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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, 2003

Commission File No. 001-10824

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 30, 2003 was approximately $656,233,206. 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 29, 2004 was 81,074,866.

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 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, 2003.

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BORLAND SOFTWARE CORPORATION

FORM 10-K

For the Fiscal Year Ended December 31, 2003

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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, revenues, earnings, margins, costs, demand for our products, market and technological trends in the software industry, interest rates and inflation and various economic and business trends. Generally, you can identify forward-looking statements by the use of words such as “expect,” “estimate,” “project,” “budget,” “forecast,” “anticipate,” “intend,” “plan,” “may,” “will,” “could,” “should,” “believes,” “predicts,” “potential,” “continue” and similar expressions or the negative or other variations thereof. Examples of sections containing forward-looking statements include 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, or SEC, or in materials incorporated by reference herein or therein. You should be aware that the occurrence of any of these risks and uncertainties may cause our actual results to differ materially from those anticipated in our forward-looking statements, 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 and reincorporated in Delaware in 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. Through our Internet website located at www.borland.com, we make our SEC filings on Forms 10-K, 10-Q and 8-K and any amendments to those filings available free of charge 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 deployment solutions that are designed to accelerate the application development lifecycle. We provide our customers solutions that help them deliver better software faster and manage software development projects from beginning to end. By connecting managers, testers, designers and developers, our solutions are designed to improve software quality, accelerate the delivery of software, lower the cost of ownership and reduce risk. We have an installed base of over three million global users that includes leading high technology, telecommunications, government contracting and financial services enterprises.

Businesses use technology to maximize their productivity, and thereby increase the enterprise’s profitability. Enterprises are increasingly demanding more speed, more reliability and a higher return on investment from the software that facilitates their businesses. In this environment of heightened expectations, 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. We believe enterprises are turning to integrated development solutions that help development teams deliver high quality software quickly.

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. Key elements of our strategy to achieve this goal include:

Industry Background

Businesses use technology to maximize productivity, and thereby increase profitability. As a result, operational success can depend on the strength of a business’s information technology assets, particularly its software. In such an environment, the ability to develop and deploy software efficiently and effectively becomes increasingly important. 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. Software application development is growing increasingly complex due to shifting standards and increasing requirements, and businesses are more frequently operating in heterogeneous computing environments. As a result, businesses are demanding development software that simplifies the application development lifecycle, reduces the time-to-market of deploying applications, facilitates deployment across multiple platforms and causes minimal disruption to the enterprise.

In addition, enterprises are focused on maximizing their investment in existing information technology. To do so, developers must integrate and enhance the scalability, reliability and manageability of existing information technology and utilize it when introducing new technology platforms. However, this process is among the most complex and costly parts of the software deployment. As a result, development teams are seeking application development software that re-purposes existing software code for deployment to new platforms and uses existing software and hardware in the deployment. Technology facilitating interoperability between new platforms and functioning legacy systems helps enterprises overcome this challenge.

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

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Our Integrated Suite of Products

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. Our integrated development solutions are designed to address the various dimensions of an application’s lifecycle—definition, design, development, testing and deployment—and to provide valuable software configuration management capabilities. We believe our integrated suite enhances development team productivity, ensures higher-quality code and reduces the total cost of ownership.

Definition Products.    CaliberRM is our web-based requirements management system that manages the evolution of software 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 desired features to meet business needs.

Design Products.    Our Together family of products provides modeling capabilities to help create and communicate better software architecture throughout the application development lifecycle. The Together family of products includes live synchronization between the UML model and the application code to ensure that changes made to the application code are immediately reflected in visual model designs. This enables developers to collaborate across modeling and code development disciplines, and consequently enables improved developer productivity, reduced development time and higher quality applications. Supporting most leading Java 2 Enterprise Edition, or J2EE, platform environments, including IBM WebSphere, BEA WebLogic, Sun, Apple and Jboss, Together products also perform integrated model-to-code audits that assist developers in building maintainable and higher-quality code.

Development Products.    For the development phase, we offer integrated development environments, or IDEs, for the following platforms: Java, Windows/.NET, Linux and C++. Our IDEs are designed to provide easy-to-use aides, templates and utilities for developers to rapidly build and troubleshoot complex software applications.

Java Solutions.    JBuilder is a leading cross-platform environment for building industrial-strength Java applications. JBuilder is designed to speed the development of Java applications, deliver web applications faster, increase code reliability and develop applications for deployment on Windows, Linux, Solaris or Mac OS X platforms.

Windows/.NET Solutions.    We provide a number of IDEs designed to support the rapid delivery of high quality Windows applications as well as applications designed for the .NET Framework. Delphi is

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designed to allow developers to deliver high quality Windows applications quickly and to port those applications to the .NET Framework. 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. C#Builder is our IDE focused on the needs of developers designing software for the emerging .NET Framework.

Linux Solutions.    Kylix is our Linux IDE that is equipped with C++ and Delphi languages to assist developers in building rapid application development solutions and to port those applications cross-platform to Linux.

Testing Products.    Our Optimizeit family 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 code coverage to locate untested code and identify dead code. Our Optimizeit family of solutions includes Optimizeit Suite, which is designed to identify performance and testing problems in Java applications; Optimizeit Enterprise Suite, which is designed to isolate performance hazards during the development of J2EE applications; Optimizeit ServerTrace, our pre-deployment phase testing solution designed to help customers identify performance hazards before they deploy J2EE applications; and Optimizeit Profiler for .NET, which is designed to provide performance management capabilities such as CPU and memory usage analysis for .NET managed code.

Software Configuration Management, or SCM, Products.    To manage the particular tasks of the application development lifecycle, we offer our customers StarTeam, a leading SCM and change management solution that puts control of the development process in the hands of project teams. By providing users with access to all project assets through a central repository, StarTeam allows teams to manage development projects by providing them with a single repository for managing requirements, resources and changes, tracking defects and threaded discussions, and managing the tasks required for effective project management. With its web-based architecture, data encryption and compression capabilities, we believe StarTeam is a particularly well suited for managing increasingly dispersed 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 common object request broker architecture (CORBA) solution for distributed object computing; Borland Enterprise Server/AppServer Edition, our J2EE 1.3 compliant application server; VisiBroker–RT, our CORBA solution for embedded devices; Janeva, which provides customers with secure, high performance interoperability between .NET and CORBA/J2EE technologies; and Deployment OpCenter, a deployment solution designed to provide the bridge between development and deployment in the complex, distributed production environment.

Professional Services

In addition to our award winning products, we offer consulting, training and certification services, as well as comprehensive technical support capabilities. Services 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. In addition, we work with third-party consulting firms and systems integrators that provide reengineering, technology assessments, customization, project management and implementation services.

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Training services.    We offer education and training services to assist customers in learning about current technology trends and our products. These programs range from introductory sessions to highly advanced seminars.

Support services.    We provide a range of support services covering application development, deployment and integration issues. We offer such services on site or remotely from our support centers in the U.S., Singapore and the Netherlands. Customers can choose the level of support—from personalized support for large corporations to minimum assistance levels for small businesses.

Certification services.    Our certification program permits individuals and companies to become Borland Product Certified or a Certified Borland Instructor. The product certification exam tests for knowledge of a Borland product’s features and associated technologies and its use in developing software applications.

Customers

Our customers range from leading Fortune 1000 and Global 2000 companies to individual developers. We are increasingly targeting enterprise customers and count as our customers leading financial services, high technology, government contractors and telecommunications enterprises. No customer accounted for more than 10% of our total revenue for the year ended December 31, 2003. Ingram Micro, a reseller, accounted for approximately 12% and 13% of our total revenue for the years ended December 31, 2002 and 2001, respectively. 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.

As we generally ship products upon receipt of orders, our backlog is not significant.

Sales and Marketing

Our sales strategy combines a direct sales organization with an established indirect sales channel. We have recently reorganized our sales and marketing organizations. Sales resources have been allocated to one of three sectors according to opportunity:

We also market our products through our own e-commerce Internet site. 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.

We permit our distributors to balance their inventories by periodically returning unsold Borland products in exchange for other Borland products. Accordingly, we maintain allowances for product returns to cover their entire reported inventory.

We conduct operations and sell a substantial portion of our products outside the U.S. In support of those efforts, we maintain overseas offices in a number of foreign countries: Australia, Brazil, Canada, China, Czech Republic, France, Finland, Germany, Hong Kong, India, Italy, Japan, Mexico, Netherlands, New Zealand, Russia, Singapore, South Korea, Spain, Sweden, Taiwan and the United Kingdom. International sales accounted for 56%, 62% and 61% of our total revenues in the years ended December 31, 2003, 2002 and 2001, respectively. 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.

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

Research and Development

Our competitive position has developed to a large extent because of our emphasis on research and development, and 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. Current research and development efforts are directed at enhancing our current technology and products and on developing new products. Research and development expenses for the years ended December 31, 2003, 2002 and 2001 were $64.3 million, $50.8 million and $46.1 million, respectively, representing 22%, 21% and 21% of our net total revenues in those years.

In addition to domestic research and development facilities in Cupertino, California; Scotts Valley, California; Santa Ana, California; Atlanta, Georgia; and Raleigh, North Carolina, we also maintain research and development facilities internationally in St. Petersburg, Russia; Prague, Czech Republic; and Singapore.

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Competition

The market for application development technologies is intensely competitive and is characterized by rapid change due to new and emerging technologies. 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:

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

However, we believe that our product quality, performance, price, Borland brand, vendor and product reputation, and product architecture make us competitive. 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 many cases, those of our competitors), give us an important source of competitive strength.

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 is 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

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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

Our success depends upon our intellectual property. We rely on a combination of patent, copyright, trademark, trade secret laws and non-disclosure and other contractual agreements to protect our intellectual property. 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 merit of any such claim, responding to these claims could be time consuming and expensive, and may require us to enter into licensing or royalty agreements which may not be offered or available on terms acceptable to us. If a successful claim is made against us 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 in our industry increase, the functionality of products overlap and industry participants become more aggressive in using patents offensively.

Our product development depends, in part, on licenses received from third parties. 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. In addition, our C++Builder and C#Builder products require proprietary technology made available by Microsoft Corporation, and we license the Open Tools software, Windows Platform SDK, and related technology from Microsoft Corporation under one or more license agreements, one of which expires on May 2, 2004. While we would expect to renew these agreements, neither Sun nor Microsoft is 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 (in the case of the Sun agreements), and to distribute those versions of our software products containing the Microsoft technology that we distributed prior to expiration (in the case of the Microsoft agreement). However, in the event of termination of the Sun license due to 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. Similarly, in the event of termination of the Microsoft license due to a material breach of its terms (or termination in the event that our insolvency or bankruptcy becomes likely), we are required to return or destroy all full or partial copies of the Microsoft technology in our possession or under our control. If either Sun Microsystems or Microsoft Corporation 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 substantially harmed.

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Employees

As of February 29, 2004, we employed approximately 1,358 employees, of which 485 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. 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 our Board of Directors, 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., which was a leading Internet site. 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.

Scott Arnold.    Mr. Arnold joined Borland in November 2003 as Executive Vice President and Chief Operating Officer. From 1988 to October 2003, Mr. Arnold served as a partner with McKinsey and Company, a leading business management consulting firm. At McKinsey, Mr. Arnold gained broad experience in operations and strategy through his fifteen years of service to senior technology executives including sustained work with leading enterprise software companies. Most recently, he led the firm’s Technology practice on the West Coast and previously held several leadership roles in the Global High Tech and Telecommunications practices. Mr. Arnold holds an M.B.A. from the Stanford Graduate School of Business and a bachelor’s degree in Electrical Engineering from Duke University.

Brian “Boz” Elloy.    Mr. Elloy joined Borland in October 2002 as Vice President and General Manager of the Enterprise Business Unit. In August 2003, he was promoted to Senior Vice President of Software Products, and is responsible for all product and solutions development for the company. From July 2001 to October 2002, Mr. Elloy served as Senior Vice President Product Development for diCarta Inc., a provider of enterprise contract management software solutions. From March 1999 to July 2001, Mr. Elloy was a Vice President of Applications Product Development for Oracle Corporation, a leading software provider, prior to which he served as Oracle’s Senior Director of Technology from January 1996. Mr. Elloy holds a bachelor’s degree in Information Systems from the Curtin University of Technology, Perth, Western Australia.

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

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Extensity, Inc., which was then a publicly-traded enterprise software company in the employee relationship management space and which was 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 bachelor of arts, summa cum laude, in business administration from California State University, Fullerton. Mr. Hahn is a Certified Public Accountant and a Certified Management Accountant.

Timothy J. Stevens.    Mr. Stevens joined Borland in October 2003 as Senior Vice President, General Counsel and Secretary. From 1997 to 2003, Mr. Stevens worked at Inktomi Corporation, a network infrastructure software provider, in a variety of legal and business roles, including General Counsel, General Manager and Senior Vice President of Business Development. From 1991 to 1997, Mr. Stevens was a corporate attorney at Wilson Sonsini Goodrich & Rosati, P.C. Mr. Stevens serves as a member of the board of directors of privately-held Fios, Inc., a leading provider of electronic discovery and litigation readiness services. Mr. Stevens holds a law degree, graduating order of the coif, from the University of California, Davis School of Law. He received bachelor of science degrees in finance and management, summa cum laude, from the University of Oregon.

Matthew A. Thompson.    Mr. Thompson joined Borland in October 2003 as Senior Vice President of Worldwide Sales. Prior to joining Borland, Mr. Thompson was Vice President of Worldwide Sales and Field Operations for Marimba, Inc., a provider of products and services for software change and configuration management, from February 2001 to January 2003. From July 2000 to January 2001, Mr. Thompson was Vice President of Worldwide Sales for Calico Commerce, Inc., a provider of eBusiness applications. Prior to joining Calico, Mr. Thompson spent six years at Cadence Design Systems, a provider of electronics design technologies. While at Cadence, from January 1998 to June 2000, Mr. Thompson served as Senior Vice President, Worldwide Sales and Field Operations and from April 1994 to January 1998 as Vice President, Worldwide Professional Services. Mr. Thompson holds a bachelor of science degree in marketing from Northern Illinois University, DeKalb.

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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.

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 for use 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 Asia Pacific. Our existing facilities are adequate to meet our current and projected needs. We presently have excess facilities under lease, and we are actively negotiating the termination of some of our lease commitments.

ITEM 3.    LEGAL PROCEEDINGS

On November 27, 2002, a stockholder class action and derivative lawsuit, Dieterich v. Harrer, et al., Case No. 02CC00350, was filed against Starbase Corporation, or Starbase, and five former directors of Starbase in the Superior Court of the State of California for Orange County, claiming that the former directors had breached fiduciary duties owed to Starbase and stockholders of Starbase. We are paying the costs of defending this litigation pursuant to indemnification obligations under the merger agreement relating to our acquisition of Starbase. Following a series of motions, the case was dismissed without prejudice on August 20, 2003. On October 28, 2003, a stockholder class action relating to the same matter, Dieterich v. Harrer, et al, Case No. 024-N, was filed against the former directors of Starbase in Chancery Court of the State of Delaware, alleging breach of fiduciary duties by the former directors of Starbase, Borland, Dale L. Fuller, Keith E. Gottfried, Frederick A. Ball, and Doug Barre. We have submitted a motion for summary judgment in the State of Delaware, and we intend to defend ourselves vigorously. There is no indication at present whether the lawsuit will have a material effect on our financial condition, results of operations or liquidity.

In the ordinary course of business, we are involved in other lawsuits, claims, investigations, proceedings, and threats of litigation consisting of intellectual property, commercial, employment and other matters. In accordance with Financial Accounting Standards Board, or FASB, Statement of Financial Accounting Standards, or SFAS, No. 5, “Accounting for Contingencies,” we make a provision for a liability when it is both probable

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

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

No matters were submitted to a vote of our stockholders, through a solicitation of proxies or otherwise, during the quarter ended December 31, 2003.

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PART II

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 2445 stockholders of record of our common stock as of February 29, 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 11, 2004, 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 $8.95.

On January 7, 2003, we reserved 395,149 shares of our common stock for issuance upon exercise of stock options as partial consideration for Starbase Corporation.

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 partial consideration for our acquisition of TogetherSoft Corporation, or 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, 1,427,773 are subject to lock-up agreements.

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Equity Compensation Plan Information

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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. These 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 (loss) per share)

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The following discussion includes a number of forward-looking statements and, with respect to this section, 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 is incorporated by reference into this Item 7. Basically, forward-looking statements are management’s best estimates and actual results could differ from those estimates.

Overview

We are a leading provider of software development and deployment solutions designed to improve software quality, accelerate the delivery of software, lower the cost of ownership and reduce the risk of errors by helping customers manage software development projects from beginning to end.

We believe a full understanding of our operating results for the year ended December 31, 2003 requires an understanding both of the elements that drove our company performance and of the macro-economic conditions that affect our business. First, total revenues increased primarily as a result of two substantial acquisitions in January 2003. Second, the market for software development tools that has been our historical revenue base continues to mature, particularly Java development tools. This maturation has put pressure on the pricing of products that constitute much of our historical revenue base, and as a consequence, pressure on our financial results for 2003. Finally, as a result of poor sales execution in 2003, we failed to generate the revenues necessary to support the cost structure in place at the time. As a result, we carried excess costs throughout 2003, which harmed our financial performance throughout the year. In addition to these company-specific factors, we believe our operating results were further affected by the continuing weakness in the software development and deployment solutions market in which we operate, with our potential customers showing a general cautiousness in capital spending on software.

In response to these conditions, particularly the maturation of our traditional market, we have recently begun transforming the company from one focused on selling individual development tools to one focused on selling multi-product enterprise solutions that span the application development lifecycle. As part of this transformation, in 2003 we acquired two companies that provide us with the requirements management, modeling and software configuration management capabilities needed to fill out our suite of application development solutions. We realigned our management and sales organization to support the strategic direction of the company. We restructured many of our operations and conducted reductions in force in an effort to improve organizational efficiencies, control our expense structure, increase sales productivity and drive to a more profitable long-term financial model. Finally, we are in the process of upgrading our marketing and selling efforts to address enterprise opportunities. We expect to continue all of these activities over the next several quarters, and doing so may put pressure on our financial results and operations as we go through this transformation.

In 2004, we will continue to focus on increasing sales force productivity by generating more sales of our multi-product solutions to enterprise customers. As we do so, we expect to compete more directly with larger companies and expect to experience longer sales cycles (which is typical for sales of larger solutions). In addition, in 2004, we will seek to contain departmental spending to levels more consistent with those of other software companies.

We achieved the following financial results during the year ended December 31, 2003:

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, or GAAP, and the application of GAAP requires us to make estimates that affect our reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. In many instances, we could have reasonably used different accounting estimates, and in other instances changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ significantly from the estimates made by us. To the extent that there are material differences between these estimates and actual results, our future financial statement presentation of our financial condition or results of operations will be affected.

On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, provision for doubtful accounts and sales returns, fair value of investments, fair value of acquired intangible assets and goodwill, useful lives of intangible assets and property and equipment, income taxes, restructuring obligations, and contingencies and litigation, among others. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We refer to accounting estimates of this type as critical accounting policies, which are discussed further below.

In addition to these estimates and assumptions that are utilized in the preparation of historical financial statements, the inability to properly estimate the timing and amount of future revenues could significantly affect our future operations. We must make assumptions and estimates as to the timing and amount of future revenue. Specifically, our sales personnel monitor the status of all proposals, including the estimated closing date and potential dollar amount of such transaction. We aggregate these estimates periodically to generate a sales pipeline and then evaluate the pipeline to identify trends in our business. This pipeline analysis and related estimates of revenue may differ significantly from actual revenues in a particular reporting period as the estimates and assumptions were made using the best available data at the time, which is subject to change. Specifically, the slowdown in the global economy and information technology spending has caused and may continue to cause

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customer purchasing decisions to be delayed, reduced in amount or canceled, all of which have reduced and could continue to reduce the rate of conversion of the pipeline into contracts. A variation in the pipeline or in the conversion rate of the pipeline into contracts could cause us to plan or budget inaccurately and thereby could adversely affect our business, financial condition or results of operations. In addition, because a substantial portion of our software license contracts close in the latter part of a quarter, we may not be able to adjust our cost structure to respond to a variation in the conversion of the pipeline in a timely manner, and thereby the delays may adversely and materially affect our business, financial condition or results of operations.

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 professional performing the services, or the amount charged on similar transactions. VSOE for annual post-contract customer support is established with the stated future 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 probable or there are extended payment terms, we defer the fee and recognize revenue at the time collection becomes probable, which is generally upon receipt of cash. We recognize revenue for software licensed for a specific time period, or term license, ratably over the term of the license.

Increasingly, we are selling more comprehensive enterprise software solutions. These solutions often involve significant implementation or integration essential to the functionality of our products. We recognize license and service revenues associated with contracts involving significant implementation or integration, either on a percentage-of-completion basis or a completed-contract basis depending on whether or not we can obtain reliable estimates of the costs to complete the work. We classify revenues from these arrangements as license and/or 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 upon shipment to our distributors. Due to the level of historic returns and willingness to accept returns from our major distributors, we maintain allowances for product returns from our distributors to cover their unsold reported inventory. Additionally, we maintain allowances for product returns from our channel resellers and end users based upon historical return rates, current economic trends, changes in customer demand and acceptance of our products. We make complex accounting decisions in our percentage-of-completion accounting, involving judgements and estimates as to future costs and recoverability of unbilled amounts. Significant management judgment and estimates must be made and used in connection with establishing our sales returns and other allowances with our channel resellers. The provision for sales returns and rebates amounted to $6.3 million in 2003, as compared to $12.4 million in 2002 and $14.1 million in 2001, reflecting a greater emphasis on direct sales to end users in 2003. We offer return rights to end users only in limited circumstances. If future returns increase over historical levels, additional allowances may be required.

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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

On January 14, 2003, we completed the acquisition of privately-held TogetherSoft for approximately $82.5 million in cash, 9,050,000 shares of Borland common stock and the assumption of TogetherSoft’s stock option plans. Approximately $22.8 million of the total consideration is being held in escrow to indemnify us against and reimburse us for certain events and cover certain liabilities and transaction costs. Unused funds will be released from escrow at certain times between 2004 and 2007.

Pursuant to a merger agreement, by and between Borland, Starbase and Galaxy Acquisition Corp., on October 11, 2002, we commenced an all-cash tender offer to acquire all outstanding shares of Starbase for aggregate consideration of approximately $24.0 million and $2.0 million in bridge financing that was forgiven upon the consummation of the transaction. In the initial tender offer, which expired on November 22, 2002, we purchased approximately 78.9% of the outstanding Starbase shares for approximately $19.0 million. Upon the completion of the initial tender, we began consolidating the operating results of Starbase. On January 7, 2003 we purchased the remaining shares outstanding for approximately $5.0 million.

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 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. Our determination of the values of our acquired intangibles was based on the discounted cash flow method. We recognize the fair value of the purchased identifiable intangibles as an operating expense over the estimated useful life of the 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 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 price 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,” or SFAS 142, 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, then 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 performed our evaluation of the goodwill during the quarter ended September 30, 2003 and determined that we had a single reporting unit and that there was no impairment. The market capitalization method was the primary method used to determine the fair values for SFAS 142 impairment purposes. The assumptions supporting the cash flows, including the premium for control, which was assumed to be 25-30%, were determined using our best estimates as of the impairment review. We did not record a loss on impairment of goodwill during the years ended December 31, 2003, 2002 and 2001. See Note 6 of Notes to Consolidated Financial Statements in Item 15 for further discussion of the valuation of goodwill and intangible assets.

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We may incur substantial liabilities connected to the termination of employees, asserted claims or litigation, impairment of assets 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 TogetherSoft in the year ending December 31, 2003. We estimate merger-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 to the accrual and the related goodwill based on actual events.

Restructuring

We report costs associated with employee terminations and other exit activity in accordance with SFAS No. 112, “Employers’ Accounting for Postemployment Benefits, an Amendment of FASB Statements No. 5 and 43,” and SFAS No. 146 “Accounting for Costs Associated with Exit or Disposal Activities,” or SFAS 146. We record employee termination benefits as an operating expense when the benefit arrangement is communicated to the employee and no significant future services are required beyond a minimum 60-day retention period from the employee to earn the termination benefits. We recognize facility lease termination obligations, net of estimated sublease income, and other exit costs when we have future payment with no future economic benefit or a commitment to pay the termination costs of a prior commitment. These termination and other exit costs are reported at fair value.

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 $71.8 million and $64.8 million as of December 31, 2003 and 2002, respectively. Our allowance for doubtful accounts was $7.6 million and $5.6 million as of December 31, 2003 and 2002, 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. We granted restricted stock to certain employees and officers during the year ended December 31, 2003. Compensation expense for restricted stock issued was not material in the year ended December 31, 2003. We provide additional pro forma disclosures as required under SFAS No. 123, “Accounting for Stock-Based Compensation,” or SFAS 123.

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Pro Forma Net Income (Loss) and Net Income (Loss) Per Share

Had we recorded compensation costs based on the estimated grant date fair value, as defined by SFAS 123, for awards granted under our stock option and stock purchase plans, our pro forma net income (loss) and earnings (loss) per share for the years ended December 31, 2003, 2002 and 2001 would have been as follows (amounts in thousands, expect per share data):

The pro forma amounts include compensation expenses related to stock option grants and stock purchase rights for the years ended December 31, 2003, 2002 and 2001. In future years, the annual compensation expense will increase relative to the fair value of stock options and stock purchase rights granted in those future years.

We account for stock options issued to non-employees, excluding non-employee directors, under SFAS 123 and EITF 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.

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 of. 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 market value of the long-lived asset for assets to be held and used, or the amount by which the carrying value exceeds the fair market value less cost to dispose for assets to be disposed. Fair market value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. No impairment was recorded during 2003, 2002 or 2001.

In accordance with SFAS 144, we account for property held for sale at the lower of the carrying value or the fair market 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 were actively seeking a purchaser for the property. At December 31, 2003, this asset was classified as a depreciable asset as we were unsuccessful at selling the property. When the property was put back into service, it was at its prior cost basis, reduced for depreciation expense that would have been recorded during the period the asset was removed from service, as required by SFAS 144.

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Investments

From time to time 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 an investment, 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, which was subsequently recovered and recorded as a gain on investments in the year ended December 31, 2003. At December 31, 2003, we do not hold a minority interest in any company.

Income Taxes

We must make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of certain tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes.

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 is 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 asset. Management will continue to evaluate the realizability of the deferred tax asset and its 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 results and the mix of income or loss in domestic and foreign tax jurisdictions in which we operate.

In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. We recognize liabilities for anticipated tax audit issues in the U.S. and other tax jurisdictions based on our estimate of whether, and to the extent to which, additional taxes will be due. If we ultimately determine that payment of these amounts is unnecessary, we reverse the liability and recognize a tax benefit during the period in which we determine that the liability is no longer necessary. We record an additional charge in our provision for taxes in the period in which we determine that the recorded tax liability is less than we expect the ultimate assessment to be.

Contingencies

Our current estimated range of liability related to some of the pending 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 liability could materially impact our results of operation and financial position. As of December 31, 2003, we have accrued approximately $6.9 million for professional service fees and other settlement costs.

From time to time we receive notices from third parties claiming infringement by our products of third-party patent, trademark and other intellectual property rights, disputing royalties, or disputing other commercial

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arrangements. Regardless of the merit of any such claim, responding to these claims could be time consuming and expensive, and may require us to enter into licensing or royalty agreements which may not be offered or available on terms acceptable to us. If a successful claim is made against us, our business could be materially and adversely affected. We expect that our software products will increasingly be subject to such claims as the number of products and competitors in our industry segment increases, the functionality of product overlap and industry participants become more aggressive in using patents offensively.

Determining Functional Currencies for the Purpose of Consolidation

We have several foreign subsidiaries which together account for approximately 56% of our total net revenues, 24% of our assets and 30% of our total liabilities as of December 31, 2003.

In preparing our consolidated financial statements, we are required to translate the financial statements of the foreign subsidiaries from their functional currencies, generally the local currency, into United States dollars. This process results in exchange gains and losses, which are included as a separate part of our net equity under the caption “Cumulative Comprehensive Income (Loss).”

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.

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 in the period during which the disposal occurs. 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 $8.1 million and $4.6 million, which were included as part of cumulative comprehensive income within our balance sheet at December 31, 2003 and 2002, respectively. During the years ended December 31, 2003, 2002 and 2001, translation adjustments of $3.5 million, $2.0 million and ($2.3) million, respectively, were included under cumulative comprehensive income (loss). 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 operations 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, Russian Ruble, Indian Rupee, Mexican Peso and Australian, New Zealand and Canadian dollars. Any future translation gains or losses could be 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.”

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Recent Accounting Pronouncements

See Note 2 of Notes to Consolidated Financial Statements in Item 15 for a full description of recent accounting pronouncements including the respective expected dates of adoption and effects on results of operations and financial condition.

RESULTS OF OPERATIONS

The following table presents our Consolidated Statements of Operations data and its percentage of revenues for the years ended December 31, 2003, 2002 and 2001 (in thousands, except percentages):

Total Net Revenues

The following table presents our net revenues for the years ended December 31, 2003, 2002 and 2001, and dollar and percentage changes from the prior year (in thousands, except percentages).

We derive revenues from licenses of our software and the sale of related services.

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Licenses and Other Revenues

The following table presents our licenses and other revenues for the years ended December 31, 2003, 2002 and 2001, and dollar and percentage changes from the prior year (in thousands, except percentages).

In 2003, we began aligning our presentation of licenses and other revenues to better reflect our Application Lifecycle Management, or ALM, strategy. Specifically, we have three major product categories: Design, Develop and Deploy. Design includes the products from our recent acquisitions of TogetherSoft and Starbase: StarTeam, CaliberRM, Together and other related design and management products. Develop includes two major categories: Java, which includes JBuilder, Java Studio and Optimizeit, and .NET, which includes Delphi, C#Builder, C++Builder, Kylix and C++ Mobile Edition. Deploy is comprised of our Borland Enterprise Server products, InterBase, Janeva and other enterprise products.

Compared to our reporting for the year ended December 31, 2002, Design is a new category, Develop encompasses our former Java and RAD product lines, and Deploy encompasses the products that we previously described as the Enterprise product group. We have sought to provide comparability between historic product groups, while updating our nomenclature to reflect new platforms and our ALM strategy.

Licenses and other revenues represent amounts for license fees and royalties earned for granting customers the right to use our software products. Licenses and other revenues were $219.0 million, $204.5 million and $187.0 million for the years ended December 31, 2003, 2002 and 2001, respectively, and represented 74%, 84% and 84% of net revenues for the years then ended, respectively.

The following table presents our licenses and other revenues by product category and its percentage of total licenses and other revenues for the years ended December 31, 2003, 2002 and 2001 (in thousands, except percentages):

Design.    There were no licenses and other revenues from our Design product group for the year ended December 31, 2001. We completed the acquisitions of TogetherSoft and Starbase and began consolidating their results in January 2003 and December 2002, respectively. In the future, we expect the license revenues from the Design product group to represent a larger percentage of our total license revenues as these products will represent more significant components within our ALM solution.

Develop.    Licenses and other revenues from our Java product lines represented $77.3 million, $94.1 million and $77.0 million of licenses and other revenues from our Develop product group for the years ended December 2003, 2002 and 2001, respectively. The 18% decrease in licenses and other revenues in our Java product lines during the year ended December 31, 2003 as compared with the same period in 2002 was due to lower revenues from our JBuilder product line partially offset by growth in our Optimizeit product line. We believe the market growth in adoption of new Java development technology has slowed, and consequently our sales of JBuilder have

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slowed. Additionally, as more of our Java customers have purchased maintenance contracts that provide them with upgrades, we believe we will generate less revenue from product upgrades. We believe that revenue growth from our JBuilder product will be dependent upon the expansion of the Java development market and the success of our ALM solutions in the Java market. The 22% increase in licenses and other revenues in our Java product lines during the year ended December 31, 2002 as compared with the same period in 2001 was primarily due to growth in the Java market and, to a lesser extent, to the introduction of Optimizeit into our product offerings.

Licenses and other revenues from our .NET product lines represented $47.4 million, $59.8 million and $60.4 million of licenses and other revenues from our Develop product group for the years ended December 31, 2003, 2002 and 2001, respectively. The 21% decrease in licenses and other revenues from our .NET product lines during the year ended December 31, 2003 was primarily attributable to the lack of a major product version release earlier in the year. Delphi 8 was released in the last half of the fourth quarter of 2003, as compared to 2002, which included the releases of Delphi 7 in the third quarter of 2002 and C++Builder 6 in the first quarter of 2002. The growth in our .NET product lines will be dependent upon the rate of adoption of the .NET Framework and our ability to provide compelling development solutions that compete with, complement or enhance offerings from Microsoft. Also, we expect to benefit from offering design and deployment solutions that complement the Microsoft’s existing development solutions, as we do not compete directly against Microsoft in these areas. The 1% decrease in licenses and other revenues from our .NET product lines during the year ended December 31, 2002 as compared with the same period in 2001 was primarily due to the general economic conditions, the maturation of our products and the timing of new product releases as mentioned above for C++Builder and Delphi 7.

Deploy.    The 7% decrease in licenses and other revenues from our Deploy product group for the year ended December 31, 2003 as compared with the same period in 2002 was due to lower revenues generated from our VisiBroker and application server products. The 5% decrease in licenses and other revenues from our Deploy product group for the year ended December 31, 2002 as compared with the same period in 2001 was due to lower revenues generated from our VisiBroker server product. We believe that these reductions in licenses and other revenues from our Deploy products were a result of recessionary economic conditions, especially in the telecommunications and financial sectors, and geopolitical uncertainty. Revenue growth from our Deploy products category will depend upon the recovery in corporate spending for deployment solutions, our ability to capture a greater portion of government spending on technology, our ability to provide compelling technical solutions for software deployment to differentiate ourselves from our competitors and our ability to integrate our Deploy products with our Design and Develop products.

Service Revenues

The following table presents our service revenues for the years ended December 31, 2003, 2002 and 2001, and dollar and percentage changes from the prior year (in thousands, except percentages).

Service revenues represent amounts earned for technical support, consulting and training services for software products. The increase in service revenues in the year ended December 31, 2003 from the year ended December 31, 2002 was primarily a result of an increase in technical support revenues and, to a lesser extent, an increase in consulting revenues.

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The following table presents our services and other revenues by service category and its percentage of total services and other revenues for the years ended December 31, 2003, 2002 and 2001 (in thousands, except percentages):

The 111% year to year growth in technical support revenues from 2002 to 2003 was due to the acquisitions of TogetherSoft and Starbase, and a larger percentage of our customers purchasing support contracts. Historically, a greater percentage of TogetherSoft and Starbase revenues were from larger enterprises, therefore a greater percentage of their customers purchased support contracts. With the acquisitions completed in 2003, our support revenues benefited from the fair value of support contracts assumed in the acquisitions and the annual renewals of those contracts. The 12% growth in technical support revenues in 2002 from 2001 was due to increased sales of our enterprise-level support offerings, principally due to the increased demand for our Java products in 2002 when compared to 2001. The 82% increase in consulting revenues for the year ended December 31, 2003, when compared with the same period in the prior year, was due to an increased emphasis on products with a greater process focus (our Design products) and approximately $3.8 million in consulting revenue recognized from large development projects with three technology partners. The 25% increase in consulting revenues for the year ended December 31, 2002, when compared with the same period in 2001, was due to the timing of the completion of certain consulting engagements.

Over the longer term, we expect growth, if any, in our support revenues and our consulting and training revenues to depend on our success in selling our solutions into larger enterprises with greater frequency. Our service revenues may also grow as our new enterprise solution offerings increase in complexity and include more services as a component of larger sales contracts. However, not all of the resultant incremental service revenue will accrue to us directly, depending on our success in partnering with systems integrators. If we are unsuccessful in expanding or finding new engagements we may experience decreases in our consulting revenue as we complete large consulting engagements.

International Net Revenues

Revenues from sources outside the United States, or non-U.S. revenues, represented approximately 56%, 62% and 60% of total net revenues for the years ended December 31, 2003, 2002 and 2001, respectively. The decrease in the percentage of non-U.S. revenues for the year ended December 31, 2003 as compared to the years ended December 31, 2002 and 2001, was principally due to the acquisitions of Starbase and TogetherSoft, which had greater percentages of their revenues from the U.S. In 2004, we expect non-U.S. revenues to continue to represent more than 50% of total net revenues.

The following table presents our total net revenues by region and its percentage of total net revenues for the years ended December 31, 2003, 2002 and 2001 (in thousands, except percentages):

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

During the year ended December 31, 2003, we experienced an increase in our Americas revenues of $37.0 million, or 34% from the year ended December 31, 2002. The increase in our Americas license revenues was due to revenues from our new Design product lines ($27.4 million for the year ended December 31, 2003). Also, we experienced an increase in our Americas service revenues of $26.1 million or 113% from the year ended December 31, 2002. However, increased Design license revenues and overall service revenues were partially offset by lower revenues from our Develop product lines ($5.0 million, or 9% decrease) and our Deploy product lines ($7.8 million, or 31% decrease) during the year ended December 31, 2003 when compared to the prior year. The increase in Americas revenues when comparing the year ended December 31, 2002 to the same period in 2001 relates to increases in our license revenues from our new Design product lines ($3.6 million, or 100% increase) and Develop product lines ($6.8 million, or 14% increase), and an increase in our service revenues ($2.7 million, or 13% increase). These increases were partially offset by a decrease in our Deploy product lines ($4.4 million, or 15% decrease).

The increase in our EMEA revenues for the year ended December 31, 2003 as compared to the same period in the prior year relates primarily to changes in foreign currency exchange rates. The following fluctuation analysis is based on actual exchange rates. During the year ended December 31, 2003, we experienced an increase in our EMEA revenues of $16.6 million or 19% from the year ended December 31, 2002. The increase in our EMEA license revenues was due to revenue from our new Design product lines ($17.3 million for the year ended December 31, 2003). Also, we experienced an increase in our EMEA service revenues of $9.1 million or 76% from the year ended December 31, 2002. Increased Design license revenues and overall service revenues were partially offset by lower revenues from our Develop product lines ($9.6 million, or 16% decrease) during the year ended December 31, 2003 when compared to the prior year. The 5% increase in EMEA revenues when comparing the year ended December 31, 2002 to the same period in 2001 relates to increases in our license revenues from our Develop product lines ($2.4 million, or 4% increase) and our Deploy product lines ($0.6 million, or 3% increase), and an increase in our service revenues ($1.3 million, or 12% increase).

During the year ended December 31, 2003, we experienced a decrease in our Asia Pacific license revenues of $3.9 million or 9% when compared with the year ended December 31, 2002. The decrease in our Asia Pacific license revenues was due to lower revenues from our Develop product lines ($11.3 million or 34% decrease) during the year ended December 31, 2003 when compared with the year earlier. We experienced an increase in our Asia Pacific service revenues of $1.0 million or 19% from the year ended December 31, 2002. Increased license revenues from our new Design product lines ($5.8 million during the year ended December 31, 2003), Deploy product lines ($1.6 million or 18% increase) and overall services revenues partially offset the impact of the lower Develop license revenues. The 26% increase in Asia Pacific revenues when comparing the year ended December 31, 2002 to the same period in 2001 relates to increases in our license revenues from our Develop product lines ($6.2 million, or 23% increase) and our Deploy product lines ($2.3 million, or 36% increase), and an increase in our service revenues ($1.4 million, or 38% increase).

Total net revenues from Japan were $21.5 million, $25.5 million and $23.6 million, in the years ended December 31, 2003, 2002, and 2001, respectively, and represented 7%, 10% and 11% of total net revenues in the years ended December 31, 2003, 2002, and 2001, respectively. Total net revenues from Germany were $30.7 million, $27.1 million and $24.6 million, in the years ended December 31, 2003, 2002, and 2001, respectively, and represented 10%, 11% and 11% of total net revenues in the years ended December 31, 2003, 2002, and 2001, respectively. No other country accounted for total net revenues greater than 10% of total net revenues in the years ended December 31, 2003, 2002, and 2001.

Our non-U.S. revenues would be harmed if the United States dollar were to strengthen against major foreign currencies, including the Japanese Yen, the United Kingdom Pound Sterling and the Euro.

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Cost of Revenues

The following table presents our cost of revenues for the years ended December 31, 2003, 2002 and 2001, and dollar and percentage changes from the prior year (in thousands, except percentages).

Cost of Licenses and Other Revenues

Cost of licenses and other revenues consists primarily of production costs, product packaging costs and royalties paid to third-party vendors. The reduction in the cost of licenses and other revenues when comparing the years ended December 31, 2003 and 2002 was principally attributable to a reduction in direct production costs and inventory costs, as we had a larger percentage of our licenses and other revenues generated from large corporate contracts. Typically, large enterprise and corporate licenses are delivered electronically or represent additional licenses of software that have already been delivered. This has the impact of reducing our production costs and inventory costs. Royalty costs were 2% of licenses and other revenues in each of the years ended December 31, 2003, 2002 and 2001, respectively. If royalty costs as a percentage of licenses and other revenues had increased by 1% of licenses and other revenues, we would have experienced an additional cost of licenses and other revenues of $2.2 million, $2.0 million and $1.9 million in the years ended December 31, 2003, 2002 and 2001, 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

The following table presents our cost of service revenues by service category and its percentage of total cost of service revenues for the years ended December 31, 2003, 2002 and 2001 (in thousands, except percentages):

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. Service revenues gross margins were 65%, 48% and 35% in the years ended December 31, 2003, 2002 and 2001, respectively. The increase in gross margins for the year ended December 31, 2003 when compared with the year ended December 31, 2002 was due to an increase in support revenues resulting from the assumed support obligations, and corresponding renewals, from the acquisitions of TogetherSoft and Starbase. The increase in gross margins for the year ended December 31, 2002 when compared with the year ended December 31, 2001 was due to a decrease in consulting and training costs during the year ended December 31, 2002. In future periods, we expect increases in our cost of service revenues as our service revenues grow to support the deployment of enterprise software solutions and as the consulting and training revenues become a larger component of service revenues.

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Amortization of Acquired Intangibles

Amortization of acquired intangibles consists of the amortization of purchased technology and maintenance contracts from acquisitions. The increase in the amortization of acquired intangibles when comparing the years ended December 31, 2003 and 2002 was principally attributable to the acquisitions of TogetherSoft and Starbase. The increase in the amortization of acquired intangibles when comparing the years ended December 31, 2002 and 2001 was principally attributable to the acquisitions VMGear, Highlander and Boldsoft.

Operating Expenses

Selling, General and Administrative Expenses

The following table presents our sales, general and administrative expenses for the years ended December 31, 2003, 2002 and 2001, and dollar and percentage changes from the prior year (in thousands, except percentages).

The increase in selling, general and administrative expenses was principally attributable to an increase in our employee-related expenses of 36% for the year ended December 31, 2003, as compared with 2002. This was primarily due to an increase in headcount as a result of the acquisitions of TogetherSoft and Starbase. In addition, our facilities cost increased 31% for the year ended December 31, 2003 as compared with 2002 as we assumed the lease obligations of TogetherSoft and Starbase. Selling, general and administrative expenses increased in absolute dollars in the year ended December 31, 2002 from the year ended December 31, 2001 primarily due to the increase in salaries related to the expansion of our direct sales force and marketing organization.

Research and Development Expenses

The following table presents our research and development expenses for the years ended December 31, 2003, 2002 and 2001, and dollar and percentage changes from the prior year (in thousands, except percentages).