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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 September 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 October 31, 2001, the most recent practicable date prior to the filing of this report,
was 65,559,233.

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INDEX

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

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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)

|                                                              | September 30,2001 |   | December 31,2000
|------------------------------------------------------------- | ----------------- | - | ----------------
|                                                              | (Unaudited)       |   | (Audited)       
|ASSETS                                                        |                   |   |                 
|Current assets:                                              
|Cash and cash equivalents                                     | $ 269,703         |   | $ 216,634       
|Short-term investments                                        | 10,907            |   | 45,925          
|Accounts receivable, net                                      | 33,083            |   | 33,495          
|Other current assets                                          | 12,499            |   | 12,935          
|                                                              |                   |   |                 
|Total current assets                                          | 326,192           |   | 308,989         
|                                                             
|Property and equipment, net                                   | 20,060            |   | 20,438          
|Other non-current assets                                      | 9,965             |   | 11,476          
|                                                              |                   |   |                 
|                                                              | $ 356,217         |   | $ 340,903       
|                                                              |                   |   |                 
|LIABILITIES AND STOCKHOLDERS EQUITY                          |                  
|Current liabilities:                                          |                  
|Accounts payable and accrued expenses                         | $   45,198        |   | $   45,753      
|Income taxes payable                                          | 6,786             |   | 5,337           
|Deferred revenue                                              | 20,358            |   | 18,765          
|Other                                                         | 8,280             |   | 9,053           
|                                                              |                   |   |                 
|Total current liabilities                                     | 80,622            |   | 78,908          
|                                                             
|Long-term debt                                                |                  |   | 8,674           
|Other long-term liabilities                                   | 10,458            |   | 10,641          
|                                                              |                   |   |                 
|                                                              | 91,080            |   | 98,223          
|                                                              |                   |   |                 
|Stockholders equity:                                         |                  
|Preferred stock: $.01 par value; 1,000,000 shares authorized;
|455 and 625 shares issued and outstanding                     |                  |   |                
|Common stock: $.01 par value; 200,000,000 shares authorized; 
|65,403,473 and 61,966,879 shares issued and outstanding       | 654               |   | 620             
|Additional paid-in capital                                    | 482,131           |   | 472,902         
|Accumulated deficit                                           | (193,170          | ) | (209,721        
|Deferred compensation                                         | (1,229            | ) | (1,527          
|Cumulative other comprehensive income                         | 4,942             |   | 5,611           
|                                                              |                   |   |                 
|                                                              | 293,328           |   | 267,885         
|Less common stock in treasury, at cost                       
|- 4,836,300 and 4,473,800 shares                              | (28,191           | ) | (25,205         
|                                                              |                   |   |                 
|                                                              | 265,137           |   | 242,680         
|                                                              |                   |   |                 
|                                                              | $ 356,217         |   | $ 340,903       
|                                                              |                   |   |                 

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 September 30, |  | Nine MonthsEnded September 30,
|----------------------------------------------------- | ------------------------------- |  | ------------------------------
|                                                      | 2001                            |  | 2000                          
|                                                      |                                 |  |                               
|Licenses and other revenues                           | $ 46,985                        |  | $ 40,926                      
|Service revenues                                      | 8,048                           |  | 6,631                         
|                                                      |                                 |  |                               
|Net revenues                                          | 55,033                          |  | 47,557                        
|                                                      |                                 |  |                               
|Cost of licenses and other revenues                   | 3,434                           |  | 2,501                         
|Cost of service revenues                              | 5,576                           |  | 4,944                         
|                                                      |                                 |  |                               
|Cost of revenues                                      | 9,010                           |  | 7,445                         
|                                                      |                                 |  |                               
|Gross profit                                          | 46,023                          |  | 40,112                        
|                                                      |                                 |  |                               
|Research and development                              | 12,311                          |  | 10,515                        
|Sales, general and administrative                     | 30,617                          |  | 24,176                        
|Restructuring and merger-related charges              |                                |  |                              
|                                                      |                                 |  |                               
|Total operating expenses                              | 42,928                          |  | 34,691                        
|                                                      |                                 |  |                               
|Operating income                                      | 3,095                           |  | 5,421                         
|Interest income, net, and other                       | 2,782                           |  | 4,511                         
|Non-recurring benefit                                 |                                |  | 2,967                         
|                                                      |                                 |  |                               
|Income before income taxes                            | 5,877                           |  | 12,899                        
|Income tax provision                                  | 1,204                           |  | 1,455                         
|                                                      |                                 |  |                               
|Net income                                            | $   4,673                       |  | $ 11,444                      
|                                                      |                                 |  |                               
|Net income per share:                                
|Basic                                                 | $     0.07                      |  | $     0.18                    
|                                                      |                                 |  |                               
|Diluted                                               | $     0.06                      |  | $     0.17                    
|                                                      |                                 |  |                               
|Weighted average number of common shares outstanding:
|Basic                                                 | 65,233                          |  | 61,506                        
|                                                      |                                 |  |                               
|Diluted                                               | 75,093                          |  | 68,983                        
|                                                      |                                 |  |                               

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 EndedSeptember 30, |  | Nine Months EndedSeptember 30, |  
|---------------------------------------- | ------------------------------- |  | ------------------------------ | -
|                                         | 2001                            |  | 2000                           |  
|                                         |                                 |  |                                |  
|Net income                               | $  4,673                        |  | $ 11,444                       |  
|Other comprehensive income (loss):      
|Foreign currency translation adjustments | 707                             |  | (908                           | )
|Fair market value adjustment            
|for available for sale securities        | 56                              |  |                               |  
|                                         |                                 |  |                                |  
|Other comprehensive income               | $  5,436                        |  | $ 10,536                       |  
|                                         |                                 |  |                                |  

See Notes to the Condensed Consolidated Financial Statements.

3

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

|                                                                                      | Nine Months EndedSeptember 30, |           
|------------------------------------------------------------------------------------- | ------------------------------ | ----------
|                                                                                      |                                | 2001      
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                 |                                |           
|Net income                                                                            |                                | $   16,939
|Adjustments to reconcile net income to net cash provided
    by operating activities: |                               
|Depreciation and amortization                                                         |                                | 5,752     
|Gain on sale of long-term investment                                                  |                                | (383      
|Loss on sale of fixed asset                                                           |                                | 15        
|CHANGES IN ASSETS AND LIABILITIES:                                                    |                               
|Accounts receivable                                                                   |                                | (192      
|Other assets                                                                          |                                | 1,202     
|Accounts payable and accrued expenses                                                 |                                | (269      
|Income taxes payable                                                                  |                                | 3,355     
|Other (primarily deferred revenue and restructuring)                                  |                                | (321      
|                                                                                      |                                |           
|Cash provided by operating activities                                                 |                                | 26,098    
|                                                                                      |                                |           
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                 |                               
|Purchase of property and equipment                                                    |                                | (4,410    
|Proceeds from sale of property                                                        |                                |          
|Net change in short-term investments                                                  |                                | 35,018    
|Long-term investment, net                                                             |                                | 383       
|                                                                                      |                                |           
|Cash provided by investing activities                                                 |                                | 30,991    
|                                                                                      |                                |           
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                 |                               
|Proceeds from issuance of common stock, net                                           |                                | 8,877     
|Repurchase of common stock                                                            |                                | (2,986    
|Repayment of long-term debt                                                           | (8,764                         | )         
|                                                                                      |                                |           
|Cash provided by (used in) financing activities                                       |                                | (2,873    
|                                                                                      |                                |           
|Effect of exchange rate changes on cash                                               |                                | (1,147    
|                                                                                      |                                |           
|Net change in cash and cash equivalents                                               |                                | 53,069    
|Cash and cash equivalents at beginning of period                                      |                                | 216,634   
|                                                                                      |                                |           
|Cash and cash equivalents at end of period                                            |                                | $ 269,703 
|                                                                                      |                                |           

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 September 30, 2001 and for the three and nine months ended
September 30, 2001 and September 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 September 30, 2001; its results of
operations for the three and nine months ended September 30, 2001 and September 30, 2000;
and its cash flows for the nine months ended September 30, 2001 and September 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
| | ---------------------------

| | 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 September 30, |           | Nine MonthsEnded September 30,
|----------------------------------------- | ------------------------------- | --------- | ------------------------------
|                                          | 2001                            |           | 2000                          
|                                          |                                 |           |                               
|Numerator:                                |                                 |           |                               
|Net income before accretion charges       |                                 | $  4,673  |                               
|Accretion charges to preferred stock      |                                 |          |                               
|                                          |                                 |           |                               
|Income available to common stockholders  
|for basic earnings per share              |                                 | $  4,673  |                               
|                                          |                                 |           |                               
|Denominator:                              |                                
|Denominator for basic income per share  
|weighted average shares                   |                                 | 65,233    |                               
|Effect of dilutive securities             |                                 | 9,860     |                               
|                                          |                                 |           |                               
|Denominator for dilutive income per share | 75,093                          |           | 68,983                        
|                                          |                                 |           |                               
|                                         
|Net income per share  basic              |                                 | $    0.07 |                               
|                                          |                                 |           |                               
|Net income per share  diluted            |                                 | $    0.06 |                               
|                                          |                                 |           |                               

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

| | The
following table summarizes costs incurred during the nine months ended September 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                 | 606                   |   | 298        |  | 213      |  | 1,117    | 
|Non-cash costs                | (50                   | ) |           |  | 151      |  | 101      | 
|                              |                       |   |            |  |          |  |          | 
|Accrual at September 30, 2001 | $    496              |   | $    322   |  | $    136 |  | $    954 | 
|                              |                       |   |            |  |          |  |          | 

| | 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REPAYMENT OF LONG-TERM DEBT
| | ----------------------------------

| | On
July 13, 2001, we used approximately $9.0 million in cash to repay the outstanding
portion of a mortgage note. The note related to a mortgage on an office building in
Scotts Valley, California which previously served as our corporate headquarters and which
is now fully leased to third party tenants through February 27, 2002. Such amounts
included approximately $0.2 million in prepayment penalties to retire such note. | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

| | During
the quarter ended September 30, 2001, we repurchased 362,500 shares of our common stock on the open market at an
average price of $8.24 a share for a total consideration of approximately $3.0 million. | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

6

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| | NOTE
6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
of accounting for business conditions. We believe that the adoption of SFAS 141 will not
have a significant impact on our financial statements. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | In
July 2001, the FASB issued 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 believe
that the adoption of SFAS 142 will not have a significant impact on our financial
statements. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

7

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| | Item
2. Managements Discussion and Analysis of Financial Conditionand 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;                                                                                                                                                             | 
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|  | unanticipated further deterioration of economic and financial
         conditions in the United States and around the world resulting from
         the terrorist attacks on September 11, 2001 and possible economic
         or other repercussions from possible future terrorist attacks; | 
|  | 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;                                                                                                                                                                                       | 
| 
|8
| 
| 
| 
|  | product returns from retailers exceeding our reserves;                                                                                                                                                                                                                                        | 
|  | our ability to successfully integrate acquisitions;                                                                                                                                                                                                                                           | 
|  | 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; and                                                                                                                                                                                                        | 
|  | other 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 | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

9

---

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

| | 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 we began shipping Kylix 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. | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

10

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| | 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
$47.0 million for the quarter ended September 30, 2001 compared to $40.9 million from the
same quarter a year ago. Licenses and other revenues from our Java, RAD, Enterprise and
other products group represented 40%, 34%, 19% and 7% of total licenses and other revenues
for the quarter ended September 30, 2001, respectively. This is compared to 38%, 26%, 30%
and 6% for the quarter ended September 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 quarter ended September 30, 2001 were favorably affected by
the continued success of JBuilder and Delphi, whose revenues grew 15% and 89%,
respectively, over the same quarter a year ago. Licenses and other revenues from our
Enterprise product group decreased by 30% over the same quarter a year ago principally due
to softness in demand for Enterprise products by technology companies and the decline in
business in the United States after the September 11 terrorist attacks. Licenses | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

11

---

| | and
other revenues from other products increased 40% from the same quarter a year ago
principally due to a significant purchase of InterBase licenses by a single customer. | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Licenses
and other revenues totaled $136.9 million for the nine months ended September 30, 2001
compared to $120.7 million from the same period a year ago. License and other revenues
from our Java, RAD, Enterprise and other products group represented 38%, 32%, 23% and 6%,
respectively, of total licenses and other revenues for the nine months ended September 30,
2001. This is compared to 29%, 36%, 27% and 8%, respectively, for the nine months ended
September 30, 2000. | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Licenses
and other revenues during the nine months ended September 30, 2001 were favorably affected
by the continued success of our JBuilder and RAD products. For the nine months ended
September 30, 2001, licenses and other revenues from JBuilder grew 45% over the same
period a year ago. Licenses and other revenues from our RAD product group and the
Enterprise product group for the nine month period ended September 30, 2001 remained
consistent with revenues in the nine month period ended September 30, 2000. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

| | Service
revenues represent amounts earned from technical support, training and consulting services
related to our software products. Service revenues increased to $8.0 million for the
quarter ended September 30, 2001, compared to $6.6 million for the quarter ended September
30, 2000. Technical support and consulting/training represented approximately 70% and 30%
of total service revenues, respectively, for the quarter ended September 30, 2001 compared
with 58% and 42% for the same quarter a year ago. For the nine months ended September 30,
2001, technical support and consulting/training represented approximately 64% and 36% of
total service revenues, respectively, compared with 57% and 43% for the same nine months a
year ago. The increase in service revenues is primarily due to growth in technical support
revenues in the United States and Europe, Middle East and Africa (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 67% and 60% of our total net revenues for the three and nine months
ended September 30, 2001, respectively, compared to 51% and 57% for the three and nine
months ended September 30, 2000. The increase in the percentage of international revenue
was due to expansion of our European and Asian-Pacific operations. Additionally, we
experienced a reduction in demand in the United States during the last few weeks of the
quarter due to the September 11 terrorist attacks. We expect that our international
operations will continue to provide a significant portion of our total revenues. | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | The
following table presents our total revenues by geographic area: | 
| | ------------------------------------------------------------------- | 

|              | Three Months EndedSeptember 30, |           | Nine Months EndedSeptember 30,
|------------- | ------------------------------- | --------- | ------------------------------
|              | 2001                            |           | 2000                          
|              |                                 |           |                               
|United States |                                 | $  18,472 |                               
|EMEA          |                                 | 21,216    |                               
|Japan         |                                 | 6,653     |                               
|Other         |                                 | 8,692     |                               
|              |                                 |           |                               
|Net revenues  |                                 | $  55,033 |                               
|              |                                 |           |                               

12

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| | 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 $2.5 million for the quarter ended September
30, 2000 to $3.4 million for the quarter ended September 30, 2001. The cost of licenses
and other revenues represented 7% and 6% of total licenses and other revenues in the
quarters ended September 30, 2001 and 2000, respectively. The increase in cost of licenses
and other revenues is due to increased sales of JBuilder and RAD products and higher
external royalty costs associated with sales of our Borland Enterprise Studio for Java
introduced earlier this year. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Cost
of licenses and other revenues increased from $9.4 million for the nine months ended
September 30, 2000 to $9.9 million for the nine months ended September 30, 2001. The cost
of licenses and other revenues represented 7% and 8% of total licenses and other revenues
for the nine month period ended September 30, 2001 and 2000, respectively. The dollar
increase in cost of licenses and other revenues during the nine month period was
principally due to increased sales of JBuilder and RAD products. | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

| | Cost
of service revenues consists primarily of salaries and benefits, third-party contractor
costs, and related expenses incurred in providing technical support, consulting and
training. Cost of service revenues were $5.6 million and $4.9 million for the quarters
ended September 30, 2001 and 2000, respectively. Cost of service revenues as a percentage
of service revenues decreased from 75% in the quarter ended September 30, 2000 to 69% for
the quarter ended September 30, 2001. The cost of service revenues were $16.6 million and
$14.8 million for the nine months ended September 30, 2001 and 2000, respectively. Cost of
service revenue as a percentage of service revenues decreased from 74% for the nine months
ended September 30, 2000 to 64% for the nine months ended September 30, 2001. The dollar
increase in cost of service revenues was due to additional employee and third party costs
in our professional service organization. The cost of service revenue decreased as a
percentage of service revenue because a larger percentage of our service revenues were
generated from more profitable service contracts. 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 $12.3 million and $10.5
million, or, 22% of net revenues for the quarters ended September 30, 2001 and 2000.
Research and development expenses were $35.0 million and $32.1 million, or, 21% and 23% of
net revenues for the nine months ended September 30, 2001 and 2000, respectively. Research
and development expenses increased in dollars primarily due to an increase in employee
costs. Employee costs increased principally due to an increase in the number of research
and development employees. | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | 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. Sales, general and administrative expenses were $30.6 million
and $24.2 million, or, 56% and 51% of net revenues for the quarters ended September 30,
2001 and 2000, respectively. Sales, general and administrative expenses were $89.4
million and $76.8 million, or, 55% of net revenues for the nine months ended September 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. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

13

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| | 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 decreased from $4.5 million during the quarter ended September 30, 2000 to $2.8
million during the quarter ended September 30, 2001. Interest income, net and other
increased from $9.1 million during the nine months ended September 30, 2000 to $9.4
million during the nine months ended September 30, 2001. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | While
cash, cash equivalents and short term investments have increased by $29.9 million, or 12%,
from September 30, 2000 to September 30, 2001, interest income decreased by $1.5 million
for the quarter ended September 30, 2001 compared to the quarter ended September 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 $1.2 million and $4.3 million for the three and nine months
ended September 30, 2001, respectively. This compares to income tax expense of $1.4
million and $3.9 million for the three and nine months ended September 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 expected 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 utilization of tax loss and credit carryforwards. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

| | As
of September 30, 2001, cash, cash equivalents and short-term investments totaled $280.6
million; up from $262.6 million at December 31, 2000. The major sources of cash during the
nine months ended September 30, 2001 were $26.1 million in cash provided from operating
activities and $8.9 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 (the Board of
Directors approved the retirement of the remaining 770 shares on October 26, 2001) and
pursuant to employee stock options and our employee stock purchase plan. The major use of
cash during this period was $9.0 million to repay the outstanding portion of a mortgage
note, $4.4 million in cash used for the purchase of computer equipment and leasehold
improvements, and $3.0 million in cash used for the repurchase of common stock. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

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

14

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

| | 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/or                              | 
| | the 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. | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

15

---

| | 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 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, server software and hardware platforms on which
         to focus;                             | 
| | the ongoing transition and investment of our resources for these
         markets;                                                                                                             | 
| | our limited experience in these markets; and                                                                                                                                                   | 
| | the 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. | 
| | -------------------------------------------------------------------------- | 

| | There is
a further 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, if emerging segments are not adopted as
anticipated, or if our new products do not achieve market acceptance, our future growth
and profitability could suffer. | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | 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 35% of our revenue during the quarter ended
September 30, 2001. Java is a relatively new language and was developed primarily for the
Internet and corporate Intranet applications. Alternatives to Java include the C# language
and .Net computing platform offered by Microsoft Corporation. If Java does not continue to
be widely adopted, or is adopted more slowly than anticipated, our business will suffer. | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Additionally,
some of our products require proprietary technology made available by Sun Microsystems,
Inc. in order to operate. Pursuant to license agreements with Sun Microsystems, Inc., we | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

16

---

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

| | 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 those of Microsoft
Corporation, 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 | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

17

---

| | markets.
Because there are relatively low barriers to entry to the markets for our AppServer and
AppCenter products, 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 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
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; or | 
| | offer 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. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

18

---

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

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

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

19

---

| | 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 AOL Time Warner, 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;                                                                              | 
| | 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; and                                                                                            | 
| | political 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. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | 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 September 30, 2000 to September 30, 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 November 9, 2001, | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

20

---

| | 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 $13.50. From time to time,
the market price of our common stock may be significantly affected by a number of
factors, including, but not limited to, the following: | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | announcements of new products or product 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;                                                                                                           | 
| | 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; and                                                                                                                                              | 
| | general 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. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | 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;                                                                           | 
|  
|21
|  
|  
|  
|   | seasonal trends; and                                                                                                          | 
|   | general 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 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
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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| | 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 97 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 or services may be the target of intentional disruptions, such as software
viruses specifically designed to impede the performance of our products or services.
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. | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | 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;           | 
|  
|23
|  
|  
|  
|   | diversion of development resources;   | 
|   | damage to our reputation; and         | 
|   | increased service and warranty costs. | 

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

| | 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 foreign, 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
and we may not have adequate insurance coverage for such risks. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | 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 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. On October 26, 2001, our
Board of Directors approved a successor stockholder rights plan, substantially similar to
the 1991 plan, which will take effect in December 2001 following the scheduled expiration
of the existing plan. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | 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, all of which is held by Microsoft Corporation, 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. On or
about August 29, 2001, Microsoft Corporation converted 170 shares of Series C Stock into 1,827,957
shares of common stock. At September 30, 2001, the | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

24

---

| | remaining 455 shares of Series C Stock issued and
outstanding were convertible into 4,892,473 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. Over the past year,
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. | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | Recent
terrorist attacks upon the United States have added (or exacerbated) economic, political
and other uncertainties, which could adversely affect our revenue growth.
Additional terrorist acts or acts of war (wherever located around the world) may cause
damage or disruption to Borland, our employees, facilities, partners, suppliers,
distributors and resellers and customers which could have a material adverse effect on
our operations and financial results. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

| | We
Are Currently Party to Various Legal Proceedings | 
| | --------------------------------------------------- | 

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

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 nine months ending September 30, 2001, we have recorded net foreign exchange
losses of $0.2 million and $ 0.7 million, respectively. The foreign exchange losses were
generated primarily due to changes in the Euro to U.S. dollar exchange rate. 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 September 30, 2001. All instruments mature within twelve months. | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

|                                             | September 30, 2001
|-------------------------------------------- | ------------------
|                                             | NotionalAmount    
|Foreign currency forward exchange contracts: |                   
|                                            
|Australian Dollar                            | $    3,214        
|Hong Kong Dollar                             | 1,607             
|New Taiwan Dollar                            | 695               
|Singapore Dollar                             | 6,791             
|                                             |                   
|Total                                        | $  12,307         
|                                             |                   

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

26

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| | investment
issuer. The portfolio includes only marketable securities with active secondary and
resale markets to ensure portfolio liquidity. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------- | 

| | We
have no interest rate exposure due to rate changes for long-term obligations. | 
| | -------------------------------------------------------------------------------- | 

| | 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             | $    | 269,703        |      |  |      |  |      |  |      |  |             |  |      
|Average interest rate  |      | 3.82%          |      |  |      |  |      |  |      |  |             |  |      
|Short-term investments |     
|Fixed rate             | $    | 10,907         |      |  |      |  |      |  |      |  |             |  |      
|Average interest rate  |      | 2.26%          |      |  |      |  |      |  |      |  |             |  |      

| | 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. Credit risk with respect to receivables is limited due to the
large number of customers and their dispersion across geographic areas. We perform
periodic credit evaluations of our customers financial condition and generally do
not require collateral. As of September 30, 2001, no group or single customer represents
greater than 10% of total accounts receivable. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

27

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PART IIOTHER INFORMATION

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

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

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

| | Successor
Rights Agreement | 
| | -------------------------- | 

| | On
October 26, 2001, Borlands Board of Directors approved and adopted a successor
stockholder rights plan under which all Borland stockholders on the record date for the
rights distribution will receive rights to purchase shares of Borlands Series D
Junior Participating Preferred Stock, a newly-authorized series of preferred stock. | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | The
terms of the new rights plan are substantially similar to the terms of Borlands
existing rights plan which is due to expire later this year. The record date for the
distribution of the rights will be the close of business on December 20, 2001 or, if
earlier, the date on which the existing rights are redeemed. Under the new rights plan,
the rights will be distributed as a non-taxable dividend and will expire ten years from
the record date. In general, the rights will be exercisable only if a person or group
acquires 15% or more of Borlands common stock. If a person or group acquires 15% or
more of Borlands common stock while the rights plan remains in place, all rights
holders, except the acquiror, will be entitled to acquire Borland common stock having a
value equal to two times the exercise price of the rights, which has been set at $80. | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | The
rights will trade with Borlands common stock, unless and until they are separated
upon the occurrence of certain future events. Borlands board of directors may
terminate the rights plan at any time or redeem the rights until ten days after the time a
person or group acquires more than 15% of Borlands common stock | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | The
rights agreement is filed as Exhibit 1 to Borlands Registration Statement on Form
8-A which was filed with the SEC on October 31, 2001 and the foregoing description of the
plan is qualified in its entirety by reference to such Exhibit 1. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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

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

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

| | Exhibit No. | Description of Exhibit                                                                                                                                                                                                                                                                                                                           | 
| | ----------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 
| |             |                                                                                                                                                                                                                                                                                                                                                  | 
| | 4           | Rights Agreement by and between Borland Software Corporation
            and Mellon Investor Services LLC, as Rights Agent, dated as
            of October 26, 2001, (filed with the Commission on October
            31, 2001 as Exhibit 1 to Borlands Registration Statement on
            Form 8-A and incorporated herein by reference). | 

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

28

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

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

29

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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:
November 13, 2001 | 
| | ----------------------- | 

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

30

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