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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2002

Commission File No. 0-16096

BORLAND SOFTWARE CORPORATION

(Exact name of Registrant as Specified in Its Charter)

100 Enterprise Way, Scotts Valley, California 95066-3249

(Address of Principal Executive Offices) (Zip code)

(831) 431-1000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

COMMON STOCK, PAR VALUE $0.01 PER SHARE

RIGHTS TO PURCHASE SERIES D JUNIOR PARTICIPATING PREFERRED STOCK

(Title of Class)

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

Indicate by check mark whether registrant is an accelerated filer.  Yes  x    No  ¨

The aggregate market value of the common stock held by non-affiliates of the registrant, based upon the closing sale price of our common stock on June 28, 2002 was approximately $726,548,765. Shares held by each executive officer and director of the registrant and by each person who owns ten percent or more of the outstanding common stock have been excluded from this computation because such persons may be deemed affiliates of the registrant. This determination of affiliate status for this purpose does not reflect a determination that any persons are affiliates for any other purposes.

The number of shares of our common stock outstanding as of February 28, 2003 was 80,305,375.

DOCUMENTS INCORPORATED BY REFERENCE

The following documents (or parts thereof) are incorporated by reference into the following parts of this Form 10-K: Certain information required in Part III of this Form 10-K is incorporated therein from our definitive Proxy Statement for our 2003 Annual Meeting of Stockholders (“Proxy Statement”), to be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after our fiscal year ended December 31, 2002.

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BORLAND SOFTWARE CORPORATION

FORM 10-K

For the Fiscal Year Ended December 31, 2002

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A CAUTION ABOUT FORWARD-LOOKING STATEMENTS

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

These forward-looking statements may relate to, but are not limited to, future capital expenditures, acquisitions, timing of the integration of acquired businesses, the ultimate cost of acquired businesses, revenue “pipeline,” revenues, including revenues from recently acquired businesses, cash flows, earnings, margins, costs, strategy, demand for our products, market and technological trends in the software industry, effective tax rates, interest rates, foreign currency exchange rates and inflation and various economic and business trends. Generally, you can identify forward-looking statements by the use of words such as “expect,” “estimate,” “project,” “budget,” “forecast,” “anticipate,” “goal,” “intend,” “plan,” “may,” “will,” “could,” “should,” “believes,” “predicts,” “potential,” “continue” and similar expressions or the negative or other variations thereof. Examples of sections containing forward-looking statements include the “Strategy,” “Strategy in Depth,” “Our Business and Its Evolution” and other sections of Part I, Item 1, entitled “Business,” and Item 7, entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These forward-looking statements involve substantial risks and uncertainties. Examples of such risks and uncertainties are described under “Factors That May Affect Future Results and Market Price of Stock” and elsewhere in this report, as well as in our other filings with the Securities and Exchange Commission, referred to herein as the SEC or the Commission, 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, which could have a material and adverse effect on our business, results of operations and financial condition. New factors may emerge from time to time, and it is not possible for us to predict new factors, nor can we assess the potential effect of any new factors on us.

These forward-looking statements are found at various places throughout this Form 10-K. 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-K.

GENERAL INFORMATION

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

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

WHERE YOU CAN FIND MORE INFORMATION

You are advised to read this Form 10-K in conjunction with other reports and documents that we file from time to time with the SEC. In particular, please read our Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K that we may file from time to time. You may obtain copies of these reports directly from us or from the SEC at the SEC’s Public Reference Room at 450 Fifth Street, N.W. Washington, D.C. 20549, and you may obtain information about obtaining access to the Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains information for electronic filers (including us) at its website www.sec.gov. We make available free of charge on or through our Internet website located at www.borland.com our SEC filings on Forms 10-K, 10-Q and 8-K and any amendments to those filings as soon as reasonably practicable after electronic filing with the SEC.

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PART I

ITEM 1.     Business

Overview

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

With the compression of business cycles and a challenging economic environment, corporations are increasingly demanding more speed, more reliability and a higher return on investment from the software that facilitates their operations. In this environment of heightened expectations, we believe existing “point solutions” that help developers only with a particular aspect of the application development lifecycle or solutions that rely exclusively on one technology platform are proving inadequate for the complex needs of development teams. To deliver the highest quality software quickly, development teams need a platform independent development solution that helps teams with the major phases of the application development lifecycle—definition, design, development, testing and deployment—and that helps teams manage software configuration.

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

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

We support our growth strategy through focused sales and marketing efforts and through particular attention to our research and development activities.

Industry Background

Businesses are utilizing technology to maximize the productivity of their companies. As a result, a company’s operational success can depend on the strength of its information technology assets, particularly its software. In such an environment, the ability to develop and implement productivity-enhancing software efficiently becomes increasingly important.

Traditionally, software developers designed, coded and deployed products without properly focusing on design parameters, without ensuring that the software was sufficiently well-coded for the task being addressed and without testing adequately to ensure that it was ready for deployment. As a result, many software implementations were never completed and attempts at implementation have resulted in a drain on developer resources as they attempt to fix these inherent deficiencies. We believe that such time-intensive, frustrating and costly processes are not practical in today’s economic environment. Speedy and effective development of applications becomes vital when productivity-enhancing applications are needed to counter the effects of changing business conditions or emerging competitive threats.

To assist in the development process, developers initially turned to multiple, non-integrated development tools that helped with discrete aspects of the definition, design, development, testing, change management and deployment of software. Unfortunately, software application development is growing increasingly complex due to shifting standards and increasing requirements, and enterprises are increasingly operating in heterogeneous computing environments. As a result, enterprises are demanding development software that simplifies these complexities, reduces the time-to-market of deploying applications across multiple platforms and causes minimal disruption to an organization. In this environment, we believe existing development software that focuses on a particular aspect of the application development lifecycle or a particular architecture will fail because it does not fully support the complex needs of an enterprise’s developers. We further believe that technology that simplifies and automates the application development lifecycle is invaluable because it allows enterprises to produce and install robust, productivity-enhancing applications in a timely and efficient manner.

In today’s difficult economic times, enterprises are also focused on maximizing the value that they can mine from their existing information technology investments. To do so, developers must integrate and enhance the scalability, reliability and manageability of existing information technology and utilize it when introducing new

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technology platforms. However, this process is among the most complex and costly parts of the software implementation. As a result, developers need application development software that re-purposes existing software code for deployment to these new platforms and that maintains and integrates legacy client-server software and hardware architecture. We believe that technology facilitating interoperability between new platforms and functioning legacy systems helps companies overcome these challenges.

Finally, the growth and expansion of the Internet has further increased the pressure on enterprises to implement new software applications quickly. The Internet has also increased the challenges involved in doing so. The Internet gives corporations the flexibility to revise their products and service offerings frequently and allows organizations to keep up with the growing and changing needs of their customers. However, applications that utilize the benefits of the Internet, known as e-business applications, need to be integrated with existing systems and data. Unfortunately, the programming languages best adapted for the creation of e-business applications, particularly modular or object-oriented programming languages such as Java, are sophisticated, and many developers lack the requisite skills and tools to use the power of these languages. As a result, to effectively exploit the promise of the Internet, enterprises need technology that simplifies and automates the process of creating and deploying e-business applications.

Several other emerging trends further highlight the need for technology that helps streamline the application development lifecycle for enterprises:

In this environment, we believe enterprises need application development solutions that:

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Our Integrated Solution

Our integrated suite of products is designed to assist in the rapid and effective development and deployment of software applications critical to our customers’ businesses. We believe our platform-independent solutions maximize development team productivity, ensure higher-quality code and increase the value that enterprises can mine from their existing technology infrastructure. Our integrated development solutions are designed to address the various dimensions of an application’s lifecycle—definition, design, development, testing and deployment—in one cohesive environment, and to provide valuable SCM capabilities.

Definition Products.    CaliberRM is our web-based requirements management system that manages the evolution of product requirements as well as the relationship between requirements and documentation, tests, models and code. Once the requirements are captured in CaliberRM, the development, documentation, test creation and project management processes can begin in parallel.

Design Products.    Our Borland Together family of products provides the modeling capabilities to help simplify the application development lifecycle. Borland Together ControlCenter’s, or TCC’s, simultaneous round-trip technology is designed to ensure that changes made to application code are immediately reflected in visual model designs. This enables developers to collaborate across modeling and code development disciplines, which we believe improves productivity, reduces development time and improves the quality of applications. Deployable on most leading platforms, including IBM WebSphere, BEA WebLogic, Sun Solaris, Apple Mac OS X and Jboss, TCC also performs integrated model-to-code audits that allow developers to build maintainable and higher-quality code.

Development Products.    For the development phase, we offer our JBuilder, Delphi, Kylix and C++Builder integrated development environments, or IDEs, each focused on a different platform (Java, Windows/.NET, Linux and C++, respectively). Our IDEs are designed to provide easy-to-use aides, templates and utilities for developers to rapidly build and troubleshoot complex software applications.

JBuilder is a leading cross-platform environment for building industrial-strength Java applications. JBuilder is designed to speed the development of Java 2 Enterprise Edition, or J2EE, applications, deliver web applications faster, increase code reliability and develop and deploy applications on Windows, Linux  or Solaris platforms.

Delphi is our development environment that is designed to provide fast delivery of high quality Windows applications.

Kylix is a leading Linux IDE. Kylix is equipped with C++ and Delphi languages to allow developers  to build rapid application development, or RAD, solutions and to port those applications cross-platform to Linux.

C++Builder is our C++ language development environment that is designed to provide American National Standards Institute, or ANSI, standard development of high-quality Windows applications.

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Testing Products.    Our Optimizeit suite of performance management solutions is designed to improve the quality of the code developed by providing profiling and memory debugging to help eliminate performance bottlenecks, thread debugging to detect code deadlocks and stalls, and code coverage to locate untested code and identify and remove dead code. Recently, we have introduced Optimizeit ServerTrace, our pre-deployment phase testing solution, that is designed to allow customers to identify performance hazards before they impact business operations.

Software Configuration Management Products.    To manage the particular tasks of the application lifecycle, we offer our customers StarTeam, a leading SCM and change management solution that brings the application development lifecycle into a single repository. It includes version control, branching, resource allocation, threaded conversations and defect tracking capabilities. With its web-based architecture, data encryption and compression capabilities, StarTeam is a scalable solution that we believe is well-suited for distributed development teams.

Deployment Products.    We provide our customers with solutions that help them deploy and manage their e-business applications by providing them with embedded databases and allowing personal digital assistants, or PDAs, and other devices that incorporate embedded computers to be integrated with enterprise applications. Our deployment solutions include VisiBroker, our solution for distributed object computing, VisiBroker-RT, our Common Object Request Broker Architecture, or CORBA, solution for embedded applications, Borland Enterprise Server, our high-performance family of application servers for the deployment and integration of e-business applications within distributed networks, and JDataStore and InterBase, our small-footprint embedded databases.

Key strengths and benefits of our integrated solution include:

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Our Business and its Evolution

As a leading global provider of technology for the application development lifecycle, our goal is to provide enterprises with the tools to gain a competitive advantage by accelerating the time-to-market of their applications and reducing the cost of development. By delivering integrated technology solutions that are designed to bridge the technical gaps between development functions, we seek to enable our customers’ development teams to work in an iterative, collaborative style.

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Throughout our history we have shown a long-standing commitment to delivering effective and dependable application software development products. We have pioneered many new product categories and have continually refined our technology and offerings to meet the evolving demands of businesses. Below is a list of some of our major achievements in software development over the last twenty years:

We believe this history of technological leadership and our consequent relationship of trust with the development community provides us with an opportunity to provide enterprises with solutions that help interdisciplinary development teams to develop better software applications faster.

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Strategy

Our goal is to become the leading provider of technology solutions for the rapid and effective development and deployment of software applications, particularly in areas such as Java, .NET, C++ and wireless and mobile computing. Key elements of our strategy to achieve this goal include:

Strategy In Depth

The following is a detailed overview of our strategy:

Delivering comprehensive solutions to large enterprises.    With comprehensive solutions designed to simplify and automate the critical phases of the application development lifecycle and provide valuable SCM capabilities, we believe we have a significant opportunity to market our solutions to major global enterprises. With our strong position in the IDE market together with the strength of the architecture of our products, we believe we have key strategic opportunities for capturing more of the enterprise customer development market. First, a number of major global enterprises are already using our IDEs. As a result, we already have strong relationships with various global enterprises. Second, as the application development lifecycle is increasingly compressed, the tight integration between our definition, design, development, testing, change management and deployment solutions is increasingly attractive to enterprises. Third, only a handful of our infrastructure competitors also offer high-performance IDEs. Relative to those few major competitors that do offer high-performance IDEs, we pride ourselves on our products’ ability to integrate smoothly into existing environments. As a result, we believe we are in a position to obtain a critical foothold through our IDEs, even if an enterprise is not yet prepared to upgrade their remaining application infrastructure software.

Elements of our comprehensive strategy to continue to successfully market the range of our products into large enterprises involve:

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Increasing our leadership in the Java market.    We intend to grow our revenues by focusing on Java and Java-based development technologies. For some time, we have been a leading provider of development solutions for Java, specifically our JBuilder IDE. Recently, we strengthened our position in the Java market by integrating JBuilder with Together ControlCenter’s leading design capabilities. If we continue to enhance JBuilder’s performance and functionality and leverage our strong reputation in the developer community, we believe we can extend JBuilder’s leadership position in this market as well as capture additional Java developer seats. According to a Fall 2002 survey by Evans Data, an independent research firm, the number of Java developer seats is expected to increase to 61% of developers in North America and 52% of developers internationally. In addition, based on our experience, numerous existing Java developers often do not use any development technology at all. We believe these developers would experience dramatic improvements in efficiency and time-to-market using JBuilder’s integrated suite of productivity tools and wizards. We believe that our suite of tools helps solidify our Java development leadership relative to the current competition, none of whom we believe can deliver a solution that meets the needs of the entire application development lifecycle in the way that we can.

The fact that Java and Java standards are still evolving is, we believe, a critical advantage for us as we target the broader Java implementation market. We plan to leverage our development expertise to spur demand throughout our comprehensive product line. While high-quality upgrades of JBuilder will be needed to allow developers to capture the benefits of the language’s evolving standards and usability, effectively using these new Java applications will require products and upgrades throughout the lifecycle, including tightly-linked deployment products facilitating front- and back-end integration. For example, the recent emergence of Jakarta Struts as an advanced web development paradigm gives us the opportunity to extend the appeal of JBuilder and license additional upgrades to JBuilder 8 Enterprise edition. We envision a future in which implementation technologies will be necessary to support Java development and deployment to a wide variety of future devices and appliances. We believe our active influence on Java’s evolution and direction through our participation in key Java industry groups, including as an executive member of the Java Community Process, or JCP, will help us shape this future and benefit from Java’s spread and proliferation through our product line.

Developing leading solutions for the .NET platform.    A key part of our strategy is to develop solutions for the .NET platform. The emergence of the .NET platform as Microsoft’s enterprise managed code platform alternative to Java and the continued adoption of C# as an important language for .NET development has created the need for products that address each of the key steps in the software application development lifecycle for the .NET platform. Not only will development tools be required by enterprises, but so too will testing, design and modeling tools that increase efficiency and time-to-market. We are currently beta testing our C# development environment for the .NET platform. In addition, we have released Optimizeit Profiler for ..NET, a testing product for the .NET platform. To develop application lifecycle solutions for the .NET platform, we are focused on enhancing our strategic relationship with Microsoft, and we will continue to invest in research and development efforts related to solutions for the .NET platform.

Increasing the integration of our suite of products. We are committed to constantly improving the level of integration of our products to offer our customers a more deeply connected solution. Presently, we offer our customers solutions in which our products are aware of one another and to some extent automatically synchronize with one another. In the future, we intend to integrate our solutions so that the discrete projects appear to be one on the desktop, and ultimately, to integrate our solutions to a level that delivers new features not before possible. We believe our ability to constantly improve the level of integration of our products will create a

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superior user experience for our customers, and, as a result, create even greater loyalty among our customers and drive new customers to our solutions.

Promoting platform independence and interoperability.    Our focus on Java development solutions underscores our commitment to technology independence, as Java applications run on most major operating systems with little additional configuration. In addition, we have designed and will continue to develop solutions for Linux and Microsoft’s .NET platform. By supporting all major platforms, we believe we maximize our opportunity for success regardless of which programming platforms or operating systems emerge as market leaders. Databases from Oracle, Microsoft, Informix, IBM, Sybase and others are accessed through our development solutions. Applications can be developed for, and deployed to, application servers from BEA Systems, Microsoft, Sun, Oracle, Sybase and Apache. By facilitating cross-platform development and interoperability, we are positioned to profit from applications that are developed and deployed on new platforms. We believe that products that facilitate cross-platform development and interoperability represent a key revenue opportunity in the future, and we intend to take advantage of this opportunity.

Capitalizing on the strength of the “Borland” brand and our worldwide distribution network to sell our new solutions to a broader base of potential customers.    Constant attention to our installed developer base and their basic needs is the reason we believe the Borland brand is among the most respected brands known to software professionals worldwide. We believe that Borland stands for quality, performance and innovation. We believe our brand also stands for solutions that enable developers to increase productivity and deliver high-performance projects faster and on budget. A critical underpinning of all elements of our strategy—whether delivering high quality product upgrades to our installed base, selling new solutions that we recently introduced or providing comprehensive applications lifecycle management solutions to large global enterprises—is to capitalize on the “Borland” brand.

Specifically, we believe we have a significant and emerging opportunity to further capitalize on the strength of our brand in the international market. This is particularly true as our core vertical markets—trained professionals in industries such as high technology, financial services, telecommunications and government contractors in the areas of space and defense—naturally expand with growth and economic development and/or changes in the geopolitical environment. While our international sales were $152.8 million in 2002, accounting for 62% of our revenue, international sales of our newly-acquired products, StarTeam and CaliberRM in particular, have been low historically. We intend to continue to focus aggressively on global markets and to promote our newly-acquired products in these markets to grow our international sales. We are also seeking to develop close relationships with foreign governments that we believe view adoption of IDEs, such as JBuilder or Kylix, in their countries as important to increasing the productivity and size of their developing high technology industries. Finally, we are also proactively working to augment opportunities in potentially large international markets by providing key underlying infrastructure and professional training. To that end, in January 2002, we acquired Advanced Training Center Ltda., or ATC, a Brazilian IT training company, to enhance our software development presence in the Latin American market.

Focusing on the needs of our installed base.    Our strategic focus on the large enterprise market does not mean we will overlook our core individual developer constituency. To the contrary, we intend to continue to nurture and grow this community—known as the Borland Developer Network—which we believe is among the most loyal and extensive installed bases in the software industry. The basic requirements of the Borland Developer Network are dependable high performance products that improve developer productivity and efficiency. In order to maintain and grow the Borland Developer Network, we listen carefully to its members and address their needs. We facilitate responsiveness to the Borland Developer Network through dedicated personnel—such as our Vice President of Developer Relations, David Intersimone—as well as through our community website and our annual user conference, “BorCon.” We also develop products centered around emerging technologies, as well as timely, dependable upgrades to our existing products, particularly Delphi and JBuilder. In 2002, we introduced 15 new products or upgrades, significantly enhancing the quality and flexibility of our existing technologies. We intend to continue to focus on improving the performance of our products in

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order to best serve these loyal customers and grow our revenues. For example, we have released Borland C++ Mobile Edition to support development to Symbian-based mobile phones, and we are currently beta testing a new C++ development solution to support the Microsoft .NET platform. In addition to giving us access to the ideas and creativity of a wide range of talented developers, we believe this focus on our installed base actually furthers our enterprise strategy. As members of the Borland Developer Network take positions in Fortune 1000 enterprises, our goal is for them to introduce the Borland products they are committed to and are trained on into the enterprise. We believe this “bottom-up” approach seeds the enterprise and provides a key advantage over our competitors as we simultaneously pursue a “top-down” enterprise-level direct sales strategy.

Recent Acquisitions and Other Initiatives

Our growth strategy depends on our ability to develop solutions that are increasingly integrated with one another, solutions that expand the breadth of support we provide to the development community and solutions for changing technology standards. To speed this growth, we have engaged in a number of acquisitions and continued our initiatives in support of wireless and mobile computing as well as Web Services.

Acquisitions.    In 2002, we advanced our objective of providing our customers with more complete, more robust development solutions by acquiring companies whose products extend the breadth of our application lifecycle solutions. In 2002 and early 2003, we completed the acquisitions of VMGear, BoldSoft, Starbase and TogetherSoft. Through these acquisitions, we were able to broaden and strengthen our product suite in the areas of performance assurance, requirements management software modeling and SCM, and we believe that these acquisitions fit squarely within our value proposition of increasing developer efficiency and productivity.

TogetherSoft. With our acquisition of TogetherSoft Corporation, or TogetherSoft, in January 2003, we are able to provide interdisciplinary development teams critical software design and analysis technology. By combining these solutions with Borland’s development solutions, we believe our combined solutions will enable developers to create complex business applications more rapidly.

Starbase. With the acquisition of Starbase Corporation, or Starbase, completed in January 2003, we acquired a leading requirements management technology that provides development teams with the requirements definition and management capabilities at the earliest project phases. We also acquired a change and configuration management technology that provides the change, versioning, configuration and audit capabilities that we believe developers need.

BoldSoft. Our October 2002 acquisition of certain assets of BoldSoft MDE Aktiebolag, or BoldSoft, is designed to accelerate our position as an independent path to the Microsoft .NET platform by adding design-driven development products that map the business model to a relational database and intuitively link modeling to the applications design environment with the goal of reducing total cost of ownership, speeding delivery of software and maintaining design integrity throughout the development process.

VMGear. Our January 2002 acquisition of Redline Software, Inc., also known as VMGear, allowed us to extend our footprint into another phase of Java application lifecycle management—performance assurance tools—as well as strengthen our Java research and development capabilities. Performance assurance differs from de-bugging in that it provides real time interactive analysis of the developer’s code, and proactively searches for and addresses bottlenecks. By giving developers this capability, VMGear’s Optimizeit technology enhances the performance of our IDEs, and we believe, directly supports the enterprise penetration potential for JBuilder.

In the future, we intend to consider additional acquisitions of technologies that we believe improve the range and depth of our application lifecycle solutions. We intend to focus on those strategic acquisitions that will provide us access to promising and complementary new technologies, research and development talent and potentially large customer bases, as well as those which could leverage the “Borland” brand and meet our strategic objectives.

Wireless and Mobile.    Through recent product introductions and relationships with leading technology companies, we have also extended our reach and expertise into the emerging field of mobile and wireless

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application development. While initially slow to grow, we believe that in the future wireless applications will grow in significance and impact. With increasingly sophisticated applications extended to mobile and wireless devices, we believe additional services and more compelling user experiences will increasingly be provided to consumers. In addition, enterprises are seeking to increase employee productivity by extending data and applications to mobile and wireless devices.

The complexity and variety of mobile devices now emerging is, we believe, an advantage for us, as we leverage our development expertise to provide the products that allow developers to concentrate on rapidly creating compelling applications rather than on the intricacies of the devices on which those applications will run. Consistent with our strategic focus on platform neutrality and interoperability, our goal is to provide development environments across the multiple mobile and wireless platforms now emerging, including Microsoft’s Windows CE, Symbian, RIM Wireless Handhelds, Palm, Linux and others. We initially focused our product introductions for wireless applications on the Java market because Java is an open-standard and robust platform well-suited for enterprises seeking to quickly and efficiently implement and distribute mobile services. Specifically, the Java 2 Platform, Micro Edition, or J2ME, platform and its related programming specification for user interface, networking, and messaging support, the Mobile Information Device Profile, or MIDP, allow developers to create small and efficient applications for portable devices, often reusing existing Java code, while providing applications for multiple devices. By targeting the wireless market in Java, we also believe we can further increase the installed base of JBuilder and for our Java-based products, including our deployment products.

In November 2002, we announced Borland C++ Mobile Edition, which extends our C++Builder to the emerging mobile device market. Jointly developed with Nokia and designed to integrate seamlessly with all editions of C++Builder 6, Borland C++ Mobile Edition provides our C++ customers with an integrated development environment to speed the creation, testing and deployment of applications for the emerging mobile device market. Borland C++ Mobile Edition enables developers to rapidly produce C++ applications for the Nokia Series 60 Platform, which runs on the Symbian OS, an operating system for advanced, data-enabled mobile phones.

Web Services.    In 2001, we announced our commitment to the emerging Web Services architecture and standards. Web Services are business processes that can be accessed and run over the Internet using pervasive, standards-based technologies. Using Web Services, all elements of the business supply chain—employee, customers and suppliers—can be connected seamlessly, efficiently and flexibly. Web Services interconnect applications from completely different hardware platforms, such as mainframes, application servers and web servers. Web Services also support connections among disparate software platforms, such as Windows, Linux, Java and Unix. As a leader in application development products and platform-independent technologies, we believe we are well positioned to enable the development of Web Services and therefore to promote and profit from adoption of this promising technology. In particular, since major commercial proprietary platform vendors have incorporated Web Services as parts of their overall strategies—Microsoft’s .NET and Sun Microsystems’ ONE—we believe we have a significant market opportunity to leverage our cross platform strengths to permit the sharing of Web Services between developers on both of these platforms. Gartner Group estimates that nearly 50% of all future enterprise projects will involve both Java and .NET. All major Borland development and deployment products currently support both Java and .NET interoperability through Web Services.

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Products and Services

We offer leading products and services for addressing the major phases of the application development lifecycle. We strive for innovation, quality, performance, ease of use and interoperability in each of our products. We believe our products provide key pieces necessary for enterprises to rapidly and effectively implement applications critical to their business. Following is a list of the various phases of the application development lifecycle and our products that address them:

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

The following are descriptions of our key product offerings:

Definition

CaliberRM.    CaliberRM is our web-based requirements management system that manages the evolution of product requirements as well as the relationship between requirements and documentation, tests, models and code. Once the requirements are captured in CaliberRM, the development, documentation, test creation and project management processes can begin in parallel. With CaliberRM, requirements volatility is made evident, teams can avoid working from stale requirements, developers avoid costly and time-consuming rework, and, as a result, developers can build the correct features to meet business needs faster. Designed to work in an Internet-centric world, we believe CaliberRM is well equipped for distributed development teams. Adopted by organizations worldwide, CaliberRM is designed to be easy to use, process agnostic and easily configured to meet the process needs of any organization, without the need to learn proprietary scripting languages. CaliberRM is a standards-based product featuring traceability and a software developers kit that can be accessed using Java, COM or .NET.

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Design

Our Borland Together family of products provide developers with integrated modeling and coding of software applications, consisting of Together Edition for JBuilder, Together ControlCenter, Together Solo and Together Edition for WebSphere Studio.

Together Edition for JBuilder.    Together Edition for JBuilder helps teams accelerate the application development lifecycle by integrating our market-leading JBuilder development environment with a design- centric solution designed to visually model software, measure quality and improve team productivity. Designed to visually connect end users, architects and developers, Together Edition for JBuilder is engineered to increase the speed of development, automate tedious tasks that can distract developers from coding and help identify performance issues early in development, when they are easier and less costly to address.

Together ControlCenter 6.0.    Together ControlCenter, or TCC, is an application development environment that encompasses design, development and deployment. The environment combines UML-based application modeling with a full-featured IDE for creating and deploying applications. By providing these capabilities within a single product, we believe development organizations can realize enhanced productivity and quality application design, development and deployment. TCC is well known for its simultaneous roundtrip engineering, extended refactorings, robust pattern support, integrated quality assurance support (including audits and metrics), automatic migration between application servers and up-to-the-minute documentation generation. TCC is designed to enable development teams to employ sophisticated and agile software development methods such as Extreme Programming, Feature Driven Development and Rational Unified Process for fast development.

Together Solo 6.0.    Together Solo 6.0 is a subset of the flagship TCC product. Together Solo’s target market is the small development team. Together Solo includes the non-enterprise features of TCC, such as UML diagram editor, programming editor, patterns and simultaneous round-trip engineering for Java, C++, C#, Visual Basic 6, Visual Basic .NET and IDL.

Together Edition for WebSphere Studio 6.0.    Together Edition for WebSphere Studio 6.0 extends the IBM WebSphere Studio enterprise development environment by adding stronger modeling capability and providing an integrated model-build-deploy solution for IBM users from within the WebSphere framework. The Together Edition for WebSphere Studio integrates the analysis, design, implementation, testing and deployment of complex enterprise applications, creating an extended environment that leverages IBM technology. Together Edition for WebSphere Studio is designed to enable developers to more efficiently collaborate and improve the quality of enterprise class applications with real-time synchronization between models and code and a common interface for IBM teams. Furthermore, Together’s modeling technology and pattern support are designed to enable reuse for future projects, increasing overall team productivity.

Development

JBuilder Family

JBuilder.    JBuilder is our award winning comprehensive set of visual development tools and wizards that enable programmers to rapidly deliver reliable and scalable applications written entirely in the Java programming language. JBuilder supports the latest Java technologies and standards, including applets, servlets, JavaBeans, EJB, Jakarta Struts and distributed CORBA applications for the Java 2 platform. JBuilder features a two-way visual designer to enable developers to easily create conventional and Enterprise JavaBeans based on an application’s design. Other features include a project manager, code editor, advanced debugger and rapid compiler. JBuilder also includes an extensible team development environment that simplifies the concurrent management of source code for large distributed teams.

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Java technology continues to evolve and new standards continue to emerge from the Java Community Process as well as from evolving needs for tools support as the uses of this technology progresses. In November 2002, we began shipping JBuilder 8. Specific new standards and technologies supported by JBuilder 8 include:

The success of JBuilder has been based upon many factors, including the support for many operating systems and software platforms. JBuilder 8 continues this approach by extending support for application servers to include:

We believe the primary reasons customers purchase software development tools is to increase developer productivity. JBuilder continues to increase developer productivity with the following features:

Borland Enterprise Studio for Java.    Borland Enterprise Studio for Java is our enterprise-focused suite combining capabilities for modeling, development and deployment of business and e-commerce solutions. It includes JBuilder as its core technology. Borland Enterprise Studio for Java combines JBuilder with the design and modeling capabilities of Together and the performance tuning capabilities of Borland Optimizeit Suite for Java. Borland Enterprise Studio for Java also includes a development license of Borland Enterprise Server. We believe the inclusion of Borland Together in this product marks a major step forward in integration, functionality and overall ease of use for Borland Enterprise Studio for Java.

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Web Services Kit for Java.    In 2001, we introduced our Web Services Kit for Java as a plug-in to JBuilder, for SOAP, Universal Description, Discovery and Integration, or UDDI, and Web Services Description Language, or WSDL, implementations. The kit includes wizards to generate Java code from WSDL and to generate WSDL from Java code, a UDDI Explorer and deployment support to expose Web Services using Tomcat and the Apache Axis implementation of the SOAP standard. The UDDI Explorer allows developers to browse UDDI servers to find appropriate Web Services to consume. The kit does not require a separate runtime environment.

JBuilder MobileSet.    Fully integrated with JBuilder, JBuilder MobileSet is a J2ME-compliant IDE for Java-enabled mobile and wireless devices. Together, JBuilder and JBuilder MobileSet include visual design tools for creating mobile applications, device emulation and debugging, as well as all of the standard features offered with JBuilder. The MobileSet development environment facilitates the building of J2ME applications using the MIDP and CLDC platforms. These platforms together provide a complete J2ME application runtime environment targeted at mobile devices such as phones and PDAs. In June 2002, we introduced JBuilder MobileSet 3, which includes support for Sprint PCS Wireless Toolkit in addition to devices supported by Nokia and Siemens.

Delphi, Kylix and C++Builder

Delphi.    Delphi is a high-performance RAD solution used to develop and deploy cross-platform Windows/Linux GUI, database, web server, and Web Services applications. Providing developers with a number of powerful, standards-based tools to control and deliver business data, Delphi combines visual productivity tools, a component library and a high-performance compiler, designed to enable software developers to build high performance software applications faster than with conventional programming tools. Developers can build, customize and reuse components, or choose from over 300 different components in the Delphi Visual Component Library, or VCL. Delphi also includes ready-to-use Internet components to build Internet functions such as web, ftp, mail and newsgroups into an application. In May 2002, we began shipping Delphi 7 Studio. Key features of Delphi 7 Studio include:

Kylix.    Kylix is a leading Linux IDE for building RAD solutions for the Linux operating environment. The Kylix development environment integrates application design and development in a manner designed to enable the creation of sophisticated Linux applications faster. Kylix is designed to allow developers to move from prototype to production quickly with a unique combination of integrated features including visual design tools, the Component Library for Cross-platform development, or CLX, an advanced code editor and a fully-integrated graphical debugger. When paired with Delphi or C++Builder 6, Kylix users can build single-source applications for both Windows and Linux. Kylix’s CLX also allows applications to compile as easily for Windows (using Delphi or C++Builder 6) as for Linux (using Kylix 3). In August 2002, we began shipping Kylix 3. Key enhancements in Kylix 3 include:

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C++Builder.    C++Builder delivers REAL ANSI/ISO C++ for the power and performance we believe developers need to build and deploy cross-platform Windows/Linux GUI, database, web server and Web Services applications that simplify e-business integration across diverse platforms among customers, suppliers, business partners and employees. C++Builder combines visual productivity tools, a component library and a high performance compiler designed to enable software developers to build e-business applications more quickly than with conventional programming tools. As part of our relationship with Nokia, in 2002 we released Borland C++ Mobile Edition, a C++ development environment for Nokia’s Series 60 Platform Symbian OS-based mobile platform. Also in 2002, we added Kylix 3 to C++Builder 6, now referred to as C++Builder 6 Studio. Selected features of C++Builder 6 Studio include:

Testing

Optimizeit.    Our Optimizeit Suite of performance assurance solutions is a complete performance management solution for Java. Integrated with JBuilder, Optimizeit is designed to assure a broad range of functionality, including profiling and memory debugging to eliminate performance bottlenecks and loitering objects in Java code; thread debugging to detect code deadlocks, stalls and race conditions; and code coverage to locate and measure untested Java code and identify and remove dead code. The highly scalable, easy-to-use assurance suite integrates with Borland Enterprise Server and other leading Java application servers and development environments, including the J2EE and J2SE platforms. Our Optimizeit suite of products also includes Optimizeit ServerTrace, which is designed to streamline performance management during testing in preparation for deployment of applications for the J2EE platform.

Software Configuration Management (SCM)

StarTeam.    StarTeam is our change management and SCM solution that brings the development lifecycle into a single repository. StarTeam’s central repository nature ensures that all team members have access to the latest version of the asset and allows security and change control processes to be imposed. It includes version control, branching, resource allocation, threaded conversations and defect tracking capabilities. We believe its web-based architecture supporting TCP/IP communication for all server access, data encryption and compression capabilities makes StarTeam well suited for distributed development teams. StarTeam is designed to offer a superior user experience by facilitating communication among project teams and providing users with several different client interfaces to support varying user skills and responsibilities. With its support for workflow definition and custom forms, StarTeam enables information visibility and access to be controlled by user roles, thus enforcing a specified approval process. StarTeam integrates with many technologies used to support the application development lifecycle and enables team members to work in their familiar environment without the need to buy or learn additional tools. StarTeam is compatible with the Microsoft Source Code Control interface and works seamlessly with many solutions that support this API, including JBuilder, Delphi and C++Builder.

Deployment

Borland Enterprise Server.    Our Borland Enterprise Server family of application servers is designed to offer enterprises the functionality to effectively and reliably manage e-business application implementations. The Borland Enterprise Server family includes our AppServer Edition for the large-scale EJB-centric application

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deployments, as well as our mid-level VisiBroker Edition for distributed objects computing and entry level Web Edition. The Borland Enterprise Server family integrates with JBuilder, our market leading IDE for Java. In January 2003, we released Borland Enterprise Server 5.2, which includes support for JDK 1.4.1, JDK switching to improve flexibility in deployment environments, automation of manual deployment tasks through the addition of a management shell, improved integration with JBuilder, enhanced Container Managed Persistence 2.0 to reduce the amount of code that developers are required to write and maintain, and simplified debugging of threads.

Borland Enterprise Server, AppServer Edition.    The core of Borland Enterprise Server is an application server we formerly marketed as Borland AppServer. Borland AppServer was the industry’s first application server product to combine the benefits of J2EE, EJB and CORBA. The highly scalable product provides a foundation for deploying enterprise grade applications. It includes support for distributed transactions, security and messaging in combination with clustering, load-balancing and fail-over capabilities. Unique features include advanced Application Server Partitioning technology, which enables a server to run multiple application instances while optimizing the resources to run each program individually, and an innovative EJB container. Based on CORBA, Borland Enterprise Server, AppServer Edition, integrates heterogeneous back-office systems comprised of enterprise resource planning, supply chain, database management and legacy systems.

Borland Enterprise Server, VisiBroker Edition.    Borland Enterprise Server, VisiBroker Edition, is a complete CORBA runtime and support environment for developing, deploying and managing distributed, interoperable enterprise applications. The product is founded on VisiBroker, our award-winning Object Request Broker, or ORB, and is based on CORBA, which is intended to facilitate development and deployment of distributed enterprise applications that are scalable, flexible and easily maintained. Borland Enterprise Server, VisiBroker Edition, enables web clients to communicate with software modules, known as objects, written in different programming languages running on different platforms. Using this product, developers can develop in either C++ or Java, and all product features are compliant with CORBA 2.4. VisiBroker Edition provides the option to license advanced security features based on industry standards. VisiBroker Edition includes the functionality of our Web Edition with additional CORBA connectivity.

Borland Enterprise Server, Web Edition.    Borland Enterprise Server, Web Edition is our web application server based on the Apache 1.3 Web Server, for effective and reliable deployment of Servlet and JSP applications. It includes Borland-enhanced versions of the Apache Web Server and the Tomcat Web Container, as well as our own JDataStore, a Java database, for caching, session management and general database needs. This provides load balancing and fault tolerance in a deployment environment for JSP/servlets, web applications and Web Services developed with Delphi.

Borland Software Platform for J2EE.    Borland Software Platform for J2EE, an enterprise-targeted implementation solution combines Borland Enterprise Studio for Java and Borland Enterprise Server. The Borland Software Platform for J2EE provides our customers with a complete solution for the development and deployment of large-scale enterprise and e-business applications.

VisiBroker-RT.    Borland VisiBroker-RT is a complete environment for developing and deploying distributed, embedded computer-based applications, including communications equipment, defense electronics, medical instrumentation and manufacturing systems. VisiBroker-RT is designed to accelerate the development of applications that incorporate multiple embedded processors and provide integration between embedded software and CORBA-compliant applications running on general-purpose systems. When combined with Borland Enterprise Server, VisiBroker-RT provides support of organizations with heterogeneous applications, as both provide the same development tools, programming interfaces and high availability infrastructure, which allows code to be shared across embedded and enterprise systems and developers to easily move among application environments.

InterBase.    InterBase is a high-performance SQL database designed to be embedded into applications running on the Windows, Linux and Solaris platforms. InterBase provides relational database solutions to meet

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the embedded database needs of value-added resellers and application developers. Selected new features of InterBase 7.0 include symmetric multiprocessor, or SMP, support for both clients and servers designed to exploit SMP hardware by running InterBase threads on all processors simultaneously for increased throughput and performance, the ability to capture monitoring and transaction statistics that are made available in a set of global system temporary tables, support for longer metadata names to enable longer table names and adherence to the Sun Type 4 JDBC standard to ease deployment for application administrators.

JDataStore.    JDataStore is a database management system written entirely in Java. It is designed to offer true platform independence and scalability in a fully integrated development environment. JDataStore features replication/synchronization with any database, SQL and direct navigational access, as well as transaction management and crash recovery. Delivering high performance, a small footprint and very little administration, JDataStore is suitable for embedded, web and mobile database applications.

Professional Services

In addition to our award winning products, we offer consulting, training and certification services, as well as comprehensive technical support capabilities. Service offerings provided by our Professional Services Organization include:

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

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

Support services.    We provide a wide range of support services covering application development, deployment and integration issues. We offer such services on site or through the telephone or the Internet from our three major worldwide support centers in the U.S., Singapore and the Netherlands. Customers can choose the adequate level of support for their business, from personalized support for corporate needs to minimum assistance levels for small businesses. Qualified technical support engineers are prepared to handle support needs on a case-by-case basis or on an ongoing relationship with our customers.

Certification services.    Our certification program permits individuals and companies to become Borland Product Certified or a Certified Borland Instructor. The Borland Product Certification Exam tests for knowledge of a Borland product’s features and associated technologies and their use in developing software applications. The exam concentrates on the features of the product’s core language, integrated development environment, visual components, debugging techniques or development of deployment products.

Product Awards and Honors

The following are some of the awards and honors we have received for our products over the last three years:

Borland Together:

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JBuilder:

Borland AppServer:

Borland Enterprise Server:

Delphi:

Kylix:

VisiBroker:

Optimizeit:

Customers

Our customers range from leading Fortune 1000 companies worldwide to individual developers. In particular, we target the enterprises in the following industries: financial services, high technology, government contractors in the areas of space and defense and telecommunications. We believe that our customers in these markets turn to us because of the performance benefits of our products, including their scalability, extensibility and reliability. Also, we maintain a listing on the United States General Services Administration schedule. As a result, we specifically target the public sector market, where we believe the market opportunity for our products may be significant. We also intend to target other vertical markets where our extensive relationships can be leveraged effectively.

As we generally ship products upon receipt of orders, our backlog is neither significant nor do we believe it will be detrimental to our future revenues. Ingram Micro, a distributor, accounted for approximately 12%, 13% and 12% of our total net revenues for the years ended December 31, 2002, 2001 and 2000, respectively. No other

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customer accounted for over 10% of revenue in 2002, 2001 or 2000. We have a number of separate agreements with various regional Ingram Micro distributors to act as a distributor of our products to resellers. Each agreement is non-exclusive. The agreements generally renew on an annual basis unless prior notice is given.

Strategic Alliances and Technology Relationships

We have strategic alliances and technology relationships with many leading technology companies, including co-marketing, licensing, bundling and original equipment manufacturers, or OEM, arrangements. In addition to providing direct revenue, these relationships open up additional sales channels for us and give us access to valuable technology and expertise. Besides leading technology companies, we also maintain relationships with systems integrators and with channel partners. Integrators and channel partners help bolster our service capabilities, provide additional expertise to our customers and open up new revenue opportunities for us. We anticipate increasing our focus on developing and expanding strategic relationships, particularly technology vendors with large installed bases and systems integrators, that will enable us to penetrate broader and more lucrative customer markets.

The following represent several of our more significant strategic alliances and technology relationships:

BEA Systems.    In 2002, we announced a relationship with BEA Systems, Inc. to provide developers with enhanced JBuilder support for building enterprise solutions and deploying them on the BEA WebLogic Platform. In connection with this relationship, BEA and Borland agreed to coordinate product development to offer JBuilder, WebLogic Edition, features such as seamless application deployment to BEA WebLogic Server and support for the emerging Java Web Services, or JWS, standard first offered in BEA WebLogic Workshop. BEA and Borland also agreed to join sales and marketing efforts to drive the success of JBuilder, WebLogic Edition. The companies are jointly marketing this developer product bundle, with the BEA and Borland sales forces working together to drive JBuilder, WebLogic Edition to market through new reselling arrangements and alliances. Both BEA and Borland are promoting and selling JBuilder, WebLogic Edition through their websites and through other distribution channels.

Mercury Interactive.    Building on the announcement of our relationship in early 2002, we have focused on providing customers with tightly integrated solutions across the application development lifecycle. We have worked together to integrate Mercury Interactive’s LoadRunner with JBuilder to enable developers and quality assurance teams to work together earlier in the development cycle. Also, the integration of Mercury Interactive’s TestDirector and CaliberRM allows requirements to be traced to or from TestDirector entities and provides the ability to synchronize defects between StarTeam Change Request management component and TestDirector Defect Tracking module. Development teams using StarTeam as their primary configuration management solution and TestDirector as their test management solution can utilize StarTeam Synchronizer component to increase coordination and automation of activities. In addition to our product integration efforts, we are working closely with Mercury on joint sales opportunities, building on the long-standing channel sales alliance that existed between Starbase and Mercury Interactive.

Microsoft.    We work closely with Microsoft on key initiatives to provide application lifecycle management solutions for the Microsoft Windows .NET platform. In December 2002, we became the first company to license the Microsoft .NET Framework software development kit, or SDK, for distribution. The agreement enables us to distribute the Microsoft .NET Framework SDK with its development environments for the .NET platform, but we receive no revenue from this distribution. The agreement is for a term of four years and can only be terminated by either party based upon a breach of the agreement. We are also a member of the Microsoft Visual Studio Integration Program. Involvement in this program enables our application lifecycle management solutions for Microsoft Windows .NET to plug-in to the Microsoft Visual Studio products. In June 1999, we entered into a strategic alliance with Microsoft, pursuant to which Microsoft paid us $100 million for the rights to use certain Borland-patented technology in Microsoft products in order to settle a number of long-standing patent and technology licensing issues with us. As part of that agreement, we agreed to support certain Microsoft technologies through our products.

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Nokia.    In 2001, we announced a technology relationship with Nokia, a leading wireless device company. Under our relationship with Nokia, JBuilder is being recommended by Nokia as the preferred IDE for the development of wireless Java applications. In return, JBuilder MobileSet provides support for development to Nokia wireless platforms, including the Nokia Series 60 Platform—a Symbian operating system-based mobile platform licensable to other device manufacturers. Borland and Nokia together also announced the release of JBuilder MobileSet, Nokia Edition which includes customized support for the Nokia Developer’s Suite for J2ME and is fully integrated with JBuilder 8 to support software development for Nokia’s Java-enabled phones, including the Nokia 9210 Communicator. JBuilder and JBuilder MobileSet, used in conjunction with one another, include visual design tools for creating mobile applications, device emulation and debugging, as well as all the other standard features offered with JBuilder. Available for download (at no cost to the end user) through the Forum Nokia website, JBuilder MobileSet, Nokia Edition, is being distributed to other manufacturers, enabling developers to standardize on one environment for the development and deployment of Java applications across wireless and mobile devices from multiple manufacturers. In addition, we have introduced Borland C++ Mobile Edition, which is designed to enable developers to rapidly produce C++ applications for the Symbian-based Nokia Series 60 Platform.

Sun Microsystems.    Close collaboration with Sun Microsystems continues to be a key element of our Java strategy and our efforts to keep our Java-based products, including JBuilder, at the cutting edge of Java development. In addition to our licensing arrangements with Sun for Java technologies, we participate with Sun in a number of industry groups and consortia. For example, along with Sun, we are an Executive Member of JCP, a consortium of Java vendors and an important standards setting body for the Java platform. In October 2001, in conjunction with our JCP role, we became the first company to publish results for ECperf, the new JCP benchmark to measure the performance and scalability of J2EE application servers. The primary goal of the ECperf benchmark is to model the workload of a real-world system that would include manufacturing, supply chain management and order/inventory. We conducted successful ECperf tests of the Borland Enterprise Server at Sun Microsystems benchmarking facility and were instrumental in providing these results for the launch of Sun’s new 8 Way Sun Fire V880 server.

Sales and Marketing

Our sales strategy combines a strong indirect sales channel with a growing direct sales organization. This balanced effort allows us to target both large enterprises with our comprehensive solutions and small-to-medium size businesses and individuals with our discrete products. In addition to direct sales, we market and distribute products worldwide through a strong network of independent distributors, dealers, sales agents, value-added resellers, or VARs, specialty catalogue vendors and independent software vendors, or ISVs. Our VARs include 20 major independent software vendors such as IBM and i2. We also market our products through our own e-commerce Internet site.

We permit our distributors to balance their inventories by periodically returning contractually limited amounts of products in exchange for other products from us. Accordingly, we include an estimate for returns in our reserves for the amount of product that may be exchanged in accordance with this policy.

We conduct operations and sell products outside the U.S. and maintain overseas sales offices in a number of foreign countries: Australia, Brazil, Canada, China, France, Finland, Germany, Hong Kong, India, Italy, Japan, Mexico, Netherlands, New Zealand, Russia, Singapore, South Korea, Spain, Sweden, Taiwan and the United Kingdom. As part of our on-going global expansion, we opened up new offices in Finland, Mexico and Spain in 2002. All of these foreign offices license and support our products both within their local jurisdictions and other foreign countries where we do not directly operate. Additionally, we market and sell our products in international territories not covered by any of our foreign offices through independent distributors and sales agents, VARs and ISVs.

Our activities in support of our direct and indirect sales efforts, both domestically and internationally, and our on-going efforts to improve the visibility of our brand include, among other things:

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Product Licensing and Related Services

Our software licenses are generally perpetual, fully paid-up named user or machine per processor licenses. Our IDE products are generally licensed on a named user basis. A named user means one named individual to whom the product was licensed. The total number of named users may not exceed the total number of licenses acquired. Only named users may access the product over a network. Some of our software is available with a floating license, which is affords enterprise customers the flexibility to determine who within the enterprise uses the license.

Our enterprise products are generally licensed on a named user basis for development purposes and licensed on a machine per processor basis for deployment purposes. Machine per processor means a specific hardware system, on which the enterprise product is running and is licensed according to the number of processors in the machine.

We also offer a support program. Our support program entitles a licensee to receive all enhancements and upgrades to the licensed product that are released in the succeeding 12-month period and certain other telephonic support services.

Our packaged training courses are offered in the form of open-enrollment public courses and in-house courses at customer facilities. Additionally, we offer consulting services that are generally priced on a time-and-materials basis.

Research and Development

We believe that our success will continue to depend heavily on our ability to develop new products and upgrades to meet the requirements of our customers and the market. We pride ourselves on the depth, quality and consistency of our research and development efforts and will continue to place significant focus and spend significant resources on this effort. Current research and development efforts are directed at enhancing our current technology and products, developing new products, testing, quality assurance and documentation. Research and development expenses for the years ended December 31, 2002, 2001 and 2000 were $50.8 million, $46.1 million and $41.9 million, respectively, representing 21%, 21% and 22% of our net total revenues in those years.

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Our research and development activities are organized principally by product group, with each of our respective product groups assuming responsibility for development efforts. The approaches within each group tend to be highly collaborative, with developers acting collectively to advance promising, commercially viable technologies that extend the range and breadth of our lifecycle solutions. We also use our customer base to derive critical feedback on product development and new release efforts, including feedback we gain through our professional services engagements. We are paying particular attention to research and development efforts in promising growth markets, including .NET, Java and wireless, as those markets impact our traditional development business and our emerging application infrastructure business.

In addition to research and development facilities in Scotts Valley, California; San Mateo, California; Santa Ana, California; Atlanta, Georgia; Beaverton, Oregon and Raleigh, North Carolina, we currently maintain research and development facilities internationally in Tokyo, Japan; St. Petersburg, Russia; Prague, Czech Republic; Stockholm, Sweden and Singapore.

Competition

The software industry is an intensely competitive industry characterized by rapid change, new and emerging technologies and fierce competition. The pace of change has accelerated due to the emergence of the Internet, corporate Intranets and new programming languages. We face intense competition in the development and marketing of our software products and services. Following is a brief summary of our major products and their main competitors:

All of our markets are intensely competitive. However, we believe that our product quality, performance, price, the Borland brand, vendor and product reputation, product architecture, quality of technical support and our 20-year history make us competitive in all of our markets. In particular, we believe that our platform-independent positioning and interoperability capabilities, including our ability to integrate with many existing technologies and systems (including, in some cases, those of our competitors), give us an important source of competitive strength.

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Manufacturing

Our product development groups produce a set of master CD-ROMs or diskettes and documentation for each of our products which are then sent to manufacturing. All of our manufacturing and order fulfillment are performed by outside contractors, under the supervision of our domestic logistics organization, and includes replication of CD-ROMs or diskettes, printing and production of documentation and packaging materials and assembly of final product packages for shipment to customers. Our products are principally sold in CD-ROM format together with user documentation. We believe that there are adequate supplies and sources for the raw materials used in our products and that there are multiple sources available for CD-ROM replication, printing and production of packaging materials and printing of documentation. We also deliver some of our products directly to our customers via electronic download from the Internet.

We have final quality control tests performed internally on our products that we believe effectively accomplish our product quality assurance goals.

Intellectual Property

We regard our software as proprietary. We rely on a combination of patent, copyright, trademark, trade secret laws, domain name registrations and non-disclosure and other contractual agreements to protect our intellectual property. We have 102 issued U.S. patents, 10 issued foreign patents, and approximately 44 additional pending applications for U.S. patents and approximately 24 pending applications for foreign patents. Despite our efforts to protect our intellectual property rights, it may be possible for an unauthorized third party to copy certain portions of our products or to reverse-engineer or obtain and use technology or other information that we regard as proprietary. In addition, the laws of many foreign countries do not protect rights in intellectual property to the same extent as do the laws of the United States. Accordingly, there can be no assurance that we will be able to protect our intellectual property against unauthorized third-party copying or use which could adversely affect our competitive position.

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. Regardless of the merits 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 and we fail to develop or license a substitute technology, 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.

Our Java products require proprietary technology made available by Sun Microsystems, Inc. We license the J2SE, J2EE and J2ME specifications from Sun Microsystems under a license agreement that provides for a five-year term and that expires on December 28, 2005. Our Together Java products require proprietary technology made available to us under a separate J2EE commercial use license agreement, which provides for a three-year term expiring on May 21, 2004. While we would expect to renew these agreements, Sun is not obligated to do so. Upon expiration of these licenses, we will continue to have the right to distribute our software products containing the version of Java technology incorporated at the time of expiration. However, in the event of termination of a license upon material breach of the terms of the license or upon an action for infringement of intellectual property rights relating to the Java technology by us against Sun Microsystems or any of its other licensees, we are required to return or destroy all copies of the Java technology, including derivative works. Furthermore, if Sun Microsystems stops making this proprietary technology available to us on commercially reasonable terms, and we are unable to develop or otherwise identify effective alternatives to licensing this technology, our business could be harmed.

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Employees

As of February 28, 2003, we employed approximately 1,608 employees, consisting of 830 in the United States, 72 in Canada and Latin America, 253 in the Asia/Pacific region, or AsiaPac, and 453 in Europe, the Middle East and Africa, or EMEA. Of our 1,608 employees, 550 are engaged in research and development. From time to time, we have also engaged temporary contract employees both in foreign countries and within the United States. As of February 28, 2003, we engaged approximately 86 temporary contract employees, approximately 40 in the United States, 27 in Canada and Latin America, 8 in AsiaPac and 11 in EMEA. None of our U.S. employees are represented by a labor union and we have experienced no work stoppages. Employees of some of our foreign subsidiaries are represented by workers’ councils or other similar organizations as required by local law. We believe that relations with our employees are good.

Executive Officers

Our executive officers are appointed annually by the Board of Directors of Borland, or the Board, and serve at the discretion of the Board. Set forth below is certain information regarding our current executive officers:

Dale L. Fuller.    Mr. Fuller has served as our President and Chief Executive Officer since December 2000, and as Interim President and Chief Executive Officer from April 1999 to December 2000. He has been a director of Borland since April 1999. Prior to joining Borland, Mr. Fuller was a private investor from 1998 to 1999. From 1996 to 1998, Mr. Fuller served as Chief Executive Officer at WhoWhere? Inc., a leading Internet site, which was sold to Lycos in 1998. From 1995 to 1996, Mr. Fuller served as General Manager and Vice President of the PowerBooks Division at Apple Computer, Inc., a personal computer manufacturer. Prior to joining Apple Computer, Mr. Fuller served as General Manager and Vice President of the Portables Division at NEC Corporation, a personal computer manufacturer, from 1993 to 1995.

Frederick A. Ball.    Mr. Ball joined Borland in September 1999 as Senior Vice President and Chief Financial Officer. In June 2001, Mr. Ball was promoted to Executive Vice President and Chief Financial Officer. In October 2002, Mr. Ball was appointed as Executive Vice President of Corporate Development and Mergers and Acquisitions. From June 1999 until joining Borland, Mr. Ball served as the Vice President of Mergers and Acquisitions for KLA-Tencor Corporation, a semiconductor equipment maker. Prior to this position at KLA-Tencor Corporation, Mr. Ball served as the Vice President of Finance for KLA-Tencor Corporation following its merger with Tencor Instruments, a semiconductor equipment maker, in 1997. Mr. Ball joined Tencor Instruments as Corporate Controller in March 1995 and was promoted to Vice President and appointed Corporate Secretary in January of 1996. Mr. Ball was employed with PricewaterhouseCoopers LLP, an accounting firm, from September 1984 until March 1995. Mr. Ball received a B.S. in Accounting from Virginia Polytechnic Institute in 1983.

Douglas W. Barre.    Mr. Barre joined Borland in May 2000 as Senior Vice President and Chief Operating Officer. From April 1997 until joining Borland, Mr. Barre was Senior Vice President of Enterprise Software at Compuware Corporation, a software company, and from October 1995 until April 1997 served as Vice President and General Manager of Compuware Corporation’s European Operations. From April 1994 until October 1995, Mr. Barre was Vice President of Business Transformation and Chief Information Officer of Bell Mobility, a

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telecommunications company. Mr. Barre has also held senior management positions at AT&T/Cantel, Imperial Oil Ltd. and Texaco Canada Inc. Mr. Barre received a B.A. in Administrative Studies at York University in 1976 and completed Executive Management Training at the University of Western Ontario in 1983.

Keith E. Gottfried.    Mr. Gottfried joined Borland in June 2000 as Senior Vice President—Law and Corporate Affairs, General Counsel, Corporate Secretary and Chief Legal Officer. Prior to joining Borland, Mr. Gottfried was a corporate attorney in the New York office of the law firm Skadden, Arps, Slate, Meagher & Flom LLP where he advised public and private companies on mergers and acquisitions, joint ventures, federal securities registrations and compliance and general corporate matters. Mr. Gottfried holds a law degree, cum laude, from Boston University’s School of Law where he was named an Edward F. Hennessey Distinguished Scholar of Law and a G. Joseph Tauro Scholar of Law. He also holds an M.B.A. with high honors from Boston University’s Graduate School of Management and a B.S. in Economics from the University of Pennsylvania’s Wharton School. Mr. Gottfried is also a Certified Public Accountant and, prior to attending law school, was employed as an accountant and auditor with the accounting firm of Arthur Young & Company, a predecessor firm to Ernst & Young LLP. Mr. Gottfried is admitted to the practice of law by the state bars of California, New York, Pennsylvania, New Jersey and Massachusetts. Mr. Gottfried is a member of the Board of Directors of the Business Software Alliance, a trade association of leading software companies.

Kenneth R. Hahn.    Mr. Hahn joined Borland in October 2002 as Senior Vice President and Chief Financial Officer. Prior to joining Borland, Mr. Hahn was Senior Vice President, Chief Financial Officer and Secretary of Extensity, Inc., which was then a publicly-traded enterprise software company in the employee relationship management space and which was recently acquired by Geac Computer Corporation Limited. He also held the positions of Vice President of Finance and Corporate Controller during his employment at Extensity from January 1998 to September 2002. Prior to Extensity, Mr. Hahn was a strategy consultant with the Boston Consulting Group, providing advisory services to Fortune 500 and high technology companies from October 1995 to December 1997. He began his career with PricewaterhouseCoopers LLP, where he completed his five year tenure in the position of audit manager. Mr. Hahn holds an M.B.A. from the Stanford Graduate School of Business, where he was named an Arjay Miller Scholar. He received a B.A., summa cum laude, in business administration from California State University, Fullerton. Mr. Hahn is a Certified Public Accountant and a Certified Management Accountant.

ITEM 2.     PROPERTIES

The following table sets forth the location, approximate square footage and use of each of the principal properties used by us. We lease or sublease all these properties. The leases expire at various times through 2010.

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We also own additional office space located at 1700-1800 Green Hills Road, Scotts Valley, California, and these facilities are leased to third parties and are held as available for sale on our balance sheet. These facilities comprise approximately 150,000 square feet of space and were constructed in 1988. We lease office space in other cities in the United States as well as in Europe, Canada, Latin America and various countries in the Asia-Pacific region. Our existing facilities are adequate to meet our current and projected needs. As a result of the Starbase and TogetherSoft acquisitions, we have excess facilities under lease and we are seeking to negotiate the reduction of some of our lease commitments.

ITEM 3.     LEGAL PROCEEDINGS

On November 27, 2002, a stockholder class action and derivative lawsuit was filed against Starbase Corporation and five former directors of Starbase, Dieterich v. Harrer, et al., Case No. 02CC00350, filed in Superior Court of the State of California for Orange County. The complaint alleged that the former directors had breached fiduciary duties owed to Starbase and stockholders of Starbase. Borland is paying the costs of defending this litigation pursuant to its indemnification obligations under the merger agreement relating to the acquisition of Starbase by Borland. On January 23, 2003, defendants filed a demurrer seeking to have all the claims dismissed, and also filed a motion to stay discovery pending a ruling on the demurrer. On  February 25, 2003, plaintiff filed its first amended class action complaint, or the amended complaint, naming as defendants the five former directors and the investment banking firm that provided financial services to Starbase, two law firms that provided legal services to Starbase and an individual and entity that helped arrange financing for Starbase. The amended complaint purports to be brought on behalf of Starbase stockholders who tendered shares of Starbase common stock to Borland in the tender offer commenced by Borland on October 11, 2002 and that ended on November 11, 2002, or in the merger that was completed on January 7, 2003. Plaintiff alleges that the five former directors breached their fiduciary duties owed to Starbase in connection with a proposed financing of Starbase in mid-2002, and that the other defendants aided and abetted the purported breach of fiduciary duty. On March 21, 2003, the Starbase defendants filed a demurrer to have the amended complaint dismissed. No dates have been set for the end of the discovery or for trial. Borland and the defendants intend to vigorously defend against the lawsuit. There is no indication at present that the lawsuit will have a material effect on our financial condition, results of operations or liquidity.

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

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

No matters were submitted to a vote of our stockholders, through a solicitation of proxies or otherwise, during the quarter ended December 31, 2002.

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PART II

ITEM 5.     MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our common stock is traded on the Nasdaq National Market under the symbol “BORL.” According to the records of our transfer agent and registrar, Mellon Investor Services, L.L.C., we had approximately  2,445 stockholders of record of our common stock as of February 28, 2003. Because many of such shares are held by brokers, institutions and other nominees on behalf of stockholders, we are unable to estimate the total number of beneficial owners represented by these record holders.

We have not paid dividends since 1988. We intend to retain future earnings for use in our business, and therefore, do not anticipate paying cash dividends in the foreseeable future.

The following table sets forth the high and low sales price per share of our common stock as reported on the Nasdaq National Market for the calendar quarters presented below:

As of March 25, 2003, the most recent practicable date prior to the filing of this Form 10-K, the closing sale price of a share of our common stock was $9.51.

On January 24, 2003, we issued 7,817,043 shares of our common stock, and reserved an additional 1,181,585 shares for issuance upon exercise of options, as consideration for our acquisition of TogetherSoft. On January 7, 2003, the Commissioner of Corporations of the State of California held a public hearing regarding the acquisition of TogetherSoft and issued a permit, pursuant to which the issuance of Borland securities to TogetherSoft security holders is exempt from registration with the SEC under Section 3(a)(10) of the Securities Act of 1933, as amended. Of the 8,998,628 shares issued in connection with this acquisition, 3,285,461 are subject to lock-up agreements, copies of which are filed herewith as exhibits to this Form 10-K.

Tabular disclosure regarding stockholder and non-stockholder approved equity compensation plans will be set forth in the Proxy Statement under the headings “Equity Compensation Plan Information,” which information is incorporated herein by reference.

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ITEM 6.     SELECTED FINANCIAL DATA

The following selected consolidated financial data are derived from our consolidated financial statements. Historical results should not be taken as indicative of the results that may be expected for any future period. This data should be read in conjunction with our consolidated financial statements and related notes, which are included elsewhere in this Form 10-K.

FIVE YEAR SUMMARY

(in thousands, except net income per share)

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ITEM 7.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion includes a number of forward-looking statements. You should read this section in conjunction with the cautionary language applicable to such forward-looking statements described above in “A Caution About Forward-Looking Statements” found before Item 1 of this Form 10-K. You should not place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. We undertake no obligation to publicly release any revisions to the forward-looking statements or reflect events or circumstances after the date of this document.

Overview

The following table presents our Consolidated Statements of Operations data and the related percentage of revenues for the years ended December 31, 2002, 2001 and 2000 (in thousands):

Overview of the Results for the Year Ended December 31, 2002

Borland was incorporated in California in 1983 and re-incorporated in Delaware in 1989. We are a leading global provider of software development and application infrastructure technologies. We provide our customers with a comprehensive solution designed to help them deliver better software faster by offering products that address the definition, design, development, testing, change management and deployment steps of the software application lifecycle. We believe our standards-based solutions improve software quality, accelerate delivery, lower cost of ownership and reduce risk of error for software development.

Despite challenging economic conditions for the software and information technology industry, the year ended December 31, 2002 included our eleventh consecutive quarter of profitability and twelfth consecutive quarter of positive cash flow from operations. We market software development and application infrastructure technologies to businesses of all sizes worldwide. When customers curtail their information technology budgets,

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elect to purchase less or delay such purchases, our business—like that of our competitors and software industry peers—naturally suffers. In addition, the prolonged downturn in the financial markets during 2002, combined with larger structural problems in industries such as telecommunications, appear to have further dampened IT capital expenditures in excess of the anticipated effects of more typical economic cyclicality. Despite these challenges, several features of our model and strategy provided for growth during 2002, and we believe, provide a foundation for growth in 2003.

During 2002, total net revenues grew 10% to $245 million from $222 million in 2001. License and other revenues increased 9% to $204 million in 2002 from $187 million in 2001. Gross margins increased to 85% in 2002 from 84% in 2001. Operating expenses increased 13% to $189 million in 2002 from $168 million in 2001. Net income decreased 25% to $17.4 million, or 7% of total net revenues, in 2002 from $23.1 million, or 10% of total net revenues, in 2001.

Strategic acquisitions have been an important component of our overall growth strategy. During 2002, we successfully completed the acquisitions of VMGear and Advanced Training Center Ltda., or ATC, as well as the acquisition of certain assets of Highlander and BoldSoft. In October 2002, we entered into an agreement to acquire Starbase, a publicly-traded company. Starbase is a provider of software configuration and requirements management tools to assist in managing development projects from inception to deployment and to facilitate the development of software solutions and applications in a more efficient manner. In the initial tender offer pursuant to the merger agreement, we acquired approximately 79% of the outstanding shares of Starbase and began consolidating the operating results of Starbase in late November 2002. In October 2002, we also entered into an agreement to acquire privately-held TogetherSoft, a provider of design-driven development solutions that enable visual modeling. The Starbase and TogetherSoft acquisitions were both completed in January 2003.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to product returns, bad debts, investments, restructuring, asset impairment, income taxes and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

We believe the following are critical accounting policies and estimates used in the preparation of our consolidated financial statements.

Revenue Recognition

We derive revenues from licenses of our software and sales of related services, which include assistance in implementation and integration, post-contract customer support, training and consulting.

We recognize license fees on contracts that do not involve significant implementation or integration essential to the functionality of our products upon delivery when there is persuasive evidence of an arrangement, the fee is fixed or determinable and collection of the receivable is probable. For arrangements with multiple elements, we determine the value for services and post-contract customer support based upon vendor specific objective evidence, or VSOE, in accordance with American Institute of Certified Public Accountants Statement of Position, or SOP, No. 97-2, “Software Revenue Recognition,” or SOP 97-2, and related accounting literature. VSOE for the services element is based upon the standard hourly rates we charge for services, given the complexity of the services and experience of the professionals performing the services, or the amount charged on similar transactions. VSOE for annual post-contract customer support is established by the stated future

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renewal rates included in the contracts or the amount charged on a similar transaction. We recognize revenues for the license portion of a multiple element arrangement based upon the residual contract value as prescribed by SOP No. 98-9, “Modification of SOP No. 97-2 with Respect to Certain Transactions.” We assess collection based on a number of factors, including past transaction history with the customer and the credit-worthiness of the customer. We do not generally request collateral from our customers. If we determine that collection of a fee is not reasonably assured or there are extended payment terms, we defer the fee and recognize revenue at the time collection becomes reasonably assured, which is generally upon receipt of cash. We recognize revenue for software licensed with software assurance for a specific time period, or term license, ratably over the term of the license.

Increasingly, we are selling more comprehensive software solutions. These solutions often involve significant implementation or integration essential to the functionality of our products. We recognize licenses and service revenues associated with contracts involving significant implementation or integration only when the services are completed. We also recognize licenses and other revenues for contracts involving modification of software under the percentage of completion method. We defer the costs associated with these contracts until revenue is recognized. We classify revenues from these arrangements as license and service revenues, based upon the estimated fair value of each element based upon VSOE. Provisions for estimated contract losses are recognized in the period in which the loss becomes probable and can be reasonably estimated in accordance with SOP No. 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts.”

We recognize revenues from reseller arrangements upon shipment to the reseller, with allowances for estimated future returns and exchanges provided based upon our return policy. We maintain allowances for product returns from end-user and channel customers based upon historical return rates of end-user customers, current economic trends, changes in customer demand and acceptance of our products and the type and quantity of inventory held by channel customers. Significant management judgments and estimates must be made and used in connection with establishing the sales returns and other allowances in any accounting period. Material differences may have resulted in the amount and timing of our revenue for any period if management made different judgments or utilized different estimates. The provision for sales returns and rebates amounted to $12.4 million in 2002, as compared to $14.1 million in 2001, reflecting a greater emphasis on direct sales to end users in 2002. We offer return rights to end-users only in limited circumstances. If future returns increase over historical levels, additional allowances may be required.

Other service revenues from consulting and training services are recognized as such services are performed. Service revenues from post-contract customer support are recognized ratably over the support period, generally one year.

Accounting For Acquisitions

Pursuant to a merger agreement, by and between Borland, Starbase and Galaxy Acquisition Corp., (a wholly-owned subsidiary of Borland) on October 11, 2002, we commenced an all-cash tender offer to acquire all outstanding shares of Starbase at a price of $2.75 per share. In the initial tender offer, which expired on November 22, 2002, we purchased approximately 78.9% of the outstanding Starbase shares. Upon the completion of the initial tender, we began consolidating the operating results of Starbase.

During 2002, we also completed the acquisitions of Boldsoft, VMGear and Highlander. We accounted for these acquisitions as purchases in accordance with the provisions of Financial Accounting Standards Board, or FASB, Statement of Financial Accounting Standards, or SFAS, No. 141, “Business Combinations.” As such, we have reported all the acquired tangible and identifiable intangible assets and assumed liabilities of the acquired companies at fair value. We recognize the fair value of the purchased identifiable intangibles as an operating expense over the estimated useful life of each identifiable intangible, unless the identifiable intangible is determined to have an indefinite life. We recognize the fair value associated with in-process technology as an operating expense during the period the transaction is consummated. We value employee stock options assumed as part of the acquisition using the Black-Scholes valuation model. The value of all vested awards and the value of unvested awards in excess of the intrinsic value of the unvested awards are included as part of the purchase

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consideration. We report the intrinsic value of the unvested awards as deferred compensation and record it as an operating expense over the remaining vesting period of the award. We value our stock issued as part of the purchase consideration based upon the average of the closing prices for the five-day trading period surrounding the transaction. We report total consideration in excess of the fair value of the acquired tangible and identifiable intangible assets, net of assumed liabilities, as goodwill.

In accordance with SFAS No. 142, “Goodwill and Other Intangibles,” we evaluate the goodwill for impairment on an annual basis. Impairment 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 move to the second step of the impairment test. 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 did not record a loss on impairment of goodwill during the years ended December 31, 2002, 2001 or 2000.

We may incur substantial liabilities connected to the termination of employees, asserted claims or litigation, or termination of leases in connection with our acquisitions that are accounted for as purchases. We have incurred such liabilities with the acquisition of Starbase in the year ended December 31, 2002 and will incur significant additional liabilities relating to the acquisitions of Starbase and TogetherSoft in the year ending December 31, 2003. We estimate acquisition-related costs at the time of the acquisition and accrue these costs, in accordance with Emerging Issues Task Force, or EITF, Issue No. 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination,” or EITF 95-3, with an offsetting entry to goodwill. These accruals involve estimates regarding future events, sometimes several years in the future. We may make revisions and adjustments of the accrual and the related goodwill based on actual events.

Restructuring

We report costs associated with employee terminations and other exit activities in accordance with EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)” or EITF 94-3. We record employee termination benefits as an operating expense when 1) management having the appropriate level of authority to involuntarily terminate employees approves and commits us to the plan of termination and establishes the benefit the employees will receive upon termination, 2) the benefit arrangement is communicated to the employees, 3) the plan specifically identifies the number of employees to be terminated, their job functions and their locations, and 4) the period of time to complete the plan of termination indicates that significant change to the plan of termination is not likely. We record other exit costs as an operating expense when 1) management having the appropriate level of authority approves and commits us to the plan, 2) the exit plan identifies all significant actions to be taken to complete the exit plan, and 3) actions required by the exit plan will begin as soon as possible after the commitment date. We recognize other exit costs at the commitment date if they are not associated with revenue generating activity and the costs are either 1) incremental to other costs incurred by us in the conduct of our activities prior to the commitment date and will be incurred as a direct results of the exit plan, or 2) represent amounts to be incurred by us under a contractual obligation that existed prior to the commitment date and will either continue after the exit plan is completed with no economic benefit to us or be a penalty incurred by us to cancel the contractual obligation.

On July 31, 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” or SFAS 146. SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF 94-3. As a result, when we adopt SFAS 146, we will recognize a liability for a cost associated with an exit or disposal activity when the liability is incurred. Under EITF 94-3, a liability for an exit cost as defined in EITF 94-3 was recognized at the date of an entity’s commitment to an exit plan. SFAS 146 eliminates this definition and requirements for recognition of exit costs in EITF 94-3. SFAS 146 also establishes that fair value is the objective for initial measurement of the liability. SFAS 146 is applicable for all

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exit activity initiated after December 31, 2002. We do not believe that our adoption of SFAS 146 will have a material impact on our results of operations, financial position or cash flows.

Allowances for Doubtful Accounts

We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Management specifically analyzes accounts receivable, historical bad debt patterns, customer concentrations, customer credit-worthiness, current economic trends and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. Our gross accounts receivable balance was $64.8 million and $53.6 million at December 31, 2002 and 2001, respectively. Our allowance for doubtful accounts was $5.6 million and $3.7 million at December 31, 2002 and 2001, respectively.

Stock-Based Compensation

We account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” or APB 25, and related Interpretations. Under APB 25, compensation cost is measured as the excess, if any, of the closing market price of our stock at the date of grant over the exercise price of the option granted. We recognize compensation cost for stock options, if any, ratably over the vesting period. Generally, we grant options with an exercise price equal to the closing market price of our stock on the grant date. Accordingly, we have not recognized any compensation expense for our stock option plans. We provide additional pro forma disclosures as required under SFAS No. 123, “Accounting for Stock-Based Compensation,” or SFAS 123. If we had adopted the fair value method prescribed in SFAS 123, we would have recognized stock-based compensation expense, net of tax, of $24.8 million, $25.0 million and $17.3 million in the years ended December 31, 2002, 2001 and 2000, respectively, and our net income (loss) would have been $(7.5) million, $(1.9) million and $3.4 million in the years ended December 31, 2002, 2001 and 2000, respectively. Please see discussion in “Recent Accounting Pronouncements” for an explanation of SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment of FASB Statement No. 123,” or SFAS 148.

We account for stock options issued to non-employees, excluding non-employee directors, under SFAS 123 and EITF Issue No. 96-18, “Accounting for Equity Instruments with Variable Terms that are Issued for Consideration Other Than Employee Services under SFAS 123,” or EITF 96-18. We record the expense of such services based upon the estimated fair value of the equity instrument using the Black-Scholes pricing model. Assumptions used to value the equity instruments are consistent with equity instruments issued to employees. We charge the value of the equity instrument to earnings over the term of the service agreement. We had no such expenses in the years ended December 31, 2002, 2001 and 2000, respectively.

Impairment or Disposal of Long-Lived Assets

In accordance with SFAS No. 144 , “Accounting for the Impairment or Disposal of Long-Lived Assets,” or SFAS 144, we evaluate the accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed. SFAS 144 requires recognition of impairment of long-lived assets if the net book value of such assets exceeds the estimated future undiscounted cash flows attributable to such assets. If the carrying value of a long-lived asset is considered impaired, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived asset for assets to be held and used, or the amount by which the carrying value exceeds the fair value less cost to dispose for assets to be disposed. Fair value is determined primarily by using the anticipated cash flows discounted at a rate commensurate with the risk involved. No impairment was recorded during the years ended December 31, 2002, 2001 or 2000, respectively.

In accordance with SFAS 144, we account for property held for sale at the lower of the carrying value or the fair value less selling costs, based on an independent appraisal. At December 31, 2002, we classified an office building we own and lease to a third party, with a book value of $9.9 million, as property held for sale, as we are actively seeking a purchaser for the property.

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Investments

We hold minority interests in companies having operations or technology in areas within our strategic focus. We record an investment impairment charge when we believe an investment has experienced a decline in value that is other than temporary. Future adverse changes in market conditions or poor operating results of underlying investments could result in losses or an inability to recover the carrying value of the investments that may not be reflected in the current carrying value of these investments, thereby possibly requiring an impairment charge in the future. In 2002, we recorded a charge of $2.4 million to write-down our investment in Trolltech A.S. and $0.5 million to write-down our loan to AppForge, Inc.

Valuation Allowance for Deferred Tax Assets

Deferred income taxes are recorded in accordance with SFAS No. 109, “Accounting for Income Taxes,” or SFAS 109. Under SFAS 109, deferred tax assets and liabilities are determined based on the differences between financial reporting and the tax basis of assets and liabilities using the tax rates and laws in effect when the differences are expected to reverse. SFAS 109 provides for the recognition of deferred tax assets if realization of such assets are more likely than not to occur. Realization of our net deferred tax assets is dependent upon our generating sufficient taxable income in future years in appropriate tax jurisdictions to realize benefit from the reversal of temporary differences and from net operating loss carryforwards. Based on the weight of the available evidence, we have provided a valuation allowance against substantially all of our net deferred tax assets. Management will continue to evaluate the realizability of the deferred tax assets and the related valuation allowance. If our assessment of the deferred tax assets or the corresponding valuation allowance were to change, we would record the related adjustment to income during the period in which we make the determination. Our tax rate may also vary based on our operating results and the mix of income or loss in the domestic and foreign tax jurisdictions in which we operate.

Contingencies

Our current estimated range of liability related to certain litigation is based on claims for which our management can estimate the amount and range of loss. We have recorded the minimum estimated liability related to those claims, where there is a range of loss. Because of the uncertainties related to both the amount and range of loss on the remaining pending litigation, management is unable to make a reasonable estimate of the liability that could result from an unfavorable outcome. As additional information becomes available, we will assess the potential liability related to our pending litigation and revise our estimates. Such revisions in our estimates of the potential liabilities could materially impact our results of operation and financial position. As of December 31, 2002, we have accrued approximately $9.8 million for professional service fees and other costs with respect to our potential liability for pending litigation and other claims, including $7.7 million for professional service fees and other costs with respect to potential liability for pending litigation and other claims related to the Starbase and TogetherSoft acquisitions.

Determining Functional Currencies for the Purpose of Consolidation

We have a number of foreign subsidiaries that together account for approximately 62% of our total net revenues, 23% of our assets and 28% of our total liabilities as of December 31, 2002.

In preparing our consolidated financial statements, we are required to translate the financial statements of the foreign subsidiaries from the currency in which they keep their accounting records, generally the local currency, into United States dollars. This process results in exchange gains and losses which, under the relevant accounting guidance are either included within the statements of operations or as a separate part of our stockholders’ equity under the caption “Cumulative comprehensive income.”

Under the relevant accounting guidance, the treatment of these translation gains or losses is dependent upon our management’s determination of the functional currency of each subsidiary. The functional currency is determined based on management judgment and involves consideration of all relevant economic facts and circumstances affecting the subsidiary. Generally, the currency in which the subsidiary transacts a majority of its transactions, including billings, financing, payroll and other expenditures, is considered the functional currency, but any dependency upon the parent and the nature of the subsidiary’s operations is also considered.

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Cumulative translation adjustments include any gain or loss associated with the translation of that subsidiary’s financial statements when the functional currency of any subsidiary is the local currency. However, if the functional currency is deemed to be the United States dollar then any gain or loss associated with the translation of these financial statements would be included within our statement of operations. If we dispose of any of our subsidiaries, any cumulative translation gains or losses would be realized and recorded within our statement of operations. If we determine that there has been a change in the functional currency of a subsidiary to the United States dollar, any translation gains or losses arising after the date of change would be included within our statement of operations.

Based on our assessment of the factors discussed above, we consider the relevant subsidiary’s local currency to be the functional currency for each of our international subsidiaries. Accordingly we had cumulative translation gains of approximately $4.6 million and $2.6 million, which were included as part of cumulative comprehensive income within our balance sheet at December 31, 2002 and 2001, respectively. During the years ended December 31, 2002, 2001 and 2000, translation adjustments of $2.0 million, ($2.3) million and ($0.4) million, respectively, were included under cumulative comprehensive income. Had we determined that the functional currency of our subsidiaries was the United States Dollar, these gains and losses would have been included in our results of operation for each of the years presented.

The magnitude of these gains or losses is dependent upon movements in the exchange rates of the foreign currencies in which we transact business against the United States Dollar and the significance of the assets, liabilities, revenues and expenses denominated in foreign currencies. These currencies include the Japanese Yen, the Euro, the United Kingdom Pound Sterling, Singapore Dollar, Hong Kong Dollar, Chinese Yen, Korean Won, Brazilian Real, Australian Dollar and Canadian Dollar. Any future translation gains or losses could have been significantly higher than those noted in each of these years. In addition, if we determine that a change in the functional currency of one of our subsidiaries has occurred at any point in time or we sell or liquidate one of our subsidiaries, we would be required to include any translation gains or losses from the date of change in our statement of operations. Hedging activities are discussed under Foreign Currency Risk in Item 7A, “Quantitative and Qualitative Disclosures About Market Risk.”

RESULTS OF OPERATIONS

Total Net Revenues

Total net revenues were $244.6 million, $221.8 million and $191.1 million for the years ended December 31, 2002, 2001 and 2000, respectively.

Licenses and Other Revenues

Licenses and other revenues represent amounts earned for granting customers licenses to use our software products. Licenses and other revenues were $204.5 million, $187.0 million and $163.7 million for the years ended December 31, 2002, 2001 and 2000, respectively. Licenses and other revenues represented 84%, 84% and 86% of total net revenues for the years ended December 31, 2002, 2001 and 2000, respectively. The following table presents our licenses and other revenue by product category for the years ended December 31, 2002, 2001 and 2000 (in thousands):

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Java.    Our Java product group consists of JBuilder, Borland Enterprise Studio for Java and other JBuilder and Java development products, including JBuilder MobileSet and Optimizeit. Licenses and other revenues from our Java products group represented 46%, 41% and 31% of total licenses and other revenues for the years ended December 31, 2002, 2001 and 2000, respectively. Licenses and other revenues from our Java product group increased 22% in the year ended December 31, 2002 to $93.8 million from $77.0 million in the prior year, primarily due to growth in the Java market and to a lesser extent due to the introduction of Optimizeit into our product offerings. Licenses and other revenues from our Java product group increased 51% in the year ended December 31, 2001 to $77.0 million from $50.9 million in the prior year, primarily due to growth in the Java market. During 2002, new releases from the Java product group included JBuilder 7 and 8. In the future, we expect growth in revenues from our Java product group to depend upon the growth in the Java market, the timing of new product releases and general economic conditions.

Rapid Application Development, or RAD.    Our RAD product group consists of Delphi, Kylix and C++Builder. Licenses and other revenues from our RAD product group represented 29%, 32% and 36% of total licenses and other revenues for the years ended December 31, 2002, 2001 and 2000, respectively. Licenses and other revenues from our RAD product group decreased 1% in the year ended December 31, 2002 to $59.8 million from $60.4 million in the prior year, primarily due to the general economic conditions, the maturation of our products and the timing of new product releases. During 2002, new releases from the RAD products group included Delphi 7 and C++Builder 6. Licenses and other revenues from our RAD products group increased 2% in the year ended December 31, 2001 to $60.4 million from $59.2 million in the prior year. Future revenue growth from our RAD group will depend upon the timing of market adoption of the Microsoft .NET platform, the timing of the release of our anticipated .NET product, and the market demand for an independent supplier of development solutions for .NET.

Enterprise.    Our Enterprise product group consists of our Borland Enterprise Server family; including AppServer Edition, VisiBroker Edition and Web Edition; InterBase and JDataStore, our database products; and Borland AppCenter. Licenses and other revenues from our Enterprise product group represented 23%, 27% and 33% of total licenses and other revenues for the years ended December 31, 2002, 2001 and 2000, respectively. License revenues from our Enterprise products group decreased 5% in the year ended December 31, 2002 to $47.0 million from $49.6 million in the prior year, primarily due to general economic conditions, especially in the telecommunications and financial sectors, and a corresponding decrease in customer information technology budgets for enterprise applications. License revenues from our Enterprise product group decreased 7% in the year ended December 31, 2001 to $49.6 million from $53.5 million in the prior year, primarily due to the impact of the decline in economic conditions in the United States that resulted in decreased demand from U.S. customers. Revenue growth from our Enterprise product group will depend upon the recovery in corporate spending for deployment solutions, our ability to provide compelling technical solutions for software deployment to differentiate ourselves from our competitors and our ability to tightly integrate our deployment solutions with our development solutions.

Developer Services Platform or DSP.    Our DSP products group consists of StarTeam, CaliberRM, CodeWright and DSP products. Licenses and other revenues from our DSP product group represented 2%, 0% and 0% of total licenses and other revenues for the years ended December 31, 2002, 2001 and 2000, respectively. Licenses and other revenues from our DSP product group in the year ended December 31, 2002 was $3.9 million comprised mainly of new products resulting from the acquisition of Starbase. At the end of November 2002, we acquired a 79% interest in Starbase and accordingly, consolidated the results of operations, including revenues, of Starbase in late November 2002. During 2002, new releases from the DSP product group included StarTeam, CaliberRM and CodeWright. In the future, we expect licenses and other revenues from our DSP product group to grow due to the inclusion of revenues from sales of new products obtained through acquisitions in our results for an entire year.

In 2003, we expect that a significant portion of our license revenues will be attributable to our newly-acquired TogetherSoft and DSP product lines. Licenses and other revenues growth for any of our products will require that we continue to improve in our current offerings through feature enhancements and integration

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between our product lines as well as continued execution of our direct sales force in selling our development solutions to large enterprises.

Service Revenues

Service revenues represent amounts earned for technical support, consulting and training services for software products. Net service revenues were $40.1 million, $34.7 million and $27.3 million for the years ended December 31, 2002, 2001 and 2000, respectively, representing 16%, 16% and 14% of total net revenues for those years, respectively. Service revenues increased $5.4 million in the year ended December 31, 2002 from the year ended December 31, 2001 primarily as a result of an increase in technical support revenues. Technical support revenues were $25.1 million, $22.5 million and $15.8 million, in the years ended December 31, 2002, 2001 and 2000, respectively, and represented 63%, 65%, and 58% of total service revenues for the years ended December 31, 2002, 2001 and 2000, respectively. The year-to-year growth in the technical support revenues in 2002 from 2001 and in 2001 from 2000 was due to increased sales of our enterprise-level support offerings, even though Enterprise license revenues have decreased slightly sequentially from 2000 to 2002. We expect this trend to continue should we have success selling into larger enterprises. Our service revenues may grow as our new enterprise solution offerings increase in complexity and include more services as a component of larger sales contracts.

During January 2003, we completed the acquisitions of Starbase and TogetherSoft. With the additional product offerings from these two acquisitions combined with our current offerings, we will further our focus on providing an end-to-end solution for enterprises challenged with large-scale software development projects. Such large-scale software development projects require a higher level of understanding of our product offerings in order to enhance the development process and shorten the time to deployment. As such, our service offerings may become a larger component of our overall revenues over time.

International Net Revenues

Revenues from sources outside the United States, or non-U.S. revenues, represented approximately 62%, 60% and 55% of total net revenues for the years ended December 31, 2002, 2001 and 2000, respectively. The increase in the percentage of non-U.S. revenues for the year ended December 31, 2002, as compared to the years ended December 31, 2001 and 2000, was principally due to the growing adoption of the Java language in the EMEA and the Asia Pacific regions (as defined below) and the decline in our Enterprise business in the U.S. due to the continued downturn in the U.S. economy. We expect non-U.S. revenues to continue to be more than 50% of total net revenues in future periods, though the U.S. percentage should increase in 2003 due to the acquisitions of Starbase and TogetherSoft, which had greater percentages of their revenues from U.S. operations.

Fluctuations in foreign currency exchange rates did not have a material impact on our total net revenues or operating results for the years ended December 31, 2002, 2001 and 2000. However, our non-U.S. revenues would be adversely affected if the U.S. dollar were to strengthen against major foreign currencies including the Japanese Yen, the United Kingdom Pound Sterling and the Euro.

The following table presents our total net revenues by region (in thousands):

Our Americas operations include activities of our parent company located in the United States and subsidiaries in Canada, Mexico and Brazil. Our EMEA operations include activities of our subsidiaries in the

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Netherlands, Germany, United Kingdom and France and branch offices in Spain, Italy, Sweden, Finland and Russia. Our Asia Pacific operations include activities of our subsidiaries in Singapore, Japan, Taiwan, Korea, Hong Kong, China, India, Australia and New Zealand.

Total net revenues from Japan were $25.5 million, $23.6 million and $20.9 million, in the years ended December 31, 2002, 2001, and 2000, respectively, and represented 10%, 11% and 11% of total net revenues in the years ended December 31, 2002, 2001, and 2000, respectively. Total net revenues from Germany were $27.1 million, $24.6 million and $17.5 million, in the years ended December 31, 2002, 2001, and 2000, respectively, and represented 11%, 11% and 9% of total net revenues in the years ended December 31, 2002, 2001, and 2000, respectively. No other country had total net revenues greater than 10% of total net revenues in the years ended December 31, 2002, 2001, and 2000.

Cost of Revenue

Cost of Licenses and Other Revenues

Cost of licenses and other revenues consist primarily of production costs, product packaging and royalties paid to third-party vendors. Cost of licenses and other revenues were $15.2 million, $13.4 million and $12.0 million for the years ended December 31, 2002, 2001 and 2000, respectively. Cost of licenses and other revenues were 7% of total licenses and other revenues in each of the years ended December 31, 2002, 2001 and 2000, respectively. Royalty costs were 2% of licenses and other revenues in each of the years ended December 31, 2002, 2001 and 2000, respectively. If royalty costs as a percentage of licenses and other revenues were to increase by 1% of licenses and other revenues, we would have experienced an additional cost of licenses and other revenues of $2.0 million, $1.9 million and $1.6 million in the years ended December 31, 2002, 2001 and 2000, respectively. The level of royalty costs in future periods will be dependent upon our ability to obtain favorable licensing terms for our products that include third-party technology and the extent to which we include such third-party technology in our product offerings.

Cost of Service Revenues

Cost of service revenues consists primarily of salaries and benefits, third-party contractor costs and related expenses incurred in providing customer support, consulting and training. Cost of service revenues were $20.8 million, $22.5 million and $19.9 million for the years ended December 31, 2002, 2001 and 2000, respectively. Cost of service revenues were 52%, 65% and 73% of total service revenues in the years ended December 31, 2002, 2001 and 2000, respectively. Cost of technical support revenues represented 29%, 26% and 24% of the total cost of service revenues for the years ended December 31, 2002, 2001 and 2000, respectively, while cost of consulting and training revenues represented 71%, 74% and 76%, respectively, of the total cost of service revenues for the same periods. Service revenues gross margins were 48%, 35% and 27% in the years ended December 31, 2002 and 2001, respectively. The increase in gross margins for the year ended December 31, 2002 when compared with the years ended December 31, 2001 and 2000 was due to a decrease in consulting and training costs during the year ended December 31, 2002 when compared with years ended December 31, 2001 and 2000. In future periods, we expect increases in our cost of service revenues only as a function of our ability to grow our service revenues.

Operating Expenses

Research and Development Expenses

Research and development expenses for the years ended December 31, 2002, 2001 and 2000, were $50.8 million, $46.1 million and $41.9 million, respectively. Such expenses were 21%, 21% and 22% of total net revenues for the years ended December 31, 2002, 2001 and 2000, respectively. Research and development as a percentage of total net revenues remained relatively flat in 2002 compared with 2001 and 2000. During 2002, we released a number of new products and product upgrades, including Delphi 7, JBuilder 7 and 8, Borland Enterprise Studio 5 for Java and Kylix 3. During 2001, we released a number of new products and product upgrades, including Delphi 6, JBuilder 5 and 6, JBuilder MobileSet, Borland AppCenter 4.1, Borland Enterprise Studio for Java and Kylix 2.

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We believe that large enterprises currently require software development solutions that will reduce the time to deployment. In order to address this need, we plan to offer integrated software solutions that address all aspects of the application development lifecycle. In 2003, we expect total dollars spent on research and development to increase over 2002 due to the acquisitions of Starbase and TogetherSoft. In 2003, we expect to spend a significant amount of our research and development dollars on integration of our traditional Borland products with our newly-acquired products from Starbase and TogetherSoft. Our future success will be dependent in part on our ability to technologically integrate these products. This effort has already begun with the commercial release of our new Borland Together Edition for JBuilder and Borland Enterprise Studio 5 for Java. These products were released for commercial shipment in March 2003.

During 2002, we entered into contracts to perform non-recurring engineering projects for several customers. Under these arrangements, we received cash payments for engineering services upon the achievement and delivery of certain milestones. We accounted for the cash payments received under these arrangements as a reduction of research and development expenses. During 2002, we received approximately $2.6 million in cash payments under these arrangements. There were no such arrangements in the years ended December 31, 2001 and 2000.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $132.9 million, $120.7 million and $103.9 million for the years ended December 31, 2002, 2001 and 2000, respectively. These expenses were 54% of total net revenues for each of the years ended December 31, 2002, 2001 and 2000, respectively. Selling, general and administrative expenses increased in absolute dollars in the year ended December 31, 2002 from the years ended December 31, 2001 and 2000 primarily due to the increase in salaries related to the continued expansion of our direct sales force and marketing organization. Selling, general and administrative salaries expense was $53.4 million, $45.6 million and $32.4 million in the years ended December 31, 2002, 2001 and 2000, respectively. In 2003, we expect our selling, general and administrative expenses to increase due to the acquisition of Starbase and TogetherSoft. We also expect an increase in sales and marketing spending in 2003 in order to support a larger installed customer base. In addition, to the extent our direct sales increase, we expect our selling, general and administrative expenses to increase as a result of variable compensation from our sales incentive plans. General and administrative expenses declined in 2002 to 17% of selling, general and administrative expenses from 20% in 2001 and 32% in 2000 as we leveraged our existing administrative resources over a higher revenue base. We expect our general and administrative expenses to increase over the 2002 levels, particularly in the first half of the year, as we integrate our acquisitions; however, we believe this spending should decrease in the second half as operations are combined in the completion of our integration activities of the Starbase and TogetherSoft operations.

Restructuring, Litigation, Amortization of Intangibles and Acquisition-Related Expenses

The following table summarizes our restructuring, litigation, amortization of intangibles and acquisition-related expenses activity for the years ended December 31, 2002, 2001 and 2000 (in thousands):

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During the year ended December 31, 2002, we recorded restructuring, amortization of intangibles and acquisition-related expenses in the amount of $5.7 million, which consisted of $4.6 million in compensation expense associated with earn-out provisions in the VMGear and Bedouin acquisitions, $1.7 million in operating expenses from the amortization of purchased intangibles acquired from Starbase, Boldsoft, Highlander, Bedouin and VMGear, $0.4 million in restructuring costs resulting from the Highlander and VMGear acquisitions, $0.3 million charge for in-process development related to the Starbase acquisition and $0.3 million in write-down of leasehold improvements related to exiting a leased facility, offset by a non-recurring benefit totaling $1.6 million related to the settlement of various litigation matters. These benefits resulted from the reversal of reserves established in prior periods based upon estimates of the cost of resolving the litigation.

Changes for the year ended December 31, 2001 included acquisition-related expenses and the amortization of purchased intangibles acquired from Bedouin and Engine Informatica, Ltd., and for compensation expense associated with an earnout provision on the Bedouin acquisition, in the amount of $1.2 million.

During 2000, we reversed approximately $2.8 million in restructuring and severance reserves and $3.0 million in legal reserves established in prior periods that were determined to be no longer necessary. The restructuring and severance reserves were reversed primarily because the individuals identified in the restructure were not terminated. The legal reserve was reversed because the related legal matters were resolved for substantially less, in the aggregate, than the amount of the legal reserves which we established in prior periods for such matters. This reversal was offset by expenses associated with the proposed merger with Corel Corporation (which was terminated in May 2000) of $3.7 million, restructuring charges of $1.5 million in connection with the termination of 30 employees, amortization of intangibles of $1.0 million and in-process research and development of $0.4 million.

The following table summarizes the current portion of our restructuring activity accounted for in accordance with EITF 94-3 for the years ended December 31, 2002, 2001 and 2000 (amounts in thousands):