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 August 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 (State or other jurisdiction of incorporation or organization)	98-0407194 (I.R.S. Employer Identification No.)
1600 Carling Avenue, Ottawa, Ontario (Address of principal executive office)	K1Z 8R7 (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 September 22, 2008 was 25,811,593

TABLE OF CONTENTS

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	28
Item 4. Controls and Procedures	29
PART II. OTHER INFORMATION	29
Item 1. Legal Proceedings	29
Item 1A. Risk Factors	30
Item 6. Exhibits	30
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

2

COREL CORPORATION

Form 10-Q

For the Quarter Ended August 31, 2008

INDEX

		Page
PART I FINANCIAL INFORMATION
Item 1.	Unaudited Consolidated Financial Statements		4
	a) Balance Sheets as of August 31, 2008 and November 30, 2007		4
	b) Statements of Operations for the Three and Nine Months Ended August 31, 2008 and 2007		5
	c) Statements of Cash Flows for the Three and Nine Months Ended August 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		28
Item 4.	Controls and Procedures		29
PART II OTHER INFORMATION
Item 1.	Legal Proceedings		29
Item 1A.	Risk Factors		30
Item 6.	Exhibits		30
Signature			30

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PART I. FINANCIAL INFORMATION

Item 1. Unaudited Consolidated Financial Statements

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

			August 31,			November 30,
	Note		2008			2007
Assets
Current assets:
Cash and cash equivalents			$	37,137		$	24,615
Restricted cash				159			217
Accounts receivable
Trade, net of allowances for doubtful accounts of $1,033 and $1,366, respectively				28,485			41,092
Other				3,236			118
Inventory		3		1,260			729
Income taxes recoverable		4		1,760			1,470
Prepaids and other current assets				3,279			3,276
Total current assets				75,316			71,517
Capital assets				9,920			8,971
Intangible assets				72,925			92,010
Goodwill				88,643			88,643
Deferred financing and other long-term assets				5,419			5,696
Total assets			$	252,223		$	266,837
Liabilities and shareholders’ deficit
Current liabilities:
Accounts payable and accrued liabilities			$	54,569		$	67,290
Income taxes payable		4		1,464			723
Deferred revenue				12,588			15,707
Current portion of long-term debt		5		16,595			2,249
Current portion of obligation under capital leases				708			767
Total current liabilities				85,924			86,736
Deferred revenue				2,236			2,365
Deferred income tax liability		4		17,054			20,754
Obligation under capital leases				1,302			2,114
Income taxes payable				13,139			11,693
Accrued pension benefit obligation		6		1,075			1,116
Long-term debt		5		140,163			156,359
Total liabilities				260,893			281,137
Commitments and contingencies		7
Shareholders’ deficit
Share capital:
Common Shares (par value: none; authorized: unlimited; issued and outstanding: 25,811 and 25,457 shares, respectively)		8		44,042			40,652
Additional paid-in capital		8		7,970			5,926
Accumulated other comprehensive loss				(2,071	)		(721	)
Deficit		4		(58,611	)		(60,157	)
Total shareholders’ deficit				(8,670	)		(14,300	)
Total liabilities and shareholders’ deficit			$	252,223		$	266,837

See Accompanying Notes to the Consolidated Financial Statements

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

			Three Months Ended						Nine Months Ended
			August 31,						August 31,
	Note		2008			2007			2008			2007
Revenues
Product			$	59,725		$	55,018		$	179,336		$	161,875
Maintenance and services				6,503			5,352			19,480			16,161
Total revenues		12		66,228			60,370			198,816			178,036
Cost of revenues
Cost of products				15,218			12,167			44,453			34,690
Cost of maintenance and services				113			244			412			663
Amortization of intangible assets				6,418			6,925			19,250			19,055
Total cost of revenues				21,749			19,336			64,115			54,408
Gross margin				44,479			41,034			134,701			123,628
Operating expenses
Sales and marketing				17,941			17,590			58,373			52,580
Research and development				10,610			11,939			34,417			34,605
General and administration				8,378			7,763			25,829			25,000
Acquired in-process research and development				—			—			—			7,831
InterVideo integration expense				—			2,220			—			3,865
Restructuring		9		293			—			918			—
Total operating expenses				37,222			39,512			119,537			123,881
Income from operations				7,257			1,522			15,164			(253	)
Other expenses (income)
Interest income				(123	)		(112	)		(342	)		(934	)
Interest expense				3,663			4,307			11,103			12,768
Amortization of deferred financing fees				270			270			810			804
Expenses associated with evaluation of strategic alternatives		13		992			—			1,697			—
Other non-operating (income) expense				1,034			(497	)		(328	)		(650	)
Income (loss) before taxes				1,421			(2,446	)		2,224			(12,241	)
Income tax (recovery) provision		4		(177	)		4,314			(274	)		4,082
Net income (loss)			$	1,598		$	(6,760	)	$	2,498		$	(16,323	)
Other comprehensive income (loss)
Unrealized (loss) gain on securities, net of taxes				(23	)		56			(58	)		56
Amortization of actuarial gain recognized for defined benefit plan				(1	)		—			21			—
Gain (loss) on interest rate swaps designated as hedges, net of taxes				(624	)		56			(1,313	)		56
Other comprehensive income (loss) income, net of taxes				(648	)		56			(1,350	)		56
Comprehensive income (loss)			$	950		$	(6,704	)	$	1,148		$	(16,267	)
Net income (loss) per share:
Basic			$	0.06		$	(0.27	)	$	0.10		$	(0.66	)
Fully Diluted		10	$	0.06		$	(0.27	)	$	0.10		$	(0.66	)
Weighted average number of shares:
Basic				25,704			25,041			25,570			24,828
Fully diluted		10		26,248			25,041			26,192			24,828

See Accompanying Notes to the Consolidated Financial Statements

5

Corel Corporation
Consolidated Statement of Cash Flows
(in thousands of U.S. dollars)
(Unaudited)

			Three Months Ended						Nine Months Ended
			August 31,						August 31,
	Note		2008			2007			2008			2007
Cash flows from operating activities
Net income (loss)			$	1,598		$	(6,760	)	$	2,498		$	(16,323	)
Depreciation and amortization				1,022			544			3,417			2,215
Amortization of deferred financing fees				270			270			810			804
Amortization of intangible assets				6,418			6,925			19,250			19,055
Stock-based compensation		9		1,839			1,770			4,954			4,068
Provision for bad debts				146			115			379			180
Deferred income taxes				(1,233	)		3,667			(3,700	)		1,352
Acquired in-process research and development				—			—			—			7,831
Unrealized (gain) loss on forward exchange contracts				—			(26	)		—			9
Loss on disposal of fixed assets				19			48			67			102
Gain in sale of investment				—			—			(822	)		—
(Gain) loss on interest rate swap recorded at fair value				(193	)		337			50			(245	)
Change in operating assets and liabilities		11		(3,667	)		(6,387	)		(7,367	)		(3,321	)
Cash flows provided by operating activities				6,219			503			19,536			15,727
Cash flows from financing activities
Reduction in restricted cash				2			500			58			500
Proceeds from operating line of credit				—			—			—			48,000
Repayments of operating line of credit				—			(6,000	)		—			(41,000	)
Proceeds from long-term debt				—			—			—			70,000
Repayments of long-term debt				(755	)		(399	)		(1,850	)		(1,479	)
Repayments of capital lease obligations				(318	)		(128	)		(657	)		(128	)
Financing fees incurred				—			(4	)		—			(1,681	)
Proceeds from exercise of stock options				231			1,298			485			3,987
Other financing activities				—			(272	)		—			(221	)
Cash flows provided by (used in) financing activities				(840	)		(5,005	)		(1,964	)		77,978
Cash flows from investing activities
Purchase of InterVideo Inc., net of cash acquired				—			(203	)		—			(121,357	)
Purchase of capital assets				(1,657	)		(1,441	)		(4,956	)		(2,159	)
Cash flows used in investing activities				(1,657	)		(1,644	)		(4,956	)		(123,516	)
Effect of exchange rate changes on cash and cash equivalents				—			(7	)		(94	)		38
Increase (decrease) in cash and cash equivalents				3,722			(6,153	)		12,522			(29,773	)
Cash and cash equivalents, beginning of period				33,415			27,410			24,615			51,030
Cash and cash equivalents, end of period			$	37,137		$	21,257		$	37,137		$	21,257
Supplementary Disclosure
Cash paid for income taxes			$	1,041		$	842		$	3,689		$	1,758
Cash paid for interest			$	3,025		$	4,499		$	10,251		$	12,617
Purchases of capital assets under capital lease			$	—		$	494		$	—		$	2,991

See Accompanying Notes to the Consolidated Financial Statements

6

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 August 31, 2008 and our results of operations and cash flows for the three and nine months ended August 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 nine months ended August 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.

7

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 uses a mark to market valuation prepared by a broker based on observable interest rate yield curves.

Interest Rate Swaps

     As of August 31, 2008, the company has $134.5 million of interest rate swaps. Of this amount, $90.0 million have been designated as effective hedging instruments under FAS 133, “Accounting for Derivative Instruments and Hedging Activities”, and as such any changes in the value of these swaps is recorded in other comprehensive income. The Company also has $44.5 million of interest rate swaps that are not designated as effective hedging instruments under FAS 133, and as such any changes in the value of these swaps is recorded in interest expense.

     The Company assesses the effectiveness of its interest rate swaps as defined in FAS 133, on a quarterly basis. During this quarter, the Company has considered the impact of the current credit crisis in the United States in assessing the risk of counterparty default. The Company believes that it is still likely that the counterparty for these swaps will continue to act throughout the contract period, and as a result continues to deem the swaps as effective hedging instruments.

     As of August 31, 2008, the accrued mark to market loss on these swaps is $4.4 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 loss recorded in the three month period ended August 31, 2008 is $431, which represents the change in the mark to market valuation on the swaps during the period. Of this loss, a gain of $193 has been recorded in interest expense and a loss of $624 has been included in other comprehensive income. The loss recorded in the nine month period ended August 31, 2008 is $1.4 million, which represents the change in the mark to market valuation on the swaps during the period. Of this loss, $50 has been recorded in interest expense and $1.3 million has been included in other comprehensive income.

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

8

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:

	August		November
	31, 2008		30, 2007
Product components	$	610	$	310
Finished goods		650		419
	$	1,260	$	729

4. Income Taxes

     For the three and nine months ended August 31, 2008, the Company recorded a tax recovery of $177 and $274 on income before income taxes of $1.4 million and $2.2 million, respectively. The current tax provision was $1.1 million and $3.4 million, for the three and nine month period ended August 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 $3.7 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 and nine months ended August 31, 2007, the Company recorded a tax provision of $4.3 million and $4.1 million on a loss before income taxes of $2.4 million and $12.2 million, respectively. The majority of the tax provision relates to an additional $5.0 million valuation allowance against all deferred tax assets assumed in the InterVideo acquisition. In that period, Corel determined that it was no longer more likely than not that the deferred tax assets would be realized, and accordingly a valuation allowance was recorded. The remaining balance reflected foreign withholding taxes plus provisions for income taxes for subsidiaries that have taxable income in the period, offset by a reduction in the Company’s deferred income tax liability related to the amortization of intangible assets recorded on the acquisition of InterVideo. The Company 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 nine months ended August 31, 2008, the total amount of unrecognized tax benefits and related interest increased by approximately $57 and $499, respectively.

     It is reasonably possible that the amount of unrecognized tax benefits, inclusive of related interest, will change in the next twelve months. At August 31, 2008, the estimated decrease in the amount of unrecognized tax benefits relating to transfer pricing and various credits for the next 12 months is expected to be $280 due to the reasonable possibility that audits will be closed or the statute of limitations will expire in various jurisdictions.

9

     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

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 $15.0 million.

     The future debt payments on long-term debt as of August 31, 2008, including the annual cash sweep payment of $15.0 million as discussed above, are as follows:

	Principal		Interest		Total
2008, remainder of		399		3,341		3,740
2009		16,595		12,059		28,654
2010		1,596		11,093		12,689
2011		1,596		10,366		11,962
2012		136,572		3,673		140,245
Total	$	156,758	$	40,532	$	197,290

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

10

6. Defined Pension Benefit Plan

Accrued pension benefit obligation as of December 1, 2007	$	1,116
Activity during six months ended May 31, 2008
Service cost		22
Interest cost		30
Expected return on plan assets		(16	)
Amortization of prior unrecognized gain		(22	)
Contributions		(48	)
Other — effect of foreign exchange		1
Accrued pension benefit obligation as of May 31, 2008	$	1,083
Activity during three months ended August 31, 2008
Service cost		11
Interest cost		15
Expected return on plan assets		(8	)
Amortization of prior unrecognized gain		1
Contributions		(24	)
Other — effect of foreign exchange		(3	)
Accrued pension benefit obligation as of August 31, 2008	$	1,075

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.

     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.

     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 the Company 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 conducting 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 was recorded as a reduction of costs of goods sold in the period. No further adjustments have been made to the accrual.

     At August 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; 5,535,008 issued on July 9, 1996; 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. Any potential loss is indeterminable at this time.

11

          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 assessment will not have a material impact on its financial condition or results of operations. As of August 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				Nine Months
	Ended August 31,				Ended May 31,
	2008		2007		2008		2007
Cost of products	$	4	$	15	$	19	$	33
Cost of maintenance and services		2		3		6		7
Sales and marketing		459		468		1,358		1,049
Research and development		232		369		767		857
General and administration		1,142		915		2,804		2,122
Total stock-based compensation expense	$	1,839	$	1,770	$	4,954	$	4,068

     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, in this case once Corel has been a public company for a period equal to the estimated life of our options, 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 a blended rate computation, as the Company was either a private company or had been a public company for less than one year.

     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 August 31, 2008 and August 31, 2007, was estimated as of the date of grant using the following weighted average assumptions:

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	Three Months Ended
	August 31,
	2008			2007
Expected option life (years)		7			7
Volatility		28.89	%		30.64	%
Risk free interest rate		3.77	%		4.92	%
Forfeiture rate		16.50	%		16.58	%
Dividend yield	Nil			Nil

     As of August 31, 2008, there was $12.4 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 4,265,255 remaining common shares authorized for issuance under the 2006 Equity Incentive Plan.

     Option activity under the 2006 Equity Incentive Plan for the three and nine month period ended August 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
Activity for six months ended May 31, 2008
Granted		887,931			10.20		3.27
Exercised		(18,422	)		6.58		3.85
Forfeited		(284,962	)		12.69		4.25
Outstanding at May 31, 2008		3,299,012		$	12.02	$	4.24
Granted		33,400			10.85		3.56
Exercised		(6,630	)		4.63		1.84
Forfeited		(389,062	)		13.34		4.59
Outstanding at August 31, 2008		2,936,720		$	11.85	$	4.19
Exercisable at August 31, 2008		903,827		$	12.37	$	4.19
Weighted average remaining life of the outstanding options	8.56 Years
Total intrinsic value of exercisable options	$	460
Weighted average remaining life of the exercisable options	7.55 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 22,500 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 June 24, 2012. Restricted stock unit activity under the 2006 equity incentive plan, for the three and nine month period ended August 31, 2008 is presented below:

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				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
RSU’s granted		5,000		$	10.75
RSU’s converted to common shares		(11,250	)		13.08
RSU’s forfeited	Nil				n/a
Outstanding at August 31, 2008		78,750		$	12.24
Exercisable at August 31, 2008	Nil			$	n/a
Weighted average remaining life of the outstanding options	9.35 Years
Weighted average remaining life of the exercisable RSU’s		n/a
Total intrinsic value of the exercisable RSU’s		n/a

2003 Share Option and Phantom Share Unit Plan

     In the nine months ended August 31, 2008, no options were granted as this plan is no longer eligible for grant distribution. Unit activity for the three and nine month period ended August 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
Activity for the six months ending May 31, 2008
Exercised		(122,099	)		1.17		5.95
Forfeited		(17,531	)		9.66		6.20
Outstanding at May 31, 2008		674,310		$	2.33	$	5.84
Exercised		(161,520	)		1.17		9.10
Forfeited		(3,472	)		8.22		5.79
Outstanding at August 31, 2008		509,318		$	2.65	$	5.34
Exercisable at August 31, 2008		450,246		$	2.23	$	4.99
Weighted average remaining life of the outstanding options	6.14 Years
Total intrinsic value of exercisable options	$	3,921
Weighted average remaining life of the exercisable options	6.03 Years

9. Restructuring Charges

          On September 10, 2008, management initiated a restructuring plan to streamline its global operations in order to become more operationally efficient and to increase its investment in key growth opportunities, including sales to emerging markets and its eCommerce program. As part of this effort, the Company will reduce its workforce by approximately 90 employees worldwide. As all affected employees, with one exception, will be notified subsequent to August 31, 2008, the majority of restructuring charges related to this plan will be expensed in the fourth quarter of fiscal 2008. For most affected individuals, there are no on-going service requirements beyond this fiscal year. The Company did expense $120 in the third quarter, which relates to one executive who was notified prior to the end of August. The total costs that will arise from this global restructuring are estimated to be $2.5 million.

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          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 California. 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 related to the Digital Media Plan are estimated to be $1,935. During the third quarter of fiscal 2008, $90 of termination benefits were expensed related to the termination dates for certain individuals. No further termination benefit expenses will be recorded from this restructuring.

          In the second quarter of fiscal 2008, the Company initiated restructuring activity, largely focused on centralizing research and development functions, as well as some administrative activities. The total costs related to these activities are estimated to be $440. Of these costs, $387 were expensed in the second quarter, $32 were expensed in the third quarter and, $21 is expected to be expensed in future periods related to certain individuals who will be retained by the Company beyond August 31, 2008.

          As of August 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 August 31, 2008 is as follows:

				Costs of
				Closing
	Termination			Redundant
	Benefits			Facilities
Balance accrued as of December 1, 2007	$	1,184		$	263
Activity during six months ended May 31, 2008
Additional restructuring charges		1,060			6
Changes in estimates		(265	)		(176	)
Cash payments		(1,567	)		(18	)
Balance accrued as of May 31, 2008	$	412		$	75
Activity during three months ended August 31, 2008
Additional restructuring charges		152			—
Change in estimates		131			10
Cash payments		(395	)		(21	)
Balance accrued as of August 31, 2008	$	300		$	64

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 remain accrued as of August 31, 2008 is as follows:

				Costs of
				Closing
	Termination			Redundant
	Benefits			Facilities
Balance accrued as of December 1, 2007	$	19		$	681
Activity during the six months ended May 31, 2008
Cash payments		(19	)		(100)	)
Change in estimates		—			(396	)
Balance accrued as of May 31, 2008	$	nil		$	185
Activity during three months ended August 31, 2008
Cash payments		—			(37	)
Change in estimates		—			(1	)
Balance accrued as of August 31, 2008	$	nil		$	147

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          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 resulted in a reduction to our operating expenses

10. Earnings (Loss) per Share

          For the three and nine months ending August 31, 2008, the dilutive impact of the outstanding options for common shares was 544,000, and 622,000, respectively. The dilutive impact of the outstanding options for common shares would have been 847,000 and 888,000 for the three and nine month periods ending August 31, 2007, respectively, but is anti-dilutive.

11. Change in Operating Assets and Liabilities

	Three months ended						Nine months ended
	August 31						August 31
	2008			2007			2008			2007
Accounts receivable	$	(134	)	$	(4,695	)	$	10,076		$	6,184
Inventory		(328	)		185			(531	)		1,407
Prepaids and other current assets		578			(73	)		(596	)		(38	)
Accounts payable and accrued liabilities		(4,189	)		(4,108	)		(14,232	)		(12,221	)
Due to related parties		—			—			—			(167	)
Accrued interest		230			(504	)		219			(418	)
Taxes payable		347			(37	)		945			1,212
Deferred revenue		(171	)		2,845			(3,248	)		720
Total change in operating assets and liabilities	$	(3,667	)	$	(6,387	)	$	(7,367	)	$	(3,321	)

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 in 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				Nine Months Ended
	August 31,				August 31,
	2008		2007		2008		2007
By product category:
Graphics and Productivity	$	37,913	$	33,683	$	113,357	$	102,264
Digital Media		28,315		26,687		85,459		75,772
	$	66,228	$	60,370	$	198,816	$	178,036
By geographic region:
Americas
Canada	$	2,424	$	1,159	$	5,465	$	6,106
United States		28,932		29,147		86,736		82,057
Other		1,644		1,120		4,489		3,471
Europe, Middle East, Africa (EMEA)		18,151		14,566		58,728		49,332
Asia Pacific (APAC)
Japan		11,333		10,576		32,200		24,952
Other		3,744		3,802		11,198		12,118
	$	66,228	$	60,370	$	198,816	$	178,036

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13. Expenses Associated with Evaluation of Strategic Alternatives

     On March 28, 2008 the Company received an unsolicited proposal from Corel Holdings, L.P. (“CHLP”) (which is controlled by an affiliate of Vector Capital Corporation) the holder of approximately 69% of the Company’s outstanding common shares. CHLP 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 (“Proposal”). 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 assisted it in evaluating and responding to the CHLP proposal. In addition, the Special Committee undertook a process to evaluate other strategic alternatives to maximize value for all shareholders. The Company assumed expenses associated with the Special Committee Review. These have been classified as a non-operating expense.

     On August 18, 2008, the Company announced that CHLP had informed the Company that it withdrew its Proposal in order to facilitate pursuit by the Company of other alternatives for maximizing value for all of the Company’s shareholders. In light of the withdrawal of the CHLP Proposal and the Board’s desire to oversee evaluation of the potential strategic alternatives directly, the Board has unanimously determined that there is no longer a need for the Special Committee.

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 evaluation of other strategic alternatives by the Board of Directors, such as the potential sale of shares to a third party, creates 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 any 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;

• the current uncertainties in the global economy, and in particular the difficulties in the credit environment in the United States, could reduce our revenues and cash flows in future periods;

• 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

17

	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 $156.8 million as of August 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 nine month periods ended August 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, CorelDESIGNER Technical Suite, WinZip, iGrafx and WordPerfect Office. CorelDRAW Graphics Suite is a leading vector illustration, page layout, image editing and bitmap conversion software suite used by design professionals and occasional graphics users in small businesses. Corel Painter is a Natural-Media^® painting and drawing software featuring digital brushes, art materials and textures that mirror the look and feel of their traditional counter parts. CorelDESIGNER Technical Suite offers users a graphics application for creating or updating complex technical illustrations. WinZip is the most widely used 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 is the leading Microsoft-alternative productivity software and features Microsoft-compatible word processing, spreadsheet and presentation applications.

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Digital Media

          Our Digital Media portfolio includes Digital Imaging and Digital Video products. 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 that are primarily taken with a point-and-shoot camera. Corel Photo Album is an entry-level software program that allows users to easily store, organize, share and manage their digital photo collections. PhotoImpact is an image editing software, which provides users with easy-to-use photo editing tools, creative project templates and digital art capabilities . Our Digital Video products include WinDVD, VideoStudio, DVD Movie Factory, DVD Copy and Instant On. WinDVD is the world’s leading software for DVD, video and Blu-ray Disc playback on PC’s with over 200 million units shipped worldwide. VideoStudio is our consumer focused 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. Instant On is a modular solution that turns a personal computer into a remotely controllable multimedia device, with a user interface resembling typical consumer electronics products.

OVERVIEW OF THE QUARTER

Operating Performance

     Revenue during the third quarter was $66.2 million, up 9.7% year over year. The revenue growth of $5.9 million was due to a $4.2 million revenue increase from our Graphics and Productivity group of products along with a $1.6 million revenue increase from our Digital Media group of products The increase in revenue from Graphics and Productivity was driven primarily by CorelDRAW Graphics Suite, WordPerfect Office, CorelDESIGNER Technical Suite, and, iGrafx. The growth in the Digital Media group of products was driven primarily by an increase in revenue from our Instant On and WinDVD products —growth that was partially offset by a decline in sales from Corel Photo Album.

     Our net income for the third quarter of fiscal 2008 was $1.6 million, or $0.06 per share, compared to a net loss of $6.8 million, or $0.27 per share in the third quarter of 2007. The increase in net income of $8.4 million resulted from a $3.4 million increase in gross margin associated with our higher revenues, a reduction of $2.2 million in integration expenses, and a reduction in our income tax expense of $4.5 million. Non-GAAP Adjusted EBITDA was $15.8 million and cash flow from operations was $6.2 million in the quarter compared to non-GAAP adjusted EBITDA of $13.5 million and cash provided by operations of $503,000 in the third quarter of 2007.

RESULTS OF OPERATIONS

Three and Nine Months ended August 31, 2008 and August 31, 2007

Revenues

	Three Months Ended									Nine Months Ended
	August 31,						Percentage			August 31,						Percentage
	2008			2007			Change			2008			2007			Change
	(dollars in thousands)
	(unaudited)
Product	$	59,725		$	55,018			8.6	%	$	179,336		$	161,875			10.8	%
As a percent of revenue		90.2	%		91.1	%					90.2	%		90.9	%
Maintenance and services		6,503			5,352			21.5	%		19,480			16,161			20.5	%
As a percent of revenue		9.8	%		8.9	%					9.8	%		9.1	%
Total		66,228			60,370			9.7	%		198,816			178,036			11.7	%

     Total revenues for the three month period ended August 31, 2008 increased by 9.7% to $66.2 million from $60.4 million for the three months ended August 31, 2007. This increase of $5.9 million is attributable to the $4.2 million revenue growth in Graphics and

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Productivity products and the $1.6 million revenue growth in Digital Media Products. Total revenues for the nine month period ended August 31, 2008 increased by 11.7% to $198.8 million from $178.0 million for the nine months ended August 31, 2007. Of this increase, $9.7 million was attributable to our Digital Media products. This increase is largely growth in Digital Video revenue due to the fact that the Company was unable to record OEM revenue of approximately $11.8 million on acquired Digital Video products in the first quarter of fiscal 2007, due to acquisition accounting standards. We have had an increase of $11.1million in revenue from Graphics and Productivity for the comparable nine month period. All of our Graphics and Productivity products have had revenue growth throughout the first nine months of fiscal 2008, with the growth in this group led by CorelDRAW, WinZip, and iGrafx.

     The increase in product revenues by 8.6% and 10.8% for the three and nine months ended August 31, 2008 as compared to three and nine months ended August 31, 2007, are driven by the same factors which affected our total revenues for the period, which are discussed above.

     Maintenance and services revenues increased by 21.5% to $6.5 million for the three month period ended August 31, 2008 and by 20.5% to $19.5 million for the nine months ended August 31, 2008. This increase is largely attributable to increased sales of WinZip’s maintenance program.

Total Revenues by Product Group

	Three Months Ended									Nine Months Ended
	August 31,						Percentage			August 31,						Percentage
	2008			2007			Change			2008			2007			Change
	(dollars in thousands)
	(unaudited)
Graphics and Productivity	$	37,913		$	33,683			12.6	%	$	113,357		$	102,264			10.8	%
As a percent of revenue		57.2	%		55.8	%					57.0	%		57.4	%
Digital Media		28,315			26,687			6.1	%		85,459			75,772			12.8	%
As a percent of revenue		42.8	%		44.2	%					43.0	%		42.6	%

     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		Quarter of
	Version		Current Release		Prior Release
Product
Graphics and Productivity:
CorelDRAW Graphics Suite		14		Q1 2008		Q1 2006
Corel Painter		10		Q1 2007		Q4 2004
CorelDESIGNER Technical Suite		14		Q3 2008		Q2 2005
WinZip		11		Q4 2006		Q4 2005
iGrafx FlowCharter		12		Q2 2007		Q1 2006
WordPerfect Office Suite		14		Q2 2008		Q1 2006
Digital Media
Paint Shop Pro Photo		12		Q4 2007		Q4 2006
MediaOne		2		Q4 2007		Q4 2006
WinDVD		9		Q1 2008		Q4 2006
VideoStudio		12		Q4 2008		Q2 2007
DVD Movie Factory		6		Q1 2007		Q1 2006
DVD Copy		6		Q1 2008		Q3 2006
PhotoImpact		13		Q1 2008		Q3 2006

     Graphics and Productivity revenues increased by $4.2 million or 12.6% to $37.9 million in the third quarter of fiscal 2008 from $33.7 million in the third quarter of fiscal 2007, and increased by $11.1 million or 10.8% to $113.4 million for the nine month period ending August 31, 2008 as compared to the nine month period ending August 31, 2007. The increase in revenues for the three month

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period was primarily due to revenue growth in CorelDRAW Graphics Suite, WordPerfect Office, CorelDESIGNER Technical Suite and iGrafx. In addition, our other major Graphics and Productivity products, WinZip and Corel Painter, had revenue increases in the third quarter of fiscal 2008 as compared to fiscal 2007, as we continue to build our markets. Revenue growth from CorelDRAW Graphics Suite was attributable to increased sales following the launch of CorelDRAW Graphics Suite X4 in February 2008. We have also benefited from allocating more sales and marketing resources in developing and emerging markets in Asia and Latin America. Revenue growth from WordPerfect Office was due primarily to the release of the X4 suite launched in the second quarter of fiscal 2008 and from solid license business in North America. Revenue from CorelDESIGNER Technical Suite has increased in EMEA and North American due to the new version release in this quarter. iGrafx revenue growth was primarily attributable to the U.S market where we continued to build our enterprise level business in a significant deal with a military institution.

     Digital Media revenues increased by $1.6 million or 6.1% to $28.3 million in the third quarter of fiscal 2008 from $26.7 million in the third quarter of fiscal 2007, and increased by $9.7 million or 12.8% to $85.5 million for the nine months ending August 31, 2008. The revenue growth in the third quarter of $1.6 million was largely due to Instant On. During the three months ended August 31, 2008 we benefited from extra distribution by one of our significant Japanese OEM distributors. We have also had revenue gains fuelled in part by WinDVD growth in North America, Paint Shop Pro Photo growth in EMEA, and in DVD Copy. These gains were partially offset by lower revenue from Corel Photo Album in the United States and by declines in WinDVD in the EMEA and APAC regions. Corel Photo Album revenue declined due to changes in an agreement with a significant OEM partner. The revenue growth for the nine months ending August 31, 2008 is largely attributable to the OEM revenue of InterVideo, which we were unable to recognize in the first quarter of fiscal 2007, due to acquisition accounting standards.

Total Revenues by Region

	Three Months Ended									Nine Months Ended
	August 31,						Percentage			August 31,						Percentage
	2008			2007			Change			2008			2007			Change
	(dollars in thousands)
	(unaudited)
Americas	$	33,000		$	31,426			5.0	%	$	96,690		$	91,634			5.5	%
As a percent of revenue		49.8	%		52.1	%					48.6	%		51.5	%
EMEA		18,151			14,566			24.6	%		58,728			49,332			19.0	%
As a percent of revenue		27.4	%		24.1	%					29.5	%		27.7	%
APAC		15,077			14,378			4.9	%		43,398			37,070			17.1	%
As a percent of revenue		22.8	%		23.8	%					21.8	%		20.8	%

     Revenues in the Americas increased by 5.0% to $33.0 million in the third quarter of fiscal 2008 compared to $31.4 million in the third quarter of fiscal 2007. For the nine months ended August 31, 2008 revenues increased by 5.5% to $96.7 million as compared to $91.6 million for the period ending August 31, 2007. In the current quarter, Corel’s revenue growth was led by WinDVD, iGrafx, WordPerfect Office, and CorelDRAW Graphics Suite. These revenue gains were partially offset by declines in revenue from Corel Photo Album and WinZip. WinDVD enjoyed continued growth as a result of its distribution arrangements with two significant OEM suppliers. IGrafx revenues increased due to a significant deal with a military unit and the continued building of the iGrafx enterprise level business. WordPerfect Office channel sales increased in the third quarter as it continued to derive benefits from the new version launch in the second quarter of fiscal 2008. CorelDRAW Graphics Suite continued to build on its market share and derive more revenue from the new version launched in the first quarter of fiscal 2008. The decline in Photo Album revenue was primarily due to changes in an agreement with a significant OEM partner, while the decline in WinZip revenue was attributable to lower internet license sales in the U.S. market. The comparative increase in revenue of $5.1 million for the nine month period ended August 31, 2008 as compared to the nine month period ending August 31, 2007 also reflects the inability to recognize certain OEM revenue from InterVideo in the first quarter of fiscal 2007, due to acquisition accounting standards.

     Revenues in EMEA increased by 24.6% to $18.2 million in the third quarter of fiscal 2008 from $14.6 million in the third quarter of fiscal 2007, and increased by 19.0% to $58.7 million in the first nine months of fiscal 2008 from $49.3 million in the first nine months of fiscal 2007. The revenue growth in this region is driven by increased revenue from CorelDRAW Graphics Suite, WinZip, Paint Shop Pro Photo and CorelDESIGNER Technical Suite. This growth was partially offset by a decline in WinDVD sales. In February 2008 we launched CorelDRAW Graphics Suite X4 and we continued to derive benefits from the success of this global launch. In addition, the product’s upward trend prior to the launch, and further expansion into Eastern Europe, in particular the Russian Federation, has further driven the increase in CorelDRAW Graphics Suite revenue. The increase in WinZip revenue was due

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primarily to increased internet license sales, the release of new language versions during the past year, and some significant new license arrangements for the product. The increase in Paint Shop Pro Photo was mainly driven by the products availability in new languages and new markets during the period. The growth in CorelDESIGNER Technical Suite revenue was driven by the new version release and by license arrangement renewals. The decline in WinDVD was primarily due to a one time license order that was received in the third quarter of fiscal 2007.

     APAC revenues increased by 4.9% to $15.1 million in the third quarter of fiscal 2008 and increased by 17.1% to $43.4 million in the first nine months of fiscal 2007. The growth in revenues in the third quarter is driven by Instant On and CorelDRAW Graphics Suite. The revenue growth was partially offset by declines in WinDVD and iGrafx. The increase in Instant On was primarily due to the Company benefiting from extra distribution by one of our significant Japanese OEM distributors. The increase in revenues from CorelDRAW Graphics Suite was due to the Company’s investment in sales and marketing and expansion within certain regions in APAC, combined with the launch of CorelDRAW Graphics Suite X4 in the first quarter of fiscal 2008. The decline in WinDVD revenue was attributable to declining royalty revenues from some of our OEM partners and one major OEM customer opting to use an in-house solution to replace the product. The decline in iGrafx revenue was due to the exceptionally strong second and third quarter of fiscal 2007 when this product was adopted by several large businesses to meet Japanese financial control compliance guidelines enacted in 2007. The comparative increase in revenues for the nine month period ending August 31, 2008 primarily 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 from InterVideo in the first quarter of fiscal 2007, in accordance with acquisition accounting standards.

Cost of Revenues

	Three Months Ended									Nine Months Ended
	August 31,						Percentage			August 31,						Percentage
	2008			2007			Change			2008			2007			Change
	(dollars in thousands)
	(unaudited)
Cost of product	$	15,218		$	12,167			25.1	%	$	44,453		$	34,690			28.1	%
As a percent of product revenue		25.5	%		22.1	%					24.8	%		21.4	%
Cost of maintenance and services		113			244			(53.7	%)		412			663			(37.9	)%
As a percent of maintenance and service revenue		1.7	%		4.6	%					2.1	%		4.1	%
Amortization of intangible assets		6,418			6,925			(7.3	%)		19,250			19,055			1.0	%
As a percent of revenue		9.7	%		11.5	%					9.7	%		10.7	%

     Cost of Product Revenues. Cost of product revenues increased by 25.1% to $15.2 million in the third quarter of fiscal 2008 as compared to the third quarter of fiscal 2007. The cost of product revenues has increased by 28.1% to $44.5 million from $34.7 million for the nine months ending August 31, 2008. As a percentage of product revenues, cost of product revenues increased to 25.5% and 24.8% from 22.1% and 21.4% for the three and nine months ended August 31, 2008 and 2007, respectively. Our cost of products have increased over the second and third quarter of fiscal 2008 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. Furthermore, there was a change in our revenue mix in the first quarter of fiscal 2008 from Graphics and Productivity products to Digital Video products. Digital Video carries a larger cost of product, both historically and in this fiscal year, resulting in a lower gross margin on Digital Video products compared to Graphics and Productivity products. These factors were partially offset in the second quarter of fiscal 2008 by a $1.7 million reduction of a royalty contingency that had been established in connection with the acquisition of InterVideo. The growth in cost of sales for the nine month period, is attributable to the changes in product mix noted above, as well as the costs of sales of some InterVideo products, which we were unable to recognize in the first quarter of fiscal 2007, due to acquisition accounting standards.

     Cost of Maintenance and Services Revenues. Cost of maintenance and services revenues decreased to 1.7% of related revenues in the third quarter of fiscal 2008 compared to 4.6% in the third quarter of fiscal 2007. For the nine months ended August 31, 2008, costs as a portion of related revenues decreased to 2.1% from 4.1% in the comparable prior period, and is primarily attributable to WinZip’s higher maintenance revenues and the limited incremental costs to provide such revenue.

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     Amortization of Intangible Assets. Amortization of intangible assets of $19.1 million has remained steady for the nine months ending August 31 2008. This is consistent with expectations as there has been no major change in our intangible asset base since the InterVideo acquisition on December 12, 2007. The decrease in amortization expense in the third quarter of fiscal 2008 is attributable to additional amortization being recorded in the third quarter of fiscal 2007 due to a change in the estimated lives of some of the acquired InterVideo intangibles.

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 August 31, 2007, we have reduced our general and administrative costs by $1.0 million, increased our sales and marketing costs by $370,000, increased our research and development costs by $657,000, and increased our cost of products sold by $24,000. For the nine months ended August 31, 2007 we have reduced our general and administrative costs by $2.1 million, increased our sales and marketing costs by $753,000, increased our research and development costs by $1.3 million, and increased our cost of products sold by $50,000.

	Three Months Ended									Nine Months Ended
	August 31,						Percentage			August 31,						Percentage
	2008			2007			Change			2008			2007			Change
	(dollars in thousands)
	(unaudited)
Sales and marketing	$	17,941		$	17,590			2.0	%	$	58,373		$	52,580			11.0	%
As a percent of revenue		27.1	%		29.1	%					29.4	%		29.5	%
Research and development		10,610			11,939			(11.1	%)		34,417			34,605			(0.5	%)
As a percent of revenue		16.0	%		19.8	%					17.3	%		19.4	%
General and administrative		8,378			7,763			7.9	%		25,829			25,000			3.3	%
As a percent of revenue		12.7	%		12.9	%					13.0	%		14.0	%
Restructuring		293			—			n/a			918			—			n/a
As a percent of revenue		0.4	%		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	%		4.4	%
InterVideo integration expenses		—			2,220			(100.0	%)		—			3,865			(100.0	%)
As a percent of revenue		0.0	%		3.7	%					0.0	%		2.2	%

     Sales and Marketing. Sales and marketing expenses increased by 2.0% to $17.9 million in the third quarter of fiscal 2008 as compared to $17.6 million in the third quarter of fiscal 2007. For this quarter, sales and marketing expenses as a percentage of revenue decreased to 27.1%, as compared to 29.1% for the prior period. Sales and marketing expenses increased by 11.0% to $58.4 million for the nine months ended August 31, 2008, as compared to $52.6 million for the nine months ended August 31, 2007 and decreased as a percentage of revenue from 29.5% to 29.4%. The increase in sales and marketing expenses was a result of additional payroll costs in the sales and marketing groups and extra marketing related to brand launches in the current year. We continue to expand our marketing efforts in emerging international markets as well as in EMEA. The Company also focused on increasing its marketing efforts in support of our Digital Media products.

     Research and Development. Research and development expenses decreased by 11.1% and 0.5% to $10.6 million and $34.4 million in the three and nine months ended August 31, 2008, respectively, as compared to $11.9 million and $34.6 million in three and nine months ended August 31, 2007. As a percentage of total revenues, research and development expenses decreased to 16.0% from 19.8% in the third quarter of fiscal 2008 as compared to the third quarter of fiscal 2007. The decrease in the current quarter was primarily attributable to the consolidation of our research and development workforce as a result of our past restructuring activities. In particular, our restructuring plan developed in November 2007, resulted in the closure of our Minneapolis location during the second quarter of fiscal 2008. This decrease in the current quarter was offset by factors which have increased R&D expense for the nine months ending August 31, 2008. These factors include the impact of our Digital Video research and development personnel being with the Company for the entire first quarter of fiscal 2008, and increased Canadian and Taiwanese payroll costs resulting from the significant strengthening of the Canadian and Taiwanese Dollar versus the US Dollar during the first two quarters of fiscal 2008.

     General and Administration. General and administration expenses increased by 7.9% and 3.3% to $8.4 million and $25.8 million in the three and nine months ended August 31, 2008, respectively, from $7.8 million and $25.0 million for the three and nine months

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ended August 31, 2007. As a percentage of total revenues, general and administration expenses decreased slightly to 12.7% in the third quarter of fiscal 2008, from 12.9% in the third quarter of fiscal 2007. In the second and third quarter of fiscal 2008, there was an increase in the amount of stock compensation expense of $680,000, of which approximately $230,000 pertains to the third quarter, mainly associated with the accelerated vesting of our former Chief Executive Officer’s options and the options granted to our new interim Chief Executive Officer which fully vest over one year. Furthermore, throughout the majority of this year 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 partially offset by the impact of restructuring and integration activities previously undertaken in fiscal 2007, reducing our operating costs in fiscal 2008. We expect these costs to decrease in further periods in conjunction with the current implementation of our restructuring plans.

     Restructuring Expense: We recorded $293,000 of restructuring expenses during the three months ended August 31, 2008, and $918,000 in the nine months ended August 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. Expenses related to the global restructuring announced on September 10, 2008, will be recorded in subsequent periods with the exception of $120,000.

     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 nine months of fiscal 2007, integration costs relating to the acquisition of InterVideo totaling $3.9 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.

Other Expenses (Income)

	Three Months Ended					Nine Months Ended
	August 31,					August 31
	2008		2007			2008			2007
	(dollars in thousands)
	(unaudited)
Interest expense, net		3,540		4,195			10,761			11,834
Amortization of deferred financing fees		270		270			810			804
Expenses associated with evaluation of strategic alternatives		992		—			1,697			—
Other non-operating expenses (income)		1,034		(497	)		(328	)		(650	)
Total non-operating expenses		5,836		3,968		$	12,940		$	11,988

     Interest Expense, Net. Net interest expense decreased by $655,000 in the third quarter of fiscal 2008 from $4.2 million in the third quarter of fiscal 2007, and decreased by $1.1 million for the nine months ending August 31, 2008, as compared to the prior year. The third quarter decrease is due to the increase in our gain on our unhedged interest swaps by $530,000 to $193,000 in the third quarter of fiscal 2008 and the fact we did not use our credit line facility during this quarter. During the first nine months of fiscal 2007 our credit line facility was as high as $43.0 million. We have not used this facility in fiscal 2008, which has resulted in a reduction of our interest expense for the nine month period ending August 31, 2008.

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

     Expenses Associated with Evaluation of Strategic Alternatives: On March 28, 2008 the Company received an unsolicited proposal from Corel Holdings, L.P. (“CHLP”) which is controlled by an affiliate of Vector Capital Corporation, the holder of approximately 69% of the Company’s outstanding common shares. CHLP had 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 (the “Proposal”). CHLP indicated that any such

24

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 assisted it in evaluating and responding to the CHLP Proposal. In addition, the Special Committee undertook a process to evaluate other strategic alternatives to maximize value for all shareholders. On August 18, 2008, CHLP withdrew its Proposal and the Board disbanded the Special Committee.

     The Company will continue to incur costs into the final quarter of fiscal 2008 for our costs related to the evaluation of other strategic alternatives. These costs will continue to be classified as other operating expenses.

     Other Non-Operating (Income) and Expenses: Non-operating expenses increased by $1.5 million to $1.0 million in the third quarter of fiscal 2008 from income of $497,000 in the third quarter of fiscal 2007. Other non-operating income also decreased by $322,000 for the nine months ended August 31, 2008 as compared to the nine months ended August 31, 2007. The increasing expense in the third quarter is generally comprised of unfavorable foreign currency exchange losses relating mostly to the strenthening of the US Dollar versus the Canadian Dollar and the Euro, and the recognition of a loss for unused space in a leased location in Ireland. For the nine month period, these losses are offset by a gain on sale of a long-term investment of $822,000.

Income Tax Recovery

     For the three and nine months ended August 31, 2008, we recorded a tax recovery of $177,000 and $274,000 on income before income taxes of $1.4 million and $2.2 million, respectively. The current tax provision was $1.1 million and $3.4 million, respectively, for the three and nine month periods ended August 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 $3.7 million, for the three and nine 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 and nine months ended August 31, 2007, the Company recorded a tax provision of $4.3 million and $4.1 million on a loss before income taxes of $2.4 million and $12.2 million, respectively. The majority of the tax provision related to an additional $5.0 million valuation allowance against all deferred tax assets assumed in the InterVideo acquisition. In that period, we determined that it no longer more likely than not that the deferred tax assets would be realized, and accordingly a valuation allowance was recorded. The remaining balance reflects foreign withholding taxes plus provisions for income taxes for subsidiaries that have taxable income in the period, offset by a reduction in our deferred income tax liability related to the amortization of intangible assets recorded on the acquisition of InterVideo. In that period we increased the valuation allowance to fully provide for tax losses realized by other subsidiaries in the quarter.

          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 assessment was for CDN$7.5 million. We intend to vigorously defend against the assessment. 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 assessment will not have a material impact on its financial condition or results of operations. As of August 31, 2008, no amounts have been accrued.

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FINANCIAL CONDITION

Working Capital

     Our working capital deficiency at August 31, 2008 was $10.6 million, a decrease of $4.6 million from the November 30, 2007 working capital deficiency of $15.2 million. The decreased working capital deficiency is primarily due to the additional operating cash flows we have generated of $19.5 million for the nine months ended August 31, 2008, which is offset by the additional current liability of $15.0 million pertaining to an estimated cash sweep payment.

     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 $15.0 million. The Company also estimates that it will incur the majority of the $2.5 million in restructuring related expenses resulting from our September 2008 global restructuring, in the fourth quarter of fiscal 2008. We expect to use the cash flows from operations to meet these obligations.

Liquidity and Capital Resources

     As of August 31, 2008, our principal sources of liquidity are cash and cash equivalents of $37.1 million and trade accounts receivable of $28.5 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 August 31, 2008.

     Cash provided by operations increased by $5.7 million to $6.2 million for the three months ended August 31, 2008, and increased by $3.8 million to $19.5 million for the nine months ended August 31, 2008. The increase in cash provided by operations in the third quarter is driven by our higher revenues in the period, with no significant change in our receivables, and a reduction in our operating expenses. Over the nine month period, our cash has increased due to the timing of cash receipts from significant OEM customers, which is offset by the payment and reduction of royalty accruals during the period.

     Cash used by financing activities decreased by $4.2 million to $0.8 million for the three months ended August 31, 2008 compared to the cash used by financing activities of $5.0 million for the three month period ended August 31, 2007. The decrease in cash used by financing relates to the repayment of $6.0 million on our operating line of credit during the prior period. This was offset by a reduction in proceeds from stock option exercises of $1.1 million as many of the terminated InterVideo employees as well as Corel executives exercised their options in the third quarter of fiscal 2007. Cash provided by financing activities decreased by $79.9 million to cash used by financing of $2.0 million for the nine month period ending August 31, 2008 as compared to the cash provided of $78.0 million for the similar period in the prior fiscal year. This decrease is largely due to an additional term loan of $70.0 million and net draws of $7.0 million from our operating line of credit, both of which were obtained in conjunction with the acquisition of InterVideo, and a decrease in cash generated from exercised options of $3.5 million due to terminated InterVideo employees in the prior year. In the upcoming periods, payments made to reduce debt will increase due to cash sweep obligations within our term loan agreement.

     Cash used in investing activities was $5.0 million in the nine months ended August 31, 2008, a significant decrease over the cash used of $123.5 million in the nine months ended August 31, 2007. The higher cash outlay in the previous fiscal period is due to the purchase of InterVideo on December 12, 2006, and the remaining interest in Ulead on December 28, 2006 for $121.4 million. Cash used in investing activities remained consistent for the three months ending August 31, 2008 as compared to the three months ending August 31, 2007. This includes additional capital asset acquisitions of $1.7 million in the period, of which $1.3 million related to computer hardware, to meet the Company’s plan to invest in its infrastructure.

Adjusted EBITDA

     Adjusted EBITDA was $15.8 million in the third quarter of fiscal 2008 compared to $13.5 million in the third quarter of fiscal 2007. For the nine months ending August 31, 2007, adjusted EBITDA was $44.0 million compared to $37.4 million for the nine months ending August 31, 2007. The increase in EBITDA is due to our increase in gross margin and our reduction in operating expenditures.

     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 August 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

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EBITDA. For the three months ended August 31, 2008 and August 31, 2007, we had cash flow from operations of $6.2 million and $503,000, respectively. The table below reconciles Adjusted EBITDA to cash flow from operations:

	Three Months Ended						Nine Months Ended
	August 31,						August 31,
(dollars in thousands)	2008			2007			2008			2007
Cash flow provided by / (used in) operations	$	6,219		$	503		$	19,536		$	15,727
Change in operating assets and liabilities		3,667			6,387			7,367			3,321
Interest expenses, net		3,540			4,195			10,761			11,834
Income tax provision		(177	)		4,314			(274	)		4,082
Deferred income taxes		1,233			(3,667	)		3,700			(1,352	)
Provision for bad debts		(146	)		(115	)		(379	)		(180	)
Unrealized foreign exchange losses on forward contracts		—			26			—			(9	)
Gain in sale of investments		—			—			822			—
Gain / (Loss) on Interest Rate Swap		193			(337	)		(50	)		245
Loss on disposal of fixed assets		(19	)		(48	)		(67	)		(102	)
InterVideo integration costs		—			2,220			—			3,865
Restructuring costs		293			—			918			—
Expenses associated with evaluation of strategic alternatives		992			—			1,697			—
Adjusted EBITDA	$	15,795		$	13,478		$	44,031		$	37,431

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. 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. Any cash sweep payments estimated to be payable within the next year are classified as a current liability on our consolidated balance sheet. We are currently not intending to refinance this obligation and intend to make the payments as required.

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     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 $334,000 or each 0.5% change in interest rates, based on debt outstanding as of August 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 August 31, 2008, our interest rate swaps convert an aggregate notional principal amount of $134.5 million (or approximately 86% 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 third quarter of fiscal 2008, we have recorded a gain of $193,000 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 loss of $624,000 in other comprehensive income during the third quarter of fiscal 2008.

     We assess the effectiveness of our interest rate swaps as defined in FAS 133, on a quarterly basis. During this quarter, we have considered the impact of the current credit crisis in the United States in assessing the risk of counterparty default. We believe that it is still likely that the counterparty for these swaps will continue to act throughout the contract period, and as a result we continue to assess the swaps as effective hedging instruments. If there was to be a counterparty default during the life of the contract, there could be a material impact on future cash flows as well as interest expense recorded on our statement of operations. To the extent that the interest rate swaps continue to be in a liability position the impact would not be adverse.

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

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rates on our business through the purchase of forward exchange contracts. As of August 31, 2008 and August 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 August 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

          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.

          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.

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          At August 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; 5,535,008 issued on July 9, 1996; 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. Any potential loss is indeterminable at this time.

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 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 2, 3, 4 and 5 are not applicable to us and have been omitted.

SIGNATURE

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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

Date: October 3, 2008

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