Borland Software (BORL)

Income Taxes

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

On a consolidated basis, we generated pre-tax losses of $11.9 million and $38.5 million in the three and nine months ended September 30, 2006, respectively, and in the three and nine months ended September 30, 2005, we reported pre-tax losses of $4.1 million and $17.6 million, respectively. Our income tax provision, as a percentage of pre-tax loss, was 11 % and 29 % for the three months ended September 30, 2006 and 2005, respectively. Our income tax provision, as a percentage of pre-tax loss, was 7 % and 10 % for the nine months ended September 30, 2006 and 2005, respectively. The change in our income tax provision in absolute dollars and as a percentage of pre-tax income in the three months ended September 30, 2006, as compared to the year-ago quarter, was largely due to an increase in non-U.S. pre-tax profits subject to foreign taxes paid. The change in our income tax provision in absolute dollars and as a percentage of pre-tax income in the nine months ended September 30, 2006, as compared to the year-ago period, was principally because of a larger benefit recorded for a refund of a foreign tax payment and the release closure of a foreign audit in the year ago period. In the period ended September 30, 2005, we recorded a tax benefit of $0.9 million for the closure of a foreign audit. In all the periods presented, substantially all of our tax provision relates to non-U.S. taxes.

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Our effective tax rate is primarily dependent on the location of taxable profits, if any, the utilization of our net operating loss carryforwards in certain jurisdictions and the imposition of withholding taxes on revenues regardless of our profitability.

Income Taxes

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

On a consolidated basis, we generated pre-tax losses of $19.1 million and $26.6 million in the three and six months ended June 30, 2006, respectively, and in the three and six months ended June 30, 2005, we reported pre-tax losses of $17.9 million and $13.5 million, respectively. Our income tax benefit, as a percentage of pre-tax loss, was 0% and 2% for the three months ended June 30, 2006 and 2005, respectively. Our income tax provision, as a percentage of pre-tax loss, was

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(5)% and (4)% for the six months ended June 30, 2006 and 2005, respectively. The change in our income tax benefit in absolute dollars and as a percentage of pre-tax income in the three months ended June 30, 2006, as compared to the year-ago quarter, was largely due to a foreign tax benefit of $1.3 million recorded in the year-ago quarter for the refund of a foreign tax payment and the completion of a foreign tax audit. In the three months ended June 30, 2006, a tax benefit of $0.9 million was recorded for the completion of a foreign tax audit. The increase in our income tax provision in absolute dollars and as a percentage of pre-tax income in the six months ended June 30, 2006, as compared to the year-ago period, was principally due to an increase in non-U.S. pre-tax profits subject to foreign taxes. In all the periods presented, substantially all of our tax provision relates to non-U.S. taxes.

Our effective tax rate is primarily dependent on the location of taxable profits, if any, the utilization of our net operating loss carryforwards in certain jurisdictions and the imposition of withholding taxes on revenues regardless of our profitability.

Income Taxes

The Company accounts for income taxes using the asset and liability method, pursuant to which deferred income taxes are recognized, based on temporary differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the temporary differences are expected to reverse. Valuation allowances are provided if, based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

The Company does not provide for U.S. income taxes on the undistributed earnings of foreign subsidiaries, which the Company considers to be permanent investments.

Income Taxes

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

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On a consolidated basis, we generated a pre-tax loss of $7.6 million in the quarter ended March 31, 2006 and pre-tax income of $4.4 million in the quarter ended March 31, 2005. Our income tax provision, as a percentage of pre-tax income (loss), was (18)% and 21% for the quarters ended March 31, 2006 and 2005, respectively. The change in income tax provision in absolute dollars in the quarter ended March 31, 2006 as compared to the year ago period was largely as a result of higher income taxes on our profitable foreign subsidiaries. In the quarters ended March 31, 2006 and 2005, substantially all of our tax provision related to non-US taxes.

Our effective tax rate is primarily dependent on the location of taxable profits (if any), the utilization of our net operating loss, or NOL, carryforwards in certain jurisdictions, and the imposition of withholding taxes on revenues regardless of our profitability.

Income Taxes

The following table presents our income taxes for the three and nine months ended September 30, 2005 and 2004 and the absolute dollar and percentage change from the comparable prior year period (dollars in thousands):

The decrease in taxes for the three months ended September 30, 2005 as compared to the year-ago quarter was primarily attributable to a decrease in the profitability of our foreign operations. The decrease in taxes for the nine months ended September 30, 2005 as compared to the year-ago period was primarily due to a decrease in the profitability of our foreign operations and the reversal of certain tax liabilities. Our income tax provision is based on our operating results for the three and nine months ended September 30, 2005 and on foreign income withholding taxes actually incurred.

The effective tax rates for the three and nine months ended September 30, 2005 and 2004 differ from statutory tax rates principally because we did not fully benefit from the operating losses we incurred in the United States and we incurred income tax in a number of foreign jurisdictions. In the three and nine months ended September 30, 2005, we also recorded a $300,000 tax expense relating to the non-permanently reinvested earnings of a foreign subsidiary. We provide U.S. income taxes on the earnings of our foreign subsidiaries unless those earnings are considered permanently reinvested. At September 30, 2005, $8.7 million of earnings from our subsidiary in Japan were not considered permanently reinvested, and were subsequently distributed to the U.S. parent in the form of a dividend. Additionally, we took a $730,000 benefit for the closure of a foreign tax audit and a $540,000 benefit for the refund of a foreign tax payment during the nine months ended September 30, 2005.

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 a 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 a substantial amount of our net deferred tax assets. 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 record liabilities for anticipated tax audit issues in the United States and other tax jurisdictions based on our estimate of whether, and to the extent to which, additional taxes may be due. If we ultimately determine that payment of these amounts is unnecessary, we will reverse the liability and recognize a tax benefit during the period in which we determine that the liability is no longer necessary. If we determine that the recorded tax liability is less than we expect the ultimate assessment to be, we will record an additional charge in our provision for taxes in the period in which we ascertain an additional liability is required. We also record deferred tax liabilities for the undistributed earnings of foreign subsidiaries in the period in which the foreign earnings are not considered permanently reinvested.

Income Taxes

The following table presents our income taxes for the three and nine months ended September 30, 2005 and 2004 and the absolute dollar and percentage change from the comparable prior year period (dollars in thousands):

The decrease in taxes for the three months ended September 30, 2005 as compared to the year-ago quarter was primarily attributable to a decrease in the profitability of our foreign operations. The decrease in taxes for the nine months ended September 30, 2005 as compared to the year-ago period was primarily due to a decrease in the profitability of our foreign operations and the reversal of certain tax liabilities. Our income tax provision is based on our operating results for the three and nine months ended September 30, 2005 and on foreign income withholding taxes actually incurred.

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The effective tax rates for the three and nine months ended September 30, 2005 and 2004 differ from statutory tax rates principally because we did not fully benefit from the operating losses we incurred in the United States and we incurred income tax in a number of foreign jurisdictions. In the three and nine months ended September 30, 2005, we also recorded a $300,000 tax expense relating to the non-permanently reinvested earnings of a foreign subsidiary. We provide U.S. income taxes on the earnings of our foreign subsidiaries unless those earnings are considered permanently reinvested. At September 30, 2005, $8.7 million of earnings from our subsidiary in Japan were not considered permanently reinvested, and were subsequently distributed to the U.S. parent in the form of a dividend. Additionally, we took a $730,000 benefit for the closure of a foreign tax audit and a $540,000 benefit for the refund of a foreign tax payment during the nine months ended September 30, 2005.

Income Taxes

The following table presents our income taxes for the three and six months ended June 30, 2005 and 2004 and the absolute dollar and percentage change from the comparable prior year period (dollars in thousands):

The decrease in taxes for both the three and six months ended June 30, 2005 as compared to the year-ago periods was primarily attributable to a decrease in the profitability of our foreign operations and the reversal of tax liabilities. Our income tax provision is based on our operating results for the three and six months ended June 30, 2005 and on foreign income withholding taxes actually incurred.

Our tax provision for the three and six months ended June 30, 2004 were not based on our actual expected rate as we incurred non-U.S. taxes in a number of foreign jurisdictions.

The effective tax rates for the three and six months ended June 30, 2005 and 2004 differ from statutory tax rates principally because we will not fully benefit from the operating losses we will incur in the U.S. and we will incur income tax in a number of foreign jurisdictions in 2005. Additionally, we took a $730,000 benefit for the closure of a foreign tax audit and a $540,000 benefit for the refund of a foreign tax in the six months ended June 30, 2005.

Income Taxes

For the three months ended March 31, 2005 and 2004, we recorded income tax expense of $0.9 million and $1.9 million, respectively. The effective tax rates for the three months ended March 31, 2005 and 2004 differ from statutory tax rates principally because 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.

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 No. 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, or NOL, 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 will reverse the liability and recognize a tax benefit during the period in which we determine that the liability is no longer necessary. We will 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.

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 No. 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, or NOL, 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 will reverse the liability and recognize a tax benefit during the period in which we determine that the liability is no longer necessary. We will 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.