e10vq

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


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

For the quarterly period ended September 30, 2007


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

For the transition period from to

001-10824
(Commission File Number)

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.)

8303 N. MO-PAC EXPRESSWAY, SUITE A-300
AUSTIN, TEXAS 78759

(Address of Principal Executive Offices) (Zip Code)

Registrant’s Telephone Number, Including Area Code: (512) 340-2200

Former address: 20450 Stevens Creek Blvd., Suite 800, Cupertino, CA 95014
(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 þ NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o Accelerated filer þ Non-accelerated filer o

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

The number of shares of the registrant’s common stock, par value $0.01 per share, outstanding as of October 31, 2007, the most recent practicable date prior to the filing of this report, was 72,758,476

PART I
FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

BORLAND SOFTWARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value and share amounts, unaudited)


	September 30, 2007			December 31, 2006
ASSETS
Current assets:
Cash and cash equivalents	$	75,716		$	55,317
Short-term investments		65,003			—
Accounts receivable, net of allowances of $7,112 and $5,413, respectively		68,100			62,154
Prepaid expenses		10,670			13,341
Other current assets		3,022			1,329

Total current assets		222,511			132,141

Property and equipment, net		10,605			11,176
Goodwill		253,192			253,356
Intangible assets, net		33,834			40,521
Long-term investments		50,002			—
Other non-current assets		11,887			6,705

Total assets	$	582,031		$	443,899


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	10,775		$	15,591
Accrued expenses		33,852			36,438
Short-term restructuring		4,560			9,582
Income taxes payable		2,710			14,925
Deferred revenue		50,669			58,930
Other current liabilities		8,729			7,264

Total current liabilities		111,295			142,730

Convertible senior notes		200,000			—
Long-term restructuring		4,163			6,231
Long-term deferred revenues		1,116			1,610
Other long-term liabilities		23,835			7,848

Total liabilities		340,409			158,419

Stockholders’ equity:
Preferred stock; $.01 par value; 1,000,000 shares authorized; 0 shares issued and outstanding		—			—
Common stock; $.01 par value; 200,000,000 shares authorized; 72,782,662 and 78,704,764 shares issued and outstanding, respectively		728			787
Additional paid-in capital		665,164			659,932
Accumulated deficit		(293,772	)		(273,892	)
Cumulative other comprehensive income		9,911			9,121

		382,031			395,948
Less common stock in treasury at cost, 21,158,980 and 15,275,899 shares, respectively		(140,409	)		(110,468	)

Total stockholders’ equity		241,622			285,480

Total liabilities and stockholders’ equity	$	582,031		$	443,899

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

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


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2007			2006			2007			2006
License and other revenues	$	40,379		$	45,701		$	107,998		$	126,524
Service revenues		32,579			36,665			99,326			102,364

Total revenues		72,958			82,366			207,324			228,888


Costs of revenues:
Cost of license and other revenues		1,622			1,972			4,692			5,869
Cost of service revenues		9,955			14,210			31,525			41,787
Amortization of acquired intangibles and other charges		2,107			2,119			6,345			4,852

Cost of revenues		13,684			18,301			42,562			52,508


Gross profit		59,274			64,065			164,762			176,380


Selling, general and administrative		43,387			52,518			135,815			149,128
Research and development		13,995			19,968			43,637			53,673
Restructuring, amortization of other intangibles, acquisition-related expenses and other charges		1,588			5,060			4,675			15,356

Total operating expenses		58,970			77,546			184,127			218,157


Operating income (loss)		304			(13,481	)		(19,365	)		(41,777	)

Gain on sale of fixed assets		—			1,658			—			1,658
Interest income		2,352			256			6,499			2,582
Interest expense and other income		(1,850	)		(321	)		(4,659	)		(993	)

Total other income		502			1,593			1,840			3,247

Income (loss) before income taxes		806			(11,888	)		(17,525	)		(38,530	)

Income tax provision		306			1,254			2,442			2,600

Net income (loss)	$	500		$	(13,142	)	$	(19,967	)	$	(41,130	)


Net income (loss) per share:
Net income (loss) per share — basic	$	0.01		$	(0.17	)	$	(0.27	)	$	(0.54	)

Net income (loss) loss per share — diluted	$	0.01		$	(0.17	)	$	(0.27	)	$	(0.54	)


Shares used in computing basic net income (loss) per share		72,371			77,263			72,989			76,799

Shares used in computing diluted net income (loss) per share		72,554			77,263			72,989			76,799

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

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


	Nine Months Ended September 30,
	2007			2006
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(19,967	)	$	(41,130	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		11,295			8,473
Stock-based compensation		4,784			8,721
Provision for accounts receivable allowances		2,187			(2,199	)
Acquired in-process research & development charge		—			4,800
Acquired developed technology impairment charge		—			497
Gain on disposals of fixed assets		—			(1,658	)
Loss on sale of subsidiary		226			—
Write-off of fixed assets		686			323
Changes in assets and liabilities, net of acquisitions:
Accounts receivable		(6,940	)		1,925
Prepaid expenses and other assets		(4,341	)		4,572
Accounts payable and accrued expenses		(6,922	)		10,533
Income taxes payable		3,184			(2,090	)
Short-term restructuring		(4,978	)		1,907
Deferred revenues		(8,935	)		(6,073	)
Long-term restructuring		(2,068	)		(2,305	)
Other liabilities		7,617			(1,290	)

Cash used in operating activities		(24,172	)		(14,994	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(4,802	)		(3,887	)
Proceeds from sale of fixed assets		—			11,015
Acquisition of Segue Software, net of cash acquired		—			(102,457	)
Proceeds from sale of subsidiary		178			—
Acquisition of developed technology		—			(497	)
Purchases of investments		(125,156	)		—
Sales and maturities of short-term investments		10,201			125,672

Cash provided by (used in) investing activities		(119,579	)		29,846

CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of convertible senior notes, net		194,230			—
Proceeds from issuance of stock options, net		964			2,817
Repurchase of common stock		(29,941	)		—

Cash provided by financing activities		165,253			2,817

Effect of exchange rate changes on cash		(1,103	)		1,398
Net change in cash and cash equivalents		20,399			19,067
Beginning cash and cash equivalents		55,317			49,075

Ending cash and cash equivalents	$	75,716		$	68,142

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

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, 2007 and December 31, 2006, and for the three and nine months ended September 30, 2007 and 2006, are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and Rule 10-01 of Regulation S-X. Accordingly, they do not include all financial information and disclosures required by GAAP for complete financial statements and certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for a fair statement of Borland’s financial position at September 30, 2007 and December 31, 2006, its results of operations for the three and nine months ended September 30, 2007 and 2006, and cash flows for the nine months ended September 30, 2007 and 2006.

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The results of operations for interim periods are not necessarily indicative of the results to be expected for any subsequent quarter or for the full year. The condensed consolidated financial statements and related notes should be read in conjunction with our audited financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2006, as filed with the Securities and Exchange Commission (“SEC”) on March 15, 2007.

NOTE 2. STOCK-BASED COMPENSATION

We follow the fair value recognition provisions of SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”). We currently have in effect certain stock purchase plans, stock award plans, and equity incentive plans as described in Note 11 of Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended December 31, 2006. There have been no material changes to such plans.

Stock-Based Compensation Expenses

The total stock-based compensation expense associated with Borland stock-based employee compensation plans under SFAS 123R for the three and nine months ended September 30, 2007 and 2006, was as follows:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2007		2006		2007		2006
	In Thousands				In Thousands
Cost of sales	$	43	$	105	$	128	$	354
Research and development		406		632		1,093		1,733
Selling, general and administrative		1,486		2,071		3,563		6,634

Stock-based compensation expense	$	1,935	$	2,808	$	4,784	$	8,721

Stock Options

Option activity during the nine months ended September 30, 2007, was as follows:


						Weighted-
				Weighted-		Average
				Average		Remaining		Aggregate
	Options			Exercise		Contractual		Intrinsic Value
	(In Thousands)			Price		Term (Years)		(In Thousands)

Outstanding at December 31, 2006		14,840		$	8.04
Granted		2,735		$	5.80
Exercised		(217	)	$	5.35
Forfeited/expired		(4,143	)	$	8.65

Outstanding at September 30, 2007		13,215		$	7.43		6.67	$	10

Vested and expected to vest at September 30, 2007		11,124		$	7.75		6.24	$	10

Exercisable at September 30, 2007		7,087		$	8.91		4.66	$	10

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between Borland’s closing stock price on the last trading day of the third quarter of fiscal 2007 and the exercise price, multiplied by the number of in-the-money options on such date) that option holders would have received had all option holders exercised their options on September 30, 2007. This amount has changed based on the fluctuation in the fair market value of Borland’s stock. The total intrinsic value of options exercised for the three and nine months ended September 30, 2007, was $0.1 million and $0.1 million, respectively and the total intrinsic value of options exercised for three and nine months ended September 30, 2006, was $0.1 million and $0.2 million, respectively.

Information regarding the stock options outstanding at September 30, 2007, is summarized below:


	Options Outstanding
			Weighted-
	Number		Average		Weighted-
	Outstanding at		Remaining		Average		Aggregate
	September 30, 2007		Contractual		Exercise		Intrinsic Value
	(In Thousands)		Life		Price		(In Thousands)

$3.50 — $5.44		2,766		8.64	$	5.20
$5.45 — $5.84		2,778		4.87	$	5.61
$5.85 — $6.42		4,151		8.63	$	6.14
$6.50 — $13.17		2,784		4.59	$	9.26
$13.30 — $714.22		736		2.90	$	22.94

Outstanding at September 30, 2007		13,215		6.67	$	7.43	$	10

Vested and expected to vest at September 30, 2007		11,124		6.24	$	7.75	$	10

The weighted-average remaining contractual life for all exercisable stock options at September 30, 2007 was 4.66 years. As of September 30, 2007, the aggregate intrinsic value of the options outstanding and the aggregate intrinsic value of the options outstanding and exercisable were each $10,000.

As of September 30, 2007, Borland expects to recognize $9.8 million of total unrecognized compensation cost related to stock options over a weighted-average period of 2.81 years.

Borland estimated the fair value of share-based payment awards using the Black-Scholes option pricing model. The weighted-average assumptions and weighted-average fair values for the three and nine months ended September 30, 2007 and 2006 are as follows:


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2007			2006			2007			2006

Expected life	5.10 years			4.65 years			4.98 years			4.65 years
Risk-free interest rate		4.25	%		4.20	%		4.78	%		4.20	%
Volatility		40.3	%		53.0	%		42.4	%		53.0	%
Dividend yield		0	%		0	%		0	%		0	%

Restricted Stock

Unvested restricted stock awards as of December 31, 2006, and changes during the nine months ended September 30, 2007, were as follows:


	Unvested			Weighted
	Restricted			Average
	Stock			Grant Date
	Outstanding			Fair
	(In Thousands)			Value
Balance at December 31, 2006		850		$	5.94
Vested		(336	)	$	6.02
Forfeited		(126	)	$	5.73

Balance at September 30, 2007		388		$	5.95

As of September 30, 2007, there was $1.1 million in unrecognized stock-based compensation expense related to unvested restricted stock awards. Borland expects to recognize that cost over a weighted-average period of 1.29 years.

Employee Stock Purchase Plan

In December 2006, we temporarily suspended our ESPP program starting with the offering period scheduled to commence December 1, 2006, pending our completion of a Registration Statement on Form S-8 for an increase to the share reserve under our 1999 Employee Stock Purchase Plan. Following the approval of our stockholders for the share increase at our 2007 Annual Stockholders’ Meeting on May 29, 2007, we filed a Registration Statement on Form S-8 and started an offering period on July 1, 2007, which will end on November 30, 2007. Thereafter, we plan to commence six month offering periods under our ESPP on December 1 and June 1 of each year.

NOTE 3. NET INCOME (LOSS) PER SHARE

We compute net income (loss) per share in accordance with SFAS 128, “Earnings per Share.” Under the provisions of SFAS 128, basic net income (loss) per share is computed by dividing the net income (loss) by the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing the net income (loss) for the period by the weighted-average number of common and potentially dilutive shares outstanding during the period. Potentially dilutive shares, which consist of incremental shares issuable upon exercise of stock options and unvested restricted stock, are included in diluted net income per share in periods in which net income is reported, to the extent such shares are dilutive. Diluted net loss per share is the same as basic net loss per share for nine months ended September 30, 2007 and the three and nine months ended September 30, 2006, due to our net losses in those periods.

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


	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2007		2006			2007			2006

Numerator:
Net income (loss)	$	500	$	(13,142	)	$	(19,967	)	$	(41,130	)

Denominator:
Weighted-average shares outstanding, excluding unvested restricted stock		72,371		77,263			72,989			76,799
Effect of dilutive securities:
Employee stock options, restricted stock awards and ESPP shares		183		—			—			—
Other		—		—			—			—


Denominator for diluted net income (loss) per share — weighted-average shares and assumed conversions		72,554		77,263			72,989			76,799


Net income (loss) per share attributable to common stockholders:
Net income (loss) per share — basic and diluted	$	0.01	$	(0.17	)	$	(0.27	)	$	(0.54	)

Net income (loss) per share — diluted	$	0.01	$	(0.17	)	$	(0.27	)	$	(0.54	)

The diluted net loss per share calculation for the nine months ended September 30, 2007, as well as the three and the nine months ended September 30, 2006, excludes options to purchase 13.4 million and 15.6 million shares of common stock, respectively, and 422,000 and 83,000 unvested restricted common shares, respectively, due to our net loss in those periods. The diluted net income per share calculation for the three months ended September 30, 2007, excludes options to purchase 13.4 million shares of common stock due to the fact that the strike price of these shares was more than the average stock price of the Company during the period. In addition, the dilutive net loss per share calculation for the nine months ended September 30, 2007, excluded 34.3 million shares, issuable upon conversion of our 2.75% Convertible Senior Notes due February 15, 2012, calculated using the “if converted method”, due to our net loss in the period. The conversion of these shares was also excluded from the diluted net income per share calculation for the three months ended September 30, 2007, as the conversion would have an anti-dilutive effect. See Note 4 for information on our Convertible Senior Notes.

NOTE 4. SENIOR NOTES OFFERING

General

In February 2007, we issued 2.75% Convertible Senior Notes due February 15, 2012, for an aggregate principal amount of $200 million in a private offering for resale to qualified institutional buyers pursuant to SEC Rule 144A under the Securities Act of 1933. The Convertible Senior Notes bear interest at 2.75% per annum. Interest is payable semiannually in arrears on February 15 and August 15, of each year, beginning August 15, 2007. We received proceeds of approximately $193.9 million after we deducted fees of the initial purchaser and our offering expenses for the aggregate amount of approximately $6.1 million. Our fees relating to the offering are being amortized in other operating expense over the term of the Convertible Senior Notes and interest expense related to the offering is being accrued in other income and expense over the term of the Convertible Senior Notes. We used approximately $30 million of the net proceeds from the sale of the Convertible Senior Notes to repurchase approximately 5.9 million shares of our common stock.

Conversion Process and Other Terms of the Convertible Senior Notes

On or after November 11, 2011, holders of the Convertible Senior Notes will have the right to convert their notes. Upon conversion, we will deliver a number of shares of our common stock equal to the conversion rate for each $1,000 of principal amount of notes converted, unless prior to the date of such conversion we have obtained stockholder approval to settle conversions of the

notes in cash and shares of our common stock. If we obtain such approval, any notes converted after such approval will be convertible into (i) cash equal to the lesser of the aggregate principal amount of the notes to be converted and the total conversion value and (ii) shares of our common stock for the remainder, if any, of the total conversion value. In addition, following specified corporate transactions, we will increase the conversion rate for holders who elect to convert notes in connection with such corporate transactions, provided that in no event may the shares issued upon conversion, as a result of adjustment or otherwise, result in the issuance of more than approximately 39.2 million shares.

Holders may convert their Convertible Senior Notes prior to maturity if: (1) the price of our common stock reaches $8.29 during periods of time specified in the Convertible Senior Notes, (2) specified corporate transactions occur or (3) the trading price of the notes falls below a certain threshold.

We evaluated the embedded conversion option in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” and concluded that the embedded conversion option contained within the Convertible Senior Notes should not be accounted for separately because the conversion option is indexed to our common stock and is classified as stockholders’ equity. Additionally, we evaluated the terms of the Convertible Senior Notes for a beneficial conversion feature in accordance with EITF No. 98-5, “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios” and EITF No. 00-27, “Application of Issue 98-5 to Certain Convertible Instruments” and concluded that there was no beneficial conversion feature at the commitment date based on the conversion rate of the Convertible Senior Notes relative to the commitment date stock price.

Each $1,000 of principal of the Convertible Senior Notes will initially be convertible into 156.8627 shares of Borland common stock, which is the equivalent of $6.38 per share and would result in the issuance of an aggregate of approximately 31.4 million shares. The number of shares issuable upon conversion is subject to adjustment under the following circumstances: (1) during any fiscal quarter beginning after March 31, 2007, if the last reported sale price of our common stock for at least 20 trading days during the 30 consecutive trading days ending on the last trading day of the immediate preceding fiscal quarter is greater or equal to 130% of the applicable conversion price on the last day of such preceding fiscal quarter; (2) during the five business day period after any ten consecutive trading day period in which the trading price per note for each day of that ten consecutive trading day period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate for such day; and (3) upon the occurrence of specified corporate transactions.

Based on SFAS No. 128, “Earnings per Share” and EITF No. 04-08, “Accounting Issues Related to Certain Features of Contingently Convertible Debt and the Effect on Diluted Earnings per Share,” the dilutive effect of the common shares issuable upon conversion of the Convertible Senior Notes would normally be reflected in the diluted earnings per share calculation. However, due to the net share settlement feature, the Convertible Senior Notes do not qualify as an Instrument C under EITF No. 90-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock.” Therefore, we use the “if- converted” method for calculating diluted earnings per share. Using the “if-converted” method, the shares issuable upon conversion of the Convertible Senior Notes was anti-dilutive for the three and nine months ended September 30, 2007. Accordingly, the impact has been excluded from the computation of diluted earnings per share.

Registration Rights

Under the terms of the Convertible Senior Notes, we are required to use reasonable efforts to file a shelf registration statement regarding the Convertible Senior Notes with the SEC by December 3, 2007. The shelf registration statement must be declared effective by the SEC by March 3, 2008. We must keep the shelf registration statement effective until February 6, 2009 or such earlier date as all shares issued upon conversion of the Convertible Senior Notes are sold. If we fail to meet these terms, we will be required to pay additional interest on the Convertible Senior Notes in the amount of 0.25% for the first 90 days after the occurrence of the failure to meet a term and 0.50% thereafter.

NOTE 5. INVESTMENTS IN MARKETABLE SECURITIES

Marketable securities, which are classified as available-for-sale, are summarized below as of September 30, 2007 (in thousands):


	September 30, 2007
	Gross Amortized		Gross Unrealized		Gross Unrealized			Estimated Fair
	Costs		Gains		Loss			Value
Corporate debt securities	$	45,827	$	30	$	(97	)	$	45,760
U.S. government debt securities		19,370		58		—			19,428
Asset-backed securities		30,658		59		—			30,717
Auction rate securities		19,100		—		—			19,100

	$	114,955	$	147	$	(97	)	$	115,005

Fixed income securities included in short-term investments above are summarized by their contractual maturities as follows (in thousands):


	September 30, 2007
	Gross Amortized		Estimated Fair
Due in	Costs		Value
Less than one year	$	64,752	$	65,003
One to five years		50,203		50,002

Total	$	114,955	$	115,005

The following table summarized the fair value and gross unrealized gains (losses) related to available-for-sale securities, aggregated by investment category and length of time individual securities have been in a continuous unrealized gain (loss) position, as of September 30, 2007 (in thousands):


	September 30, 2007
	Less than twelve months					Greater than twelve months					Total
	Estimated Fair		Gross Unrealized			Estimated Fair		Gross Unrealized			Estimated Fair		Gross Unrealized
	Value		Gains (Losses)			Value		Gains (Losses)			Value		Gains (Losses)
Corporate debt securities	$	11,774	$	(6	)	$	33,986	$	(61	)	$	45,760	$	(67	)
U.S. government debt securities		13,918		22			5,510		36			19,428		58
Asset-backed securities		20,211		41			10,506		18			30,717		59
Auction rate securities		19,100		—			—		—			19,100		—

	$	65,003	$	57		$	50,002	$	(7	)	$	115,005	$	50

NOTE 6. ACQUISITIONS

Segue Software, Inc.

On April 19, 2006, we completed the acquisition of Segue Software, Inc., or Segue, pursuant to an Agreement and Plan of Merger, dated as of February 7, 2006, or the Merger Agreement. Segue is now a wholly-owned subsidiary of Borland. Segue was a Massachusetts-based provider of quality and testing solutions. Under the terms of the Merger Agreement, we paid $8.67 per share in cash for all outstanding shares of Segue. The purchase price was approximately $115.9 million and consisted of fixed consideration of

$105.4 million in cash used to purchase all of Segue’s outstanding common shares, $8.1 million in cash paid to eligible Segue employees who held vested common stock options on the closing date of the acquisition and $2.5 million of direct acquisition-related costs. The purchase price of the transaction was allocated to the acquired assets and liabilities based on their estimated fair values as of the date of the acquisition, including identifiable intangible assets, with the remaining amount being classified as goodwill. Additionally, we expect to pay contingent consideration through 2009 of up to a maximum of $1.3 million, of which a total of $0.7 million has been paid, including $0.3 million paid in the nine months ended September 30, 2007, to eligible former Segue employees who held unvested common stock options on the closing date of the acquisition and were retained as Borland employees. The contingent consideration is based upon continued employment with Borland and paid in accordance with the vesting schedules of the original Segue common stock options. This contingent consideration is recognized as compensation expense in the periods when it is earned and paid. Cash acquired in the acquisition was $13.5 million. The results of operations for Segue have been included in our consolidated financial statements from the date of acquisition. The acquisition was accounted for as a purchase and the total purchase price was recorded as follows (in thousands):


Cash paid for outstanding common shares	$	105,358
Cash paid for outstanding vested common stock options		8,130
Direct transaction costs		2,451

Total purchase price	$	115,939

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


Current assets and other tangible assets:
Cash and short-term investments	$	13,482
Accounts receivable		4,199
Other current assets		1,210
Property and equipment		902
Deferred tax assets		17,835
Goodwill		65,528
Amortizable intangible assets:
Developed technology		23,400
In-process research and development		4,800
Customer relationships		7,500
Trademarks		1,000
Non-compete agreements		300
Maintenance agreements		11,300

Total assets acquired		151,456
Liabilities assumed:
Deferred revenues		(9,042	)
Current liabilities		(7,276	)
Deferred tax liabilities		(17,835	)
Other long-term liabilities		(1,364	)

Net assets acquired	$	115,939

The developed technology is being amortized over three to six years, the customer relationships and maintenance agreements over seven years, the trademarks over four years and the non-compete agreements over one year, each from the date of acquisition. The amortizable intangible assets were calculated using the income approach by estimating the expected cash flows from the projects once commercially viable and discounting the net cash flows back to their present value. The discount rates used in the valuation were 11% to 21%.

Of the purchase price, $4.8 million represented acquired in-process research and development, or IPR&D, which had not yet reached technological feasibility and had no alternative future use. Accordingly, this amount was immediately charged to operating expense upon completion of the acquisition. Independent third-party sources assisted us in calculating the value of the intangible assets, including the IPR&D. The value of the IPR&D was calculated using the income approach by estimating the expected cash flows from the projects once commercially viable and discounting the net cash flows back to their present value. The discount rates used in the valuation of IPR&D were 18% to 20% and factored in the costs expected to complete each project.

In accordance with SFAS 109, “Accounting for Income Taxes,” deferred tax liabilities of $17.8 million have been recorded for the tax effect of the amortizable intangible assets. We have recorded an offsetting deferred tax asset of $17.8 million to reflect future

deductible differences that could be allocable to offset future taxable income. We are releasing a portion of the valuation allowance to the extent the realization of deferred tax assets becomes assured as a result of the additional taxable income generated by the non-deductible amortizable intangible assets and other taxable temporary differences. Any future release of valuation allowance against deferred tax assets of Segue will be recorded against goodwill. None of the goodwill recorded as a result of the acquisition of Segue is deductible for tax purposes.

Additionally, subsequent to the completion of the acquisition, options to purchase approximately 843,000 shares of common stock pursuant to our 2003 Supplemental Stock Option Plan were issued to Segue employees who became our employees. These options provided for vesting over a four year period.

Pro Forma Financial Information

The unaudited financial information in the table below summarizes the combined results of operations of Borland and Segue, on a pro forma basis, as though the companies had been combined as of the beginning of each of the periods presented. The pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of each of the periods presented. The pro forma financial information for all periods presented includes the business combination accounting effect on historical Segue revenues, amortization charges from acquired intangible assets, stock-based compensation charges for the payouts made for unvested options, adjustments to interest expense and related tax effects.


	September 30, 2006
	Three Months Ended			Nine Months Ended
Total revenues	$	239,049		$	231,531

Net loss	$	(52,041	)	$	(31,961	)


Net loss per share:
Net loss per share — basic and diluted	$	(0.67	)	$	(0.41	)

NOTE 7. GOODWILL AND INTANGIBLE ASSETS

Changes in the carrying amount of goodwill are as follows (in thousands):


	Goodwill
Balance as of December 31, 2006	$	253,356
Purchase accounting adjustments — Segue		(539	)
Effect of exchange rates		375

Balance as of September 30, 2007	$	253,192

The initial purchase price allocation for the Segue acquisition resulted in $65.5 million of goodwill. In the nine months ended September 30, 2007, we adjusted the goodwill for the Segue acquisition for amounts related to purchase consideration adjustments primarily for accounts receivable, deferred revenue and customer deposits based on post-closing reviews.

The following tables summarize our intangible assets, net at September 30, 2007 and December 31, 2006 (in thousands):


	September 30, 2007
	Gross Carrying		Accumulated			Net Carrying
	Amount		Amortization			Amount
Acquired technology	$	46,330	$	(28,822	)	$	17,508
Maintenance agreements		11,300		(2,332	)		8,968
Trade names and trademarks		1,100		(428	)		672
Customer relationship		9,075		(2,389	)		6,686
Other		400		(400	)		—

	$	68,205	$	(34,371	)	$	33,834


	December 31, 2006
	Gross Carrying		Accumulated			Net Carrying
	Amount		Amortization			Amount
Acquired technology	$	46,330	$	(24,701	)	$	21,629
Maintenance agreements		11,300		(1,121	)		10,179
Trade names and trademarks		1,100		(215	)		885
Customer relationship		9,075		(1,376	)		7,699
Other		400		(271	)		129

	$	68,205	$	(27,684	)	$	40,521

The intangible assets are all amortizable and have original estimated useful lives as follows: acquired developed technology—3 to 6 years; maintenance agreements—7 years; trade names and trademarks—4 years; customer relationships—7 years; other—1 to 3 years. Based on the current amount of intangibles subject to amortization, the estimated future amortization expense related to our intangible assets at September 30, 2007, is as follows (in thousands):


	Future
	Amortization
2007 (3 months)	$	2,172
2008		8,469
2009		7,967
2010		6,467
2011		5,272
Thereafter		3,487

Total	$	33,834

NOTE 8. RESTRUCTURING

We account for our restructuring activities in accordance with SFAS 146 “Accounting for Costs Associated with Exit or Disposal Activities,” SFAS 112, “Employers’ Accounting for Postemployment Benefits—an amendment of FASB Statement No. 5 and 43,” and SEC Staff Accounting Bulletin No. 100, “Restructuring and Impairment Charges,” as applicable.

Summary of Restructuring Activity for the First, Second and Third Quarters of 2007.

The following table summarizes our restructuring activity relating to our FY 2007 and FY 2006 restructurings for the first three quarters of 2007 (in thousands):


	FY 2007 Restructuring						FY 2006 Restructuring
	Severance						Severance
	and Benefits			Other			and Benefits			Facilities			Other			Total
Accrual at December 31, 2006	$	—		$	—		$	4,178		$	11,551		$	84		$	15,813
Cash paid		—			—			(2,666	)		(1,451	)		(79	)		(4,196	)

Accrual at March 31, 2007	$	—		$	—		$	1,512		$	10,100		$	5		$	11,617

Additional accruals		1,357			62			—			—			—			1,419
Cash paid		(156	)		—			(373	)		(1,348	)		(5	)		(1,882	)
Reversal of previous restructuring		—			—			(103	)		—			—			(103	)
Fixed asset disposal		—			(23	)		—			—			—			(23	)

Accrual at June 30, 2007	$	1,201		$	39		$	1,036		$	8,752		$	—		$	11,028

Additional accruals		444			—			—			—			—			444
Cash paid		(471	)		(39	)		(417	)		(1,410	)		—			(2,337	)
Reversal of previous restructuring		—			—			(412	)		—			—			(412	)
Fixed asset disposal		—			—			—			—			—			—

Accrual at September 30, 2007	$	1,174		$	—		$	207		$	7,342		$	—		$	8,723

Of the $8.7 million in our restructuring accrual at September 30, 2007, $4.6 million was in our short-term accrual and $4.1 million was in our long-term accrual. Our $4.1 million long-term restructuring accrual is related to the lease obligation for excess capacity at our Scotts Valley, California facility.

FY 2007 Restructuring

In the second quarter of 2007, we announced the relocation of our corporate headquarters from Cupertino, California to Austin, Texas. The relocation involved restructuring actions with respect to personnel and the consolidation of facilities. Approximately 70 employees, or approximately six percent of our full-time staff, prior to the relocation, were affected. In connection with the 2007 restructuring plan, we recognized costs at September 30, 2007, related to termination benefits for employee positions eliminated as a result of the relocation.

During the three and nine months ended September 30, 2007, we paid $0.5 million and $0.7 million, respectively, related to accrued severance, benefits and other costs. Additionally, during the three months ended September 30, 2007, we incurred an additional $0.8 million for severance, benefits and other related costs.

FY 2006 Restructuring

In the second quarter of 2006, in connection with the acquisition of Segue and in response to our previous efforts to seek a buyer for our CodeGear division, we initiated plans to restructure our operations to eliminate certain duplicative activities, focus our resources on future growth opportunities and reduce our cost structure. In connection with the 2006 restructuring plan, we recognized costs related to termination benefits for employee positions that were eliminated and for the closure of duplicative facilities.

During the three and nine months ended September 30, 2007, we paid $1.4 million and $4.2 million, respectively, related to restructured facility operating leases and $0.4 million and $3.5 million, respectively, related to accrued severance, benefits and other costs. During the three and nine months ended September 30, 2007, we reversed $0.4 and $0.5 million, respectively, in previously accrued severance and benefit costs.

The restructuring charges relating to operating leases have been recorded, net of assumed sublease income and present value factors. Substantially all of these restructuring costs have or will require the outlay of cash, although the timing of lease payments relating to leased facilities over the next five years will be unchanged by the restructuring.

NOTE 9. INCOME TAXES

For the three months ended September 30, 2007 and 2006, we recorded income tax expense of $0.3 million and $1.3 million, respectively. For the nine months ended September 30, 2007 and 2006, we recorded income tax expense of $2.4 million and $2.6 million, respectively. Our non-U.S. income tax provision is based on our estimated annualized foreign effective tax rate plus foreign income withholding taxes actually incurred. Our U.S. tax is based on our actual results for the quarter.

The effective tax rates for the quarters ended September 30, 2007 and 2006, differ from applying the U.S. federal statutory tax rate to our pre-tax loss principally because we do not fully benefit from the operating losses incurred in the United States, and the tax effect of non-deductible amortization due to acquisition accounting, together with the fact that we incur withholding and income taxes in a number of foreign jurisdictions. We also provide U.S. taxes on the un-remitted earnings of our foreign subsidiaries.

We adopted the provisions of FIN 48 on January 1, 2007. As a result of the implementation of FIN 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109,” we recorded a $1.9 million increase in the liability for unrecognized tax benefits, a decrease in cumulative translation adjustments of $0.7 million for the foreign currency impact of foreign unrecognized tax benefits, a $1.3 million increase to deferred tax assets and a $0.1 million increase to the beginning balance of retained earnings in our balance sheet. Upon adoption, we had $58.3 million of unrecognized tax benefits of which $15 million, when recognized, will impact the effective tax rate. In accordance with FIN 48, we reclassified $15 million of income tax liabilities from current to non-current liabilities because payment of cash is not anticipated within one year of the balance sheet date. These non-current income tax liabilities are recorded in other long-term liabilities in our balance sheet. There have been no significant changes in these amounts in the nine months ended September 30, 2007.

Included in the balance of unrecognized tax benefits at September 30, 2007, is between $0.8 to $1.1 million related to tax positions and interest for which it is reasonably possible that audits will be closed or the statute of limitations will expire in various foreign jurisdictions within the next twelve months.

We record interest and penalties related to unrecognized tax benefits in income tax expense. At September 30, 2007, we had approximately $3.2 million accrued for estimated interest and $307,000 for estimated penalties related to uncertain tax positions. Estimated interest totaled approximately $208,000 for the quarter ended September 30, 2007.

We and our subsidiaries are subject to taxation in various foreign and state jurisdictions as well as the U.S. Our U.S. federal and state income tax returns are generally not subject to examination by the tax authorities for tax years before 2002. With a few exceptions, the tax years 2001-2006 remain open to examination by tax authorities in the major foreign jurisdictions in which we operate. We are currently in the process of concluding an examination in Germany for tax years 2002-2005. The final outcome of the examination is not yet known; however, management does not anticipate any adjustments which would result in material changes to our results of operations, financial condition or liquidity. For the period ended September 30, 2007, we concluded an examination in Australia for transfer pricing. As a result of competent authority proceedings with the Australian and U.S. taxing authorities, the settlement resulted in a reduction of net operating loss carryforwards in Australia and an increase in net operating loss carryforwards in the U.S. which are offset by a full valuation allowance, respectively. The net effect of the settlement did not have a material impact to the financial statements.

NOTE 10. STOCK REPURCHASES

There were no stock repurchases during the three months ending September 30, 2007, other than repurchases of shares of restricted stock surrendered by Borland employees in order to meet tax withholding obligations in connection with the vesting of installments of their restricted stock awards.

Discretionary Repurchase Program

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

Repurchase Following Senior Notes Offering

In connection with our offering of our Convertible Senior Notes in February 2007, our Board of Directors authorized the repurchase of 5,882,200 shares at an average price of $5.10 per share for a total consideration of approximately $30 million.

NOTE 11. COMMITMENTS AND CONTINGENCIES

Indemnification Obligations and Guarantees

The following is a summary of our agreements we have determined are within the scope of FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” some of which are specifically grandfathered in because the guarantees were in effect prior to December 31, 2002. Accordingly, we have no liabilities recorded for these agreements as of September 30, 2007, except as described below.

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

As part of the Starbase, TogetherSoft and Segue acquisitions, we entered into agreements whereby we indemnify the officers and directors of the acquired companies for certain events or occurrences while such officers or directors served in such capacity. The term of the indemnification period in the Starbase and TogetherSoft acquisitions is for the officers’ or directors’ lifetime, and in the Segue acquisition the term is for six years. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited; however, we have purchased directors’ and officers’ insurance policies for Starbase and TogetherSoft, if applicable, through 2009, and for Segue through 2012, which in certain circumstances enable us to recover a portion of any future amounts paid. As a result of our insurance policy coverage, we believe the estimated fair value of these indemnification agreements is minimal.

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

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

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

penalties to be incurred if specific non-performance or breach of agreement occurs on our behalf. To date we have not incurred a significant expense in relation to these penalties and we believe the estimated fair value of these penalties is minimal.

Leases

We lease certain of our office and operating facilities and certain furniture and equipment under various operating leases. In connection with our acquisition of Segue we acquired a capital lease for leasehold improvements on a facility in Austria. At September 30, 2007, the obligation amounted to $0.1 million which is payable through 2010.

Our operating leases expire at various times through 2021. Future minimum lease and sublease payments under non-cancelable leases and subleases and future minimum lease and sublease income under non-cancelable leases and subleases, were as follows (in thousands):

In Thousands


	Remainder
	of 2007			2008			2009			2010			2011			Thereafter			Total
Operating Leases	$	2,905		$	10,322		$	9,169		$	5,924		$	3,992		$	14,054		$	46,366
Restructured Operating Leases		1,600			5,914			5,832			3,497			2,778			4,843			24,464
Capital Lease		10			41			43			41			—			—			135

Gross Commitments		4,515			16,277			15,044			9,462			6,770			18,897			70,965
Sublease Income		(597	)		(3,056	)		(2,937	)		(2,824	)		(2,819	)		(4,909	)		(17,142	)

Net Commitments	$	3,918		$	13,221		$	12,107		$	6,638		$	3,951		$	13,988		$	53,823

Rent expense, net, for all operating leases was $1.8 million and $7.0 million for the three and nine months ended September 30, 2007, respectively, and was $3.2 million and $9.3 million for the three and nine months ended September 30, 2006, respectively.

The restructured operating leases above represent total lease commitments that are not associated with continuing operations and include facilities we vacated or partially exited in California, Massachusetts, North Carolina, Australia, New Zealand and Japan.

Litigation

From time to time, we are involved in lawsuits, claims, investigations and proceedings, consisting of intellectual property, commercial, employment and other matters, which arise in the ordinary course of business. In accordance with SFAS 5, “Accounting for Contingencies,” we record a liability when it is both probable a liability has been incurred and the amount of the loss can be reasonably estimated. These accruals are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular case. Litigation is inherently unpredictable; however, we believe that we have valid defenses with respect to the legal matters pending against us, as well as adequate accruals for any probable and estimable losses. If an unanticipated or unfavorable ruling or settlement were to occur in any of these matters in a particular period, our liquidity and financial condition could be adversely impacted, as well as our results of operations and cash flows.

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

Service Commitments

We have outsourced portions of our information technology operations. The committed expenditures average $5.2 million per year from November 2004 through November 2014. We can terminate this contract with or without cause upon payment of a termination fee, the maximum amount of which is $1.3 million at September 30, 2007 and declines to $0.5 million in 2014, the final year of the contract. These amounts are not included in the operating lease commitments table above.

NOTE 12. REPORTABLE SEGMENTS

Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information,” establishes standards for reporting information about operating segments in a company’s financial statements. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. Borland’s chief operating decision maker, or CODM, is its Chief Executive Officer.

Description of Segments

Effective January 1, 2007, consistent with how we manage our business, we changed from reporting one segment to reporting two segments: Enterprise and CodeGear. A summary of the types of products and services provided by the Enterprise and CodeGear segments is provided below.

Enterprise. Our Enterprise segment focuses on Open Application Lifecycle Management solutions, or ALM, which includes a combination of software products as well as consulting and education services to help our customers better manage their software development projects. Our ALM portfolio includes products and services for project and portfolio management, requirements definition and management, lifecycle quality management, software configuration and change management and modeling. The Enterprise segment also includes our Deployment Product Group, or DPG, products.

CodeGear. Our CodeGear segment focuses on developing tools for individual developers and currently offers a number of Integrated Developer Environment, or IDE, and database products for Java, .NET and Windows development. CodeGear products include Delphi, Delphi for PHP, C++Builder, C#Builder, JBuilder, Turbo™ and Interbase. CodeGear also provides worldwide developer support and education services.

Segment Data

We derive the results of the business segments directly from our internal management reporting system. The accounting policies we use to derive business segment results are substantially the same as those the consolidated company uses. Management, under the direction of the CODM, measures the performance of each business segment based on several metrics, including earnings from operations. Additionally, management, under the direction of the CODM, uses these results, in part, to evaluate the performance of, and to assign resources to, each of the business segments. We do not allocate costs to CodeGear that are not directly attributable to CodeGear. We have no intersegment revenue. Discrete operating financial information for the new segments has not been prepared for periods prior to January 1, 2007, as we have concluded it is not practicable for us to prepare such information.

Selected operating results information for each business segment was as follows (in thousands):


Three Months Ended September 30, 2007	Enterprise			CodeGear		Total


License and other revenues	$	31,611		$	8,768	$	40,379
Service revenues		28,839			3,740		32,579

Total revenues	$	60,450		$	12,508	$	72,958

Operating income (loss)	$	(1,372	)	$	1,676	$	304


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2007			2006			2007			2006
	In Thousands						In Thousands
Total revenues from unaffiliated customers:
Americas	$	32,497		$	52,439		$	105,679		$	126,684
EMEA		32,112			21,541			75,713			73,879
Asia Pacific		8,349			8,386			25,932			28,325

Total revenues		72,958			82,366			207,324			228,888

License and other revenues	$	40,379		$	45,701		$	107,998		$	126,524
Technical support		25,619			25,767			77,120			73,152
Consulting and education services		6,960			10,898			22,206			29,212

Total revenues		72,958			82,366			207,324			228,888

Inter-company revenue U.S.	$	3,316		$	7,274		$	10,702		$	8,781
Elimination of inter-company-revenues		(3,316	)		(7,274	)		(10,702	)		(8,781	)

Reported inter-company revenues	$	—		$	—		$	—		$	—


Operating income (loss):
Americas	$	(13,633	)	$	(11,125	)	$	(44,114	)	$	(61,157	)
EMEA		12,517			(1,602	)		19,337			16,666
Asia Pacific		1,420			(754	)		5,412			2,714

Operating income (loss)		304			(13,481	)		(19,365	)		(41,777	)

Interest and other income, net		502			1,593			1,840			3,247

Income (loss) before income taxes	$	806		$	(11,888	)	$	(17,525	)	$	(38,530	)


	September 30, 2007		December 31, 2006
	In Thousands
Long-lived assets:
Americas	$	66,600	$	11,143
EMEA		2,799		2,549
Asia Pacific		1,734		4,190

Long-lived assets:		71,133		17,882
Other non-current assets		288,387		293,876

Non-current assets		359,520		311,758

Identifiable assets:
Americas	$	382,099	$	339,424
EMEA		50,594		38,308
Asia Pacific		8,619		10,850

Identifiable assets:		441,312		388,582
General corporate assets (cash, cash equivalents and short-term investments)		140,719		55,317

Total assets	$	582,031	$	443,899

NOTE 13. RECENT ACCOUNTING PRONOUNCEMENTS

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 expands the use of fair value accounting but does not affect existing standards which require assets or liabilities to be carried at fair value. Under SFAS 159, a company may elect to use fair value to measure accounts and loans receivable, available-for-sale and held-to-maturity securities, equity method investments, accounts payable, guarantees and issued debt. Other eligible items include firm commitments for financial instruments that otherwise would not be recognized at inception and non-cash warranty obligations where a warrantor is permitted to pay a third party to provide the warranty goods or services. If the use of fair value is elected, any upfront costs and fees related to the item must be recognized in earnings and cannot be deferred, e.g., debt issue costs. The fair value election is irrevocable and generally made on an instrument-by-instrument basis, even if a company has similar instruments that it elects not to measure based on fair value. At the adoption date, unrealized gains and losses on existing items for which fair value has been elected are reported as a cumulative adjustment to beginning retained earnings. Subsequent to the adoption of SFAS 159, changes in fair value are recognized in earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007, and is required to be adopted by the Company in the first quarter of fiscal 2008. We are currently in the process of evaluating the impact of SFAS 159 on our financial position and results of operations.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 establishes a framework for measuring the fair value of assets and liabilities. This framework is intended to provide increased consistency in how fair value determinations are made under various existing accounting standards which permit, or in some cases require, estimates of fair market value. SFAS 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Earlier application is encouraged, provided the reporting entity has not yet issued financial statements for that fiscal year, including any financial statements for an interim period within that fiscal year. We are currently in the process of evaluating the impact of SFAS 157 on our financial position and results of operations.

In July 2006, the FASB issued FASB Interpretation 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (“FIN 48”), which became effective for the Company beginning in 2007. This interpretation clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with SFAS 109, “Accounting for Income Taxes.” It prescribes a recognition threshold and measurement attribute for financial statement disclosure of tax benefits taken or expected to be taken on a tax return. Under FIN 48, the Company must recognize the tax benefit from an uncertain tax position at the largest amount that is more likely than not will be sustained on examination by the relevant tax authorities, based solely on the technical merits of the position. An uncertain tax position will not be recognized if it has less than a 50% likelihood of being sustained. If recognized, a tax benefit is then measured based upon the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution of the tax position. For additional information regarding the adoption of FIN 48, see Note 9, Income Taxes.

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments” (“SFAS 155”), which amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”) and SFAS 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” (“SFAS 140”). SFAS 155 simplifies the accounting for certain derivatives embedded in other financial instruments by allowing them to be accounted for as a whole if the holder elects to account for the whole instrument on a fair value basis. SFAS 155 also clarifies and amends certain other provisions of SFAS 133 and SFAS 140. SFAS 155 is effective for all financial instruments acquired, issued or subject to a remeasurement event occurring in fiscal years beginning after September 15, 2006. The adoption of SFAS 155 did not have a material impact on our consolidated financial position, results of operations or cash flows.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

The statements made throughout this Quarterly Report on Form 10-Q that are not historical facts are forward-looking statements and accordingly, involve estimates, projections, goals, forecasts, assumptions and uncertainties that could cause actual results or outcomes to differ materially from those expressed or implied in the forward-looking statements. These forward-looking statements may relate to, but are not limited to, revenues, composition of revenues, cash flows, earnings, margins, costs, expenses, strategy, research and development, customer service and relationships, demand for our products, market and technological trends in the software industry, licenses, developments in technology, organizing CodeGear as a division, effects of and timeframe for company restructuring actions and relocation of headquarters, effects of our offering of Convertible Senior Notes, product quality, competition, sales, cash resources, utilization of cash resources, personnel, interest rates, foreign currency exchange rates, financial systems, internal controls and disclosure controls and procedures and various economic and business trends. Generally, you can identify

forward-looking statements by the use of words such as “expect,” “estimate,” “project,” “budget,” “forecast,” “anticipate,” “goal,” “intend,” “plan,” “may,” “will,” “could,” “should,” “believes,” “predicts,” “potential,” “continue” and similar expressions or the negative or other variations thereof. These forward-looking statements involve substantial risks and uncertainties. Examples of such risks and uncertainties are described under “Risk Factors” and elsewhere in this report, as well as in our other filings with the SEC or in materials incorporated by reference herein or therein. You should be aware that the occurrence of any of these risks and uncertainties may cause our actual results to differ materially from those anticipated in our forward-looking statements and have a material adverse effect on our business, results of operations and financial condition. New factors may emerge from time to time, and it may not be possible for us to predict new factors, nor can we assess the potential effect of any new factors on us.

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

Overview

Effective January 1, 2007, consistent with how we manage our business, we changed from reporting a single segment to reporting two segments: Enterprise and CodeGear.

Enterprise. Our Enterprise segment focuses on our Open Application Lifecycle Management solutions, or ALM, which represents the segment of the ALM market in which vendors’ solutions are flexible enough to support a customer’s specific processes, tools and platforms. Open ALM is a new, customer-centric approach to helping IT organizations transform software delivery into a managed, efficient and predictable business process. Borland is a leading vendor of Open ALM solutions. Our solutions address five critical ALM processes: project & portfolio management, requirements definition & management, lifecycle quality management, software change management and model driven development. Open ALM products include Tempo, TeamFocus, CaliberRM, Caliber DefineIT, SilkCentral Test Manager, SilkPerformer, SilkTest, Gauntlet, Together and StarTeam. We also offer services aimed at streamlining the path to software process improvement, including technical support, consulting and education services.

Our Enterprise segment also includes our Deployment Products Group, or DPG, which includes our VisiBroker and AppServer products. Our deployment products are application middleware for high-performance, low-latency, transaction-intensive applications.

CodeGear. Our CodeGear segment focuses on developing tools for individual developers and currently offers a number of Integrated Developer Environment, or IDE, and database products for Java, .NET and Windows development. CodeGear products include Delphi, Delphi for PHP, C++Builder, C#Builder, JBuilder, Turbo™ and Interbase. CodeGear also provides worldwide developer support and education services.

Summary of key financial results

The following is a summary of our key financial results for the three and nine months ended September 30, 2007:

	•		Total revenues decreased 11% to $73.0 million for the three months ended September 30, 2007, from $82.4 million for the three months ended September 30, 2006 and decreased 9% to $207.3 million for the nine months ended September 30, 2007, from $228.9 million for the nine months ended September 30, 2006.

	•		License and other revenues decreased 12% to $40.4 million for the three months ended September 30, 2007, from $45.7 million for the three months ended September 30, 2006 and decreased 15% to $108.0 million for the nine months ended September 30, 2007, from $126.5 million for the nine months ended September 30, 2006.

	•		Service revenues decreased 11% to $32.6 million for the three months ended September 30, 2007, from $36.7 million for the three months ended September 30, 2006 and decreased 3% to $99.3 million for the nine months ended September 30, 2007, from 102.4 million for the nine months ended September 30, 2006.

	•		Gross profit as a percentage of revenue increased to 81% for the three months ended September 30, 2007, compared to 78% in the three months ended September 30, 2006 and increased to 79% for the nine months ended September 30, 2007, from 77% for the nine months ended September 30, 2006.

	•		Operating expenses decreased 24% to $59.0 million for the three months ended September 30, 2007, from $77.5 million for the three months ended September 30, 2006 and decreased 16% to $184.0 million for the nine months ended September 30, 2007, from $218.2 million for the nine months ended September 30, 2006.

	•		Net income was $0.5 million for the three months ended September 30, 2007, compared to net loss of $13.1 million for the three months ended September 30, 2006 and net loss was $20.0 million for the nine months ended September 30, 2007, compared to $41.1 million for the nine months ended September 30, 2006.

	•		Cash, cash equivalents and short-term investments increased $85.4 million to $140.7 million as of September 30, 2007, from $55.3 million as of December 31, 2006.

For a more in-depth discussion of our business, including a discussion of our critical accounting policies and estimates, please read our Annual Report on Form 10-K for the year ended December 31, 2006, as filed with the SEC on March 15, 2007.

Results of Operations

The following table presents our Condensed Consolidated Statements of Operations data and the related percentage of total revenues (dollars in thousands):


	Three Months Ended												Nine Months Ended
	September 30,												September 30,
	2007			% of Rev			2006			% of Rev			2007			% of Rev			2006			% of Rev
License and other revenues	$	40,379			55	%	$	45,701			55	%	$	107,998			52	%	$	126,524			55	%
Service revenues		32,579			45	%		36,665			45	%		99,326			48	%		102,364			45	%

Total revenues		72,958			100	%		82,366			100	%		207,324			100	%		228,888			100	%


Cost of license and other revenues		1,622			2	%		1,972			2	%		4,692			2	%		5,869			3	%
Cost of service revenues		9,955			14	%		14,210			17	%		31,525			15	%		41,787			18	%
Amortization of acquired intangibles and other charge		2,107			3	%		2,119			3	%		6,345			3	%		4,852			2	%

Total cost of revenues		13,684			19	%		18,301			22	%		42,562			21	%		52,508			23	%


Gross profit		59,274			81	%		64,065			78	%		164,762			79	%		176,380			77	%
Operating expenses:
Selling, general and administrative		43,387			59	%		52,518			64	%		135,815			66	%		149,128			65	%
Research and development		13,995			19	%		19,968			24	%		43,637			21	%		53,673			23	%
Restructuring, amortization of other intangibles and acquisition related expenses and other charges		1,588			2	%		5,060			6	%		4,675			2	%		15,356			7	%

Total operating expenses		58,970			81	%		77,546			94	%		184,127			89	%		218,157			95	%

Operating income (loss)		304			0	%		(13,481	)		(16	%)		(19,365	)		(9	%)		(41,777	)		(18	%)
Gain on sale of fixed assets		—			0	%		1,658			2	%		—			0	%		1,658			1	%
Interest income		2,352			3	%		256			(0	%)		6,499			3	%		2,582			1	%
Interest expense and other income		(1,850	)		(3	%)		(321	)		(0	%)		4,659			(2	%)		(993	)		(0	%)

Total other income		502			1	%		1,593			2	%		1,840			1	%		3,247			1	%

Income (loss) before income taxes		806			1	%		(11,888	)		(14	%)		(17,525	)		(8	%)		(38,530	)		(17	%)
Income tax provision		306			0	%		1,254			2	%		2,442			1	%		2,600			1	%

Net income (loss)	$	500			1	%	$	(13,142	)		(16	%)	$	(19,967	)		(10	%)	$	(41,130	)		(18	%)

The following table presents our total revenues and the absolute dollar and percentage change from the comparable prior year periods (dollars in thousands):


	Three Months Ended																Nine Months Ended
	September 30,																September 30,
	2007					2006					Change						2007					2006					Change
	Amount		% of Total			Amount		% of Total			$			%			Amount		% of Total			Amount		% of Total			$			%
License and other revenues	$	40,379		55	%	$	45,701		55	%	$	(5,322	)		(12	%)	$	107,998		52	%	$	126,524		55	%	$	(18,526	)		(15	%)
Service revenues		32,579		45	%		36,665		45	%		(4,086	)		(11	%)		99,326		48	%		102,364		45	%		(3,038	)		(3	%)


Total revenues	$	72,958		100	%	$	82,366		100	%	$	(9,408	)		(11	%)	$	207,324		100	%	$	228,888		100	%	$	(21,564	)		(9	%)

We derive revenues from the license of our software and the sale of related services. We had one customer representing more than 10% of our total revenues in the quarter ended September 30, 2007.

Revenues by Product

We have three major product categories: Application Lifecycle Management (“ALM”), which includes our Tempo, TeamFocus, Caliber, Together, Silk and Gauntlet products; Deployment Product Group (“DPG”), which includes our VisiBroker and AppServer products; and Integrated Development Environment (“IDE”), which includes our JBuilder, Delphi, Delphi for PHP, C++Builder, C# Builder, Turbo and Interbase products.

The following table presents our revenues by product (in thousands):


	Three Months Ended								Three Months Ended
	September 30, 2007								September 30, 2006
	ALM		DPG		IDE		Total		ALM		DPG		IDE		Total
License and other revenues	$	23,661	$	7,950	$	8,768	$	40,379	$	29,721	$	6,661	$	9,319	$	45,701
Service revenues		23,717		5,122		3,740		32,579		25,008		5,931		5,726		36,665

Total	$	47,378	$	13,072	$	12,508	$	72,958	$	54,729	$	12,592	$	15,045	$	82,366


	Nine Months Ended								Nine Months Ended
	September 30, 2007								September 30, 2006
	ALM		DPG		IDE		Total		ALM		DPG		IDE		Total
License and other revenues	$	58,213	$	22,150	$	27,632	$	107,995	$	65,302	$	21,327	$	39,895	$	126,524
Service revenues		71,723		15,115		12,491		99,329		64,582		18,780		19,002		102,364

Total	$	129,936	$	37,265	$	40,123	$	207,324	$	129,884	$	40,107	$	58,897	$	228,888

License and Other Revenues

License and other revenues represent amounts for license fees and royalties earned for granting customers the right to use and distribute our software products. Revenue recognition for our software licenses may be affected by numerous aspects of a contract, for the majority of our customer contracts, we recognize software license revenue upon shipment of the product. License and other revenues decreased $5.3 million in the quarter ended September 30, 2007, as compared to the year-ago quarter. ALM license revenue decreased 20% compared to the year-ago quarter, from $29.7 million to $23.7 million. This decrease was the result of lower sales of our Caliber, Control Center, OptimizeIt and StarTeam products, partially offset by growth of our Silk products, which we obtained through our acquisition of Segue in April 2006. DPG license revenue increased 19% compared to the year-ago quarter, from $6.7 million to $8.0 million. The increase was primarily driven by increased sales of VisiBroker and AppServer products. License revenue in our IDE products decreased 5% from $9.3 million to $8.8 million, when compared to the year-ago quarter, on lower sales of our JBuilder product, partially offset by increased sales of our Delphi products.

License and other revenues decreased $18.5 million in the nine months ended September 30, 2007, as compared to the year-ago period. ALM license revenue decreased 11% compared to the year-ago period, from $65.3 million to $58.2 million. This decrease was the result of lower sales of our Caliber, Control Center, OptimizeIt and StarTeam products, partially offset by improved performance in solution selling to larger enterprise-level customers and the incremental contribution of our Silk products, which we obtained through our acquisition of Segue in April 2006. DPG license revenue increased 4% compared to the year-ago period, from $21.3 million to $22.2 million. License revenues in our IDE products decreased 31% from $39.9 million to $27.6 million, when compared to the year-ago period. The IDE license revenue decline, year to date, is the combined effect of the discontinuation of legacy products, along with reduced benefit from the release of new versions of existing products.

Service Revenues

Service revenues represent amounts earned for technical support, which includes call support, maintenance and upgrades and for consulting and education services for our software products. Service revenues decreased 11% compared to the year-ago quarter, from $36.7 million to $32.6 million in the quarter ended September 30, 2007 and decreased $3.1 million to $99.3 million in the nine months ended September 30, 2007, from $102.4 million in the year-ago period.

Technical support revenues decreased 1% compared to the year-ago quarter, from $25.8 million to $25.6 million, and increased $4 million to $77.1 million in the nine months ended September 30, 2007, from $73.1 million in the year-ago period. The increase during the nine month period was due to the contribution of Silk products as a result of the Segue acquisition in April 2006 and support revenue growth in our Caliber, StarTeam and Together products, partially offset by decreases in both the DPG and IDE products.

Consulting and education services revenues decreased 36% compared to the year-ago quarter, from $10.9 million to $7 million and decreased $7 million to $22.2 million in the nine months ended September 30, 2007 from $29.2 million in the year-ago period. The decrease was primarily attributable to a focus on more license driven consulting projects versus pure consulting engagements.

As of September 30, 2007, open sales orders were insignificant.

International Revenues

International revenues represented 62% and 43% of total revenues in the quarters ended September 30, 2007 and 2006, respectively, and represented 58% and 52% of total revenues in the nine months ended September 30, 2007 and 2006, respectively. The increase was primarily due to two significant transactions which closed in the United Kingdom and Germany during the quarter ended September 30, 2007. The following table presents our total revenues by country and the absolute dollar and percentage change from the comparable prior year periods (dollars in thousands):


	Three Months Ended										Nine Months Ended
	September 30,				Change						September 30,				Change
	2007		2006		$			%			2007		2006		$			%
United States	$	27,539	$	46,606	$	(19,067	)		(41	%)	$	87,773	$	110,349	$	(22,576	)		(20	%)
Germany		10,056		7,224		2,832			39	%		24,342		21,551		2,791			13	%
United Kingdom		13,945		4,561		9,384			206	%		24,163		17,351		6,812			39	%
All other countries		21,418		23,975		(2,557	)		(11	%)		71,046		79,637		(8,591	)		(11	%)

Total revenues	$	72,958	$	82,366	$	(9,408	)		(11	%)	$	207,324	$	228,888	$	(21,564	)		(9	%)

The United States, Germany and the United Kingdom accounted for revenues greater than 10% of total revenues in the three and nine months ended September 30, 2007. No single country, other than the United States, accounted for revenues greater than 10% of total revenues in the three and nine months ended September 30, 2006.

Regional Revenues

The following table presents our total revenues by region and the absolute dollar and the percentage change from the comparable prior year periods (dollars in thousands):


	Three Months Ended										Nine Months Ended
	September 30,				Change						September 30,				Change
	2007		2006		$			%			2007		2006		$			%
Americas	$	32,497	$	52,439	$	(19,942	)		(38	%)	$	105,679	$	126,684	$	(21,005	)		(17	%)
Europe, Middle East and Africa		32,112		21,541		10,571			49	%		75,713		73,879		1,834			2	%
Asia Pacific		8,349		8,386		(37	)		(0	%)		25,932		28,325		(2,393	)		(8	%)

Total revenues	$	72,958	$	82,366	$	(9,408	)		(11	%)	$	207,324	$	228,888	$	(21,564	)		(9	%)

Our Americas operations include our activities in the United States as well as subsidiaries and branch offices in Brazil and Canada. Our Europe, Middle East and Africa, or EMEA, operations include activities of our subsidiaries and branch offices in Austria, Czech Republic, Finland, France, Germany, Ireland, Italy, Netherlands, Russia, Spain, Sweden and the United Kingdom. Our Asia Pacific, or APAC, operations include activities of our subsidiaries and branch offices in Australia, China, Hong Kong, India, Japan, New Zealand, Singapore and Taiwan.

Americas. Revenues in our Americas region decreased 38% to $32.5 million in the three months ended September 30, 2007, from $52.4 million in the year-ago period when we had one transaction representing more than 10% of our total revenue. Of the decrease in revenues from our Americas region, license revenues decreased $18.2 million and service revenues decreased $1.7 million.

Revenues in our Americas region decreased 17% to $105.7 million in the nine months ended September 30, 2007, from $126.7 million in the year-ago period. Of the decrease in revenues from our Americas region, license revenues decreased $20 million and service revenues decreased $1 million.

EMEA. Revenues in our EMEA region increased 49% to $32.1 million in the three months ended September 30, 2007, from $21.5 million in the year-ago period. Of the increase in revenues from our EMEA region, license revenues increased $12.4 million and service revenues decreased $1.8 million.

Revenues in our EMEA region increased 2% to $75.7 million in the nine months ended September 30, 2007, from $73.9 million in the year-ago period. Of the increase in revenues from our EMEA region, license revenues increased $3.0 million and service revenues decreased $1.2 million.

APAC. Revenues in our APAC region were $8.4 million in the three months ended September 30, 2007, and 2006, respectively.

Revenues in our APAC region decreased 8% to $25.9 million in the nine months ended September 30, 2007, from $28.3 million in the year-ago period. Of the decrease in revenues from our APAC region, license revenues decreased $1.5 million and services revenue decreased $0.9 million.

Cost of Revenues

The following table presents cost of revenues and the absolute dollar and percentage changes from the comparable prior year periods (dollars in thousands):


	Three Months Ended												Nine Months Ended
	September 30,						Change						September 30,						Change
	2007			2006			$			%			2007			2006			$			%
Cost of license and other revenues	$	1,622		$	1,972		$	(350	)		(18	%)	$	4,692		$	5,869		$	(1,177	)		(20	%)


As a percentage of license and other revenues		4	%		4	%								4	%		5	%

Cost of service revenues	$	9,955		$	14,210		$	(4,255	)		(30	%)	$	31,525		$	41,787		$	(10,262	)		(25	%)


As a percentage of service revenues		31	%		39	%								32	%		41	%

Amortization of acquired intangibles and other charges	$	2,107		$	2,119		$	(12	)		(1	%)	$	6,345		$	4,852		$	1,493			31	%


As a percentage of total revenues		3	%		3	%								3	%		2	%

Cost of License and Other Revenues

Cost of license and other revenues consists primarily of variable costs including production costs, product packaging costs and royalties paid to third-party vendors. Cost of license and other revenues decreased $0.4 million compared to the year-ago quarter, from $2.0 million to $1.6 million and decreased $1.2 million to $4.7 million in the nine months ended September 30, 2007, from $5.9 million in the year-ago period. The decrease was attributable to a reduction in royalties and production materials. Royalty, manufacturing and shipping costs tend to fluctuate with changes in the mix of products sold. Generally, manufacturing and shipping costs are lower for ALM, as compared to IDE and DPG, due to the greater proportion of ALM contracts that are fulfilled electronically. The level of royalty costs in future periods will be dependent upon our ability to obtain favorable licensing terms for our products that include third-party technology and the extent to which we include such third-party technology in our product offerings.

Cost of Service Revenues

Cost of service revenues consists primarily of employee salaries and benefits, third-party contractor costs and related expenses incurred in providing technical support and consulting and education services. Cost of service revenues decreased $4.3 million compared to the year-ago quarter, from $14.2 million to $9.9 million and decreased $10.3 million to $31.5 million in the nine months ended September 30, 2007, from $41.8 million in the year-ago period. Cost of service revenues for the three months ended September 30, 2007 has been reduced by $0.4 million as a result of reversal of an accrual for certain customer service obligations. The overall decrease in cost of services as a percentage of service revenues was attributable to the replacement of non-billable headcount by billable headcount, improved resource utilization, lower negotiated rates with third-party contractors and effective cost management through consolidation of worldwide call centers from nine to three.

Amortization of Acquired Intangibles and Other Charges

Amortization of acquired intangibles and other charges consists of the amortization of acquired developed technology, maintenance agreements and customer relationships. Amortization of acquired intangibles was $2.1 million for the three months ending September 30, 2007 and 2006, respectively. Amortization and acquired intangibles increased $1.5 million to $6.4 million in the nine months ended September 30, 2007, from $4.9 million in the year-ago period. The increase in amortization was attributable to the acquisition of Segue.

Operating Expenses

Selling, General and Administrative Expenses

The following table presents our selling, general and administrative expenses and the absolute dollar and percentage change from the comparable prior year periods (dollars in thousands):


	Three Months Ended												Nine Months Ended
	September 30,						Change						September 30,						Change
	2007			2006			$			%			2007			2006			$			%
Selling, general and administrative expenses	$	43,387		$	52,518		$	(9,131	)		(17	%)	$	135,815		$	149,128		$	(13,313	)		(9	%)

As a percentage of total revenues		59	%		64	%								66	%		65	%

Selling, general and administrative expenses primarily consist of employee salaries and benefits, sales commissions, marketing programs, professional fees, and facilities and equipment costs. Selling, general and administrative expenses decreased $9.1 million compared to the year-ago quarter, from $52.5 million to $43.4 million. The decrease was primarily due to reduced employee compensation, benefits expense, facilities, outside services and depreciation. These decreases were partially offset by an increase in bad debt expense.

Selling, general and administrative expenses decreased $13.3 million to $135.8 million in the nine month ended September 30, 2007, from $149.1 million in the year-ago period. The decrease was primarily due to reduced employee compensation, benefits expense, outside services, travel and facilities expenses. These decreases were partially offset by increases in bad debt expense and convertible debt expense.

Research and Development Expenses

The following table presents our research and development expenses and the absolute dollar and percentage change from the comparable prior year periods (dollars in thousands):


	Three Months Ended												Nine Months Ended
	September 30,						Change						September 30,						Change
	2007			2006			$			%			2007			2006			$			%
Research and development expenses	$	13,995		$	19,968		$	(5,973	)		(30	%)	$	43,637		$	53,673		$	(10,036	)		(19	%)

As a percentage of total revenues		19	%		24	%								21	%		23	%

Research and development expenses primarily consist of employee salaries, benefits, and related costs of our engineering staff, external personnel costs, and facilities and equipment costs. Research and development expenses decreased $6.0 million compared to the year-ago quarter, from $20.0 million to $14.0 million. The decrease is due to personnel and benefits expense reductions resulting from the worldwide R&D restructuring and consolidation of physical development locations implemented in 2006.

Research and development expenses decreased $10.1 million to $43.6 million in the nine months ended September 30, 2007, from $53.7 million in the year-ago period. The decrease is due to personnel and benefits expense reductions resulting from the worldwide R&D restructuring and consolidation of physical development locations implemented in 2006. These costs were partially offset by an increase in outside services.

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

The following table summarizes our restructuring, amortization of other intangibles and acquisition-related expenses and the absolute dollar and percentage change from the comparable prior year periods (dollars in thousands):


	Three Months Ended												Nine Months Ended
	September 30,						Change						September 30,						Change
	2007			2006			$			%			2007			2006			$			%
Restructuring	$	791		$	3,871		$	(3,080	)		(80	%)	$	2,138		$	7,169		$	(5,031	)		(70	%)
Amortization of other intangibles		84			158			(74	)		(47	%)		342			398			(56	)		(14	%)
Acquisition-related expenses		713			1,031			(318	)		(31	%)		2,195			2,989			(794	)		(27	%)
Write-off of in-process research and development		—			—			—						—			4,800			(4,800	)		(100	%)

Total	$	1,588		$	5,060		$	(3,472	)		(69	%)	$	4,675		$	15,356		$	(10,681	)		(70	%)


As a percentage of total revenues		2	%		6	%								2	%		7	%

Restructuring.

The following table summarizes our restructuring activity relating to our FY 2006 and FY 2007 restructurings for the first three quarters of 2007 (in thousands):


	FY 2007 Restructuring						FY 2006 Restructuring
	Severance						Severance
	and Benefits			Other			and Benefits			Facilities			Other			Total
Accrual at December 31, 2006	$	—		$	—		$	4,178		$	11,551		$	84		$	15,813
Cash paid		—			—			(2,666	)		(1,451	)		(79	)		(4,196	)

Accrual at March 31, 2007	$	—		$	—		$	1,512		$	10,100		$	5		$	11,617


Additional accruals		1,357			62			—			—			—			1,419
Cash paid		(156	)		—			(373	)		(1,348	)		(5	)		(1,882	)
Reversal of previous restructuring		—			—			(103	)		—			—			(103	)
Fixed asset disposal		—			(23	)		—			—			—			(23	)

Accrual at June 30, 2007	$	1,201		$	39		$	1,036		$	8,752		$	—		$	11,028


Additional accruals		444			—			—			—			—			444
Cash paid		(471	)		(39	)		(417	)		(1,410	)		—			(2,337	)
Reversal of previous restructuring		—			—			(412	)		—			—			(412	)
Fixed asset disposal		—			—			—			—			—			—

Accrual at September 30, 2007	$	1,174		$	—		$	207		$	7,342		$	—		$	8,723

Amortization of other intangibles. In the three and nine months ended September 30, 2007, we incurred $0.1 million and $0.3 million, respectively, of amortization expense related to intangible non-compete agreements and trade names as a result of our acquisitions, compared to $0.2 million and $0.4 million in the comparable year-ago periods. Amortization of other intangibles decreased due to the completion of amortization of trade names in December 2006, related to the acquisition of TogetherSoft.

Acquisition-related expenses. In the three and nine months ended September 30, 2007, we recorded $0.7 million and $2.2 million, respectively, in acquisition-related expenses, which primarily consisted of contingent consideration payable under the terms of the Legadero acquisition agreement. Acquisition-related expenses in the three and nine months ended September 30, 2006, consisted of $1.0 million and $3.0 million, respectively, of contingent consideration payable under the terms of the TeraQuest and Legadero acquisitions.

Interest Income and Expense and Other Income

The following table presents our interest and other income, net and the absolute dollar and percentage change from the comparable prior year periods (dollars in thousands):


	Three Months Ended												Nine Months Ended
	September 30,						Change						September 30,						Change
	2007			2006			$			%			2007			2006			$			%
Interest income	$	2,352		$	256		$	2,096			819	%	$	6,499		$	2,582		$	3,917			152	%
Interest expense and other income		(1,850	)		(321	)		(1,529	)		476	%		(4,659	)		(993	)		(3,666	)		369	%

Total	$	502		$	(65	)	$	567			(872	%)	$	1,840		$	1,589		$	251			16	%

As a percentage of total revenues		1	%		0	%								1	%		1	%

Interest income consists primarily of interest earned on cash and cash equivalents. Interest expense and other income consists primarily of interest incurred on our Convertible Senior Notes offering, but also includes foreign exchange transaction gains and losses. The increase in interest income in the three and nine months ended September 30, 2007, was primarily attributable to interest income generated from our Convertible Senior Notes offering that occurred in the first quarter of 2007. The increase in interest expense and other income in the three and nine months ended September 30, 2007, when comparing the year-ago periods was primarily attributable to interest incurred on our Convertible Senior Notes offering that occurred in the first quarter of 2007. The amount of foreign currency and other gains or losses we realize primarily represents fluctuations in the U.S. dollar versus the foreign currencies in which we conduct business with respect to short-term inter-company balances with our international subsidiaries, offset by gains and losses recognized on foreign currency forward exchange contracts entered into as hedges of these inter-company foreign currency exposures.

Income Taxes

The following table presents our income taxes and the absolute dollar and percentage change from the comparable prior year periods (dollars in thousands):


	Three Months Ended												Nine Months Ended
	September 30,						Change						September 30,						Change
	2007			2006			$			%			2007			2006			$			%
Income tax provision (benefit)	$	306		$	1,254		$	(948	)		(76	%)	$	2,442		$	2,600		$	(158	)		(6	%)

As a percentage of total revenues		0	%		2	%								1	%		1	%

On a consolidated basis, we generated a pre-tax earnings of $0.8 million and pre-tax losses of $17.5 million in the three and nine months ended September 30, 2007, respectively, and in the three and nine months ended September 30, 2006, we reported pre-tax losses of $11.9 million and $38.5 million, respectively. Our income tax provision, as a percentage of pre-tax earnings, was 38% and 11% for the three months ended September 30, 2007 and 2006, respectively. Our income tax provision, as a percentage of pre-tax earnings, was 14% and 7% for the nine months ended September 30, 2007 and 2006, respectively. In the three and nine months ended September 30, 2007 and 2006, respectively, substantially all of our tax provision related to non-U.S. taxes.

Our effective tax rate is primarily dependent on the location of taxable profits, if any, and the utilization of our net operating loss carryforwards in certain jurisdictions. Our tax rate is also affected by the tax impact of nondeductible amortization due to acquisition accounting and the imposition of withholding taxes on revenues regardless of our profitability.

Liquidity and Capital Resources


	Nine Months Ended
	September 30,
	2007			2006
	In Thousands
Net cash provided by (used for):
Operating activities	$	(24,172	)	$	(14,994	)
Investing activities		(119,579	)		29,846
Financing activities		165,253			2,817
Effect of exchange rate changes on cash		(1,103	)		1,398

Net change in cash and cash equivalents	$	20,399		$	19,067

Cash, cash equivalents and short-term investments. Cash, cash equivalents and short-term investments were $140.7 million at September 30, 2007, an increase of $85.4 million from a balance of $55.3 million at December 31, 2006. Working capital increased $121.8 million to $111.2 million at September 30, 2007, from a negative $10.6 million at December 31, 2006.

In February 2007, we completed a debt offering. We issued 2.75% Convertible Senior Notes due 2012 in the aggregate principal amount of $200 million to qualified institutional buyers in accordance with Rule 144A under the Securities Act of 1933, as amended. We used approximately $30 million of the net proceeds from the sale of the notes to repurchase approximately 5.9 million shares of our common stock.

Net cash used in operating activities. Net cash used in operating activities, in the nine months ended September 30, 2007, was $24.2 million, which includes $7.0 million used in restructuring activities.

Net cash used in investing activities. Net cash used in investing activities, during the nine months ended September 30, 2007, was $119.6 million, primarily driven by the purchase of short and long-term investments of $115.0 million and purchases of property and equipment of $4.8 million.

Net cash provided by financing activities. Net cash provided by financing activities during the nine months ended September 30, 2007, was $165.3 million, resulting primarily from net proceeds of $194.2 million from the 2.75% Convertible Senior Notes offering issued in February 2007 and $1.0 million received from the exercise of stock options. These proceeds were partially offset by our $29.9 million repurchase of shares of our common stock in the open market.

Currency. Although we utilize foreign currency forward exchange contracts to reduce our foreign currency exchange rate risk, the strengthening of the United States dollar against the Euro, the United Kingdom Pound Sterling, the Australian and Singapore dollars and the Japanese Yen could harm our financial condition. We cannot predict currency exchange rate fluctuations and there can be no assurance that foreign currency exchange rates will not have a material adverse impact on our future cash flows and operating results. Refer to Item 3 “Quantitative and Qualitative Disclosures About Market Risk” for additional discussion of foreign currency risk.

Contractual Obligations and Off-Balance Sheet Arrangements

Leases. We lease certain of our office and operating facilities and certain furniture and equipment under various operating leases. In connection with our acquisition of Segue we acquired a capital lease for leasehold improvements on a facility in Austria. At September 30, 2007, the obligation amounted to $0.1 million which is payable through 2010.

In Thousands


	Remainder
	of 2007			2008			2009			2010			2011			Thereafter			Total
Operating Leases	$	2,905		$	10,322		$	9,169		$	5,924		$	3,992		$	14,054		$	46,366
Restructured Operating Leases		1,600			5,914			5,832			3,497			2,778			4,843			24,464
Capital Lease		10			41			43			41			—			—			135

Gross Commitments		4,515			16,277			15,044			9,462			6,770			18,897			70,965
Sublease Income		(597	)		(3,056	)		(2,937	)		(2,824	)		(2,819	)		(4,909	)		(17,142	)

Net Commitments	$	3,918		$	13,221		$	12,107		$	6,638		$	3,951		$	13,988		$	53,823

Additionally, we have a commitment regarding an outsourcing arrangement for portions of our information technology operations. The committed expenditures average $5.2 million per year from November 2004 through November 2014. We can terminate this contract with or without cause upon payment of a termination fee, the maximum amount of which is $1.3 million at September 30, 2007, declining to $0.5 million in 2014, the final year of the contract. These amounts are not included in the operating lease commitments table above.

FIN 48 Liability. Effective January 1, 2007, we adopted the provisions of FIN 48 (see Note 9 & 13). As of September 30, 2007, the liability for uncertain tax positions, net of offsetting tax benefits associated with the correlative effects of potential transfer pricing adjustments, state income taxes, and interest deductions is $15 million, of which none is expected to be paid within one year. The balance of $15 million is recorded in other long-term liabilities in the balance sheet.

Indemnification Obligations and Guarantees. For information regarding our indemnification obligations and guarantees, refer to Note 11 of Notes to Condensed Consolidated Financial Statements in Item 1.

Off-Balance Sheet Arrangements. As part of our ongoing business, we do not participate in material transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance, variable interest or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of September 30, 2007, we are not involved in any material unconsolidated transactions.

Critical Accounting Estimates and Policies

Goodwill and Purchased Intangible Assets

Goodwill and identifiable intangibles are accounted for in accordance with SFAS No. 141 “Business Combinations” and SFAS No. 142 “Goodwill and Other Intangible Assets.” We recorded goodwill and identifiable intangibles related to our acquisitions and we evaluate these items for impairment on an annual basis, or more often if events or changes in circumstances indicate that the carrying values may not be recoverable. Impairment testing of goodwill is performed in two steps. First, the carrying value of the reporting unit is compared to the fair value of the reporting unit including the goodwill. If the carrying amount of the reporting unit is greater than the fair value of the reporting unit, we perform the second step. The second step of the impairment test, used to measure the amount of impairment loss, compares the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of the goodwill, the impairment loss shall be recognized as an operating expense in an amount equal to that excess. We performed our goodwill impairment testing in the third quarter of 2006 based on a single reporting unit and concluded there was no impairment as of September 30, 2006. The market capitalization method was the primary method used to determine the fair values for SFAS 142 impairment purposes. We did not record impairment to goodwill during 2005, however, we recorded a $0.5 million impairment to acquired developed technology in the second quarter of 2006 as a result of the departure of certain key employees. Refer to Note 7 of Notes to Condensed Consolidated Financial Statements in Part 1—Item 1 for further discussion of the valuation of goodwill and intangible assets and the impairment charge to acquired developed technology.

Effective January 1, 2007, we changed from reporting one segment to reporting two segments. As a result of this change we no longer utilize the market capitalization method. As of January 1, 2007, we began utilizing a discounted cash flow method and goodwill was allocated to each of the reporting units. For more information on the accounting related to the reportable segments, please see the narrative below under the heading “Reportable Segments” in this note. We perform our annual testing of goodwill for impairment during the third quarter of each fiscal year. At September 30, 2007, there were no impairments of our goodwill.

Reportable Segments

Under SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” we operate in two reportable segments. Effective January 1, 2007, consistent with how we manage our business, we changed from reporting one segment to reporting two segments: Enterprise and CodeGear. We market our products in the United States and in foreign countries through our sales personnel and our subsidiaries. The Chief Executive Officer is our Chief Operating Decision Maker, or CODM, as defined by SFAS No. 131. Refer to Note 12 of Notes to Condensed Consolidated Financial Statements in Item 1 for a discussion of our reportable segments.

For a more in-depth discussion of our other critical accounting policies and estimates, please read our Annual Report on Form 10-K for the year ended December 31, 2006, as filed with the SEC on March 15, 2007.

Effect of New Accounting Pronouncements

For information regarding the effect of new accounting pronouncements, refer to Note 13 of Notes to Condensed Consolidated Financial Statements in Item 1.

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 foreign currency forward exchange contracts as described below. We do not use financial instruments for trading purposes.

Foreign Currency Risk

A portion of our business is conducted in currencies other than the U.S. dollar. The functional currency for all of our foreign operations is the local currency of the country in which we have established business operations. Both revenues and operating expenses in each of these countries are largely denominated in local currencies, which mitigate a portion of the exposure related to fluctuations in local currencies against the U.S. dollar. However, our financial results could still be adversely affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. In addition, we have established a program to minimize our foreign currency exposure utilizing forward exchange contracts to manage foreign currency exposures related to short-term inter-company balances denominated in foreign currencies. The goal of this program is to offset the translation effect of foreign currency-denominated short-term inter-company balances by entering into contracts to buy or sell foreign currency at the time a foreign currency receivable or payable is generated. At month-end, foreign currency-denominated balances and the forward exchange contracts are marked-to-market and unrealized gains and losses are included in interest and other income, net.

During the three and nine months ended September 30, 2007, we recorded net realized foreign exchange losses of $0.2 million and $0.9 million, respectively, included as part of interest and other income, net, in our Condensed Consolidated Statements of Operations. The foreign exchange losses were generated primarily from fluctuations in the Brazilian Real, the Canadian dollar, the Euro, the United Kingdom Pound Sterling, and the Japanese Yen versus the U.S. dollar. It is uncertain whether these currency trends will continue. In the future we may experience foreign exchange losses on our inter-company receivables and payables to the extent that we have not mitigated our exposure utilizing foreign currency forward exchange contracts. Foreign exchange losses could have a material adverse effect on our operating results and cash flows.

During the three and nine months ended September 30, 2007, we had an increase of $1.2 million and $0.7 million, respectively, in unrealized foreign currency gains in cumulative other comprehensive income on our Condensed Consolidated Balance Sheets, in part, due to foreign currency movements on our long-term inter-company balances. As of September 30, 2007, we had $12 million, $5.7 million, $1.5 million, $1.1 million and $0.4 million in long-term inter-company receivable balances that will be settled in Singapore dollars, Indian Rupees, Brazilian Real, Australian dollars and Japanese Yen, respectively and $15.5 million in long-term inter-company payable balances that will be settled in Euros.

Interest Rate Risk

The primary objective of our investment activities is to preserve principal while maximizing income without significantly increasing risk. Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio. We do not use derivative financial instruments in our investment portfolio. During the quarter ending September 30, 2007, we initiated an investment strategy to achieve this objective by investing available funds in a portfolio of cash equivalents, short-term and long-term investments in a variety of securities, including but not limited to government and corporate securities, auction rate securities, time deposits and money market funds. These securities are generally classified as available for sale and consequently are recorded on the balance sheet at fair value with unrealized gains or losses reported as a separate component of accumulated other comprehensive income (loss), net of estimated tax.

Short-term investments. At September 30, 2007, our cash and cash equivalents consisted primarily of commercial paper. Short-term investments consist of marketable securities, including but not limited to corporate notes, corporate bonds and medium-term notes in large U.S. institutions and governmental agencies and auction rate securities. Our marketable securities that are classified as short-term investments will mature in less than one year from September 30, 2007. Auction rate securities may have nominal maturity dates that are more than one year from September 30, 2007, but are classified as short term investments by the Company. These securities are classified as available-for-sale and are recorded at their estimated fair value.

Long-term investments. At September 30, 2007, long-term investments consisted of long-term marketable securities. We will periodically analyze our long-term investments for impairments that could be considered other than temporary. We classify our long-term investments as available-for-sale.

Credit Risks

Our financial instruments that are exposed to concentrations of credit risk consist primarily of cash, cash equivalents, short-term and long-term investments and trade receivables. Our cash, cash equivalents, short-term and long-term investments are in high-quality

securities placed with major banks and financial institutions and commercial paper. Concentrations of credit risk with respect to receivables are limited due to the large number of customers and their dispersion across geographic areas. We perform periodic credit evaluations of our customers’ financial condition and generally do not require collateral. We had one customer representing greater than 10% of total accounts receivable, net of allowances, as of September 30, 2007.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Our Disclosure Controls and Procedures

Disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”)) are those controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, who is our Principal Financial Officer, to allow timely decisions regarding required disclosure.

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated our disclosure controls and procedures pursuant to the Exchange Act rules as of the end of the period covered by this Report. Based upon this evaluation, our Chief Executive Officer and Principal Financial Officer concluded that, as of September 30, 2007, our disclosure controls and procedures were effective to provide a reasonable level of assurance that the financial information we are required to disclose in the reports we file or submit under the Exchange Act was recorded, processed, summarized and reported accurately within the time periods specified in the SEC’s rules and forms.

Changes in Internal Control Over Financial Reporting

During the quarter ended September 30, 2007, we completed the conversion of certain financial reporting systems used in our operations to new enterprise resource planning (“ERP”) systems. During the migration, we maintained the operation of the prior ERP systems for backup purposes. As with any significant change in our internal control over financial reporting, the design of these applications, along with the design of the internal controls included in our processes, are evaluated by management for effectiveness. There were no other changes in our internal control over financial reporting during the quarter ended September 30, 2007 which our management concluded have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II

OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time, we are involved in lawsuits, claims, investigations and proceedings, consisting of intellectual property, commercial, employment and other matters, which arise in the ordinary course of business. In accordance with SFAS 5, “Accounting for Contingencies” we record a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These accruals are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular case. Litigation is inherently unpredictable; however, we believe that we have valid defenses with respect to the legal matters pending against us, as well as adequate accruals for any probable and estimable losses. If an unanticipated unfavorable ruling or settlement were to occur in any of these matters in a particular period, our liquidity and financial condition could be adversely impacted, as well as our results of operations and cash flows.

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

ITEM 1A. RISK FACTORS

We operate in a rapidly changing environment that involves many risks, some of which are beyond our control. The following discussion highlights some of these risks. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations or results. If any of these risks actually occur, our business operations or results could be harmed. Risk Factors that have been added or have materially changed since the filing of our Annual Report on Form 10-K for the year ended December 31, 2006, are identified with an “*”.

Risks Relating to Our Business

We are re-focusing the company to primarily focus on the development and distribution of enterprise software development solutions. If we are unable to successfully complete this change to the business quickly and smoothly, our operating results could be harmed.

Over the past several quarters we have been transforming our business to focus on Open Application Lifecycle Management, or ALM, solutions. Prior to the development of our ALM strategy, our principal business related to our integrated developer environment, or IDE, products, which we now operate as our CodeGear division. Our enterprise business focuses on the development and distribution of enterprise software development solutions, in contrast to our CodeGear division, which targets development tools for individual software developers. The risks of this change in focus include, among others:

•

Changes in go-to-market strategy. Our ALM offerings are sold to enterprises, whereas our CodeGear offerings are primarily sold to individual software developers. As a result, to achieve revenue growth with our ALM strategy, we must enhance our enterprise selling capability, increase sales force productivity and generally complete more large revenue, multi-product sales of our ALM solutions. We will also need to further define our product roadmaps and generally continue to evolve our ALM offerings. To do so, we must coordinate the efforts of our marketing, sales, services and research and development organizations to focus on the needs of large enterprises. These tasks are complicated, involve many people and processes, and require consistency and persistence in the market place to be effective. In addition, this enterprise-focused strategy involves different skills, partners and competencies than our historical IDE strategy, which focused principally on sales through distribution channels. If we fail to coordinate our efforts and deliver broader value to large enterprise customers, our operating results may suffer.

	•		Changes in our sales organization and sales leadership. Our ALM strategy requires us to focus our sales effort on enterprise customers. To drive these changes, we will continue to make changes throughout our global sales force balancing the sales people that focus on larger deals and those that focus on acquiring new customers and smaller transactions. While we believe these changes will enhance our leadership globally, these efforts may prove unsuccessful in increasing our sales to enterprise customers.

	•		Changes in our sales cycles. Sales to large enterprises often involve long and unpredictable sales cycles. We are becoming more dependent on large revenue, multi-product transactions to meet our revenue expectations. These transactions often have long sales cycles and we may be unable to accurately forecast revenues derived from these transactions. If we fail to accurately forecast revenues, we may not achieve the anticipated financial performance, which could harm our business and operating results.

	•		Changes in our marketing strategy. As part of our change in focus, we continue to redefine our marketing strategy. We must increase lead generation and develop appropriate marketing programs targeted at the enterprise customer. As an organization, we are relatively new at this. If we are unable to develop effective marketing programs and increase our pipeline of sales opportunities, or if our sales organization in turn is unable to effectively convert leads into customers, our revenues will suffer.

	•		Changes in our services organization. In 2006, we consolidated our consulting services and sales organizations to better focus on customer engagements. We also combined our technical support organization with our field operations organization to more closely align our efforts relating to customers. Further, we focused our consulting organizations on working with customers that have or will purchase software licenses. We have de-emphasized selling services when there is no software license opportunity. The implementation of these changes will continue to require careful planning and coordination to ensure we maintain customer satisfaction. In addition, such changes may result in the loss of key services personnel. In the event customer satisfaction is harmed or we lose key personnel, our business could be harmed.

While we believe the change in our business to focus on our ALM strategy is critical to growing our business, we may be unable to manage this change effectively and quickly and our business, results of operations, financial condition and prospects could be harmed. In addition, expenses associated with our restructuring and change of strategy will likely continue to have an adverse impact on our operating results at least through 2007.

Our failure to effectively operate CodeGear following the separation of this division from our enterprise business could harm our operating results. *

As announced in November 2006, we are retaining our IDE assets for the foreseeable future rather than selling them. We began operating this part of our business as our CodeGear division on January 1, 2007. The separation of CodeGear from our enterprise business has been a complicated process. While the separation process is substantially complete, we are still in the process of determining how to operate CodeGear effectively as a new division. We are also continuing to work on running our international operations more efficiently, which involves changes to the sales structure. This process requires time and effort of management and key personnel of both our enterprise business and CodeGear division who would otherwise be dedicated to running these respective businesses. While our goal is to operate CodeGear in a manner that is efficient for our CodeGear and enterprise businesses, there can be no guarantee that we will achieve these goals. Sales may be negatively impacted by changes in the sales structure and customers may lose confidence in the CodeGear business during this transition period. Failure to implement this separation efficiently could have a material adverse effect on our overall business, results of operations and financial condition.

We have experienced significant changes in our senior management team over the past two years and if we are not able to effectively integrate new senior management members, our business could be harmed. *

There have been a number of significant changes in our senior management team, including the addition of our new Senior Vice President, Research and Development in August 2006, our new Senior Vice President and General Counsel in October 2006, our new Chief Financial Officer in November 2006 and our new Senior Vice President of Worldwide Field Operations in January 2007. As a result of these changes, we may not be able to effectively manage our business during this period of transition, especially in light of the changes in our strategy, our restructuring actions and related operations. In addition, we relocated our headquarters from Cupertino, CA to Austin, TX, in October 2007 and our General Counsel will remain in our Cupertino office while other senior management have relocated to Austin, TX. Our ongoing operations could be disrupted during this transition period. There is a risk that the management may not work effectively as a team, at least in the near term. During this transition period, our customers may defer purchasing our products or decide not to purchase them at all. We may experience employee distraction, or we may see

increased competitive pressure as our competitors attempt to use this period of change to their advantage. If we are unable to effectively manage through this transition quickly and effectively, it could adversely affect our operating results.

Our failure to implement systems to meet the requirements and manage the large service projects necessary for our enterprise may result in delays in recognizing revenue on these projects and thus could harm our profit and adversely affect our results of operations.

Our enterprise business focuses on large enterprise sales which may include complex professional services agreements. Our inability to structure and manage services agreements may result in unanticipated changes to the timing of our services revenue. In addition, if we bundle services together with our license agreements, this may also affect the timing of recognizing our license revenue. We may need to implement new systems or upgrade current systems to manage these large, complex services agreements. If we fail to make appropriate changes to our existing systems or if our services agreements lead to unanticipated changes to the timing of revenue recognition, our results of operations could be harmed.

Our inability to forecast our revenue pipeline or convert revenue pipeline into contracts, especially given our increasing focus on enterprise customers, could increase fluctuations in our revenue and financial results.

We use a “pipeline” system, a common industry practice, to forecast sales and trends in our ALM business. Our sales personnel monitor the status of all potential transactions, including the estimated closing date and potential dollar amount of each transaction. We aggregate these estimates periodically to generate a sales pipeline and then evaluate the pipeline to identify trends in our business. This pipeline analysis and related estimates of revenue may differ significantly from actual revenues in a particular reporting period. When customers delay purchasing decisions, reduce the amount of their purchases or cancel their purchases altogether, it will reduce the rate of conversion of the pipeline into contracts and our revenues will be harmed. In addition, because a substantial portion of our software license contracts close in the latter part of a quarter, we may not be able to adjust our cost structure to respond to a variation in the conversion of the pipeline into contracts in a timely manner. Our inability to respond to a variation in the pipeline or in the conversion of the pipeline into contracts in a timely manner, or at all, could cause us to plan or budget inaccurately and thereby could adversely affect our results of operations and financial condition.

We have begun to license our software directly to large enterprises and have experienced sales cycles that are substantially more lengthy and uncertain than those associated with our traditional business of licensing software through indirect and retail channels and more modest direct sales. As we focus on large transactions involving multiple elements, enterprise customers generally require us to expend substantial time, effort and money establishing a relationship and educating them about our solutions. Also, sales to enterprise customers generally require an extensive sales effort throughout many levels within the customer’s organization and often require final approval by several layers of executives, including the customer’s chief information officer, chief financial officer and/or other senior executives. These factors substantially extend the sales cycle and increase the uncertainty of whether a sale will be made in any particular quarter, or at all. We have experienced and expect to continue to experience delays and uncertainties in our sales cycles as well as increased up-front expenses in connection with our enterprise sales efforts. The timing of the execution of enterprise volume licenses could cause our results of operations to vary significantly from quarter to quarter, especially when we anticipate certain transactions will close in a particular quarter. Further, industry buying patterns suggest that larger transactions are frequently deferred until later in the quarter, creating increased difficulty in quarterly forecasting. If a sale is never completed despite months or even years of selling efforts, we will have expended substantial time, money and resources during the pre-sales effort without generating any revenue to offset these expenses. Finally, due to the complexity and time commitment necessary to pursue each of these transactions, we focus on a small number of proposed sales at any time and if we fail to complete any of these sales, our business, results of operations and financial condition would be negatively affected.

Because competition for qualified finance, technical and management personnel is intense and because we recently moved our headquarters, we may not be able to recruit or retain qualified personnel quickly, which could harm our business.*

We believe our ability to successfully manage and grow our business and to develop new products depends, in large part, on our ability to recruit and retain qualified employees, particularly highly skilled finance personnel, software engineers, sales personnel and management personnel. Competition for qualified technical and management personnel is intense. Effective in October 2007, we moved our headquarters from Cupertino, CA to Austin, TX. While we believe we will be able to retain qualified personnel in Austin, it may take longer than we expect to hire those people and for them to be able to function effectively. Also, 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. We employ a variety of measures to retain our key people, including granting of stock options and restricted stock and the use of bonuses, but these measures may not be sufficient.

We have experienced a relatively high rate of employee turnover and could be subject to continued risk of turnover given the changes we are experiencing. If we are unable to recruit and retain quality personnel, our ability to provide competitive products could be harmed. As a result, we may lose customers or may not achieve anticipated sales during a particular period. In addition, the loss of technical talent may result in the inability to ship new products or product upgrades at the times originally planned. If we experience delays in the shipment of new products or product upgrades, we may be unable to achieve anticipated sales during a particular period.

We have historically used stock options and other forms of equity compensation as key components of our employee compensation program in order to align employees’ interest with the interests of our stockholders while encouraging employee retention. The decline of our stock price over the last few years has made stock options a less attractive portion of our employee compensation program. As a result, we may find it increasingly difficult to attract, retain and motivate employees.

Our success is dependent upon our ability to enhance the quality and scalability of our various products, improve the integration and overall functionality of these products, and evolve our solutions toward our ALM strategy.

We produce and sell a broad portfolio of products to manage the software development process. The market for these products is characterized by continuous technological advancement, evolving industry standards and changing customer requirements. A significant portion of our research and development focus is on integrating our many existing and recently acquired products into a cohesive ALM solution. Managing our development activities as we execute our change in strategy is complex and involves a number of risks, especially with respect to maintaining competitiveness across our individual products while at the same time bolstering the integration and functionality of our products. We may not be successful in designing and marketing new products, integrating acquired products, providing the necessary product enhancements or features to address increasingly sophisticated and varied needs of our customers or in enhancing the integration and functionality of our ALM platform. To be successful in this market, we will also need to be able to compete with several large and well-established companies with more experience in these markets.

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

If we are unable to maintain revenue levels for our deployment products, our financial results may be harmed.

We currently have a portion of our revenue attributable to our deployment products. These products are mature products and we primarily rely on new sales to existing customers, maintenance agreements with existing customers, compliance purchases through customer audits and sales through existing independent software vendors and original equipment manufacturers’ partners to generate revenue. We have experienced weakness and fluctuations in revenue from these products in the past and believe they will continue to be subject to commoditization. Our deployment products are generally based on older standards and technologies, which are used in a decreasing number of industries, networks and applications. We devote little marketing to these products and primarily rely on the effectiveness of the sales force and compliance teams to work with customers and partners to generate sales. There have been many changes in the sales force over the past several quarters, especially in Europe where we have historically generated a significant amount of revenue from our deployment products. If we are unable to maintain effective sales programs for our deployment products, or if existing customers migrate away from our deployment products, our business, results of operations and financial condition could suffer.

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

Our markets are intensely competitive. In the market for comprehensive software development solutions, we face competition from some of the largest software providers in the world. For example, IBM, Microsoft, Sun Microsystems, Hewlett-Packard, Computer Associates and others provide or have stated they intend to provide comprehensive enterprise software development and integration solutions. Traditionally, we have partnered with some of these competitors to offer a broader solution to their or our customer base; however, as our partners and business strategy change, a larger market overlap may develop and some or all of these partnering arrangements could be adversely affected or terminated. Most of these competitors have substantially greater financial, management, marketing and technical resources than we have. In addition, many of our competitors have well established relationships with our current and potential customers, extensive knowledge of the market, substantial experience in selling enterprise solutions, strong professional services and technical support offerings and extensive product development, sales and marketing

resources. As a result of their greater resources and established relationships, these competitors may be more successful than we are at developing and marketing products and solutions in our markets.

In addition, the markets for our CodeGear products are characterized by rapid change, new and emerging technologies, and aggressive competition. Some of our competitors include IBM, Microsoft and Sun Microsystems. We attempt to differentiate our products from those of our competitors based on interoperability, total cost of ownership, product quality, performance, level of integration and reliability. We may be unable to successfully differentiate our products from those of our competitors, or we may be unable to compete with the substantially greater resources many of our competitors have. If so, our business, results of operations and financial condition may suffer.

The complexity of accounting regulations and related interpretations and policies, particularly those related to revenue recognition, could materially affect our financial results for a given period.

Although we use standardized agreements designed to meet current revenue recognition criteria under generally accepted accounting principles, we must often negotiate and revise terms and conditions of these standardized agreements, particularly in multi-product license and services transactions. As our transactions have increased in complexity, particularly with the sale of larger, multi-product licenses, negotiation of mutually acceptable terms and conditions may require us to defer recognition of revenue on such licenses. We believe that we are in compliance with Statement of Position 97-2, “Software Revenue Recognition,” as amended; however, more complex, multi-product license transactions require additional accounting analysis to account for them accurately. Errors in such analysis in any period could lead to unanticipated changes in our revenue accounting practices and may affect the timing of revenue recognition, which could adversely affect our financial results for any given period. If we discover that we have interpreted and applied revenue recognition rules differently than prescribed by generally accepted accounting principles in the U.S, we could be required to devote significant management resources, and incur the expense associated with an audit, restatement or other examination of our financial statements.

We previously had material weaknesses in our internal control over financial reporting. While our management has determined that we do not currently have any material weaknesses in our internal control over financial reporting, there can be no assurance that we will maintain an effective framework for internal control over financial reporting in the future, which would harm our business and the trading price of our stock.*

Under Section 404 of the Sarbanes-Oxley Act of 2002, we are required to evaluate and determine the effectiveness of our internal control over financial reporting. We dedicated a significant amount of time and resources to ensure compliance with this legislation for the year ended December 31, 2006, and the quarters ended March 31, 2007 and June 30, 2007, and will continue to do so for future fiscal periods. We may encounter problems or delays in completing the review and evaluation, the implementation of improvements and the receipt of a positive attestation, or any attestation at all, by our independent registered public accounting firm. Additionally, management’s assessment of our internal control over financial reporting may identify deficiencies that need to be addressed in our internal control over financial reporting or other matters that may raise concerns for investors.

A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. In our Form 10-K for the fiscal year ended December 31, 2005, we reported management’s conclusion that we had two material weaknesses in our internal control over financial reporting. One of the material weaknesses was our lack of effective controls in our services organization to ensure that invoices from third party contractors were completely and accurately recorded. This material weakness was remediated as of the quarter ended September 30, 2006. The second material weakness was our lack of an effective control environment based on the criteria established in the COSO framework with respect to promoting compliance with policies and procedures and the prevention or detection of the override of our controls. As a result of this control deficiency, a senior officer was able to override controls which resulted in: (1) an amendment to a sales contract creating an obligation to deliver an additional software feature without authorization of the finance and legal organization, and (2) a post-contract offer to refund the customer payment in the same transaction without authorization of the finance and legal organization. This material weakness was remediated as of the quarter ended June 30, 2007.

Because of their inherent limitations, internal control over financial reporting may not prevent or detect misstatements or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Also, projections of an evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Should we or our independent registered public accounting firm, determine in future fiscal periods that we have a material weaknesses

in our internal control over financial reporting, the reliability of our financial reports may be impacted, and our results of operations or financial condition may be harmed and the price of our common stock may decline.

We have been unable to timely file our annual and quarterly reports as required by the Securities Exchange Act of 1934, and our continued inability to file these reports on time could result in your not having access to important information about us and the delisting of our common stock from the Nasdaq Global Market.

We were late in filing our Annual Report on Form 10-K for the fiscal year ended December 31, 2005, and our Quarterly Reports on Forms 10-Q for the fiscal quarters ended March 31, 2006, June 30, 2006, and September 30, 2006. As a result, during the periods in which these reports were late, we were not in compliance with the continued listing requirements of the Nasdaq Global Market and, in some cases, with the SEC’s rules and regulations under the Securities Exchange Act of 1934. We are required to comply with these rules as a condition of the continued listing of our stock on the Nasdaq Global Market.

Although we are not currently late with respect to any annual or quarterly report, there can be no assurance that we will be able to file all such reports in the future in a timely manner. If we are unable to timely file these reports in the future, it may impede your access to important information about us and, in the case of a prolonged delay in filing, result in our common stock being delisted from the Nasdaq Global Market. Delisting could result in our common stock no longer being traded on any securities exchange or over-the-counter market and could impact its liquidity and price. In addition, if we were delisted, we would be in default under the Convertible Senior Notes we issued in February 2007, which would cause the notes to become immediately due and payable.

We are in the midst of significant changes to our financial reporting and accounting team and systems, which may impact our ability to comply with our financial reporting and accounting obligations. *

Our financial reporting and accounting team has undergone several personnel changes, including the departure of our Chief Financial Officer in the second quarter of 2006, and the hiring of our new Chief Financial Officer in November 2006. In October 2007 we moved our corporate headquarters from Cupertino, CA to Austin, TX and are in the process of transitioning a significant portion of our finance team. While we have planned with a goal of facilitating an orderly transition, our hiring activities and headquarters move may impair the ability of our finance organization to function effectively. During this transition period, we may have a difficult time attracting, recruiting and retaining qualified finance personnel. In addition, we are in the process of changing our financial reporting systems. While we have taken measures aimed at protecting data and keeping accurate records, there can be no assurance the transition will be done without causing errors, delays or inefficiencies. If we fail to staff our accounting and finance function adequately or maintain adequate internal control over financial reporting, we may be unable to report our financial results accurately or in a timely manner and our business, results of operations and financial condition may suffer.

We have recently moved our headquarters and are implementing plans for reducing expenses. If we fail to achieve the results we expect, there will be a negative effect on our financial condition.*

As a part of our restructuring plans, in October 2007, we moved our headquarters from Cupertino, CA to Austin, TX. We are also implementing other plans to reduce expenses, which have included the consolidation of certain office locations worldwide, reductions in capital expenditures, reduction in discretionary spending and reduction in our work force. These restructuring actions may distract management and other key personnel from focusing on our business. In addition, if we experience difficulties in implementing these measures, it may be necessary to implement additional cost cutting measures. Our plans to reduce expenses may not be completed in a timely manner or result in anticipated cost savings, which would impair our goal to achieve profitability and positive cash flow. In addition, we are currently operating at a net loss and there can be no assurance as to when we will return to profitability, if at all. In order to fund our ongoing operations in future periods it will be necessary for us to achieve profitability.

Consolidation in our industry or fluctuation in our stock price may impede our ability to compete effectively.

Consolidation continues to occur among companies that compete in our markets. Additionally, some of the largest software and hardware providers in the world have sought to expand their software and services offerings through acquisitions in the software development, deployment and integration space. For instance, in November 2006, Hewlett Packard acquired one of our competitors, Mercury Interactive. If these large providers, who have significantly greater financial, management, marketing and technical resources than we have, are successful in increasing their offerings in the software development market, our business will be subject to significant pressure and our ability to compete effectively harmed. Additionally, changes resulting from these and other consolidations may harm our competitive position, particularly as certain products, when offered as part of a bundled suite, are offered for free or are given away to sell more hardware, infrastructure components or information technology services.

As the trend toward consolidation continues, we may encounter increased competition for attractive acquisition targets and may

have to pay higher prices for those businesses or technologies we seek to acquire. In addition, we have seen a recent decline in our stock price, which will in turn make it more difficult for us to use stock as a currency for the acquisition of strategic businesses or technologies. This will put pressure on our ability to seek out potential acquisition targets which may impede our growth and our ability to compete effectively.

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

We depend on licenses from third-party suppliers for some elements of our products such as various file libraries. In particular, we depend on technology licenses from Sun Microsystems for certain of our Java products, and we depend on licenses from Microsoft for our Delphi, C++, C#Builder and Borland Developer Studio products. If any of these licenses or other third-party licenses were terminated or were not renewed, or if these third-parties failed to notify us in a timely manner of any new or updated technology, we might not be able to ship such products as planned or provide support for such products, including upgrades. We would then have to seek an alternative to the third-party’s technology and, in some cases, an alternative may not exist. This could result in delays in releasing and/or shipping our products, increased costs by having to secure unfavorable royalty arrangements or reduced functionality of our products, which in turn could adversely affect our business, results of operations and financial condition.

Failure to effectively manage our international operations could harm our results.

A substantial portion of our revenues are generated from international sales. In addition, a significant portion of our operations consist of activities outside the United States. We now have research and development facilities in several domestic and international locations, and we currently have a direct sales force in approximately twenty countries around the world. We have a complicated corporate structure, and historically have had geographically dispersed operational controls. In particular, we rely on personnel in our international locations to properly account for and manage our international operations, which introduce inherent difficulties in management and control. Given this, we have and may continue to experience difficulty in efficiently and effectively managing our dispersed and complicated organization. As a result, our results of operations may suffer. In addition, we are subject to other risks inherent in doing business internationally, including:

	•		fluctuations in foreign currency exchange rates;

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

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

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

	•		restrictions on the expatriation of currency;

	•		foreign taxes, export restrictions, tariffs, duties and other trade barriers;

	•		changes in regulatory requirements and resulting costs;

	•		differing cultures and business practices not consistent with our regulatory obligations in the United States;

	•		compliance with various conflicting laws and regulations, including employment laws, and resulting costs; and

	•		war, threats of war, terrorist activity or political or economic instability in certain parts of the world.

One or more of these risks could harm our future research operations and international sales. If we are unable to manage these risks of doing business internationally, our business, results of operations and financial condition could suffer.

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

Some of our competitors, particularly those that are primarily hardware vendors or platform providers, generate a substantially

greater proportion of their sales in markets in which we do not directly compete. We believe a number of these competitors view sales of software application lifecycle technologies as important to enhancing the functionality and demand for their core products. As a result, these companies often bundle software products that compete with our offerings, with products such as application servers, work stations, personal computers, operating systems databases and information technology services. When competitors do so, the effective price for their software products that compete with our software development platform/solutions are often heavily discounted or offered at no charge. This has required us to reduce the price of our products and related services in certain circumstances, sometimes to no avail. Similarly, industry alliances and arrangements exist or may be formed in the future under which our competitors ally with companies in markets in which we do not compete to bundle products. These arrangements may also result in lower effective prices for our competitors’ products than for our products, putting pressure on our business and diminishing our competitive position.

Our future success depends upon enhancing existing relationships and establishing new technology alliances.

The market for enterprise software application development and deployment solutions is broad, and our products and solutions must integrate with a wide variety of technologies. To be successful, we must continue to establish and enhance strategic alliances with a wide variety of companies in the software development ecosystem. Many of these companies have competitive products or have stated a desire to move broadly into the software development lifecycle space. In addition, many of these companies are competitive with one another and approach partnering with us cautiously. This has made it difficult in some cases to establish or enhance desired relationships or achieve intended objectives. We currently have a number of important strategic alliances and technology relationships with industry leaders. Where we have established working relationships, our allies may choose to terminate their arrangements with us where no binding contractual arrangements exist. The failure to develop or maintain our strategic alliances and technology relationships or our allies’ decision to opt out of their arrangements with us may impede our ability to introduce new products or enter new markets, and consequently harm our business, results of operations and financial condition.

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

Software products occasionally contain errors or defects, especially when they are first introduced or when new versions are released. We cannot be certain that our products are currently or will be completely free of defects and errors. We could lose revenue as a result of product defects or errors, including defects contained in third-party products that enable our products to work. In addition, the discovery of a defect or error in a new version or product may result in the following consequences, among others:

	•		delayed shipping of the product;

	•		delay in or failure to ever achieve market acceptance;

	•		diversion of development resources;

	•		damage to our reputation;

	•		product liability claims; and

	•		increased service and warranty costs.

As we transition from selling individual IDE products towards selling enterprise-wide solutions, we also expect our products to become more critical to our customers. Thus, a defect or error in our products could result in a significant disruption to our customers’ businesses. In addition, as we transition to selling larger, more complex solutions, there is also the risk that our current products will not prove scalable without substantial effort. In addition, there could be a market perception that our products are too complex. If we are unable to develop products that are free of defects or errors or if our products are not able to scale across an enterprise or are perceived to be too complex to scale across an enterprise, our business, results of operations and financial condition could be harmed.

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

From time to time, we receive notices claiming that we have infringed a third-party’s patent or other intellectual property right. We expect that software products in general will increasingly be subject to these claims as the number of products and competitors

increase, the functionality of products overlap and as the patenting of software functionality becomes more widespread. Further, the receipt of a notice alleging infringement may require in some situations a costly opinion of counsel be obtained to prevent an allegation of intentional infringement. Regardless of its merits, responding to any claim can be time consuming and costly and divert the efforts of our technical and management personnel. 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 the use and sale of the infringing products, expend significant resources to develop non-infringing technology and/or enter into royalty and licensing agreements that might not be offered or be available on acceptable terms. If a successful claim was made against us and we failed to commercially develop or license a substitute technology, our business, results of operations and financial condition could be harmed. In addition, we may not have insurance coverage for these types of claims or our insurance coverage for these types of claims may not be adequate.

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

As a software company, our intellectual property rights are among our most valuable assets. We rely on a combination of patent, copyright, trademark, trade secrets, confidentiality agreements and other contractual arrangements and other methods to protect our intellectual property rights, but these measures may provide only limited protection. The protective steps we have taken may be inadequate to deter misappropriations of our intellectual property rights. In addition, it may be possible for an unauthorized third-party to reverse-engineer or decompile our software products. We may be unable to detect the unauthorized use of, or take appropriate steps to enforce, our intellectual property rights, particularly in certain international markets, making misappropriation of our intellectual property more likely. Litigation may be necessary to protect our intellectual property rights, and such litigation can be time consuming and expensive.

Our debt obligations expose us to risks that could adversely affect our business, operating results and financial condition.

In February 2007, we issued an aggregate principal amount of $200,000,000 in 2.75% Convertible Senior Notes due in 2012. The level of our indebtedness, among other things, could:

	•		require us to dedicate a portion of our expected cash flow or our existing cash to service our indebtedness, which would reduce the amount of our cash available for other purposes, including working capital, capital expenditures and research and development expenditures;

	•		make it difficult for us to incur additional debt or obtain any necessary financing in the future for working capital, capital expenditures, debt service, acquisitions or general corporate purposes;

	•		limit our flexibility in planning for or reacting to changes in our business;

	•		limit our ability to sell ourselves or engage in other strategic transactions;

	•		make us more vulnerable in the event of a downturn in our business; or

	•		place us at a possible competitive disadvantage relative to less leveraged competitors and competitors that have greater access to capital resources.

If we experience a decline in revenue due to any of the factors described in this section entitled “Risk Factors,” or otherwise, we could have difficulty paying amounts due on our indebtedness. Although the Convertible Senior Notes mature in 2012, the holders of the convertible senior notes may require us to repurchase their notes prior to maturity under certain circumstances, including specified fundamental changes such as the sale of a majority of the voting power of the company. If we are unable to generate sufficient cash flow or otherwise obtain funds necessary to make required payments, or if we fail to comply with the various requirements of the convertible senior notes, we would be in default, which would permit the holders of our indebtedness to accelerate the maturity of the indebtedness and could cause defaults under any other indebtedness that we may have outstanding at such time. Any default under our indebtedness could have a material adverse effect on our business, operating results and financial condition.

Conversion of the Convertible Senior Notes will dilute the ownership interests of existing stockholders.

The terms of the Convertible Senior Notes permit the holders to convert the notes into shares of our common stock. The Convertible Senior Notes are convertible into our common stock initially at a conversion price of $6.38 per share, which would result in an aggregate of approximately 31.4 million shares of our common stock being issued upon conversion, subject to adjustment upon the occurrence of specified events, provided that the total number of shares of common stock issuable upon conversion, as may be

adjusted for fundamental changes or otherwise, may not exceed approximately 39.2 million shares. The conversion of some or all of the Convertible Senior Notes will dilute the ownership interest of our existing stockholders. Any sales in the public market of the common stock issuable upon conversion could adversely affect prevailing market prices of our common stock.

Each $1,000 of principal of the Convertible Senior Notes is initially convertible into 156.8627 shares of our common stock, subject to adjustment upon the occurrence of specified events. However we may seek to obtain stockholder approval to settle conversions of the notes in cash and shares of common stock, which approval would require the vote of a majority of shares of our common stock at a stockholder meeting duly called and convened in accordance with our organizational documents, applicable law and the rules of the Nasdaq Global Market.

In addition, holders may convert their Convertible Senior Notes prior to maturity if: (1) the price of our common stock reaches $8.29 during specific periods of time, (2) specified corporate transactions occur or (3) the trading price of the notes falls below a certain threshold. As a result, although the convertible senior notes mature in 2012, the holders may require us to convert the notes prior to maturity. As of the date this Quarterly Report on Form 10-Q was filed with the Securities and Exchange Commission, none of the conditions allowing holders of the notes to convert had occurred.

Under the terms of the 2.75% Convertible Senior Notes due 2012, events that we do not control may trigger conversion rights that, if exercised, may have an adverse effect on our liquidity.

Holders of our convertible senior notes due 2012 will have the right to require us to repurchase the notes upon the occurrence of a fundamental change of Borland, including some types of change of control transactions. We may not have sufficient funds to repurchase the notes in cash or to make the required repayment at such time or have the ability to arrange necessary financing on acceptable terms. In addition, upon conversion of the notes, if we have received approval from our stockholders to settle conversions of the notes in cash and shares of our common stock, we will be required to make cash payments to the holders of the notes equal to the lesser of the principal amount of the notes being converted and the conversion value of those notes. Such payments could be significant, and we may not have sufficient funds to make them at such time. Our failure to repurchase the notes or pay cash in respect of conversions when required would result in an event of default.

Our rights plan and our ability to issue additional preferred stock could harm the rights of our common stockholders.

In October 2001, we adopted our stockholder rights plan and currently each share of our outstanding common stock is associated with one right. Each right entitles the registered stockholder to purchase 1/1,000 of a share of our Series D Junior Participating Preferred Stock at an exercise price of $80.00.

The rights only become exercisable in certain limited circumstances following the tenth day after a person or group announces acquisition of or tender offers for 15% or more of our common stock. For a limited period of time following the announcement of any such acquisition or offer, the rights are redeemable by us at a price of $0.01 per right. If the rights are not redeemed, each right will then entitle the holder to purchase common stock having the value of twice the then-current exercise price. For a limited period of time after the exercisability of the rights, each right, at the discretion of our board of directors, may be exchanged for either 1/1,000 share of Series D Junior Participating Preferred Stock or one share of common stock. The rights expire on December 19, 2011.

Pursuant to our restated certificate of incorporation, our board of directors has the authority to issue up to 850,000 shares of undesignated preferred stock and to determine the powers, preferences and rights and the qualifications, limitations or restrictions granted to or imposed upon any wholly unissued shares of undesignated preferred stock and to fix the number of shares constituting any series and the designation of such series, without the consent of our stockholders. The preferred stock could be issued with voting, liquidation, dividend and other rights superior to those of the holders of common stock.

The issuance of Series D Junior Participating Preferred Stock or any preferred stock subsequently issued by our board of directors, under some circumstances, could have the effect of delaying, deferring or preventing a change in control. For example, an issuance of shares of our preferred stock could:

	•		adversely affect the voting power of the stockholders of our common stock;

	•		make it more difficult for a third party to gain control of us;

	•		discourage bids for our common stock at a premium;

	•		limit or eliminate any payments the stockholders of our common stock could expect to receive upon our liquidation; or

•

otherwise adversely affect the market price of our common stock.

Specifically, some provisions may deter tender offers for shares of common stock, which may be attractive to stockholders, or deter purchases of large blocks of common stock, thereby limiting the opportunity for stockholders to receive a premium for their shares of common stock over the then-prevailing market prices.

Changes in generally accepted accounting principles may adversely affect us. *

In July 2007, the Financial Accounting Standards Board (“FASB”) voted to issue a draft FASB Staff Position (“FSP 14a”) to change the accounting treatment for convertible debt instruments that require or permit partial cash settlement upon conversion. The proposed accounting change would require issuers to separate the debt instruments into two components: a non-convertible bond and a conversion option. The separation of the conversion option would create an original issue discount in the bond component which would be amortized as interest expense over the term of the instrument, resulting in an increase to our reported interest expense. If the FSP is approved and requires adoption to existing convertible debt instruments, we would recognize incremental interest expense on our Convertible Senior Notes which would negatively impact our diluted earnings per share.

Provisions of our certificate of incorporation and bylaws might discourage, delay or prevent a change of control of our company or changes in our management and, therefore, depress the trading price of our common stock.

Our certificate of incorporation and bylaws contain provisions that could discourage, delay or prevent a change in control of our company or changes in our management that our stockholders may deem advantageous. These provisions:

	•		authorize the issuance of “blank check” preferred stock by our board that could increase the number of outstanding shares and discourage a takeover attempt;

	•		limit the ability of our stockholders to call special meetings of stockholders;

	•		prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders;

	•		provide that our board is expressly authorized to amend our bylaws, or enact such other bylaws as in their judgment may be advisable; and

	•		establish advance notice requirements for nominations for election to our board or for proposing matters that can be acted upon by stockholders at stockholder meetings.

In addition, certain of our named executive officers and certain other executives have entered into change of control severance agreements, which were approved by our compensation committee. These agreements would likely increase the costs that an acquiror would face in purchasing us and may thereby act to discourage such a purchase.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

SALES OF UNREGISTERED SECURITES

The shares shown as repurchased in the table below were surrendered by Borland employees in order to meet minimum tax withholding obligations in connection with the vesting of an installment of their restricted stock awards. Below is a summary of these transactions for the three months ended September 30, 2007:

ISSUER PURCHASES OF EQUITY SECURITIES


					Total Number of		Maximum Number (or
			Average		Shares (or Units)		Approximate Dollar Value) of
	Total Number		Price Paid		Purchased as Part of		Shares (or Units) that May Yet
	of Shares (or Units)		per share		Publicly Announced		Be Purchased Under the Plans
Period	Purchased		(or Unit)		Plans or Programs		or Programs (1)
Beginning dollar value available to be repurchased as of June 30, 2007							$	59,332
July 1, 2007 — July 31, 2007 (2)		13,331	$	5.76		—		—
August 1, 2007 — August 31, 2007 (2)		10,835	$	4.46		—		—
September 1, 2007 — September 30, 2007 (2)		2,435	$	4.46		—		—

Total shares repurchased		26,601	$	5.11		—	$	59,332

Ending dollar value available to be repurchased under the Discretionary Program as of September 30, 2007 (1)							$	59,332


(1)		In September 2001, our Board of Directors authorized the use of up to $30 million to repurchase shares of our outstanding common stock under a discretionary stock repurchase program (“Discretionary Program”). In February 2004, our Board of Directors authorized an additional $30 million of repurchases under the Discretionary Program, which was announced in our Current Report on Form 8-K filed with the Securities and Exchange Commission, or SEC, on February 4, 2004. In May 2005, our Board of Directors authorized an additional $75 million of repurchases under the Discretionary Program, which was announced in our Current Report on Form 8-K filed with the SEC on May 20, 2005. No shares were repurchased through our Discretionary Program during the three months ended September 30, 2007.

(2)		Consists of shares of restricted stock surrendered by Borland employees in order to meet tax withholding obligations in connection with the vesting of an installment of their restricted stock awards.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to a vote of security holders during the quarter ended September 30, 2007

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

(a) Exhibits

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

Exhibit

Incorporated by Reference

Filed

Number

Description of Exhibit

Form

Date

Number

Herewith

3.1

Restated Certificate of Incorporation of Borland Software Corporation.

10-Q

08/09/05

3.1

3.2

Amended and Restated Bylaws of Borland Software Corporation.

10-Q

08/09/05

3.2

4.1

Stockholder Rights Agreement, dated as of October 26, 2001, between Borland Software Corporation and Mellon Investor Services, L.L.C.

8-A

10/31/01

4.2

Specimen Stock Certificate of Borland Software Corporation.

10-Q

05/13/02

4.1

31.1

Certification of Tod Nielsen, Chief Executive Officer of Borland Software Corporation, pursuant to Rule 13a-14(a).

31.2

Certification of Erik E. Prusch, Principal Financial Officer of Borland Software Corporation, pursuant to Rule 13a-14(a).

32.1

Certification of Tod Nielsen, Chief Executive Officer of Borland Software Corporation, pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350. +

32.2

Certification of Erik E. Prusch, Principal Financial Officer of Borland Software Corporation, pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350. +


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

A copy of any exhibit will be furnished (at a reasonable cost) to any stockholder of Borland upon receipt of a written request. Such request should be sent to Borland Software Corporation, 8303 N. Mo-Pac Expressway, Suite A-300, Austin, TX 78759, Attention: Investor Relations.

EXHIBIT INDEX

Exhibit

Incorporated by Reference

Filed

Number

Description of Exhibit

Form

Date

Number

Herewith

3.1

Restated Certificate of Incorporation of Borland Software Corporation.

10-Q

08/09/05

3.1

3.2

Amended and Restated Bylaws of Borland Software Corporation.

10-Q

08/09/05

3.2

4.1

Stockholder Rights Agreement, dated as of October 26, 2001, between Borland Software Corporation and Mellon Investor Services, L.L.C.

8-A

10/31/01

4.2

Specimen Stock Certificate of Borland Software Corporation.

10-Q

05/13/02

4.1

31.1

Certification of Tod Nielsen, Chief Executive Officer of Borland Software Corporation, pursuant to Rule 13a-14(a).

31.2

Certification of Erik E. Prusch, Principal Financial Officer of Borland Software Corporation, pursuant to Rule 13a-14(a).

32.1

Certification of Tod Nielsen, Chief Executive Officer of Borland Software Corporation, pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350. +

32.2

Certification of Erik E. Prusch, Principal Financial Officer of Borland Software Corporation, pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350. +


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


		PAGE
PART I FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)		3
	Condensed Consolidated Balance Sheets at September 30, 2007 and December 31, 2006		3
	Condensed Consolidated Statements of Operations for the three months and nine months ended September 30, 2007 and 2006		4
	Condensed Consolidated Statements of Comprehensive Income (loss) for the three months and nine months ended September 30, 2007 and 2006		5
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2007 and 2006		6
	Notes to Condensed Consolidated Financial Statements		7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		22
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		33
Item 4.	Controls and Procedures		35
PART II OTHER INFORMATION
Item 1.	Legal Proceedings		36
Item 1A.	Risk Factors		36
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		46
Item 3.	Defaults upon Senior Securities		47
Item 4.	Submission of Matters to a Vote of Security Holders		47
Item 5.	Other Information		47
Item 6.	Exhibits		48
	Signatures		49
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2


Nine Months Ended September 30, 2007	Enterprise			CodeGear		Total


License and other revenues	$	80,366		$	27,632	$	107,998
Service revenues		86,835			12,491		99,326

Total revenues	$	167,201		$	40,123	$	207,324

Operating income (loss)	$	(24,191	)	$	4,826	$	(19,365	)


	BORLAND SOFTWARE CORPORATION (Registrant)
	/s/ ERIK E. PRUSCH
	Erik E. Prusch Principal Financial Officer
	(Principal Financial Officer and Duly Authorized Officer)