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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended March 31, 2004

OR

For the transition period from              to             

0-16096

(Commission File Number)

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)

Registrant’s Telephone Number, Including Area Code: (831) 431-1000

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

YES x NO ¨

The number of shares of the registrant’s common stock, par value $0.01 per share, outstanding as of April 30, 2004, the most recent practicable date prior to the filing of this report, was 80,746,100.

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INDEX

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PART I

FINANCIAL INFORMATION

BORLAND SOFTWARE CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value and share amounts)

See accompanying Notes to Condensed Consolidated Financial Statements.

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BORLAND SOFTWARE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts, unaudited)

See accompanying Notes to Condensed Consolidated Financial Statements.

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BORLAND SOFTWARE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands, unaudited)

See accompanying Notes to Condensed Consolidated Financial Statements.

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BORLAND SOFTWARE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, unaudited)

See accompanying Notes to Condensed Consolidated Financial Statements.

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BORLAND SOFTWARE CORPORATION

Notes to Condensed Consolidated Financial Statements (unaudited)

NOTE 1—BASIS OF PRESENTATION

The accompanying Borland Software Corporation, or Borland, condensed consolidated financial statements at March 31, 2004 and December 31, 2003 and for the three months ended March 31, 2004 and 2003, are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information and Rule 10-01 of Regulation S-X. Accordingly, they do not include all financial information and disclosures required by GAAP for complete financial statements and certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly Borland’s financial position at March 31, 2003 and December 31, 2003, and its results of operations and cash flows for the three months ended March 31, 2004 and 2003. Certain amounts in the March 31, 2003 and December 31, 2003 information have been reclassified in order to be consistent with current financial statement presentation. See Note 5 to our Notes to Condensed Consolidated Financial Statements for information regarding our reclassifications.

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The results of operations for interim periods are not necessarily indicative of the results to be expected for any subsequent quarter or for the full year. The condensed consolidated financial statements and notes should be read in conjunction with our audited financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2003 as filed with the Securities and Exchange Commission, or the SEC, on March 15, 2004.

Transition of sales cycle

We are in the process of transforming the company from one focused on selling individual development tools alone to one focused on selling multi-product enterprise solutions that span the entire software application development lifecycle. As part of this transformation, we are focused on increasing sales force productivity by generating more sales of our multi-product solutions, developing stronger alliances with systems integrators and technology partners that have strong relationships with enterprise-level customers, and selling our individual products through our network of channel partners. As we make the transition to selling enterprise solutions, we expect to compete more directly with larger companies and, as a result, we may face additional pricing pressures, longer sales cycles, and more complex revenue agreements.

NOTE 2—STOCK BASED COMPENSATION

Stock-Based Compensation Plans

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 expense is measured as the excess, if any, of the closing market price of our stock at the date of grant over the exercise price of the option granted. We recognize compensation cost for stock options, if any, ratably over the vesting period. Generally, we grant options with an exercise price equal to the closing market price of our stock on the grant date. Accordingly, we have not recognized any compensation expense for our stock option plans. We have also granted restricted stock awards to certain officers and other executives as an incentive to retain key employees. The awarded shares are made in common stock and vest at the end of the restriction period. Upon issuance of the award, an amount equivalent to the excess of the market price of the shares awarded over the price paid by the recipient at the date of grant is recorded in deferred compensation and is amortized against income over the related vesting period. We provide additional pro forma disclosures as required under Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation,” or SFAS No. 123, as amended by SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure-an amendment of FASB Statement No. 123,” or SFAS No. 148.

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

Compensation expense included in pro forma net income (loss) and net income (loss) per share is recognized for the fair value of the awards granted under our stock option and stock purchase plans using the Black-Scholes pricing model. The fair value of each stock option is estimated on the date of grant using the Black-Scholes pricing model with the following weighted average assumptions:

The fair value of each employee stock purchase plan award is estimated using the Black-Scholes pricing model with the following weighted average assumptions:

The weighted average fair value of the stock options granted under our employee stock option plans and the stock awarded under our employee stock purchase plan during the three months ended March 31, 2004 and 2003, as defined by SFAS No. 123, was $4.01 and $7.80, respectively.

Had we recorded compensation expenses based on the estimated grant date fair value for awards granted under our stock option and stock purchase plans as defined by SFAS No. 123, our pro forma net loss and net loss per share for the three months ended March 31, 2004 and 2003, would have been as follows (in thousands, except per share amounts):

The pro forma amounts include compensation expenses related to stock option grants and stock purchase rights for the three months ended March 31, 2004 and 2003. In future periods, the compensation expense will increase as a result of the fair value of stock options and stock purchase rights granted in those future periods.

NOTE 3—NET INCOME (LOSS) PER SHARE

We compute net income (loss) per share in accordance with SFAS No. 128, “Earnings per Share,” or SFAS No. 128. Under the provisions of SFAS No. 128, basic net income (loss) per share is computed by dividing the net income (loss) by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing the net income (loss) for the period by the weighted average number of common and potentially diluted shares outstanding during the period. Potentially diluted shares, which consist of incremental shares issuable upon exercise of stock options, are included in diluted net income (loss) per share to the extent such shares are dilutive.

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The following table sets forth the computation of basic and diluted net income (loss) per share for the three months ended March 31, 2004 and 2003 (in thousands, except per share amounts):

The diluted earnings per share calculation for the three months ended March 31, 2004 and 2003, excludes options to purchase approximately 6.4 million and 15.3 million shares, respectively, because their effect would have been antidilutive.

NOTE 4—ACQUISITIONS

TogetherSoft Corporation

On January 14, 2003, we completed the acquisition of TogetherSoft Corporation, or TogetherSoft, a privately-held corporation. The consideration consisted of approximately $82.5 million in cash, 9,050,000 shares of Borland common stock and the assumption of certain liabilities and obligations of TogetherSoft, including those arising under its stock option plans. The consideration paid was reduced for certain legal expenses paid by TogetherSoft. 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.

During the three months ended March 31, 2004, we recorded approximately $3.0 million in acquisition-related expenses associated with the amortization of the purchased intangibles from the acquisition of TogetherSoft.

Of the total purchase price, approximately $150.9 million was allocated to goodwill. Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired. In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” or SFAS No. 142, goodwill is not being amortized and is tested for impairment at least annually.

Supplemental pro forma information reflecting the acquisition of TogetherSoft as if it occurred on January 1, 2003 is as follows (in thousands, except per share amounts, unaudited):

Such information is not necessarily representative of the actual results that would have occurred for those periods.

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The following table summarizes the short-term portion of our restructuring activity related to the TogetherSoft acquisition accounted for according to the Emerging Issues Task Force Issue No. 95-3, or EITF 95-3, for the three months ended March 31, 2004 (in thousands):

Starbase Corporation

On October 8, 2002, we signed a merger agreement to purchase all of the outstanding shares of Starbase Corporation, or Starbase, for an aggregate consideration of approximately $24.0 million and $2.0 million in bridge financing that was forgiven upon the consummation of the transaction. Starbase was a provider of end-to-end enterprise software lifecycle solutions covering requirements definition and management, code and content development, and change and configuration management.

During the three months ended March 31, 2004, we recorded approximately $0.7 million in acquisition-related expenses associated with the amortization of the purchased intangibles from the acquisition of Starbase.

NOTE 5—GOODWILL AND INTANGIBLE ASSETS

The changes in the carrying amount of goodwill for the three months ended March 31, 2004 are as follows (in thousands):

The adjustment to goodwill is primarily related to fluctuations in foreign currency exchange rates during the three months ended March 31, 2004.

The following tables summarize our intangible assets, net (in thousands):

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Estimated future amortization expense related to our intangible assets at March 31, 2004 is as follows (in thousands):

We have reclassified from operating expenses to cost of revenues the amortization of acquired technology and maintenance contracts for the three months ended March 31, 2003 to provide consistent presentation with the three months ended March 31, 2004. This reclassification did not impact total net revenues, net loss, or net loss per share for the three months ended March 31, 2003. The effect of the reclassification on the Condensed Consolidated Statements of Operations is as follows (in thousands):

NOTE 6—RESTRUCTURING

The following table summarizes our short-term restructuring and acquisition-related activity accounted for according to SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” for the three months ended March 31, 2004 (in thousands):

During the three months ended March 31, 2004 we reclassified approximately $0.5 million from our long-term restructuring accrual to short-term restructuring accrual to properly reflect the current portion of the lease obligations for vacant facilities in the United Kingdom. At March 31, 2004 we had approximately $3.5 million in our long-term restructuring accrual related to the lease obligations for vacant facilities. During the three months ended March 31, 2004, we paid approximately $1.5 million in cash for the termination of a facility lease which is included in cash payments and write-offs under facilities in the table above. We expect our severance and benefits accrual to be fully paid by the end of 2004 and we are currently seeking to sublet or terminate the leases on our vacant facilities.

NOTE 7—INCOME TAXES

For the three months ended March 31, 2004 and 2003, we recorded income tax expense of $1.9 million and $1.5 million, respectively. Our tax provisions for the three months ended March 31, 2004 and 2003 were not based on our expected annual rate, as we incurred non-U.S. withholding taxes in a number of foreign jurisdictions, which were not based on our profitability, as well as non-U.S. income taxes for certain profitable foreign operations. We also incurred U.S. federal tax expense for Alternative Minimum Tax, or AMT, purposes, as well as state income tax expense. Tax liabilities incurred in foreign jurisdictions were not offset by the benefits of prior U.S. net operating loss and tax credit carryforwards.

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NOTE 8—REPURCHASE OF COMMON STOCK

Discretionary Repurchase Program

In September 2001, our Board of Directors authorized the use of up to $30.0 million to repurchase shares of our outstanding common stock under a discretionary stock repurchase program. During the three months ended March 31, 2004, the plan approached its $30.0 million limit and in February 2004, our Board of Directors authorized an additional $30.0 million to repurchase shares of our outstanding stock under the discretionary program, bringing the total discretionary stock repurchase authorizations to $60.0 million.

As a part of our discretionary stock repurchase program, we repurchased 523,100 common shares at an average price of $9.56 per share for an aggregate cost of approximately $5.0 million during the three months ended March 31, 2004. During the three months ended March 31, 2003, we repurchased 299,801 common shares at an average price of $9.61 per share for an aggregate cost of approximately $2.9 million. The discretionary program is currently deemed to be in effect and at March 31, 2004, approximately $27.7 million remains authorized for future repurchases.

10b5-1 Repurchase Program

In August 2003, our Board of Directors authorized a 10b5-1 repurchase program whereby up to 1,000,000 shares or $15.0 million worth of our outstanding common stock, whichever comes first, may be repurchased with a per trading day limit of 2,000 shares. Under this program we repurchased 124,000 common shares at an average price of $9.69 a share for total consideration of $1.2 million during the three months ended March 31, 2004. This authorization is currently deemed to be in effect and at March 31, 2004, approximately $12.0 million, or 676,000 shares, whichever comes first, remains authorized for future repurchases.

NOTE 9—LITIGATION

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. On March 31, 2004, the Delaware Chancery Court held a hearing on our motion for summary judgment, but has not ruled on such motion. We intend to defend ourselves vigorously. There is no indication at present whether the lawsuit will have a material effect on our financial condition or liquidity.

From time to time, we may be involved in other lawsuits, claims, investigations and proceedings, consisting of intellectual property, commercial, employment and other matters, which arise in the ordinary course of business. In accordance with SFAS No. 5, “Accounting for Contingencies,” or SFAS No. 5, we make a provision for a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular case. Litigation is inherently unpredictable. However, we believe that we have valid defenses with respect to the legal matters pending against us, as well as adequate provisions for any probable and estimable losses. If an unfavorable ruling were to occur in any specific period, there exists the possibility of a material adverse impact on the results of operations for that period. We believe that, except as listed above, 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 or liquidity.

NOTE 10—LOAN RECEIVABLE WRITE-OFF

At March 31, 2003, we had a loan receivable with a book value of $2.2 million related to a loan to AltoWeb, Inc., or AltoWeb, a provider of J2EE applications. Subsequent to March 31, 2003, we were informed by AltoWeb that it had ceased substantially all of its operations. We recorded the write-off of this loan receivable of

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$2.2 million during the three months ended March 31, 2003. Since our investment in Altoweb was related to AltoWeb’s attempt to extend their product development efforts for the Borland platform, we have included these expenses in research and development during the three months ended March 31, 2003.

NOTE 11—INDEMNIFICATIONS AND GUARANTEES

The following is a summary of our agreements that we have determined are within the scope of FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” or FIN No. 45, which are specifically grandfathered because the guarantees were in effect prior to December 31, 2002. Accordingly, we have no liabilities recorded for these agreements as of March 31, 2004, except as noted below.

As permitted under Delaware law, we have agreements whereby we indemnify our officers and directors for certain events or occurrences while the officer or director is, or was serving, at our request in such capacity. The term of the indemnification period is for the officer or director’s lifetime. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited; however, we have a Director and Officer insurance policy that limits our exposure and enables us to recover a portion of any future amounts paid. As a result of our insurance policy coverage, we believe the estimated fair value of these indemnification agreements is minimal.

As part of the Starbase and TogetherSoft acquisitions, we entered into agreements whereby we indemnify the officers and directors of the acquired company for certain events or occurrences while such officers or directors served in such capacity. The term of the indemnification period is for the officer’s or director’s lifetime. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited; however, we have purchased Director and Officer insurance policies for Starbase and TogetherSoft that limit our exposure for six years. These insurance policies enable us to recover a portion of any future amounts paid. As a result of our insurance policy coverage, we believe the estimated fair value of these indemnification agreements is minimal.

We entered into an agreement for the outsourcing of inventory fulfillment. As a component of this agreement, we guarantee that in the event we terminate the fulfillment agreement, we will purchase all inventory held by the vendor at the time of termination. We estimate and accrue reserves for excess inventory at the fulfillment vendor. As of March 31, 2004, we had inventory in excess of the reserves of approximately $0.4 million, which represents the potential obligation relating to this guarantee.

During the year ended December 31, 2003, we entered into an operating lease for our U.S. regional sales headquarters in Cupertino, California. In the event that we do not exercise our option to extend the term of the lease, we guarantee certain costs to restore the property to certain conditions in place at the time the lease commenced. We are accruing the estimated lease restoration costs over the lease term.

During 1999, we entered into a ten-year operating lease for our corporate headquarters buildings in Scotts Valley, California. In the event that we do not exercise our option to extend the term of the lease, we guarantee certain costs to restore the property to certain conditions in place at the time of lease. We believe the estimated fair value of this guarantee is minimal.

We enter into standard indemnification agreements in our ordinary course of business. Pursuant to these agreements, we indemnify and agree to repair, replace or reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally our business partners or customers, in connection with any U.S. patent, or any copyright or other intellectual property infringement claim by any third party with respect to our products. The term of these indemnification agreements is generally perpetual. The maximum potential amount of future payments we could be required to make under these indemnification agreements is presently unknown. We have never incurred costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, we believe the estimated fair value of these agreements is minimal.

NOTE 12—RECENT ACCOUNTING PRONOUNCEMENTS

In December 2003, the FASB issued additional guidance clarifying the provisions of FASB Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51,” or FIN No. 46-R. FIN No. 46-R provides a deferral of FIN No. 46 for certain entities. FIN No. 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. We do not have any interests in variable interest entities and the adoption of FIN No. 46-R is not expected to have a material impact on our financial position, results of operations or cash flows.

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Forward-Looking Statements

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

These forward-looking statements may relate to, but are not limited to, future capital expenditures, acquisitions, timing of the integration of acquired businesses, the ultimate cost of acquired businesses, revenue “pipeline,” revenues, including revenues from recently acquired businesses, cash flows, earnings, margins, costs, strategy, demand for our products, market and technological trends in the software industry, effective tax rates, interest rates, foreign currency exchange rates and inflation and various economic and business trends. Generally, you can identify forward-looking statements by the use of words such as “expect,” “estimate,” “project,” “budget,” “forecast,” “anticipate,” “goal,” “intend,” “plan,” “may,” “will,” “could,” “should,” “believes,” “predicts,” “potential,” “continue” and similar expressions or the negative or other variations thereof. 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 SEC or in materials incorporated by reference herein or therein. You should be aware that the occurrence of any of these risks and uncertainties may cause our actual results to differ materially from those anticipated in our forward-looking statements and have a material 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-Q. We caution you not to place undue reliance on these forward-looking statements, which, unless otherwise indicated, speak only as of the date they were made. We do not undertake any obligation to update or release publicly any revisions to these forward-looking statements to reflect events or circumstances after the date of this Form 10-Q, except as required by law.

General

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 the risk of project failure. In support of our solutions, we also provide training, consulting and support services through our professional services organization.

We are in the process of transforming the company from one focused on selling individual development tools alone to one focused on selling multi-product enterprise solutions that span the entire software application development lifecycle. As part of this transformation, we are focused on increasing sales force productivity by generating more sales of our multi-product solutions, developing stronger alliances with systems integrators and technology partners that have strong relationships with enterprise-level customers, and selling our individual products through our network of channel partners. As we make the transition to selling enterprise solutions, we expect to compete more directly with larger companies. As a result, we may face additional pricing pressures. We believe that, over time as we compete for these larger enterprise customers, the pricing of our individual products may become less meaningful than the overall blend of our enterprise solutions offered. We also expect to experience longer sales cycles, which is typical for sales of larger solutions.

We are and have been transitioning certain product lines into a “software assurance” model in which upgrades are sold as part of a customer’s maintenance offering and are reported as service revenues instead of license revenues as is the case when sold as a stand-alone product upgrades. Further, we have enhanced our systems and focus around renewal of software assurance contracts. As such, our service revenues have become a larger portion of our business.

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We remain focused on improving operating margins, and in recent quarters have restructured our operations toward this objective. We believe we are structured appropriately at this time and believe overall expenses will stabilize over the next several quarters close to the current level or with a minimal increase as we pursue our enterprise marketing and selling strategy.

We achieved the following financial results during the three months ended March 31, 2004:

For a more in-depth discussion of our business, including a discussion of our critical accounting policies and estimates, please read our Annual Report on Form 10-K for the year ended December 31, 2003 as filed with the SEC on March 15, 2004.

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Results of Operations

The following table presents our Condensed Consolidated Statements of Operations data and the related percentage of net revenues for the three months ended March 31, 2004 and 2003 (dollars in thousands):

Total Net Revenues

The following table presents our net revenues for the three months ended March 31, 2004 and 2003, and the absolute dollar and percentage change from the comparable prior year period (dollars in thousands):

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

Licenses and Other Revenues

The following table presents our licenses and other revenues for the three months ended March 31, 2004 and 2003, and the absolute dollar and percentage change from the comparable prior year period (dollars in thousands):

With the integration of the acquisitions of TogetherSoft and Starbase, we have aligned our presentation of licenses and other revenues to better reflect our application lifecycle strategy. Specifically, our application lifecycle management, or ALM, offerings comprise three major product categories: Design, Develop and Deploy. Design includes the products from our acquisitions of TogetherSoft and Starbase: StarTeam, CaliberRM, Together and other

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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, Kylix and C++ Mobile Edition. Deploy is comprised of our Visibroker, Borland Enterprise Server products, InterBase and other enterprise products.

Licenses and other revenues represent amounts for license fees and royalties earned for granting customers the right to use our software products. License and other revenues represented 70% of net revenues in the three months ended March 31, 2004 compared to 76% in the three months ended March 31, 2003. The change in mix between licenses/other revenues and service revenues is due to our transition of certain products from a stand-alone upgrade selling model to a software assurance model that provides upgrades to products while being reflected in the service revenues line item.

The following table presents our licenses and other revenues by product category and the percentage of net licenses and other revenues of each category for the three months ended March 31, 2004 and 2003 (dollars in thousands):

In the future, if we are successful in selling integrated ALM solutions, it may prove difficult to break out license revenues on a product category basis.

Design. The decrease in Design licenses and other revenues in the three months ended March 31, 2004 from the three months ended March 31, 2003 was due to lower revenues generated from the sales of our Together product line. Historically, revenues from the Together product line have been influenced by the design and development functionality within the product. As we transform the Together product line into a pure modeling solution and promote JBuilder and Delphi as our flagship development solutions, we are seeing less license revenue from this product line. However, we believe the Together product line is an important element of our ALM studio product, Borland Enterprise Studio.

Develop. The decrease in Develop licenses and other revenues in the three months ended March 31, 2004 from the three months ended March 31, 2003 was due to weakness in our Java revenues. Licenses and other revenues from our Develop products group included licenses and other revenues of $13.4 million and $20.9 million in the three months ended March 31, 2004 and 2003, respectively, from our Java product line. The decrease in licenses and other revenues in our Java product line was due to lower revenues from our JBuilder product line. We believe the market growth in adoption of new Java development technology has slowed, we face competition from open source offerings, and consequently, we face increasing price pressure. Thus, while unit sales of the current version of JBuilder (JBuilder X) are higher than unit sales of the version of JBuilder that was current as of March 31, 2003 (JBuilder 8), our JBuilder revenue has declined. Additionally, as more of our Java customers have purchased software assurance contracts that include upgrades, we expect to generate less revenue from stand-alone upgrades of Java products. We believe that revenue trends for our JBuilder product will be dependent upon the maturation of the Java development market and the success of our ALM solutions in the Java market.

Licenses and other revenues from our Develop products group included $15.2 million and $14.0 million in the three months ended March 31, 2004 and 2003, respectively, from our .NET product line. The increase in licenses and other revenues from our .NET product line was due to higher licenses and other revenues generated from our Delphi products following a release of Delphi 8 in late December 2003. We have historically experienced an increase in revenues from our Delphi product during the quarter following the release of a new version, as a majority of our Delphi customers purchase stand-alone upgrades instead of purchasing technical support contracts.

Deploy. The increase in licenses and other revenues in the three months ended March 31, 2004 from the three months ended March 31, 2003 was due to higher revenues generated from large deals with our telecommunications customers and OEM partners. We believe that the growth in our deployment revenues is due, in part, to increasing sales in the telecommunications sector. While we expect to receive a short-term benefit from the increased spending in this market, more sustained growth in our deployment revenues will require broader adoption of the next generation telecommunication technology.

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Service revenues

The following table presents our service revenues for the three months ended March 31, 2004 and 2003, and the absolute dollar and percentage change from the comparable prior year period (dollars in thousands):

Service revenues represent amounts earned for technical support, which includes call support and maintenance, and for consulting and training services for our software products. The increase in service revenues in the three months ended March 31, 2004 from the three months ended March 31, 2003 primarily resulted from an increase in technical support revenues due to our efforts to transition customers to our software assurance model. We expect our service revenues to represent between 25% and 35% of total net revenues in the future. We believe that our technical support revenues have benefited from increased revenues generated from larger enterprises, which generally purchase support contracts with their software licenses. We expect our support revenues to grow to the extent we are successful in selling our solutions to 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, if we are unsuccessful in our efforts to transition customers to a software assurance model or in selling new enterprise solutions, we may experience decreases in our service revenues.

The following table presents our service revenues by service category and as a percentage of total service revenues for the three months ended March 31, 2004 and 2003 (dollars in thousands):

International Net Revenues

Revenues from sources outside the United States, or non-U.S. revenues, represented approximately 58% and 56% of net revenues for the three months ended March 31, 2004 and 2003, respectively. The increase in the percentage of non-U.S. revenues for the three months ended March 31, 2004, as compared to the three months ended March 31, 2003, was principally due to a $1.9 million increase in EMEA revenues as a result of the weakening of the U.S. Dollar against the Euro and due to a $1.8 million decrease in revenues attributable to the United States primarily as a result of a decrease in revenues from our Java product line in the United States. We believe that our transformation efforts created the most disruption with our sales efforts in the United States, and we expect this disruption to continue in the near-term as new personnel gain experience and as we continue to modify our go-to-market effort. On a percentage basis, we expect non-U.S. revenues to decline slightly in future periods due to the anticipated growth of revenues in the United States as we increase our efforts to sell our ALM solutions to large enterprise customers in the United States.

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

The following table presents our net revenues by region and as a percentage of total net revenues for the three months ended March 31, 2004 and 2003 (dollars in thousands):

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Cost of Revenues

The following table presents cost of revenues for the three months ended March 31, 2004 and 2003, and the absolute dollar and percentage changes from the comparable prior year period (dollars in thousands):

Cost of Licenses and Other Revenues

Cost of licenses and other revenues consists primarily of production costs, product packaging and royalties paid to third-party vendors. The reduction in the cost of licenses and other revenues was in line with the change in licenses and other revenues. Royalty costs were 2% of licenses and other revenues in the three months ended March 31, 2004 and 2003. The level of royalty costs in future periods will depend on 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.