---

SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549

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# FORM 10-Q

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

For the quarterly period ended June 30, 2003

OR

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

For the transition period from
____________ to ____________

Commission File Number 0-16096

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

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

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

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

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

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

The number of shares of common stock
outstanding as of July 31, 2003, the most recent practicable date prior to the filing of this report,
was 80,995,474.

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INDEX

|        |                                                                                                                     |  | PAGE
|------- | ------------------------------------------------------------------------------------------------------------------- |  | ----
|        |                                                                                                                     |  |     
|PART I  | FINANCIAL INFORMATION                                                                                               |  |     
|        |                                                                                                                     |  |     
|Item 1. | Financial Statements (unaudited)                                                                                    |  | 1   
|        |                                                                                                                     |  |     
|        | Condensed Consolidated Balance Sheets at June 30, 2003 and December 31, 2002                                        |  | 1   
|        |                                                                                                                     |  |     
|        | Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2003 and 2002           |  | 2   
|        |                                                                                                                     |  |     
|        | Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2003 and 2002 |  | 3   
|        |                                                                                                                     |  |     
|        | Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2003 and 2002                     |  | 4   
|        |                                                                                                                     |  |     
|        | Notes to Condensed Consolidated Financial Statements                                                                |  | 5   
|        |                                                                                                                     |  |     
|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations                               |  | 14  
|        |                                                                                                                     |  |     
|Item 3. | Quantitative and Qualitative Disclosures About Market Risk                                                          |  | 42  
|        |                                                                                                                     |  |     
|Item 4. | Controls and Procedures                                                                                             |  | 43  
|        |                                                                                                                     |  |     
|        |                                                                                                                     |  |     
|PART II | OTHER INFORMATION                                                                                                   |  |     
|        |                                                                                                                     |  |     
|Item 1. | Legal Proceedings                                                                                                   |  | 44  
|        |                                                                                                                     |  |     
|Item 4. | Submission of Matters to a Vote of Security Holders                                                                 |  | 44  
|        |                                                                                                                     |  |     
|Item 6. | Exhibits and Reports on Form 8-K                                                                                    |  | 45  
|        |                                                                                                                     |  |     
|        | Signatures                                                                                                          |  | 47  

---

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

PART IFINANCIAL INFORMATION

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

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

|                                                                                                                                | June 30, 2003 |  | December 31, 2002 |         
|------------------------------------------------------------------------------------------------------------------------------- | ------------- |  | ----------------- | --------
|
|ASSETS                                                                                                                          |               |  |                   |         
|Current assets:                                                                                                                 |               | 
|Cash and cash equivalents                                                                                                       |               |  | $                 | 180,284 
|Short-term investments                                                                                                          |               |  |                   | 25,116  
|Accounts receivable, net of allowances of $16,944 and $17,538                                                                   |               |  |                   | 57,841  
|Deferred tax assetscurrent                                                                                                     |               |  |                   | 10,446  
|Other current assets                                                                                                            |               |  |                   | 16,612  
|                                                                                                                                |               |  |                   |         
|Total current assets                                                                                                            |               |  |                   | 290,299 
|Property and equipment, net                                                                                                     |               |  |                   | 10,434  
|Property held for sale                                                                                                          |               |  |                   | 9,935   
|Goodwill and intangible assets                                                                                                  |               |  |                   | 223,896 
|Deferred taxnon-current                                                                                                        |               |  |                   | 10,942  
|Other non-current assets                                                                                                        |               |  |                   | 5,087   
|                                                                                                                                |               |  |                   |         
|Total assets                                                                                                                    |               |  | $                 | 550,593 
|                                                                                                                                |               |  |                   |         
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                            |               | 
|Current liabilities:                                                                                                            |               | 
|Accounts payable                                                                                                                |               |  | $                 | 13,699  
|Accrued expenses                                                                                                                |               |  |                   | 52,260  
|Short-term restructuring                                                                                                        |               |  |                   | 3,506   
|Income taxes payable                                                                                                            |               |  |                   | 6,340   
|Deferred revenues                                                                                                               |               |  |                   | 47,703  
|Other current liabilities                                                                                                       |               |  |                   | 17,115  
|                                                                                                                                |               |  |                   |         
|Total current liabilities                                                                                                       |               |  |                   | 140,623 
|Long-term deferred tax liabilities                                                                                              |               |  |                   | 10,713  
|Long-term restructuring                                                                                                         |               |  |                   | 4,140   
|Other long-term liabilities                                                                                                     |               |  |                   | 7,414   
|                                                                                                                                |               |  |                   |         
|                                                                                                                                |               |  |                   | 162,890 
|                                                                                                                                |               |  |                   |         
|Commitments and contingencies (Notes 9  and 11)                                                                                 |               | 
|Minority interest                                                                                                               |               |  |                   |        
|Stockholders equity:                                                                                                           |               | 
|Common stock; $0.01 par value; 200,000,000 shares authorized; 80,950,450 and           72,183,463 shares issued and outstanding |               |  |                   | 809     
|Additional paid-in capital                                                                                                      |               |  |                   | 614,907 
|Accumulated deficit                                                                                                             |               |  |                   | (192,313
|Deferred compensation                                                                                                           |               |  |                   | (810    
|Cumulative comprehensive income                                                                                                 |               |  |                   | 7,898   
|                                                                                                                                |               |  |                   |         
|                                                                                                                                |               |  |                   | 430,491 
|Less common stock in treasury at cost, 6,395,401 and 5,700,600 shares                                                           |               |  |                   | (42,788 
|                                                                                                                                |               |  |                   |         
|                                                                                                                                |               |  |                   | 387,703 
|                                                                                                                                |               |  |                   |         
|Total liabilities and stockholders equity                                                                                      |               |  | $                 | 550,593 
|                                                                                                                                |               |  |                   |         

See Notes to the Condensed Consolidated Financial Statements.

1

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

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

|                                                                                              | Three Months Ended
June 30, |  | Six Months Ended
June 30, |       
|--------------------------------------------------------------------------------------------- | --------------------------- |  | ------------------------- | ------
|
|Licenses and other revenues                                                                   |                             |  | $                         | 56,622
|Service revenues                                                                              |                             |  |                           | 19,648
|                                                                                              |                             |  |                           |       
|Net revenues                                                                                  |                             |  |                           | 76,270
|                                                                                              |                             |  |                           |       
|Cost of licenses and other revenues                                                           |                             |  |                           | 3,012 
|Cost of service revenues                                                                      |                             |  |                           | 7,324 
|                                                                                              |                             |  |                           |       
|Cost of revenues                                                                              |                             |  |                           | 10,336
|                                                                                              |                             |  |                           |       
|Gross profit                                                                                  |                             |  |                           | 65,934
|                                                                                              |                             |  |                           |       
|Research and development                                                                      |                             |  |                           | 15,457
|Selling, general and administrative                                                           |                             |  |                           | 46,640
|Restructuring, amortization of intangibles,    acquisition-related expenses and other charges |                             |  |                           | 8,510 
|                                                                                              |                             |  |                           |       
|Total operating expenses                                                                      |                             |  |                           | 70,607
|                                                                                              |                             |  |                           |       
|Operating income (loss)                                                                       |                             |  |                           | (4,673
|Interest income, net and other                                                                |                             |  |                           | 889   
|                                                                                              |                             |  |                           |       
|Income (loss) before income taxes                                                             |                             |  |                           | (3,784
|Income tax provision                                                                          |                             |  |                           | 1,185 
|                                                                                              |                             |  |                           |       
|Net income (loss)                                                                             |                             |  | $                         | (4,969
|                                                                                              |                             |  |                           |       
|Net income (loss) per share:                                                                  |                             | 
|Income (loss) per sharebasic                                                                 |                             |  | $                         | (0.06 
|                                                                                              |                             |  |                           |       
|Income (loss) per sharediluted                                                               |                             |  | $                         | (0.06 
|                                                                                              |                             |  |                           |       
|Shares used in computing basic income (loss) per share                                        |                             |  |                           | 80,547
|                                                                                              |                             |  |                           |       
|Shares used in computing diluted income (loss) per share                                      |                             |  |                           | 80,547
|                                                                                              |                             |  |                           |       

See Notes to the Condensed Consolidated Financial Statements.

2

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

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

|                                                              | Three Months Ended
June 30, |  | Six Months Ended
June 30, |       
|------------------------------------------------------------- | --------------------------- |  | ------------------------- | ------
|
|Net income                                                    |                             |  | $                         | (4,969
|Other comprehensive income (loss):                            |                             | 
|Foreign currency translation adjustments                      |                             |  |                           | 1,126 
|Fair market value adjustment foravailable-for-sale securities |                             |  |                           | 11    
|                                                              |                             |  |                           |       
|Comprehensive income                                          |                             |  | $                         | (3,832
|                                                              |                             |  |                           |       

See Notes to the Condensed Consolidated Financial Statements.

3

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

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

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

See Notes to the Condensed Consolidated Financial Statements.

4

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

BORLAND SOFTWARE CORPORATION

# Notes to Condensed
Consolidated Financial Statements (unaudited)

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

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

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

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

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

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

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

|                         | Three Months Ended June 30, |  | Six Months Ended June 30,
|------------------------ | --------------------------- |  | -------------------------
|
|Expected life (in years) |                             |  |                          
|Expected volatility      |                             |  |                          
|Risk-free interest rate  |                             |  |                          
|Expected dividend rate   |                             |  |                          

5

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

| | The
weighted average fair value of the stock options granted under our employee stock option
plans and the stock awarded under our employee stock purchase plan, as defined by SFAS
123, was $5.94 and $6.61 for the three months ended June 30, 2003 and 2002, respectively
and $7.69 and $7.70 for the six months ended June 30, 2003 and 2002, respectively. | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

|                                                | Three Months Ended June 30, |  | Six Months Ended June 30, |        
|----------------------------------------------- | --------------------------- |  | ------------------------- | -------
|
|Net income (loss):                              |                             |  |                           |        
|As reported                                     |                             |  | $                         | (4,969 
|Stock compensation adjustment  intrinsic value |                             |  |                           | (35    
|Stock compensation expense  fair value         |                             |  |                           | (6,622 
|                                                |                             |  |                           |        
|Pro Forma                                       |                             |  | $                         | (11,626
|                                                |                             |  |                           |        
|Net income (loss) per share:                    |                             | 
|As reported  basic                             |                             |  | $                         | (0.06  
|As reported  diluted                           |                             |  | $                         | (0.06  
|Pro Forma  basic                               |                             |  | $                         | (0.14  
|Pro Forma  diluted                             |                             |  | $                         | (0.14  

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

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

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

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

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

|                                                                                       | Three Months Ended June 30, |  | Six Months Ended June 30, |       
|-------------------------------------------------------------------------------------- | --------------------------- |  | ------------------------- | ------
|
|Numerator:                                                                             |                             |  |                           |       
|Net income (loss)                                                                      |                             |  | $                         | (4,969
|Denominator:                                                                           |                             | 
|Denominator for basic income (loss) per share     weighted average shares outstanding |                             |  |                           | 80,547
|Effect of dilutive securities                                                          |                             |  |                           |      
|                                                                                       |                             |  |                           |       
|Denominator for dilutive income (loss) per share                                       |                             |  |                           | 80,547
|                                                                                       |                             |  |                           |       
|Net income (loss) per share  basic                                                    |                             |  | $                         | (0.06 
|                                                                                       |                             |  |                           |       
|Net income (loss) per share  diluted                                                  |                             |  | $                         | (0.06 
|                                                                                       |                             |  |                           |       

6

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

| | The
diluted earnings per share calculation for the three and six months ended June 30, 2003
and 2002 excludes options to purchase approximately 14.7 million and 5.3 million shares,
respectively, because their effect would have been antidilutive. | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

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

| | On
January 14, 2003, we completed the acquisition of TogetherSoft Corporation, or
TogetherSoft, which was a privately-held corporation. The consideration consisted of
approximately $82.5 million in cash, 9,050,000 shares of Borland common stock and the
assumption of certain liabilities and obligations of TogetherSoft, including those arising
under its stock option plans. The consideration paid was reduced for certain legal
expenses paid by TogetherSoft. Approximately $26.0 million of the total consideration is
being held in escrow to indemnify us against, and reimburse us for, certain events and
cover certain liabilities and transaction costs. Unused funds will be released from escrow
at specified times between 2004 and 2007. We recorded $151.3 million in goodwill for the
excess of the purchase price over the net assets acquired and $37.2 million for acquired
technology. TogetherSoft was a provider of platform-neutral, design-driven development
solutions designed to accelerate the software development process. | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | During
the three and six months ended June 30, 2003, we recorded approximately $4.1 million and
$7.7 million in acquisition-related costs associated with the amortization of the
purchased intangibles from the acquisition of TogetherSoft. During the three months ended
June 30, 2003, we paid approximately $0.2 million in acquisition-related expenses, which
were recorded as an adjustment to goodwill. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

|                             | Severance
and Benefits |  | Facilities |        | Other |   | Total 
|---------------------------- | ---------------------- |  | ---------- | ------ | ----- | - | ------
|Accrual at December 31, 2002 |                        |  | $          |       |       | $ |      
|2003 restructuring accrual   |                        |  |            | 3,234  |       |   | 3,109 
|Cash payments and write-offs |                        |  |            | (2,518 | )     |   | (2,521
|                             |                        |  |            |        |       |   |       
|Accrual at June 30, 2003     |                        |  | $          | 716    |       | $ | 588   
|                             |                        |  |            |        |       |   |       

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

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

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

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

7

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

| | During
the three and six months ended June 30, 2003, we recorded approximately $1.5 million and
$3.1 million, respectively, in acquisition-related costs associated with the amortization
of the purchased intangibles from the acquisition of Starbase. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

|                             | Severance
and Benefits |  | Facilities |        | Other |   | Total 
|---------------------------- | ---------------------- |  | ---------- | ------ | ----- | - | ------
|Accrual at December 31, 2002 |                        |  | $          | 2,350  |       | $ | 3,385 
|2003 restructuring accrual   |                        |  |            | 274    |       |   | 13    
|Cash payments and write-offs |                        |  |            | (2,548 | )     |   | (3,193
|                             |                        |  |            |        |       |   |       
|Accrual at June 30, 2003     |                        |  | $          | 76     |       | $ | 205   
|                             |                        |  |            |        |       |   |       

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

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

|                   | Three Months Ended June 30, |  | Six Months Ended June 30,
|------------------ | --------------------------- |  | -------------------------
|
|Total net revenues |                             |  | $                        
|Net loss           |                             |  |                          
|Net loss per share |                             |  | $                        

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

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

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

| | In
accordance with the provisions of SFAS No. 142, Goodwill and Other Intangible
Assets, or SFAS 142, we did not amortize the excess of the purchase price over net
assets acquired. The contingent consideration will be expensed when it is deemed probable
that such payments will be made. For the three and six months ended June 30, 2003, we
expensed $2.5 million and $4.5 million, respectively, in contingent consideration related
to the VMGear acquisition. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

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

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

| | We
performed a transitional impairment test of our goodwill and intangible assets as of
January 1, 2002. At the time of the test, no impairment of our goodwill or intangible
assets was noted. We performed our annual | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

8

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

| | assessment
of goodwill in December 2002, and concluded that there was no additional impairment. Due
to the adoption of SFAS 142 on January 1, 2002, we ceased amortizing goodwill. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

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

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

| | The
intangible assets are all amortizable and have original estimated useful lives as follows:
acquired technology  2 to 3 years; maintenance contracts  1 year;
trademarks3 years; other1 to 3 years. Based on the current amount of
intangibles subject to amortization, the estimated amortization expense for the remainder
of 2003 and the succeeding four years is as follows: remainder of 2003: $11.7 million;
2004: $14.2 million; 2005: $12.1 million; 2006: $0.1 million; and 2007: $0 million. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

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

|                                              | Severance
and Benefits |  | Facilities |      | Other |   | Total 
|--------------------------------------------- | ---------------------- |  | ---------- | ---- | ----- | - | ------
|Accrual at December 31, 2002                  |                        |  | $          | 149  |       | $ | 678   
|2003 restructuring                            |                        |  |            | 961  |       |   | 2,024 
|Cash paid during 2003                         |                        |  |            | (623 | )     |   | (1,970
|Reclassification from long term restructuring |                        |  |            |     |       |   | 303   
|                                              |                        |  |            |      |       |   |       
|Accrual at June 30, 2003                      |                        |  | $          | 487  |       | $ | 1,035 
|                                              |                        |  |            |      |       |   |       

| | Our
2003 restructuring accrual included $1.0 million resulting from headcount reductions of 28
employees, including 19 in sales and general and administrative and 9 in research and
development, and $2.0 million resulting from reduction of certain facilities leases. This
amount represents our estimate of the costs to exit the facilities and is recorded in
current liabilities. | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | In
addition, we recorded a charge of $2.4 million during the six months ended June 30, 2003
for a change in estimate for lease termination costs related to a facility in the United
Kingdom. Due to the timing of payments under the lease agreement, we have recorded these
costs as a part of long-term restructuring. The total long-term lease termination
obligation as of June 30, 2003 was $4.1 million. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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| | NOTE
7INCOME TAXES | 
| | ------------------- | 

| | During
the three months ended June 30, 2003, we contemplated an election to achieve a step-up in
basis of Starbases assets for income tax purposes. Our analysis led us to conclude
that the additional benefits from the basis step-up did not justify the additional tax
liabilities we would incur in order to make the election. Therefore, in accordance with
SFAS No. 109, Accounting for Income Taxes, or SFAS 109, deferred tax
liabilities of approximately $4.7 million have been recorded for the tax effect of
the intangible assets which are not amortizable for tax purposes. Deferred tax assets of
$4.7 million have also been recorded as we are releasing a portion of our previously
established valuation allowance against our deferred tax assets. We are releasing a
portion of the valuation allowance to the extent the realization of our deferred tax
assets becomes assured as a result of the additional taxable income generated by the
non-deductible amortizable intangible assets. | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

| | During
September 2001, our Board of Directors authorized repurchases of up to $30.0 million of our outstanding common stock. As a part of this program, we repurchased
395,000 shares of our common stock for an average price of $9.91 per share for a total
consideration of $3.9 million during the three months ended June 30, 2003. We repurchased
695,000 shares of our common stock for an average price of $9.78 per share for a total
consideration of $6.8 million during the six months ended June 30, 2003. We repurchased
359,700 shares of our common stock for an average price of $9.53 per share for a total
consideration of $3.4 million during the six months ended June 30, 2002, all of which were
purchased during the three months ended June 30, 2002. This authorization is still deemed
to be in effect and $12.7 million remains authorized for future repurchases. During August
2003, our Board of Directors authorized an additional repurchase of up to $15.0 million in
Borland common stock. We expect to continue to repurchase shares under our repurchase
program from time to time depending on market conditions, share price and availability and
other factors at our discretion. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | NOTE
9LITIGATION | 
| | ----------------- | 

| | On
November 27, 2002, a stockholder class action and derivative lawsuit, Dieterich v. Harrer,
et al., Case No. 02CC00350, was filed against Starbase Corporation and five former
directors of Starbase in the Superior Court of the State of California for Orange County.
The complaint alleged that the former directors had breached fiduciary duties owed to
Starbase and stockholders of Starbase. Borland is paying the costs of defending this
litigation pursuant to indemnification obligations under the merger agreement relating to
the acquisition of Starbase by Borland. On January 23, 2003, defendants filed a demurrer
seeking to have all the claims dismissed, and also filed a motion to stay discovery
pending a ruling on the demurrer. On February 25, 2003, plaintiff filed its first amended
class action complaint, or the amended complaint, naming as defendants the five former
directors and the investment banking firm that provided financial services to Starbase,
two law firms that provided legal services to Starbase and an individual and entity that
helped arrange financing for Starbase. The amended complaint purported to be brought on
behalf of Starbase stockholders who tendered shares of Starbase common stock in the tender
offer commenced by Borland on October 11, 2002 and that ended on November 11, 2002, or in
the merger that was completed on January 7, 2003. Plaintiff alleged that the five former
directors breached their fiduciary duties owed to Starbase in connection with a proposed
financing of Starbase in mid-2002, and that the other defendants aided and abetted the
purported breach of fiduciary duty. The director defendants filed a demurrer seeking
dismissal of the amended complaint. On June 6, 2003, the court sustained the demurrer of
all defendants and dismissed the lawsuit against all defendants but granted the plaintiff
leave to amend the complaint against the director defendants. On July 3, 2003, the
plaintiff filed a second amended complaint. On July 8, 2003, plaintiff filed a request for
voluntary dismissal of the action without prejudice. Defendants opposed that request on
the ground that plaintiff wanted to refile the action in another jurisdiction while still
being able to pursue the litigation in the Superior Court of the State of California of
Orange County or appeal the courts decision to the California Court of Appeal. On
July 31, 2003, the court held that plaintiffs request for dismissal was deficient,
but permitted plaintiff to file another request. The court also stayed the litigation
until October 29, 2003. The court has granted the motion of the director defendants to
stay discovery. There is no indication at present that the lawsuit will have a material
effect on Borlands financial condition, results of operations or liquidity. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | From
time to time, we may be involved in other lawsuits, claims, investigations and
proceedings, consisting of intellectual property, commercial, employment and other
matters, which arise in the ordinary course of business. In accordance with Statement of
Financial Accounting Standards No. 5, Accounting for Contingencies, or SFAS 5,
we make a provision for a liability when it is both probable that a liability has been
incurred and the amount of the loss can be reasonably estimated. These provisions are
reviewed at least quarterly and adjusted to reflect the impacts | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

| | of
negotiations, settlements, rulings, advice of legal counsel and other information and
events pertaining to a particular case. Litigation is inherently unpredictable. However,
we believe that we have valid defenses with respect to the legal matters pending against
us, as well as adequate provisions for any probable and estimable losses. If an
unfavorable ruling were to occur in any specific period, there exists the possibility of
a material adverse impact on the results of operations for that period. We believe that,
given our current liquidity and cash and investment balances, even were we to receive an
adverse judgment with respect to litigation that we are currently a party to, it is
likely that such a judgment would not have a material impact on our financial condition,
results of operations or liquidity. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

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

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

| | NOTE
11INDEMNIFICATIONS AND GUARANTEES | 
| | --------------------------------------- | 

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

| | We
have entered into an agreement for the outsourcing of our order fulfillment. As a
component of this agreement, we guarantee that in the event we terminate the fulfillment
agreement, we will purchase all inventory held by the vendor at the time of termination.
We estimate and accrue reserves for excess inventory held by the fulfillment vendor. As of
June 30, 2003, we had inventory in excess of the reserves of approximately $0.3 million,
which represents the potential obligation relating to this guarantee. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

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

| | During
the six months ended June 30, 2003, we entered into an operating lease for our U.S.
regional sales headquarters office in Cupertino, California. In the event that we do not
exercise our option to extend the term of the | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

| | lease,
we guarantee certain costs to restore the property to certain conditions in place at the
time of lease. We are accruing the estimated lease restoration costs over the lease term. | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | NOTE
12RECENT ACCOUNTING PRONOUNCEMENTS | 
| | ---------------------------------------- | 

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

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

| | In
January 2003, the FASB issued FIN No. 46, Consolidation of Variable Interest
Entities, or FIN 46. Until this interpretation, a company generally included another
entity in its consolidated financial statements only if it controlled the entity through
voting interests. FIN 46 requires a variable interest entity to be consolidated by a
company if that company is subject to a majority of the risk of loss from the variable
interest entitys activities or entitled to receive a majority of the entitys
residual returns. We have adopted the requirements of FIN 46. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | In
December 2002, the FASB issued SFAS 148. SFAS 148 provides alternative methods of
transition for a voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, SFAS 148 amends the disclosure
requirements of SFAS 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. SFAS 148 is effective for financial
statements for years ending after December 31, 2002. We have adopted the disclosure
requirements of SFAS 148. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

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

| | In
June 2002, the FASB issued SFAS 146. SFAS 146 addresses financial accounting and reporting
for costs associated with exit or disposal activities and nullifies EITF 94-3. SFAS 146
requires that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. Under EITF 94-3, a liability | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

12

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

| | for
an exit cost as defined in EITF 94-3 was recognized at the date of an entitys
commitment to an exit plan. SFAS 146 eliminates the definition and requirements for
recognition of exit costs in EITF 94-3. SFAS 146 also establishes that fair value is the
objective for initial measurement of the liability. SFAS 146 is applicable for all exit
activity initiated after December 31, 2002. Our adoption of SFAS 146 did not have a
material impact on our results of operation, financial condition or cash flows. | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

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

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

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

| | We
were incorporated in California in 1983 and reincorporated in Delaware in 1989. We
maintain our corporate headquarters 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 http://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 claimed by 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 | 
| | -------------------------- | 

| | We
are a leading global provider of software development and deployment solutions. We provide
our customers with a comprehensive solution designed to help them deliver better software
faster by offering products that address the definition, design, development, testing and
deployment phases of the application development lifecycle and products that help
customers manage software development projects from beginning to end. Our standards-based
solutions are designed to improve software quality, accelerate the delivery of software,
lower the cost of ownership and reduce the risk of errors. We have an installed base of
over three million users worldwide, including leading enterprises in the following
industries: high technology, telecommunications, financial services and government
contractors in the fields of space and defense. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | We
believe that our customers turn to us because our products and services offer the
following benefits: | 
| | -------------------------------------------------------------------------------------------------------- | 

| |  | Comprehensive
Solution.We offer our customers products and services for each of the key phases of
the application development lifecycle. We believe this comprehensive solution helps our
customers | 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

| |  | rapidly
and effectively create and implement applications critical to their businesses and offers
those customers a single vendor to resolve their technological issues. | 
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

| |  | Value Proposition.Our products are designed to allow companies to deploy
their applications in environments that utilize a variety of technology
platforms and to deploy web strategies for e-business applications integrated
with legacy client-server software and hardware architecture. By doing so, our
products enable businesses to increase the value of their existing
infrastructure and minimize the need for new computing infrastructure
investment. | 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

| |  | Quality Enhancement.Our products are designed to enhance the quality of
the applications our customers produce. By integrating requirements, modeling,
development and optimization, we believe our products allow fewer iterations in
the application development lifecycle and assist in the production of higher
quality applications. Additionally, various products in our comprehensive
solution are designed to help developers audit the quality of the code that they
produce, enhance the performance and efficiency of their code and assure
higher-quality code by testing it for defects and against required parameters. | 
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| |  | Freedom of Choice.Our products are designed to work with most major
technology platforms. Unlike software solutions from major system vendors that
encourage customers to purchase all of their technology infrastructure on a
particular platform, our products are designed to provide interoperability
between competing technologies. This provides customers with the flexibility to
choose the best solution, technology and vendors and still achieve a fully
integrated solution for software implementation. | 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| |  | Deep Integration.We offer our customers a collection of deeply
integrated, highly interconnected application lifecycle management solutions.
These solutions are designed to help our customers learn our products quickly,
get wider product adoption rates with their organizations sooner and build
better software faster. | 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

| |  | Accelerated Application Development and Deployment.Our products are
designed to maximize developer productivity by simplifying the process of
defining, designing, developing, testing and deploying software applications and
by providing teams with valuable software configuration management, or SCM,
capabilities. As a result, our customers can create higher-quality applications
and deliver their applications faster. | 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| |  | Superior User Experience.We believe customers turn to us because our
solutions provide them with a high-quality user experience. Our products have
won numerous awards, and we maintain an installed base of more than three
million users worldwide. | 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Our
goal is to become the leading provider of technology solutions for the rapid and effective
creation and implementation of software applications, particularly in Java, .NET and C++.
Key elements of our strategy to achieve this goal include: | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| |  | delivering
our comprehensive application lifecycle management solutions to large enterprises; | 
| | - | --------------------------------------------------------------------------------------------- | 

| |  | increasing
the level of integration of our suite of products in a way that makes our solution more
             effective and easier to use; | 
| | - | -------------------------------------------------------------------------------------------------------------------------------------------- | 

| |  | developing
leading solutions for the .NET platform; | 
| | - | --------------------------------------------------- | 

| |  | strengthening
our strong position in Java development solutions; | 
| | - | ---------------------------------------------------------------- | 

| |  | developing
leading solutions for mobile platforms; | 
| | - | -------------------------------------------------- | 

| |  | promoting
platform independence and interoperability by offering products for the development of
             applications spanning multiple platforms and heterogeneous environments; | 
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| |  | capitalizing
on the strength of the Borland brand and our worldwide distribution network to sell our
             new solutions to a broader base of potential customers; and | 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| |  | focusing
on the needs of our installed base. | 
| | - | -------------------------------------------- | 

| | To
achieve this goal, we offer products and services that address the definition, design,
development, testing and deployment phases of the software development process and that
help customers with their SCM needs. We support our growth strategy through our sales and
marketing efforts and through particular attention to our research and development
activities. We believe our platform-independent solutions maximize development team | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

15

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

| | productivity,
ensure higher-quality code and increase the value that enterprises can mine from their
existing technology infrastructure. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------- | 

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

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

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

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

| | Overview
of the Results of Operations for the Three and Six Months Ended June 30, 2003 | 
| | -------------------------------------------------------------------------------------- | 

| | We
believe our financial performance for the first six months of 2003 was solid, despite the challenging
economic conditions for the software industry, due in part to
the acquisitions of TogetherSoft and Starbase. Revenues from these acquisitions accounted
for $20.2 million and $37.2 million of our total revenue for the three and six months
ended June 30, 2003, respectively. | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | When
customers curtail their information technology, or IT, budgets, elect to purchase less
software or delay such purchases indefinitely, our businesslike that of competitors
and software industry peerssuffers. However, we believe that we are well-positioned
to improve our financial performance upon the eventual return to growth in IT spending
worldwide because our solutions offer our customers a clear return on investment, or ROI.
With many customers having invested significantly in computing hardware and network
infrastructure in recent years, software development and deployments such as ours are
valuable because they can be used to facilitate the efficient production and/or migration
of software for systems currently in place. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | During
the three months and six months ended June 30, 2003, we continued to focus on improving
our operating model and on positioning Borland for success when corporate IT and software
spending returns to healthier levels. Specifically, we focused on: | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| |  | Leadership Across Platforms. We believe that our success hinges, in part,
on our ability to deliver best-in-class solutions across a wide range of
technology platforms, including Java and .NET. As part of this commitment, we
released the following new products during the three months ended June 30, 2003: | 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | o | Janeva, a new solution that is designed to enable cross-platform mobility
by offering companies a secure and scalable means of linking J2EE and .NET; | 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------- | 

16

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

| | o | C#Builder, a completely new Borland product that offers a comprehensive,
design-driven solution for the development of .NET applications; and | 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------- | 

| | o | JBuilder 9, the most recent version of our leading Java development
environment which offers users greater integration with our other application
lifecycle components. | 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| |  | Solution Selling. Our move to selling entire application lifecycle
solutions to our customers is designed to result in larger contracts with our
customers. In the three months ended June 30, 2003, we entered into 102 sales
contracts over $100,000, up from 93 such contracts in the three months ended
March 31, 2003. In addition, a number of these transactions in the three months
ended June 30, 2003 included multi-product sales. We believe our transition from
single product sales to solution selling will provide us with an opportunity for
growth in the future. | 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| |  | Cost Control and Financial Discipline. We continue to pay close attention
to our cost structure in order to maintain and grow operating cash flow. As part
of this commitment, we undertook a reduction in force in the three months ended
March 31, 2003, which resulted in lower operating expenditures during the three
months ended June 30, 2003. In addition, in an effort to minimize operating
expenditures, we consolidated a number of our facilities during the three months
ended June 30, 2003. | 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

| |  | Selective Acquisitions. We continue to pursue acquisitions that better
position us to increase revenue growth and serve our customers technology
needs. During the first half of 2003, we completed the acquisitions of Starbase and TogetherSoft, and made
substantial strides in our efforts to integrate Starbase and TogetherSoft, both of which
contributed to our Design product group performance during the first half of 2003. | 
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| |  | Balance Sheet Strength. We believe that our balance sheet
strengthparticularly in a weak capital markets environmentis a key
factor that enables us to successfully and effectively pursue our major
objectives, including sustained research and development, acquisitions, and
investments in sales and marketing. We finished the second quarter of 2003 with
approximately $205 million in cash and short-term investments and no long-term
debt. | 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| |  | Strengthening Strategic Relationships. We are focused on developing
closer relationships with leading technology providers, system integrators and
other partners who may provide us with access to key technologies and a broader
potential customer base. In furtherance of this goal, we entered into strategic
relationships with Fujitsu, Microsoft, Nokia, SAP and Sony Ericsson during the
three months ended June 30, 2003. | 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| |  | International Diversification. We market and sell our solutions
worldwide, and we believe that our brand recognition in the IT community is
strong both in the United States and internationally. As a result, we believe we
are positioned to benefit from pockets of economic strength worldwide. In the
three months ended June 30, 2003, approximately 54% of our revenue came from outside
the United States. Our European region continued to perform well (representing
35% of our revenue for the three months ended June 30, 2003), despite economic
weakness in selected countries. While generally our Asia-Pacific region
experienced economic weakness (notably in Korea and Japan), Australia, New
Zealand, China and India delivered their best quarters in recent history. We
believe that our geographic diversification will continue to benefit us in the
future. | 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

| | As
a result of these efforts and the addition of Starbase and TogetherSoft to our operations, we
achieved the following financial results during the first half of 2003: | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

| |  | For the three months ended June 30, 2003, net revenues grew 28% to $76.3
million, including $20.2 million in revenue associated with the operations we
assumed in our acquisitions of Starbase and TogetherSoft, from $59.7 million for
the three months ended June 30, 2002. For the six months ended June 30, 2003,
net revenues grew 29% to $150.6 million, including $37.2 million in revenues
associated with the operations we assumed in our acquisitions of Starbase and
TogetherSoft, from $116.8 million for the six months ended June 30, 2002. | 
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| |  | Licenses and other revenues increased 13% to $56.6 million for the three months
ended June 30, 2003 from $50.1 million for the three months ended June 30, 2002.
Licenses and other revenues increased 16% to $113.4 million for the six months
ended June 30, 2003 from $97.8 million for the six months ended June 30, 2002. | 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

17

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

| |  | Service revenues increased 104% and 95% for the three and six months ended June
30, 2003, respectively, over the same periods in 2002. Service revenues
increased 12% in the second quarter of 2003 as compared with the first quarter
of 2003. | 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| |  | Gross margins increased to 86% for the three months ended June 30, 2003 from 85%
for the three months ended June 30, 2002. Gross margins increased to 87% for the
six months ended June 30, 2003 from 85% for the six months ended June 30, 2002. | 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| |  | Operating expenses increased 52% to $70.6 million for the three months ended
June 30, 2003 from $46.4 million for the three months ended June 30, 2002.
Operating expenses increased 68% to $152.7 million for the six months ended June
30, 2003 from $90.9 million for the six months ended June 30, 2002. | 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

| |  | We had a net loss of $5.0 million for the three months ended June 30, 2003,
compared to net income of $4.7 million for the three months ended June 30, 2002.
We had a net loss of $22.7 million for the six months ended June 30, 2003,
compared to net income of $9.3 million for the six months ended June 30, 2002. | 
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| |  | Expenses from the amortization of intangible assets increased to $5.9 million
and $11.2 million for the three and six months ended June 30, 2003,
respectively, from $0.2 million and $0.4 million for the three and six months
ended June 30, 2002, respectively, primarily as a result of our acquisitions of
Starbase and TogetherSoft. | 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

| |  | Cash, cash equivalents and short-term investments stood at $205.4 million as of
June 30, 2003, a decrease of approximately $100 million from June 30, 2002. The
decrease is primarily attributable to cash expended in connection with the
acquisitions of Starbase and TogetherSoft. | 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| |  | We repurchased a total of 695,000 shares of our stock under our stock repurchase
program for a total cost of $6.8 million during the first six months of 2003. | 
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

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

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

|                            | Three Months Ended June 30, |  | Six Months Ended June 30,
|--------------------------- | --------------------------- |  | -------------------------
|
|Licenses and other revenues |                             |  | $                        
|Service revenues            |                             |  |                          
|                            |                             |  |                          
|Net revenues                |                             |  | $                        
|                            |                             |  |                          

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

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

| | Compared
to our previous reporting, Design essentially encompasses the acquired products from
Starbase and TogetherSoft, Develop encompasses our former Java and RAD product lines for
which we break out revenues from Java and .NET, and Deploy encompasses the products that
we previously described as the Enterprise product group. We have sought to provide
comparability between historic product groups while updating our nomenclature to reflect
new platforms and our emphasis on the application development lifecycle. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

18

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

| | Licenses
and other revenues represent amounts for license fees and royalties earned for granting
customers the right to use our software products. Licenses and other revenues were $56.6
million and $50.1 million for the three months ended June 30, 2003 and 2002, respectively,
and represented 74% and 84% of net revenues for the three months ended June 30, 2003 and
2002, respectively. Licenses and other revenues were $113.4 million and $97.8 million for
the six months ended June 30, 2003 and 2002, respectively, and represented 75% and 84% of
net revenues for the six months ended June 30, 2003 and 2002, respectively. | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

|                                | Three Months Ended June 30, |  | Six Months Ended June 30,
|------------------------------- | --------------------------- |  | -------------------------
|
|Design                          |                             |  | $                        
|Develop                         |                             |  |                          
|Deploy                          |                             |  |                          
|                                |                             |  |                          
|Net licenses and other revenues |                             |  | $                        
|                                |                             |  |                          

| | Design.  
Licenses and other revenues from our Design product group for the three and six months
ended June 30, 2003 consisted of approximately $14.5 million and $26.2 million,
respectively. There were no licenses and other revenues from our Design
product group in the three or six months ended June 30, 2002, as we completed the
acquisitions of TogetherSoft and Starbase and began consolidating their results in
January 2003 and December 2002, respectively. | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Develop.  Licenses
and other revenues from our Develop product group included licenses and other revenues of
$21.9 million and $25.9 million in the three months ended June 30, 2003 and 2002,
respectively, from our Java product lines. The decrease in licenses and other revenues in
our Java product lines was due to lower revenues from our JBuilder product. Licenses and
other revenues from our Develop product group included licenses and other revenues of
$43.2 million and $47.3 million in the six months ended June 30, 2003 and 2002,
respectively, from our Java product lines. The decrease in licenses and other revenues in
our Java product lines was due to lower revenues from our JBuilder product line partially
offset by growth in our Optimizeit product line. The decrease in the JBuilder license
revenue was due to lower upgrade revenues from our latest release, JBuilder 9, when
compared with the release of JBuilder 7 in the three months ended June 30, 2002. We
believe that licenses and other revenues from JBuilder will not be as dependent on future
releases as the technology platform matures and more of our customers purchase software
support services that provide customers with product upgrades. Licenses and other
revenues from our Develop products group included licenses and other revenues of $10.7
million and $13.0 million in the three months ended June 30, 2003 and 2002, respectively,
from our .NET product lines. Licenses and other revenues from our Develop products group
included licenses and other revenues of $24.7 million and $28.0 million in the six months
ended June 30, 2003 and 2002, respectively, from our .NET product lines. The decrease in
licenses and other revenues from our .NET product lines was due to lower licenses and
other revenues generated from our C++ products. This decrease was primarily attributable
to the lack of a major product version release during the six months ended June 30, 2003
compared to the six months ended June 30, 2002, which included the release of C++Builder
6. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Deploy.  Licenses
and other revenues from our Deploy product group were $9.6 million and $11.2 million in
the three months ended June 30, 2003 and 2002, respectively. Licenses and other revenues
from our Deploy product group were $19.3 million and $22.5 million in the six months
ended June 30, 2003 and 2002, respectively. The decrease in licenses and other revenues
was due to lower revenues generated from our VisiBroker and application server products.
Lower licenses and other revenues from these products resulted principally from a lower
volume of sales in the Americas. We believe that this reduction in licenses and other
revenues from our Deploy products was a result of general economic weakness and
geopolitical uncertainty. Revenue growth from our Deploy products category will depend
upon the recovery in corporate spending for deployment solutions, our ability to provide
compelling technical solutions for software deployment to differentiate ourselves from
our competitors and our ability to integrate our Deploy products with our Design and
Develop products. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

| | Service
revenues represent amounts earned for technical support, consulting and training services
for our software products. Net service revenues were $19.6 million and $9.6 million for
the three months ended June 30, 2003 and 2002, respectively, representing 26% and 16% of
net revenues for those periods, respectively. Service revenues increased $10.0 million in
the three months ended June 30, 2003 from the three months ended | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

19

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

| | June
30, 2002 primarily as a result of an increase in technical support revenues and, to a
lesser extent, an increase in consulting revenue. Technical support revenues were $12.9
million and $6.1 million in the three months ended June 30, 2003 and 2002, respectively,
and represented 65% and 63% of total service revenues in the three months ended June 30,
2003 and 2002, respectively. The growth in the technical support revenues in the three
months ended June 30, 2003 from the three months ended June 30, 2002 was due to the
increase in support revenues associated with our assumption of the support obligations
from the acquisitions of TogetherSoft and Starbase. Consulting revenues were $5.2 million
and $1.9 million in the three months ended June 30, 2003 and 2002, respectively, and
represented 27% and 20% of total service revenues in the three months ended June 30, 2003
and 2002, respectively. The increase in the consulting revenue for the three months ended
June 30, 2003 when compared with the same period in the prior year was due to an
increased emphasis on products with a greater process focus (our Design products) and
approximately $2.5 million in consulting revenue recognized from large development
projects with three technology partners. Based upon our progress to date on these
projects, we expect consulting revenues from the development projects to decrease by
approximately $1.2 million for the three months ended September 30, 2003 with
substantially lower levels in the following quarters. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

| | Net
service revenues were $37.2 million and $19.0 million for the six months ended June 30,
2003 and 2002, respectively, representing 25% and 16% of net revenues for those periods,
respectively. Service revenues increased $18.2 million in the six months ended June 30,
2003 from the six months ended June 30, 2002 primarily as a result of an increase in
technical support revenues and, to a lesser extent, an increase in consulting revenues.
Technical support revenues were $24.9 million and $12.5 million in the six months ended
June 30, 2003 and 2002, respectively, and represented 67% and 65% of total service
revenues in the six months ended June 30, 2003 and 2002, respectively. The growth in the
technical support revenues in the six months ended June 30, 2003 from the six months ended
June 30, 2002 was due to the increase in support revenues associated with our assumption
of the support obligations from the acquisitions of TogetherSoft and Starbase. Consulting
revenues increased from $3.8 million for the six months ended June 30, 2002 to $9.2
million for the six months ended June 30, 2003. The increase in the consulting revenues
for the six months ended June 30, 2003 when compared with the same period in the prior
year was due to an increased emphasis on products with a greater process focus (our Design
products) and approximately $4.0 million in consulting revenue recognized from large
development projects with three technology partners. Over the longer term, we expect
growth, if any, in our support revenues and our consulting revenues to depend on our
success in selling our solutions into larger enterprises with greater frequency. Our
service revenues may also grow as our new enterprise solution offerings increase in
complexity and include more services as a component of larger sales contracts. We may
experience decreases in our consulting revenue on a quarter-to-quarter basis as we
complete large consulting engagements and if we are unsuccessful in expanding or renewing
such engagements. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

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

| | Revenues
from sources outside the United States, or non-U.S. revenues, represented approximately
54% and 62% of net revenues for the three months ended June 30, 2003 and 2002,
respectively. Non-U.S. revenues represented approximately 55% and 62% of net revenues for
the six months ended June 30, 2003 and 2002, respectively. The decrease in the percentage
of non-U.S. revenues for the three and six months ended June 30, 2003, as compared to the
same periods in 2002, was principally due to net revenues generated from our
newly-acquired Design products in the U.S. We expect non-U.S. revenues to continue to be a
significant portion of our net revenues in future periods, though the U.S. percentage is
expected to be higher in 2003 as compared with 2002 due to the acquisitions of Starbase
and TogetherSoft which had sales channels with a greater U.S. focus. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

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

20

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

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

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

| | Cost
of licenses and other revenues consists primarily of production costs, product packaging
costs and royalties paid to third-party vendors. Cost of licenses and other revenues were
$3.0 million and $3.6 million for the three months ended June 30, 2003 and 2002,
respectively, representing 4% and 6% of total licenses and other revenues in the three
months ended June 30, 2003 and 2002, respectively. Cost of licenses and other revenues
were $6.1 million and $7.1 million for the six months ended June 30, 2003 and 2002,
respectively, representing 4% and 6% of total licenses and other revenues in the six
months ended June 30, 2003 and 2002, respectively. The reduction in the cost of licenses
and other revenues was principally attributable to a reduction in direct production costs
as we had a larger percentage of our licenses and other revenues generated from large
corporate contracts. Typically, large enterprise and corporate licenses are delivered
electronically or represent additional licenses of software that have already been
delivered. This has the impact of reducing our overall production costs. Royalty costs
were 2% of licenses and other revenues for the three and six months ended June 30, 2003
and 2002. The level of royalty costs in future periods will depend on our ability to
obtain favorable licensing terms for our products that include third-party technology and
the extent to which we include such third-party technology in our product offerings. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

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

| | Cost
of service revenues consists primarily of salaries and benefits, third-party contractor
costs and related expenses incurred in providing customer support, consulting and
training. Cost of service revenues were $7.3 million and $5.4 million for the three
months ended June 30, 2003 and 2002, respectively, representing 37% and 56% of service
revenues in the three months ended June 30, 2003 and 2002, respectively. Cost of technical
support revenues represented 25% and 29% of the cost of service revenues for the three
months ended June 30, 2003 and 2002, respectively, while cost of consulting and training
revenues represented 75% and 71%, respectively, of the cost of service revenues for the
same periods. Service revenues gross margins were 63% and 44% in the three months ended
June 30, 2003 and 2002, respectively. Cost of service revenues were $13.9 million and
$10.4 million for the six months ended June 30, 2003 and 2002, respectively, representing
37% and 55% of service revenues in the six months ended June 30, 2003 and 2002,
respectively. Cost of technical support revenues represented 26% and 29% of the cost of
service revenues for the six months ended June 30, 2003 and 2002, respectively, while cost
of consulting and training revenues represented 74% and 71%, respectively, of the cost of
service revenues for the same periods. Service revenues gross margins were 63% and 45% in
the six months ended June 30, 2003 and 2002, respectively. The increase in gross margins
for the three and six month periods ended June 30, 2003 when compared with the three and
six month periods ended June 30, 2002 was due to an increase in support revenues resulting
from the assumed support obligations from the acquisitions of TogetherSoft and Starbase.
In future periods, we expect increases in our cost of service revenues as our service
revenues grow and the consulting and training revenues become a larger component of
service revenues. | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

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

| | Research
and development expenses for the three months ended June 30, 2003 and 2002 were
$15.5 million and $12.7 million, respectively, representing 20% and 21% of total net
revenues for the three months ended June 30, 2003 and 2002, respectively. Research and
development expenses for the six months ended June 30, 2003 and 2002 were $33.4 million
and $24.7 million, respectively. Such expenses were 22% and 21% of total net revenues for
the six months ended June 30, 2003 and 2002, respectively. The increase in research and
development expenses was principally attributable to an increase in our research and
development employee-related expenses of 29% and 37% for the three and six months ended
June 30, 2003, respectively, as compared with the same periods in 2002. This was primarily
due to an increase in our research and development headcount of approximately 210
employees at June 30, 2003 when compared to June 30, 2002, which was mostly a result of
the acquisitions of TogetherSoft and Starbase. In addition, we recorded outsourced
research and development charges of $2.2 million during the six months ended June 30,
2003, resulting from the write-off of the loan receivable from AltoWeb. There were no
outsourced research and development charges during the three months ended June 30, 2003 or
for the three and six months ended June 30, 2002. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

21

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

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

| | Selling,
general and administrative expenses were $46.6 million and $32.1 million for the three
months ended June 30, 2003 and 2002, respectively, representing 61% and 54% of net
revenues for the three months ended June 30, 2003 and 2002, respectively. Selling, general
and administrative expenses were $92.9 million and $63.1 million for the six months
ended June 30, 2003 and 2002, respectively, representing 62% and 54% of net revenues for
the six months ended June 30, 2003 and 2002, respectively. The increase in selling,
general and administrative expenses was principally attributable to an increase in our
employee-related expenses of 43% and 48% for the three and six months ended June 30, 2003,
respectively, as compared with the same periods in 2002. This was primarily due to an
increase in headcount of approximately 250 employees at June 30, 2003 when compared to
June 30, 2002, which was mostly a result of the acquisitions of TogetherSoft and Starbase.
In addition, our facilities cost increased 38% for the three-month period ended June 30,
2003 and 42% for the six-month period ended June 30, 2003 as compared with the same
periods in 2002 as we assumed the lease obligations of TogetherSoft and Starbase. | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

| | The
following table summarizes our restructuring, amortization of intangibles,
acquisition-related expenses and other charges activity for the three and six months ended
June 30, 2003 and 2002 (in thousands): | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

| | During
the three months ended June 30, 2003, we recorded $5.9 million in amortization from
purchased intangibles from the TogetherSoft, Starbase, VMGear, Bedouin, Boldsoft and
Highlander acquisitions, and $2.7 million in acquisition-related expenses, which is
principally associated with the earn-out provision of the VMGear acquisition. During the
six months ended June 30, 2003, we recorded $5.3 million in restructuring costs from
redundancies as a result of the TogetherSoft and Starbase acquisitions and excess
facilities in the United Kingdom, $11.2 million in amortization from purchased intangibles
from the TogetherSoft, Starbase, VMGear, Bedouin, Boldsoft and Highlander acquisitions,
$5.2 million in acquisition-related expenses, which is principally associated with the
earn-out provision of the VMGear acquisition, and a $4.6 million charge for in-process
research and development from the TogetherSoft acquisition. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | During
the three months ended June 30, 2002, we recorded restructuring, amortization of
intangibles and acquisition-related expenses in the amount of $1.6 million, which
consisted primarily of $1.2 million in acquisition-related expense associated with an
earn-out provision in the VMGear acquisition. During the six months ended June 30, 2002,
we recorded restructuring, amortization of intangibles and acquisition-related expenses in
the amount of $3.1 million, which consisted primarily of $2.3 million in
acquisition-related expense associated with an earn-out provision in the VMGear
acquisition. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

|                                              | Severance
and Benefits |  | Facilities |      | Other |   | Total 
|--------------------------------------------- | ---------------------- |  | ---------- | ---- | ----- | - | ------
|Accrual at December 31, 2002                  |                        |  | $          | 149  |       | $ | 678   
|2003 restructuring                            |                        |  |            | 961  |       |   | 2,024 
|Cash paid during 2003                         |                        |  |            | (623 | )     |   | (1,970
|Reclassification from long term restructuring |                        |  |            |     |       |   | 303   
|                                              |                        |  |            |      |       |   |       
|Accrual at June 30, 2003                      |                        |  | $          | 487  |       | $ | 1,035 
|                                              |                        |  |            |      |       |   |       

| | Our
2003 restructuring accrual included $1.0 million resulting from headcount reductions of 28
employees, including 19 in sales and general and administrative and 9 in research and
development, and $2.0 million resulting | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

| | from reduction of certain facilities leases. This amount represents our estimate of the
costs to exit the facilities and is recorded in current liabilities. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

| | In
addition, we recorded a charge for $2.4 million during the six months ended June 30, 2003,
for a change in estimate for lease termination costs related to a facility in the United
Kingdom. Due to the timing of payments under the lease agreement, we have recorded these
costs as a part of long-term restructuring. The total long-term lease termination
obligation as of June 30, 2003 was $4.1 million. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

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

| | Interest
income, net and other was $0.9 million and $1.7 million for the three months ended June
30, 2003 and 2002, respectively. Interest income, net and other was $2.1 million and $3.4
million for the six months ended June 30, 2003 and 2002, respectively. The decline in
interest income, net and other during these periods when compared to the same periods in
2002 reflects a decrease in interest income of $1.4 million and $2.2 million for the
three and six months ended June 30, 2003, respectively, due to decreases in
average cash balances and lower prevailing interest rates. Other income also decreased due
to a decrease in rental income from our property on Green Hills Road, Scotts Valley,
California of $0.4 million and $0.6 million for the three and six months ended June 30,
2003, respectively. These declines were offset by foreign currency gains of approximately
$0.2 million and $0.5 million for the three and six months ended June 30, 2003,
respectively, compared to foreign currency losses of approximately $0.7 million and $1.0
million during the three and six months ended June 30, 2002, respectively. Currency gains
recorded for the three and six months ended June 30, 2003 were due to a decline in the
U.S. dollar against certain major currencies including the Euro and Australian dollar.
Currency losses recorded for the three and six months ended June 30, 2002 were due
primarily to a gain in the U.S. dollar against the Brazilian Real and a decline against
the Euro. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

| | For
the three months ended June 30, 2003 and 2002, we recorded an income tax expense of $1.2
million and $1.5 million, respectively. For the six months ended June 30, 2003 and 2002,
we recorded an income tax expense of $2.7 million and $2.6 million, respectively. Our tax
provisions for the three-month and six-month periods ended June 30, 2003 were not based on
our expected annual rate as we incurred non-U.S. withholding taxes in a number of foreign
jurisdictions, regardless of our profitability, as well as non-U.S. income taxes for
certain profitable foreign operations. As these tax liabilities were incurred in foreign
jurisdictions, they were not offset by the benefits of prior U.S. net operating loss and
tax credit carryforwards. | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

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

| | As
of June 30, 2003, cash, cash equivalents and short-term investments totaled $205.4
million, a decrease of $90.8 million from $296.2 million at December 31, 2002. Working
capital decreased from $246.7 million at December 31, 2002 to $149.7 million at June 30,
2003. Working capital decreased $97.1 million during the six months ended June 30, 2003
principally due to $76.9 million in cash used to purchase TogetherSoft and Starbase and
$7.7 million in negative working capital assumed in the acquisition of TogetherSoft. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

| | Cash
used in operating activities for the six months ended June 30, 2003 was $15.1 million,
consisting of $22.7 million in net loss offset by $15.6 million in depreciation and
amortization, a change in short-term restructuring of $10.9 million, a $2.2 million loss
on a write-off of a loan receivable and a decrease in non-cash working capital, excluding
change in short-term restructuring, of $0.7 million. Cash provided by operating activities
for the six months ended June 30, 2002 was $12.2 million, consisting of $9.3 million in
net income and $3.4 million in depreciation and amortization offset by an increase in
non-cash working capital of $0.5 million. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Cash
used in investing activities for the six months ended June 30, 2003 included $71.6 million
and $5.3 million used for the acquisitions of TogetherSoft and Starbase, respectively,
discussed in Note 3 to the Condensed Consolidated Financial Statements, $24.4 million for
purchases of short-term investments and $3.3 million in cash used for the purchase of
property and equipment, offset by $55.7 million in sales and maturities of short-term
investments. Cash used in investing activities for the six months ended June 30, 2002
included $2.2 million used for | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

| | the
acquisition of VMGear discussed in Note 3 to the Condensed Consolidated Financial
Statements, $2.3 million in cash used for the purchase of property and equipment, and net
purchases of short-term investments of $47.4 million. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Cash
provided by financing activities was $2.4 million for the six months ended June 30, 2003
and principally consisted of proceeds of $9.4 million from the issuance of common stock to
employees under our employee stock option and employee stock purchase plans offset by $7.1
million in repurchases of common stock. Cash provided by financing activity was $2.3
million for the six months ended June 30, 2002, which principally consisted of proceeds of
$5.7 million from the issuance of common stock to employees under our employee stock
option and employee stock purchase plans offset by $3.4 million in repurchases of common
stock. $12.7 million remains authorized for future repurchases under the repurchase program
authorized by our Board of
Directors in September 2001. During August 2003, our Board of Directors authorized an additional
repurchase of up to $15.0 million of our common stock. We expect to continue to repurchase
shares under our repurchase program from time to depending on market conditions, share
price and availability and other factors at our discretion. | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

| | For
the remainder of 2003, we expect that operating expenses will decrease as a percentage of
revenue when compared with the six months ended June 30, 2003. We anticipate that
operating expenses and planned capital expenditures will continue to constitute a material
use of our cash resources. We expect our capital expenditures in 2003 to be greater than
in 2002, however, there are currently no significant capital commitments. In addition, we
may utilize cash resources to fund acquisitions or investments in other businesses,
technologies or products lines. We believe that our available cash and cash equivalents,
together with our anticipated future cash provided by operating activities, will be
sufficient to meet our working capital and operating expense requirements for at least the
next twelve months. At some point in the future we may seek additional funds to support
our working capital and operating expense requirements or for other purposes and may seek
to raise the additional funds through public or private debt or equity financings. If we
seek additional financing, there is no assurance that this additional financing will be
available, or if available, will be on reasonable terms and not dilutive to our
stockholders. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

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

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

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

| | We
may not be able to successfully integrate acquired businesses into our existing business. | 
| | -------------------------------------------------------------------------------------------- | 

| | As
a part of our business strategy, we recently acquired a number of businesses, products and
technologies, including our significant acquisitions of TogetherSoft and Starbase.
Acquisitions entail numerous risks, including difficulties associated with 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: | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| |  | combining product offerings into an integrated solution suite and preventing
customers from deferring purchasing decisions or switching to other suppliers
due to uncertainty about the direction of our product offerings; | 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

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

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

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

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

| | In
the future, we may continue to make acquisitions of businesses, products or technologies.
However, acquisitions entail numerous risks that, if realized, could harm our 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; | 
| | - | -------------------------------------------------------------------------------------------------------------- | 

| |  | we may acquire businesses that bring with them unanticipated or undisclosed
liabilities, risks, costs              and expenses; | 
| | - | -------------------------------------------------------------------------------------------------------------------------------- | 

| |  | we may acquire businesses or technologies at prices that are later determined
post-acquisition to be in              excess of fair value; | 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------ | 

| |  | integration and other risks of acquisitions may 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, which may put us
at a competitive disadvantage, or we may be harmed by negative market
perceptions, any of which would damage our operating results. | 
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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| | 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#. | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Below
is a table of our chief competitors for each of our product lines: | 
| | ------------------------------------------------------------------------ | 

|                                              |                                                                                                         
|--------------------------------------------- | --------------------------------------------------------------------------------------------------------
|Product                                       | Competitive Products                                                                                    
|CaliberRM                                     | IBMs Rational Requisite Pro and Telelogics DOORS                                                      
|Together ControlCenter                        | IBMs Rational Rose and Rational XDE, and Embarcaderos Describe                                        
|JBuilder                                      | IBMs WebSphere Studio Application Developer, Oracles JDeveloper and JetBrains IntelliJ               
|Delphi/C++                                    | Microsofts Visual Studio and Visual Basic                                                              
|Optimizeit                                    | IBMs Rational Purify Plus and Quests JProbe                                                           
|StarTeam                                      | Telelogics CM Synergy, Merants PVCS, IBMs Rational ClearCase and ClearQuest and MKS Source Integrity
|Borland Enterprise Server, VisiBroker Edition | Ionas Orbix                                                                                            
|Borland Enterprise Server, AppServer Edition  | BEA Systems WebLogic, IBMs WebSphere, Oracle 9i and Sun Microsystems Sun ONE                          
|                                              |                                                                                                         

| | We
attempt to differentiate our products from our competitors products based on
interoperability, cost of ownership, performance and reliability as well as their
effectiveness in addressing our customers needs. We may not 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. As a result of their
greater resources and established relationships, these competitors may be more successful
than we are at developing and marketing products in our markets. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Because
there are relatively low barriers to entry in a number of our markets, we also expect
additional new competition from other established and emerging companies. In particular,
given the growth and adoption of Java, we are observing increased attention to 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. Increased competition in our markets, including competition 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 substantially
reduce our revenues. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | 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, particularly those that are primarily hardware vendors or platform
providers, generate a substantially greater proportion of their sales in markets in which
we do not directly compete. We believe a number of these competitors view sales of
software development technologies as important for enhancing the functionality of, and
demand for, their core products. As a result, some companies may bundle software
development products that compete with our offerings with their other products, such as
application servers, work stations, personal computers, operating systems and databases.
When competitors do so, the effective price for | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

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

| | software
development products that compete with our products may be heavily discounted or offered
at no charge. This could require us to reduce the price of our products and related
services, diminish our revenues and harm our profitability. Similarly, industry alliances
and arrangements exist or may be formed in the future under which our competitors ally
with companies in markets in which we do not compete to bundle products. These
arrangements may result in lower effective prices for our competitors products than
our own prices, putting pressure on our business and diminishing our competitive position. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

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

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

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

| | The
application development lifecycle market has been evolving, as customers are increasingly
demanding development solutions that address each stage of the application development
lifecycle. While we believe we maintain strong relationships with the IT organizations in
large enterprises through our developer network, we do not have extensive experience
selling comprehensive development solutions. Historically, we have focused on selling
particular products for particular segments of the development process, most notably the
sale of development tools. We have recently acquired a number of companies that we believe
provide us with a more comprehensive product offering that is attractive to large
enterprises. However, we have little history of selling these comprehensive solutions, and
we may be unable to transition to effectively selling these solutions to large
enterprises. To compete successfully in the application development lifecycle market we
believe we will need to: | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

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

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

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

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

| | A
large portion of our revenues is derived from customers in a small number of vertical
markets such as the technology, telecommunications, financial services and government
related 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 adverse impact on our revenues.
Our revenues from our Deploy business category were hurt in 2001, 2002 and the first six
months of 2003 by the economic downturn in these markets, particularly the
telecommunications market. Our failure to broaden our base of | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

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

| | customers
outside these vertical markets could reduce our future revenues if the extended downturn
in our targeted vertical markets continues. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------- | 

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

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

| | We
plan to continue to expand the number and breadth of our solutions and their use
in the future. Our ability to manage our planned growth effectively will require us to: | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

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

| |  | expand and integrate 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. However,
given that our customers do not commit to license our software for more than a short time
in advance, any increase in expenses in anticipation of future orders that do not
materialize could reduce our net income. If we are unable to match our increased staffing
and other expenditures with similarly increased revenue, our profitability would be
harmed. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

| | As
we increasingly seek to license software products directly to 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. As we move to selling customers comprehensive
solutions, we believe that a significant percentage of our future revenues 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. Also, sales to enterprise
customers generally require an extensive sales effort throughout the customers
organization and often require final approval by the customers Chief Information
Officer or other senior executive employee. In particular, while our strategy includes
leveraging the loyalty of our developer network to sell our application lifecycle
management solutions within their enterprises, we believe that purchase decisions on
software application technology often involve more senior-level employees than sales of
the development products that we have traditionally sold. 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 our sales cycle as well as increased up-front
expenses in connection with enterprise sales. The timing of the execution of enterprise
volume licenses, or their nonrenewal by large customers, could cause our results of
operations to vary significantly from quarter to quarter. In addition, the continued
weakness in the market for IT investment, particularly for 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. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | We
have a relatively new direct sales force and our limited experience in managing it may
impair our ability to expand sales and generate increased revenues. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Because
a significant percentage of our sales force is relatively new to our company following our
recent acquisitions of TogetherSoft and Starbase, 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 | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

| | 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 and adequately training them on our comprehensive solutions. Our
failure to successfully manage our sales force may impair our ability to increase sales
and grow our revenues. | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

| | In
light of our substantially expanded product portfolio (as a result of our acquisitions),
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 targeted at the senior
management and IT departments of our prospective customers. In addition, we believe our
products compare well to our competitions products in performance and other
technical benefits, increasing our 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 on the benefits of each
component of our comprehensive solution in an effort to improve and motivate our sales
force and increase sales. In addition, following our recent acquisitions, we re-allocated
the territories in which our sales force operates. There can be no assurance, however,
that these efforts will be successful in achieving positive results in the long term, and
such changes and additional investments could significantly increase our sales-related
expenses. | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

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

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

| |  | our limited experience in consistently forecasting revenues across all of our
business units, particularly our newly-acquired business units; | 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------- | 

| |  | 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; | 
| | - | ------------------------- | 

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

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

| |  | IT
and overall capital expenditure budgets of our customers and prospective customers. | 
| | - | -------------------------------------------------------------------------------------- | 

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

29

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

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

| | Our
historical financial information relating to a number of our software development
technologies is based on sales of software designed to develop applications for currently
adopted platforms (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 revenues, we expect to derive an increasing percentage of
our revenues from sales of our development technologies for emerging platforms such as
..NET, as well as emerging hardware platforms such as 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 not meet our
anticipated results. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

| | Our
success is dependent on the growth of certain programming languages and standards. | 
| | -------------------------------------------------------------------------------------- | 

| | 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, 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 expected revenues would diminish. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | In
addition, our deployment products, including Borland Enterprise Server, are based on
Common Object Request Broker Architecture, or CORBA. CORBA is a standard from the Object
Management Group, or OMG, for communicating between distributed objects (objects are
self-contained software modules). CORBA provides a way to execute software programs
written in different programming languages running on different platforms no matter where
they reside in the network. While we believe that CORBA has achieved widespread acceptance
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 to support and
train users. If CORBA is displaced or its popularity is diminished, our business would be
harmed. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

| | We
are currently investing resources in our research and development efforts for Microsoft
..NET development products. Microsoft .NET is Microsofts new operating environment
for software applications. While we have and will continue to release development products
that support the .NET platform, our business would be harmed if our development product
for the .NET platform fails to address the needs of our customers, or if our competitors,
particularly Microsoft, develop more effective or efficient products. In addition, despite
our efforts to provide effective and compatible development products for the .NET
platform, customers may still elect to use an all-Microsoft development platform.
Furthermore, the success of our .NET products is dependent upon Microsoft gaining market
acceptance of its .NET platform. If Microsofts .NET platform 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. 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. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

30

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

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

| | We
are dependent on licenses from third-party suppliers for some elements of our products
such as various file libraries. In particular, we are dependent on technology licenses
from Sun Microsystems for our Java products and we are dependent on licenses from
Microsoft for our Delphi, C++Builder, C#Builder and Janeva products. If any of these licenses were terminated
or were not renewed, or if these third parties failed to 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 substantially reduce our revenues. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | 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. This is especially
true regarding the development of comprehensive solutions for the .NET platform. | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | 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 anticipated 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. | 
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

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

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

31

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

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

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

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

| | We
believe that growth in our licenses and other revenues will depend on our ability to
provide our customers with comprehensive professional services and to enlist other parties
to provide similar services, including 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 ability
to sell comprehensive solutions to enterprise customers could be seriously harmed.
Competition for qualified professional services personnel is intense, and we may be unable
to attract, train and retain the number of highly qualified professional services
personnel that we need. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | 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
growth strategy. | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

| | We
currently maintain a number of important strategic alliances and technology relationships
with industry leaders such as BEA Systems, Mercury Interactive, Microsoft, Nokia and Sun
Microsystems. Our current technology allies give us, among other things, early access to
emerging technologies and additional resources to market our products, as well as an entry
point to contact potential customers. Similarly, our strategic relationships with systems
integrators and resellers provide additional expertise to our customers and bolster our
service capabilities. In the future, we anticipate exploring additional strategic
alliances, technology relationships and other arrangements designed to further all of
these goals. Our current or prospective strategic alliances and technology relationships
may not achieve their intended objectives, however, and parties to our strategic alliances
and technology relationships may not perform as contemplated. Additionally, our allies may
choose to terminate their arrangements with us where no binding contractual arrangements
exist. The failure to develop or maintain our strategic alliances and technology
relationships, or our allies inability to perform or 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. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

| | A
substantial portion of our revenues is from international sales. International sales
accounted for approximately 54% and 62% of our revenues in the three and six months ended
June 30, 2003, respectively. In addition, following our acquisition of TogetherSoft, an
increasing portion of our operations consists of activities outside the United States. We
now have research facilities in Singapore, Sweden, Russia and the Czech Republic. Given
our increasing presence in international markets and the potential for sales of our
products in international markets, our business is increasingly subject to risks inherent
in doing business internationally, including: | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

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

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

| |  | 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 and resulting costs; | 
| | - | ------------------------------------------------------- | 

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

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

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

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

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

| | One
or more of these risk factors could harm our future research operations and international
sales. 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, our products may become more
expensive to foreign businesses, and, as a result, our sales in those foreign
jurisdictions may suffer. | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

| | Political
and economic conditions abroad may harm 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 harm our international operations. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | 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 existing products obsolete. We believe that we will need to
continue to incur significant research and development expenditures to remain competitive,
particularly since many of our competitors have substantially greater resources than we
do. 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 markets. 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 | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

33

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

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

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

| | We
believe that our ability to successfully grow and manage our business and to develop new
products will depend, in large part, on our ability to recruit and retain qualified
employees, particularly highly skilled software engineers and management personnel. In the past, some of our
competitors have utilized their greater resources to provide substantial signing bonuses
and other inducements to lure key personnel away from us. As a result, we may be required
to further increase compensation and benefits, especially for members of management such
as Dale L. Fuller, our President and Chief Executive Officer, who are almost completely
vested in their options to purchase our stock. 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 revenues. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | We
do not maintain key person insurance on any of our employees or management team members,
including Mr. Fuller. If we lose one or more of the members of our management team 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. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

| | Certain
members of our senior management team have a limited history working together. The
inability of our senior management team to work together effectively could harm our
business. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Our
success depends largely on the skills, experience and performance of the members of our
senior management team and other key personnel. Several members of our existing senior
management team, including Kenneth R. Hahn, our Senior Vice President and Chief Financial
Officer, Scott
Langmack, our Senior Vice President and Chief Marketing Officer, and Peter Coad,
our Senior Vice President & Chief Strategist, have been with us for less than two years. As a
result, certain members of our senior management team have had a relatively limited time
to work together, including their ability to work together as a team to manage our
company. If they are unable to work together effectively and manage our organization, our
business will suffer. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | If
the wireless and mobile application market does not develop as anticipated or we fail to
penetrate the wireless market, our future growth may be harmed. | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | We
have introduced new solutions targeted at development applications for mobile and wireless
devices, including JBuilder Mobile Edition, JDataStore 6 and C++Builder Mobile Edition. We
have also entered into strategic relationships or technology relationships 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
growth in the market for mobile and wireless applications will depend on a number of
factors, including: | 
| | ------------------------------------------------------------------------------------------------------------ | 

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

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

| |  | the success in marketing of wireless applications and services by a limited
number of communication service providers, and the effect of the pricing of
those applications and services on market penetration; | 
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| |  | 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; | 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

34

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

| |  | completion
of fixed network implementation; expansion of customer care, network management and
billing systems; and vendor equipment availability; and | 
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------ | 

| |  | the availability of additional radio frequency spectrum capacity to enable
service providers to expand existing wireless data services and develop third
generation services. | 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | In
addition to the development and growth of the market itself, our ability to generate
significant revenue in the wireless application development 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 harm our ability to generate
substantial revenue in the wireless market include: | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

| |  | a decline in the popularity of Java or C++ as programming languages for wireless
and mobile application development; | 
| | - | -------------------------------------------------------------------------------------------------------------------- | 

| |  | 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; | 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| |  | 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; and | 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| |  | evolving standards and other technological changes. | 
| | - | --------------------------------------------------- | 

| | 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 could be reduced. 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 harm our anticipated sales
and operating results. | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

| | We
continue to expand our marketing operations in order 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 effective 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. In addition, the need to engage in these marketing efforts could result in a
significant increase in our expenses. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

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

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

| | We
are dependent upon certain retail distribution channels. If these retailers cease to
carry our products our revenues would be harmed. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------- | 

| | Our
license revenues made through retail distribution channels is 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, our distributors may not continue to carry our products, which would
harm our revenue prospects. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

35

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

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

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

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

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

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

| | On
January 7 and January 14, 2003, we completed the acquisitions of Starbase and
TogetherSoft, respectively. As a result, we succeeded to the pre-acquisition federal and
state net operating loss and tax credit carryforwards of both companies. Utilization of
these federal and state net operating loss and tax credit carryforwards will be subject to
a similar annual limitation as discussed above. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

| | Legislative
actions may cause our operating expenses to increase. | 
| | ----------------------------------------------------------------- | 

| | The
Sarbanes-Oxley Act of 2002, the California Disclosure Act and newly-proposed or enacted
rules and regulations of the SEC or the Nasdaq National Market, impose new duties on us
and our executives, directors, attorneys and auditors. In order to comply with the
Sarbanes-Oxley Act and any new rules promulgated by the SEC or Nasdaq, we may be required
to hire additional personnel and use additional outside legal, accounting and advisory
services. These expenses affect our company proportionally more than they do larger
companies. Any of these developments could materially increase our operating expenses and,
accordingly, reduce our net income. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Potential
new accounting pronouncements may cause our net income to decrease. | 
| | ----------------------------------------------------------------------------- | 

| | We
currently account for employee stock options using the intrinsic-value method in
accordance with APB 25, and have not recognized any compensation expense for awards of
employee stock options in the three months ended June 30, 2003 and 2002. SFAS 123 permits
us to continue accounting for stock-based compensation as set forth in APB 25, provided we
disclose the pro forma effect on net income and earnings per share of using a fair-value
method of accounting for stock-based employee compensation plans. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

36

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

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

|                                                | Three Months Ended June 30, |  | Six Months Ended June 30, |        
|----------------------------------------------- | --------------------------- |  | ------------------------- | -------
|
|Net income (loss):                              |                             |  |                           |        
|As reported                                     |                             |  | $                         | (4,969 
|Stock compensation adjustment  intrinsic value |                             |  |                           | (35    
|Stock compensation expense  fair value         |                             |  |                           | (6,622 
|                                                |                             |  |                           |        
|Pro Forma                                       |                             |  | $                         | (11,626
|                                                |                             |  |                           |        
|Net income (loss) per share:                    |                             | 
|As reported  basic                             |                             |  | $                         | (0.06  
|As reported  diluted                           |                             |  | $                         | (0.06  
|Pro Forma  basic                               |                             |  | $                         | (0.14  
|Pro Forma  diluted                             |                             |  | $                         | (0.14  

| | If
we change our method of accounting for employee stock options, whether voluntarily or as a
result of changes in accounting rules, it could materially decrease our net income as
reported under generally accepted accounting principles. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | If
our encryption technology does not satisfy our potential customers needs for the
confidential transfer of information, sales of certain of our deployment 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 harm our
reputation and sales of our deployment products. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | If
the license of our products that contain encryption technology is delayed by export
regulations, revenues from licensing some of our 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 reduce our revenues. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

| | Software
products occasionally contain errors or defects, especially when they are first introduced
or when new versions are released. We have not experienced any substantial problems to
date from potential defects and errors, but we cannot assure you that our products are or
in the future will be completely free of defects and errors. Errors in our software may be
caused by defects in third-party software incorporated into our products. 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; | 
| | - | -------------------------------- | 

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

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

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

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

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

| | These
consequences could increase our costs or decrease our revenues. | 
| | --------------------------------------------------------------------- | 

| | 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 reduce our profitability. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Intentional
efforts to harm or disrupt the functioning of our software or website 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 website 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 July 1, 2002 to June 30, 2003, the price of our
common stock has ranged from a low of $6.48 on July 12, 2002 to a high of $14.85 on
November 4, 2002. On August 11, 2003, 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 National
Market was $9.03. 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; | 
| | - | --------------------------------------------------------------------------- | 

| |  | announcements of the acquisition of new products or businesses by us or our
competitors; | 
| | - | ---------------------------------------------------------------------------------------- | 

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

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

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

| |  | changes
in actual or projected revenues 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 revenues, 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, our
products, revenues and/or earnings, including the growth rate of each, or
potential acquisitions; | 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

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

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

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

| |  | general market and economic 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 own significant portions of our common stock. For example,
based on the most recent Schedule 13G filings made with the SEC, Merrill Lynch and Co.,
Inc. owned 5,809,366 shares, or 7.2%, of our common stock, FMR Corp. owned 4,061,982
shares, or 5.0%, of our common stock, Franklin Resources, Inc. owned 4,021,016 shares, or
5.0%, of our common stock and Microsoft Corporation owned 1,900,169 shares, or 2.3%, of
our common stock. Further, of the 8,998,628 shares of common stock we issued in connection
with our acquisition of TogetherSoft, a total of 3,285,461 shares were issued to Object
International, Inc. and Dietrich Charisius, two former stockholders of TogetherSoft. These
3,285,461 shares are subject to restrictions on their resale until January 14, 2005. 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 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 could 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. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Our
investments in securities of other companies may not yield any returns. Any investment
losses or other expenses related to these investments could harm our operating results
for a particular period. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | From
time to time, we may make investments in equity and/or debt securities of other companies
that we believe further our strategic objectives. Our ability to recover our investments
in non-marketable equity and debt securities and to earn a return on these investments is
dependent, in part, on how successfully these companies are able to execute on their
business plans, as well as their ability to obtain venture capital funding to continue
operations and to grow. In the current equity market environment, their ability to obtain
additional funding as well as to take advantage of liquidity events, such as initial
public offerings, mergers and acquisitions, is significantly constrained. As a result, we
may not be able to recover the initial amount invested in these companies. In the event
that our investments in these or other debt or equity securities do not prove successful,
our operating results may be harmed. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

| | As
a software company, our intellectual property rights are among our most valuable assets.
We rely on a combination of patent, copyright, trademark, trade secret laws, domain name
registrations, confidentiality agreements and other contractual arrangements and other
methods to protect our intellectual property rights, but these measures may provide only
limited protection. The protective steps we have taken may be inadequate to deter
misappropriations of our intellectual property rights. In addition, it may be possible for
an unauthorized third party to reverse-engineer or decompile our software products. We may
be unable to detect the unauthorized use of, or take appropriate steps to enforce, our
intellectual property rights, particularly in certain international markets. Litigation
may be necessary to protect our intellectual property rights, and such litigation can be
time consuming and expensive. We have 106 issued U.S. patents, 10 issued foreign patents,
approximately 49 additional pending applications for U.S. patents and approximately 32
pending applications for foreign patents. It is possible that some or all of our patents
may be challenged, invalidated or circumvented. It is also possible that our pending
patent applications may never result in issued patents, and if they do result in issued
patents, those patents may be invalidated. In addition, effective protection of
intellectual property rights is unavailable or limited in some foreign countries, making
the possibility of misappropriation of our intellectual property more likely. Current laws
in the United States that prohibit copying give us only limited practical protection from
software pirates, and the laws of many other countries provide very little
protection in this respect. Policing unauthorized use of our products is difficult,
expensive and time consuming and we expect that software piracy will be a persistent
problem for all software products. In addition, the unique technology of the Internet may
tend to increase, and provide new methods for, illegal copying and distribution of
intellectual property. Accordingly, we cannot be certain that we will be able | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

39

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

| | to
protect our intellectual property rights against unauthorized third-party copying or use.
This could harm our competitive position. | 
| | -------------------------------------------------------------------------------------------------------------------------------------- | 

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

| | 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. 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 be available on acceptable
terms. If a successful claim were made against us and we failed to commercially develop or
license a substitute technology, our business could be harmed. In addition, we may not
have insurance coverage for these types of claims or our insurance coverage for these
types of claims may not be adequate. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

| | The
electronic commerce market 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 harm our future sales and revenue
growth. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | 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 could be beneficial to and in the best interests of our
stockholders. This could limit our stockholders ability to approve a transaction
that they may deem to be in their best interests. In addition, our Board of Directors has
the authority, without stockholder approval, to fix the rights and preferences of, and
issue shares of one or more series of preferred stock. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

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

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

| | Our
corporate headquarters and a substantial portion of our research and development
operations are currently located in Northern and Southern California, areas 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. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

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

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

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

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

| | During
the three months and six months ended June 30, 2003, we have recorded net foreign exchange
gains of $0.2 million and $0.5 million, respectively. The foreign exchange gains were
generated primarily due to the weakness of the dollar relative to the South Korean Won,
the United Kingdom Pound Sterling, the Australian Dollar and the Euro offset against
foreign exchange losses due to the strength of the dollar against the Brazilian Real. It
is uncertain whether these currency trends will continue. If the U.S. dollar strengthens
against these or other major currencies, we will experience foreign exchange losses on our
intercompany receivables to the extent that we have not hedged the exposure with foreign
currency forward exchange contracts. Such foreign exchange losses could have a material
adverse effect on our operating results and cash flows. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

| | During
the three months and six months ended June 30, 2003, we recorded a foreign currency gain
of approximately $1.5 million and $2.3 million, respectively, as part of other
comprehensive income due to foreign currency movements on our long-term intercompany
balances. As of June 30, 2003, we had $8.8 million and $2.9 million in long-term
intercompany balances that will be denominated in Australian dollars and Singapore
dollars, respectively. We also have a U.S. dollar denominated long-term intercompany
receivable with our Brazilian subsidiary of $1.8 million. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | The
table below provides information about our derivative financial instruments, comprised of
foreign currency forward exchange contracts as of June 30, 2003. The information is
provided in U.S. dollar equivalent amounts, as presented in our financial statements. For
foreign currency forward exchange contracts, the table presents the notional amounts (at
the contract exchange rates), the weighted average contractual foreign currency exchange
rates and the net fair value as of June 30, 2003. All forward contracts in the table below
are net amounts and represent contracts to sell the currencies listed. These instruments
mature within twelve months (dollar amounts in thousands). | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

|                                             | (USD) Notional
Amount |  | Average
Contract Rate |        | June 30, 2003
Net Fair
Value
|-------------------------------------------- | --------------------- |  | --------------------- | ------ | ----------------------------
|Foreign currency forward exchange contracts: |                       |  |                       |        |                             
|Australian Dollar                            |                       |  | $                     | 3,000  |                             
|Euro                                         |                       |  |                       | 2,000  |                             
|New Zealand Dollar                           |                       |  |                       | 500    |                             
|United Kingdom Pound Sterling                |                       |  |                       | 1,400  |                             
|Swedish Krona                                |                       |  |                       | 700    |                             
|Singapore Dollar                             |                       |  |                       | 3,000  |                             
|Japanese Yen                                 |                       |  |                       | 1,250  |                             
|South Korean Won                             |                       |  |                       | 2,000  |                             
|                                             |                       |  |                       |        |                             
|Total                                        |                       |  | $                     | 13,850 |                             
|                                             |                       |  |                       |        |                             

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

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

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

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

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

|                       | 2003 |         | 2004 |  | 2005 |  | 2006 |  | 2007 |  | There-after |  | Total
|---------------------- | ---- | ------- | ---- |  | ---- |  | ---- |  | ---- |  | ----------- |  | -----
|Cash equivalents       |      |         |      |  |      |  |      |  |      |  |             |  |      
|Fixed rate             | $    | 180,284 |      |  |     |  |     |  |     |  |            |  |     
|Average interest rate  |      | 0.98%   |      |  |     |  |     |  |     |  |            |  |     
|Short-term investments |     
|Fixed rate             | $    | 25,116  |      |  |     |  |     |  |     |  |            |  |     
|Average interest rate  |      | 1.21%   |      |  |     |  |     |  |     |  |            |  |     

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

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

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

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

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

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

PART IIOTHER INFORMATION

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

| | On
November 27, 2002, a stockholder class action and derivative lawsuit, Dieterich v. Harrer,
et al., Case No. 02CC00350, was filed against Starbase Corporation and five former
directors of Starbase in the Superior Court of the State of California for Orange County.
The complaint alleged that the former directors had breached fiduciary duties owed to
Starbase and stockholders of Starbase. Borland is paying the costs of defending this
litigation pursuant to indemnification obligations under the merger agreement relating to
the acquisition of Starbase by Borland. On January 23, 2003, defendants filed a demurrer
seeking to have all the claims dismissed, and also filed a motion to stay discovery
pending a ruling on the demurrer. On February 25, 2003, plaintiff filed its first amended
class action complaint, or the amended complaint, naming as defendants the five former
directors and the investment banking firm that provided financial services to Starbase,
two law firms that provided legal services to Starbase and an individual and entity that
helped arrange financing for Starbase. The amended complaint purported to be brought on
behalf of Starbase stockholders who tendered shares of Starbase common stock in the tender
offer commenced by Borland on October 11, 2002 and that ended on November 11, 2002, or in
the merger that was completed on January 7, 2003. Plaintiff alleged that the five former
directors breached their fiduciary duties owed to Starbase in connection with a proposed
financing of Starbase in mid-2002, and that the other defendants aided and abetted the
purported breach of fiduciary duty. The director defendants filed a demurrer seeking
dismissal of the amended complaint. On June 6, 2003, the court sustained the demurrer of
all defendants and dismissed the lawsuit against all defendants but granted the plaintiff
leave to amend the complaint against the director defendants. On July 3, 2003, the
plaintiff filed a second amended complaint. On July 8, 2003, plaintiff filed a request for
voluntary dismissal of the action without prejudice. Defendants opposed that request on
the ground that plaintiff wanted to refile the action in another jurisdiction while still
being able to pursue the litigation in the Superior Court of the State of California of
Orange County or appeal the courts decision to the California Court of Appeal. On
July 31, 2003, the court held that plaintiffs request for dismissal was deficient,
but permitted plaintiff to file another request. The court also stayed the litigation
until October 29, 2003. The court has granted the motion of the director defendants to
stay discovery. There is no indication at present that the lawsuit will have a material
effect on Borlands financial condition, results of operations or liquidity. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

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

| | At
the annual meeting of Borland stockholders held on June 12, 2003 at the offices of
Skadden, Arps, Slate, Meagher and Flom LLP, located at 4 Times Square, New York, New York
(the Annual Meeting), the following matters were voted upon: | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

| | Nominee:          | For        |  | Withheld  | 
| | ----------------- | ---------- |  | --------- | 
| |                   |            |  |           | 
| | Dale L. Fuller    | 68,981,623 |  | 1,518,927 | 
| | William K. Hooper | 65,896,391 |  | 4,604,159 | 
| | Charles J. Robel  | 67,509,363 |  | 2,991,187 | 

44

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

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

| | 2)   Approval
of an amendment to our 2002 Stock Incentive Plan to authorize the issuance of an
additional 2,500,000 shares of common stock thereunder and to reserve all shares
authorized under the 2002 Stock Incentive Plan as incentive stock options. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| |            | 
| | ---------- | 
| | For        | 
| |            | 
| | 40,868,245 | 

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

| |            | 
| | ---------- | 
| | For        | 
| |            | 
| | 64,537,267 | 

| | 4)  Ratification
of the selection of PricewaterhouseCoopers LLP as our independent auditors for the fiscal
year ending December 31, 2003. | 
| | ----------------------------------------------------------------------------------------------------------------------------------------- | 

| |            | 
| | ---------- | 
| | For        | 
| |            | 
| | 68,784,465 | 

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

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

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

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

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

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

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

| | 3.1 | Restated
Certificate of Incorporation of Borland Software Corporation (previously filed with the
Commission on March 29, 2002 as an exhibit to Borlands Annual
Report on Form 10-K for the year ended December 31, 2001 and
incorporated herein by reference). | 
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

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

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

| | 4.3 | Preferred
Stock Purchase Agreement between Borland Software Corporation and Microsoft
Corporation, dated as of June 7, 1999 (previously filed with the
Commission on July 6, 1999 as an exhibit to Borlands Current
Report on Form 8-K and incorporated herein by reference). | 
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

45

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

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

| | 4.4 | Investor
Rights Agreement between Borland Software Corporation and Microsoft Corporation, dated
as of June 7, 1999 (previously filed with the Commission on July 6,
1999 as an exhibit to Borlands Current Report on Form 8-K and
incorporated herein by reference). | 
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | 4.5 | Stockholder
Lock-up Agreement between Borland Software Corporation and Object International,
Inc., dated as of January 14, 2003 (previously filed with the
Commission on March 28, 2003 as an exhibit to Borlands Annual
Report of Form 10-K for the year ended December 31, 2002 and
incorporated herein by reference). | 
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | 4.6 | Stockholder
Lock-up Agreement between Borland Software Corporation and Dietrich Charisius, dated
as of January 14, 2003 (previously filed with the Commission on March
28, 2003 as an exhibit to Borlands Annual Report of Form 10-K for
the fiscal year ended December 31, 2002 and incorporated herein by
reference). | 
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

| | 10.1 | 1999
Employee Stock Purchase Plan, as amended (previously filed with the Commission on April
30, 2003 as an appendix to Borlands Definitive Proxy Statement
and incorporated herein by reference).+ | 
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | 10.2 | 2002
Stock Incentive Plan, as amended (previously filed with the Commission on April 30, 2003
as an appendix to Borlands Definitive Proxy Statement and
incorporated herein by reference).+ | 
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | 10.3 | Incentive
Compensation Plan for Chief Executive Officer.* | 
| | ---- | --------------------------------------------------------- | 

| | 31.1 | Certification
of Dale L. Fuller, Chief Executive Officer of Borland Software Corporation
pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.* | 
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | 31.2 | Certification
of Kenneth R. Hahn, Chief Financial Officer of Borland Software Corporation,
pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.* | 
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | 32.1 | 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.* | 
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | 32.2 | 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.* | 
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| |  | 
| |  | 

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

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

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

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

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

| | Form
8-K filed on April 10, 2003 announcing the preliminary financial results for the quarter
ended March 31, 2003. | 
| | ------------------------------------------------------------------------------------------------------------------- | 

| | Form
8-K filed on April 29, 2003 announcing the financial results for the quarter ended March
31, 2003. | 
| | ------------------------------------------------------------------------------------------------------- | 

| | Form
8-K filed on May 6, 2003 announcing the appointment of Charles J. Robel to Borlands
Board of Directors. | 
| | ------------------------------------------------------------------------------------------------------------- | 

| | Form
8-K filed on June 19, 2003 announcing the results from Borlands annual stockholder
meeting held on June 12, 2003. | 
| | ----------------------------------------------------------------------------------------------------------------------- | 

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

SIGNATURES

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

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

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

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

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

EXHIBIT INDEX

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

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

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

| | 3.1 | Restated
Certificate of Incorporation of Borland Software Corporation (previously filed with the
Commission on March 29, 2002 as an exhibit to Borlands Annual
Report on Form 10-K for the year ended December 31, 2001 and
incorporated herein by reference). | 
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

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

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

| | 4.3 | Preferred
Stock Purchase Agreement between Borland Software Corporation and Microsoft
Corporation, dated as of June 7, 1999 (previously filed with the
Commission on July 6, 1999 as an exhibit to Borlands Current
Report on Form 8-K and incorporated herein by reference). | 
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

| | 4.4 | Investor
Rights Agreement between Borland Software Corporation and Microsoft Corporation, dated
as of June 7, 1999 (previously filed with the Commission on July 6,
1999 as an exhibit to Borlands Current Report on Form 8-K and
incorporated herein by reference). | 
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | 4.5 | Stockholder
Lock-up Agreement between Borland Software Corporation and Object International,
Inc., dated as of January 14, 2003 (previously filed with the
Commission on March 28, 2003 as an exhibit to Borlands Annual
Report of Form 10-K for the year ended December 31, 2002 and
incorporated herein by reference). | 
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | 4.6 | Stockholder
Lock-up Agreement between Borland Software Corporation and Dietrich Charisius, dated
as of January 14, 2003 (previously filed with the Commission on March
28, 2003 as an exhibit to Borlands Annual Report of Form 10-K for
the fiscal year ended December 31, 2002 and incorporated herein by
reference). | 
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

| | 10.1 | 1999
Employee Stock Purchase Plan, as amended (previously filed with the Commission on April
30, 2003 as an appendix to Borlands Definitive Proxy Statement
and incorporated herein by reference).+ | 
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | 10.2 | 2002
Stock Incentive Plan, as amended (previously filed with the Commission on April 30, 2003
as an appendix to Borlands Definitive Proxy Statement and
incorporated herein by reference).+ | 
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | 10.3 | Incentive
Compensation Plan for Chief Executive Officer.* | 
| | ---- | --------------------------------------------------------- | 

| | 31.1 | Certification
of Dale L. Fuller, Chief Executive Officer of Borland Software Corporation
pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.* | 
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | 31.2 | Certification
of Kenneth R. Hahn, Chief Financial Officer of Borland Software Corporation,
pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.* | 
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------- | 

48

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

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

| | 32.1 | 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.* | 
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | 32.2 | 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.* | 
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| |  | 
| |  | 

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

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

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