
| |  | ----------------------------------- | 
| |  |                                     | 
| |  | Dale L. Fuller                      | 
| |  | Chief Executive Officer & President | 

44

---

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

| | Certification
of Chief Financial Officer Pursuant toSection 302(a) of the Sarbanes-Oxley Act of 2002 | 
| | ---------------------------------------------------------------------------------------------------- | 

| | I,
Kenneth R. Hahn, certify that: | 
| | --------------------------------- | 

| | 1. | I
have reviewed this quarterly report on Form 10-Q of Borland Software Corporation
(registrant); | 
| | -- | -------------------------------------------------------------------------------------------------- | 

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

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

| | 4. | The registrants other certifying officers and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have: | 
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| |  | a) | designed such disclosure controls and procedures to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in which this quarterly
report is being prepared; | 
| |  | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| |  | b) | evaluated the effectiveness of the registrants disclosure controls and procedures
as of a date within 90 days prior to the filing date of this quarterly report (the Evaluation
Date); and | 
| |  | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| |  | c) | presented in this quarterly report our conclusions about the effectiveness of the
disclosure controls and procedures based on our evaluation as of the Evaluation Date; | 
| |  | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | 5. | The registrants other certifying officers and I have disclosed, based on our most
recent evaluation, to the registrants auditors and the audit committee of the
registrants board of directors (or persons performing the equivalent functions): | 
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| |  | a) | all significant deficiencies in the design or operation of internal controls which could
adversely affect the registrants ability to record, process, summarize and report
financial data and have identified for the registrants auditors any material
weaknesses in internal controls; and | 
| |  | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| |  | b) | any fraud, whether or not material, that involves management or other employees who have
a significant role in the registrants internal controls; and | 
| |  | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------ | 

| | 6. | The registrants other certifying officers and I have indicated in the quarterly
report whether or not there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date of our
most recent evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses. | 
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Date: 11/13/02 | 
| | -------------- | 

| |  | /s/ KENNETH R. HAHN                             | 
| |  | ----------------------------------------------- | 
| |  |                                                 | 
| |  | Kenneth R. Hahn                                 | 
| |  | Senior Vice President & Chief Financial Officer | 

45

---

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