FORM 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q


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

For the Quarterly Period Ended May 31, 2009


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

For the Transition Period From to

Commission File Number 000-20562

COREL CORPORATION

(Exact name of registrant as specified in its charter)


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

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

Registrant’s telephone number, including area code:

(613) 728-0826

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o 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 July 3, 2009 was 25,897,652.

PART I. FINANCIAL INFORMATION

Item 1. Unaudited Consolidated Financial Statements

Corel Corporation
Consolidated Balance Sheets
(In thousands of US dollars or shares)
(Unaudited)


					November
			May 31,		30,
	Note		2009		2008
Assets
Current assets:
Cash and cash equivalents			$	32,127	$	50,260
Restricted cash				159		159
Accounts receivable
Trade, net of allowance for doubtful accounts of $850 and $1,357, respectively				29,033		33,241
Other				1,889		2,932
Inventory		3		1,138		1,562
Income taxes recoverable				719		785
Deferred tax assets				—		3,138
Prepaids and other current assets				3,530		2,456

Total current assets				68,595		94,533

Capital assets				9,475		10,549
Intangible assets				54,520		67,029
Goodwill		4		80,993		82,343
Deferred financing and other long-term assets				4,407		4,942


Total assets			$	217,990	$	259,396


Liabilities and shareholders’ deficit
Current liabilities:
Accounts payable and accrued liabilities			$	53,470	$	64,376
Due to related parties				334		341
Income taxes payable		5		1,404		1,226
Deferred revenue				11,461		15,190
Current portion of long-term debt				14,385		19,095
Current portion of obligations under capital lease				732		621

Total current liabilities				81,786		100,849

Deferred revenue				1,987		2,404
Income taxes payable				13,232		12,960
Deferred income taxes		5		8.431		13,059
Long-term debt				123,729		137,264
Accrued pension benefit obligation				243		261
Obligations under capital lease				701		962


Total liabilities				230,109		267,759

Commitments and contingencies		6


Shareholders’ deficit
Share capital:
Common Shares (par value: none; authorized: unlimited; issued and outstanding: 25,893 and 25,823 shares, respectively)		44,718			43,992
Additional paid-in capital		10,867			9,198
Accumulated other comprehensive loss		(4,641	)		(4,151	)
Deficit		(63,063	)		(57,402	)


Total shareholders’ deficit		(12,119	)		(8,363	)


Total liabilities and shareholders’ deficit	$	217,990		$	259,396

See Accompanying Notes to the Consolidated Financial Statements

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


			Three Months Ended						Six Months Ended
			May 31,						May 31,
	Note		2009			2008			2009			2008

Revenues
Product			$	44,280		$	60,249		$	94,355		$	119,611
Maintenance and services				6,088			6,795			12,227			12,977


Total revenues		12		50,368			67,044			106 582			132,588


Cost of revenues
Cost of products				14,366			14,008			29,897			29,235
Cost of maintenance and services				110			132			210			299
Amortization of intangible assets				6,154			6,418			12,319			12,832


Total cost of revenues				20,630			20,558			42,426			42,366


Gross margin				29,738			46,486			64,156			90,222


Operating expenses
Sales and marketing				14,820			20,748			30,042			40,432
Research and development				9,180			11,716			18,396			23,807
General and administration				5,945			8,640			12,424			17,451
Restructuring		8		1,404			447			1,613			625


Total operating expenses				31,349			41,551			62,475			82,315


Income (loss) from operations				(1,611	)		4,935			1,681			7,907


Other expenses (income)
Interest income				(13	)		(99	)		(89	)		(219	)
Interest expense				2,982			3,032			6,112			7,440
Amortization of deferred financing fees				271			270			542			540
Expenses associated with evaluation of strategic alternatives				—			705			—			705
Other non-operating (income) expense				(1,774	)		102			(898	)		(1,362	)


Income (loss) before taxes				(3,077	)		925			(3,986	)		803
Income tax (recovery) provision		5		1,048			(5	)		1,675			(97	)


Net income (loss)			$	(4,125	)	$	930		$	(5,661	)	$	900


Other comprehensive income (loss)
Amortization of actuarial gain recognized for defined benefit plan				(6	)		—			(10	)		22
Unrealized (gain) loss on long-term investments				71			(35	)		46			(35	)
Gain (loss) on interest rate swaps designated as hedges		9		49			2,938			(526	)		(689	)


Other comprehensive income (loss), net of taxes				114			2,903			(490	)		(702	)


Comprehensive income (loss)			$	(4,011	)	$	3,833		$	(6,151	)	$	198


Net income (loss) per share:
Basic		$	(0.16	)	$	0.04	$	(0.22	)	$	0.04
Fully Diluted		$	(0.16	)	$	0.04	$	(0.22	)	$	0.03
Weighted average number of shares:
Basic			25,878			25,543		25,860			25,503
Fully diluted	10		25,878			26,238		25,860			26,165

See Accompanying Notes to the Consolidated Financial Statements

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


			Three Months Ended						Six Months Ended
			May 31,						May 31,
	Note		2009			2008			2009			2008

Cash flows from operating activities
Net income (loss)			$	(4,125	)	$	930		$	(5,661	)	$	900
Depreciation and amortization				1,119			1,233			2,299			2,395
Amortization of deferred financing fees				271			270			542			540
Amortization of intangible assets				6,154			6,418			12,319			12,832
Stock-based compensation		7		1,307			1,977			2,360			3,115
Provision for bad debts				80			129			(29	)		233
Deferred income taxes		4		605			(1,233	)		(140	)		(2,467	)
Loss on disposal of fixed assets				17			6			18			48
Unrealized (gain) loss on interest rate swap		9		(122	)		(512	)		(219	)		243
Unrealized gain on forward foreign exchange contracts				(45	)		—			(45	)		—
Gain on sale of investment				—			—			—			(822	)
Defined benefit plan costs				15			—			22			—
Change in operating assets and liabilities		11		(4,496	)		(2,308	)		(10,715	)		(3,700	)


Cash flows provided by operating activities				780			6,910			751			13,317


Cash flows from financing activities
Restricted cash				—			—			—			56
Repayments of long-term debt				(17,846	)		(404	)		(18,245	)		(1,095	)
Repayments of capital lease obligations				(190	)		(205	)		(366	)		(339	)
Proceeds from exercise of stock options				1			203			35			254
Other financing activities				(21	)		—			(50	)		—


Cash flows provided by (used in) financing activities				(18,056	)		(406	)		(18,626	)		(1,124	)


Cash flows from investing activities
Purchase of long lived assets				(269	)		(1,865	)		(1,053	)		(3,299	)


Cash flows used in investing activities				(269	)		(1,865	)		(1,053	)		(3,299	)


Effect of exchange rate changes on cash and cash equivalents				999			(59	)		795			(94	)


Increase (decrease) in cash and cash equivalents				(16,546	)		4,580			(18,133	)		8,800
Cash and cash equivalents, beginning of period				48,673			28,835			50,260			24,615


Cash and cash equivalents, end of period			$	32,127		$	33,415		$	32,127		$	33,415


Supplementary Disclosure



Interest paid, net	2,987	3,788	6,057	7,226
Taxes paid, net	867	2,187	1,790	2,648

See Accompanying Notes to the Consolidated Financial Statements

Corel Corporation
Notes to the Consolidated Financial Statements
(All amounts in thousands of US dollars, unless otherwise stated)
(Unaudited)

1. Unaudited Interim Financial Information

The interim financial information is unaudited and includes all adjustments (consisting of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of our financial position at May 31, 2009 and our results of operations and cash flows for the three and six months ended May 31, 2009 in conformity with accounting principles generally accepted in the United States of America (“US GAAP”). The consolidated balance sheet as of November 30, 2008 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 US GAAP for complete financial statements. Operating results for the three and six months ended May 31, 2009 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, 2008 (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, 2008.

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. Despite the Company’s intention to establish accurate estimates and use reasonable assumptions, actual results may differ from these estimates.

Derivative Instruments and Hedging Activities

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 the Company during this interim period. 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 assessed and evaluated the new disclosure requirements for its derivative instruments, and in particular the hedges on its term loans. The only significant derivative instrument held by the Company is its interest rate swaps used to hedge the cash flows for interest on its long-term debt. These are disclosed in accordance with FAS 161, in note 9 to these consolidated financial statements.

Recent Accounting Pronouncements

In December 2007, the FASB issued SFAS No. 141 (revised 2007) Business Combinations (SFAS No. 141(R)). SFAS No. 141(R) retains the fundamental requirements of the original pronouncement requiring that the purchase method be used for all business combinations. SFAS No. 141(R) defines the acquirer as the entity that obtains control of one or more businesses in the business combination, establishes the acquisition date as the date that the acquirer achieves control and requires the acquirer to recognize the assets acquired, liabilities assumed and any noncontrolling interest at their fair values as of the acquisition date. SFAS No. 141(R) also requires that acquisition-related costs be recognized separately from the acquisition. SFAS No. 141(R) is effective for fiscal years beginning on or after December 15, 2008, which for the Company is the fiscal year beginning December 1, 2009.

In May 2008, the FASB issued FASB Staff Position (FSP) Financial Accounting Standard (FAS) 142-3 (FSP FAS 142-3), Determination of the Useful Life of Intangible Assets, which is effective for fiscal years beginning after December 15, 2008 and for interim periods within those years, which for the Company is the fiscal year beginning December 1, 2009. FSP FAS 142-3 provides guidance on the renewal or extension assumptions used in the determination of the useful life of a recognized intangible asset. The intent of FSP FAS 142-3 is to better match the useful life of the recognized intangible asset to the period of the expected cash flows used to measure its fair value. The Company does not expect the adoption of FSP FAS 142-3 to have a material effect on its consolidated financial statements.

In September 2006, the Financial Accounting Standards Board released FAS 157, “Fair Value Measurements” and was effective for fiscal years beginning after November 15, 2007, which was the year ending November 30, 2008 for the Company. At that time we adopted the non-deferred items of FAS 157. FAS 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 will adopt the items that have been deferred in its financial statements for the year ending November 30, 2009 and is currently assessing the impact the adoption of the above deferred items will have on its financial statements.

In April 2009, the FASB issued FASB Staff Position (FSP) Financial Accounting Standard (FAS) 107-1 (FSP FAS 107-1), Interim Disclosures about Fair Value of Financial Instruments, which is effective for interim and annual periods ending after June 15, 2009, which for the Company is the interim period ending August 31, 2009. FSP FAS 107-1 applies to all financial instruments within the scope of Statement 107, and requires entities to disclose the methods and significant assumptions used to estimate the fair value of financial instruments, in both interim financial statements as well as annual financial statements. The Company is currently assessing the impact the adoption will have on its financial statements.

3. Inventory

The components of inventory are as follows:


	May 31,		November
	2009		30, 2008
Product components	$	459	$	844
Finished goods		679		718


Inventory	$	1,138	$	1,562

4. Goodwill

During the quarter ended May 31, 2009, the Company reduced its goodwill related to the InterVideo acquisition by $1,350. This was related to the transfer of intellectual property which was not subject to Taiwanese tax as a result of a pre-acquisition tax basis that was not recognized.

5. Income Taxes

For the three months ended May 31, 2009, the Company recorded a tax provision of $1,048 on a loss before income taxes of $3,077. The current tax provision was $443 and the deferred tax provision was $605. The current tax provision relates mostly to withholding tax which is not creditable due to loss carryforwards and income taxes in foreign jurisdictions. The Company undertook a reorganization in which intellectual property was transferred from Taiwan to Canada at its fair market value for tax purposes. There was no current Taiwanese tax on the transfer as a result of existing tax basis; however there was deferred tax expense of $1,350 related to this transfer as a result of revising the estimated amount of pre-acquisition losses to be utilized upon the transfer. This is partially offset by a deferred tax recovery of $745 related to the amortization of the intellectual property acquired with InterVideo.

For the six months ended May 31, 2009, the Company recorded a tax provision of $1,675 on a loss before income taxes of $3,986. The current tax provision was $1,815 and the deferred tax recovery was $140. The current tax provision relates mostly to withholding tax which is not creditable due to loss carryforwards and income taxes in foreign jurisdictions. There was no current Taiwanese tax on the transfer as a result of existing tax basis; however there was deferred tax expense of $1,350 related to this transfer as a result of revising the estimated amount of pre-acquisition losses to be utilized upon the transfer. This is partially offset by a deferred tax recovery of $1,490 related to the amortization of the intellectual property acquired with InterVideo.

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

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 related to transactions with a foreign related party 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, 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 notice of reassessment amended the original assessment to CDN$7.5 million. The Company has not provided any amount of income tax payable in respect of these reassessments as it has and continues to vigorously defend against these reassessments. The Company has filed Notice of Objections for the denied deductions and for the capital tax issue. Although the Company believes that it will prevail in the appeals process, the ultimate liability for the tax and interest may differ from the amount recorded in our financial statements. While the Company believes that they have adequately provided for potential assessments, it is possible that an adverse outcome may lead to a material deficiency in recorded income tax expense, reduced net income and adversely affect liquidity. As of May 31, 2009, no potential losses have been accrued. The Company has obtained a letter of credit of CDN$6.9 million through its $75.0 million line of credit with its principal lender, to cover the balance of the current reassessment from the Ministry of Ontario.

6. 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 the Company’s agreements with customers and distributors, including OEMs and online services companies, require the Company 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 the Company’s cost of litigation and could significantly increase its exposure to losses from an adverse ruling.

At May 31, 2009, the Company was 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 certain US patents. JVC alleges certain Corel video applications infringe the patents. Earlier this year, Cyberlink Corp. and JVC entered into a confidential settlement, and the complaint against Cyberlink Corp. was dismissed. The Company believes it has meritorious defenses to JVC’s claims, is situated differently than Cyberlink Corp. and intends to continue to defend the litigation vigorously. The ultimate outcome of the litigation, however, is uncertain. Any potential loss that may arise is indeterminable at this time.

7. Stock Based Compensation

Stock option plans

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


	Three Months				Six Months
	Ended May 31,				Ended May 31,
	2009		2008		2009		2008
Cost of products	$	3	$	5	$	7	$	15
Cost of maintenance and services		2		2		4		4
Sales and marketing		631		504		947		899
Research and development		176		329		343		536
General and administration		495		1,137		1,059		1,661

Total stock-based compensation expense	$	1,307	$	1,977	$	2,360	$	3,115

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, which will be in April 2013, 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 expected life of the option is calculated under the simplified method as the Company does not have an extended history of options issued and subsequently exercised as a public company. The majority of options that have been exercised were issued when the Company was a private entity, and the grant price was not reflective of the Company’s share price since it went public in May 2006. The risk-free interest rate used in the model is the zero-coupon yield implied from U.S. Treasury securities with equivalent remaining terms.

There were 25,000 options granted during the three months ended May 31, 2009. The fair value, estimated using the Black-Scholes Model, of all options granted during the three months ended May 31, 2009 and May 31, 2008, was estimated as of the date of grant using the following weighted average assumptions:


	Three Months Ended
	May 31,
	2009			2008
Expected option life (years)		7			7
Volatility		46.00	%		29.41	%
Risk free interest rate		2.70	%		3.13	%
Forfeiture rate		25.00	%		16.50	%
Dividend yield		Nil			Nil

As of May 31, 2009, there was $6.2 million of unrecognized compensation cost for the Company’s equity incentive plans, 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

Corel has 6,209,505 remaining common shares authorized for issuance under the 2006 Equity Incentive Plan. Option activity under the 2006 Equity Incentive Plan for the three month period ended May 31, 2009 is presented below:


	2006 Equity Incentive Plan
						Weighted
				Weighted		Average
				Average		Grant
				Exercise		Date Fair
	Options			Price		Value
Balance at November 30, 2008		2,784,031		$	11.81	$	4.21
Granted		Nil			n/a		n/a
Exercised		Nil			n/a		n/a
Forfeited		(238,942	)		12.30		4.03

Outstanding balance at February 28, 2009		2,545,089		$	11.76	$	4.23
Granted		25,000			1.93		0.68
Exercised		Nil			n/a		n/a
Forfeited		(70,643	)		12.73		4.13


Outstanding balance at May 31, 2009		2,499,446		$	11.63	$	4.20


Exercisable at May 31, 2009		1,551,112		$	11.78	$	4.20


Weighted average remaining life of the outstanding options		7.90 Years
Total intrinsic value of exercisable options	$	37
Weighted average remaining life of the exercisable options		7.70 Years

Restricted stock unit activity under the 2006 equity incentive plan, for the three month period ended May 31, 2009 is presented below:


				Weighted
				Average
				Grant Date
				Fair
	Units			Value
Outstanding balance at November 30, 2008		106,500		$	11.24
Restricted stock units converted to common shares		(11,875	)		11.78
Forfeited		(5,000	)		10.10

Outstanding balance at February 28, 2009		89,625		$	11.23
Restricted stock units converted to common shares		(28,125	)		12.64


Outstanding balance at May 31, 2009		61,500		$	10.58


Exercisable at May 31, 2009		Nil		$	n/a


Weighted average remaining life of the outstanding restricted stock units		8.94 Years
Weighted average remaining life of the exercisable restricted stock units		n/a
Total intrinsic value of the exercisable restricted stock units	$	Nil

2003 Share Option and Phantom Share Unit Plan

In the three months ended May 31, 2009, no options were granted as this plan is no longer eligible for grant distribution. Unit activity for the three month period ended May 31, 2009 is presented below:


	The 2003 Plan
				Weighted
				Average		Weighted Average
				Exercise		Grant Date
	Options			Price		Fair Value
Outstanding balance at November 30, 2008		504,499		$	2.61	$	5.35
Exercised		(29,220	)		1.17		6.51
Forfeited		(15,336	)		1.63		7.90

Outstanding balance at February 28, 2009		459,943		$	2.74	$	5.13
Exercised		(985	)		1.17		4.18
Forfeited		(2,286	)		6.97		4.76


Outstanding balance, May 31, 2009		456,672		$	2.72	$	5.13


Exercisable at May 31, 2009		441,257		$	2.46	$	5.04


Weighted average remaining life of the outstanding options		5.35 Years
Total intrinsic value of exercisable options	$	293
Weighted average remaining life of the exercisable options		5.32 Years

8. Restructuring Charges

In April 2009, management initiated a restructuring plan to reduce its workforce by approximately 80 people. The total costs that arose from this global restructuring were $1.6 million, of which $1.4 million was expensed in the second quarter of fiscal 2009. The remaining expenditures of $158 will be recorded in the third quarter of fiscal 2009 related to certain individuals who were retained by the Company beyond the current period.

In the second quarter of fiscal 2008, the Company continued its implementation of its global restructuring plan, largely focused on centralizing its research and development activities, as well as some administrative activities. This resulted in the closure of the Company’s Minneapolis location. The total costs that were expensed from these activities in the second quarter of fiscal 2008 was $447.

A summary of the Company’s restructuring activities, that are accrued as of May 31, 2009 is as follows:

Balance as

Additional

Balance as

Restructuring

Change in

Cash Payments

February 28,

Charges in Q2

Estimates

in Q2

May 31,

2009

in Q2 2009

2009

Termination benefits

145

1,438

(34

)

1,109

440

9. Derivative Instruments

Cash Flow Hedges Designated as an Effective Hedging Instrument


										Gain (loss) in		Balance in accrued
				Fair Value at			Fair Value at			OCI for three months		liabilities and OCI
	Notional			May 31,			February 28,			ending May 31,		as at May 31,
Instrument	Amount		Maturity Date	2009			2009			2009		2009
Interest Rate Swap	$	40,000	May 31, 2011	$	(2,148	)	$	(2,148	)	$	0	$	2,148
Interest Rate Swap		50,000	October 31, 2011		(3,812	)		(3,861	)		49		3,812


Total	$	90,000		$	(5,960	)	$	(6,009	)	$	49	$	5,960

Cash Flow Hedges not Designated as a Hedging Instrument


										Gain (loss) in
										Interest Expense		Balance in
				Fair Value at			Fair Value at			for period		accrued
	Notional			May 31,			February 28,			ending		liabilities as at
Instrument	Amount		Maturity Date	2009			2008			May 31, 2009		May 31, 2009
Interest Rate Swap		21,000	January 2, 2010		(652	)		(771	)		119		652
Interest Rate Swap		4,500	January 2, 2011		(324	)		(327	)		3		324


Total	$	25,500		$	(976	)	$	(1,098	)	$	122	$	976

In connection with its current long-term debt facility, the Company uses interest rate swaps to limit its exposure to changing interest rates and future cash outflows for interest. Interest rate swaps provide for the Company to pay an amount equal to a specified fixed rate of interest times a notional principal amount and to receive in return an amount equal to a variable rate of interest times the same notional amount. As of May 31, 2009, the Company has $115.5 million of interest rate swaps which convert an aggregate notional principal amount of $115.5 million (or approximately 84% of its interest-bearing debt). The fixed rates of the interest rate swaps range from 8.19% to 9.49%. The Company does not use its interest rate swaps for speculative purposes.

During fiscal 2007 and fiscal 2008, the Company entered into interest rate swaps for $50.0 million and $40.0 million, respectively, with its principal lender to reduce the risk of changes in cash flows associated with interest payments due to changes in one-month LIBOR. The interest rate swaps expire prior to the period which the senior credit extends. The objective of the swaps is to hedge the risk of changes in cash flows associated with the first future interest payments on floating rate debt with a notional amount of $90.0 million which is subject to changes in the one-month LIBOR rate, and therefore the cash flow from the derivative is expected to offset any changes in the first interest payments on floating rate debt with a notional amount of $90.0 million due to changes in one-month LIBOR. This is a hedge of specified cash flows. As a result, these interest rate swaps are derivatives and were designated as hedging instruments at the initiation of the swaps. The Company has applied cash flow hedge accounting in accordance with FAS 133. At the end of each period, the interest rate swaps are recorded in the consolidated balance sheet at fair value, in either other current assets if it is an asset position, or in accrued liabilities if it is in a liability position. Any related increases or decreases in the fair value are recognized on the Company’s balance sheet within accumulated other comprehensive income. Of the loss in other comprehensive income, approximately $3.2 million is expected to be re-classified into earnings over the next twelve months.

As of May 31, 2009, the Company has two additional interest rate swaps with a notional amount of $25.5 million. The interest rate swaps qualify as derivatives and were not designated as a hedging instrument at the initiation of the swap, and as such, the Company has not applied hedge accounting. At the end of each period, the interest rate swaps are recorded in the consolidated balance sheet at fair value, either in other current assets or accrued liabilities, and any related gains or losses are recognized on the Company’s statement of operations within interest expense.

The Company considers its interest rate swaps to be a Level 2 measurement under the FAS 157 hierarchy, as it is largely based on observable inputs over the life of the swaps in a liquid market. The fair value of the interest rate swaps is calculated by comparing the stream of cash flows on the fixed rate debt versus the stream of cash flows that would arise under the floating rate debt. The floating and fixed rate cash flows are then discounted to the valuation date by using the one month LIBOR rate at the date of the valuation. In order to value the interest rate swaps, management used observable LIBOR rates. Linear interpolation was used to estimate the relevant rates along the zero coupon curve. To construct the zero coupon curves, management used cash rates up to three months inclusively, futures rates from three months to two years inclusively, and swap rates from two to thirty years. The fair value of the interest rate swaps include a credit valuation adjustment. The credit adjusted valuation values the swaps using an adjusted LIBOR curve for discounting cash flows to take into account our and the counterparty’s credit risk. The credit spread used for the calculation was based on the Company’s debt ratings in May 2009.

The valuation of the interest rate swap can be sensitive to changes in the current and future one month LIBOR rates, which can have a material impact on the fair value of the derivative. However, as these swaps are used to manage the Company’s cash outflows, these changes will not impact its liquidity and capital resources. Furthermore, since the majority of the interest rate swaps are deemed as effective hedging instruments, these changes do not impact income from operations, as they would be included in other comprehensive income.

The Company assesses the effectiveness of its interest rate swaps as defined in FAS 133 on a quarterly basis. 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. A counterparty default risk is considered in the valuation of the interest rate swaps.

Management has assessed that its cash flow hedges have no ineffectiveness, as determined by the hypothetical derivate method. If the hedge of any of the interest rate swaps, was deemed ineffective, or extinguished by either counterparty, any accumulated gains or losses remaining in other comprehensive income would be fully recorded in interest expense during the period.

Foreign Currency Exchange Options

As of May 31, 2009 the Company held certain foreign currency exchange options for an aggregate amount of CDN$2.0 million that will mature prior to the end of the next fiscal quarter. These options have a fair value of $45, of which $45 has been recorded as a gain into income in the current fiscal quarter.

10. Loss per Share

The impact of the potential exercise of Corel options is anti-dilutive for the three and six month period ending May 31, 2009. Had there been income for the three and six month period ending May 31, 2009, the impact of these potentially dilutive instruments would have been 185,000 and 260,000 respectively. For the three and six months ending May 31, 2008, the dilutive impact of the outstanding options for common shares was 695,000, and 662,000, respectively.

11. Change in Operating Assets and Liabilities


	Three months ended						Six months ended
	May 31,						May 31,
	2009			2008			2009			2008

Accounts receivable	$	(154	)	$	606		$	4,883		$	10,210
Inventory		216			(74	)		424			(203	)
Prepaids and other current assets		(835	)		(513	)		(1,035	)		(1,174	)
Accounts payable and accrued liabilities		(972	)		(831	)		(11,480	)		(10,043	)
Due to related parties		(385	)		—			(7	)
Accrued interest		81			1			130			(11	)
Taxes payable		(189	)		(264	)		516			598
Deferred revenue		(2,258	)		(1,233	)		(4,146	)		(3,077	)

Total change in operating assets and liabilities	$	(4,496	)	$	(2,308	)	$	(10,715	)	$	(3,700	)

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


	Three Months Ended				Six Months Ended
	May 31,				May 31,
	2009		2008		2009		2008

By product category:
Graphics and Productivity	$	27,582	$	38,497	$	57,236	$	75,444
Digital Media		22,786		28,547		49,346		57,144


	$	50,368	$	67,044	$	106,582	$	132,588


By geographic region:
Americas
Canada	$	1,353	$	1,133	$	2,707	$	3,041
United States		22,512		30,172		46,214		57,803
Other		1,132		1,488		2,245		2,846
Europe, Middle East, Africa (EMEA)		11,249		19,564		26,369		40,577
Asia Pacific (APAC)
Japan		8,863		10,621		17,975		20,867
Other		5,259		4,066		11,072		7,454


	$	50,368	$	67,044	$	106,582	$	132,588

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

Special Note Regarding Forward-Looking Statements

Statements contained in this Quarterly Report on Form 10-Q which are not historical facts are forward-looking statements within the meaning of Section 21E of the US. Securities Exchange Act of 1934, as amended. A forward-looking statement may contain words such as “anticipate that,” “believes,” “continue to,” “estimates,” “expects to,” “hopes,” “intends,” “plans,” “to be,” “will be,” “will continue to be,” or similar words. These forward-looking statements include the statements in this Report regarding: future developments in our markets and the markets in which we expect to compete; our estimated cost reductions; our future ability to fund our operations; our development of new products and relationships; our ability to increase our customer base; the services that we or our customers will introduce and the benefits that end users will receive from these services; the impact of entering new markets; our plans to use or not to use certain types of technologies in the future; our future cost of revenue, gross margins and net losses; our future restructuring, research and development, sales and marketing, general and administrative, stock-based compensation and depreciation and amortization expenses; our future interest expenses; the value of our goodwill and other intangible assets; our future capital expenditures and capital requirements; and the anticipated impact of changes in applicable accounting rules.

These forward-looking statements are based on estimates and assumptions made by us in light of our experience and our perception of historical trends, current conditions and expected future developments, as well as other factors we believe are appropriate in the circumstances including but not limited to general economic conditions, product pricing levels and competitive intensity, and new product introductions. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause actual results, performance or achievements to differ materially from any future results, performance, or achievements discussed or implied by such forward-looking statements. These risks include the following:

•		we are subject to restrictive covenants under our credit facility that impose operating and financial restrictions on our operations. Due to the uncertainties presented by the current state of the global economy and our resulting financial performance, there is a risk that we may, over the next twelve months, be in violation of certain of those covenants or that we may not be able to access funds under our revolving credit facility. If a violation of certain debt covenants were to occur, it could result in a default under the credit facility or mandatory prepayment of all or a portion of our credit facility debt;

•		we face adverse effects to our business due to the recent disruption in the global economy and financial markets;

•		we rely on relationships with a small number of OEM’s and distributors for a significant percentage of our revenues, and if any of these companies terminates its relationship with us, our revenues could decline;

•		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, if any; accordingly, we must develop new products, successfully complete acquisitions, penetrate new markets or increase penetration of our installed base to achieve revenue growth;

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

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

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

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

•		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;

•		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 risk factors should be considered carefully, and readers should not place undue reliance on our forward-looking statements. Forward-looking statements speak only as of the date of the document in which they are made. We disclaim any intention 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, except as required by law.

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 above factors.

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 9, 2009 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 following discussion and analysis should be read in conjunction with our unaudited consolidated financial statements and accompanying notes for the three and six month period ended May 31, 2009 included elsewhere in this quarterly report on Form 10-Q. 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, 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 manufacturer’s (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, Europe Middle East and Africa (EMEA), and the Asia Pacific (APAC) regions. 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. We are subject to certain debt covenants which may restrict our ability to pursue certain acquisitions.

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 non-professionals around the world. Corel Painter is a Natural-Media^® digital painting and drawing software that mirrors 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.

Digital Media

Our Digital Media portfolio includes products for digital imaging, video editing, optical disc authoring (Blu-ray, DVD, and CD), and video playback. 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. Photo Impact is an image editing software, which provides users with easy-to-use photo editing tools, creative project templates and some digital art capabilities. VideoStudio^® is our consumer focused video editing and DVD authoring software for users who want to produce professional-looking videos, slideshows and DVDs. Our optical disc authoring software

applications are DVD Movie Factory^® and DVD Movie Writer^®. 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.

OVERVIEW OF THE QUARTER

Operating Performance

Revenue for the three months ended May 31, 2009 was $50.4 million, down 25% year over year. The revenue decrease of $16.7 million coincides with weakness in the global economy which has had an adverse impact on our operations particularly in Europe and North America. Within our Digital Media group, our revenues for the second quarter of fiscal 2009 decreased by $5.8 million or 20%, largely due to decreases in Instant On, Corel Paint Shop Pro Photo, DVD Movie Factory, VideoStudio, and PhotoImpact. Our Graphics and Productivity revenues decreased by $10.9 million or 28%, due mainly to declines in revenues from our CorelDRAW, WinZip, iGrafx, and WordPerfect products. Despite the decrease in revenues of $16.7 million, overall cost of revenues remained consistent with the prior year, due to the change in sales mix resulting from a decreased proportion of revenues associated with products with lower royalty costs as compared to revenues associated with products with higher royalty costs, such as WinDVD.

From an operating income perspective, we were able to mitigate the impact of the decreased revenues and gross margins through a 25% year over year reduction in our operating expenses of $10.2 million, which was driven by our prior restructuring activities, a decrease in discretionary spending, and favourable changes in foreign exchange from the weakening of the US Dollar against the CDN Dollar and the Pound Sterling.

Our net loss for the second quarter of fiscal 2009 was $4.1 million, or $0.16 per share, compared to net income of $930,000, or $0.04 per share in the second quarter of 2008. Non-GAAP Adjusted EBITDA was $10.1 million and cash provided by operations was $780,000 in the second quarter of fiscal 2009 compared to non-GAAP Adjusted EBITDA of $14.9 million and cash flow from operations of $6.9 million in the second quarter of fiscal 2008. Adjusted EBITDA represents net income before interest, income taxes, depreciation and amortization, further adjusted to eliminate items specifically defined in our credit facility agreement. Refer to the Financial Condition section within this MD&A for a reconciliation of non-GAAP Adjusted EBITDA to cash flow provided by operations.

RESULTS OF OPERATIONS

Three and Six Months ended May 31, 2009 and May 31, 2008

Revenues


	Three Months Ended									Six Months Ended
	May 31,						Percentage			May 31,						Percentage
	2009			2008			Change			2009			2008			Change
	(dollars in thousands)
	(unaudited)

Product	$	44,280		$	60,249			(26.5	)%	$	94,355		$	119,611			(21.1	)%
As a percent of revenue		87.9	%		89.9	%					88.5	%		90.2	%
Maintenance and services		6,088			6,795			(10.4	)%		12,227			12,977			(5.8	)%
As a percent of revenue		12.1	%		10.1	%					11.5	%		9.8	%
Total		50,368			67,044			(24.9	)%		106,582			132,588			(19.6	)%

Total revenues for the three month period ended May 31, 2009 decreased by 24.9% to $50.4 million from $67.0 million for the three months ended May 31, 2008. Total revenues for the six month period ended May 31, 2009 decreased by 19.6% to $106.6 million from $132.6 million for the six months ended May 31, 2008. On a global level, all of our products, product groups, and distribution channels have been impacted by the weakening of the global economy and the declining EURO in relation to the US Dollar. Of the current quarter decrease in total revenues of $16.7 million, $10.9 million is attributable to the Graphics and Productivity group of products and $5.8 million is attributable to the Digital Media group of products. Revenues from the direct sales channel have remained fairly flat, compared to the prior period. Our remaining distribution channels, including OEM and resellers, have had declining revenues compared to the three and six months ended May 31, 2008. Our resellers have been reducing inventory levels across all our products.

Product revenues for the three and six months ended May 31, 2009 decreased by 26.5% and 21.1%, to $44.3 million and $94.4 million, respectively, from $60.2 and $119.6 million for the three and six months ended May 31, 2008. Product revenues have declined for the same reasons as described above for total revenues.

Maintenance and services revenues for the three and six months ending May 31, 2009 have been decreasing as compared to the three and six months ending May 31, 2008. We have not experienced declines in maintenance revenues similar to those with product revenues, as much of this revenue is related to products sold in prior periods, in which we had growth in revenues.

Total Revenues by Product Group


	Three Months Ended									Six Months Ended
	May 31,						Percentage			May 31,						Percentage
	2009			2008			Change			2009			2008			Change
	(dollars in thousands)
	(unaudited)

Graphics and Productivity	$	27,582		$	38,497			(28.4	)%	$	57,236		$	75,444			(24.1	)%
As a percent of revenue		54.8	%		57.4	%					53.7	%		56.9	%
Digital Media		22,786			28,547			(20.2	)%		49,346			57,144			(13.6	)%
As a percent of revenue		45.2	%		42.6	%					46.3	%		43.1	%

Our products generally have release cycles 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:

Quarter of

Current

Quarter of

Version

Release

Prior Release

Product

Graphics and Productivity:

CorelDRAW Graphics Suite

Q1 2008

Q1 2006

Corel Painter

Q2 2009

Q1 2007

Corel Designer Technical Suite

Q3 2008

Q3 2005

WinZip

Q4 2008

Q4 2006

iGrafx FlowCharter

Q2 2007

Q1 2006

WordPerfect Office Suite

Q2 2008

Q1 2006

Digital Media

Paint Shop Pro Photo (ultimate)

Q4 2008

Q4 2006

MediaOne

Q4 2007

Q4 2006

WinDVD

Q1 2008

Q4 2006

VideoStudio

Q4 2008

Q2 2007

DVD Movie Factory

Q1 2007

Q1 2006

PhotoImpact

Q1 2008

Q3 2006

Graphics and Productivity revenues decreased by $10.9 million or 28.4% to $27.6 million in the second quarter of fiscal 2009 from $38.5 million in the second quarter of fiscal 2008, and decreased by $18.2 million or 24.1% to $57.2 million for the six month period ending May 31, 2009 as compared to the six month period ending May 31, 2008. The revenue decline was primarily driven by declines in CorelDRAW, WinZip, iGrafx and WordPerfect. CorelDRAW, which enjoyed a sales peak in the first two quarters of fiscal 2008 due the launch of CorelDRAW Graphics Suite X4, experienced most of its decline in EMEA. WinZip revenues have declined in both North America and EMEA as a decrease in license sales continues from prior periods. iGrafx revenues have declined in both EMEA and the Americas, as some enterprise customers have delayed or declined orders of this product due to the current economy. The decline in WordPerfect revenues has been isolated mainly to the United States, where there were large benefits in the prior year due to the launch of X4 in the second quarter of fiscal 2008.

Digital Media revenues decreased by $5.8 million or 20.2% to $22.8 million in the second quarter of fiscal 2009 from $28.5 million in the second quarter of fiscal 2008, and decreased by $7.8 million or 13.6% to $49.3 million for the six months ending May 31, 2009. Our decline in these revenues in the current quarter were led by Paint Shop Pro Photo, Instant On, DVD Movie Factory, and VideoStudio. Year to date, these decreases were partially offset by an increase in sales WinDVD, which in the first quarter of fiscal 2009 enjoyed success in Taiwan and Japan with existing and new OEM customers. The decline in Paint Shop Pro Photo, a product towards the end of its life cycle, was largely in the

EMEA market where they have faced adverse economic factors which has decreased sales to resellers. The decline in Instant On is due to a significant Japanese OEM customer that is not currently bundling this product with their computers. However, we changed the specifications in the agreement with this OEM customer in the first quarter of fiscal 2009, and expect to see increases in revenues in future periods from Instant On to a limited scale of those earned in fiscal 2008. The majority of the decrease in DVD Movie Factory is in North America, relating largely to OEM sales decreases for two significant customers. VideoStudio has had declines across varying distribution channels in both EMEA and APAC.

Total Revenues by Region


	Three Months Ended									Six Months Ended
	May 31,						Percentage			May 31,						Percentage
	2009			2008			Change			2009			2008			Change
	(dollars in thousands)
	(unaudited)

Americas	$	24,997		$	32,793			(23.8	%)	$	51,166		$	63,690			(19.7	%)
As a percent of revenue		49.6	%		48.9	%					48.0	%		48.0	%
EMEA		11,249			19,564			(42.5	%)		26,369			40,577			(35.0	%)
As a percent of revenue		22.3	%		29.2	%					24.7	%		30.6	%
APAC		14,122			14,687			(3.8	%)		29,047			28,321			2.6	%
As a percent of revenue		28.0	%		21.9	%					27.3	%		21.4	%

Revenues in the Americas decreased by 23.8% to $25.0 million in the second quarter of fiscal 2009 compared to $32.8 million in the second quarter of fiscal 2008. For the six months ended May 31, 2009 revenues decreased by 19.7% to $51.2 million as compared to revenues for the six month period ending May 31, 2008. The decline in revenue was led by WinDVD, WinZip, DVD Movie Factory CorelDRAW, WordPerfect, and iGrafx. The WinDVD and DVD Movie Factory decline in revenues are primarily due to lower OEM sales with two large customers. The decrease in CorelDRAW and WordPerfect revenues is primarily attributable to the launch of products in the prior period, those being CorelDRAW Graphics Suite X4 in the first quarter of fiscal 2008 and WordPerfect Office Suite X4 in the second quarter of 2008. iGrafx has received smaller orders from its largest enterprise customers as they delay the purchases of this specialty product. The WinZip decline is due to lower internet licenses and corporate license sales to enterprise customers, due in part to delayed upgrade cycles.

Revenues in EMEA decreased by 42.5% to $11.2 million in the second quarter of fiscal 2009 from $19.6 million in the second quarter of fiscal 2008, and decreased by 35.0% to $26.4 million in the first six months of fiscal 2009 from $40.6 million in the first six months of fiscal 2008. One significant cause of the declining revenues in this region is the drop in the value of the EURO and Pound Sterling relative to the US dollar. The average exchange rate for the EURO and Pound Sterling was 1.51 and 1.98 in the first two quarters of fiscal 2008, respectively, and 1.33 and 1.47 in the first two quarters of fiscal 2009. The impact of the declining exchange rates is estimated to have lowered revenues by approximately $4.5 million in the first six months of fiscal 2009 as compared to the prior year. The largest portion of the declines in this region are in Russia and Eastern Europe. The product with the most significant portion of the decline in revenues was CorelDRAW, which had significant growth in the first two quarter of fiscal 2008 due to the launch of CorelDRAW Graphics Suite X4. The decrease in revenues in this region was also caused by declines in Paint Shop Pro Photo, WinDVD and iGrafx. The decline in Paint Shop Pro Photo is largely due to declining orders from the largest resellers of this product as the product is nearing the end of its life cycle that has been longer than normal. iGrafx revenues have declined due to the falloff of enterprise level orders across various customers who are delaying or declining purchases in this economy. WinDVD revenues have decreased in the second quarter largely due to a decrease in sales to resellers.

APAC revenues decreased by 3.8% to $14.1 million in the second quarter of fiscal 2009 and increased by 2.6% to $29.0 million in the first six months of fiscal 2009. While revenues in the current quarter did decrease, year to date revenues have increased due to the revenues from WinDVD product in the first quarter of fiscal 2009. The growth in revenue from WinDVD continued into the second quarter of fiscal 2009 and is attributable to significant agreements entered into with two OEM customers in Taiwan. Revenue growth from WinDVD and DVD Movie Factory have been offset by decreasing sales in Instant On, VideoStudio, and CorelDRAW. The growth in DVD Movie Factory is related to additional OEM sales by one of our key suppliers who have bundled the product into more of their systems. There was a significant sale of Instant On with an OEM customer in the first two quarters of fiscal 2008; these sales did not occur in fiscal 2009. However, we have had a change of specifications with this OEM customer in the first quarter of fiscal 2009, such that Instant On sales should increase in future periods to partially offset the decrease in the current year. The decline in revenues of VideoStudio is mainly due to the decreased sales through one OEM customer. The decline in CorelDRAW in the second quarter is attributable to a decline in sales by distributors.

Cost of Revenues


	Three Months Ended									Six Months Ended
	May 31,						Percentage			May 31,						Percentage
	2009			2008			Change			2009			2008			Change
	(dollars in thousands)
	(unaudited)

Cost of product	$	14,366		$	14,008			2.6	%	$	29,897		$	29,235			2.3	%
As a percent of product revenue		32.4	%		23.3	%					31.7	%		24.4	%
Cost of maintenance and services		110			132			(16.7	%)		210			299			(29.8	%)
As a percent of maintenance and service revenue		1.8	%		1.9	%					1.7	%		2.3	%
Amortization of intangible assets		6,154			6,418			(4.1	%)		12,319			12,832			(4.0	%)
As a percent of revenue		12.2	%		9.6	%					11.6	%		9.7	%

Cost of Products. Cost of products increased by 2.6% to $14.4 million in the second quarter of fiscal 2009 from $14.0 million in the second quarter of fiscal 2008. As a percentage of product revenues, cost of products increased to 32.4% for the three months ended May 31, 2009 from 23.3% in the three month period ended May 31, 2008. This is consistent with the trend for the six months ending May 31, 2009. The increase in the period is largely attributable to the change in our product mix caused by the higher proportion of Digital Media products sold, and in particular WinDVD. WinDVD sales, which have been increasing relative to other products, carry a higher royalty charge as a percentage of revenue than any of our other products.

Cost of Maintenance and Services. Cost of maintenance and services decreased to 1.8% of related revenues in the second quarter of fiscal 2009 from 1.9% in the second quarter of fiscal 2008. We incur minimal incremental costs to earn maintenance revenues.

Amortization of Intangible Assets. Amortization of intangible assets decreased by $264,000 to $6.2 million in the three months ended May 31, 2009, from $6.4 million in the three months ended May 31, 2008. This is consistent with the trend for the six months ending May 31, 2009. The decrease is due to declining amortization for certain customer relationships obtained in the acquisition of InterVideo in fiscal 2007.

Operating Expenses


	Three Months Ended									Six Months Ended
	May 31,						Percentage			May 31,						Percentage
	2009			2008			Change			2009			2008			Change
	(dollars in thousands)
	(unaudited)

Sales and marketing	$	14,820		$	20,748			(28.6	%)	$	30,042		$	40,432			(25.7	%)
As a percent of revenue		29.4	%		30.9	%					28.2	%		30.5	%
Research and development		9,180			11,716			(21.6	%)		18,396			23,807			(22.7	%)
As a percent of revenue		18.2	%		17.5	%					17.3	%		18.0	%
General and administrative		5,945			8,640			(31.2	%)		12,424			17,451			(28.8	%)
As a percent of revenue		11.8	%		12.9	%					11.7	%		13.2	%
Restructuring		1,404			447			214.1	%		1,613			625			158.1	%
As a percent of revenue		2.8	%		0.7	%					1.5	%		0.5	%

Total		31,349			41,551			(24.6	%)		62,475			82,315			(24.1	%)
As a percent of revenue		62.2	%		62.0	%					58.6	%		62.1	%

A significant portion of our operating expenses relates to employee costs. Most of our employees are located in Canada, Taiwan and the United Kingdom and therefore a significant portion of our labour and other operating costs are incurred in those jurisdictions outside of the United States. As compared to the two first quarters of fiscal 2008, the US Dollar is relatively stronger to each of the Canadian Dollar, the

Pound Sterling, and the New Taiwanese Dollar. In the second quarter of fiscal 2009, this has caused an estimated reduction in our operating expenses of $2.6 million, of which $1.4 million, $0.8 million, and $0.4 million is related to the weakening of the Canadian Dollar, the Pound Sterling, and the New Taiwanese Dollar, respectively. For the six month period ending May 31, 2009, this has caused an estimated reduction in our operating expenses of $6.0 million, of which $3.7 million, $1.7 million, and $0.6 million is related to the weakening of the Canadian Dollar, the Pound Sterling, and the New Taiwanese Dollar, respectively.

Sales and Marketing.

Sales and marketing expenses decreased by 28.6% to $14.8 million in the second quarter of fiscal 2009 as compared to $20.7 million in the second quarter of fiscal 2008. For this quarter, sales and marketing expenses as a percentage of revenue decreased to 29.4%, as compared to 30.9% for the prior period, as we have largely mitigated our declining revenues with lower operating expenses. Sales and marketing expenses decreased by 25.7% to $30.0 million for the six months ended May 31, 2009, as compared to $40.4 million for the six months ended May 31, 2008 and decreased as a percentage of revenue from 30.5% to 28.2%. The decrease in sales and marketing expenses results from reduced headcount in our sales and marketing force subsequent to our September 2008 and April 2009 restructuring initiatives, a decrease in discretionary spending on marketing programs, and the decline in the Canadian dollar and the Pound Sterling relative to the US Dollar, which has a favorable impact on operating costs of $1.3 million and $2.8 million for the three and six month periods ended May 31, 2009, respectively.

Research and Development.

Research and development expenses decreased by 21.6% and 22.7% to $9.2 million and $18.4 million in the three and six months ended May 31, 2009, respectively, as compared to $11.7 million and $23.8 million in three and six months ended May 31, 2008. As a percentage of total revenues, research and development expenses increased to 18.2% from 17.5% in the second quarter of fiscal 2009 as compared to the second quarter of fiscal 2008 as we have largely mitigated our declining revenues with lower operating expenses. The decrease in research and development expense results from reduced headcount subsequent to our completed restructuring activities in September 2008 and April 2009, a decrease in facility costs related to the consolidation of operations, such as the closure of the Minneapolis location subsequent to the end of the first quarter of fiscal 2008, and the decline in the Canadian dollar and the New Taiwanese dollar relative to the US Dollar which had a favorable impact on operating costs of $0.5 million and $1.1 million for the three and six months ending May 31, 2009, respectively.

General and Administration.

General and administration expenses decreased by 31.2% and 28.8% to $5.9 million and $12.4 million in the three and six months ended May 31, 2009, respectively, from $8.6 million and $17.5 million for the three and six months ended May 31, 2008. As a percentage of total revenues, general and administration expenses decreased to 11.8% in the second quarter of fiscal 2009, from 12.9% in the second quarter of fiscal 2008, as we have mitigated against our declining revenues by reducing operating expenses. The decrease in general and administration expense results from reduced headcount subsequent to our completed restructuring activities in September 2008 and April 2009, a decrease in facility costs related to the consolidation of operations, a $602,000 reduction in stock compensation expense over the first two quarters of fiscal 2008, and the decline in the Canadian dollar and the Pound Sterling relative to the US Dollar which had a favorable impact on operating costs of $0.9 million and $2.1 million for the three and six months ending May 31, 2009, respectively.

Restructuring Expense.

In April 2009, we initiated a restructuring plan to reduce our workforce by approximately 80 employees. We took these actions to better align our cost structure with our current business conditions. The total costs that arose from this global restructuring were $1.6 million, of which $1.4 million was expensed in the second quarter of fiscal 2009. The remaining costs of $158,000 are related to certain individuals who were retained by us beyond the end of the second quarter.

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

Our major restructuring activities initiated in September 2008 and April 2009, have had a significant impact in reducing our operating expenses in the first two quarters of fiscal 2009 as compared to the first two quarters of fiscal 2008. We expect this trend to continue through the end of fiscal 2009.

Additional Expense Reduction Initiatives. In the second quarter of fiscal 2009, we implemented a series of initiatives to further reduce costs. These initiatives included a 10% salary reduction for all senior executives, five unpaid days off for all employees taken in the second quarter of fiscal 2009, and accelerated timing for the use of vacation time. As a result of these initiatives, we expect to realize operational cost savings totalling approximately $2.0 million throughout fiscal 2009.

Non-Operating (Income) Expense


	Three Months Ended					Six Months Ended
	May 31,					May 31,
	2009			2008		2009			2008
	(dollars in thousands)
	(unaudited)

Interest expense, Net		2,969			2,933		6,023			7,221
Amortization of deferred financing fees		271			270		542			540
Expenses associated with evaluation of strategic alternatives		—			705		—			705
Other non-operating (income) expenses		(1,774	)		102		(898	)		(1,362	)


Total Other Expenses (Income)		1,466			4,010	$	5,667		$	7,094

Interest Expense, Net.

Net interest expense increased minimally by $36,000 in the second quarter of fiscal 2009 as compared to the second quarter of fiscal 2008, and decreased by $1.2 million for the six months ending May 31, 2009, as compared to the prior year. The year to date decrease is attributable to a favourable change in gains pertaining to the valuation of our unhedged interest rate swaps of $462,000, a decrease in the LIBOR rate in the past 12 months which has reduced the interest we pay on the approximately 16% portion of our long-term debt that is not hedged, and a decrease in our long-term debt balance of approximately 13% due to our cash sweep payment made at the beginning of the second quarter of fiscal 2009. Despite an increase in interest expense of $390,000 over the second quarter of fiscal 2008 attributable to reduced gains on the valuation of the interest rate swaps, our interest expense for the second quarter has only increased slightly due to the reduction of long-term debt and the lower LIBOR rate.

Amortization of Deferred Financing Fees. Amortization of deferred financing fees of $271,000 in the second quarter of fiscal 2009 is consistent with the second quarter of fiscal 2008, as there have been no new credit facilities during the period.

Expenses Associated with Evaluation of Strategic Alternatives: These expenses were isolated to fiscal 2008, as the purchase of Corel by its majority shareholders was being evaluated. No charges have been recorded in the first half of fiscal 2009.

Other Non-Operating Income. Other non-operating income increased by $1.9 million to $1.8 million in the second quarter of fiscal 2009 from the second quarter of fiscal 2008. The increase is primarily related to foreign exchange, where we have benefitted from the recent strengthening of the Euro and Pound Sterling versus the US Dollar. Other non-operating income decreased by $464,000 for the six months ended May 31, 2009 as compared to the six months ended May 31, 2008. The decrease is primarily related to the gain on sale of a long-term income investment of $822,000 which was recorded in the first quarter of fiscal 2008.

Income Tax Expense (Recovery)

For the three and six months ended May 31, 2009, we recorded a tax provision of $1.0 million and $1.7 million on a loss before income taxes of $3.1 million and $4.0 million, respectively. The current tax provision was $443,000 and $1.8 million, respectively, for the three and six month periods ended May 31, 2009, which relates mostly to withholding taxes which are not creditable due to loss carryforwards and income taxes in foreign jurisdictions. The deferred tax provision was $605,000 and the deferred tax recovery was $140,000, for the three and six month periods, respectively. We uundertook a reorganization in which intellectual property was transferred from Taiwan to Canada at its fair market value for tax purposes. There was no current Taiwanese tax on the transfer as a result of existing tax basis; however there was deferred tax expense of $1.4 million for each of the three and six month periods, related to this transfer as a result of revising the estimated amount of pre- acquisition losses to be utilized upon the transfer. This is partially offset by a deferred tax recovery of $745,000 and $1.5 million for the three and six month periods, respectively, related to the amortization of the intellectual property acquired with InterVideo.

For the three and six months ended May 31, 2008, we recorded a tax recovery of $5,000 and $97,000 on income before income taxes of $925,000 and $803,000, respectively. The current tax provision was $1.2 million and $2.4 million, respectively, for the three and six month periods ended May 31, 2008, which relates mostly to withholding taxes which are not creditable due to loss carryforwards and income taxes in foreign jurisdictions. The current tax provision was offset by a deferred tax recovery of $1.2 million and $2.5 million, for the three and six month periods, which is related to the amortization of the intellectual property acquired with InterVideo. We uundertook a reorganization in which intellectual property was transferred from Taiwan to Canada at its fair market value for tax purposes. There was no current Taiwanese

tax on the transfer as a result of its existing tax basis; however there was deferred tax expense of $1,350 related to this transfer, which is partially offset by a recovery of $745,000 related to the amortization of the intellectual property acquired with InterVideo.

The amount of the current tax provision has been reduced by $0.8 million in the second quarter of fiscal 2009, due to the implementation of tax plans to reduce withholding taxes in certain entities. The deferred tax provision increased by $1.8 million in the second quarter of fiscal 2009, due to the $1.4 million related to the intellectual property, as discussed above, and a reduction of $468,000 in recovery related to the amortization of the intellectual property due to the change in tax basis.

FINANCIAL CONDITION

Liquidity and Capital Resources

As of May 31, 2009, our principal sources of liquidity include cash and cash equivalents of $32.1 million and trade accounts receivable of $29.0 million.

At May 31, 2009, all of our cash and cash equivalents are held on deposit with banks. The largest proportion of our bank deposits are held in Canadian banking institutions which we believe to be secure in the current global economy due to historically strict regulations. We believe that we will be able to access the remaining balance of bank deposits outside of Canada as these deposits are with large, reputable banks. We have and will continue to make a series of short-term investments in term deposits and commercial paper. Our investment policy is to invest in low risk short-term investments which are investment grade commercial paper and term deposits. We have not had a history of any defaults on this commercial paper, nor do we expect any in the future given the grade and short term to maturity of these investments.

Based on our current business plan, internal forecasts and the risks that are present in the current global economy, we believe that cash generated from operations and our existing cash balance, will be sufficient to meet our working capital and operating cash requirements over the next twelve months. In the past quarter, we generated $780,000 of operating cash flows, despite the fact that our changes to our working capital reduced our operating cash flows by $4.5 million. We could be affected by various risks and uncertainties, including, but not limited to, the risks detailed Item 1A — “Risk Factors” of our 10-K for the period ending November 30, 2008.

In fiscal 2008, the Company generated an increase in cash of $25.6 million, largely driven by our operating cash flows, increasing our cash and cash equivalents to $50.3 million. In the first six months of fiscal 2009, the main driver of our decrease in cash of $18.1 million was a loan repayment (cash sweep payment) of $17.5 million. Despite our reduced operating income in the current economy, we are not generating negative cash flows from our operating activities, and we expect our operating cash flows to remain relatively stable or potentially improve over the next 12 months. The cash sweep payment due under our senior credit facility on March 1, 2010, has been estimated to be $13.0 million. Given our current cash balance of $32.1 million, our ability to maintain slightly positive operating cash flows in these uncertain times, and the fact that our next cash sweep payment is estimated to be $13.0 million, we believe we are in an adequate cash position for the next 12 months.

Over the next 12 months our operating cash flows could decrease as we continue to face revenue uncertainty. The revenue uncertainty will be largely offset by a reduction in our operating expenditures, including through the additional cost reduction initiatives announced on April 2, 2009, our global restructuring plan implemented in May 2009, an elimination of salary increases for fiscal 2009, a reduction in expenditures such as the charges associated with the evaluation of strategic alternatives, a reduction in discretionary spending and a reduction in our capital expenditures. The benefits of our restructuring activities and our cost curtailment initiatives are evident in our operating expenditures for the six months ending May 31, 2009, which have decreased by 24.1% from the same period in the prior year. We expect this level of reduced expenditures to continue for the remainder of fiscal 2009 and into fiscal 2010. We also have no significant liabilities for our defined pension benefit plan, our past restructuring activities, and do not expect significant cash flows from tax uncertainties and in particular our tax contingency with the province of Ontario.

We expect that our actions to reduce operating expenses will allow us to generate operating cash flows sufficient to sustain operations, to address future cash sweep payments noted above, and to offset, in whole or in part, the potential impact of a decrease in future revenues. We also believe the global positioning of our diverse group of products will reduce the revenue risks created by the uncertainty in the present economy.

We have a five-year $75.0 million revolving line of credit facility, of which approximately $69.0 million is unused as of May 31, 2009. Management believes based on our current market conditions, forecasts and our debt covenant restrictions, that limited amounts, if any, of the line of credit will be available to us over the next twelve months. Ultimately, we would need to obtain approval from our lenders for permitted transactions as defined in the credit agreement. Management has not used, and does not anticipate using the revolving line of credit to fund operating requirements and debt re-payments over the next 12 months.

As of May 31, 2009 we are in full compliance with all debt covenants with our lenders. We are required to meet the following financial covenants:

•

a maximum total leverage ratio, which is defined as the ratio of total debt to trailing four quarter consolidated Adjusted EBITDA, as defined in the credit agreement, to be less than specified amounts over the term of the facility as follows:


Period	Ratio

November 30, 2008 through November 29, 2009		3.00
November 30, 2009 through November 29, 2010		2.75
November 30, 2010 through November 29, 2011		2.50
November 30, 2011, thereafter		2.25

•

a minimum fixed charge coverage ratio, which is defined as the ratio of trailing four quarter consolidated Adjusted EBITDA to fixed charges (fixed charges include interest paid, scheduled repayment of principal on long-term debt, capital expenditures and taxes paid) as follows:


Period	Ratio

Through to November 29, 2010		2.00
November 30, 2010 through November 29, 2011		2.25
November 30, 2011, thereafter		2.50

Due to the uncertainties presented by the current state of the global economy and our financial performance, there is a risk that we may be in violation of certain debt covenants with our lenders over the next twelve months. However, due to our current excess cash position, management is investigating the option to pre-pay a portion of our term loan debt. This would reduce our interest expense and our total amount of long-term debt, which would ease our ability to meet the financial covenants under our senior credit facility.

Based on our current senior debt facility, a significant balloon payment will be required in fiscal 2012. We are unable to currently assess our ability to maintain our creditworthiness over this period, which would be required to refinance this payment at or prior to that date.

Working Capital

Our working capital deficiency at May 31, 2009 was $13.2 million, an increase of $6.9 million from the November 30, 2008 working capital deficiency of $6.3 million.

Current assets at May 31, 2009 were $68.6 million, a decrease of $25.9 million from the November 30, 2008 year end balance of $94.5 million. The decrease is due to a decrease in our cash and cash equivalents of $18.1 million, a decrease in our trade accounts receivable of $4.2 million, and a decrease in our deferred tax assets of $3.1 million. The decrease in our cash position is due to our cash sweep payment of $17.5 million made in March 2009. The decrease in our trade accounts receivable is attributable to our decreasing revenues in the past two fiscal quarters. The deferred tax assets decreased by $3.1 million due to transactions related to the transfer of intellectual property.

Current liabilities were $81.8 million at May 31, 2009, a decrease of $19.1 million from November 30, 2008. This is attributable to a $10.9 million decrease in accounts payable and accrued liabilities, a $4.7 million decrease in the current portion of long-term debt, and a $3.7 million decrease in deferred revenue. The decrease in accounts payable and accrued liabilities is attributable to our decreasing royalty payables which are attributable to declining sales and the decrease in our organizational headcount which impacts various employee related accruals. The decrease in the current portion of long-term debt is due to a reduction in the estimated cash sweep payment from $17.5 million to $13.0 million. The decrease in deferred revenues is caused by the timing of several maintenance renewals which historically take place in the fourth quarter, and partially by our declining revenue base.

Cash Flows

Cash provided by operations decreased by $6.1 million to $0.8 million for the three months ended May 31, 2009, and decreased by $12.6 million to $0.8 million for the six months ended May 31, 2009. The decrease is primarily due to our decreasing income from operations caused by our declining revenues and gross margins as well as the reduction in royalties payable due to timing of certain payments.

Cash used by financing activities increased by $17.7 million and $17.5 million to $18.1 million and $18.6 million for the three and six months ended May 31, 2009 as compared to the respective periods in fiscal 2008. This increase is attributable to our first cash sweep payment of $17.5 million which was made in March 2009. Our other financing activities such as a required quarterly 0.25% repayment on our long-term debt and the repayment of our capital lease obligations have remained and will continue to remain consistent.

Cash used in investing activities was $1.1 million in the six months ended May 31, 2009, a significant decrease of $2.2 million over the cash used of $3.3 million in the six months ended May 31, 2008. These cash flows pertain to capital purchases, and the decrease in capital spending is attributable to management’s decision to reduce spending in the current economic environment.

Adjusted EBITDA

Adjusted EBITDA represents net income before interest, income taxes, depreciation and amortization, further adjusted to eliminate items specifically defined in our credit facility agreement. Adjusted EBITDA is not a measure of operating income, operating performance or liquidity under GAAP. We use this non-GAAP financial measure to confirm our compliance with covenants contained in our debt facilities, as a supplemental indicator of our operating performance and to assist in evaluation of our ongoing operations and liquidity and to determine appropriate levels of indebtedness. In particular, we have included a presentation of Adjusted EBITDA because certain covenants in our credit facility are tied to Adjusted EBITDA. If our Adjusted EBITDA were to decline below certain levels, it could result in, among other things, a default or mandatory prepayment under our current credit facility. Adjusted EBITDA was $10.1 million in the first quarter of fiscal 2009 compared to $14.9 million in the second quarter of fiscal 2008. The decrease of $4.8 million is primarily attributable to our decrease in gross margin in the period, caused by the decline in revenues being principally concentrated in our higher margin products, which was partially offset by our decline in operating expenditures.

We believe Adjusted EBITDA is useful to investors in allowing for greater transparency with respect to supplemental information used by management in its financial and operational decision making. This measure does not have any standardized meaning prescribed by GAAP and therefore is not comparable to the calculation of similar measures used by other companies. Adjusted EBITDA should not be considered in isolation, and should not be viewed as an alternative to or substitute for measures of financial performance or changes in cash flows calculated in accordance with GAAP. We consider Adjusted EBITDA to be a measure of liquidity and that cash flow from operations is the closest GAAP measure to Adjusted EBITDA. For the three months ended May 31, 2009 and May 31, 2008, we had cash provided by operations of $780,000, and cash flow from operations of $6.9 million, respectively. The table below reconciles Adjusted EBITDA to cash flow from operations; investors are encouraged to review the related GAAP financial measure and the reconciliation:


	Three Months Ended						Six Months Ended
	May 31,						May 31,
	2009			2008			2009			2008
Cash flow provided by / (used in) operations	$	780		$	6,910		$	751		$	13,317
Change in operating assets and liabilities		4,496			2,308			10,715			3,700
Interest expenses, net		2,969			2,933			6,023			7,221
Income tax provision		1,048			(5	)		1,675			(97	)
Deferred income taxes		(605	)		1,233			140			2,467
Provision for bad debts		(80	)		(129	)		29			(233	)
Defined benefit pension plan costs		(15	)		—			(22	)		—
Unrealized gain on forward foreign exchange contracts		45			—			45			—
Gain (loss) on interest rate swap		122			512			219			(243	)
Loss on disposal of fixed assets		(17	)		(6	)		(18	)		(48	)
Gain on sale of investments		—			—			—			822
Restructuring costs		1,404			447			1,613			625
Expenses associated with evaluation of strategic alternatives		—			705			—			705


Adjusted EBITDA	$	10,147		$	14,908		$	21,170		$	28,236

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, 2008.

Impairment of Goodwill

In accordance with Statement of Financial Accounting Standards No. 142 Goodwill and Other Intangible Assets (“FAS 142”), goodwill is subject to annual impairment tests or on a more frequent basis if events or conditions indicate that goodwill may be impaired. Goodwill is tested for impairment at the beginning of the fourth quarter of each fiscal year. We also test goodwill for impairment more frequently if events or circumstances warrant. Corel as a whole is considered one reporting unit. We estimate the value of our reporting unit based on our market capitalization. If we determine that our carrying value exceeds our fair value, we would conduct the second step of the goodwill impairment test. The second step compares the implied fair value of the goodwill (determined as the excess fair value over the fair value assigned to our other assets and liabilities) to the carrying amount of goodwill. If the carrying amount of goodwill were to exceed the implied fair value of goodwill, an impairment loss would be recognized. Our goodwill balance of approximately $81.0 million arose from the acquisition of Jasc in fiscal 2004, which generated goodwill of approximately $9.9 million, and from the acquisition of InterVideo in fiscal 2007, which now has goodwill of approximately $71.1 million.

Management concluded that no triggers had been reached during the three months ended May 31, 2009 that would require us to perform additional impairment testing.

Definite-lived Intangible Assets

We amortize our long-lived assets over the estimated useful life of the asset. We evaluate all of our long-lived assets, excluding goodwill, periodically for impairment in accordance with Statement of Financial Accounting Standards No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets (“FAS 144”). FAS 144 requires that long-lived assets be evaluated for impairment when events or changes in facts and circumstances indicate that their carrying value may not be recoverable. Events or changes in facts or circumstances can include a strategic change in business direction, decline or discontinuance of a product line, a reduction in our customer base or a restructuring. If one of these events or circumstances indicates that the carrying value of an asset may not be recoverable, or that our estimated amortization period was not appropriate, we would record an impairment charge against our long-lived assets. The amount of impairment would be measured as the difference between the carrying value and the fair value of the impaired asset as calculated using a net realizable value methodology. An impairment charge would be recorded as an operating expense in the period of the impairment and as a reduction in the carrying value of that asset.

Management concluded that no triggers had been reached during the three months ended May 31, 2009, that would require us to perform additional impairment testing.

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 LIBOR rate.

Given the amount of debt that we have, if LIBOR rates were to rise significantly, the resulting interest cost could materially affect the business. Our annual interest expense, after considering our interest rate swaps that are deemed as effective hedging instruments, would change by approximately $241,000 for each 0.5% change in interest rates based on debt outstanding as of May 31, 2009. In connection with the current debt facility, we use interest rate swaps to limit our exposure to changing interest rates and future cash outflows for interest. Interest rate swaps provide for us to pay an amount equal to a specified fixed rate of interest times a notional principal amount and to receive in return an amount equal to a variable rate of interest times the same notional amount.

As of May 31, 2009 our interest rate swaps convert an aggregate notional principal amount of $115.5 million (or approximately 84% 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 one-month LIBOR plus 4.00%. The fixed rates range from 8.19% to 9.49%. As of May 31, 2009, $90.0 million of these interest rate swaps have been designated as effective hedging instruments and any gains or losses on these items are recorded in other comprehensive income. In this quarter, the decrease in the liability to record the fair value of the swaps of $49,000 has been recorded as a gain in other comprehensive income.

We assess the effectiveness of our interest rate swaps as defined in Financial Accounting Standards No. 133 Accounting for Derivative Instruments and Hedging Activities (“FAS 133”), on a quarterly basis. We have considered the impact of the current credit crisis in the United States and elsewhere, and the downturn in the global economy 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

Most of our employees 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. In addition we have a disproportionate amount of revenues in Euros and Japanese Yen, as compared to costs in Euros and Japanese Yen. We are therefore exposed to loss if the Canadian and Taiwanese dollar appreciates against the US dollar, and if the Euro and the Japanese Yen depreciate against the US 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 US and Canadian dollar exchange rates on our business through the purchase of forward exchange contracts. As of May 31, 2009, we have four forward exchange option collars for a notional amount totaling CDN $2.0 million in order to hedge against certain payroll costs that will expire prior to the end of July 2009. As of May 31, 2009, these options have a fair value of $45,000. This unrealized gain has been included in other operating income in our statement of operations, as we have not deemed these as hedging instruments.

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

Item 4. Controls and Procedures

Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures as required by Exchange Act Rule 13a-15(b) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective at the reasonable assurance level. There were no changes in our internal control over financial reporting during the quarter ended May 31, 2009 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

We are 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 our business, including assertions from third parties that we 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.

At May 31, 2009, 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 US 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; 6,141,491 issued October 31, 2000; and 5,535,008 issued July 9, 1996. JVC alleges certain Corel video applications infringe the patents. Earlier this year, Cyberlink Corp. and JVC entered into a confidential settlement, and the complaint against Cyberlink Corp. was dismissed. We believe we have meritorious defenses to JVC’s claims, we are situated differently than Cyberlink Corp. and intend to continue to defend the litigation vigorously. The ultimate outcome of the litigation, however, is uncertain. Any potential loss that may arise is indeterminable at this time.

Item 1A. Risk Factors

See the risk factors set forth in the section entitled “Risk Factors” in our Annual Report on Form 10-K for the period ending November 30, 2008 (File No. 000-20562), which are incorporated by reference into this quarterly report.

Item 2. Use of Proceeds

Not applicable


	Page
PART I FINANCIAL INFORMATION		3

Item 1. Unaudited Consolidated Financial Statements		3
a) Balance Sheets as of May 31, 2009 and November 30, 2008		3
b) Statements of Operations for the Three and Six Months Ended May 31, 2009 and May 31, 2008		5
c) Statements of Cash Flows for the Three and Six Months Ended May 31, 2009 and May 31, 2008		7
d) Notes to Financial Statements		9
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		30

Item 1. Legal Proceedings		30
Item 1A. Risk Factors		30
Item 2. Use of Proceeds		30
Item 6. Exhibits		31
*Signature*		31
EX-31.1
EX-31.2
EX-32.1
EX-32.2


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.


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

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*		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)