10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q


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

For the Quarterly Period Ended May 31, 2008


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

For the Transition Period From to

Commission File Number 000-20562

COREL CORPORATION

(Exact name of registrant as specified in its charter)


Canada		98-0407194
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

1600 Carling Avenue, Ottawa, Ontario		K1Z 8R7
(Address of principal executive office)		(Zip Code)

Registrant’s telephone number, including area code:
(613) 728-0826

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o

Accelerated filer þ

Non-accelerated filer o
(Do not check if a smaller reporting company)

Smaller reporting company o

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

The number of shares outstanding of the registrant’s common stock as of June 20, 2008 was 25,633,459

PART I. FINANCIAL INFORMATION

Item 1. Unaudited Consolidated Financial Statements

Corel Corporation
Consolidated Balance Sheets
(In thousands of U.S. dollars or shares)
(Unaudited)


			May 31,			November 30
	Note		2008			2007

Assets
Current assets:
Cash and cash equivalents			$	33,415		$	24,615
Restricted cash				161			217
Accounts receivable
Trade, net of allowances for doubtful accounts of $887 and $1,366, respectively				28,775			41,092
Other				2,958			118
Inventory		3		932			729
Income taxes recoverable		4		1,649			1,470
Prepaids and other current assets				3,930			3,276

Total current assets				71,820			71,517
Capital assets				9,176			8,971
Intangible assets				79,471			92,010
Goodwill				88,643			88,643
Deferred financing and other long-term assets				5,641			5,696

Total assets			$	254,751		$	266,837

Liabilities and shareholders’ deficit
Current liabilities:
Accounts payable and accrued liabilities			$	58,089		$	67,290
Income taxes payable		4		944			723
Deferred revenue				12,816			15,707
Current portion of long-term debt		5		18,952			2,249
Current portion of obligation under capital leases				728			767

Total current liabilities				91,529			86,736
Deferred revenue				2,179			2,365
Deferred income tax liability		4		18,287			20,754
Obligation under capital leases				1,600			2,114
Income taxes payable		4		13,201			11,693
Accrued pension benefit obligation		6		1,083			1,116
Long-term debt		5		138,561			156,359

Total liabilities				266,440			281,137

Commitments and contingencies		7
Shareholders’ deficit
Share capital:
Common Shares (par value: none; authorized: unlimited; issued and outstanding: 25,632 and 25,457 shares, respectively)		8		42,182			40,652
Additional paid-in capital		8		7,763			5,926
Accumulated other comprehensive loss				(1,425	)		(721	)
Deficit		4		(60,209	)		(60,157	)

Total shareholders’ deficit				(11,689	)		(14,300	)

Total liabilities and shareholders’ deficit			$	254,751		$	266,837

See Accompanying Notes to the Consolidated Financial Statements

Consolidated Statements of Operations
(In thousands of U.S. dollars or shares, except per share data)
(Unaudited)


			Three Months Ended						Six Months Ended
			May 31,						May 31,
	Note		2008			2007			2008			2007

Revenues
Product			$	60,249		$	59,553		$	119,611		$	106,857
Maintenance and services				6,795			5,479			12,977			10,809

Total revenues		12		67,044			65,032			132,588			117,666

Cost of revenues
Cost of products				14,008			14,026			29,235			22,523
Cost of maintenance and services				132			221			299			419
Amortization of intangible assets				6,418			6,373			12,832			12,130

Total cost of revenues				20,558			20,620			42,366			35,072

Gross margin				46,486			44,412			90,222			82,594

Operating expenses
Sales and marketing				20,748			17,715			40,432			34,990
Research and development				11,716			11,070			23,807			22,666
General and administration				8,640			8,575			17,451			17,237
Acquired in-process research and development				—			—			—			7,831
InterVideo integration expense				—			860			—			1,645
Restructuring		9		447			—			625			—

Total operating expenses				41,551			38,220			82,315			84,369

Income (loss) from operations				4,935			6,192			7,907			(1,775	)

Other expenses (income)
Interest income				(99	)		(518	)		(219	)		(882	)
Interest expense				3,032			4,236			7,440			8,521
Amortization of deferred financing fees				270			269			540			534
Expenses associated with Special Committee review		13		705			—			705			—
Other non-operating (income) expense				102			479			(1,362	)		(153	)

Income (loss) before taxes				925			1,726			803			(9,795	)
Income tax (recovery)		4		(5	)		(587	)		(97	)		(232	)

Net income (loss)			$	930		$	2,313		$	900		$	(9,563	)

Other comprehensive income (loss)
Amortization of actuarial gain recognized for defined benefit plan				—			—			22			—
Unrealized loss on long-term investments				(35	)		—			(35	)		—
Gain (loss) on interest rate swaps designated as hedges				2,938			—			(689	)		—

Other comprehensive income (loss), net of taxes				2,903			—			(702	)		—

Comprehensive income (loss)			$	3,833		$	2,313		$	198		$	(9,563	)

Net income (loss) per share:
Basic			$	0.04		$	0.09		$	0.04		$	(0.39	)
Fully Diluted			$	0.04		$	0.09		$	0.03		$	(0.39	)
Weighted average number of shares:
Basic				25,543			24,817			25,503			24,722
Fully diluted		10		26,238			25,284			26,165			24,722

See Accompanying Notes to the Consolidated Financial Statements

COREL CORPORATION

Consolidated Statement of Cash Flows
(In thousands of U.S. dollars)
(Unaudited)


			Three Months Ended						Six Months Ended
			May 31,						May 31,
	Note		2008			2007			2008			2007

Cash flows from operating activities
Net income (loss)			$	930		$	2,313		$	900		$	(9,563	)
Depreciation and amortization				1,233			969			2,395			1,671
Amortization of deferred financing fees				270			269			540			534
Amortization of intangible assets				6,418			6,373			12,832			12,130
Stock-based compensation		8		1,977			1,290			3,115			2,298
Provision for bad debts				129			49			233			65
Deferred income taxes		4		(1,233	)		(1,280	)		(2,467	)		(2,315	)
Acquired in-process research and development				—			—			—			7,831
Unrealized loss on forward exchange contracts				—			—			—			35
Loss on disposal of fixed assets				6			54			48			54
Loss (Gain) on interest rate swap recorded at fair value				(512	)		(391	)		243			(582	)
Gain on sale of investment							—			(822	)		—
Change in operating assets and liabilities		11		(2,308	)		(12,862	)		(3,700	)		3,066

Cash flows provided by (used in) operating activities				6,910			(3,216	)		13,317			15,224


Cash flows from financing activities
Restricted cash				—			—			56			—
Proceeds from operating line of credit				—			5,000			—			48,000
Repayments on operating line of credit				—			(15,000	)		—			(35,000	)
Proceeds from long-term debt				—			—			—			70,000
Repayments of long-term debt				(404	)		(399	)		(1,095	)		(1,080	)
Repayments of capital lease obligations				(205	)		—			(339	)		—
Financing fees incurred				—			(5	)		—			(1,677	)
Proceeds from exercise of stock options				203			1,387			254			2,689
Other financing activities				—			51			—			51

Cash flows provided by (used in) financing activities				(406	)		(8,966	)		(1,124	)		82,983


Cash flows from investing activities
Purchase of InterVideo Inc., net of cash acquired				—			(786	)		—			(121,154	)
Purchase of long lived assets, net of proceeds				(1,865	)		(608	)		(3,299	)		(718	)

Cash flows used in investing activities				(1,865	)		(1,394	)		(3,299	)		(121,872	)


Effect of exchange rate changes on cash and cash equivalents				(59	)		80			(94	)		45

Increase (decrease) in cash and cash equivalents				4,580			(13,496	)		8,800			(23,620	)
Cash and cash equivalents, beginning of period				28,835			40,906			24,615			51,030

Cash and cash equivalents, end of period			$	33,415		$	27,410		$	33,415		$	27,410


Supplementary Disclosure

Purchases of capital assets under capital lease			$	—		$	2,498		$	—		$	2,498
Interest paid, net				3,788			3,817			7,226			8,493
Taxes paid, net				2,187			1,078			2,648			915

See Accompanying Notes to the Consolidated Financial Statements

Corel Corporation

Notes to the Consolidated Financial Statements
(All amounts in thousands of U.S. dollars, unless otherwise stated)
(Unaudited)

1. Unaudited Interim Financial Information

The interim financial information is unaudited and includes all adjustments (consisting of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of our financial position at May 31, 2008 and our results of operations and cash flows for the three and six months ended May 31, 2008 in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The consolidated balance sheet as of November 30, 2007 was derived from the audited consolidated financial statements at that date, but, in accordance with the rules and regulations of the United States Securities and Exchange Commission (“SEC”), does not include all of the information and notes required by U.S. GAAP for complete financial statements. Operating results for the three and six months ended May 31, 2008 are not necessarily indicative of results that may be expected for the entire fiscal year. The financial statements should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this Form 10-Q, and in conjunction with Management’s Discussion and Analysis and the financial statements and notes thereto included in the Company’s Form 10-K for the period ending November 30, 2007 (File No. 000-20562).

2. Summary of Significant Accounting Policies

Basis of presentation

The consolidated financial statements have been presented in United States (US) dollars. The Company’s accounting polices are consistent with those presented in our annual consolidated financial statements as at November 30, 2007, except as noted below. Certain prior period balances relating to operating expenses and cost of product have been re-classified to conform to the current year’s presentation.

Estimates and assumptions

The preparation of these financial statements is in conformity with US GAAP, which requires management to make certain estimates that affect the reported amounts in the consolidated financial statements, and the disclosures made in the accompanying notes. In addition to the significant estimates presented in our annual consolidated financial statements as at November 30, 2007, we also use assumptions to estimate the cash sweep payments required under our term loan agreement in the next twelve months. Despite the Company’s intention to establish accurate estimates and use reasonable assumptions, actual results may differ from these estimates.

Income Taxes

The Company accounts for income taxes under the asset and liability method. Under this method, the Company recognizes deferred tax assets and liabilities for future tax consequences attributable to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. The Company records a valuation allowance to reduce its deferred tax assets to an amount for which realization is more likely than not.

The Company adopted FASB Interpretation 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), as of December 1, 2007. FIN 48 provides guidance for how uncertain tax positions should be recognized, measured, presented and disclosed in the financial statements. FIN 48 requires the evaluation of tax positions taken or expected to be taken in the course of preparing tax returns to determine whether the tax positions have met a “more-likely-than-not” threshold of being sustained by the applicable tax authority. Tax benefits related to tax positions not deemed to meet the “more-likely-than-not” threshold are not permitted to be recognized in the financial statements. Upon adoption of FIN 48, the Company has elected an accounting policy that continues to classify accrued interest and penalties related to liabilities for income taxes in income tax expense.

Fair Value Measurements

In September 2006, FASB released FAS 157, “Fair Value Measurements” (“FAS 157”) and is effective for fiscal years beginning after November 15, 2007, which is the year ending November 30, 2008 for the Company. FASB 157 defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. In November 2007, FASB agreed to a one-year deferral of the effective date for nonfinancial assets and liabilities that are recognized or disclosed at fair value on a nonrecurring basis. The Company is currently assessing the deferred portion of the pronouncement.

As of December 1, 2007, the Company has adopted FAS 157 for the fair value measurement of recurring items, in particular its interest rate swaps. There was no impact on the basis for which the fair value of these items was determined.

The Company measures the fair value of its $134.5 million of interest rate swaps under a Level 2 input as defined by FAS 157. The Company relies on a mark to market valuation prepared by a broker based on observable interest rate yield curves. As of May 31, 2008, the accrued mark to market loss on these swaps is $4.0 million. Of this amount, a loss of $3.0 million has been recorded in fiscal periods ending on or prior to November 30, 2007 including $1.8 million in other comprehensive income and $1.2 million in interest expense. The gain recorded in the three month period ended May 31, 2008 is $3.4 million, which represents the change in the mark to market valuation on the swaps during the period. Of this gain, $512 has been recorded in interest expense as it relates to swaps that are not designated as effective hedging instruments under FAS 133, “Accounting for Derivative Instruments and Hedging Activities”, and $2.9 million has been included in other comprehensive income as it relates to swaps that qualify as effective hedging instruments under FAS 133. The loss recorded in the six month period ended May 31, 2008 is $933, which represents the change in the mark to market valuation on the swaps during the period. Of this loss, $244 has been recorded in interest expense as it relates to swaps that are not designated as effective hedging instruments under FAS 133, and $689 has been included in other comprehensive income as it relates to swaps that qualify as effective hedging instruments under FAS 133.

Accelerated Debt Payments

All cash sweep payments are classified on the balance sheet based on the Company’s ability and intent to refinance the obligation on a long-term basis, the existence of financing arrangements to allow short-term obligations to be refinanced, and the remoteness of the acceleration due date. The Company is not currently intending to refinance this obligation and intends to make the payment as required. As such, the estimated cash sweep obligations due over the next 12 months have been classified as current liabilities.

Recent Accounting Pronouncements

In December 2007, FASB released FAS 141-R, “Business Combinations”. This Statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008, which is business combinations in the fiscal year ending November 30, 2010 for the Company. The objective of this Statement is to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a business combination and its effects.

In December 2007, the FASB released FAS 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51”. This Statement is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008, which for the Company is the fiscal year ending November 30, 2010 and the interim periods within that fiscal year. The objective of this Statement is to improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements. This standard currently does not currently impact the Company as it has full controlling interest of all of its subsidiaries.

In March 2008, the FASB released FAS 161, “Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133” This Statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, which for the Company is the interim period ending February 28, 2009. This statement requires that objectives for using derivative instruments be disclosed in terms of underlying risk and accounting designation, in order to better convey the purpose of derivative use in terms of the risks that the Company is intending to manage. Management is currently assessing and evaluating the new disclosure requirements for our derivative instruments, and in particular our hedges on our term loans.

3. Inventory

The components of inventory are as follows:


	May		November
	31, 2008		30, 2007
Product components	$	704	$	310
Finished goods		228		419

	$	932	$	729

4. Income Taxes

For the three and six months ended May 31, 2008, the Company recorded a tax recovery of $5 and $97 on income before income taxes of $925 and $803 respectively. The current tax provision was $1.2 million and $2.4 million, for the three and six month period ended May 31, 2008, respectively, which relates mostly to withholding taxes which are not creditable due to loss carryforwards and income taxes in foreign jurisdictions. The current tax provision was offset by a deferred tax recovery of $1.2 million and $2.5 million, for the respective periods, which is related to the amortization of the intangible assets acquired with InterVideo which have a tax basis of $nil.

For the three months ended May 31, 2007, the Company recorded a tax recovery of $587 on income before income taxes of $1.7 million. This recovery reflects foreign withholding taxes plus provisions for income taxes for subsidiaries that have taxable income in the quarter, offset by a reduction in our deferred income tax liability related to the amortization of intangible assets acquired with InterVideo, which have a tax basis of $nil. The Company has increased the valuation allowance to fully provide for tax losses realized by other subsidiaries in the quarter.

The Company adopted the provisions of FIN 48 on December 1, 2007. As a result of the adoption of FIN 48, the Company’s cumulative-effect adjustment resulted in an increase in non-current income tax liabilities of $952 with a corresponding increase to the December 1, 2007 deficit balance of $952. As of December 1, 2007 the Company had $32.4 million of unrecognized tax benefits which, if recognized, $12.6 million would impact the effective tax rate. At December 1, 2007, the Company has accrued approximately $1.3 million for the potential payment of interest and penalties.

Using the recognition and measurement criteria in FIN 48 during the three and six months ended May 31, 2008, the total amount of unrecognized tax benefits and related interest increased by approximately $289 and $556, respectively..

It is reasonably possible that the amount of unrecognized tax benefits, inclusive of related interest, will change in the next twelve months. At May 31, 2008, the estimated decrease in amount of unrecognized tax benefits relating to transfer pricing and various credits for the next 12 months is expected to be $544 due to the reasonable possibility that audits will be closed or the statute of limitations will expire in various jurisdictions.

The Company or its subsidiaries file income tax returns in Canada, the United States, Taiwan and various other foreign jurisdictions. These tax returns are subject to examination by local taxing authorities provided the tax years remain open to audit under the relevant statute of limitations. The tax years 2000 to 2007 remain open to examination by some of the major taxing jurisdictions to which the Company is subject. Included below is a summary of the periods open to examination by major tax jurisdiction.


Country		Tax Years Open for Examination

Canada		2000 through 2007

United States of America		2004 through 2007

Taiwan		2002 through 2007

Other		2006 through 2007

5. Long-Term Debt

On an annual basis, the Company may be required to make a cash sweep payment to fund its principal balance, based on excess cash flow as defined in the senior credit facility agreement. The Company was not required to make a payment during the first quarter of fiscal 2008. The first cash sweep payment is expected to be required in February 2009 and has been estimated to be approximately $17.0 million.

The future debt payments on long-term debt as of May 31, 2008, including the annual cash sweep payment of $17.0 million as discussed above, are as follows:


	Principal		Interest		Total
2008, remainder of		1,159		6,693		7,852
2009		18,596		11,972		30,568
2010		1,596		10,980		12,576
2011		1,596		10,265		11,861
2012		134,571		3,642		138,213

Total	$	157,518	$	43,552	$	201,070

The above table does not consider cash sweep payments that may be due more than 12 months beyond May 31, 2008. It is possible that significant cash sweep payments will be required in fiscal 2010 and fiscal 2011.

6. Defined Pension Benefit Plan


Accrued pension benefit obligation as of December 1, 2007	$	1,116
Activity during three months ended February 29, 2008
Service cost		11
Interest cost		15
Expected return on plan assets		(8	)
Amortization of prior unrecognized gain		(22	)
Contributions		(29	)
Other — effect of foreign exchange		37

Accrued pension benefit obligation as of February 29, 2008	$	1,120

Activity during three months ended May 31, 2008
Service cost		11
Interest cost		15
Expected return on plan assets		(8	)
Amortization of prior unrecognized gain		—
Contributions		(19	)
Other — effect of foreign exchange		(36	)

Accrued pension benefit obligation as of May 31, 2008	$	1,083

7. Commitments and Contingencies

The Company is currently, and from time to time, involved in certain legal proceedings, as well as demands, claims and threatened litigation that arise in the normal course of its business, including assertions from third parties that it may be infringing patents or other intellectual property rights of others and from certain of our customers that they are entitled to indemnification from us in respect of claims that they are infringing such third party rights through the use or distribution of our products. The ultimate outcome of any litigation is uncertain and, regardless of outcome, litigation can have an adverse impact on the business because of defense costs, negative publicity, diversion of management resources and other factors. Failure to obtain any necessary license or other rights on commercially reasonable terms, or otherwise, or litigation arising out of intellectual property claims could materially adversely affect the business.

not subject to monetary limits. The existence of these indemnification provisions could increase our cost of litigation and could significantly increase our exposure to losses from an adverse ruling.

During fiscal 2007 the Company received an invoice from a supplier of InterVideo relating to the period prior to the acquisition date of December 12, 2006. The Company is currently performing an audit on this invoice as it is disputing some of the items invoiced. In the prior fiscal year, the Company accrued for what it believed to be an appropriate settlement. This accrual was included in the purchase price allocation. However, it is possible that this estimate may be materially different from the final settlement amount. Any difference between the final settlement and the amount accrued will be included in earnings. As part of completing the audit in the second quarter of fiscal 2008, the Company re-assessed its estimate, and reduced the accrual by approximately $1.7 million. This amount has been recorded as a reduction of costs of goods sold in this period.

At May 31, 2008, we were a defendant in the Victor Company of Japan, Ltd (“JVC”) v. Corel Corporation, InterVideo, Inc., Cyberlink Corp. et al., patent infringement proceeding. JVC filed a patent infringement action on January 15, 2008, against Corel and others in the United States District Court for the Western District of Texas (Austin Division), alleging infringement of U.S. Patents: 6,493,383 issued on December 10, 2002; 6,522,692 issued February 18, 2003; 6,542,543 issued April 1, 2003; 6,570,920 issued May 27, 2003; and 6,141,491 issued October 31, 2000. JVC alleges certain Corel video playback applications infringe the patents. The Company believes it has meritorious defenses to JVC’s claims and intends to defend the litigation vigorously. The ultimate outcome of the litigation, however, is uncertain.

During the second quarter the company resolved the Simon Systems (“Simon”) v. Corel Corporation patent infringement proceeding. Simon filed patent infringement action on September 24, 2007, against the Company in the United States District Court for the District of Maryland (Southern Division), alleging infringement of U.S. Patent 5,559,562, issued on September 24, 1996. Simon alleged certain Corel video editing applications infringed the patent in the manner in which the alleged products provide functionality to allow the transitioning from a first video stream to a second video stream. In April, 2008 the Company entered into a license agreement with the Plaintiff and the Plaintiff dismissed the action. The terms of the license were not material to the Company’s operations and results.

At the beginning of the third quarter of fiscal 2007, the Company received a notice of reassessment from the Ministry of Revenue of Ontario (the “Ministry”) for CDN$13.4 million. The Ministry reassessment disallows various deductions claimed on our tax returns for the 2000, 2001 and 2002 taxation years resulting in a potential disallowance of loss carryforwards and liabilities for tax and interest. Subsequent to August 31, 2007, Corel received further notice that the Ministry had applied tax losses and other attributes which reduced the assessment from CDN$13.4 million to CDN$6.4 million. Subsequently, in November 2007, the Company received another notice of assessment regarding this issue, which increased the capital tax and interest owing for the 2000, 2001, and 2002 taxation years. This reassessment was for CDN$7.5 million. The Company intends to vigorously defend against the reassessment. While the Company believes that they have adequately provided for potential assessments, it is possible that an adverse outcome may lead to a deficiency in recorded income tax expense and may adversely affect liquidity. However, the Company believes that the positions taken in its tax returns are correct and estimates the potential loss from the re-reassessment will not have a material impact on its financial condition or results of operations. As of May 31, 2008, no amounts have been accrued.

8. Shareholders’ Equity

Stock option plans

The following table shows total stock-based compensation expense included in the consolidated statement of operations:


	Three Months				Six Months
	Ended May 31,				Ended May 31,
	2008		2007		2008		2007

Cost of products	$	5	$	9	$	15	$	18
Cost of maintenance and services		2		2		4		4
Sales and marketing		504		311		899		581
Research and development		329		293		536		488
General and administration		1,137		675		1,661		1,207

Total stock-based compensation expense	$	1,977	$	1,290	$	3,115	$	2,298

There have been no capitalized stock-based compensation costs.

The Company estimates the fair value of its options for financial accounting purposes using the Black-Scholes option pricing model (“Black Scholes Model”), which requires the input of subjective assumptions including the expected life of the option, risk-free interest rate, dividend rate, future volatility of the price of the Company’s common shares, forfeiture rate and vesting period. Changes in subjective input assumptions can materially affect the fair value estimate. Prior to the Company’s public offering in April 2006 there was no active market for the Company’s common shares. Since the Company has been public for less than the vesting period of its options, the Company does not consider the historic volatility of the Company’s share price to be representative of the estimated future volatility when computing the fair value of options granted. Accordingly, until such time that a representative volatility can be determined based on the Company’s share price, the Company will use a blended rate of its own share price volatility and the US Dow Jones Software and Computer Services Index. Up to the second quarter of fiscal 2007, the Company did not use its own share price volatility in the blended rate computation, as the Company was either a private company or had been a public company for less than one year. Once Corel has been a public company for a period equal to the estimated life of our stock options, the Company will no longer use a blended rate.

The Company determines the fair value of its restricted stock units based on the share price of its stock on the date the units are granted. The restricted stock units have no characteristics which would require a revaluation in subsequent periods.

The fair value, estimated using the Black-Scholes Model, of all options granted during the three months ended May 31, 2008 and May 31, 2007, was estimated as of the date of grant using the following weighted average assumptions:


	Three Months Ended
	May 31,
	2008			2007
Expected option life (years)		7			7
Volatility		29.41	%		31.33	%
Risk free interest rate		3.13	%		3.56	%
Forfeiture rate		16.50	%		16.50	%
Dividend yield	Nil			Nil

As of May 31, 2008, there was $14.0 million of unrecognized compensation cost related to equity incentive plans, adjusted for estimated forfeitures, related to non-vested stock-based payments granted to Corel employees. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures.

2006 Equity Incentive Plan

The 2006 Equity Incentive Plan was adopted by the Board of Directors in February 2006. This plan provides for the grant of options to employees and employees of the Company’s subsidiaries, and restricted shares, share appreciation rights, restricted share units, performance share units, deferred share units, phantom shares and other stock-based awards (“options”) to the Company’s employees, consultants and directors, and employees, consultants and directors of the Company’s subsidiaries and affiliates. Corel has 4,283,135 remaining common shares authorized for issuance under the 2006 Equity Incentive Plan.

Option activity under the 2006 Equity Incentive Plan for the three month period ended May 31, 2008 is presented below:


	2006 Equity Incentive Plan
						Weighted
				Weighted Average		Average Grant
	Options			Exercise Price		Date Fair Value

Balance at November 30, 2007		2,714,465		$	12.60	$	4.66
Granted		120,141			8.96		3.05
Exercised		(1,334	)		9.83		5.09
Forfeited		(129,950	)		12.72		4.09

Outstanding at February 29, 2008		2,703,322		$	12.48	$	4.54
Granted		767,790			10.39		3.30
Exercised		(17,088	)		6.33		3.75
Forfeited		(155,012	)		12.66		4.39

Outstanding at May 31, 2008		3,299,012		$	12.02	$	4.24

Exercisable at May 31, 2008		784,325		$	12.58	$	4.09

Weighted average remaining life of the outstanding options	8.78		Years
Total intrinsic value of exercisable options	$	494
Weighted average remaining life of the exercisable options	7.35		Years

During fiscal 2007 the Company issued 110,000 units of restricted stock (“RSU’s”) to senior officers of the Company under the 2006 Equity Incentive Plan. In fiscal 2008, the Company issued a further 17,500 RSU’s to senior officers under this same plan. These units will vest fully if the officers remain with the Company until periods ranging from April 23, 2011 through March 13, 2012. Restricted stock unit activity under the 2006 equity incentive plan, for the three month period ended May 31, 2008 is presented below:


				Weighted
				Average
				Grant Date Fair
	Units			Value

Balance at November 30, 2007 and, February 29, 2008		102,500		$	13.26
RSU’s granted		17,500		$	10.10
RSU’s converted to common shares		(35,000	)	$	13.68
RSU’s forfeited	Nil				n/a

Outstanding at May 31, 2008		85,000		$	12.43

Exercisable at May 31, 2008		5,000		$	13.13

Weighted average remaining life of the outstanding options	9.35		Years
Weighted average remaining life of the exercisable RSU’s	8.90		Years
Total intrinsic value of the exercisable RSU’s	$	55

2003 Share Option and Phantom Share Unit Plan

In the six months ended May 31, 2008, no options were granted as this plan is no longer eligible for grant distribution. Unit activity for the three month period ended May 31, 2008 is presented below:


	The 2003 Plan
						Weighted
				Weighted		Average
				Average		Grant Date
				Exercise		Fair
	Options			Price		Value

Balance, November 30, 2007		813,940		$	2.31	$	5.86
Exercised		(32,758	)		1.17		6.70
Forfeited		(6,749	)		11.71		6.06

Outstanding at February 29, 2008		774,433		$	2.28	$	5.83
Exercised		(89,341	)		1.17		5.67
Forfeited		(10,782	)		8.38		6.29

Outstanding at May 31, 2008		674,310		$	2.33	$	5.84

Exercisable at May 31, 2008		581,792		$	1.93	$	5.53

Weighted average remaining life of the outstanding options	6.54		Years
Total intrinsic value of exercisable options	$	5,366
Weighted average remaining life of the exercisable options	6.45		Years

9. Restructuring Charges

InterVideo Acquisition Related Restructuring Charges

In conjunction with the acquisition of InterVideo, management initiated a restructuring plan (“InterVideo Plan”) and recorded restructuring charges in fiscal 2007 related to this plan. The InterVideo Plan included the reduction of headcount across all functions, the closure of certain facilities and the termination of certain redundant operational contracts. The total restructuring costs were estimated at $3.5 million, including $2.1 million for termination benefits and $1.4 million for closing redundant facilities.

A summary of restructuring activities related to the acquisition of InterVideo that are accrued as of February 29, 2008 is as follows:


				Costs of
				Closing
	Termination			Redundant
	Benefits			Facilities
Balance accrued as of December 1, 2007	$	19		$	681
Activity during three months ended February 29, 2008
Cash payments		(19	)		(54	)

Balance accrued as of February 29, 2008	nil				627
Activity during three months ended May 31, 2008
Cash payments		—			(46	)
Change in estimates		—			(396	)

Balance accrued as of May 31, 2008	$	nil		$	185

Any further changes in estimates related to the InterVideo Plan will result in a charge to earnings. During the second quarter of fiscal 2008, the Company realized a $396 benefit associated with entering a new sublease agreement, which has been charged to operating expenses

Other Restructuring Plans

In the fourth quarter of fiscal 2007, management adopted a restructuring plan (“Digital Media Plan”) to centralize much of the Company’s Digital Media operations in Greater China and Fremont, California. Additionally, further changes have been made to staff to align and balance our global teams. This resulted in the planned closure of the Company’s Minneapolis location in fiscal 2008 as well as the termination of certain individuals. The total costs that will arise from the Digital Media Plan are estimated to be $1,835. During the second quarter of fiscal 2008, $210 of termination benefits were expensed related to certain individuals who were retained by the Company through this date.

In the second quarter of fiscal 2008, the Company continued its global restructuring plan, largely focused on centralizing our research and development activities, as well as some administrative activities. The total costs that will arise from this plan are estimated to be $484. Of these costs, $97, which relates to certain individuals who will be retained by the Company beyond May 31, 2008, will be expensed in future periods.

In the second quarter of fiscal 2008, the Company revised its estimates for the closure of facilities, as a result of activities which were planned to be completed by external consultants that were ultimately completed internally.

As of May 31, 2008, all of the headcount reductions have been identified and the effected employees have been notified. All facility closures have been identified and completed. Any changes from our initial estimates will be recorded against fiscal 2008 earnings.

A summary of our restructuring activities, that are accrued as of February 29, 2008 is as follows:


				Costs of
				Closing
	Termination			Redundant
	Benefits			Facilities
Balance accrued as of December 1, 2007	$	1,184		$	263
Activity during three months ended February 29, 2008
Additional restructuring charges		464			—
Changes in estimates		(256	)		(30	)
Cash payments		(632	)		—

Balance accrued as of February 29, 2008		760			233
Activity during three months ended May 31, 2008
Additional restructuring charges		596			6
Change in estimates		(9	)		(146	)
Cash payments		(935	)		(18	)

Balance accrued as of May 31, 2008	$	412		$	75

10. Earnings (Loss) per Share

For the three months ending May 31, 2007 and May 31, 2008, and the six months ending May 31, 2008, the dilutive impact of the outstanding options for common shares was 467,000, 695,231, and 662,033, respectively. The impact of the potential exercise of Corel options is anti-dilutive for the six month period ending May 31, 2007. Potentially dilutive instruments relating to the six month period ended May 31, 2007, were 3,216,000 options for common shares.

11. Change in Operating Assets and Liabilities


	Three months ended						Six months ended
	May 31						May 31
	2008			2007			2008			2007

Accounts receivable	$	606		$	(4,779	)	$	10,210		$	10,879
Inventory		(74	)		482			(203	)		1,222
Prepaids and other current assets		(513	)		(255	)		(1,174	)		35
Accounts payable and accrued liabilities		(831	)		(7,241	)		(10,043	)		(8,113	)
Due to related parties		—			—						(167	)
Accrued interest		1			64			(11	)		86
Taxes payable		(264	)		(352	)		598			1,249
Deferred revenue		(1,233	)		(781	)		(3,077	)		(2,125	)

Total change in operating assets and liabilities	$	(2,308	)	$	(12,862	)	$	(3,700	)	$	3,066

12. Segment Reporting

The Company has determined that it operates in one business operating and reportable segment, the packaged software segment. The Company does manage revenue based on two product line categories; Graphics and Productivity, and Digital Media.

As a result of the integration with InterVideo, sales in Japan have become more significant within Corel. Accordingly, the Company has broken down sales once recorded as Asia Pacific, into Japan and Other, beginning the first quarter of fiscal 2008. For comparability purposes, the prior period results have been re-classified to reflect this change.

Revenues by product and region are disclosed in the following table:


	Three Months Ended				Six Months Ended
	May 31,				May 31,
	2008		2007		2008		2007

By product category:
Graphics and Productivity	$	38,497	$	34,517	$	75,444	$	68,582
Digital Media		28,547		30,515		57,144		49,084

	$	67,044	$	65,032	$	132,588	$	117,666

By geographic region:
Americas
Canada	$	1,133	$	4,377	$	3,041	$	4,947
United States		30,172		27,475		57,803		52,910
Other		1,488		1,163		2,846		2,351
Europe, Middle East, Africa (EMEA)		19,564		17,108		40,577		34,766
Asia Pacific (APAC)
Japan		10,621		9,904		20,867		14,376
Other		4,066		5,005		7,454		8,316

	$	67,044	$	65,032	$	132,588	$	117,666

13. Expenses Associated with Special Committee Review

On March 28, 2008 the Company received an unsolicited proposal from Corel Holdings, L.P. (which is controlled by an affiliate of Vector Capital Corporation) (“CHLP”), the holder of approximately 69% of the Company’s outstanding common shares. CHLP has proposed to make an offer to acquire all of Company’s outstanding common shares not currently held by CHLP at a price of US$11.00

cash per share. CHLP indicated that any such offer would be conditional upon, among other things, satisfactory confirmatory due diligence and the Company’s existing credit facility remaining in place following the consummation of any transaction.

The Board of Directors of the Company formed a Special Committee of the Board, which continues to assist it in evaluating and responding to the CHLP proposal. In addition, the Special Committee is undertaking a process to evaluate other strategic alternatives to maximize value for all shareholders. There can be no assurance that any transaction with CHLP or any other party will be consummated.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Special Note Regarding Forward-Looking Statements

Certain statements made in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this filing (including in the section entitled “Risk Factors”) constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and applicable Canadian securities laws. Forward-looking statements are based on estimates and assumptions made by Corel in light of its experience of historical trends, current conditions and expected future developments, as well as other factors that we believe are appropriate in the circumstances. However, many factors could cause our actual results, performance or achievements to differ materially from those expressed or implied by such forward-looking statements, including, without limitation, the following factors:

•		the pending proposed offer from CHLP and the evaluation of the strategic alternatives by the Special Committee create additional expenses and uncertainty which could affect our ability to retain customers and employees, either of which could adversely affect our operations and results. There can be no assurance that any transaction with CHLP or any other party will be consummated.

•		we face competition from companies with significant competitive advantages, such as significantly greater market share and resources;

•		many of our core products have been marketed for many years and the packaged software market in North America and Europe is relatively mature and characterized by modest growth. Accordingly, we must develop new products, successfully complete acquisitions, penetrate new markets or increase penetration of our installed base to achieve revenue growth;

•		as an increasing number of companies with advertising or subscriber-fee business models seek to offer competitive software products over the Internet at little or no cost to consumers, it may become more challenging for us to maintain our historical pricing policies and operating margins;

•		we rely on relationships with a small number of strategic partners and these relationships can be modified or effectively terminated at any time without our approval;

•		we face potential claims from third parties who may hold patent and other intellectual property rights which purport to cover various aspects of our products and from certain of our customers who may be entitled to indemnification from us in respect of potential claims they may receive from third parties related to their use or distribution of our products;

•		our acquisition strategy may fail for various reasons, including our inability to find suitable acquisition candidates, complete acquisitions on acceptable terms or effectively integrate acquired businesses;

•		we have higher levels of indebtedness following the InterVideo acquisition, including term loan debt of $157.2 million as of May 31, 2008, which could have important consequences for our business such as limiting our ability to make further significant acquisitions;

•		the manner in which packaged software is distributed is changing rapidly, which presents challenges to established software companies such as us and presents opportunities for potential competitors; and

•		the proliferation of open source software and open standards may make us more vulnerable to competition because new market entrants and existing competitors could introduce similar products quickly and cheaply.

These and other important factors are described in greater detail in the section entitled “Risk Factors” in our annual report on Form 10-K dated February 8, 2008 filed with the Securities and Exchange Commission and with Canadian securities regulators. A copy of the 10-K can be obtained on our website (http://www.corel.com), or at www.sec.gov

The words “expect”, “estimate”, “project”, “intend”, “believe”, “plan” and similar expressions are intended to identify forward-looking statements. Forward-looking statements speak only as of the date of the document in which they are made. We disclaim any obligation or undertaking to provide any updates or revisions to any forward-looking statement to reflect any change in our expectations or any change in events, conditions or circumstances on which the forward-looking statement is based.

The following discussion and analysis should be read in conjunction with our unaudited consolidated financial statements and accompanying notes for the three and six month periods ended May 31, 2008. All amounts are in United States dollars, except as otherwise noted.

BACKGROUND

We are a leading global packaged software company with an estimated installed base of over 100 million active users in over 75 countries. We provide high quality, affordable and easy-to-use Graphics and Productivity and Digital Media software. Our products enjoy a favorable market position among value-conscious consumers and small businesses benefiting from the widespread, global adoption of personal computers, or PCs, and digital capture devices. The functional departments within large companies and governmental organizations are also attracted to the industry-specific features and technical capabilities of our software. Our products are sold through a scalable distribution platform comprised of Original Equipment Manufacturers (“OEMs”), our global e-Stores, and our international network of resellers and retail vendors. We have broad geographic representation with dedicated sales and marketing teams based in the Americas, EMEA, and APAC. Our product portfolio includes well-established, globally recognized brands.

An important element of our business strategy is to grow revenues through acquisitions of companies or product lines. We intend to focus our acquisition activities on companies or product lines with proven and complementary products and established user bases that we believe can be accretive to our earnings shortly after completion of the acquisition. While we review acquisition opportunities on an ongoing basis, we currently have no binding obligations with respect to any particular acquisition.

Graphics and Productivity

Our primary Graphics and Productivity products include: CorelDRAW Graphics Suite, Corel Painter, Corel DESIGNER, WinZip, iGrafx and WordPerfect Office Suite. CorelDRAW Graphics Suite is a leading vector illustration, page layout, digital image editing and bitmap conversion software suite used by design professionals and small businesses. Corel Painter is a Natural-Media ^{^®}painting and illustration software featuring digital brushes, art materials and textures that mirror the look and feel of their traditional counter parts. Corel DESIGNER Technical Suite offers users a graphics application for creating or updating complex technical illustrations. WinZip is the most widely used aftermarket compression utility, with more than 40 million licenses sold to date. Our iGrafx products allow enterprises to analyze, streamline and optimize their business processes. WordPerfect Office Suite, is the leading Microsoft-alternative productivity software and features Microsoft-compatible word processing, spreadsheet and presentation applications.

Digital Media

Our Digital Media products are classified as Digital Imaging and Digital Video. Our Digital Imaging products include Corel Paint Shop Pro Photo , Corel MediaOne, Corel Photo Album, and PhotoImpact. Corel Paint Shop Pro Photo is a digital image editing and management application used by novice and professional photographers and photo editors. Corel MediaOne, is a multimedia software program for organizing and enhancing photos and video clips. Corel Photo Album allows users to store, organize, share and manage their digital photograph collections. PhotoImpact is image editing software, which combines easy-to-use photo editing, photo projects and digital art. Our Digital Video products include WinDVD, VideoStudio, DVD Movie Factory, and DVD Copy. WinDVD is the world’s leading software for DVD, video and Blu-ray Disc playback on PC’s with over 200 millions units shipped worldwide. VideoStudio is our video editing and DVD authoring software for users who want to produce professional-looking videos, slideshows and DVDs. DVD Movie Factory is a consumer DVD authoring software. DVD Copy is an application that copies and backs up DVDs and CDs in multiple device formats.

OVERVIEW OF THE QUARTER

Operating Performance

Revenue was $67.0 million, up 3.1% year over year. The revenue growth of $2.0 million is due to the increased revenues in our Graphics and Productivity group of products by $4.0 million, offset by a decline in our Digital Media growth of products of $2.0 million. The increase in Graphics and Productivity is led by our CorelDRAW, WinZip, iGrafx, and WordPerfect products. The decrease in the Digital Media group of products is driven primarily by a decrease in sales from our Digital Video products and from Corel Photo Album. The decrease in Digital Video sales is due to a decline in WinDVD Creator / DVD Movie Factory, partially offset by revenue gains in Instant On and WinDVD.

Our net income for the second quarter of fiscal 2008 was $930,000, or $0.04 per share, compared to net income of $2.3 million, or $0.09 per share in the second quarter of 2007. Non-GAAP Adjusted EBITDA was $14.9 million and cash flow from operations was $6.8 million in the quarter compared to non-GAAP adjusted EBITDA of $15.2 million and cash used by operations of $3.2 in the second quarter of 2007.

RESULTS OF OPERATIONS

Three and Six Months ended May 31, 2008 and May 31, 2007

Revenues


	Three Months Ended									Six Months Ended
	May 31,						Percentage			May 31,						Percentage
	2008			2007			Change			2008			2007			Change
	(dollars in thousands)
	(unaudited)

Product	$	60,249		$	59,553			1.2	%	$	119,611		$	106,857			11.9	%
As a percent of revenue		89.9	%		91.6	%					90.2	%		90.8	%
Maintenance and services		6,795			5,479			24.0	%		12,977			10,809			20.1	%
As a percent of revenue		10.1	%		8.4	%					9.8	%		9.2	%
Total		67,044			65,032			3.1	%		132,588			117,666			12.7	%

Total revenues for the three month period ended May 31, 2008 increased by 3.1% to $67.0 million from $65.0 million for the three months ended May 31, 2007. This increase of $2.0 million is attributable to the $4.0 million revenue growth in Graphics and Productivity products offset by the $2.0 million decrease in Digital Media Products. Total revenues for the six month period ended May 31, 2008 increased by 12.7% to $132.6 million from $117.7 million for the six months ended May 31, 2008. Of this increase, $8.1 million was attributable to our Digital Media products. This increase is largely due to the fact that the company was unable to record OEM revenue of approximately $11.8 million on acquired Digital Media products in the first quarter of fiscal 2007, due to acquisition accounting standards. This increase was offset by declines in our Corel Photo Album revenues of $2.3 million over the six month period, and declines in our WinDVD Creator and DVD Movie Factory products. Our Graphics and Productivity revenue increased by $6.9 million or 10.0%, led by growth in our WinZip, iGrafx, CorelDRAW and Painter products.

Product revenues for the three and six months ended May 31, 2008 increased by 1.2% and 11.9%, to $60.2 million and $119.6 million, respectively, from $59.6 and $106.9 million for the three and six months ended May 31, 2008. The largest driver of this increase was the comparable OEM revenue that was not recorded in the first quarter of fiscal 2007 due to acquisition accounting standards. The remaining increase in product revenues was driven by the continued growth of our Graphics and Productivity products with increases in product revenue from our CorelDRAW, WinZip, iGrafx, and Corel Painter, partially offset by lower revenues from from Corel Photo Album and an overall decline in Digital Video products.

Maintenance and services revenues increased by 24.0% to $6.8 million for the three month period ended May 31, 2008 and by 20.1% to $13.0 million for the six months ended May 31, 2008. This increase is largely attributable to increased sales of WinZip’s maintenance program.

Total Revenues by Product Group


	Three Months Ended									Six Months Ended
	May 31,						Percentage			May 31,						Percentage
	2008			2007			Change			2008			2007			Change
	(dollars in thousands)
	(unaudited)

Graphics and Productivity	$	38,497		$	34,517			11.5	%	$	75,444		$	68,582			10.0	%
As a percent of revenue		57.4	%		53.1	%					56.9	%		58.3	%
Digital Media		28,547			30,515			(6.5	%)		57,144			49,084			16.4	%
As a percent of revenue		42.6	%		46.9	%					43.1	%		41.7	%

Our products generally have release cycles of between 12 and 24 months and we typically earn the largest portion of revenues for a particular product during the first half of its release cycle. In the past we have experienced declines in product revenues during the second half of product release cycles, with the sharpest declines occurring toward the end of the release cycle. The fiscal quarter of the most recent and prior release of each of our major products is set forth below:

Current

Quarter of

Version

Current Release

Prior Release

Product

Graphics and Productivity:

CorelDRAW Graphics Suite

Q1 2008

Q1 2006

Corel Painter

Q1 2007

Q4 2004

Corel Designer Technical Suite

Q2 2005

Q3 2003

WinZip

Q4 2006

Q4 2005

iGrafx FlowCharter

Q2 2007

Q1 2006

WordPerfect Office Suite

Q2 2008

Q1 2006

Digital Media

Paint Shop Pro Photo

Q4 2007

Q4 2006

MediaOne

Q4 2007

Q4 2006

WinDVD

Q1 2008

Q4 2006

VideoStudio

Q2 2007

Q2 2006

DVD Movie Factory

Q1 2007

Q1 2006

DVD Copy

Q1 2008

Q3 2006

PhotoImpact

Q1 2008

Q3 2006

Graphics and Productivity revenues increased by $4.0 million or 11.5% to $38.5 million in the second quarter of fiscal 2008 from $34.5 million in the second quarter of fiscal 2007, and increased by $6.9 million or 10.0% to $75.4 million for the six month period ending May 31, 2008 as compared to the six month period ending May 31, 2007. This was driven by increased revenue from CorelDRAW, WinZip and iGrafx, which was partially offset by lower revenues from WordPerfect in the first quarter of fiscal 2008. Revenue growth from CorelDRAW is largely attributable to our EMEA market, where we have increased sales from the launch of CorelDRAW Graphics Suite X4 in February 2008; we have also experienced growth in APAC and North America due to this launch. Revenues from our WinZip products have grown significantly due to increased new license sales and upgrades resulting from increased conversion of trial customers to license users through more targeted in-product messaging. The increase in iGrafx revenues is attributable to additional marketing and promotional initiatives targeted at enterprise users. While we have experienced a decline in revenues from WordPerfect for the six months ending May 31, 2008, we have experienced growth in the second quarter of fiscal 2008 due to new sales initiatives associated with the launch of WordPerfect Office Suite X4 in the second quarter.

Digital Media revenues decreased by $2.0 million or 6.5% to $28.5 million in the second quarter of fiscal 2008 from $30.5 million in the second quarter of fiscal 2007, and increased by $8.1 million or 16.4% to $57.1 million for the six months ending May 31, 2008. The $2.0 million decline in the second quarter for the Digital Media group of products is driven by a $0.8 million decrease in Corel Photo Album, and a decrease in Digital Video products of $0.6 million. Photo Album, WinDVD Creator / DVD Movie Factory revenue declined primarily due to changes in OEM partners, which was partially offset by gains from Instant On and WinDVD. The decrease in WinDVD Creator / DVD Movie Factory is due to decreased sales in APAC, caused by one of our significant OEM distributors creating an in house alternative, and in EMEA due to the loss of a key distributor. The increase in Instant On, is due to increased distribution by one of our significant OEM distributors in the Asia Pacific. The increase in WinDVD sales is due to increased sales in the Americas from some of our key OEM distributors, partially offset by lost sales due to an in house alternative created by a significant OEM. Revenues from Paint Shop Pro Photo have remained steady in the period with growth in APAC and in EMEA regions offset by a decline in the Americas. The revenue growth for the six months ending May 31, 2008 is largely attributable to the $11.8 million of OEM revenue, which we were unable to recognize in the first quarter of fiscal 2007, due to acquisition accounting standards associated with the acquisition of InterVideo.

Total Revenues by Region


	Three Months Ended									Six Months Ended
	May 31,						Percentage			May 31,						Percentage
	2008			2007			Change			2008			2007			Change
	(dollars in thousands)
	(unaudited)

Americas	$	32,793		$	33,015			(0.7	%)	$	63,690		$	60,208			5.8	%
As a percent of revenue		48.9	%		50.8	%					48.0	%		51.2	%
EMEA		19,564			17,108			14.4	%		40,577			34,766			16.7	%
As a percent of revenue		29.2	%		26.3	%					30.6	%		29.5	%
APAC		14,687			14,909			(1.5	%)		28,321			22,692			24.8	%
As a percent of revenue		21.9	%		22.9	%					21.4	%		19.3	%

Revenues in the Americas decreased by 0.7% to $32.8 million in the second quarter of fiscal 2008 compared to $33.0 million in the second quarter of fiscal 2007. For the six months ended May 31, 2008 revenues increased by 5.8% to $63.7 million as compared to revenues for the period ending May 31, 2007. In the current quarter, Corel experienced growth in Digital Video products, CorelDRAW, and iGrafx, which was offset by declines in Corel Photo Album, Paint Shop Pro Photo and WinZip. The growth in Digital Video products was largely due to new arrangements with two significant OEM suppliers which increased the distribution of WinDVD. CorelDRAW revenues increased due to launches of CorelDRAW Graphics Suite X4 in the first quarter of fiscal 2008, and the launch of Deco Studio in the second quarter of fiscal 2008. iGrafx revenues increased due to increased billings as the product continues to build its enterprise level business. The decline in Photo Album revenue and Paint Shop Pro Photo is due to changes in an agreement with a significant OEM partner. The decline in WinZip is attributable to lower internet license sales. The increase of $4.2 million for the six month period was principally driven by the inability to recognize certain OEM revenue in the first quarter of fiscal 2007 related to the InterVideo acquisition.

Revenues in EMEA increased by 14.4% to $19.6 million in the second quarter of fiscal 2008 from $17.1 million in the second quarter of fiscal 2007, and increased by 16.7% to $40.6 million in the first six months of fiscal 2008 from $34.8 million in the first six months of fiscal 2007. The revenue growth in this region is driven by increased revenue from CorelDRAW, WinZip, and iGrafx, offset by declines in Digital Video products and Corel Photo Album. In February 2008 we launched CorelDRAW Graphics Suite X4, which along with the upward trend prior to the launch, and further expansion into the Eastern European markets has further driven the increase in CorelDRAW revenue. The increase in WinZip is due to increased internet license sales and the release of new language versions during the past year. The increase in iGrafx is due to the continued growth at the enterprise business level. The decline in Photo Album revenue is due to changes in an agreement with a significant OEM partner. There have been slow Digital Video product sales in this region, primarily with DVD Creator, due to the loss of a key distributor in the region.

APAC revenues decreased by 1.5% to $14.7 million in the second quarter of fiscal 2008 and increased by 24.8% to $28.3 million in the first six months of fiscal 2007. In the second quarter there was a decline in revenues from Digital Video products and iGrafx, offset by revenue growth in Paint Shop Pro Photo and CorelDRAW. The decline in Digital Video is attributable to one significant

OEM customer using in-house products to replace WinDVD Creator, WinDVD Movie Factory and WinDVD. This was offset by a revenue increase from Instant On due to increased distribution by a significant OEM customer, The decline in iGrafx was due to the exceptionally strong second quarter of fiscal 2007; when this product was pushed to the large businesses to meet Japanese financial control compliance guidelines, which were enacted in 2007. The increase in revenues from Paint Shop Pro Photo and CorelDRAW are driven by the ongoing benefits from the launch of Paint Shop Pro X2 in the fourth quarter of fiscal 2007, and the launch of CorelDRAW Graphics Suite X4 in the first quarter of fiscal 2008. The increase in revenues for the six month period ending May 31, 2008 relates to the $5.4 million growth in revenue from Digital Video products in the first quarter of fiscal 2008, due to inability to recognize certain OEM revenue in the first quarter of fiscal 2007 after the InterVideo acquisition.

Cost of Revenues


	Three Months Ended									Six Months Ended
	May 31,						Percentage			May 31,						Percentage
	2008			2007			Change			2008			2007			Change
	(dollars in thousands)
	(unaudited)

Cost of product	$	14,008		$	14,010			(0.1	%)	$	29,235		$	22,523			29.8	%
As a percent of product revenue		23.3	%		23.5	%					24.4	%		21.1	%
Cost of maintenance and services		132			221			(40.3	%)		299			419			(28.6	%)
As a percent of maintenance and service revenue		1.9	%		4.0	%					2.3	%		3.9	%
Amortization of intangible assets		6,418			6,373			0.7	%		12,832			12,130			5.8	%
As a percent of revenue		9.6	%		9.8	%					9.7	%		10.3	%

Cost of Product Revenues. Cost of product revenues remained steady at $14.0 million as compared to the second quarter of fiscal 2007. The costs of products as a percentage of revenue have held steady due to the $1.7 million reduction of a royalty contingency that had been established in connection with the acquisition of InterVideo. Without this $1.7 million reduction, our cost of products would have increased over the second quarter of fiscal 2007, due to a change in the mix within the Digital Video product line where we have experienced a shift in revenue from our higher margin products to our lower margin products. The cost of product revenues has increased by 29.8% to $29.2 million from $22.5 million for the six months ending May 31, 2008. As a percentage of product revenues, cost of product revenues increased to 24.4% from 21.1% for the six months ended May 31, 2008, respectively. The increase in the six month period is largely attributable to the change in our product mix in the first quarter of fiscal 2008 from Productivity and Graphics products to Digital Video products in this period.. Digital Video carries a larger cost of product, both historically and in this quarter, resulting in a lower gross margin on Digital Video products compared to Graphics and Productivity products.

Cost of Maintenance and Services Revenues. Cost of maintenance and services revenues decreased to 1.9% of related revenues in the second quarter of fiscal 2008 compared to 4.0% in the second quarter of fiscal 2007. For the six months ended May 31, 2008, costs as a portion of related revenues decreased to 2.3% from 3.9% in the comparable prior period, and is primarily attributable to WinZip’s higher maintenance revenues and the limited incremental costs to provide such revenue.

Amortization of Intangible Assets. Amortization of intangible assets has remained steady at $6.4 million during the second quarter of fiscal 2008 as compared to the second quarter of fiscal 2007. The increase of 5.8% to 12.8 million from 12.1 million in the six months ending May 31, 2008 is due to the fact that intangibles acquired in the purchase of InterVideo in fiscal 2007 have been amortized for the entire six month period ending May 31, 2008. In fiscal 2007, no amortization was recorded from the stub period of December 1, 2006 through the date of acquisition of December 12, 2006.

Operating Expenses

During the first quarter of fiscal 2008, we have re-classified some of our operating expenses related to our Information Technology group, so that costs of certain employees were better aligned with the functions they performed. As a result, for the three months ended May 31, 2007, we have reduced our general and administrative costs by $612,000, increased our sales marketing costs by $223,000, increased our research and development costs by $373,000, and increased our cost of products sold by $16, 000. For the six months ended May 31, 2007 we have reduced our general and administrative costs by $1.0 million, increased our sales marketing costs by $394,000, increased our research and development costs by $625,000, and increased our cost of products sold by $26,000.


	Three Months Ended									Six Months Ended
	May 31,						Percentage			May 31,						Percentage
	2008			2007			Change			2008			2007			Change
	(dollars in thousands)
	(unaudited)

Sales and marketing	$	20,748		$	17,715			17.1	%	$	40,432		$	34,990			16.6	%
As a percent of revenue		30.9	%		27.2	%					30.5	%		29.7	%
Research and development		11,716			11,070			5.8	%		23,807			22,666			5.0	%
As a percent of revenue		17.5	%		17.0	%					18.1	%		19.3	%
General and administrative		8,640			8,575			0.8	%		17,451			17,237			1.2	%
As a percent of revenue		12.9	%		13.2	%					12.9	%		14.6	%
Restructuring		447			—			n/a			625			—			n/a
As a percent of revenue		0.7	%		0.0	%					0.5	%		0.0	%
Acquired in-process research and development		—			—			n/a			—			7,831			(100.0	%)
As a percent of revenue		0.0	%		0.0	%					0.0	%		6.7	%
InterVideo integration expenses		—			860			0.0	%		—			1,645			(100.0	%)
As a percent of revenue		0.0	%		1.3	%					0.0	%		1.4	%

Sales and Marketing. Sales and marketing expenses increased by 17.1% to $20.7 million in the second quarter of fiscal 2008 as compared to $17.7 million in the second quarter of fiscal 2007. For this quarter, sales and marketing expenses as a percentage of revenue increased to 30.9%, as compared to 27.2% for the prior period. Sales and marketing expenses increased by 16.6% to $40.4 million for the six months ended May 31, 2008, as compared to $35.0 million for the six months ended May 31, 2007 and increased as a percentage of revenue from 29.7% to 30.5%. The increase in sales and marketing expenses is as a result of additional headcount in our sales and marketing force as we continue to expand our marketing efforts in non-traditional international markets and in EMEA as well as the launch of WordPerfect Office Suite X4 and CorelDRAW Graphics Suite X4. The Company has also focused on further marketing of our Digital Media products.

Research and Development. Research and development expenses increased by 5.8% and 5.0% to $11.7 million and $23.8 million in the three and six months ended May 31, 2008, respectively, as compared to $11.1 million and $22.7 million in three and six months ended May 31, 2007. As a percentage of total revenues, research and development expenses increased to 17.5% from 17.0% in the second quarter of fiscal 2008 as compared to the second quarter of fiscal 2007. The increase in expenditures is related to the impact of our Digital Video research and development personnel being with the Company for the entire first quarter of fiscal 2008, and increased payroll costs related to our Canadian staff resulting from the significant strengthening of the Canadian Dollar versus the US Dollar from the same period last year. There are also additional facility charges and stock compensation expense during the second quarter of fiscal 2008.

General and Administration. General and administration expenses increased slightly to $8.6 million and $17.5 million in the three and six months ended May 31, 2008, respectively, from $8.6 million and $17.2 million for the three and six months ended May 31, 2007. As a percentage of total revenues, general and administration expenses decreased slightly to 12.9% in the second quarter of fiscal 2008, from 13.2% in the second quarter of fiscal 2007. In the second quarter of fiscal 2008, there was an increase in the amount of stock compensation expense due to the accelerated vesting of options, which primarily pertains to our former Chief Executive Officer. Furthermore, costs have increased due to the strengthening of the Canadian Dollar versus the US Dollar, which impacts our expenses related to employees at our head office in Ottawa. These increases were offset by lower facility charges and the impact of restructuring and integration activities previously undertaken in fiscal 2007, reducing our costs in fiscal 2008.

Acquired in-process Research and Development. Intangible assets acquired with InterVideo included $7.8 million of in-process research and development projects that, on the date of the acquisition, the related technology had not reached technological feasibility and did not have an alternate future use. As required by purchase accounting, this in-process research and development was expensed upon acquisition in the first quarter of fiscal 2007.

InterVideo Integration Expense: Our integration activities related to the InterVideo acquisition ceased at the end of fiscal 2007. In the first six months of fiscal 2007, integration costs relating to the acquisition of InterVideo totaling $1.6 million were recorded. These costs related to the integration of the InterVideo business into our existing operations, including travel costs, retention bonuses and other incremental costs for Corel employees who worked on the integration planning process.

Restructuring Expense: We recorded $447,000 of restructuring expenses during the three months ended May 31, 2008, and $625,000 in the six months ended May 31, 2008, related to restructuring plans adopted in the fourth quarter of fiscal 2007 and the second quarter of fiscal 2008, to centralize much of the Company’s Digital Media operations in Greater China and Fremont, California. Additionally, further changes were made to staff to align and balance our global teams. This has resulted in the closure of

the Company’s Minneapolis location at the end of the second quarter as well as the termination of certain individuals. We expect to have some cost savings in future periods as a result of this centralization of staff and facilities.

Other Expenses (Income)


	Three Months Ended				Six Months Ended
	May 31,				May 31,
	2008		2007		2008			2007
	(dollars in thousands)
	(unaudited)

Interest expense, Net		2,933		3,718		7,221			7,639
Amortization of deferred financing fees		270		269		540			534
Expenses associated with Special Committee review		705		—		705			—
Other non-operating (income) expenses		102		479		(1,362	)		(153	)

Total Other Expenses (Income)		4,010		4,466	$	7,094		$	8,020

Interest Expense, Net. Net interest expense decreased by $785,000 in the second quarter of fiscal 2008 from $3.7 million in the second quarter of fiscal 2007, and decreased by $418,000 for the six months ending May 31, 2008, as compared to the prior year. The decrease is due to the reduction in the utilized credit line facility during the period and the $123,000 increase in our gain on our unhedged interest swaps to $512,000 in the second quarter of fiscal 2008. During the first six months of fiscal 2007 our credit line facility, which is now fully paid off, was as high as $43.0 million.

Amortization of Deferred Financing Fees. Amortization of deferred financing fees of $270,000 in the second quarter of fiscal 2008 was consistent with the second quarter of fiscal 2007, as there have been no new credit facilities during the period.

Expenses associated with Special Committee review: On March 28, 2008 the Company received an unsolicited proposal from Corel Holdings, L.P. (which is controlled by an affiliate of Vector Capital Corporation) (“CHLP”), the holder of approximately 69% of the Company’s outstanding common shares. CHLP has proposed to make an offer to acquire all of Company’s outstanding common shares not currently held by CHLP at a price of US$11.00 cash per share. CHLP indicated that any such offer would be conditional upon, among other things, satisfactory confirmatory due diligence and the Company’s existing credit facility remaining in place following the consummation of any transaction.

As of May 31, 2008, this proposal is still being evaluated by a Special Committee of the board, and as such there will be further costs in the third quarter of fiscal 2008.

Other Non-Operating (Income) and Expenses: Non-operating expenses decreased by $377,000 to $102,000 in the second quarter of fiscal 2008 from $479,000 in the second quarter of fiscal 2007. Other non-operating income also increased by $1.2 million for the six months ended May 31, 2008 as compared to the six months ended May 31, 2007. The increase is primarily related to the gain on sale of a long-term income investment of $822,000. The remaining increase is generally comprised of favorable foreign currency exchange gains relating mostly to the weakening of the US Dollar versus the Canadian Dollar and the Euro.

Income Tax Recovery

For the three and six months ended May 31, 2008, we recorded a tax recovery of $5,000 and $97,000 on income before income taxes of $925,000 and $803,000, respectively. The current tax provision was $1.2 million and $2.4 million, respectively, for the three and six month periods ended May 31, 2008, which relates mostly to withholding taxes which are not creditable due to loss carryforwards and income taxes in foreign jurisdictions. The current tax provision was offset by a deferred tax recovery of $1.2 million and $2.5 million, for the three and six month periods, which is related to the amortization of the intellectual property acquired with InterVideo which has a tax basis of $nil.

For the three months ended May 31, 2007, we recorded a tax recovery of $587,000 on income before income taxes of $1.7 million. This recovery reflected foreign withholding taxes plus provisions for income taxes for subsidiaries that had taxable income in the

quarter, offset by a reduction in the deferred income tax liability related to the amortization of intangible assets recorded on the acquisition of InterVideo. In the second quarter of fiscal 2007, we increased the valuation allowance to fully provide for tax losses realized by other subsidiaries.

At the beginning of the third quarter of fiscal 2007, we received a notice of reassessment from the Ministry of Revenue of Ontario (the “Ministry”) for CDN$13.4 million. The Ministry reassessment disallows various deductions claimed on our tax returns for the 2000, 2001 and 2002 taxation years resulting in a potential disallowance of loss carryforwards and liabilities for tax and interest. In September 2007, we received further notice that the Ministry had applied tax losses and other attributes which reduced the assessment from CDN$13.4 million to CDN$6.4 million. Subsequently, in November 2007, we received another notice of assessment regarding this issue, which increased the capital tax and interest owing for the 2000, 2001, and 2002 taxation years. This reassessment was for CDN$7.5 million. We intend to vigorously defend against the reassessment. While management believes that we have adequately provided for potential assessments, it is possible that an adverse outcome may lead to a deficiency in recorded income tax expense and may adversely affect liquidity. However, we believe that the positions taken in our tax returns are correct and estimates the potential loss from the re-reassessment will not have a material impact on its financial condition or results of operations. As of May 31, 2008, no amounts have been accrued.

FINANCIAL CONDITION

Working Capital

Our working capital deficiency at May 31, 2008 was $19.8 million, an increase of $4.6 million from the November 30, 2007 working capital deficiency of $15.2 million. The increased working capital deficiency is primarily due to the additional current liability of $17.0, which is offset by the operating cash flows we have generated of $13.3 million for the six months ended May 31, 2008.

The Company expects to continue generating positive cash flows from operations over the next 12 months. In February 2009, the Company is required to make a cash sweep payment against its term loan payable based on excess cash flow, as defined in the Company’s credit facility agreement, that is estimated to be approximately $17.0 million. We expect to use the cash flows from operations to meet this obligation.

Liquidity and Capital Resources

As of May 31, 2008, our principal sources of liquidity are cash and cash equivalents of $33.4 million and trade accounts receivable of $28.8 million. As a part of our senior credit facility, we also entered into a five-year $75.0 million revolving line of credit facility, of which the entire balance is unused as at May 31, 2008.

Cash provided by operations increased by $10.1 million to $6.9 million for the three months ended May 31, 2008, and decreased by $1.9 million to $13.3 million for the six months ended May 31, 2008. The changes to our net operating assets in this quarter, is largely due to the timing of certain cash receipts from significant OEM’s, offset by our payments on royalty obligations.

Cash used by financing activities decreased by $8.6 million to $0.4 million for the three months ended May 31, 2008 compared to the cash used by financing activities of $9.0 million for the three month period ended May 31, 2007. The decrease in cash used by financing relates to the net repayment of $10.0 million on our operating line of credit during the prior period. This was offset by a reduction in proceeds from stock compensation exercises of $1.2 million as many of the terminated InterVideo employees exercised their options in the second quarter of fiscal 2007. Cash provided by financing activities decreased by $84.1 million to cash used by financing of $1.1 million for the six month period ending May 31, 2008 as compared to the cash provided of $83.0 million for the similar period in the prior fiscal year. This decrease is largely due to an additional term loan of $70.0 million obtained in conjunction with the acquisition of InterVideo and net draws from our operating line of credit of $13.0 million.

Cash used in investing activities was $3.3 million in the six months ended May 31, 2008, a significant decrease over the cash used of $121.9 million in the six months ended May 31, 2007. This reduced cash outlay is due to the purchase of InterVideo on December 12, 2006, and the remaining interest in Ulead on December 28, 2006 for $121.2 million. Cash used in investing activities increased by $471,000 to $1.9 million for the three months ending May 31, 2008, as compared to the cash used of $1.4 million in the similar period ending May 31, 2007. This includes additional capital asset acquisitions of $1.2 million in the period, related to computer hardware.

Adjusted EBITDA

Adjusted EBITDA was $14.9 million in the second quarter of fiscal 2008 compared to $15.2 million in the second quarter of fiscal 2007. For the six months ending May 31, 2007, adjusted EBITDA was $28.2 million compared to $24.0 million for the six months ending May 31, 2007.

Adjusted EBITDA is a non-GAAP measure that we use to assist in evaluation of our liquidity and is used by our bank lenders to calculate compliance with certain financial covenants. As of May 31, 2008 we were in compliance with all debt covenants. This measure does not have any standardized meaning prescribed by GAAP and therefore is unlikely to be comparable to the calculation of similar measures used by other companies, and should not be viewed as alternatives to measures of financial performance or cash flows calculated in accordance with GAAP. We consider cash flow from operations to be the closest GAAP measure to Adjusted EBITDA. For the three months ended May 31, 2008 and May 31, 2007, we had cash flow from operations of $6.9 million and cash used by operations of $3.2 million, respectively. The table below reconciles Adjusted EBITDA to cash flow from operations:


	Three Months Ended						Six Months Ended
	May 31,						May 31,
	2008			2007			2008			2007
Cash flow provided by / (used in) operations	$	6,910		$	(3,216	)	$	13,317		$	15,224
Change in operating assets and liabilities		2,308			12,862			3,700			(3,066	)
Interest expenses, net		2,933			3,718			7,221			7,639
Income tax provision		(5	)		(587	)		(97	)		(232	)
Deferred income taxes		1,233			1,280			2,467			2,315
Provision for bad debts		(129	)		(49	)		(233	)		(65	)
Unrealized foreign exchange losses on forward contracts		—			—			—			(35	)
Gain (loss) on interest rate swap		512			391			(243	)		582
Loss on disposal of fixed assets		(6	)		(54	)		(48	)		(54	)
Gain on sale of investments		—			—			822			—
InterVideo integration costs		—			860			—			1,645
Restructuring costs		447			—			625			—
Expenses associated with Special Committee review		705			—			705			—

Adjusted EBITDA	$	14,908		$	15,205		$	28,236		$	23,953

Off Balance Sheet Arrangements

In certain agreements with customers and distributors, including OEMs and online services companies, we provide indemnifications for third-party intellectual property infringement claims, and many of these indemnification obligations are not subject to monetary limits. We evaluate estimated losses for such indemnifications under SFAS No. 5, Accounting for Contingencies, as interpreted by Financial Accounting Standards Board (“FASB”) Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. We consider factors such as the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. To date, we have not encountered material costs as a result of such obligations and have not accrued any material liabilities related to such indemnifications in our financial statements.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States consistently applied throughout all periods. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to product returns, bad debts, inventories, intangible assets, income taxes, contingencies, litigation and cash sweep payments related to our long-term debt. 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. Actual results may differ from these estimates under different assumptions or conditions.

All critical accounting policies that affect our more significant judgments and estimates used in the preparation of our consolidated financial statements have been discussed in Item 7 of our 10-K filing as at November 30, 2007, except as noted below:

Accelerated Debt Payments

On an annual basis, we are required to make a cash sweep payment to fund our principal balance on our term loans, based on excess cash flow as defined in our senior credit facility agreement. Any cash sweep payments estimated to be payable within the next year are classified as a current liability on our consolidated balance sheet. All cash sweep payments are classified on the balance sheet based on the Company’s ability and intent to refinance the obligation on a long-term basis, the existence of financing arrangements to allow short-term obligations to be refinanced, and the remoteness of the acceleration due date. We are currently not intending to refinance this obligation and intend to make the payments as required.

Our estimate of our cash sweep payment is based on our excess cash flow forecasts for the period ending November 30, 2008, based on our current revenue, expense, collection and payment projections. Excess cash flow is computed in accordance with our senior credit facility agreement. In computing our excess cash flow, we use estimates and judgment based on our experience. These estimates are based on current historical trends, including new product introductions. Actual excess cash flow could vary materially from our estimates. An increase or decrease in excess cash flow could result from changes in consumer demand or other factors. Should this variance occur, our required cash sweet payment could fluctuate significantly. Variances are considered and adjusted for on a quarterly basis.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Market risk is the risk of a loss that could affect our financial position resulting from adverse changes in the financial markets. Our primary risks relate to increases in interest rates and fluctuations in foreign currency exchange rates. Our market risk sensitive instruments were all entered into for non-trading purposes.

Interest Rate Risk

Our exposure to interest rate risk relates primarily to our long-term debt. We have significantly larger amounts of interest bearing debt as compared to interest bearing assets. The risk is associated with increases in the prime lending rate, as a significant portion of the debt has a floating rate of interest based on the prime lending rate.

Given the amount of debt that we have, if lending rates were to rise significantly, the resulting interest cost could materially affect the business. Our annual interest expense would change by $336,000 or each 0.5% change in interest rates, based on debt outstanding as of May 31, 2008. In connection with the current debt facility, we use interest rate swaps to limit our exposure to changing interest rates and related future cash outflows. Interest rate swaps provide for us to pay an amount equal to a specified fixed rate of interest times a notional principal amount and to receive in return an amount equal to a variable rate of interest times the same notional amount.

As of May 31, 2008, our interest rate swaps convert an aggregate notional principal amount of $134.5 million (or approximately 85% of our interest-bearing debt) from floating rate interest payments under our term loan facility to fixed interest rate obligations. The variable rate of interest is based on three-month LIBOR plus 4.00%. The fixed rates range from 8.19% to 9.49%. Of our interest rate swaps, $44.5 million are not designated as hedging instruments. During the second quarter of fiscal 2008, we have recorded a gain of $512,000 as a result of recording these interest rate swaps at fair value. On our $90.0 million of interest rate swaps designated as effective hedging instruments under FAS 133, we have recorded a gain of $2.9 million in other comprehensive income during the second quarter of fiscal 2008.

Foreign Currency Risk

As we also operate internationally, a portion of our business outside North America is conducted in currencies other than the U.S. dollar. Accordingly, the results of our business may also be affected by fluctuations in the U.S. dollar against the Canadian dollar and certain European and Asian currencies, in particular the Pound Sterling, the Yen, the Taiwanese dollar and the Euro. Our exposure

to these and other currencies is minimized due to certain hedges naturally occurring in our business as we have decentralized sales, marketing and support operations in which most costs are local currency based.

Most of our operations are located in Canada and Taiwan. We incur a disproportionate percentage of costs in Canadian and Taiwanese dollars as compared to Canadian and Taiwanese dollar denominated revenues. We are therefore exposed to loss if the Canadian and Taiwanese dollar appreciates against the U.S. dollar.

We manage our financial exposure to certain foreign exchange fluctuations with the objective of minimizing the impact of foreign currency exchange movements on our operations. We try to minimize the effect of changes in U.S. and Canadian dollar exchange rates on our business through the purchase of forward exchange contracts. As of May 31, 2008 and May 31, 2007 we did not have any forward exchange contracts outstanding. However, we have used U.S Dollar foreign exchange contracts during fiscal 2008, and intend to continue using such contracts into the future.

Item 4. Controls and Procedures

Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures as required by Exchange Act Rule 13a-15(b) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective at the reasonable assurance level. There were no changes in our internal control over financial reporting during the quarter ended May 31, 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent or detect all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Corel have been detected.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

In addition, some of our agreements with customers and distributors, including OEMs and online services companies, require us to indemnify these parties for third-party intellectual property infringement claims, and many of these indemnification obligations are not subject to monetary limits. The existence of these indemnification provisions could increase our cost of litigation and could significantly increase our exposure to losses from an adverse ruling.

At May 31, 2008, we were a defendant in Victor Company of Japan, Ltd (“JVC”) v. Corel Corporation, InterVideo, Inc., Cyberlink Corp. et al, an ongoing patent infringement proceeding.. JVC filed a patent infringement action on January 15, 2008, against Corel and others in the United States District Court for the Western District of Texas (Austin Division), alleging infringement of U.S. Patents: 6,493,383 issued on December 10, 2002; 6,522,692 issued February 18, 2003; 6,542,543 issued April 1, 2003; 6,570,920 issued May 27, 2003; and 6,141,491 issued October 31, 2000. JVC alleges certain Corel video playback applications infringe the patents. We believe that we have meritorious defenses to JVC’s claims and intend to defend the litigation vigorously. The ultimate outcome of the litigation, however, is uncertain.

During the second quarter we resolved the Simon Systems (“Simon”) v. Corel Corporation patent infringement proceeding. Simon filed patent infringement action on September 24, 2007, against the Company in the United States District Court for the District of Maryland (Southern Division), alleging infringement of U.S. Patent 5,559,562, issued on September 24, 1996. Simon alleged certain Corel video editing applications infringed the patent in the manner in which the alleged products provide functionality to allow the transitioning from a first video stream to a second video stream. In April, 2008 we entered into a license agreement with the Plaintiff and the Plaintiff dismissed the action. The terms of the license were not material to oue operations and results.

Item 1A. Risk Factors

The risk factors set forth in the section entitled “Risk Factors” in our Form 10-K for the period ending November 30, 2007 (File No. 000-20562), are incorporated by reference into this quarterly report.

Item 2. Use of Proceeds

Not applicable

Item 6. Exhibits


Exhibit
Number		Exhibit
3.1*		Certificate and Articles of Continuance

3.2*		Articles of Amendment

3.3*		By-laws

31.1		Certifications of Chief Executive Officer Pursuant to Section 302 Certifications of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certifications of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certifications of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certifications of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


*		Incorporated by reference to the exhibit of the same number in the Company’s Registration Statement on Form F-1, as amended (File No. 333-132970) Items 3, 4 and 5 are not applicable to us and have been omitted.


PART I. FINANCIAL INFORMATION			4
Item 1. Unaudited Consolidated Financial Statements			4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			17
Item 3. Quantitative and Qualitative Disclosures about Market Risk			27
Item 4. Controls and Procedures			28
PART II. OTHER INFORMATION			28
Item 1. Legal Proceedings			28
Item 1A. Risk Factors			29
Item 2. Use of Proceeds			29
Item 6. Exhibits			29
SIGNATURE			30
EX-31.1: CERTIFICATIONS
EX-31.2: CERTIFICATIONS
EX-32.1: CERTIFICATIONS
EX-32.2: CERTIFICATIONS
EX-31.1: CERTIFICATION
EX-31.2: CERTIFICATION
EX-32.1: CERTIFICATION
EX-32.2: CERTIFICATION


	Corel Corporation
	By:	/s/ Douglas McCollam
		Douglas McCollam
		Chief Financial Officer, Director (Principal Financial Officer and Chief Accounting Officer)

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		Page
	PART I FINANCIAL INFORMATION		4
Item 1.	Unaudited Consolidated Financial Statements		4
	a) Balance Sheets as of May 31, 2008 and November 30, 2007		4
	b) Statements of Operations for the Three and Six Months Ended May 31, 2008 and 2007		5
	c) Statements of Cash Flows for the Three and Six Months Ended May 31, 2008 and 2007		6
	d) Notes to Financial Statements		7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		17
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		27
Item 4.	Controls and Procedures		28
	PART II OTHER INFORMATION		28
Item 1.	Legal Proceedings		28
Item 1A.	Risk Factors		29
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		29
Item 6.	Exhibits		29
*Signature*			30