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SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549

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# FORM 10-Q

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

For the quarterly period ended June 30, 2001

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, 2001, the most recent practicable date prior to the filing of this report,
was 63,437,738.

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INDEX

|        |                                                                                                                           |  | PAGE
|------- | ------------------------------------------------------------------------------------------------------------------------- |  | ----
|        |                                                                                                                           |  |     
|PART I  | FINANCIAL INFORMATION                                                                                                     |  |     
|        |                                                                                                                           |  |     
|Item 1. | Financial Statements                                                                                                      |  | 1   
|        |                                                                                                                           |  |     
|        | Condensed Consolidated Balance Sheets at June 30, 2001 and December 31, 2000                                              |  | 1   
|        |                                                                                                                           |  |     
|        | Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2001 and 2000                 |  | 2   
|        |                                                                                                                           |  |     
|        | Condensed Consolidated Statements of Other Comprehensive Income for the three and six months ended June 30, 2001 and 2000 |  | 3   
|        |                                                                                                                           |  |     
|        | Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2001 and 2000                           |  | 4   
|        |                                                                                                                           |  |     
|        | Notes to the Condensed Consolidated Financial Statements                                                                  |  | 5   
|        |                                                                                                                           |  |     
|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations                                     |  | 8   
|        |                                                                                                                           |  |     
|Item 3. | Quantitative and Qualitative Disclosures About Market Risk                                                                |  | 26  
|        |                                                                                                                           |  |     
|        |                                                                                                                           |  |     
|PART II | OTHER INFORMATION                                                                                                         |  |     
|        |                                                                                                                           |  |     
|Item 1. | Legal Proceedings                                                                                                         |  | 28  
|        |                                                                                                                           |  |     
|Item 4. | Submission of Matters to a Vote of Security Holders                                                                       |  | 28  
|        |                                                                                                                           |  |     
|Item 5. | Other Information                                                                                                         |  | 29  
|        |                                                                                                                           |  |     
|Item 6. | Exhibits and Reports on Form 8-K                                                                                          |  | 29  
|        |                                                                                                                           |  |     
|        | Signatures                                                                                                                |  | 31  

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PART IFINANCIAL INFORMATION

Item 1. Financial Statements

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

|                                                              | June 30,2001 |            | December 31,2000
|------------------------------------------------------------- | ------------ | ---------- | ----------------
|                                                              | (Unaudited)  |            | (Audited)       
|ASSETS                                                        |              |            |                 
|Current assets:                                               |             
|Cash and cash equivalents                                     |              | $ 256,266  |                 
|Short-term investments                                        |              | 18,162     |                 
|Accounts receivable, net                                      |              | 42,994     |                 
|Other current assets                                          |              | 13,338     |                 
|                                                              |              |            |                 
|Total current assets                                          |              | 330,760    |                 
|                                                             
|Property and equipment, net                                   |              | 20,489     |                 
|Other non-current assets                                      |              | 10,428     |                 
|                                                              |              |            |                 
|                                                              |              | $ 361,677  |                 
|                                                              |              |            |                 
|LIABILITIES AND STOCKHOLDERS EQUITY                          |             
|Current liabilities:                                          |             
|Accounts payable and accrued expenses                         |              | $   44,921 |                 
|Income taxes payable                                          |              | 7,102      |                 
|Deferred revenue                                              |              | 21,514     |                 
|Other                                                         |              | 9,651      |                 
|                                                              |              |            |                 
|Total current liabilities                                     |              | 83,188     |                 
|                                                             
|Long-term debt and other                                      |              | 19,111     |                 
|                                                              |              |            |                 
|                                                              |              | 102,299    |                 
|                                                              |              |            |                 
|Stockholders equity:                                         |             
|Preferred stock: $.01 par value; 1,000,000 shares authorized; |             
|625 shares issued and outstanding                             |              |           |                 
|Common stock: $.01 par value; 200,000,000 shares authorized;  |             
|62,938,328 and 61,966,879 shares issued and outstanding       |              | 629        |                 
|Additional paid-in capital                                    |              | 478,954    |                 
|Accumulated deficit                                           |              | (197,851   | )               
|Deferred compensation                                         |              | (1,328     | )               
|Cumulative other comprehensive income                         |              | 4,179      |                 
|                                                              |              |            |                 
|                                                              |              | 284,583    |                 
|Less common stock in treasury, at cost                        |             
|- 4,473,800 shares                                            |              | (25,205    | )               
|                                                              |              |            |                 
|                                                              |              | 259,378    |                 
|                                                              |              |            |                 
|                                                              |              | $ 361,677  |                 
|                                                              |              |            |                 

See Notes to the Condensed Consolidated Financial Statements.

1

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

|                                                      | Three MonthsEnded June 30, |  | Six MonthsEnded June 30,
|----------------------------------------------------- | -------------------------- |  | ------------------------
|                                                      | 2001                       |  | 2000                    
|                                                      |                            |  |                         
|Licenses and other revenues                           | $47,538                    |  | $40,000                 
|Service revenues                                      | 8,474                      |  | 6,716                   
|                                                      |                            |  |                         
|Net revenues                                          | 56,012                     |  | 46,716                  
|                                                      |                            |  |                         
|Cost of licenses and other revenues                   | 3,460                      |  | 2,867                   
|Cost of service revenues                              | 6,019                      |  | 4,880                   
|                                                      |                            |  |                         
|Cost of revenues                                      | 9,479                      |  | 7,747                   
|                                                      |                            |  |                         
|Gross profit                                          | 46,533                     |  | 38,969                  
|                                                      |                            |  |                         
|Research and development                              | 11,398                     |  | 10,509                  
|Selling, general and administrative                   | 30,246                     |  | 25,447                  
|Restructuring and merger-related charges              |                           |  | 2,014                   
|                                                      |                            |  |                         
|Total operating expenses                              | 41,644                     |  | 37,970                  
|                                                      |                            |  |                         
|Operating income (loss)                               | 4,889                      |  | 999                     
|Interest income, net, and other                       | 3,160                      |  | 2,392                   
|                                                      |                            |  |                         
|Income before income taxes                            | 8,049                      |  | 3,391                   
|Income tax provision                                  | 1,635                      |  | 1,389                   
|                                                      |                            |  |                         
|Net income                                            | $  6,414                   |  | $  2,002                
|                                                      |                            |  |                         
|Net income per share:                                
|Basic                                                 | $    0.10                  |  | $    0.03               
|                                                      |                            |  |                         
|Diluted                                               | $    0.09                  |  | $    0.03               
|                                                      |                            |  |                         
|Weighted average number of common shares outstanding:
|Basic                                                 | 62,577                     |  | 61,464                  
|                                                      |                            |  |                         
|Diluted                                               | 73,879                     |  | 69,165                  
|                                                      |                            |  |                         

See Notes to the Condensed Consolidated Financial Statements.

2

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

|                                         | Three Months EndedJune 30, |   | Six Months EndedJune 30, |  
|---------------------------------------- | -------------------------- | - | ------------------------ | -
|                                         | 2001                       |   | 2000                     |  
|                                         |                            |   |                          |  
|Net income                               | $6,414                     |   | $ 2,002                  |  
|Other comprehensive income (loss):      
|Foreign currency translation adjustments | (675                       | ) | (95                      | )
|Fair market value adjustment            
|for available for sale securities        | 122                        |   |                         |  
|                                         |                            |   |                          |  
|Other comprehensive income               | $5,861                     |   | $ 1,907                  |  
|                                         |                            |   |                          |  

See Notes to the Condensed Consolidated Financial Statements.

3

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

|                                                                                      | Six Months EndedJune 30, |             
|------------------------------------------------------------------------------------- | ------------------------ | ------------
|                                                                                      |                          | 2001        
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                 |                          |             
|Net income                                                                            |                          | $     12,266
|Adjustments to reconcile net income to net cash provided
    by operating activities: |                         
|Depreciation and amortization                                                         |                          | 3,986       
|(Gain) loss on sale of fixed asset                                                    |                          | (13         
|CHANGES IN ASSETS AND LIABILITIES:                                                    |                         
|Accounts receivable                                                                   |                          | (11,911     
|Other assets                                                                          |                          | (24         
|Accounts payable and accrued expenses                                                 |                          | 2           
|Income taxes payable                                                                  |                          | 1,765       
|Other (primarily deferred revenue and restructuring)                                  |                          | 4,282       
|                                                                                      |                          |             
|Cash provided by operating activities                                                 |                          | 10,353      
|                                                                                      |                          |             
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                 |                         
|Purchase of property and equipment                                                    |                          | (3,276      
|Proceeds from sale of property                                                        |                          | 13          
|Net change in short-term investments                                                  |                          | 27,763      
|Long-term investment, net                                                             |                          |            
|                                                                                      |                          |             
|Cash provided by investing activities                                                 |                          | 24,500      
|                                                                                      |                          |             
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                 |                         
|Proceeds from issuance of common stock, net                                           |                          | 5,665       
|Repayment of capital lease obligations and other debt activity                        | (98                      | )           
|                                                                                      |                          |             
|Cash provided by financing activities                                                 |                          | 5,567       
|                                                                                      |                          |             
|Effect of exchange rate changes on cash                                               |                          | (788        
|                                                                                      |                          |             
|Net change in cash and cash equivalents                                               |                          | 39,632      
|Cash and cash equivalents at beginning of period                                      |                          | 216,634     
|                                                                                      |                          |             
|Cash and cash equivalents at end of period                                            |                          | $ 256,266   
|                                                                                      |                          |             

See Notes to the Condensed Consolidated Financial Statements.

4

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BORLAND SOFTWARE CORPORATION

Notes to Condensed Consolidated Financial Statements (unaudited)

NOTE 1BASIS OF PRESENTATION

The
accompanying Borland Software Corporation (Borland) condensed
consolidated financial statements at June 30, 2001 and for the three and six
months ended June 30, 2001 and June 30, 2000 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, 2001; its results of operations for the three and
six months ended June 30, 2001 and June 30, 2000; and its cash flows for the six
months ended June 30, 2001 and June 30, 2000. The preparation of condensed
consolidated financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. The results of operations for interim
periods are not necessarily indicative of the results to be expected for our
full fiscal year. The condensed consolidated financial statements and notes
should be read in conjunction with our audited financial statements included in
our Annual Report on Form 10-K for the fiscal year ended December 31, 2000 as
filed with the United States Securities and Exchange Commission (the
SEC) on March 29, 2001.

NOTE 2NET INCOME PER SHARE

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

5

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

|                                          | Three MonthsEnded June 30, |           | Six MonthsEnded June 30,
|----------------------------------------- | -------------------------- | --------- | ------------------------
|                                          | 2001                       |           | 2000                    
|                                          |                            |           |                         
|Numerator:                                |                            |           |                         
|Net income before accretion charges       |                            | $  6,414  |                         
|Accretion charges to preferred stock      |                            | 178       |                         
|                                          |                            |           |                         
|Income available to common stockholders  
|for basic earnings per share              |                            | $  6,236  |                         
|                                          |                            |           |                         
|Denominator:                              |                           
|Denominator for basic income per share  
|weighted average shares                   |                            | 62,577    |                         
|Effect of dilutive securities             |                            | 11,302    |                         
|                                          |                            |           |                         
|Denominator for dilutive income per share | 73,879                     |           | 69,165                  
|                                          |                            |           |                         
|Net income per share  basic              |                            | $    0.10 |                         
|                                          |                            |           |                         
|Net income per share  diluted            |                            | $    0.09 |                         
|                                          |                            |           |                         

NOTE 3RESTRUCTURING

The
following table summarizes costs incurred during the six months ended June 30,
2001 associated with prior period restructuring activities (in thousands):

|                             | Severanceand Benefits |   | Facilities |  | Other  |  | Total   | 
|---------------------------- | --------------------- | - | ---------- |  | ------ |  | ------- | 
|Accrual at December 31, 2000 | $ 1,052               |   | $  620     |  | $  500 |  | $ 2,172 | 
|Cash payments                | 261                   |   | 187        |  | 208    |  | 656     | 
|Non-cash costs               | (50                   | ) |           |  | 151    |  | 101     | 
|                             |                       |   |            |  |        |  |         | 
|Accrual at June 30, 2001     | $    841              |   | $  433     |  | $  141 |  | $ 1,415 | 
|                             |                       |   |            |  |        |  |         | 

Subsequent
to December 31, 2000, there have not been any significant changes to our
estimate of the total costs of prior restructuring activities.

NOTE 4SUBSEQUENT EVENT

On
July 13, 2001, we used approximately $9.0 million in cash and/or cash
equivalents to repay the outstanding portion of a mortgage note. The note
related to a mortgage on an office building in Scotts Valley, California which
used to serve as our corporate headquarters and which is now fully leased to
third party tenants. Such amounts included approximately $0.2 million in
prepayment penalties to retire such note.

6

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NOTE 5RECENT ACCOUNTING PRONOUNCEMENTS

In
July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 141 (SFAS 141),
Business Combinations. SFAS 141 requires the purchase method of
accounting for business combinations initiated after June 30, 2001 and
eliminates the pooling-of-interests method. We believe that the adoption of SFAS
141 will not have a significant impact on our financial statements.

In
July 2001, the FASB issued Statement of Financial Accounting Standards No. 142
(SFAS 142), Goodwill and Other Intangible Assets, which
is effective for fiscal years beginning after March 15, 2001. SFAS 142 requires,
among other things, the discontinuance of goodwill amortization. In addition,
the standard includes provisions upon adoption for the reclassification of
certain existing recognized intangibles as goodwill, reassessment of the useful
lives of existing recognized intangibles, reclassification of certain
intangibles out of previously reported goodwill and the testing for impairment
of existing goodwill and other intangibles. We are currently assessing but have
not yet determined the impact of SFAS 142 on our financial position and results
of operations.

7

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

A CAUTION ABOUT FORWARD-LOOKING STATEMENTS

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

These
forward-looking statements may relate to, but are not limited to, future capital
expenditures, acquisitions, future revenues, earnings, margins, costs, demand
for our products, market and technological trends in the software industry,
interest rates and inflation and various economic and business trends. You can
identify forward-looking statements by the use of words such as
expect, estimate, project,
budget, forecast, anticipate,
intend, plan, may, will,
could, should, believes,
predicts, potential, continue and similar
expressions or the negative or other variations thereof. Such factors are not
exclusive and are in addition to other factors discussed elsewhere in this Form
10-Q, in our other filings with the SEC, or in materials incorporated therein by
reference. You should consider the following factors with respect to any
forward-looking statements made throughout this Form 10-Q:

| | adverse
general industry trends and the potential effects on us of competition in computer
software product and services markets;rapid technological changes that can
adversely affect the demand for our products;changes in political, societal and
economic conditions and local regulations of geographic areas where we do business;changes
in our sales mix;customer business conditions;our ability to maintain or raise
current pricing levels;financial or regulatory accounting principles or policies
imposed by the Financial Accounting Standards Board, the SEC and similar agencies with
regulatory oversight;the potential loss of key employees;our ability to attract
and retain qualified personnel;general economic factors and capital market
conditions;changes in tax compliance requirements, including tax rate changes, new
tax laws and revised interpretation of tax laws;adverse changes, trends and
conditions in the financial and capital markets;reduction in sales to, or loss of,
any significant customers;growth rates in the software and professional services
markets that we participate in;market acceptance of new or enhanced products or
services developed, marketed or sold by us;the publics perception of Borland and
its products;changes in laws and regulations, both domestically and overseas, which
are applicable to the Internet and electronic commerce;our reliance on value-added
resellers (VARs) to market and sell many of our products;the lengthy
sales cycles applicable to our enterprise software products;our dependence, with
respect to certain of our business units, on licenses from third parties;product
returns from retailers exceeding our reserves;our ability to successfully integrate
acquisitions;
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

8

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| | delays
in scheduled product availability dates (which could result from various occurrences
including development or testing difficulties, software errors and project management
problems);disruption of our products or services, or theft of proprietary
information, by hackers;the increasing trend for software companies to
consolidate and our ability to compete against these larger companies, and their
substantially greater financial, technical, marketing and other resources;our
ability to effectively safeguard our products from software piracy;changes in
laws and regulations, domestically and overseas, with respect to the protection and
enforcement of intellectual property rights, including but not limited to, those laws and
regulations applicable to the patentability of computer software;the
possibility that we may need to defend ourselves against intellectual property
infringement lawsuits regardless of the merits of the underlying claims;the rate
of adoption of Linux® as an operating system;catastrophic natural disasters;foreign
currency exchange rate fluctuations;unanticipated changes in our operating
expenses and capital expenditures; andother risks and uncertainties described
under the caption Factors That Could Affect Future Results and Market Price of Stock in
this Form 10-Q as well as in our other filings with the SEC and public announcements.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

These
factors are difficult to predict. They also involve uncertainties that may
materially and adversely affect actual results, and may be beyond our control.
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.

Forward-looking
statements are found 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 release publicly any revisions to these forward-looking statements
to reflect events or circumstances after the date of this Form 10-Q.

You
are advised to read this Quarterly Report on Form 10-Q in conjunction with other
reports and documents that we file from time to time with the SEC. In
particular, please read our Annual Report on Form 10-K, our other Quarterly
Reports on Form 10-Q and any Current Reports on Form 8-K that we may file from
time to time. You may obtain copies of these reports directly from us or from
the Securities and Exchange Commission at the SECs Public Reference Room
at 450 Fifth Street, N.W. Washington, D.C. 20549, and you may obtain information
about obtaining access to the Reading Room by calling the SEC at 1-800-SEC-0330.
In addition, the SEC maintains information for electronic filers (including us)
at its web site www.sec.gov.

Overview

We
are a leading provider of high performance e-business platform solutions
designed to increase developer productivity and reduce time to market for
enterprise software projects. E-business platform solutions consist of software
products that allow businesses to develop, deploy and manage e-business
applications. We offer products in all three phases of the process of
implementing such solutions: development, deployment and management. For the
development phase, Borland offers JBuilder, C++Builder,
Delphi, and Kylix. Our deployment products include Borland®
AppServer, InterBase® and VisiBroker.® To manage these systems,
Borland offers Borland® AppCenter, a visual distributed application
management solution. We also are in the process of developing Borland®
TeamSource, a hosted collaborative development platform for distributed
teams. We are committed to all major computing platforms as well as the open
standards of the Internet. We also provide service and support for software
developers worldwide through an online developer community and an e-commerce
site, community.borland.com, which offers a range of technical information,
value-added services and third-party

9

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products. We market and distribute products worldwide through our direct
sales organization, e-commerce Internet site, independent distributors, dealers and
value-added resellers (VARs).

Recent Developments

Borland
and SAP AG announced on June 4, 2001 that they had entered into an agreement
whereby JBuilder will be SAPs preferred Java development environment
and will become the recommended Java development environment for SAPs
customers worldwide.

Borland
and Nokia announced on June 4, 2001 that they have collaborated to deliver
JBuilder MobileSet, Nokia Editiona Java 2 Platform, Micro Edition
(J2ME platform) compliant environmentfully integrated with JBuilder
5 to support software development for Nokias Java-enabled phones.
Together, JBuilder 5 and JBuilder MobileSet, Nokia Edition, include visual
design tools for creating mobile applications, device emulation and debugging,
as well as all the other standard features offered with the JBuilder development
environment. While our JBuilder MobileSet, Nokia Edition exclusively supports
development for Nokia mobile phones, later this year we expect to introduce a
second edition of JBuilder MobileSet to develop applications for other
wireless platforms.

Product Offerings

The
following are descriptions of our key product offerings:

E-Business
   Development

JBuilder:
JBuilder is a comprehensive set of visual development tools that allow the
creation of applets, servlets, JavaBeans®, Enterprise JavaBeans
(EJB) and distributed CORBA® (Common Object Request Broker
Architecture) applications for the Java 2 platform. JBuilder enables programmers
to rapidly create, edit, run and deploy applications that target a variety of
Java enabled platforms such as Windows,® Solaris and Linux. In June
2001, we began shipping the latest version of this product, JBuilder 5.

Delphi:
Delphi is a high-performance, rapid application development tool (RAD) used to
create Windows, Internet and distributed software applications. The Delphi
product combines visual productivity tools, a component library and a
high-performance compiler so that software developers can build high-speed
e-business systems more quickly than with conventional programming tools. Delphi
and our Kylix product are compatible, allowing developers to build
cross-platform workstation and server applications and deploy to either Windows
or Linux. In June 2001, we began shipping Delphi 6, the latest version of the
product containing Web Services and XML-based B2B integration support.

C++Builder:
C++Builder is a software development tool and compiler for C and C++ computing
languages used to create Internet, desktop, client/server and distributed
applications. The C++Builder product combines visual productivity tools, a
component library and a high performance compiler so that software developers
can build high performance e-business applications more quickly than with
conventional programming tools. In February 2000, we began shipping C++Builder
5, the latest version of this product.

Kylix:
Kylix is our implementation of a RAD platform for the Linux operating
environment. The implementation mirrors the Delphi and C++Builder development
paradigms, but is implemented to generate native code and native look-and-feel
applications for the Linux operating environment. Kylix and our Delphi product
are compatible, allowing developers to build cross-platform workstation and
server applications and deploy to either Windows or Linux. The product was
announced in January 2001, and began shipping in March 2001.

E-Business
   Deployment

InterBase:
InterBase is a powerful, high-performance SQL database designed to be embedded
into applications running on the Windows, Linux and Solaris platforms. InterBase
provides superior relational database solutions to meet the business-critical
embedded database needs for value-added resellers and application developers. In
July 2000, we open-sourced InterBase software version 6.0. In March 2001, we
released commercial versions of InterBase 6.0 for Linux, Windows and Solaris
environments.

10

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Borland
AppServer:Borland AppServer was the industrys first
application server product to combine the benefits of Java 2 Platform Enterprise
Edition (J2EE platform), EJB and CORBA. The product, which is highly
scalable, provides a foundation for deploying enterprise grade business
applications. Borland AppServer simplifies and accelerates the integration,
deployment and management of e-business applications. Borland AppServer
integrates heterogeneous back-office systems comprised of ERP, supply chain,
database management and legacy systems. In February 2001, we began shipping
Borland AppServer 4.5, the latest version of this product.

VisiBroker:
VisiBroker is an award-winning Object Request Broker (ORB), based on
CORBA, and designed to facilitate development and deployment of distributed
enterprise applications that are scalable, flexible and easily maintained.
Customers for this product have included Sun Microsystems, Inc., Hitachi Ltd.,
Oracle Corporation, Novell, Inc., Netscape Communications Corporation and
Silicon Graphics, Inc. These companies, among others, have played a key role in
making VisiBroker a leading deployed and adopted ORB in the computer software
industry. In the fourth quarter of 2000, we began shipping VisiBroker for Java
4.5, the latest version of this product.

E-Business
   System Management

Borland
AppCenter: Borland AppCenter is the first management solution designed to
enable customers to model, monitor and manage component-based application
servers. Borland AppCenter provides robust management capabilities for CORBA-
and EJB-based applications and is tightly integrated with VisiBroker and the
Borland AppServer.

Services

In
addition to our products, we offer a wide range of hosted development,
consulting, training and support services to customers. Our service offerings
include:

Borland
TeamSource: We are in the process of developing Borland TeamSource, a
collaborative development platform for distributed teams. Borland TeamSource
speeds global e-business applications to market by reaching across the Internet
to bridge functional, geographic and corporate boundaries among team members.
The high-performance hosted infrastructure and business messaging of Borland
TeamSource brings widely dispersed teams together and provides a secure
environment that scales up or down with team members as they collaborate around
digital assets.

Consulting
services: We offer a variety of both packaged and custom consulting services
that include architectural assessment, prototyping, legacy migration,
application integration, performance evaluation, application deployment and data
conversions. We work closely with third-party consulting firms and systems
integrators who provide reengineering, technology assessments, customization,
project management and implementation services.

Training
services: We offer education and training services to assist customers in
learning about our products and current technology trends. These programs range
from introductory sessions to highly advanced seminars. Training services are
offered at either customer sites or locations designated by us and are led by
our employees or consultants.

Support
services: We provide a wide range of support services, and offer such
services on-site or through telephone or the Internet. A comprehensive range of
support programs allow customers to choose the level of support for their
business, from personalized support for corporate needs to minimum assistance
levels for small businesses.

Results of Operations

Licenses
   and Other Revenues

Licenses
and other revenues represent revenues from granting customers licenses to use
our software products and revenues from subscription contracts. Licenses and
other revenues totaled $47.5 million for the quarter ended June 30, 2001
compared to $40.0 million from the same quarter a year ago. Licenses and other
revenues from our Java, RAD, Enterprise and other products group represented
38%, 38%, 21% and 3% of

11

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total license and other revenues for the quarter ended June 30, 2001,
respectively. This is compared to 27%, 40%, 28% and 5% for the quarter ended June 30,
2000, respectively. Our Java product group consists of JBuilder. Our RAD product group
consists of Delphi, Kylix and C++Builder. Our Enterprise product group consists of
VisiBroker, Borland AppServer and Borland AppCenter. Our other products group consists
primarily of InterBase.

Licenses
and other revenues during the three months ended June 30, 2001 were favorably
affected by the introduction of new versions of our Java development tool,
JBuilder 5.0, and RAD development tool, Delphi 6.0. With the introduction of
these products, licenses and other revenues from JBuilder and Delphi grew 65% and
49%, respectively, over the same quarter a year ago. Licenses and other revenues
from our Enterprise product group decreased by 9% over the same quarter a year
ago principally due to softness in demand for Enterprise products by technology
companies, particularly those in the telecommunications sector, during the
second quarter of 2001. Licenses and other revenues from other products declined
41% from the same quarter a year ago.

Licenses
and other revenues totaled $89.9 million for the six months ended June 30, 2001
compared to $79.8 million from the same period a year ago. License and other
revenues from our Java, RAD, Enterprise and other products group represented
37%, 34%, 26% and 3%, respectively, of total licenses and other revenues for the
six months ended June 30, 2001. This is compared to 24%, 45%, 26% and 5%,
respectively, for the six months ended June 30, 2000.

Licenses
and other revenues during the six months ended June 30, 2001 were favorably
affected by the introduction of a new version of our Java development tool,
JBuilder 5.0, and the release of our new development tool for the Linux
operating system, Kylix. For the six months ended June 30, 2001, licenses and
other revenues from JBuilder grew 71% over the same period a year ago. Licenses
and other revenues from our Enterprise product group for the six month period
ending June 30, 2001 increased by 13% over the same period a year ago. The
increase in Enterprise revenue was principally due to growth in Enterprise
business in our EMEA (Europe, Middle East and Africa) region, as we have
expanded our direct sales force in that region.

Service
   Revenues

Service
revenues represent amounts earned from customer support, training, consulting
and educational services related to our software products. Service revenues
increased to $8.5 million for the quarter ended June 30, 2001, compared to $6.7
million for the quarter ended June 30, 2000. Technical support and
consulting/training represented approximately 64% and 36% of total service
revenues, respectively, for the quarter ended June 30, 2001 compared with 46%
and 54% for the same quarter a year ago. Service revenues increased to $17.8
million for the six months ended June 30, 2001 from $13.4 million for the six
months ended June 30, 2000. Technical support and consulting/training
represented approximately 62% and 38% of total service revenues, respectively,
for the six months ending June 30, 2001 compared with 57% and 43% for the same
period a year ago. The increase in service revenues is primarily due to growth
in technical support revenues in the United States and EMEA. The increase in
service revenues represents our continued focus on direct sales and marketing of
our support services to corporate customers. In the future, we expect service
revenues to remain dependent upon our ability to grow the number of corporate
customers.

International
   Revenues

International
revenues represented 57% of our total net revenues for the three and six months
ended June 30, 2001 compared to 61% and 62% for the three and six months ended
June 30, 2000, respectively. The decrease was due to the growth in license and
other revenues from our Java and RAD business units in the United States. We
expect that our international operations will continue to provide a significant
portion of our total revenues.

12

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The
following table presents our total revenues by geographic area:

|              | Three Months EndedJune 30, |         | Six Months EndedJune 30,
|------------- | -------------------------- | ------- | ------------------------
|              | 2001                       |         | 2000                    
|              |                            |         |                         
|United States |                            | $23,882 |                         
|EMEA          |                            | 20,308  |                         
|Japan         |                            | 5,208   |                         
|Other         |                            | 6,614   |                         
|              |                            |         |                         
|Net revenues  |                            | $56,012 |                         
|              |                            |         |                         

Cost of Revenue

Cost
   of Licenses and Other Revenues

Cost
of licenses and other revenues consist primarily of production costs such as
purchase of compact discs, transferring software to electronic media, printing
of user manuals, product packaging and distribution and royalties paid
to third-party vendors. Cost of licenses and other revenues increased from$2.9 million for the quarter ended June 30, 2000 to $3.5 million for the
quarter ended June 30, 2001. The cost of licenses and other revenues represented
7% of total licenses and other revenues in each quarter. The increase in cost of
licenses and other revenues is due to the increase in volume of unit sales with
the release of JBuilder 5.0 and Delphi 6.0 during the current quarter.

Cost
of licenses and other revenues decreased from $6.9 million for the six months
ended June 30, 2000 to $6.4 million for the six months ended June 30, 2001. The
cost of licenses and other revenues represented 9% and 7% of total licenses and
other revenues for the six month periods, respectively. The decrease in cost of
licenses and other revenues during the six month period was principally due to a
decrease in external royalty costs and inventory obsolescence costs.

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,
training and education. Cost of service revenues were $6.0 million and $4.9
million for the quarters ended June 30, 2001 and 2000, respectively. Cost of
service revenues as a percentage of service revenues decreased from 73% in the
quarter ended June 30, 2000 to 71% for the quarter ended June 30, 2001. The cost
of service revenues were $11.1 million and $9.8 million for the six months ended
June 30, 2001 and 2000, respectively. Cost of service revenue as a percentage of
service revenues decreased from 73% for the six months ended June 30, 2000 to
62% for the six months ended June 30, 2001. The dollar increase in cost of
service revenues was due to additional employee and third party costs in our
professional service organization. Due to the relative fixed nature of our cost
of services, we expect the service revenue margins to remain a function of our
ability to enter into enterprise level support contracts.

Operating Expenses

Research
   and Development

Research
and development expenses consist primarily of salaries and other
personnel-related expenses for those involved in research and development, costs
of computer equipment used in software development, information technology and
facilities costs and fees and expenses of third-party consultants. Research and
development expenses were $11.4 million and $10.5 million, or, 20% and 22% of
net revenues for the quarters ended June 30, 2001 and 2000, respectively.
Research and development expenses were $22.7 million and $21.6 million, or, 21%
and 23% of net revenues for the six months ended June 30, 2001 and 2000,
respectively. Research and development expenses increased in dollars primarily
due to an increase in

13

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employee costs and software translation costs. Employee costs increased
principally due to an increase in the number of research and development employees.
Software translation costs increased during the current quarter due to the development of
the local language versions of JBuilder 5.0 and Delphi 6.0.

Sales,
   General and Administrative

Sales,
general and administrative (SG&A) expenses consist primarily of
salaries, benefits, sales commissions, the cost of product marketing programs,
and facility and information system costs. Selling, general and administrative
expenses were $30.2 million and $25.4 million, or, 54% of net revenues for the
quarters ended June 30, 2001 and 2000, respectively. Selling, general and
administrative expenses were $58.8 million and $52.7 million, or, 55% and 57% of
net revenues for the six months ended June 30, 2001 and 2000, respectively. The
dollar increase in sales, general and administrative expenses was principally
due to an increase in the number of sales and marketing employees.

Interest Income, Net and Other

Interest
income, net and other consists primarily of interest income, interest expense,
foreign currency exchange and gains and losses on the sale of fixed assets.
Interest income, net and other increased to $3.2 million during the quarter
ended June 30, 2001 from $2.4 million during the quarter ended June 30, 2000.
Interest income, net and other increased to $6.6 million during the six months
ended June 30, 2001 from $4.6 million during the six months ended June 30, 2000.

The
quarter ended June 30, 2000 included a loss of about $1.0 million on the sale of
our facilities in Scotts Valley, California. While cash, cash equivalents and
short term investments have increased by $30.5 million, or 13%, from June 30,
2000 to June 30, 2001, interest income decreased by $0.4 million for the quarter
ended June 30, 2001 compared to the quarter ended June 30, 2000 due to lower
effective interest rates on investments. We anticipate that interest income will
continue to be less than the corresponding prior year amounts for the remainder
of the year as interest rates are expected to remain significantly lower.

Income Taxes

We
recorded income tax expense of $1.6 million and $3.1 million for the three and
six months ended June 30, 2001, respectively. This compares to income tax
expense of $1.4 million and $2.4 million for the three and six months ended June
30, 2000, respectively. This is based on our expected effective tax rate of 20
percent for the year ending December 31, 2001, which is a combination of U.S.
alternative minimum tax, non-U.S. income taxes and withholding taxes imposed in
various jurisdictions regardless of the profitability of Borland in that
jurisdiction. Our effective tax rate for the year ending December 31, 2001 is
less than the effective tax rate for the year ended December 31, 2000
principally due to our increased profitability which was offset by our tax loss
and credit carryforwards.

Liquidity and Capital Resources

As
of June 30, 2001, cash, cash equivalents and short-term investments totaled
$274.4 million; up from $262.6 million at December 31, 2000. The major sources
of cash during the six months ended June 30, 2001 were $10.4 million in cash
provided from operating activities and $5.7 million in cash received from the
issuance of stock upon the exercise of warrants held by the former holders of
our Series B preferred stock (which is being retired) and pursuant to employee
stock options and our employee stock purchase plan. The major use of cash during
this period was $3.3 million in cash used for the purchase of computer equipment
and leasehold improvements.

On
July 13, 2001, we used approximately $9.0 million in cash and/or cash
equivalents to repay the outstanding portion of a mortgage note. The note
related to a mortgage on an office building in Scotts Valley, California which
used to serve as our corporate headquarters and which is now fully leased to
third party tenants. Such amounts included approximately $0.2 million in
prepayment penalties to retire such note.

We
expect that our existing cash, cash equivalents, short-term investments and cash
generated from operating activities will be sufficient to finance our business
requirements at least through the next twelve months.

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FACTORS THAT COULD AFFECT FUTURE RESULTS AND MARKET PRICE
OF STOCK

We
operate in a rapidly changing environment that involves many risks and
uncertainties, some of which are beyond our control, which could affect our
future results of operations as well as our stock price. The following
discussion highlights some of these risks.

We Depend on the Overall Demand for Information Technology and
Services

Our
success depends on the growth of the overall demand for information technology
and services, particularly in the market for our e-business platform solutions.
Our business is affected by general economic and business conditions throughout
the world. A softening of the demand for our e-business platform solutions
specifically, and information technology and services generally, caused by a
weakening of the economy, may result in decreased revenues or slower growth for
us.

We Are Currently Party to Various Legal Proceedings

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

Risks Related to New Product Introductions; Rapid Technological and Market Changes

The
market for our products is highly competitive and is characterized by continuous
technological advancement, evolving industry standards and changing customer
requirements. Our success in generating revenues in the future will depend
substantially on our ability to design and market new products and upgrades to
our current products for existing and new computer platforms and operating
environments.

We
face a number of inherent risks in the current market environment, including, but not
limited to, the following:

| | we
may introduce products later than we expect or later than competitors introductions;the
mere announcement by us of a new product or an upcoming upgrade to an existing product
could cause potential customers to defer or cancel purchases of existing products and
services;competitors may introduce competing products at lower prices;products
may not meet customers expectations regarding features and performance;competitors
products based on new technologies or new industry standards may quickly render an
existing product obsolete and unmarketable;product upgrades, which enable users
to upgrade from earlier versions of our products or our competitors products, have
lower prices and margins than new products; and/orthe acceptance of some of our
new products is highly dependent, in part, on the continued adoption of the Internet as a
new computing paradigm and the continued adoption of the Linux operating system.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

From
time to time, we announce when we expect to begin shipping a new product. In the
past, some of our products have shipped later, and sometimes substantially
later, than when we originally expected. The loss of key employees may increase
the risk of these delays. Some of our products are based on technology licensed
from third parties. We have limited control over when and whether these
technologies are upgraded. The failure or delay in enhancements of 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.

15

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We Depend on Key Personnel

We
believe that our future success will depend, in large part, on our ability to
recruit and retain qualified employees, particularly highly skilled software
engineers and management personnel. Competition for such personnel is intense,
particularly in Northern California where our operations are based, due to the
strong demand for such personnel by the many technology companies that are based
in or have significant operations in Northern California. There can be no
assurances that we will be successful in retaining or recruiting such personnel.

To
retain key employees, we have instituted retention programs. We have increased
compensation, bonuses, stock options and other fringe benefits in order to
attract and retain management and other key personnel. We may be required to
further increase such compensation and benefits. We are not certain that these
efforts will succeed in retaining our key employees, and failure to attract and
retain key personnel could significantly harm our business. These increased
compensation costs may not be offset through either improved productivity or
higher revenue.

Unpredictability of Future Revenues: Potential
Fluctuations in Quarterly Operating Results and Seasonality

Our
quarterly operating results have varied significantly in the past. We expect
that our operating results will continue to vary significantly from time to
time. We believe that these variations may result from many factors already
described in this Form 10-Q and may include, but may not be limited to, any of
the following factors:

| | introduction
of new products;the mix of channels through which we market, distribute and sell
our products;the overall level of demand for our products and services;the
size and timing of significant orders and their fulfillment;the number, timing
and significance of product enhancements and new product announcements by us and our
competitors;changes in pricing policies by us or our competitors;customer
order deferrals in anticipation of enhancements or new products offered by us or our
competitors;deferral of customer orders based on customers uncertainty about
our short-term and long-term prospects;product release cycles of existing
products;product defects and other product quality problems;seasonal
trends; andgeneral domestic and international economic and political conditions.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

An
additional risk factor is the lengthening of our sales cycle. We expect that a
significant percentage of our future revenues will be from large orders. These
large sales typically contain multiple elements, including licenses for
development and deployment products, technical support, maintenance, consulting
and training services. A significant portion of the revenues from a large order
is typically recognized over time. For example, when the contract is signed, the
license and deployment fees may be recognized by us as revenue. However,
revenues related to further services, such as technical support and consulting
services, must be deferred until the services are rendered. The timing of
recognition of revenues associated with larger sales may have a material adverse
effect on our business, operating results and financial position.

Furthermore,
many customers 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. Our costs are based on projected revenues
and are relatively fixed in the short term. Therefore, if our

16

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revenue levels fall below projections, net income may be significantly
reduced, and, accordingly, we may experience a loss.

As
a result of all of these factors, we believe that quarterly revenues and
operating results are 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.

Risks in Direct Sales, Lengthy Sales Cycles and Systems
Implementation Selling

Selling
enterprise software products directly to our customers entails sales cycles that
are substantially more lengthy and more uncertain than those associated with our
traditional business of selling desktop software through retail channels.
Customers for enterprise products are predominately larger companies,
institutions and government entities. These customers generally commit
significant time and resources to evaluating enterprise software, and they
require us to expend substantial time, effort and money educating them about our
software products and solutions. As a result, sales to these types of customers
generally require an extensive sales effort throughout the customers
organization, and they often require final approval by the customers Chief
Information Officer or other senior level employee. All of these factors
substantially extend the sales cycle and increase the uncertainty of whether a
sale will be made. We have experienced and expect to continue to experience
delays and uncertainty in the sales cycle as well as increased expenses for
these sales. The timing of sales could cause our results of operations to vary
significantly from quarter to quarter and could have a material adverse impact
on our results of operations.

We
need to extensively train and effectively manage our sales personnel, invest
additional resources in our sales efforts and educate our authorized resellers.
Our failure to do so could have a material adverse impact on our business. We
have made changes to our sales compensation programs in recent years in an
effort to motivate our sales force and, accordingly, increase sales. There can
be no assurance, however, that such programs will be successful in achieving
this result in the long term, and such changes could significantly impact our
sales-related expenses.

We
have added trained technical support personnel to assist our customers in
implementing our enterprise software products. Personnel with sufficient
expertise and experience for these positions are in great demand, and we may not
be able to attract or retain a sufficient number of qualified personnel. Our
failure to do so could significantly harm our business.

Results of Our Research and Development Efforts are
Uncertain

Our
future success will depend upon our ability to enhance our current products and
develop and introduce new products on a timely basis. We believe that we will
need to incur significant research and development expenditures to remain
competitive. The products we are currently developing or may develop in the
future may not be technologically successful. In addition, the length of our
product development cycle may be greater than we originally expected. We are
likely to experience delays in future product development. If the resulting
products are not technologically successful, they may not achieve market
acceptance or compete effectively with products of our competitors.

Our
competitors may respond more quickly to emerging technologies than we do. We may
lose customers to competitors if we are not able to respond to requests for
additional features and new products in a timely fashion. We may not be able to
maintain or improve our competitive position against current or potential
competitors, especially those with greater resources.

Risks of New Software and Hardware Platforms

We
invest and will continue to invest a significant amount to develop products for
emerging market segments such as new software and hardware platforms. However,
there is a risk that a new hardware or software platform that we do not provide
products for could rapidly grow in popularity. 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, our future growth and profitability
could suffer.

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Risks of Entering a New Business Area

Our
strategy is to focus on e-business system solutions at the enterprise,
departmental and individual developer levels. Our sales are dependent on
enterprise customers adopting distributed object technology for information
processing and the Internet and corporate Intranets for commerce and
communications.

Our
distributed object software products, such as VisiBroker, Borland AppCenter and
Borland AppServer, are based on several industry standards, including CORBA,
Extended Markup Language or XML, EJB and the J2EE platform. These standards
guide the development and management of applications created in object oriented
programming languages such as C++ and Java. These industry standards have begun
to gain widespread acceptance and they compete with proprietary solutions such
as ActiveX® and DCOM and the emerging .Net initiative, all of which
are marketed by Microsoft Corporation. CORBA-based implementations have been
tried and tested in extremely demanding application environments, and are
generally deemed suitable for enterprise class applications. EJB and J2EE
platform implementations are earlier in the maturity cycle for use in enterprise
class processing environments. The rate of adoption of these latter standards
will affect our business results and success.

We
are investing time and resources in developing products, such as Kylix, which
was released and began shipping in the first quarter of 2001, for the Linux
operating system. Linux is a new operating system that has yet to be adopted on
a widespread basis. At this time, there are relatively few commercially viable
products that operate on the Linux operating system. If Linux is not adopted, or
is adopted more slowly than we anticipate, our investments in Linux compatible
products may not generate the anticipated return, and as a result there could be
a material and adverse effect on our business.

As
a newcomer to these markets, we face a number of risks including:

| | the
new and evolving nature of the markets themselves;our need to make choices
regarding the operating systems, database management systems and server software on which
to focus;the ongoing transition and investment of our resources for these
markets;our limited experience in these markets; andthe presence of
several very large and well-established companies, as well as a number of smaller
successful companies, that are already competing in some of these markets.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

There
can be no assurance that we will be successful in these new markets.

Risks Related to the Use of Java

A
number of our most popular products are based on Java, an object-oriented
software programming language and distributed computing platform developed by
Sun Microsystems, Inc. Such products accounted for approximately 33% of our
revenue during the three months ended June 30, 2001. Java is a relatively new
language and was developed primarily for the Internet and corporate Intranet
applications. Alternatives to Java include Microsoft Corporations C#
language and .Net computing platform. If Java does not continue to be widely
adopted, or is adopted more slowly than anticipated, our business will suffer.

Additionally,
because some of our products are written in Java, they require proprietary
technology made available by Sun Microsystems, Inc. in order to operate.
Pursuant to license agreements with Sun Microsystems, Inc., we license the Java
2 Platform Standard Edition specification, the Java 2 Platform Enterprise
Edition specification, the Java 2 Platform Micro Edition specification and the
PersonalJava specification. If Sun Microsystems, Inc. stops making this
proprietary technology available on commercially reasonable terms, due to the
absence of effective alternatives to licensing this technology, our business
will be harmed. Alternatively, if Sun Microsystems, Inc. makes significant
changes to the Java language or its proprietary technology, or fails to correct
defects and limitations in these products, our ability to continue improving and
shipping our products could be impaired, perhaps materially. In the future, our
customers also may require the ability to deploy our products on platforms for
which technically acceptable Java implementations either do not exist or are not
available on commercially reasonable terms.

18

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Extremely Competitive Industry

The
computer software industry is an intensely competitive industry. Rapid change,
new and emerging technologies and fierce competition characterize the industry.
The pace of change has accelerated due to the emergence of the Internet and
corporate Intranets, programming languages such as Java, and operating systems
such as Linux.

Our
e-business platform solutions compete with products offered by a number of
companies, including, but not limited to, BEA Systems, Inc., International
Business Machines Corporation, Iona Technologies PLC, Microsoft Corporation,
Oracle Corporation, Sun Microsystems, Inc. and Webgain, Inc. With respect to our
Borland AppServer product, we compete primarily with BEA Systems, Inc. and
International Business Machines Corporation. With respect to our VisiBroker
product, we compete primarily with Iona Technologies PLC. With respect to our
JBuilder product, we compete primarily with International Business Machines
Company, Sun Microsystems, Inc. and Webgain, Inc. With respect to our Delphi and
C++Builder products we compete primarily with Microsoft Corporation. With
respect to our TeamSource service, our potential competitors may include Merant,
Microsoft Corporation, Oracle Corporation and Rational Software Corporation. At
this time we have no significant competitors to our Borland AppCenter and Kylix
products.

In
addition, we compete with, and in some cases are dependent upon, operating
systems vendors such as Apple Computer, Inc., Hewlett-Packard Company,
International Business Machines Corporation, Microsoft Corporation, Red Hat,
Inc. and Sun Microsystems, Inc. To the extent that we are unable to obtain
information regarding existing and future operating systems from the developers
of such systems, the release of our products for such systems may be delayed or
may not be competitive. For example, Microsoft Corporation, the developer of the
Windows operating environment, has introduced a product that includes certain
basic application server functionality. The bundling of competing functionality
in versions of Windows products requires us to compete with Microsoft
Corporation in the Windows marketplace where Microsoft Corporation has certain
inherent advantages due to its significantly greater financial, technical,
marketing and other resources, greater name recognition, substantial installed
base and the integration of its middleware functionality with Windows. We need
to differentiate our products from Microsoft Corporations, based on
scalability, functionality, interoperability with non-Microsoft Corporation
platforms, performance and reliability as well as to establish that our products
provide more effective solutions to customers needs. There can be no
assurance that we will be able to differentiate our products successfully from
those offered by Microsoft Corporation, or that Microsoft Corporations
entry into the middleware market will not harm this portion of our business.

Some
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. They
also have extensive knowledge of the market, and extensive development, sales
and marketing resources, and they are capable of offering single vendor
solutions. In particular, operating system vendors such as those mentioned above
may offer similar products bundled with their own operating systems. For
example, Microsoft Corporation has introduced DCOM for Microsoft Corporation
operating systems. In addition, 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.

Some
of our products are targeted at the market for standards-based distributed
object software products. These markets are intensely competitive. We believe
that our product quality, performance and price, vendor and product reputation,
product architecture and quality of support make us competitive in these
markets. However, because there are relatively low barriers to entry in these
markets, we expect additional competition from other established and emerging
companies. Increased competition could result in price reductions, fewer
customer orders, reduced gross margins and loss of market share. Any one of
these results could materially adversely affect our business, operating results
and financial condition.

It
is possible that current and new competitors may form alliances to gain
significant market share. Some of our competitors have offered to license
software for free to gain competitive advantage. For example, Sun Microsystems,
Inc. offers NetBeans at no charge. This kind of competition could
materially adversely affect our ability to sell additional licenses and
maintenance and support renewals on profitable terms. Competitive pressures
could require us to reduce the price of our products and related services. We
are not certain that we will be able to compete successfully against current and
future competition. The failure to

19

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compete successfully could have a material adverse effect on our
business, operating results and financial condition.

We
need to differentiate our products from our competitors products based on
functionality, interoperability, developer productivity, performance and
reliability. There can be no assurance that we will be able to successfully
differentiate our products from those of our competitors.

We
face intense competition in the development and marketing of Internet and
corporate Intranets, middleware and development software. We are not certain
that we will be able to compete effectively for Internet and corporate
Intranets, online services, electronic commerce and other business opportunities
as they arise.

We
also need to constantly expand our product lines to meet the needs of our
customers. This includes not only the development, but also the acquisition, of
new products and technologies. In addition, there is no guarantee that any newly
acquired technologies or products will be successfully commercialized so as to
realize revenue.

A Trend Toward Consolidation in our Industry May Impede
Our Ability to Compete Effectively

Consolidation
may occur among companies in the software industry as firms seek to offer more
extensive suites of software products and broader arrays of software solutions.
Changes resulting from consolidation may negatively impact our competitive
condition. In addition, to the extent that we seek to expand our product lines,
a trend toward consolidation may result in increased competition for attractive
companies for acquisition, and higher prices for such companies.

Risks Associated with Potential Business Combinations

As
a part of our business strategy, we may need to acquire businesses, products or
technologies in the future. However, there may not be suitable businesses,
products or technologies available for acquisition on terms acceptable to us. We
will review potential acquisition prospects to determine if they:

| | complement
our existing product offerings;augment our market coverage;enhance our
technological capabilities; oroffer growth opportunities.
| | -------------------------------------------------------------------------------------------------------------------------------------------

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
goodwill and other intangible assets and the legal and other fees associated
with the negotiation and consummation of the acquisition. Acquisitions entail
numerous risks, including difficulty in the assimilation of operations,
technologies, products and personnel, as well as difficulties and uncertainties
in our ability to maintain key business relationships that the business entities
have established. Acquisitions also divert the attention of management from
other business concerns. An acquisition in a new area risks entering markets
where we have limited or no prior experience as well as potential loss of key
employees of the acquired organization. Further, there is no guarantee that the
expected synergies will occur between ourselves and the new acquisition. There
is also no assurance that we will be able to commercialize a new product or
technology so as to realize revenue. Finally, despite due diligence reviews,
acquired businesses may bring with them certain unanticipated or undisclosed
liabilities and risks. Any one of these risks, if realized, could negatively
affect our business, financial condition and operating results.

Dependence on Third-Party Licenses

We
are dependent on licenses from third-party suppliers for some elements of our
products. If any of these licenses were terminated or were not renewed, or these
third parties failed to develop new or updated products in a timely manner, we
might not be able to ship some of our products. We would then have to seek an
alternative to the third partys product and, in some cases, it is possible
that an alternative may not exist. This could result in delays in releasing
and/or shipping the product, increased costs or reduced functionality

20

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of our products and could have a material and adverse effect on our
business, operating results and financial condition.

Protecting Our Intellectual Property Rights

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, contractual arrangements, domain name registrations and other methods to
protect our intellectual property rights. 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.
Litigation may be necessary to protect our intellectual property rights,
particularly our patent portfolio which currently consists of 96 issued United
States patents. Litigation can be time consuming and expensive. In addition,
effective protection of intellectual property rights is unavailable or limited
in certain foreign countries, making the possibility of misappropriation of our
intellectual property more likely. Current U.S. laws that prohibit copying give
us only limited practical protection from software pirates, and the
laws of many other countries provide very little protection. Policing
unauthorized use of our products is difficult, expensive and time consuming, and
we expect that software piracy will be a persistent problem for our software
products. In addition, the unique technology of the Internet has increased
software piracy. Accordingly, we cannot be certain that we will be able to
protect our intellectual property rights against unauthorized third-party
copying or use. This could materially and adversely affect our revenues.

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

Our Software Products and Web Site May Be Subject to
Intentional Disruption

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

The Price of Our Common Stock May 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 52-week period from July 31,
2000 to July 31, 2001, the price of our common stock has ranged from a low of
$4.16 on October 13, 2000 to a high of $16.39 on July 17, 2001. On August 10,
2001, the most recent practicable date prior to the filing of this Form 10-Q,
the closing price of a share of our common stock on The Nasdaq Stock Market®
was $12.97. 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 enhancements by us or our competitors;technological
innovation by us or our competitors;quarterly variations in our results of
operations or those of our competitors;
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

21

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| | changes in the prices of our products or
those of our competitors;changes in actual or projected revenue and revenue
growth rates for us as a whole or for specific geographic areas, business units, products
or product categories;changes in the price-to-earnings and other multiples used
to value companies in the software industry;changes in revenue, earnings or
other estimates by the research analysts who cover Borland;actual or anticipated
changes in information technology spending;speculation by the press, product
analysts or research analysts with respect to Borland and its products, revenues and/or
earnings, including the growth rate relating thereto;actual or anticipated
changes in interest rates; andgeneral market conditions or market conditions
specific to the software industry.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
stock prices for many companies in the technology sector have experienced wide
fluctuations which, at times, have been unrelated to the operating performance
of such companies.

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

Risks of Regulation of the Internet and Electronic Commerce

We
intend to expand our business through, among other channels, electronic commerce
on the Internet. The electronic commerce market on the Internet is new and
rapidly evolving. While this is an evolving area of the law in the U.S. 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, acceptable payment
methods and quality of products or services could have a material adverse effect
on our business, operating results and financial condition. Taxation of Internet
commerce, or other charges imposed by government agencies or by private
organizations may also be imposed. Laws and regulations applying to the
solicitation, collection and processing of personal or consumer information
could also be enacted. Any of these regulations could result in a decline in the
use or popularity of the Internet as a medium for commerce, which could have an
adverse effect on our future sales and revenue growth.

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

Risks Associated with Our Dependence on Encryption Technology

We
use and will continue to use encryption technology in some of our products to
provide security for the exchange of confidential information. Encryption
technologies have been breached in the past. There can be no assurance that
there will not be a compromise or breach of our security technology. If such a
breach were to occur, it could have a material adverse effect on our business.

22

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Risks of Using Retail Distribution Channels

A
significant portion of our sales are made through retail distribution channels.
Demand in these channels fluctuate based on customer demand. Our retail
distributors also carry the products of competitors. Some of our retail
distributors have limited capital to invest in inventory. Their decision to
purchase our products is based on a combination of demand for our products, our
pricing and the terms and special promotions we offer.

Our
net revenues and earnings may be affected by a practice called channel
fill. Channel fill occurs when a distributor purchases more products than
it expects to sell in anticipation of price changes, sales promotions or
incentives. After we announce a new version or new product and prior to the date
of product availability, distributors, dealers and end users often delay
purchases, cancel orders or return products in anticipation of the availability
of the new version or product. We try to mitigate the negative effect of this
pattern by deferring recognition of revenue associated with distributors
and resellers inventories that are in excess of appropriate levels.
However, channel fill may still affect our net revenues, particularly during
periods where we announce several new products and/or new versions at the same
time.

When
we introduce new versions of our products, our distributors return their
inventories of the older versions. Our return policy allows our distributors,
with some limitations, to return products in exchange for credit toward new
products. Similarly, end users may return products through dealers and
distributors within a reasonable period from the date of purchase for a full
refund. Retailers may then return the older versions to us. We estimate and
maintain reserves for product returns. However, future product returns could
exceed our reserves, and this could have a material adverse effect on our
business.

Risks of Reliance on VARs

A part of our distribution strategy is to embed and bundle our
technology in the products offered by value-added resellers, or VARs, such as
America Online, Inc., Cisco Systems, Inc., Hewlett-Packard Company, Hitachi
Ltd., i2 Technologies, Inc. and Oracle Corporation. In the past, a small
number of VAR customers accounted for a significant percentage of our
enterprise product revenue.

For
these sales, the pricing and discount terms and conditions of our license
agreements are negotiated and vary among our customers. Most of our license
agreements with these customers are non-exclusive and do not require them to
recommend or offer our products exclusively. 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. Many of the markets for VAR products are new and evolving. Therefore,
we cannot predict that these customers will purchase our technology for their
products in the future. If we are not successful in securing additional licenses
with our current or new customers on profitable terms, our business, financial
condition and results of operations could be materially and adversely affected.

Risks Associated with International Operations and Sales

A
substantial portion of our revenue is from international sales. There are
inherent risks in doing business internationally. Some of these risks include
the following:

| | general
economic conditions in each country;seasonal reductions in business activity
during the summer months in Europe and certain other parts of the world;the
difficulty of staffing and managing an organization spread over various countries and
continents;reduced or less certain protection for intellectual property rights
than is available under the laws of the United States;fluctuations in foreign
currency exchange rates;longer payment cycles in certain countries;export
restrictions, tariffs and other trade barriers;
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

23

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| | changes in regulatory
requirements;restrictions on the expatriation of currency from a particular
country;compliance with various conflicting laws and regulations;overlap
of different tax structures; andpolitical instability.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

Risks of Software Defects and 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. We routinely
test our new products and new versions for defects and errors. We cannot be
certain, however, that our products are completely free of defects and errors.
Errors in our software may be caused by defects in third-party software
incorporated into our software. If so, we may be unable to fix these defects
without the cooperation of these software providers. Because these defects may
not be as significant to our software providers as they are to us, we may not
receive the full and timely cooperation that we may require. In addition, we may
not have the contractual right to access the source code of third-party software
and, even if we access the source code, we may be unable to detect and fix the
defect. The discovery of a defect or error in a new version or product may
result in the following consequences, among others:

| | delayed
shipping of the product;immediate loss of revenue;delay in market
acceptance;diversion of development resources;damage to our reputation;
andincreased service and warranty costs.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

Most
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 or
local laws or ordinances or judicial decisions. A successful product liability
claim for large damages brought against us could have a material adverse effect
on our business, operating results and financial condition.

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

Risks of Certain Anti-Takeover Provisions

In
December 1991, we implemented a stockholder rights plan 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 stockholder rights plan, each
share of our outstanding common stock has attached to it one preferred share

24

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purchase right. Each preferred share purchase right entitles the holder,
under certain circumstances, to purchase shares of our common stock at a 50% discount
from its then current market price. The preferred share purchase rights are redeemable at
a nominal price and expire in December 2001.

Our
stockholder rights plan and certain provisions of our Restated Certificate of
Incorporation and Amended and Restated Bylaws may discourage, delay or prevent
an actual or potential change in control of Borland even if such a change in
control would be beneficial to and in the best interests of our stockholders.
These limitations may limit our stockholders ability to approve
transactions that they may deem to be in their best interests. In addition, our
Board of Directors has the authority to fix the rights and preferences of, and
issue shares of, preferred stock without action by our stockholders.

Potential Dilutive Effect of Conversion and Additional Issuance of Series C
Preferred Stock (Series C Stock)

Each
share of our Series C Stock is presently convertible, at the option of the
holder, into fully paid and non-assessable shares of Borland common stock based
upon a fixed conversion ratio. In the event of a reorganization,
reclassification or other change (other than a stock dividend, stock split or
reverse stock split), each share of Series C Stock would be convertible, at the
option of the holder, into the kind and amount of shares of stock and other
securities and property receivable upon such events. Upon transfer by the holder
to an unaffiliated third party, each share of Series C Stock would automatically
convert into fully-paid and non-assessable shares of our common stock based upon
a fixed conversion ratio. In the event of a merger, consolidation, tender offer,
agreement to sell, or sale of all or substantially all of our assets, each share
of Series C Stock would automatically convert into the right to receive the same
consideration as if the Series C Stock had been converted into common stock
immediately prior to such events. In the event of liquidation, dissolution or
winding up of Borland, the holders of shares of Series C Stock would receive the
same consideration as if the Series C Stock had been converted into common stock
immediately prior to such event. The conversion ratio is subject to certain
adjustments in the event of a stock split and other capital reorganizations. At
June 30, 2001, the 625 shares of Series C Stock were convertible into 6,720,430
shares of common stock.

Risk of Natural Disasters, Power Shortages and Other
Unexpected Events

Our
corporate headquarters, including most of our research and development
operations, are located in the Greater San Francisco Bay Area of California, an
area known for significant seismic activity. Seismic activity, such as a major
earthquake, could have a material adverse effect on our business, financial
condition and operating results. In recent months, there has been a shortage of
electricity in California. As a result, many regions, including the Greater San
Francisco Bay Area, have experienced rolling power outages as capacity has
failed to satisfy demand. Continued power shortages, a power failure or other
similar unexpected events could impair our ability to operate our business,
which could also significantly disrupt our operations.

25

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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 denominated balances. We do not use foreign currency forward exchange
contracts for trading purposes. At month-end, foreign denominated balances and
the forward exchange contracts are marked-to-market and unrealized gains and
losses are included in current period net income. Unrealized gains and losses on
long term foreign denominated intercompany balances are reported as part of
cumulative other comprehensive income.

During
the three and six months ending June 30, 2001, we have recorded net foreign
exchange losses of $0.1 million and $0.5 million. The foreign exchange losses
were generated primarily due to the strength of the dollar relative to certain
Asian currencies. It is uncertain whether these currency trends will continue.
If these currency trends continue, we will continue to experience foreign
exchange losses on our intercompany receivables 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 affect on our operating
results and cash flows.

The
table below provides information about our derivative financial instruments,
comprised of foreign currency forward exchange contracts. The information is
provided in U.S. dollar equivalent amounts, as presented in our financial
statements. For foreign currency forward exchange contracts, the table presents
the notional amounts (at the contract exchange rates), the weighted average
contractual foreign currency exchange rates and the estimated fair value as of
June 30, 2001. All instruments mature within twelve months.

|                                             | June 30, 2001 
|-------------------------------------------- | --------------
|                                             | NotionalAmount
|Foreign currency forward exchange contracts: |               
|                                            
|Australian Dollar                            | $  2,550,650  
|Hong Kong Dollar                             | 1,601,989     
|New Taiwan Dollar                            | 1,009,958     
|Singapore Dollar                             | 5,154,639     
|                                             |               
|Total                                        | $10,317,236   
|                                             |               

Interest Rate Risk

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

We
mitigate default risk by investing in only safe and high credit quality
securities and by constantly positioning our portfolio to respond appropriately
to a significant reduction in the credit rating of any investment issuer. The
portfolio includes only marketable securities with active secondary and resale
markets to ensure portfolio liquidity.

26

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We
have no interest rate exposure due to rate changes for long-term debt
obligations. We primarily enter into debt and capital lease obligations to
finance capital expenditures. Such debt and capital lease obligations have a
fixed rate of interest.

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

|                       | 2001 |                | 2002 |        | 2003 |        | 2004 |        | 2005 |        | There-after |         | Total
|---------------------- | ---- | -------------- | ---- | ------ | ---- | ------ | ---- | ------ | ---- | ------ | ----------- | ------- | -----
|                       |      | (in thousands)
|Cash equivalents       |      |                |      |        |      |        |      |        |      |        |             |         |      
|Fixed rate             | $    | 256,266        |      |       |      |       |      |       |      |       |             |        |      
|Average interest rate  |      | 4.26%          |      |       |      |       |      |       |      |       |             |        |      
|Short-term investments |     
|Fixed rate             | $    | 18,162         |      |       |      |       |      |       |      |       |             |        |      
|Average interest rate  |      | 3.46%          |      |       |      |       |      |       |      |       |             |        |      
|Long-term debt         |     
|Fixed rate             | $    | 133            |      | $  200 |      | $  222 |      | $  247 |      | $  275 |             | $ 7,820 |      
|Average interest rate  |      | 10.75%         |      | 10.75% |      | 10.75% |      | 10.75% |      | 10.75% |             | 10.75%  |      

Credit Risks

Our
financial instruments that are exposed to concentrations of credit risk consist
primarily of cash equivalents, short-term investments and trade receivables. Our
cash equivalents and short-term investments are in high quality securities
placed with major banks and financial institutions. Concentrations of credit
risk with respect to receivables are limited due to the large number of
customers and their dispersion across geographic areas. We perform periodic
credit evaluations of our customers financial condition and generally do
not require collateral. At June 30, 2001, one customer, our major distributor in
the United States, accounted for approximately 20% of total accounts receivable.
As of June 30, 2001, no other group or single customer represents greater than
10% of total accounts receivable.

27

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PART IIOTHER INFORMATION

Item 1. Legal Proceedings

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

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

At
the annual meeting of Borland stockholders held on May 31, 2001 at our corporate
headquarters located at 100 Enterprise Way, Scotts Valley, California (the
Annual Meeting) the following matters were voted upon:

1) The following individuals were elected to serve as Class III
directors on our Board of Directors:

|                  |            | 
|----------------- | ---------- | 
|Nominee:          | For        | 
|                  |            | 
|John R. Kasich *  | 49,356,656 | 
|William F. Miller | 49,284,636 | 

---

|* | Mr. Kasich subsequently resigned in June 2001 due to a business conflict and,
accordingly, there is currently only one Class III director.
|- | ------------------------------------------------------------------------------------------------------------------------------------------

In addition to the two Class III directors elected at the Annual Meeting,
the following individuals continued in their term of office as directors following the
Annual Meeting:

Class I directors serving a three-year term expiring at the 2002 Annual
Meeting:

Robert H. Kohn

Robert Dickerson

Class II directors serving a three-year term expiring at the 2003 Annual
Meeting:

Dale L. Fuller

William K. Hooper

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) Approved an amendment to our 1997 Stock Option Plan to authorize for
issuance thereunder an additional 3,000,000 shares of common stock.

| |            | 
| | ---------- | 
| | For        | 
| |            | 
| | 39,402,219 | 

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3) Approved an amendment to our Restated Certificate of Incorporation to
authorize an additional 100 million shares of common stock.

| |            | 
| | ---------- | 
| | For        | 
| |            | 
| | 42,427,614 | 

4) Ratified the selection of PricewaterhouseCoopers LLP as our
independent auditors for the fiscal year ending December 31, 2001.

| |            | 
| | ---------- | 
| | For        | 
| |            | 
| | 50,600,151 | 

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

Item 5. Other Information

Agreements with Sun Microsystems, Inc.

Filed
with this Form 10-Q, pursuant to (b)(10) of Item 601 of Regulation S-K, are
certain agreements between ourselves and Sun Microsystems, Inc.
(Sun) relating to Borlands license from Sun of Suns Java
technology.

Item 6.Exhibits and Reports on Form 8-K

A. Exhibits

The following exhibits are filed as part of, or incorporated by
reference into, this Quarterly Report.

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

|3.1 | Certificate of Amendment of Restated Certificate of Incorporation of Borland Software
Corporation, dated as of June 1, 2001. *
|--- | ------------------------------------------------------------------------------------------------------------------------------

|10.1 | Consulting Agreement between David Heller, a former director of Borland, and Borland
Software Corporation, dated as of May 18, 2001. * ++
|---- | -----------------------------------------------------------------------------------------------------------------------------------------

|10.2 | Technology License and Distribution Agreement between Sun Microsystems, Inc. and Borland
Software Corporation, dated as of October 31, 1995. *
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------

|10.3 | Addendum Number 1 to Technology License and Distribution Agreement between Sun
Microsystems, Inc. and Borland Software Corporation, dated as of June 25, 1998. * +
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.4 | Addendum Number 3 to Technology License and Distribution Agreement between Sun
Microsystems, Inc. and Borland Software Corporation, dated as of June 15, 2000. *
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.5 | Letter Agreement between Sun Microsystems, Inc. and Borland Software Corporation, dated
as of November 7, 1995. *
|---- | -----------------------------------------------------------------------------------------------------------------

|10.6 | Letter Agreement between Sun Microsystems, Inc. and Borland Software Corporation, dated
as of March 9, 1998. *
|---- | --------------------------------------------------------------------------------------------------------------

|10.7 | Letter Agreement between Sun Microsystems, Inc. and Borland Software Corporation, dated
as of November 5, 1998. *
|---- | -----------------------------------------------------------------------------------------------------------------

|10.8 | Letter Agreement between Sun Microsystems, Inc. and Borland Software Corporation, dated
as of February 1, 1999. *
|---- | -----------------------------------------------------------------------------------------------------------------

|10.9 | Master Support Agreement between Sun Microsystems, Inc. and Borland Software Corporation,
dated as of June 15, 2000. *
|---- | ----------------------------------------------------------------------------------------------------------------------

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

|10.10 | Amendment Number 1 to the Master Support Agreement between Sun Microsystems, Inc. and
Borland Software Corporation, dated as of December 29, 2000. *
|----- | ----------------------------------------------------------------------------------------------------------------------------------------------------

|10.11 | Software License Agreement between Sun Microsystems, Inc. and Borland Software
Corporation, dated as of December 29, 2000. *
|----- | ----------------------------------------------------------------------------------------------------------------------------

|10.12 | Trademark License for Java Powered between Sun Microsystems, Inc. and Borland Software
Corporation, dated as of December 29, 2000. *
|----- | ------------------------------------------------------------------------------------------------------------------------------------

|10.13 | Trademark License for PersonalJava Compatible between Sun Microsystems, Inc. and Borland Software
Corporation, dated as of December 29, 2000. *
|----- | -----------------------------------------------------------------------------------------------------------------------------------------------

|10.14 | Trademark License between Sun Microsystems, Inc. and Borland Software
Corporation, dated as of January 4, 2001. *
|----- | -----------------------------------------------------------------------------------------------------------------

---

|*  | Filed
herewith.                                                                      
|-- | -------------------------------------------------------------------------------------
|+  | To
the best of our knowledge, no executed document titled Addendum Number 2 exists.
|++ | 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: Lynne Farris, Director of Investor Relations.

B. Reports on Form 8-K

During
the quarter ended June 30, 2001, Borland did not file any Current Reports on
Form 8-K with the Securities and Exchange Commission.

30

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SIGNATURES

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

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

Date: August 13, 2001

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

31

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