##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




---

Form 10-Q

|           |  |                                                                                             
|---------- |  | --------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                             
|þ          |  | QUARTERLY REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|          
|           |  | For the quarterly period ended
    September 30, 2004                                       
|          
|or        
|          
|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: 000-26247



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VERITAS Software Corporation

(Exact name of Registrant as Specified in Its
Charter)


|                                                                   |  |                                         
|------------------------------------------------------------------ |  | ----------------------------------------
|Delaware                                                           |  | 77-0507675                              
|(State or other jurisdiction of
    incorporation or organization) |  | (I.R.S. Employer
    Identification No.)

350 Ellis Street

Mountain View, California 94043


(650) 527-8000


(Address, including Zip Code, of
Registrants Principal Executive Offices and


Registrants Telephone Number, including
Area Code)


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

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

The number of shares of the registrants
common stock outstanding as of October 29, 2004 was
422,130,057 shares.



---






---










VERITAS SOFTWARE CORPORATION

INDEX

|                                  |  |                                                                                                                         |    |      |    | 
|--------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|                                  |  |                                                                                                                         |    | Page
|                                  |  |                                                                                                                         |    |     
|PART I: FINANCIAL
    INFORMATION
|Item 1.                           |  | Condensed Consolidated
    Financial Statements                                                                         |    |      | 2  | 
|                                  |  | Condensed Consolidated
    Balance Sheets as of September 30, 2004 and
    December 31, 2003                            |    |      | 2  | 
|                                  |  | Condensed Consolidated
    Statements of Operations for the Three and Nine Months Ended
    September 30, 2004 and 2003 |    |      | 3  | 
|                                  |  | Condensed Consolidated
    Statements of Cash Flows for the Nine Months Ended
    September 30, 2004 and 2003           |    |      | 4  | 
|                                  |  | Notes to Condensed
    Consolidated Financial Statements                                                                |    |      | 5  | 
|Item 2.                           |  | Managements Discussion
    and Analysis of Financial Condition and Results of Operations                               |    |      | 22 | 
|Item 3.                           |  | Quantitative and Qualitative
    Disclosures About Market Risk                                                          |    |      | 50 | 
|Item 4.                           |  | Controls and Procedures                                                                                                 |    |      | 54 | 
|PART II: OTHER
    INFORMATION   
|Item 1.                           |  | Legal Proceedings                                                                                                       |    |      | 54 | 
|Item 2.                           |  | Unregistered Sales of Equity
    Securities and Use of Proceeds                                                         |    |      | 56 | 
|Item 4.                           |  | Submission of Matters to a
    Vote of Security Holders                                                                 |    |      | 57 | 
|Item 6.                           |  | Exhibits                                                                                                                |    |      | 57 | 
|Signature                         |  |                                                                                                                         | 59 |     
|EXHIBIT 2.01                     
|EXHIBIT 10.02                    
|EXHIBIT 10.03                    
|EXHIBIT 10.04                    
|EXHIBIT 10.05                    
|EXHIBIT 31.01                    
|EXHIBIT 31.02                    
|EXHIBIT 32.01                    



1



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##### Table of Contents






PART I: FINANCIAL INFORMATION






|        |                                                
|------- | -----------------------------------------------
|Item 1. | Condensed Consolidated Financial
    Statements

VERITAS SOFTWARE CORPORATION




CONDENSED CONSOLIDATED BALANCE
SHEETS

|                                         |                                                                                                                     |                            |           |              |           |   |           |            |           | 
|---------------------------------------- | ------------------------------------------------------------------------------------------------------------------- | -------------------------- | --------- | ------------ | --------- | - | --------- | ---------- | --------- | 
|                                         |                                                                                                                     | September 30,              |           | December 31,
|                                         |                                                                                                                     | 2004                       |           | 2003        
|                                         |                                                                                                                     |                            |           |             
|                                         |                                                                                                                     | (Unaudited)                |           |             
|                                         |                                                                                                                     |                           
|                                         |                                                                                                                     | (In thousands)            
|ASSETS                                  
|Current assets:                          |                                                                                                                     |                            |           |              |           |   |           |           
|                                         | Cash and cash equivalents                                                                                           |                            | $         | 626,291      |           |   | $         | 823,171    |          
|                                         | Short-term investments                                                                                              |                            |           | 1,912,939    |           |   |           | 1,679,844  |          
|                                         | Accounts receivable, net of allowance for
    doubtful accounts of $6,509 and $7,807, respectively                  |                            |           | 205,209      |           |   |           | 250,098    |          
|                                         | Other current assets                                                                                                |                            |           | 73,447       |           |   |           | 60,254     |          
|                                         | Deferred income taxes                                                                                               |                            |           | 34,230       |           |   |           | 30,302     |          
|                                         |                                                                                                                     |                            |           |              |           |   |           |           
|                                         |                                                                                                                     | Total current assets       |           |              | 2,852,116 |   |           |            | 2,843,669 | 
|Property and equipment, net              |                                                                                                                     |                            | 574,850   |              |           |   | 572,977   |           
|Other intangibles, net                   |                                                                                                                     |                            | 160,824   |              |           |   | 81,344    |           
|Goodwill, net                            |                                                                                                                     |                            | 1,983,006 |              |           |   | 1,755,591 |           
|Other non-current assets                 |                                                                                                                     |                            | 23,414    |              |           |   | 25,385    |           
|Deferred income taxes                    |                                                                                                                     |                            | 57,196    |              |           |   | 69,500    |           
|                                         |                                                                                                                     |                            |           |              |           |   |           |           
|                                         |                                                                                                                     | $                          | 5,651,406 |              |           | $ | 5,348,466 |           
|                                         |                                                                                                                     |                            |           |              |           |   |           |           
|                                        
|LIABILITIES AND STOCKHOLDERS
    EQUITY
|Current liabilities:                     |                                                                                                                     |                            |           |              |           |   |           |           
|                                         | Accounts payable                                                                                                    |                            | $         | 44,319       |           |   | $         | 38,289     |          
|                                         | Payable for repurchase of common stock                                                                              |                            |           | 23,365       |           |   |           |           |          
|                                         | Accrued compensation and benefits                                                                                   |                            |           | 125,359      |           |   |           | 124,655    |          
|                                         | Accrued acquisition and restructuring costs                                                                         |                            |           | 23,091       |           |   |           | 25,051     |          
|                                         | Other accrued liabilities                                                                                           |                            |           | 69,288       |           |   |           | 83,184     |          
|                                         | Current portion of long-term debt                                                                                   |                            |           | 380,630      |           |   |           |           |          
|                                         | Income taxes payable                                                                                                |                            |           | 138,323      |           |   |           | 141,623    |          
|                                         | Deferred revenue                                                                                                    |                            |           | 418,157      |           |   |           | 398,772    |          
|                                         |                                                                                                                     |                            |           |              |           |   |           |           
|                                         |                                                                                                                     | Total current liabilities  |           |              | 1,222,532 |   |           |            | 811,574   | 
|                                         | Convertible subordinated notes                                                                                      |                            |           | 520,000      |           |   |           | 520,000    |          
|                                         | Long-term debt                                                                                                      |                            |           |             |           |   |           | 380,630    |          
|                                         | Accrued acquisition and restructuring costs                                                                         |                            |           | 49,808       |           |   |           | 69,019     |          
|                                         | Other long-term liabilities                                                                                         |                            |           | 24,404       |           |   |           | 23,649     |          
|                                         |                                                                                                                     |                            |           |              |           |   |           |           
|                                         |                                                                                                                     | Total liabilities          |           |              | 1,816,744 |   |           |            | 1,804,872 | 
|                                         |                                                                                                                     |                            |           |              |           |   |           |           
|Stockholders equity:                    |                                                                                                                     |                            |           |              |           |   |           |           
|                                         | Common stock                                                                                                        |                            |           | 463          |           |   |           | 458        |          
|                                         | Additional paid-in capital                                                                                          |                            |           | 7,062,464    |           |   |           | 6,941,798  |          
|                                         | Accumulated deficit                                                                                                 |                            |           | (1,095,359   | )         |   |           | (1,378,076 | )        
|                                         | Deferred stock-based compensation                                                                                   |                            |           | (27,889      | )         |   |           | (8,455     | )        
|                                         | Accumulated other comprehensive income                                                                              |                            |           | 7,576        |           |   |           | 6,172      |          
|                                         | Treasury stock, at cost; 34,009 and
    28,609 shares at September 30, 2004 and
    December 31, 2003, respectively |                            |           | (2,112,593   | )         |   |           | (2,018,303 | )        
|                                         |                                                                                                                     |                            |           |              |           |   |           |           
|                                         |                                                                                                                     | Total stockholders equity |           |              | 3,834,662 |   |           |            | 3,543,594 | 
|                                         |                                                                                                                     |                            |           |              |           |   |           |           
|                                         |                                                                                                                     | $                          | 5,651,406 |              |           | $ | 5,348,466 |           
|                                         |                                                                                                                     |                            |           |              |           |   |           |           

See accompanying notes to condensed consolidated
financial statements.

2



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##### Table of Contents



VERITAS SOFTWARE CORPORATION




CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                                    |                                      |                                          |                                                                                        |                   |         |         |         |         |         |         |         |         |           |           |         |         |           |           | 
|------------------------------------------------------------------- | ------------------------------------ | ---------------------------------------- | -------------------------------------------------------------------------------------- | ----------------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | --------- | --------- | ------- | ------- | --------- | --------- | 
|                                                                    |                                      |                                          |                                                                                        |                  
|                                                                    |                                      | Three Months Ended                       |                                                                                        | Nine Months Ended
|                                                                    |                                      | September 30,                            |                                                                                        | September 30,    
|                                                                    |                                      |                                          |                                                                                        |                  
|                                                                    |                                      | 2004                                     |                                                                                        | 2003              |         | 2004    |         | 2003   
|                                                                    |                                      |                                          |                                                                                        |                   |         |         |         |        
|                                                                    |                                      |                                         
|                                                                    |                                      | (Unaudited)                             
|                                                                    |                                      | (In thousands, except per share amounts)
|Net revenue:                                                        |                                      |                                          |                                                                                        |                   |         |         |         |         |         |         |         |         |           |           |         |        
|                                                                    | User license fees                    |                                          | $                                                                                      | 287,352           |         |         | $       | 281,814 |         |         | $       | 859,677 |           |           | $       | 782,070 |          
|                                                                    | Services                             |                                          |                                                                                        | 209,306           |         |         |         | 164,811 |         |         |         | 607,762 |           |           |         | 463,059 |          
|                                                                    |                                      |                                          |                                                                                        |                   |         |         |         |         |         |         |         |         |           |           |         |        
|                                                                    |                                      | Total net revenue                        |                                                                                        |                   | 496,658 |         |         |         | 446,625 |         |         |         | 1,467,439 |           |         |         | 1,245,129 |          
|Cost of revenue:                                                    |                                      |                                          |                                                                                        |                   |         |         |         |         |         |         |         |         |           |           |         |        
|                                                                    | User license fees                    |                                          |                                                                                        | 5,103             |         |         |         | 11,483  |         |         |         | 23,500  |           |           |         | 35,116  |          
|                                                                    | Services(1)                          |                                          |                                                                                        | 68,793            |         |         |         | 58,948  |         |         |         | 201,448 |           |           |         | 166,057 |          
|                                                                    | Amortization of developed technology |                                          |                                                                                        | 4,376             |         |         |         | 5,043   |         |         |         | 12,255  |           |           |         | 30,379  |          
|                                                                    |                                      |                                          |                                                                                        |                   |         |         |         |         |         |         |         |         |           |           |         |        
|                                                                    |                                      | Total cost of revenue                    |                                                                                        |                   | 78,272  |         |         |         | 75,474  |         |         |         | 237,203   |           |         |         | 231,552   |          
|                                                                    |                                      |                                          |                                                                                        |                   |         |         |         |         |         |         |         |         |           |           |         |        
|                                                                    |                                      |                                          | Gross profit                                                                           |                   |         | 418,386 |         |         |         | 371,151 |         |         |           | 1,230,236 |         |         |           | 1,013,577 | 
|Operating expenses:                                                 |                                      |                                          |                                                                                        |                   |         |         |         |         |         |         |         |         |           |           |         |        
|                                                                    | Selling and marketing(1)             |                                          |                                                                                        | 153,037           |         |         |         | 136,184 |         |         |         | 447,655 |           |           |         | 373,325 |          
|                                                                    | Research and development(1)          |                                          |                                                                                        | 87,196            |         |         |         | 77,377  |         |         |         | 250,700 |           |           |         | 219,433 |          
|                                                                    | General and administrative(1)        |                                          |                                                                                        | 49,541            |         |         |         | 39,209  |         |         |         | 143,679 |           |           |         | 117,026 |          
|                                                                    | Amortization of other intangibles    |                                          |                                                                                        | 1,389             |         |         |         | 2,454   |         |         |         | 6,192   |           |           |         | 32,895  |          
|                                                                    | In-process research and development  |                                          |                                                                                        | 11,500            |         |         |         |        |         |         |         | 11,900  |           |           |         | 19,400  |          
|                                                                    | Restructuring reversals, net         |                                          |                                                                                        | (9,648            | )       |         |         |        |         |         |         | (9,648  | )         |           |         |        |          
|                                                                    |                                      |                                          |                                                                                        |                   |         |         |         |         |         |         |         |         |           |           |         |        
|                                                                    |                                      | Total operating expenses                 |                                                                                        |                   | 293,015 |         |         |         | 255,224 |         |         |         | 850,478   |           |         |         | 762,079   |          
|                                                                    |                                      |                                          |                                                                                        |                   |         |         |         |         |         |         |         |         |           |           |         |        
|                                                                    |                                      |                                          | Income from operations                                                                 |                   |         | 125,371 |         |         |         | 115,927 |         |         |           | 379,758   |         |         |           | 251,498   | 
|Interest and other income, net                                      |                                      |                                          | 13,661                                                                                 |                   |         |         | 8,653   |         |         |         | 35,425  |         |           |           | 33,556  |        
|Interest expense                                                    |                                      |                                          | (6,455                                                                                 | )                 |         |         | (9,249  | )       |         |         | (18,157 | )       |           |           | (24,785 | )      
|Loss on extinguishment of debt                                      |                                      |                                          |                                                                                       |                   |         |         | (4,714  | )       |         |         |        |         |           |           | (4,714  | )      
|Gain (loss) on strategic investments                                |                                      |                                          |                                                                                       |                   |         |         |        |         |         |         | 7,496   |         |           |           | (3,518  | )      
|                                                                    |                                      |                                          |                                                                                        |                   |         |         |         |         |         |         |         |         |           |           |         |        
|                                                                    |                                      |                                          | Income before income taxes and cumulative effect
    of change in accounting principle |                   |         | 132,577 |         |         |         | 110,617 |         |         |           | 404,522   |         |         |           | 252,037   | 
|Provision for income taxes                                          |                                      |                                          | 36,378                                                                                 |                   |         |         | 36,250  |         |         |         | 121,805 |         |           |           | 88,932  |        
|                                                                    |                                      |                                          |                                                                                        |                   |         |         |         |         |         |         |         |         |           |           |         |        
|                                                                    |                                      |                                          | Income before cumulative effect of change in
    accounting principle                  |                   |         | 96,199  |         |         |         | 74,367  |         |         |           | 282,717   |         |         |           | 163,105   | 
|Cumulative effect of change in accounting
    principle, net of tax |                                      |                                          |                                                                                       |                   |         |         | (6,249  | )       |         |         |        |         |           |           | (6,249  | )      
|                                                                    |                                      |                                          |                                                                                        |                   |         |         |         |         |         |         |         |         |           |           |         |        
|                                                                    |                                      |                                          | Net income                                                                             |                   | $       | 96,199  |         |         | $       | 68,118  |         |         | $         | 282,717   |         |         | $         | 156,856   | 
|                                                                    |                                      |                                          |                                                                                        |                   |         |         |         |         |         |         |         |         |           |           |         |        
|Net income per share:                                               |                                      |                                          |                                                                                        |                   |         |         |         |         |         |         |         |         |           |           |         |        
|                                                                    |                                      | Basic                                    |                                                                                        | $                 | 0.22    |         |         | $       | 0.16    |         |         | $       | 0.65      |           |         | $       | 0.37      |          
|                                                                    |                                      |                                          |                                                                                        |                   |         |         |         |         |         |         |         |         |           |           |         |        
|                                                                    |                                      | Diluted                                  |                                                                                        | $                 | 0.22    |         |         | $       | 0.15    |         |         | $       | 0.64      |           |         | $       | 0.36      |          
|                                                                    |                                      |                                          |                                                                                        |                   |         |         |         |         |         |         |         |         |           |           |         |        
|Number of shares used in computing per share
    amounts  basic    |                                      |                                          | 433,126                                                                                |                   |         |         | 425,153 |         |         |         | 431,933 |         |           |           | 418,314 |        
|                                                                    |                                      |                                          |                                                                                        |                   |         |         |         |         |         |         |         |         |           |           |         |        
|Number of shares used in computing per share
    amounts  diluted  |                                      |                                          | 437,697                                                                                |                   |         |         | 440,815 |         |         |         | 441,936 |         |           |           | 430,587 |        
|                                                                    |                                      |                                          |                                                                                        |                   |         |         |         |         |         |         |         |         |           |           |         |        



---

|                                                              |                            |                                                |   |     |       |  |   |     |       |  |   |       |       |  |   |       |       | 
|------------------------------------------------------------- | -------------------------- | ---------------------------------------------- | - | --- | ----- |  | - | --- | ----- |  | - | ----- | ----- |  | - | ----- | ----- | 
|(1) Amortization of stock-based compensation
    consists of: |                            |                                                |   |     |       |  |   |     |       |  |   |       |       |  |   |      
|                                                              | Services                   |                                                | $ | 61  |       |  | $ | 69  |       |  | $ | 364   |       |  | $ | 69    |      
|                                                              | Selling and marketing      |                                                |   | 578 |       |  |   | 246 |       |  |   | 4,440 |       |  |   | 246   |      
|                                                              | Research and development   |                                                |   | 608 |       |  |   | 642 |       |  |   | 2,444 |       |  |   | 1,372 |      
|                                                              | General and administrative |                                                |   | 24  |       |  |   | 45  |       |  |   | 792   |       |  |   | 45    |      
|                                                              |                            |                                                |   |     |       |  |   |     |       |  |   |       |       |  |   |      
|                                                              |                            | Total amortization of stock-based compensation |   | $   | 1,271 |  |   | $   | 1,002 |  |   | $     | 8,040 |  |   | $     | 1,732 | 
|                                                              |                            |                                                |   |     |       |  |   |     |       |  |   |       |       |  |   |      

See accompanying notes to condensed consolidated
financial statements.

3



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##### Table of Contents



VERITAS SOFTWARE CORPORATION




CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                                          |                                                                    |                                                          |          |            |          |   |         |            |          |  
|----------------------------------------------------------------------------------------- | ------------------------------------------------------------------ | -------------------------------------------------------- | -------- | ---------- | -------- | - | ------- | ---------- | -------- | -
|                                                                                          |                                                                    |                                                         
|                                                                                          |                                                                    | Nine Months Ended                                       
|                                                                                          |                                                                    | September 30,                                           
|                                                                                          |                                                                    |                                                         
|                                                                                          |                                                                    | 2004                                                     |          | 2003      
|                                                                                          |                                                                    |                                                          |          |           
|                                                                                          |                                                                    |                                                         
|                                                                                          |                                                                    | (Unaudited)                                             
|                                                                                          |                                                                    | (In thousands)                                          
|Cash flows from operating
    activities:                                                 |                                                                    |                                                          |          |            |          |   |         |           
|Net income                                                                                |                                                                    | $                                                        | 282,717  |            |          | $ | 156,856 |           
|Adjustments to reconcile net income to net cash
    provided by operating activities:     |                                                                    |                                                          |          |            |          |   |         |           
|                                                                                          | Cumulative effect of change in accounting
    principle            |                                                          |          |           |          |   |         | 6,249      |         
|                                                                                          | Depreciation and amortization                                      |                                                          |          | 89,388     |          |   |         | 94,900     |         
|                                                                                          | Amortization of developed technology                               |                                                          |          | 12,255     |          |   |         | 30,379     |         
|                                                                                          | Amortization of other intangibles                                  |                                                          |          | 6,192      |          |   |         | 32,895     |         
|                                                                                          | In-process research and development                                |                                                          |          | 11,900     |          |   |         | 19,400     |         
|                                                                                          | Provision for (recovery of) allowance for
    doubtful accounts    |                                                          |          | (135       | )        |   |         | 1,459      |         
|                                                                                          | Stock-based compensation                                           |                                                          |          | 8,040      |          |   |         | 1,732      |         
|                                                                                          | Tax benefits from stock plans                                      |                                                          |          | 10,618     |          |   |         | 24,869     |         
|                                                                                          | Loss on extinguishment of debt                                     |                                                          |          |           |          |   |         | 4,714      |         
|                                                                                          | (Gain) loss on strategic investments                               |                                                          |          | (7,496     | )        |   |         | 3,518      |         
|                                                                                          | (Gain) loss on sale and disposal of assets                         |                                                          |          | 833        |          |   |         | (180       | )       
|                                                                                          | Deferred income taxes                                              |                                                          |          | 3,738      |          |   |         | (27,580    | )       
|Changes in operating assets and liabilities, net
    of effects of business combinations: |                                                                    |                                                          |          |            |          |   |         |           
|                                                                                          | Accounts receivable                                                |                                                          |          | 53,880     |          |   |         | 40,259     |         
|                                                                                          | Other assets                                                       |                                                          |          | (10,752    | )        |   |         | 16,998     |         
|                                                                                          | Accounts payable                                                   |                                                          |          | 5,695      |          |   |         | (12,036    | )       
|                                                                                          | Accrued compensation and benefits                                  |                                                          |          | (315       | )        |   |         | (10,056    | )       
|                                                                                          | Accrued acquisition and restructuring costs                        |                                                          |          | (28,850    | )        |   |         | (21,248    | )       
|                                                                                          | Other liabilities                                                  |                                                          |          | (17,774    | )        |   |         | (28,794    | )       
|                                                                                          | Income taxes payable                                               |                                                          |          | (3,208     | )        |   |         | 72,972     |         
|                                                                                          | Deferred revenue                                                   |                                                          |          | 10,727     |          |   |         | 41,259     |         
|                                                                                          |                                                                    |                                                          |          |            |          |   |         |           
|                                                                                          |                                                                    | Net cash provided by operating activities                |          |            | 427,453  |   |         |            | 448,565  |  
|Cash flows from investing
    activities:                                                 |                                                                    |                                                          |          |            |          |   |         |           
|                                                                                          | Purchases of investments                                           |                                                          |          | (3,604,703 | )        |   |         | (1,373,938 | )       
|                                                                                          | Sales and maturities of investments                                |                                                          |          | 3,374,167  |          |   |         | 1,389,493  |         
|                                                                                          | Purchases of property and equipment                                |                                                          |          | (84,349    | )        |   |         | (56,961    | )       
|                                                                                          | Purchases of businesses and technology, net of
    cash acquired   |                                                          |          | (325,076   | )        |   |         | (402,421   | )       
|                                                                                          |                                                                    |                                                          |          |            |          |   |         |           
|                                                                                          |                                                                    | Net cash used for investing activities                   |          |            | (639,961 | ) |         |            | (443,827 | )
|Cash flows from financing
    activities:                                                 |                                                                    |                                                          |          |            |          |   |         |           
|                                                                                          | Net proceeds from issuance of convertible
    subordinated notes   |                                                          |          | (170       | )        |   |         | 508,300    |         
|                                                                                          | Redemption of convertible subordinated notes                       |                                                          |          |           |          |   |         | (391,671   | )       
|                                                                                          | Repurchase of common stock                                         |                                                          |          | (70,925    | )        |   |         | (316,239   | )       
|                                                                                          | Proceeds from issuance of common stock                             |                                                          |          | 80,202     |          |   |         | 132,501    |         
|                                                                                          |                                                                    |                                                          |          |            |          |   |         |           
|                                                                                          |                                                                    | Net cash provided by (used for) financing
    activities |          |            | 9,107    |   |         |            | (67,109  | )
|Effect of exchange rate changes on cash and cash
    equivalents                          |                                                                    |                                                          | 6,521    |            |          |   | 20,921  |           
|                                                                                          |                                                                    |                                                          |          |            |          |   |         |           
|Net decrease in cash and cash equivalents                                                 |                                                                    |                                                          | (196,880 | )          |          |   | (41,450 | )         
|Cash and cash equivalents at beginning of period                                          |                                                                    |                                                          | 823,171  |            |          |   | 764,062 |           
|                                                                                          |                                                                    |                                                          |          |            |          |   |         |           
|Cash and cash equivalents at end of period                                                |                                                                    | $                                                        | 626,291  |            |          | $ | 722,612 |           
|                                                                                          |                                                                    |                                                          |          |            |          |   |         |           
|Supplemental disclosures:                                                                 |                                                                    |                                                          |          |            |          |   |         |           
|                                                                                          | Cash paid for interest                                             |                                                          | $        | 14,799     |          |   | $       | 10,570     |         
|                                                                                          |                                                                    |                                                          |          |            |          |   |         |           
|                                                                                          | Cash paid for taxes                                                |                                                          | $        | 124,887    |          |   | $       | 19,478     |         
|                                                                                          |                                                                    |                                                          |          |            |          |   |         |           
|Supplemental schedule of non-cash
    transactions:                                       |                                                                    |                                                          |          |            |          |   |         |           
|                                                                                          | Issuance of common stock and options for business
    combinations |                                                          | $        | 19,563     |          |   | $       | 311,394    |         
|                                                                                          |                                                                    |                                                          |          |            |          |   |         |           
|                                                                                          | Increase in property and equipment upon adoption
    of FIN 46     |                                                          | $        |           |          |   | $       | 366,849    |         
|                                                                                          |                                                                    |                                                          |          |            |          |   |         |           
|                                                                                          | Increase in long-term debt upon adoption of
    FIN 46             |                                                          | $        |           |          |   | $       | 380,630    |         
|                                                                                          |                                                                    |                                                          |          |            |          |   |         |           
|                                                                                          | Issuance of common stock for conversion notes                      |                                                          | $        |           |          |   | $       | 79,852     |         
|                                                                                          |                                                                    |                                                          |          |            |          |   |         |           

See accompanying notes to condensed consolidated
financial statements.

4



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##### Table of Contents



VERITAS SOFTWARE CORPORATION




NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS

(Unaudited)




|   |                      
|-- | ---------------------
|1. | Basis of Presentation

The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with
generally accepted accounting principles in the United States of
America for interim financial information and with the
instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted
accounting principles for annual financial statements. In the
opinion of management, all adjustments, consisting only of
normal recurring adjustments, considered necessary for a fair
presentation have been included. The results for the interim
periods presented are not necessarily indicative of the results
that may be expected for any future period. The following
information should be read in conjunction with the consolidated
financial statements and accompanying notes included in VERITAS
Software Corporations Annual Report on Form 10-K for
the year ended December 31, 2003.



|   |                 
|-- | ----------------
|2. | Use of Estimates

The preparation of financial statements in
conformity with generally accepted accounting principles in the
United States of America requires management to make estimates
and assumptions that affect the amounts reported in the
condensed consolidated financial statements and accompanying
notes. Actual results could differ from those estimates.



|   |                                            
|-- | -------------------------------------------
|3. | Accounting for Stock-Based
    Compensation

The Company accounts for employee stock-based
compensation in accordance with Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock
Issued to Employees, and related interpretations, and the
disclosure requirements of Statement of Financial Accounting
Standards (SFAS) No. 148, Accounting for
Stock-Based Compensation  Transition and
Disclosure  an Amendment of FASB Statement
No. 123. Since the exercise price of options granted
under the Companys stock option plans is equal to the
market value on the date of grant, no compensation cost has been
recognized for grants under such plans. In accordance with APB
Opinion No. 25, the Company does not recognize compensation
cost related to its employee stock purchase plan. The following
table illustrates the effect on net income (loss) and net income
(loss) per share if the Company had accounted for its stock
option and stock purchase plans under the fair value method of
accounting under SFAS No. 123, Accounting for
Stock-Based Compensation:

|                   |             |                                                                                                              |   |                   |         |      |   |        |         |   |   |         |          |   |   |         |          |  
|------------------ | ----------- | ------------------------------------------------------------------------------------------------------------ | - | ----------------- | ------- | ---- | - | ------ | ------- | - | - | ------- | -------- | - | - | ------- | -------- | -
|                   |             |                                                                                                              |   |                  
|                   |             | Three Months Ended                                                                                           |   | Nine Months Ended
|                   |             | September 30,                                                                                                |   | September 30,    
|                   |             |                                                                                                              |   |                  
|                   |             | 2004                                                                                                         |   | 2003              |         | 2004 |   | 2003  
|                   |             |                                                                                                              |   |                   |         |      |   |       
|                   |             |                                                                                                             
|                   |             | (In thousands, except per share amounts)                                                                    
|Net income (loss): |             |                                                                                                              |   |                   |         |      |   |        |         |   |   |         |          |   |   |        
|                   | As reported |                                                                                                              | $ | 96,199            |         |      | $ | 68,118 |         |   | $ | 282,717 |          |   | $ | 156,856 |         
|                   | Add:        |                                                                                                              |   |                   |         |      |   |        |         |   |   |         |          |   |   |         |         
|                   |             | Stock-based compensation expense included in net
    income, net of tax                                      |   |                   | 864     |      |   |        | 671     |   |   |         | 5,467    |   |   |         | 1,160    |  
|                   | Less:       |                                                                                                              |   |                   |         |      |   |        |         |   |   |         |          |   |   |         |         
|                   |             | Total stock-based compensation expense determined
    under the fair value method for all awards, net of tax |   |                   | (52,177 | )    |   |        | (76,639 | ) |   |         | (201,268 | ) |   |         | (238,174 | )
|                   |             |                                                                                                              |   |                   |         |      |   |        |         |   |   |         |          |   |   |        
|                   | Pro forma   |                                                                                                              | $ | 44,886            |         |      | $ | (7,850 | )       |   | $ | 86,916  |          |   | $ | (80,158 | )       
|                   |             |                                                                                                              |   |                   |         |      |   |        |         |   |   |         |          |   |   |        

5



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##### Table of Contents



VERITAS SOFTWARE CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                 |             |                                          |   |                   |  |      |   |       |   |  |   |      |  |  |   |       |  
|-------------------------------- | ----------- | ---------------------------------------- | - | ----------------- |  | ---- | - | ----- | - |  | - | ---- |  |  | - | ----- | -
|                                 |             |                                          |   |                  
|                                 |             | Three Months Ended                       |   | Nine Months Ended
|                                 |             | September 30,                            |   | September 30,    
|                                 |             |                                          |   |                  
|                                 |             | 2004                                     |   | 2003              |  | 2004 |   | 2003 
|                                 |             |                                          |   |                   |  |      |   |      
|                                 |             |                                         
|                                 |             | (In thousands, except per share amounts)
|Basic income (loss) per share:   |             |                                          |   |                   |  |      |   |       |   |  |   |      |  |  |   |      
|                                 | As reported |                                          | $ | 0.22              |  |      | $ | 0.16  |   |  | $ | 0.65 |  |  | $ | 0.37  |  
|                                 |             |                                          |   |                   |  |      |   |       |   |  |   |      |  |  |   |      
|                                 | Pro forma   |                                          | $ | 0.10              |  |      | $ | (0.02 | ) |  | $ | 0.20 |  |  | $ | (0.19 | )
|                                 |             |                                          |   |                   |  |      |   |       |   |  |   |      |  |  |   |      
|Diluted income (loss) per share: |             |                                          |   |                   |  |      |   |       |   |  |   |      |  |  |   |      
|                                 | As reported |                                          | $ | 0.22              |  |      | $ | 0.15  |   |  | $ | 0.64 |  |  | $ | 0.36  |  
|                                 |             |                                          |   |                   |  |      |   |       |   |  |   |      |  |  |   |      
|                                 | Pro forma   |                                          | $ | 0.10              |  |      | $ | (0.02 | ) |  | $ | 0.20 |  |  | $ | (0.19 | )
|                                 |             |                                          |   |                   |  |      |   |       |   |  |   |      |  |  |   |      

For purposes of the pro forma disclosures, the
expected volatility assumptions the Company used prior to the
fourth quarter of fiscal 2003 were based solely on the
historical volatility of the Companys common stock over
the most recent period commensurate with the estimated expected
life of the Companys stock options. Beginning with the
fourth quarter of fiscal 2003, the Company modified its approach
and expected volatility by considering other relevant factors in
accordance with SFAS No. 123. The Company considered implied
volatility in market-traded options on the Companys common
stock as well as historical volatility. The Company will
continue to monitor these and other relevant factors used to
measure expected volatility for future option grants.

Also, beginning with the third quarter of fiscal
2003, the Company decreased its estimate of the expected life of
new options granted to its employees from five years to four
years. The Company bases its expected life assumption on
historical experience as well as the terms and vesting periods
of the options granted. The reduction in the estimated expected
life was a result of an analysis of the Companys
historical experience.

For the pro forma amounts determined under
SFAS No. 123, as set forth above, the fair value of
each stock option grant under the stock option plans is
estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average
assumptions used for grants:

|                               |  |                    |            |                   |  |      |            |      |  |  |            |   |  |  |            |  
|------------------------------ |  | ------------------ | ---------- | ----------------- |  | ---- | ---------- | ---- |  |  | ---------- | - |  |  | ---------- | -
|                               |  |                    |            |                  
|                               |  | Three Months Ended |            | Nine Months Ended
|                               |  | September 30,      |            | September 30,    
|                               |  |                    |            |                  
|                               |  | 2004               |            | 2003              |  | 2004 |            | 2003
|                               |  |                    |            |                   |  |      |            |     
|Risk-free interest rate        |  |                    | 3.22       | %                 |  |      | 2.65       | %    |  |  | 2.81       | % |  |  | 2.69       | %
|Dividend yield                 |  |                    | 0          | %                 |  |      | 0          | %    |  |  | 0          | % |  |  | 0          | %
|Weighted average expected life |  |                    | 4.0  years |                   |  |      | 4.0  years |      |  |  | 4.0  years |   |  |  | 4.6  years |  
|Volatility of common stock     |  |                    | 61         | %                 |  |      | 90         | %    |  |  | 55         | % |  |  | 90         | %

The fair value of the employees purchase
rights under the employee stock purchase plan is estimated on
the date of grant using the Black-Scholes option-pricing model
with the following assumptions used for grants:

|                               |  |                    |                 |                   |  |      |                 |      |  |  |                 |   |  |  |                 |  
|------------------------------ |  | ------------------ | --------------- | ----------------- |  | ---- | --------------- | ---- |  |  | --------------- | - |  |  | --------------- | -
|                               |  |                    |                 |                  
|                               |  | Three Months Ended |                 | Nine Months Ended
|                               |  | September 30,      |                 | September 30,    
|                               |  |                    |                 |                  
|                               |  | 2004               |                 | 2003              |  | 2004 |                 | 2003
|                               |  |                    |                 |                   |  |      |                 |     
|Risk-free interest rate        |  |                    | 1.96            | %                 |  |      | 1.06-1.87       | %    |  |  | 1.86            | % |  |  | 1.06-1.87       | %
|Dividend yield                 |  |                    | 0               | %                 |  |      | 0               | %    |  |  | 0               | % |  |  | 0               | %
|Weighted average expected life |  |                    | 6 to 24  months |                   |  |      | 6 to 24  months |      |  |  | 6 to 24  months |   |  |  | 6 to 24  months |  
|Volatility of common stock     |  |                    | 67              | %                 |  |      | 90              | %    |  |  | 70              | % |  |  | 90              | %

6



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##### Table of Contents



VERITAS SOFTWARE CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

As a result of the Companys restatement of
its financial statements for 2002 and 2001 and the delay in
filing its Form 10-K for the year ended December 31,
2003, the Company suspended option-holders ability to use
the Companys registration statements for its stock option
plans (the Plans). As a result, option-holders were
unable to exercise options under the Plans until such time as
the Company filed its Form 10-K for the year ended
December 31, 2003 and lifted the suspension on the use of
the registration statements. Pursuant to the terms of the Plans,
options held by certain former employees of the Company were
scheduled to expire during the suspension period. On
March 15, 2004, the Company extended the expiration date of
such options for a period of 15 days from the date of
filing the Form 10-K, which was considered a modification
of such options. For the nine months ended September 30,
2004, $4.3 million was expensed in the statement of
operations as a result of this modification.



|   |                     
|-- | --------------------
|4. | Net Income per Share

The following table sets forth the computation of
basic and diluted net income per share:

|                             |                                                                                       |                                          |      |                   |  |      |      |         |  |   |      |         |  |   |      |         | 
|---------------------------- | ------------------------------------------------------------------------------------- | ---------------------------------------- | ---- | ----------------- |  | ---- | ---- | ------- |  | - | ---- | ------- |  | - | ---- | ------- | 
|                             |                                                                                       |                                          |      |                  
|                             |                                                                                       | Three Months Ended                       |      | Nine Months Ended
|                             |                                                                                       | September 30,                            |      | September 30,    
|                             |                                                                                       |                                          |      |                  
|                             |                                                                                       | 2004                                     |      | 2003              |  | 2004 |      | 2003   
|                             |                                                                                       |                                          |      |                   |  |      |      |        
|                             |                                                                                       |                                         
|                             |                                                                                       | (In thousands, except per share amounts)
|Numerator:                   |                                                                                       |                                          |      |                   |  |      |      |         |  |   |      |         |  |   |      |        
|                             | Net income                                                                            |                                          | $    | 96,199            |  |      | $    | 68,118  |  |   | $    | 282,717 |  |   | $    | 156,856 | 
|                             |                                                                                       |                                          |      |                   |  |      |      |         |  |   |      |         |  |   |      |        
|Denominator:                 |                                                                                       |                                          |      |                   |  |      |      |         |  |   |      |         |  |   |      |        
|                             | Denominator for basic net income per
    share   weighted-average shares outstanding |                                          |      | 433,126           |  |      |      | 425,153 |  |   |      | 431,933 |  |   |      | 418,314 | 
|                             | Potential common shares                                                               |                                          |      | 4,571             |  |      |      | 15,662  |  |   |      | 10,003  |  |   |      | 12,273  | 
|                             |                                                                                       |                                          |      |                   |  |      |      |         |  |   |      |         |  |   |      |        
|                             | Denominator for diluted net income per share                                          |                                          |      | 437,697           |  |      |      | 440,815 |  |   |      | 441,936 |  |   |      | 430,587 | 
|                             |                                                                                       |                                          |      |                   |  |      |      |         |  |   |      |         |  |   |      |        
|Basic net income per share   |                                                                                       | $                                        | 0.22 |                   |  | $    | 0.16 |         |  | $ | 0.65 |         |  | $ | 0.37 |        
|                             |                                                                                       |                                          |      |                   |  |      |      |         |  |   |      |         |  |   |      |        
|Diluted net income per share |                                                                                       | $                                        | 0.22 |                   |  | $    | 0.15 |         |  | $ | 0.64 |         |  | $ | 0.36 |        
|                             |                                                                                       |                                          |      |                   |  |      |      |         |  |   |      |         |  |   |      |        

For the three and nine months ended
September 30, 2004 and 2003, potential common shares
consist of employee stock options using the treasury stock
method. The following table sets forth the potential common
shares that were excluded from the net income per share
computations:

|                                        |  |                    |        |                   |  |      |        |      |  |  |        |  |  |  |        | 
|--------------------------------------- |  | ------------------ | ------ | ----------------- |  | ---- | ------ | ---- |  |  | ------ |  |  |  | ------ | 
|                                        |  |                    |        |                  
|                                        |  | Three Months Ended |        | Nine Months Ended
|                                        |  | September 30,      |        | September 30,    
|                                        |  |                    |        |                  
|                                        |  | 2004               |        | 2003              |  | 2004 |        | 2003
|                                        |  |                    |        |                   |  |      |        |     
|                                        |  |                   
|                                        |  | (In thousands)    
|Employee stock options outstanding(1)   |  |                    | 47,723 |                   |  |      | 24,196 |      |  |  | 39,122 |  |  |  | 34,938 | 
|0.25% convertible subordinated notes(2) |  |                    | 11,274 |                   |  |      | 11,274 |      |  |  | 11,274 |  |  |  | 11,274 | 



---



|    |                                                                                                                                                                                                                                                                                                                                              
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | These employee stock options were excluded from
    the computation of diluted net income per share because the
    exercise price was greater than the average market price of the
    Companys common stock during the period, and therefore the
    effect is antidilutive.                                                              
|   
|(2) | Potential common shares related to the
    Companys 0.25% convertible subordinated notes were
    excluded from the computation of diluted net income per share
    because the conversion price was higher than the average market
    price of the Companys common stock during the period, and
    therefore the effect is antidilutive.

The weighted average exercise prices of employee
stock options with exercise prices exceeding the average fair
value of the Companys common stock was $49.18 and
$75.49 per share for the three months

7



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##### Table of Contents



VERITAS SOFTWARE CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

ended September 30, 2004 and 2003,
respectively, and $56.57 and $61.72 per share for the nine
months ended September 30, 2004 and 2003, respectively.



|   |                      
|-- | ---------------------
|5. | Business Combinations



| |                        
| | -----------------------
| | KVault Software Limited

On September 20, 2004, the Company acquired
all of the outstanding capital stock of KVault Software Limited
(KVS), a provider of e-mail archiving products. The
Company acquired KVS to expand its product offerings in the
storage software market to include products to store, manage,
backup and archive corporate e-mail and data. The KVS
acquisition included total purchase consideration of
$249.6 million which included $224.1 million of cash,
$19.6 million relating to the assumption of KVS
outstanding unvested stock options for 1.2 million shares
of the Companys common stock and $5.9 million of
acquisition-related costs. As a result of the acquisition, the
Company recorded deferred stock-based compensation of
$17.2 million, which will be amortized over the remaining
vesting period for the stock options assumed. The fair value of
the Companys stock options assumed was determined using
the Black-Scholes option pricing model and the following
assumptions: estimated expected life of 4 years, risk-free
interest rate of 3.08%, expected volatility of 62% and no
expected dividend yield. Upon assumption by the Company of the
outstanding KVS options, each KVS option became exercisable for
0.0886 shares of the Companys common stock.

The total estimated purchase price was allocated
to KVS net tangible and intangible assets based upon their
estimated fair values as of the date of the completion of the
acquisition. The following represents the allocation of the
aggregate purchase price to the acquired net assets of KVS:

|                                                  |       |                |         |         | 
|------------------------------------------------- | ----- | -------------- | ------- | ------- | 
|                                                  |       | (In thousands)
|Cash, cash equivalents and short-term investments |       | $              | 2,565   |        
|Other current assets                              |       |                | 13,374  |        
|Long-term assets                                  |       |                | 1,434   |        
|Current liabilities                               |       |                | (15,071 | )      
|Goodwill                                          |       |                | 143,532 |        
|Developed technology                              |       |                | 54,300  |        
|Other intangible assets                           |       |                | 18,140  |        
|Trademark                                         |       |                | 2,600   |        
|Deferred stock-based compensation                 |       |                | 17,182  |        
|In-process research and development               |       |                | 11,500  |        
|                                                  |       |                |         |        
|                                                  | Total |                | $       | 249,556 | 
|                                                  |       |                |         |        

Goodwill represents the excess of the purchase
price over the fair value of tangible and identifiable
intangible assets acquired. Goodwill is not amortized, which is
consistent with the guidance in SFAS No. 142,
Goodwill and Other Intangible Assets. Developed
technology, customer base and other intangible assets are being
amortized over their estimated useful lives of five years. The
weighted average amortization period for all purchased
intangible assets is five years.

In connection with the acquisition of KVS, the
Company allocated $11.5 million of the purchase price to
in-process technology that had not yet reached technological
feasibility and had no alternative future use. This amount has
been expensed in the consolidated statements of operations for
the quarter ended September 30, 2004.

In order to value purchased in-process research
and development (IPR&D), a research project for
which technological feasibility had not been established was
identified. The value of this project was

8



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##### Table of Contents



VERITAS SOFTWARE CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

determined by estimating the expected cash flows
from the project and discounting the net cash flows back to
their present value, using an appropriate discount rate.

Net Cash Flows.The
net cash flows expected from the identified project are based on
the Companys estimates of revenues, cost of sales,
research and development costs, selling, general and
administrative costs and income taxes from those projects.
Revenue estimates are based on the assumptions mentioned below.
The research and development costs included in the estimates
reflect costs to bring in-process projects to technological
feasibility and sustain the technology thereafter.

The estimated revenues are based on the
Companys projection of each in-process project and the
business projections were compared and found to be consistent
with industry analysts forecasts of growth in
substantially all of the relevant markets. Estimated total
revenues related to the contribution of the IPR&D project to
the various products affected are expected to peak in the year
ending December 31, 2008 and decline from 2009 into 2011 as
the affected products continue to evolve.

These projections are based on the Companys
estimates of market size and growth, expected trends in
technology and the nature and expected timing of new project
introductions by KVS.

Discount Rate.Discounting the expected net cash flows back to their present
value is based on the industry weighted average cost of capital
(WACC). The Company believes the overall WACC is
approximately 21%. The discount rate used to discount the
expected net cash flows from IPR&D is 23%. The discount rate
used is higher than the overall WACC due to inherent
uncertainties surrounding the successful development of
IPR&D, market acceptance of the technology, the useful life
of such technology and the uncertainty of technological advances
which could potentially impact the estimates described above.

Percentage of
Completion.The percentage of
completion for the in-process project identified was estimated
at approximately 56% based on costs incurred to date on the
project as compared to the remaining costs required to bring the
project to technological feasibility.

If the projects discussed above are not
successfully developed, the sales and profitability of the
Company may be adversely affected in future periods.

Acquisition-related costs of $5.9 million
consist of $2.6 million associated with legal and other
professional fees, $2.1 million for terminating and
satisfying existing lease commitments, $0.1 million of
severance related costs and $1.1 million of government
taxes associated with the acquisition. Costs associated with
terminating and satisfying existing lease commitments will
generally be paid over the remaining lease terms ending in 2006
through 2015 or over a shorter period as the Company may
negotiate with its lessors. The Company expects the majority of
costs will be paid by the year ending December 31, 2008.
Total cash outlays for acquisition-related costs were
approximately $0.3 million for legal and other professional
fees through September 30, 2004.

The results of operations of KVS are included in
the Companys condensed consolidated financial statements
from September 21, 2004. The pro forma results of
operations disclosed below give effect to the acquisition of KVS
as if the acquisition was consummated at the beginning of each
period presented.



| |                     
| | --------------------
| | Invio Software, Inc.

On July 14, 2004, the Company acquired all
of the outstanding capital stock of Invio Software, Inc.
(Invio), a privately held supplier of information
technology (IT) process automation technology. The
Company acquired Invio to extend the capability of software
products that enable utility computing by offering customers a
tool for standardizing and automating IT service delivery in key
areas such as storage provisioning, server provisioning and data
protection. The Invio acquisition included purchase
consideration of approximately $35.4 million which included
$34.9 million in cash and $0.5 million of
acquisition-related costs. The purchase price was allocated to
goodwill of $30.5 million, developed technology of
$7.7 million, net

9



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##### Table of Contents



VERITAS SOFTWARE CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

deferred tax liabilities of $2.9 million and
net tangible assets of $0.1 million. The amortization
period for the developed technology is 4.0 years.
Acquisition-related costs consist of $0.5 million for legal
and other professional fees. Total cash outlays for
acquisition-related costs were $0.5 million through
September 30, 2004. The results of operations of Invio were
included in the Companys condensed consolidated financial
statements from the date of acquisition. The pro forma impact of
the acquisition on the Companys results of operations is
not significant.



| |              
| | -------------
| | Ejasent, Inc.

On January 20, 2004, the Company acquired
all of the outstanding capital stock of Ejasent, Inc.
(Ejasent), a privately held provider of application
virtualization technology for utility computing. The Company
acquired Ejasent to add important application migration
technology, which allows IT personnel to move an application
from one server to another without disrupting or terminating the
application, to the Companys growing utility computing
portfolio. The Ejasent acquisition included purchase
consideration of $61.4 million, with $47.8 million in
cash and $13.6 million of acquisition-related costs. The
purchase price was allocated to goodwill of $53.7 million,
developed technology of $11.8 million, other intangibles of
$0.3 million, IPR&D of $0.4 million, net deferred
tax liabilities of $4.6 million and net tangible
liabilities of $0.2 million. The weighted average
amortization period for all purchased intangible assets is
4.4 years. Acquisition-related costs consist of
$11.5 million of change in control bonuses and direct
transaction costs of $2.1 million for legal and other
professional fees. Total cash outlays for acquisition-related
costs were $13.4 million through September 30, 2004.
The results of operations of Ejasent were included in the
Companys condensed consolidated financial statements from
the date of acquisition. The pro forma impact of the acquisition
on the Companys results of operations is not significant.



| |                                    
| | -----------------------------------
| | Precise Software Solutions
    Ltd.

On June 30, 2003, the Company acquired all
of the outstanding common stock of Precise Software Solutions
Ltd. (Precise), a provider of application
performance management products. The Company acquired Precise in
order to expand its product and service offerings across
storage, databases and application management. The Precise
acquisition included purchase consideration of
$714.7 million, with 7.3 million shares of common
stock valued at $210.6 million, $397.8 million of
cash, $94.0 million relating to the assumption of
Precises outstanding vested and unvested stock options for
4.4 million shares of the Companys common stock and
$12.3 million of acquisition-related costs. The purchase
price was allocated to goodwill of $509.3 million,
developed technology of $27.6 million, other intangibles of
$34.3 million, IPR&D of $15.3 million, net
deferred tax liabilities of $21.4 million, deferred
stock-based compensation of $7.3 million and net tangible
assets of $142.3 million. The weighted average amortization
period for all purchased intangible assets is 3.7 years.
The acquired IPR&D of $15.3 million was written off and
the related charge was expensed in the statement of operations
in the second quarter of 2003. Acquisition-related costs of
$12.3 million consist of $9.0 million associated with
investment banking, legal and other professional fees,
$2.9 million for terminating and satisfying existing lease
commitments and $0.4 million for severance-related costs.
Total cash outlays for acquisition-related costs were
approximately $8.8 million for investment banking, legal
and other professional fees, $0.4 million for severance and
$0.7 million for leases through September 30, 2004.

The results of operations of Precise are included
in the Companys condensed consolidated financial
statements from July 1, 2003. The pro forma results of
operations disclosed below give effect to the acquisition of
Precise as if the acquisition was consummated at the beginning
of each period presented.

10



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##### Table of Contents



VERITAS SOFTWARE CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                          
| | -------------------------
| | Jareva Technologies, Inc.

On January 27, 2003, the Company acquired
all of the outstanding capital stock of Jareva Technologies,
Inc. (Jareva), a privately held provider of
automated server provisioning products that enable businesses to
automatically deploy additional servers without manual
intervention. The Company acquired Jareva to integrate
Jarevas technology into the Companys software
products to enable the Companys customers to optimize
their investments in server hardware by deploying new server
resources on demand. The Jareva acquisition included total
purchase consideration of $68.7 million, with
$58.7 million of cash, $6.8 million relating to the
assumption of options exercisable for 426,766 shares of the
Companys common stock and $3.2 million of
acquisition-related costs. The purchase price was allocated to
goodwill of $51.3 million, developed technology of
$9.1 million, other intangibles of $1.9 million,
IPR&D of $4.1 million, net deferred tax liabilities of
$6.1 million, deferred stock-based compensation of
$4.6 million and net tangible assets of $3.8 million.
The weighted average amortization period for all purchased
intangible assets is 3.3 years. The acquired IPR&D of
$4.1 million was written off and the related charge was
expensed in the statement of operations in the first quarter of
2003. Acquisition-related costs of $3.2 million consist of
$2.7 million associated with terminating and satisfying
remaining lease commitments, partially offset by sublease income
net of related sublease costs, and direct transaction costs of
$0.5 million for legal and other professional fees. Total
cash outlays for acquisition-related costs were
$2.1 million through September 30, 2004. The results
of operations of Jareva are included in the Companys
condensed consolidated financial statements from the date of
acquisition. The pro forma impact on the Companys results
of operations is not significant.



| |                                    
| | -----------------------------------
| | Pro Forma Results of
    Operations

The results of operations of KVS and Precise are
included in the Companys condensed consolidated financial
statements from the dates of acquisition. The following table
presents pro forma results of operations and gives effect to the
acquisitions of KVS and Precise as if the acquisitions were
consummated at the beginning of the period presented. The
unaudited proforma results of operations are not necessarily
indicative of what would have occurred had the acquisitions been
made as of the beginning of the period or of the results that
may occur in the future. Net income excludes the write-off of
acquired IPR&D of $11.5 million for KVS and
$15.3 million for Precise and includes amortization of
intangible assets per quarter related to the acquisition of
$3.7 million for KVS and $4.7 million for Precise. Net
income also includes amortization of deferred compensation per
quarter of $2.0 million for KVS and $0.5 million for
Precise. The unaudited pro forma information is as follows:

|                                                                      |  |                                          |         |                   |  |      |         |      |  |   |           |  |  |   |           | 
|--------------------------------------------------------------------- |  | ---------------------------------------- | ------- | ----------------- |  | ---- | ------- | ---- |  | - | --------- |  |  | - | --------- | 
|                                                                      |  |                                          |         |                  
|                                                                      |  | Three Months Ended                       |         | Nine Months Ended
|                                                                      |  | September 30,                            |         | September 30,    
|                                                                      |  |                                          |         |                  
|                                                                      |  | 2004                                     |         | 2003              |  | 2004 |         | 2003
|                                                                      |  |                                          |         |                   |  |      |         |     
|                                                                      |  |                                         
|                                                                      |  | (In thousands, except per share amounts)
|Total net revenue                                                     |  | $                                        | 501,620 |                   |  | $    | 451,845 |      |  | $ | 1,492,720 |  |  | $ | 1,291,231 | 
|Income before cumulative effect of change in
    accounting principle |  | $                                        | 90,693  |                   |  | $    | 68,760  |      |  | $ | 260,921   |  |  | $ | 128,369   | 
|Net income                                                            |  | $                                        | 90,693  |                   |  | $    | 62,511  |      |  | $ | 260,921   |  |  | $ | 122,120   | 
|Net income per share  basic                                          |  | $                                        | 0.21    |                   |  | $    | 0.15    |      |  | $ | 0.60      |  |  | $ | 0.29      | 
|Net income per share  diluted                                        |  | $                                        | 0.21    |                   |  | $    | 0.14    |      |  | $ | 0.59      |  |  | $ | 0.28      | 



|   |                                     
|-- | ------------------------------------
|6. | Goodwill and Other Intangible Assets

On January 1, 2002, the Company adopted
SFAS No. 142, Goodwill and Other Intangible
Assets. As a result, the Company no longer amortizes
goodwill but will test it for impairment annually or whenever
events or changes in circumstances suggest that the carrying
amount may not be recoverable.

11



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##### Table of Contents



VERITAS SOFTWARE CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table sets forth the carrying
amount of goodwill. Goodwill also includes amounts originally
allocated to assembled workforce:

|          |                                 |                                 |   |              |           |  |   |            |           | 
|--------- | ------------------------------- | ------------------------------- | - | ------------ | --------- |  | - | ---------- | --------- | 
|          |                                 | September 30,                   |   | December 31,
|          |                                 | 2004                            |   | 2003        
|          |                                 |                                 |   |             
|          |                                 |                                
|          |                                 | (In thousands)                 
|Goodwill: |                                 |                                 |   |              |           |  |   |           
|          | Gross carrying amount           |                                 | $ | 4,069,633    |           |  | $ | 3,842,218  |          
|          | Less  accumulated amortization |                                 |   | (2,086,627   | )         |  |   | (2,086,627 | )        
|          |                                 |                                 |   |              |           |  |   |           
|          |                                 | Net carrying amount of goodwill |   | $            | 1,983,006 |  |   | $          | 1,755,591 | 
|          |                                 |                                 |   |              |           |  |   |           

During 2004, the Company acquired Ejasent, Invio
and KVS (see Note 5), which increased goodwill by
$227.7 million.

The following tables set forth the carrying
amount of other intangible assets that will continue to be
amortized:

|                                              |                                     |                         |         |              |         |              |         |         |         |   |         |         |         | 
|--------------------------------------------- | ----------------------------------- | ----------------------- | ------- | ------------ | ------- | ------------ | ------- | ------- | ------- | - | ------- | ------- | ------- | 
|                                              |                                     |                        
|                                              |                                     | September 30, 2004     
|                                              |                                     |                        
|                                              |                                     | Gross                   |         |             
|                                              |                                     | Carrying                |         | Accumulated  |         | Net Carrying
|                                              |                                     | Amount                  |         | Amortization |         | Amount      
|                                              |                                     |                         |         |              |         |             
|                                              |                                     |                        
|                                              |                                     | (In thousands)         
|Developed technology                          |                                     | $                       | 361,749 |              |         | $            | 250,430 |         |         | $ | 111,319 |        
|Distribution channels                         |                                     |                         | 234,800 |              |         |              | 234,800 |         |         |   |        |        
|Trademarks                                    |                                     |                         | 29,250  |              |         |              | 25,788  |         |         |   | 3,462   |        
|Other intangible assets                       |                                     |                         | 78,752  |              |         |              | 40,460  |         |         |   | 38,292  |        
|                                              |                                     |                         |         |              |         |              |         |         |         |   |         |        
|                                              | Intangibles related to acquisitions |                         |         | 704,551      |         |              |         | 551,478 |         |   |         | 153,073 |        
|Convertible subordinated notes issuance costs |                                     |                         | 12,570  |              |         |              | 4,819   |         |         |   | 7,751   |        
|                                              |                                     |                         |         |              |         |              |         |         |         |   |         |        
|                                              |                                     | Total other intangibles |         | $            | 717,121 |              |         | $       | 556,297 |   |         | $       | 160,824 | 
|                                              |                                     |                         |         |              |         |              |         |         |         |   |         |        

|                                              |                                              |                         |         |              |         |              |         |         |         |   |        |        |        | 
|--------------------------------------------- | -------------------------------------------- | ----------------------- | ------- | ------------ | ------- | ------------ | ------- | ------- | ------- | - | ------ | ------ | ------ | 
|                                              |                                              |                        
|                                              |                                              | December 31, 2003      
|                                              |                                              |                        
|                                              |                                              | Gross                   |         |             
|                                              |                                              | Carrying                |         | Accumulated  |         | Net Carrying
|                                              |                                              | Amount                  |         | Amortization |         | Amount      
|                                              |                                              |                         |         |              |         |             
|                                              |                                              |                        
|                                              |                                              | (In thousands)         
|Developed technology                          |                                              | $                       | 287,949 |              |         | $            | 237,043 |         |         | $ | 50,906 |       
|Distribution channels                         |                                              |                         | 234,800 |              |         |              | 234,800 |         |         |   |       |       
|Trademarks                                    |                                              |                         | 26,650  |              |         |              | 24,925  |         |         |   | 1,725  |       
|Other intangible assets                       |                                              |                         | 51,734  |              |         |              | 33,714  |         |         |   | 18,020 |       
|                                              |                                              |                         |         |              |         |              |         |         |         |   |        |       
|                                              | Intangibles related to business acquisitions |                         |         | 601,133      |         |              |         | 530,482 |         |   |        | 70,651 |       
|Convertible subordinated notes issuance costs |                                              |                         | 12,401  |              |         |              | 1,708   |         |         |   | 10,693 |       
|                                              |                                              |                         |         |              |         |              |         |         |         |   |        |       
|                                              |                                              | Total other intangibles |         | $            | 613,534 |              |         | $       | 532,190 |   |        | $      | 81,344 | 
|                                              |                                              |                         |         |              |         |              |         |         |         |   |        |       

12



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##### Table of Contents



VERITAS SOFTWARE CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Total amortization expense of intangible assets
related to acquisitions is set forth in the table below:

|                        |                            |                    |       |                   |  |      |       |       |  |   |        |        |  |   |        |        | 
|----------------------- | -------------------------- | ------------------ | ----- | ----------------- |  | ---- | ----- | ----- |  | - | ------ | ------ |  | - | ------ | ------ | 
|                        |                            |                    |       |                  
|                        |                            | Three Months Ended |       | Nine Months Ended
|                        |                            | September 30,      |       | September 30,    
|                        |                            |                    |       |                  
|                        |                            | 2004               |       | 2003              |  | 2004 |       | 2003 
|                        |                            |                    |       |                   |  |      |       |      
|                        |                            |                   
|                        |                            | (In thousands)    
|Developed technology    |                            | $                  | 4,753 |                   |  | $    | 5,420 |       |  | $ | 13,387 |        |  | $ | 31,512 |       
|Distribution channels   |                            |                    |      |                   |  |      |      |       |  |   |       |        |  |   | 24,458 |       
|Trademarks              |                            |                    | 288   |                   |  |      | 288   |       |  |   | 863    |        |  |   | 2,825  |       
|Other intangible assets |                            |                    | 1,958 |                   |  |      | 2,329 |       |  |   | 6,746  |        |  |   | 5,872  |       
|                        |                            |                    |       |                   |  |      |       |       |  |   |        |        |  |   |        |       
|                        | Total amortization expense |                    | $     | 6,999             |  |      | $     | 8,037 |  |   | $      | 20,996 |  |   | $      | 64,667 | 
|                        |                            |                    |       |                   |  |      |       |       |  |   |        |        |  |   |        |       

Total amortization expense for developed
technology and other intangibles includes approximately
$1.2 million and $0.5 million, respectively, for the
three months ended September 30, 2004 and 2003 and
approximately $2.5 million and $1.4 million,
respectively, for the nine months ended September 30, 2004
and 2003 that is included in cost of user license fees.

The total expected future annual amortization of
intangible assets related to acquisitions is set forth in the
table below:

|     |       |                |        |         | 
|---- | ----- | -------------- | ------ | ------- | 
|     |       | Future        
|     |       | Amortization  
|     |       |               
|     |       | (In thousands)
|2004 |       | $              | 11,167 |        
|2005 |       |                | 43,046 |        
|2006 |       |                | 40,719 |        
|2007 |       |                | 28,896 |        
|2008 |       |                | 17,929 |        
|2009 |       |                | 11,316 |        
|     |       |                |        |        
|     | Total |                | $      | 153,073 | 
|     |       |                |        |        



|   |                      
|-- | ---------------------
|7. | Strategic Investments

The Company holds investments in capital stock of
several privately-held companies. The total carrying amount of
these strategic investments was $2.7 million at
September 30, 2004 and $5.4 million at
December 31, 2003. These strategic investments are included
in other non-current assets. For the nine months ended
September 30, 2004, the Company realized a gain of
$7.5 million on the sale of a strategic investment. The
Company recorded no impairment losses on strategic investments
for the three and nine months ended September 30, 2004 and
for the three months ended September 30, 2003. The Company
recorded $3.5 million of impairment losses for the nine
months ended September 30, 2003. The losses realized
represent other-than-temporary declines in the fair value of the
investments and were determined based on the value of the
investees stock, its inability to obtain additional
private financing, its cash position and current cash burn rate,
the status and competitive position of the investees
products and the uncertainty of its financial condition, among
other factors.



|   |                                                
|-- | -----------------------------------------------
|8. | Accrued Acquisition and Restructuring
    Costs

In the fourth quarter of 2002, the Companys
board of directors approved a facility restructuring plan to
exit and consolidate certain of the Companys facilities
located in 17 metropolitan areas worldwide. The facility
restructuring plan was adopted to address overcapacity in its
facilities as a result of lower than planned

13



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##### Table of Contents



VERITAS SOFTWARE CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

headcount growth in these metropolitan areas. In
connection with this facility restructuring plan, the Company
recorded a net restructuring charge (the 2002 Facility
Accrual) to operating expenses of $96.1 million in
the fourth quarter of 2002. The 2002 Facility Accrual was
originally comprised of (i) $86.9 million associated
with terminating and satisfying remaining lease commitments,
partially offset by sublease income net of related sublease
costs and (ii) write-offs of $9.2 million for net
assets.

In the third quarter of 2004, the Company
acquired KVS and, as a result, reversed $9.6 million of the
2002 Facility Accrual related to previously restructured
facilities to be occupied by KVS personnel. In addition, cash
outlays of $4.0 million and the impact of foreign exchange
rates of $0.4 million were recognized in the third quarter
of 2004. As of September 30, 2004, the remaining balance of
the 2002 Facility Accrual was $55.0 million. Restructuring
costs will generally be paid over the remaining lease terms,
ending at various dates through 2022, or over a shorter period
as the Company may negotiate with its lessors. The majority of
costs are expected to be paid by the year ending
December 31, 2010.

The Company is in the process of seeking suitable
subtenants for these facilities. The estimates related to the
2002 Facility Accrual may vary significantly depending, in part,
on factors that are beyond the Companys control, including
the commercial real estate market in the applicable metropolitan
areas, its ability to obtain subleases related to these
facilities and the time period to do so, the sublease rental
market rates and the outcome of negotiations with lessors
regarding terminations of some of the leases. Adjustments to the
2002 Facility Accrual will be made if actual lease exit costs or
sublease income differ from amounts currently expected. Because
a portion of the 2002 Facility Accrual relates to international
locations, the accrual will be affected by exchange rate
fluctuations.

As of September 30, 2004, accrued
acquisition and restructuring costs consisted of the 2002
Facility Accrual discussed above, acquisition related costs
discussed in Note 5 and other accrued acquisition and
restructuring charges incurred from 1999 through 2003, net of
cash payments made.

The components of accrued acquisition and
restructuring costs and movements within these components
through September 30, 2004 were as follows:

|                              |                              |               |     |             |   |               |     |            |   |       |      |      |   |   |     |      |   |   |      |       |  
|----------------------------- | ---------------------------- | ------------- | --- | ----------- | - | ------------- | --- | ---------- | - | ----- | ---- | ---- | - | - | --- | ---- | - | - | ---- | ----- | -
|                              |                              | Direct        |     | Involuntary |   |               |     |            |   |      
|                              |                              | Transaction   |     | Termination |   | Facilities    |     | Asset      |   |      
|                              |                              | Costs         |     | Benefits    |   | Related Costs |     | Write-offs |   | Total
|                              |                              |               |     |             |   |               |     |            |   |      
|                              |                              |              
|                              |                              | (In millions)
|Balance at December 31, 2003  |                              | $             | 0.6 |             |   | $             |    |            |   | $     | 91.4 |      |   | $ | 2.1 |      |   | $ | 94.1 |      
|                              | Additions                    |               |     | 2.1         |   |               |     | 11.5       |   |       |      |     |   |   |     |     |   |   |      | 13.6  |  
|                              | Cash payments                |               |     | (1.8        | ) |               |     | (11.4      | ) |       |      | (5.1 | ) |   |     |     |   |   |      | (18.3 | )
|                              | Non-cash charges             |               |     |            |   |               |     |           |   |       |      |     |   |   |     | (2.1 | ) |   |      | (2.1  | )
|                              | Impact of exchange rates     |               |     |            |   |               |     |           |   |       |      | 0.7  |   |   |     |     |   |   |      | 0.7   |  
|                              |                              |               |     |             |   |               |     |            |   |       |      |      |   |   |     |      |   |   |      |      
|Balance at March 31, 2004     |                              |               | 0.9 |             |   |               | 0.1 |            |   |       | 87.0 |      |   |   |    |      |   |   | 88.0 |      
|                              | Cash payments                |               |     | (0.4        | ) |               |     |           |   |       |      | (5.0 | ) |   |     |     |   |   |      | (5.4  | )
|                              | Impact of exchange rates     |               |     |            |   |               |     |           |   |       |      | 0.3  |   |   |     |     |   |   |      | 0.3   |  
|                              |                              |               |     |             |   |               |     |            |   |       |      |      |   |   |     |      |   |   |      |      
|Balance at June 30, 2004      |                              |               | 0.5 |             |   |               | 0.1 |            |   |       | 82.3 |      |   |   |    |      |   |   | 82.9 |      
|                              | Additions                    |               |     | 4.2         |   |               |     | 0.1        |   |       |      | 2.1  |   |   |     |     |   |   |      | 6.4   |  
|                              | Cash payments                |               |     | (0.8        | ) |               |     |           |   |       |      | (5.1 | ) |   |     |     |   |   |      | (5.9  | )
|                              | Restructuring reversals, net |               |     |            |   |               |     |           |   |       |      | (9.6 | ) |   |     |     |   |   |      | (9.6  | )
|                              | Other                        |               |     |            |   |               |     |           |   |       |      | (0.4 | ) |   |     |     |   |   |      | (0.4  | )
|                              | Impact of exchange rates     |               |     |             |   |               |     |            |   |       |      | (0.5 | ) |   |     |     |   |   |      | (0.5  | )
|                              |                              |               |     |             |   |               |     |            |   |       |      |      |   |   |     |      |   |   |      |      
|Balance at September 30, 2004 |                              | $             | 3.9 |             |   | $             | 0.2 |            |   | $     | 68.8 |      |   | $ |    |      |   | $ | 72.9 |      
|                              |                              |               |     |             |   |               |     |            |   |       |      |      |   |   |     |      |   |   |      |      

14



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##### Table of Contents



VERITAS SOFTWARE CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                               
|-- | ------------------------------
|9. | Convertible Subordinated Notes

In August 2003, the Company issued
$520.0 million of 0.25% convertible subordinated notes
due August 1, 2013 (the 0.25% Notes), to
several initial purchasers in a private offering, for which the
Company received net proceeds of approximately
$508.2 million. The 0.25% Notes were issued at their
face value and provide for semi-annual interest payments of
$0.7 million each February 1 and August 1, beginning
February 1, 2004. Effective as of January 28, 2004,
the 0.25% Notes began accruing additional interest at a
rate of 0.25% as a result of the Companys registration
statement having not been declared effective by the SEC on or
before the 180th day following the original issuance of the
0.25% Notes and the 0.25% Notes continued to accrue
such additional interest until April 27, 2004, the 90th day
following such registration default. As of April 27, 2004,
the 0.25% Notes began to accrue additional interest at a
rate of 0.50% and will continue to accrue such additional
interest until the date on which the registration statement is
declared effective. The 0.25% Notes are convertible, under
specified circumstances, into shares of the Companys
common stock at a conversion rate of 21.6802 shares per
$1,000 principal amount of notes, which is equivalent to a
conversion price of approximately $46.13 per share;
provided that, pursuant to the terms of a supplemental indenture
dated as of October 25, 2004, the Company will be required
to deliver cash to holders upon conversion, except to the extent
that the Companys conversion obligation exceeds the
principal amount of the notes converted, in which case the
Company will have the option to satisfy the excess (and only the
excess) in cash and/or shares of common stock.



|    |               
|--- | --------------
|10. | Long-Term Debt

In 1999 and 2000, the Company entered into three
build-to-suit lease agreements for office buildings in Mountain
View, California, Roseville, Minnesota and Milpitas, California.
The Company began occupying the Roseville and Mountain View
facilities in May and June 2001, respectively, and began
occupying the Milpitas facility in April 2003. The Mountain View
facility includes 425,000 square feet and serves as the
Companys corporate headquarters and for research and
development functions. The Milpitas facility includes
466,000 square feet and is primarily used for technical
support, sales and general corporate functions. The Roseville
facility includes 204,000 square feet and provides space
for technical support and research and development functions. A
syndicate of financial institutions financed the acquisition and
development of these properties. Prior to July 1, 2003, the
Company accounted for these properties as operating leases in
accordance with SFAS No. 13, Accounting for
Leases, as amended. On July 1, 2003, the Company
adopted Financial Accounting Standards Board (FASB)
Interpretation Number (FIN) 46. Under FIN 46,
the lessors of the facilities are considered variable interest
entities, and the Company is considered the primary beneficiary.
Accordingly, the Company began consolidating these variable
interest entities on July 1, 2003 and has included the
property and equipment and long-term debt on its balance sheet
at September 30, 2004 and December 31, 2003 and the
results of their operations in its consolidated statement of
operations for the three and nine months ended
September 30, 2004. As of September 30, 2004,
$380.6 million of debt has been classified as current as
the lease terms for the Mountain View and Roseville facilities
expire in March 2005 and the lease term for the Milpitas
facility expires in July 2005.

Interest only payments under the debt agreements
relating to the facilities are generally paid quarterly and are
equal to the termination value of the outstanding debt
obligations multiplied by the Companys cost of funds,
which is based on London Inter Bank Offered Rate
(LIBOR) using 30-day to 180-day LIBOR contracts and
adjusted for the Companys credit spread. The termination
values of the debt agreements are approximately
$145.2 million, $41.2 million and $194.2 million
for the Mountain View, Roseville and Milpitas leases,
respectively. The terms of these debt agreements are five years
with an option to extend the lease terms for two successive
periods of one year each, if agreed to by the financial
institutions that financed the facilities. The terms of these
debt agreements began March 2000 for the Mountain View and
Roseville facilities and July 2000 for the Milpitas facility.
The Company has the option to purchase the three facilities for
the aggregate termination value of $380.6 million or, at
the end of the term, to arrange for the sale of the

15



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VERITAS SOFTWARE CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

properties to third parties while the Company
retains an obligation to the financial institutions that
financed the facilities in an amount equal to the difference
between the sales price and the guaranteed residual value up to
an aggregate $344.6 million if the sales price is less than
this amount, subject to the specific terms of the debt
agreements. In addition, the Company is entitled to any proceeds
from a sale of the facilities in excess of the termination
values.

In January 2002, the Company entered into two
three-year pay fixed, receive floating, interest rate swaps for
the purpose of hedging the cash payments related to the Mountain
View, California and Roseville, Minnesota agreements (see
Note 13). Under the terms of these interest rate swaps, the
Company makes payments based on the fixed rate and will receive
interest payments based on the 3-month LIBOR rate. For the three
months ended September 30, 2004 and 2003, the aggregate
payments, including the net payments on the interest rate swaps,
were $4.3 million and for the nine months ended
September 30, 2004 and 2003, the aggregate payments,
including the net payments on the interest rate swaps, were
$12.3 million and $12.5 million, respectively. The
payments for the three months ended September 30, 2004 and
2003 and the nine months ended September 30, 2004 were
included in interest expense in the consolidated statement of
operations in accordance with FIN 46. The payments made for
the six months ended June 30, 2003 were classified as rent
expense and included in cost of revenue and operating expenses,
in accordance with SFAS No. 13.

The agreements for the facilities described above
require that the Company maintain specified financial covenants,
all of which the Company was in compliance with as of
September 30, 2004. The specified financial covenants as of
September 30, 2004 require the Company to maintain a
minimum rolling four quarters earning before interest, taxes,
depreciation and amortization (EBITDA) of
$500.0 million, a minimum ratio of cash and cash
equivalents and accounts receivable to current liabilities plus
the debt consolidated under the build-to-suit lease agreements
of 1.2 to 1, and a leverage ratio of total funded
indebtedness to rolling four quarter EBITDA of not more than 2
to 1. For purposes of these financial covenants, EBITDA
represents the Companys net income for the applicable
period, plus interest expense, taxes, depreciation and
amortization and all non-cash restructuring charges, less
software development expenses classified as capital
expenditures. In order to secure the obligation under each
agreement, each of the facilities is subject to a deed of trust
in favor of the financial institutions that financed the
development and acquisition of the respective facility. Bank of
America, N.A. was the agent for the syndicate of banks that
funded the development of the Mountain View, California and
Roseville, Minnesota facilities, and ABN AMRO Bank, N.V. was the
agent for the syndicate of banks that funded the development of
the Milpitas, California facility.



|    |             
|--- | ------------
|11. | Common Stock

In July 2004, the Companys board of
directors authorized a program by which the Company may
repurchase up to $500.0 million of the Companys
common stock over a 12 to 18 month period. In the third
quarter of 2004, the Company repurchased 5.4 million shares
of common stock for an aggregate purchase price of
$94.3 million, of which $23.4 million was payable to
the Companys agent as of September 30, 2004. Between
October 1 and October 31, 2004, the Company
repurchased an additional 7.6 million shares of common
stock for an aggregate purchase price of $155.7 million.

16



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##### Table of Contents



VERITAS SOFTWARE CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |                     
|--- | --------------------
|12. | Comprehensive Income

The following are the components of comprehensive
income:

|                                        |                                                 |                      |        |                   |         |      |        |       |        |   |         |        |         |   |         |        |         | 
|--------------------------------------- | ----------------------------------------------- | -------------------- | ------ | ----------------- | ------- | ---- | ------ | ----- | ------ | - | ------- | ------ | ------- | - | ------- | ------ | ------- | 
|                                        |                                                 |                      |        |                  
|                                        |                                                 | Three Months Ended   |        | Nine Months Ended
|                                        |                                                 | September 30,        |        | September 30,    
|                                        |                                                 |                      |        |                  
|                                        |                                                 | 2004                 |        | 2003              |         | 2004 |        | 2003 
|                                        |                                                 |                      |        |                   |         |      |        |      
|                                        |                                                 |                     
|                                        |                                                 | (In thousands)      
|Net income                              |                                                 | $                    | 96,199 |                   |         | $    | 68,118 |       |        | $ | 282,717 |        |         | $ | 156,856 |       
|Other comprehensive income, net of tax: |                                                 |                      |        |                   |         |      |        |       |        |   |         |        |         |   |         |       
|                                        | Foreign currency translation adjustments        |                      |        | 3,393             |         |      |        | 1,556 |        |   |         | 1,288  |         |   |         | 16,196 |        
|                                        | Derivative financial instrument adjustments     |                      |        | 1,298             |         |      |        | 1,126 |        |   |         | 4,641  |         |   |         | 878    |        
|                                        | Unrealized gain (loss) on marketable securities |                      |        | 5,390             |         |      |        | (884  | )      |   |         | (4,525 | )       |   |         | (999   | )      
|                                        |                                                 |                      |        |                   |         |      |        |       |        |   |         |        |         |   |         |       
|                                        |                                                 | Comprehensive income |        | $                 | 106,280 |      |        | $     | 69,916 |   |         | $      | 284,121 |   |         | $      | 172,931 | 
|                                        |                                                 |                      |        |                   |         |      |        |       |        |   |         |        |         |   |         |       

The components of accumulated other comprehensive
income are:

|                                                |                                        |                |        |              |  |   |        |       | 
|----------------------------------------------- | -------------------------------------- | -------------- | ------ | ------------ |  | - | ------ | ----- | 
|                                                |                                        | September 30,  |        | December 31,
|                                                |                                        | 2004           |        | 2003        
|                                                |                                        |                |        |             
|                                                |                                        |               
|                                                |                                        | (In thousands)
|Foreign currency translation adjustments        |                                        | $              | 14,744 |              |  | $ | 13,456 |      
|Derivative financial instrument adjustments     |                                        |                | (3,141 | )            |  |   | (7,782 | )    
|Unrealized gain (loss) on marketable securities |                                        |                | (4,027 | )            |  |   | 498    |      
|                                                |                                        |                |        |              |  |   |        |      
|                                                | Accumulated other comprehensive income |                | $      | 7,576        |  |   | $      | 6,172 | 
|                                                |                                        |                |        |              |  |   |        |      



|    |                                 
|--- | --------------------------------
|13. | Derivative Financial Instruments

In September 2000, the Company entered into a
three-year cross currency cash flow hedge against foreign
exchange fluctuations on foreign currency denominated cash flows
under an intercompany loan receivable. Under the terms of this
derivative financial instrument, Euro denominated fixed
principal and interest payments to be received under the
intercompany loan were swapped for U.S. dollar-fixed
principal and interest payments. In September 2003, the
intercompany loan was paid in full and the derivative financial
instrument was settled.

In January 2002, the Company entered into two
three-year pay fixed, receive floating, interest rate swaps for
the purpose of hedging cash flows on variable interest rate debt
related to Mountain View, California and Roseville, Minnesota
build-to-suit lease agreements. Under the terms of these
interest rate swaps, the Company makes payments based on the
fixed rate and will receive interest payments based on the
3-month LIBOR. The Companys payments on its build-to-suit
lease agreements are based upon a 3-month LIBOR plus a credit
spread. If critical terms of the interest rate swap or the
hedged item do not change, the interest rate swap will be
considered to be highly effective with all changes in the fair
value included in other comprehensive income. If critical terms
of the interest rate swap or the hedged item change, the hedge
may become partially or fully ineffective, which could result in
all or a portion of the changes in fair value of the derivative
recorded in the statement of operations. The interest rate swaps
settle the first day of January, April, July and October until
expiration. As of September 30, 2004, the fair value of the
interest rate swaps was $(3.1) million and was recorded in
other long-term liabilities. As a result of entering into the
interest rate swaps, the Company has mitigated its exposure to
variable cash flows associated with interest rate fluctuations.
Because the rental payments on the leases are based on the
3-month LIBOR and the Company receives 3-month LIBOR from the
interest rate swap counter-party, the Company has eliminated any
impact to raising interest rates related to its rent payments
under the build-to-suit lease agreements. On July 1, 2003,
the Company began accounting for its variable interest rate debt
in accordance with FIN 46 (see Note 10). In accordance
with SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, the Company had
designated the interest rate swap as a cash flow hedge of the
variability embedded in the rent expense as it

17



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##### Table of Contents



VERITAS SOFTWARE CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

was based on a 3-month LIBOR. However, with the
adoption of FIN 46, the Company redesignated the interest
rate swap as a cash flow hedge of variability in interest
expense and it remains highly effective with all changes in the
fair value included in other comprehensive income.

As of September 30, 2004, the total gross
notional amount of the Companys forward contracts was
approximately $132.5 million, all hedging intercompany
accounts of certain of its international subsidiaries. The
forward contracts had terms of 31 days or less and settled
on October 29, 2004. All foreign currency transactions and
all outstanding forward contracts are marked-to-market at the
end of the period with unrealized gains and losses included in
other income. The unrealized gain (loss) and fair market value
of the outstanding forward contracts at September 30, 2004
were not material to the Companys consolidated financial
statements.



|    |                    
|--- | -------------------
|14. | Segment Information

The Company operates in one segment, storage and
infrastructure software solutions. The Companys products
and services are sold throughout the world, both directly to
end-users and through a variety of indirect sales channels. The
Companys chief operating decision maker, the chief
executive officer, evaluates the performance of the Company
based upon stand-alone revenue from product channels and the
geographic regions of the segment and does not receive discrete
financial information about asset allocation, expense allocation
or profitability related to the Companys specific product
categories or services.



| |                       
| | ----------------------
| | Geographic Information

|                      |               |                         |                   |                   |         |         |   |         |         |         |   |         |         |           |   |         |         |           | 
|--------------------- | ------------- | ----------------------- | ----------------- | ----------------- | ------- | ------- | - | ------- | ------- | ------- | - | ------- | ------- | --------- | - | ------- | ------- | --------- | 
|                      |               |                         |                   |                  
|                      |               | Three Months Ended      |                   | Nine Months Ended
|                      |               | September 30,           |                   | September 30,    
|                      |               |                         |                   |                  
|                      |               | 2004                    |                   | 2003              |         | 2004    |   | 2003   
|                      |               |                         |                   |                   |         |         |   |        
|                      |               |                        
|                      |               | (In thousands)         
|User license fees(1): |               |                         |                   |                   |         |         |   |         |         |         |   |         |         |           |   |        
|                      | United States |                         | $                 | 152,789           |         |         | $ | 166,346 |         |         | $ | 468,050 |         |           | $ | 476,614 |        
|                      | Europe(2)     |                         |                   | 92,384            |         |         |   | 78,268  |         |         |   | 271,628 |         |           |   | 204,556 |        
|                      | Other(3)      |                         |                   | 42,179            |         |         |   | 37,200  |         |         |   | 119,999 |         |           |   | 100,900 |        
|                      |               |                         |                   |                   |         |         |   |         |         |         |   |         |         |           |   |        
|                      |               | Total user license fees |                   |                   | 287,352 |         |   |         | 281,814 |         |   |         | 859,677 |           |   |         | 782,070 |          
|                      |               |                         |                   |                   |         |         |   |         |         |         |   |         |         |           |   |        
|Services(1):          |               |                         |                   |                   |         |         |   |         |         |         |   |         |         |           |   |        
|                      | United States |                         |                   | 139,106           |         |         |   | 118,487 |         |         |   | 410,851 |         |           |   | 332,142 |        
|                      | Europe(2)     |                         |                   | 49,381            |         |         |   | 31,224  |         |         |   | 141,214 |         |           |   | 90,417  |        
|                      | Other(3)      |                         |                   | 20,819            |         |         |   | 15,100  |         |         |   | 55,697  |         |           |   | 40,500  |        
|                      |               |                         |                   |                   |         |         |   |         |         |         |   |         |         |           |   |        
|                      |               | Total services          |                   |                   | 209,306 |         |   |         | 164,811 |         |   |         | 607,762 |           |   |         | 463,059 |          
|                      |               |                         |                   |                   |         |         |   |         |         |         |   |         |         |           |   |        
|                      |               |                         | Total net revenue |                   | $       | 496,658 |   |         | $       | 446,625 |   |         | $       | 1,467,439 |   |         | $       | 1,245,129 | 
|                      |               |                         |                   |                   |         |         |   |         |         |         |   |         |         |           |   |        

|                      |               |                                 |                           |              |           |           |   |           |           |           | 
|--------------------- | ------------- | ------------------------------- | ------------------------- | ------------ | --------- | --------- | - | --------- | --------- | --------- | 
|                      |               | September 30,                   |                           | December 31,
|                      |               | 2004                            |                           | 2003        
|                      |               |                                 |                           |             
|                      |               |                                
|                      |               | (In thousands)                 
|Long-lived assets(4): |               |                                 |                           |              |           |           |   |          
|                      | United States |                                 | $                         | 1,997,417    |           |           | $ | 1,902,181 |          
|                      | Europe(2)     |                                 |                           | 701,690      |           |           |   | 483,315   |          
|                      | Other(3)      |                                 |                           | 11,822       |           |           |   | 13,723    |          
|                      |               |                                 |                           |              |           |           |   |          
|                      |               | Total                           |                           |              | 2,710,929 |           |   |           | 2,399,219 |          
|                      |               | Other assets, including current |                           |              | 2,940,477 |           |   |           | 2,949,247 |          
|                      |               |                                 |                           |              |           |           |   |          
|                      |               |                                 | Total consolidated assets |              | $         | 5,651,406 |   |           | $         | 5,348,466 | 
|                      |               |                                 |                           |              |           |           |   |          



---



|    |                                                                                                       
|--- | ------------------------------------------------------------------------------------------------------
|(1) | License and services revenues are attributed to
    geographic regions based on location of customers.
|   
|(2) | Europe includes the Middle East and Africa.                                                           
|   
|(3) | Other includes Canada, Latin America, Japan and
    the Asia Pacific region.                          

18



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##### Table of Contents



VERITAS SOFTWARE CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |                                                                                                                                             
|--- | --------------------------------------------------------------------------------------------------------------------------------------------
|(4) | Long-lived assets include all long-term assets
    except those specifically excluded under SFAS No. 131,
    such as deferred income taxes.

For the three and nine months ended
September 30, 2004 and for the three months ended
September 30, 2003, no customer represented 10% or more of
the Companys net revenue. For the nine months ended
September 30, 2003, a distributor that sells the
Companys products and services through resellers,
accounted for 10% of the Companys net revenue.



| |                              
| | -----------------------------
| | User License Fees Information

The Company markets and distributes its software
products both as stand-alone software products and as integrated
product suites, also referenced as application solutions. The
Company derives its user license fees from the licensing of its
technology, segregated into three product areas: Data
Protection, which include its NetBackup and Backup Exec product
families; Storage Management, which includes its Storage
Foundation Suites, which includes File Systems, Volume Manager,
replication, Database Editions and storage resource management
product families; and Utility Computing Infrastructure, which
includes its clustering, high-availability offerings,
application performance management, OpForce and CommandCentral
Service product families. User license fees by product area were
as follows:

|                   |                                  |                         |   |                   |       |      |   |       |       |  |   |       |       |  |   |       |       | 
|------------------ | -------------------------------- | ----------------------- | - | ----------------- | ----- | ---- | - | ----- | ----- |  | - | ----- | ----- |  | - | ----- | ----- | 
|                   |                                  |                         |   |                  
|                   |                                  | Three Months Ended      |   | Nine Months Ended
|                   |                                  | September 30,           |   | September 30,    
|                   |                                  |                         |   |                  
|                   |                                  | 2004                    |   | 2003              |       | 2004 |   | 2003 
|                   |                                  |                         |   |                   |       |      |   |      
|                   |                                  |                        
|                   |                                  | (In millions)          
|User license fees: |                                  |                         |   |                   |       |      |   |       |       |  |   |       |       |  |   |      
|                   | Data protection                  |                         | $ | 161.0             |       |      | $ | 154.0 |       |  | $ | 474.1 |       |  | $ | 440.5 |      
|                   | Storage management               |                         |   | 64.4              |       |      |   | 69.1  |       |  |   | 222.6 |       |  |   | 194.4 |      
|                   | Utility computing infrastructure |                         |   | 62.0              |       |      |   | 58.7  |       |  |   | 163.0 |       |  |   | 147.2 |      
|                   |                                  |                         |   |                   |       |      |   |       |       |  |   |       |       |  |   |      
|                   |                                  | Total user license fees |   | $                 | 287.4 |      |   | $     | 281.8 |  |   | $     | 859.7 |  |   | $     | 782.1 | 
|                   |                                  |                         |   |                   |       |      |   |       |       |  |   |       |       |  |   |      



|    |                
|--- | ---------------
|15. | Credit Facility

During 2002, the Companys Japanese
subsidiary entered into a short-term credit facility with a
multinational Japanese bank in the amount of 1.0 billion
Japanese yen ($9.0 million USD). At September 30,
2004, no amount was outstanding. The short-term credit facility
was renewed in March 2004 and is due to expire in March 2005.
Borrowings under the short-term credit facility bear interest at
Tokyo Inter Bank Offered Rate plus 0.5%. There are no covenants
on the short-term credit facility and the loan has been
guaranteed by VERITAS Software Global LLC, a wholly-owned
subsidiary of the Company.



|    |                              
|--- | -----------------------------
|16. | Commitments and Contingencies



| |                    
| | -------------------
| | Acquired Technology

On October 1, 2002, the Company acquired
volume replicator software technology for $6.0 million and
contingent payments of up to another $6.0 million based on
future revenues generated by the acquired technology. The
contingent payments will be paid quarterly over 40 quarters, in
amounts between $150,000 and $300,000. The Company issued a
promissory note payable in the principal amount of
$5.0 million, representing the present value of the
Companys minimum payment obligations under the purchase
agreement for the acquired technology, which are payable
quarterly commencing in the first quarter of 2003 and ending in
the fourth quarter of 2012. The contingent payments in excess of
the quarterly minimum obligations will be paid as they may
become due. The outstanding balance of the note payable was
$4.3 million as of September 30, 2004 and
$4.6 million as of December 31, 2003 and is included
in other long-term liabilities.

SEC Related Matters

SEC Investigation.As previously disclosed, since the third quarter of 2002, the
Company has received subpoenas issued by the Securities Exchange
Commission in the investigation entitled In the Matter of
AOL/ Time Warner. The SEC has requested information
concerning the facts and circumstances surrounding the
Companys transactions with AOL Time Warner
(AOL) and related accounting and disclosure matters.

19



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##### Table of Contents



VERITAS SOFTWARE CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Companys transactions with AOL, entered
into in September 2000, involved a software and services
purchase by AOL at a stated value of $50.0 million and the
purchase by the Company of advertising services from AOL at a
stated value of $20.0 million. In March 2003, the Company
restated its financial statements for 2001 and 2000 to reflect a
reduction in revenues and expenses of $20.0 million. The
restatement included an additional reduction in revenues and
expenses of $1.0 million related to two other
contemporaneous transactions with other parties entered into in
2000 that involved software licenses and the purchase of on-line
advertising services.

In March 2004, the Company announced its
intention to restate its financial statements for 2002 and 2001
and revise its previously announced financial results for 2003.
The decision resulted from the findings of an investigation into
past accounting practices that concluded on March 12, 2004.
The investigation resulted from concerns raised by an employee
in late 2003, which led to a detailed review of the matter in
accordance with the Companys corporate governance
processes, including the reporting of the matter to the audit
committee of the Companys board of directors, and to KPMG
LLP, the Companys independent registered public accounting
firm. The audit committee retained independent counsel to
investigate issues relating to these past accounting practices,
and the audit committees counsel retained independent
accountants to assist with the investigation. In the first
quarter of 2004, the Company voluntarily disclosed to the staff
of the SEC past accounting practices applicable to its 2002 and
2001 financial statements that were not in compliance with GAAP.
For more information regarding the audit committees
investigation and the restatement of the Companys
financial statements for 2002 and 2001, including the
corresponding interim periods for 2002 and 2001 and the interim
periods ended March, June and September 2003, see
Managements Discussion and Analysis of Financial
Condition and Results of Operations  Restatement of
Consolidated Financial Statements, Financial
Statements and Supplementary Data  Selected Quarterly
Results of Operations, Controls and Procedures
and Note 2 of the Notes to Consolidated Financial
Statements of the Companys annual report on Form 10-K
for the year ended December 31, 2003.

The Company and its audit committee continue to
cooperate with the SEC in its review of these matters. At this
time, the Company cannot predict the outcome of the SECs
review.

Litigation

After the Company announced in January 2003 that
it would restate its financial results as a result of
transactions entered into with AOL in September 2000, numerous
separate complaints purporting to be class actions were filed in
the United States District Court for the Northern District of
California alleging that the Company and some of its officers
and directors violated provisions of the Securities Exchange Act
of 1934. The complaints contain varying allegations, including
that the Company made materially false and misleading statements
with respect to its 2000, 2001 and 2002 financial results
included in its filings with the SEC, press releases and other
public disclosures. On May 2, 2003, a lead plaintiff and
lead counsel were appointed. A consolidated complaint entitled
In Re VERITAS Software Corporation Securities Litigationwas filed by the lead plaintiff on July 18, 2003. On
December 10, 2003, the District Court granted the
defendants motion to dismiss the consolidated complaint,
with leave to amend. On May 19, 2004, the District Court
granted the defendants motion to dismiss the
plaintiffs first amended complaint, with leave to amend.
On June 30, 2004, a second amended complaint was filed with
the Court in this matter and defendants have filed a motion to
dismiss the second amended complaint. The second amended
complaint seeks an unspecified amount of damages.

In addition, in 2003 several complaints
purporting to be derivative actions were filed in California
state court against some of the Companys directors and
officers. These complaints are generally based on the same facts
and circumstances alleged in In Re VERITAS Software
Corporation Securities Litigation, referenced above, and
allege that the named directors and officers breached their
fiduciary duties by failing to oversee adequately the
Companys financial reporting. The state court complaints
have been consolidated into the action In Re VERITAS Software
Corporation Derivative Litigation, which was filed on
May 8, 2003 in the Superior Court of Santa Clara
County. The consolidated complaint seeks an unspecified amount
of damages.

20



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##### Table of Contents



VERITAS SOFTWARE CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

On August 2, 2004, the Company received a copy of
an amended complaint in Stichting Pensioenfonds ABP v. AOL
Time Warner, et. al. in which the Company was named as a
defendant. The case was originally filed in the U.S. District
Court for the Southern District of New York in July 2003 against
Time Warner (formerly, AOL Time Warner), current and former
officers and directors of Time Warner and AOL, and Time
Warners outside auditor, Ernst & Young LLP. In adding
the Company as a defendant, the plaintiff alleges that the
Company aided and abetted AOL in alleged common law fraud and
also alleges that the Company itself engaged in common law fraud
as part of a civil conspiracy. The allegations against the
Company are based on the factual allegations in the second
amended consolidated class action complaint and other filings in
the matter entitled In Re VERITAS Software Corporation
Securities Litigation, referenced above. The plaintiff seeks
an unspecified amount of compensatory and punitive damages.

On July 7, 2004, a purported class action
complaint entitled Paul Kuck, et al. v. VERITAS
Software Corporation, et al. was filed in the United
States District Court for the District of Delaware. The lawsuit
alleges violations of federal securities laws in connection with
the Companys announcement on July 6, 2004 that it
expected its results of operations for the fiscal quarter ended
June 30, 2004 to fall below estimates that were earlier
provided by the Company. The complaint generally seeks an
unspecified amount of damages. Subsequently, additional
purported class action complaints have been filed in Delaware
federal court against the same defendants named in the Kuck
lawsuit. These complaints are based on the same facts and
circumstances as the Kuck lawsuit.

The foregoing cases are still in the preliminary
stages, and it is not possible for the Company to quantify the
extent of its potential liability, if any. An unfavorable
outcome in any of these matters could have a material adverse
effect on the Companys business, financial condition,
results of operations and cash flow. In addition, defending any
litigation may be costly and divert managements attention
from the day-to-day operations of the Companys business.

In addition to the legal proceedings listed
above, the Company is also party to various other legal
proceedings that have arisen in the ordinary course of its
business. While the Company currently believes that the ultimate
outcome of these proceedings, individually and in the aggregate,
will not have a material adverse effect on its financial
position or overall trends in results of operations, litigation
is subject to inherent uncertainties. If an unfavorable ruling
were to occur, there exists the possibility of a material
adverse impact on the Companys results of operations and
cash flows for the period in which the ruling occurs. The
estimate of the potential impact on the Companys financial
position or overall results of operations for the above
discussed legal proceedings could change in the future.

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|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 2. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

This quarterly report on Form 10-Q
contains forward-looking statements within the meaning of the
Securities Exchange Act of 1934 and the Securities Act of 1933
that involve risks and uncertainties. These forward-looking
statements include statements about our revenue, revenue mix,
gross margin, operating expense levels, financial outlook,
commitments under existing leases, research and development
initiatives, sales and marketing initiatives and competition. In
some cases, forward-looking statements are identified by words
such as believe, anticipate,
expect, intend, plan,
will, may and similar expressions. You
should not place undue reliance on these forward-looking
statements, which speak only as of the date of this quarterly
report on Form 10-Q. All of these forward-looking
statements are based on information available to us at this
time, and we assume no obligation to update any of these
statements. Actual results could differ from those projected in
these forward-looking statements as a result of many factors,
including those identified in the section captioned
Factors That May Affect Future Results below, and
elsewhere in this quarterly report. We urge you to review and
consider the various disclosures made by us in this report, and
those detailed from time to time in our filings with the
Securities and Exchange Commission, that attempt to advise you
of the risks and factors that may affect our future
results.

The following discussion should be read in
conjunction with our financial statements and accompanying
notes, which appear elsewhere in this quarterly report on
Form 10-Q. Unless expressly stated or the context otherwise
requires, the terms we, our,
us and VERITAS refer to VERITAS Software
Corporation and its subsidiaries.

Overview

The following Managements Discussion and
Analysis of Financial Condition and Results of Operations, or
MD&A, is intended to help the reader understand our company.
MD&A is provided as a supplement to  and should
be read in conjunction with  our condensed
consolidated financial statements and the accompanying notes.



| |             
| | ------------
| | Our Business

VERITAS Software Corporation is a leading
independent supplier of storage and infrastructure software
products and services. Our software products operate across a
variety of computing environments, from PCs and workgroup
servers to enterprise servers and networking platforms in
corporate data centers. Our products protect, archive and
recover business-critical data, provide high levels of
application availability, enhance and tune system and
application performance and enable recovery from disasters. Our
solutions enable businesses to reduce costs by efficiently and
effectively managing their information technology, or IT,
infrastructure as they seek to maximize value from their IT
investments.

We generate revenues, income and cash flows by
licensing software products and selling related services to our
customers, which include many leading global corporations and
small and medium-sized enterprises around the world operating in
a wide variety of industries. We market our products and related
services both directly and through a variety of indirect sales
channels, which include value added resellers, or VARs,
distributors, system integrators, or SIs, and original equipment
manufacturers, or OEMs. Specifically, the channel mix for the
three and nine months ended September 30, 2004 was 54% and
56%, respectively, from sales to end-users and through VARs, and
46% and 44%, respectively, from other indirect sales channels,
which includes 12% from our OEM partners.

We invest significantly in research and
development activities and for the three and nine months ended
September 30, 2004, we spent $87.2 million and
$250.7 million, respectively, on research and development.
Our research and development efforts have been directed toward
developing new products for UNIX, Linux and Windows, developing
new features and functionality for existing products,
integrating products across our existing product lines, porting
new and existing products to different operating systems and
expanding our product portfolio into new markets such as
application performance management, server provisioning and
centralized service level management.

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| |             
| | ------------
| | Our Strategy

Our strategy is to continue to compete in our
current markets while expanding and integrating our product
portfolio in the area of utility computing infrastructure, to
continue to expand our product offering across key operating
system platforms, including UNIX, Linux and Windows, and to
continue to invest for growth in international markets.

We expect to continue to grow the company
organically and through acquisitions. In January 2004, we
completed the acquisition of Ejasent, Inc., or Ejasent, which
added application migration technology to our utility computing
infrastructure. In addition, in July 2004, we completed the
acquisition of Invio Software, Inc., or Invio, which added IT
process automation technology to our utility computing
infrastructure portfolio. Then in September 2004, we completed
the acquisition of KVault Software Limited, or KVS, which added
e-mail archiving software to our Data Protection product line.
Consistent with our strategy of growing revenue both organically
and through acquisition, we will continue to evaluate new
strategic acquisitions in the future.

Our revenue from international sales continues to
increase primarily as a result of our increased investment in
our international geographies, market strength in the emerging
market areas in Europe and Asia and a favorable impact of
changes in foreign currency exchange rates related to the weaker
U.S. dollar. For the three and nine months ended
September 30, 2004, revenue from international sales,
consisting of sales of licenses and services to customers
located outside the U.S., increased 27% and 35% from the three
and nine months ended September, 2003, respectively, and
represented 41% and 40% of our total revenue for the three and
nine months ended September 30, 2004, respectively.



| |                       
| | ----------------------
| | Our Financial Position

In the third quarter of 2004, our operating
results were affected by several factors, including a
challenging IT spending environment and a decrease in demand by
the U.S. federal government offset by the growing need of
enterprises to effectively manage storage and computing
infrastructure, the strength of our product offerings and the
contribution of our recent acquisitions. For the nine months
ended September 30, 2004, we experienced stronger IT
spending in our customer base internationally, resulting in
stronger demand for our products and growth in our user license
fees compared to the same period last year. In the U.S., our
license revenue decreased 2% for the nine months ended
September 30, 2004 over 2003, primarily due to a decrease
in our government business. The acquisition of Precise and the
integration of the acquired products into our product offerings
contributed to our overall growth, as did our increased sales
penetration in international markets and the favorable impact of
changes in foreign currency exchange rates. Additionally, our
services revenue grew significantly over last year due to new
service contracts associated with user license fees as well as
our success in increasing support contract renewals within our
customer base.

For the three months ended September 30,
2004, total revenue from sales in the U.S., consisting of sales
of licenses and services to customers located in the U.S.,
increased 2% from the three months ended September 30,
2003. License revenue decreased by 8% from $166.3 million
for the three months ended September 30, 2003 to
$152.8 million for the three months ended
September 30, 2004 reflecting the decrease in our
government business. U.S. services revenue increased by 17%
from $118.5 million for the three months ended
September 30, 2003 to $139.1 million for the three
months ended September 30, 2004 primarily as a result of
strong maintenance renewal rates.

For the nine months ended September 30,
2004, total revenue from sales in the U.S. increased 9%
from the nine months ended September 30, 2003 and
represented approximately 60% of our total revenue for the nine
months ended September 30, 2004 compared to 65% for the
same period in 2003.

For the three and nine months ended
September 30, 2004, net revenue was $496.7 million and
$1,467.4 million, respectively, an increase of 11% and 18%,
respectively, from the three and nine months ended
September 30, 2003. Revenue from user license fees for the
three and nine months ended September 30, 2004 was
$287.4 million and $859.7 million, respectively, an
increase of 2% and 10%, respectively, from 2003, and
representing 58% and 59% of total net revenue, respectively.
Services revenue for the three and nine months ended
September 30, 2004 was $209.3 million and
$607.8 million, respectively, an increase of

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27% and 31% from 2003, and representing 42% and
41% of total net revenue, respectively. Diluted net income per
share for the three months ended September 30, 2004 was
$0.22, up from $0.15 for the three months ended
September 30, 2003, primarily as a result of earnings
leverage from revenue growth, the restructuring reversal in the
third quarter of 2004, the loss on extinguishment of debt in the
third quarter of 2003 and the cumulative effect of change in
accounting principle in the third quarter of 2003 offset by the
write-off of in-process research and development in the third
quarter of 2004 in connection with the acquisition of KVS.
Diluted net income per share for the nine months ended
September 30, 2004 was $0.64, up from $0.36 for the nine
months ended September 30, 2003, primarily as a result of
earnings leverage from revenue growth, the restructuring
reversal in 2004, gains on strategic investments in 2004, the
loss on extinguishment of debt in 2003, the cumulative effect of
change in accounting principle in 2003 and a reduction in
acquisition-related expenses, such as amortization of
intangibles and in-process research and development in 2004.


We continue to generate cash from operations and
to retain a significant balance of cash and short-term
investments. As of September 30, 2004, we had
$2,539.2 million in cash, cash equivalents and short-term
investments, which represented 72% of our tangible assets. We
generated $427.5 million of cash from operating activities
for the nine months ended September 30, 2004. We utilize
cash in ways that management believes will provide an optimal
return on investment. Principal uses of our cash include
acquisitions of businesses and technologies, repurchases of our
common stock and purchases of property and equipment.

Recent Acquisitions

In September 2004, we acquired all of the
outstanding capital stock of KVS, a provider of e-mail archiving
products. We acquired KVS in order to expand our product
offerings in the storage software market to include products to
store, manage, backup and archive corporate e-mail and data. The
KVS acquisition included total purchase consideration of
$249.6 million. We have included the results of operations
of KVS in our consolidated financial statements beginning
September 21, 2004. In connection with the acquisition of
KVS, we allocated approximately $11.5 million of the
purchase price to in-process research and development, or
IPR&D, that had not yet reached technological feasibility
and had no alternative future use. We have expensed this amount
in our condensed consolidated statement of operations for the
three months ended September 30, 2004.

In July 2004, we acquired all of the outstanding
capital stock of Invio, a privately held supplier of IT process
automation technology. We acquired Invio to extend the
capability of software products that enable utility computing by
offering customers a tool for standardizing and automating IT
service delivery in key areas such as storage provisioning,
server provisioning and data protection. The Invio acquisition
included purchase consideration of approximately
$35.4 million. We have included the results of operations
of Invio in our condensed consolidated financial statements
beginning July 14, 2004.

In January 2004, we acquired Ejasent, a privately
held provider of application virtualization technology for
utility computing. We acquired Ejasent to add important
application migration technology, which allows IT personnel to
move an application from one server to another without
disrupting or terminating the application. The Ejasent
acquisition included total purchase consideration of
$61.4 million. We have included the results of operations
of Ejasent in our consolidated financial statements beginning
January 20, 2004. In connection with the acquisition of
Ejasent, we allocated approximately $0.4 million of the
purchase price to IPR&D that had not yet reached
technological feasibility and had no alternative future use. We
have expensed this amount in our condensed consolidated
statement of operations for the nine months ended
September 30, 2004.

In June 2003, we acquired Precise Software
Solutions Ltd., or Precise, a provider of application
performance management products. We acquired Precise to expand
our product and service offerings across storage, databases and
application performance management. The Precise acquisition
included total purchase consideration of $714.7 million. We
have included the results of operations of Precise in our
consolidated financial statements beginning July 1, 2003.
In connection with the acquisition of Precise, we allocated
approximately $15.3 million of the purchase price to
IPR&D that had not yet reached technological feasibility

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and had no alternative future use. We have
expensed this amount in our condensed consolidated statement of
operations for the nine months ended September 30, 2003.


In January 2003, we acquired Jareva Technologies,
Inc., or Jareva, a privately held provider of automated server
provisioning products that enable businesses to automatically
deploy additional servers without manual intervention. We
acquired Jareva to integrate its technology into our software
products. This technology enables our customers to optimize
their investments in server hardware by deploying new server
resources on demand. The Jareva acquisition included total
purchase consideration of $68.7 million. We have expensed
the acquired IPR&D of $4.1 million in our condensed
consolidated statement of operations for the nine months ended
September 30, 2003.

Critical Accounting Policies and
Estimates

We believe that there are several accounting
policies that are critical to understanding our historical and
future performance, as these policies affect the reported
amounts of revenue and other significant areas that involve
managements judgments and estimates. These critical
accounting policies and estimates include:



| |   |                                             
| | - | --------------------------------------------
| |  | revenue recognition;                        
|
| |  | restructuring expenses and related accruals;
|
| |  | impairment of long-lived assets; and        
|
| |  | accounting for income taxes.                

These policies and estimates and our procedures
related to these policies and estimates are described in detail
below and under specific areas within the discussion and
analysis of our financial condition and results of operations.
Please refer to the Notes to Consolidated Financial Statements
in our annual report on Form 10-K for the year ended
December 31, 2003 for further discussion of our accounting
policies and estimates.



| |                    
| | -------------------
| | Revenue Recognition

We make significant judgments related to revenue
recognition. For each arrangement, we make significant judgments
regarding the fair value of multiple elements contained in our
arrangements, judgments regarding whether our fees are fixed or
determinable and judgments regarding whether collectibility is
probable. We also make significant judgments when accounting for
concurrent transactions with our suppliers and in our accounting
for potential product returns and, in some cases, we also have
discretion over the timing of product shipments. These
decisions, and their effect on revenue recognition, are
discussed below.



| |                              
| | -----------------------------
| | Multiple Element Arrangements

We typically enter into arrangements with
customers that include perpetual software licenses, maintenance
and technical support. Some arrangements may also include
consulting and education services. Software licenses are sold as
site licenses or on a per copy basis. Site licenses give
customers the right to copy licensed software on either a
limited or unlimited basis during a specified term. Per copy
licenses give customers the right to use a single copy of
licensed software. We make judgments regarding the fair value of
each element in the arrangement and generally account for each
element separately.

Assuming all other revenue recognition criteria
are met, license revenue is recognized upon delivery using the
residual method in accordance with Statement of Position, or
SOP, No. 98-9, Modification of SOP No. 97-2,
Software Revenue Recognition, with Respect to Certain
Transactions. Under the residual method, we allocate and
defer revenue for the undelivered elements based on
vendor-specific objective evidence, or VSOE, of fair value, and
recognize the difference between the total arrangement fee and
the amount deferred for the undelivered elements as revenue.
Undelivered elements typically include maintenance and technical
support, consulting and education services. The determination of
fair value of each undelivered element in multiple element
arrangements is based on the price charged when the same element
is sold separately. If sufficient evidence of fair value cannot
be determined for any undelivered item, all revenue from the
arrangement will be deferred until VSOE of fair value can be
established or until all elements of the

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arrangement have been delivered. If the only
undelivered element is maintenance and technical support for
which we cannot establish VSOE, we will recognize the entire
arrangement fees ratably over the maintenance and support term.


Our VSOE of fair value for maintenance and
technical support is based upon stated renewal rates for site
licenses and historical renewal rates for per copy licenses.
Maintenance and technical support revenue is recognized ratably
over the maintenance term. Our VSOE of fair value for education
services is based upon the price charged when sold separately.
Revenue is recognized when the customer has completed the
course. For annual education passes, revenue is recognized
ratably over the one-year term. Our VSOE of fair value for
consulting is based upon the price charged when sold separately.
Consulting revenue is recognized as work is performed when
reasonably dependable estimates can be made of the extent of
progress toward completion, contract revenue and contract costs.
Otherwise, consulting revenue is recognized when the services
are complete.



| |                                 
| | --------------------------------
| | The Fee is Fixed or Determinable

We make judgments, at the outset of an
arrangement, regarding whether the fees are fixed or
determinable. Our customary payment terms are generally within
30 days after invoice date. Arrangements with payment terms
extending beyond 90 days after invoice date are not
considered to be fixed or determinable, in which case revenue is
recognized as the fees become due and payable.



| |                       
| | ----------------------
| | Collection is Probable

We also make judgments at the outset of an
arrangement regarding whether collection is probable.
Probability of collection is assessed on a customer-by-customer
basis. We typically sell to customers with whom we have a
history of successful collections. New customers are subjected
to a credit review process to evaluate the customers
financial position and ability to pay. If it is determined at
the outset of an arrangement that collection is not probable,
revenue is recognized upon receipt of payment.



| |                       
| | ----------------------
| | Indirect Channel Sales

We generally recognize revenue from licensing of
software products through our indirect sales channel upon
sell-through or when evidence of an end-user exists. For certain
types of customers, such as distributors, we recognize revenue
upon receipt of a point of sales report, which is our evidence
that the products have been sold through to an end-user. For
resellers, we recognize revenue when we obtain evidence that an
end-user exists, which is usually when the software is
delivered. For licensing of our software to original equipment
manufacturers, or OEMs, royalty revenue is recognized when the
OEM reports the sale of software to an end-user customer,
generally on a quarterly basis. In addition to license
royalties, some OEMs pay an annual flat fee and/or support
royalties for the right to sell maintenance and technical
support to the end-user. We recognize revenue from OEM support
royalties and fees ratably over the term of the support
agreement.



| |                                
| | -------------------------------
| | Transactions with our Suppliers

Some of our customers are also our suppliers.
Occasionally, in the normal course of business, we purchase
goods or services for our operations from these suppliers at or
about the same time we license our software to them. We also
have multi-year agreements under which we receive sub-licensing
royalty payments from OEMs from whom we may also purchase goods
or services. We identify and review significant transactions to
confirm that they are separately negotiated, settled in cash,
and recorded at terms we consider to be arms length. In
addition, the goods or services have generally been budgeted in
advance of the transaction, are necessary for our current
operations and are expected to be placed in service shortly
after purchase. In cases where the transactions are not
separately negotiated, we apply the provisions of Accounting
Principles Board, or APB, Opinion No. 29, Accounting for
Nonmonetary Transactions,and Emerging Issues Task Force
Issue, or EITF, No. 01-02, Interpretations of APB
Opinion 29. If the fair values are reasonably determinable,
revenue is recorded at the fair values of the products delivered
or products or services received, whichever is more readily
determinable. If we can not determine fair value of either of
the goods or services involved within

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reasonable limits, we record the transaction on a
net basis. License revenue associated with software licenses
entered into with our suppliers at or about the same time we
purchase goods or services from them is not material to our
consolidated financial statements.




| |                
| | ---------------
| | Product Returns

We estimate potential future product returns
based on our analysis of historical return rates and reduce
current period product revenue accordingly. Actual returns may
vary from estimates if we experience a change from historical
sales and returns patterns or if there are unanticipated changes
in competitive or economic conditions that affect our actual
returns.



| |                              
| | -----------------------------
| | Delivery of Software Products

Delivery of our software products is a
prerequisite to the recognition of software license revenue. We
consider delivery complete when the software products have been
shipped and the customer has access to license keys. If
arrangements include an acceptance provision, we defer revenue
and recognize it upon the earlier of receipt of written customer
acceptance or expiration of the acceptance period.



| |                                                
| | -----------------------------------------------
| | Restructuring Expenses and Related
    Accruals

We monitor and regularly evaluate our
organizational structure and associated operating expenses.
Depending on events and circumstances, we may decide to
restructure our operations to reduce operating costs.

We applied the provisions of EITF Issue
No. 94-3, Liability Recognized for Certain Employee
Termination Benefits and other Costs to Exit an Activity
(Including Certain Costs Incurred in a Restructuring), to
all of our restructuring activities initiated before
January 1, 2003. For exit or disposal activities initiated
on or after January 1, 2003, we apply the provisions of
Statement of Financial Accounting Standards, or SFAS,
No. 146, Accounting for Costs Associated with Exit or
Disposal Activities.

Our restructuring costs and any resulting
accruals involve significant estimates made by management using
the best information available at the time the estimates are
made, some of which may be provided by third parties. These
estimates include facility exit costs, such as lease termination
costs, and amount and timing of sublease income and related
sublease expense costs, such as brokerage fees.

We regularly evaluate a number of factors to
determine the appropriateness and reasonableness of our
restructuring accruals. These factors include, but are not
limited to, our ability to enter into sublease or lease
termination agreements and market data about lease rates, timing
and term of potential subleases and costs associated with
terminating certain leases on vacated facilities.

Our estimates involve a number of risks and
uncertainties, some of which are beyond our control, including
future real estate market conditions and our ability to
successfully enter into subleases or lease termination
agreements upon terms as favorable as those assumed under our
restructuring plan. Actual results may differ significantly from
our estimates and may require adjustments to our restructuring
accruals and operating results in future periods. For example,
if the actual proceeds from our sublease agreements were to
differ by 10% from the estimate we included in our facility
restructuring plan, the facility restructuring charge recorded
in operating expenses during the fourth quarter of 2002 would
have been different by approximately $6 million.



| |                                    
| | -----------------------------------
| | Impairment of Long-Lived
    Assets

We review our goodwill for impairment annually or
whenever events or changes in circumstances suggest that the
carrying amount may not be recoverable. We are required to test
our goodwill for impairment at the

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reporting unit level. We have determined that we
have only one reporting unit. The test for goodwill impairment
is a two-step process:




| |                                                                                                                                                                                                                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Step 1- We compare the carrying amount of our
    reporting unit, which is the book value of our entire company,
    to the fair value of our reporting unit, which corresponds to
    our market capitalization. If the carrying amount of our
    reporting unit exceeds its fair value, we have to perform the
    second step of the process. If not, no further work is required.
|
| | Step 2- We compare the implied fair value of our
    reporting units goodwill to its carrying amount. If the
    carrying amount of our reporting units goodwill exceeds
    its fair value, an impairment loss will be recognized in an
    amount equal to that excess.                                                                                                           

We completed this test during the fourth quarter
of 2003 and were not required to record an impairment loss on
goodwill.

We review our long-lived assets, including
property and equipment and other intangibles, for impairment
whenever events indicate that their carrying amount may not be
recoverable. When we determine that one or more impairment
indicators are present for an asset, we compare the carrying
amount of the asset to net future undiscounted cash flows that
the asset is expected to generate. If the carrying amount of the
asset is greater than the net future undiscounted cash flows
that the asset is expected to generate, we would compare the
fair value to the book value of the asset. If the fair value is
less than the book value, we would recognize an impairment loss.
The impairment loss would be the excess of the carrying amount
of the asset over its fair value.

Some of the events that we consider as impairment
indicators for our long-lived assets, including goodwill, are:



| |   |                                                                                         
| | - | ----------------------------------------------------------------------------------------
| |  | significant underperformance of our company
    relative to expected operating results; 
|
| |  | our net book value compared to our market
    capitalization;                           
|
| |  | significant adverse economic and industry trends;                                       
|
| |  | significant decrease in the market value of the
    asset;                              
|
| |  | the extent to which we use an asset or changes in
    the manner in which we use it; and
|
| |  | significant changes to the asset since we
    acquired it.                              

Significant assumptions and estimates are made
when determining if our goodwill or other long-lived assets have
been impaired or if there are indicators of impairment. We base
our estimates on assumptions that we believe to be reasonable,
but actual future results may differ from those estimates as our
assumptions are inherently unpredictable and uncertain. Our
estimates include estimates of future market growth and trends,
forecasted revenue and costs, expected periods of asset
utilization, appropriate discount rates and other variables.
Based on our assumptions and estimates, we do not expect to
record an impairment loss on our long-lived assets in the near
future.



| |                            
| | ---------------------------
| | Accounting for Income Taxes

We are required to estimate our income taxes in
each federal, state and international jurisdiction in which we
operate. This process requires that we estimate the current tax
exposure as well as assess temporary differences between the
accounting and tax treatment of assets and liabilities,
including items such as accruals and allowances not currently
deductible for tax purposes. The income tax effects of the
differences we identify are classified as current or long-term
deferred tax assets and liabilities in our consolidated balance
sheets. Our judgments, assumptions and estimates relative to the
current provision for income tax take into account current tax
laws, our interpretation of current tax laws and possible
outcomes of current and future audits conducted by foreign and
domestic tax authorities. Changes in tax laws or our
interpretation of tax laws and the resolution of current and
future tax audits could significantly impact the amounts
provided for income taxes in our balance sheet and results of
operations. We must also assess the likelihood that deferred tax
assets

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will be realized from future taxable income and,
based on this assessment, establish a valuation allowance, if
required. As of September 30, 2004, we determined the
valuation allowance to be $138.4 million based upon
uncertainties related to our ability to recover certain deferred
tax assets. These deferred tax assets are in specific
geographical or jurisdictional locations or are related to
losses on strategic investments that will only be realized with
the generation of future capital gains within a limited time
period. Our determination of our valuation allowance is based
upon a number of assumptions, judgments and estimates, including
forecasted earnings, future taxable income and the relative
proportions of revenue and income before taxes in the various
domestic and international jurisdictions in which we operate.
Future results may vary from these estimates, and at this time
it is not practicable to determine if we will need to establish
an additional valuation allowance and if it would have a
material impact on our financial statements.


Results of Operations



| |            
| | -----------
| | Net Revenue

|                  |  |                                   |       |      |  |                   |       |      |  |      |    |          |  |   |         |  |  |   |         |  |  |  |    |  
|----------------- |  | --------------------------------- | ----- | ---- |  | ----------------- | ----- | ---- |  | ---- | -- | -------- |  | - | ------- |  |  | - | ------- |  |  |  | -- | -
|                  |  |                                   |       |      |  |                   |       |     
|                  |  | Three Months Ended                |       |      |  | Nine Months Ended |       |     
|                  |  | September 30,                     |       |      |  | September 30,     |       |     
|                  |  |                                   |       |      |  |                   |       |     
|                  |  | 2004                              |       | 2003 |  | % Change          |       | 2004 |  | 2003 |    | % Change
|                  |  |                                   |       |      |  |                   |       |      |  |      |    |         
|                  |  |                                  
|                  |  | (In millions, except percentages)
|Total net revenue |  | $                                 | 496.7 |      |  | $                 | 446.6 |      |  |      | 11 | %        |  | $ | 1,467.4 |  |  | $ | 1,245.1 |  |  |  | 18 | %

For the three and nine months ended
September 30, 2004, our total net revenue increased by
$50.1 million or 11% and $222.3 million or 18%,
respectively, compared to the same periods in 2003 due primarily
to the growth in user license fees, which grew by 2% and 10%,
increased sales penetration of international markets which grew
by 27% and 35% and the continued growth of our services
businesses which grew by 27% and 31%, respectively. During 2003
and 2004, as part of our strategy to increase our net revenues,
we continued expanding our product portfolio and offerings,
increased the computer platforms supported by our software and
continued to invest in sales and service capacity
internationally. Net revenue increased by $11.6 million
from the second to third quarter of 2004 primarily due to the
growth in user license fees in all geographic areas. We expect
net revenue to increase in the fourth quarter of 2004,
consistent with historical seasonality and continued penetration
of international markets, the benefit of new product offerings,
growth in services revenue, the impact of our recent
acquisitions and improved general economic conditions resulting
in stronger IT spending.

For the three months ended September 30,
2004, we completed and recognized revenue for 11 direct
transactions valued at over $1.0 million, including related
services, and 231 direct transactions valued at over $100,000.
For the three months ended September 30, 2003, we completed
and recognized revenue for 15 direct transactions valued at over
$1.0 million, including related services, and 239 direct
transactions valued at over $100,000.



| |                                       
| | --------------------------------------
| | International Sales and
    Operations

We believe that a key component of our growth
strategy is the continued expansion of our international
operations. We currently have sales and services offices and
resellers located in Europe, Asia-Pacific and Japan, Latin
America, Canada, Africa and the Middle East, and research and
development centers in India, the United Kingdom, Israel, China
and Japan. Our international sales consist of sales of licenses
and services to customer locations outside the U.S. and are
generated primarily through our international sales
subsidiaries. International revenue, a majority of which is
collectible in foreign currencies, accounted for approximately
41% and 36% of our total revenue for the three months ended
September 30, 2004 and 2003, respectively, and 40% and 35%
for the nine months ended September 30, 2004 and 2003,
respectively. Our international revenue increased 27% to
$204.8 million and 35% to $588.5 million for the three
and nine months ended September 30, 2004 over 2003. During
2003 and through the third quarter of 2004, we saw continued
strength in the emerging markets in Europe, Asia-Pacific and
Japan. Additionally, during 2004, our international sales
benefited from favorable foreign currency exchange rate
movements relative to the weaker U.S. dollar. Excluding the
benefit from foreign currency movement, the increase in
international sales would have been 21% from the three months
ended September 30, 2003 to 2004 and 27% from the nine
months ended

29



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September 30, 2003 to 2004. We expect that
our international revenue will increase in absolute dollars and
as a percent of total revenue for the remainder of 2004 because
of the continued expansion of international markets and the
focus and increased investment by our company in these markets.




| |                  
| | -----------------
| | User License Fees

We market and distribute our software products
both as standalone software products and as integrated product
suites. We derive our user license fees from the licensing of
our technology, segregated into three product categories: Data
Protection, which includes our NetBackup and Backup Exec product
families; Storage Management, which includes our Storage
Foundation Suite Products, Database Editions and storage
resource management product families; and Utility Computing
Infrastructure, which includes our clustering, high-availability
offerings, application performance management, or APM, OpForce
and CommandCentral Service product families.

|                                      |                                  |                                   |   |       |       |                   |   |       |       |      |  |          |    |   |   |       |       |   |   |       |       |   |  |    |    |  
|------------------------------------- | -------------------------------- | --------------------------------- | - | ----- | ----- | ----------------- | - | ----- | ----- | ---- |  | -------- | -- | - | - | ----- | ----- | - | - | ----- | ----- | - |  | -- | -- | -
|                                      |                                  |                                   |   |       |       |                   |   |      
|                                      |                                  | Three Months Ended                |   |       |       | Nine Months Ended |   |      
|                                      |                                  | September 30,                     |   |       |       | September 30,     |   |      
|                                      |                                  |                                   |   |       |       |                   |   |      
|                                      |                                  | 2004                              |   | 2003  |       | % Change          |   | 2004  |       | 2003 |  | % Change
|                                      |                                  |                                   |   |       |       |                   |   |       |       |      |  |         
|                                      |                                  |                                  
|                                      |                                  | (In millions, except percentages)
|User license fees:                    |                                  |                                   |   |       |       |                   |   |       |       |      |  |          |    |   |   |       |       |   |   |       |       |   |  |   
|                                      | Data protection                  |                                   | $ | 161.0 |       |                   | $ | 154.0 |       |      |  | 5        | %  |   | $ | 474.1 |       |   | $ | 440.5 |       |   |  | 8  | % 
|                                      | Storage management               |                                   |   | 64.4  |       |                   |   | 69.1  |       |      |  | (7       | )% |   |   | 222.6 |       |   |   | 194.4 |       |   |  | 15 | % 
|                                      | Utility computing infrastructure |                                   |   | 62.0  |       |                   |   | 58.7  |       |      |  | 6        | %  |   |   | 163.0 |       |   |   | 147.2 |       |   |  | 11 | % 
|                                      |                                  |                                   |   |       |       |                   |   |       |       |      |  |          |    |   |   |       |       |   |   |       |       |   |  |   
|                                      |                                  | Total user license fees           |   | $     | 287.4 |                   |   | $     | 281.8 |      |  |          | 2  | % |   | $     | 859.7 |   |   | $     | 782.1 |   |  |    | 10 | %
|                                      |                                  |                                   |   |       |       |                   |   |       |       |      |  |          |    |   |   |       |       |   |   |       |       |   |  |   
|As a percentage of user license fees: |                                  |                                   |   |       |       |                   |   |       |       |      |  |          |    |   |   |       |       |   |   |       |       |   |  |   
|                                      | Data protection                  |                                   |   | 56    | %     |                   |   | 55    | %     |      |  |          |    |   |   | 55    | %     |   |   | 56    | %     |   |  |    |   
|                                      | Storage management               |                                   |   | 22    | %     |                   |   | 24    | %     |      |  |          |    |   |   | 26    | %     |   |   | 25    | %     |   |  |    |   
|                                      | Utility computing infrastructure |                                   |   | 22    | %     |                   |   | 21    | %     |      |  |          |    |   |   | 19    | %     |   |   | 19    | %     |   |  |    |   
|                                      |                                  |                                   |   |       |       |                   |   |       |       |      |  |          |    |   |   |       |       |   |   |       |       |   |  |   
|                                      |                                  | Total user license fees           |   |       | 100   | %                 |   |       | 100   | %    |  |          |    |   |   |       | 100   | % |   |       | 100   | % |  |    |    |  
|                                      |                                  |                                   |   |       |       |                   |   |       |       |      |  |          |    |   |   |       |       |   |   |       |       |   |  |   
|                                      |                                  | As a percentage of net revenue    |   |       | 58    | %                 |   |       | 63    | %    |  |          |    |   |   |       | 59    | % |   |       | 63    | % |  |    |    |  
|                                      |                                  |                                   |   |       |       |                   |   |       |       |      |  |          |    |   |   |       |       |   |   |       |       |   |  |   

For the three and nine months ended
September 30, 2004 compared to 2003, user license fees
increased by $5.6 million or 2% and $77.6 million or
10%, respectively, due to increased user license fees in Europe
and other international regions of 18% and 13%, respectively,
for the three months ended September 30, 2004 over 2003 and
33% and 19% for the nine months ended September 30, 2004
over 2003. These increases were offset by an 8% decrease in
U.S. user license fees for the three months ended
September 30, 2004 over 2003 and a 2% decrease for the nine
months ended September 30, 2004 over 2003, primarily
reflecting a decrease in demand by the U.S. federal
government and weaker than expected license revenue in the
U.S. enterprise market in the second quarter of 2004. User
license fees across our Data Protection product category
increased by $7.0 million and $33.6 million for the
three and nine months ended September 30, 2004,
respectively, over 2003 due primarily to growth in our core
backup family of products, including NetBackup 5.0 which was
introduced during the fourth quarter of 2003. User license fees
across our Storage Management product category decreased
$4.7 million for the three months ended September 30,
2004 over 2003 as a result of a smaller number of large customer
transactions in the quarter and a decrease in revenue from the
U.S. federal government. For the nine months ended
September 30, 2004 compared to 2003, user license fees
across our Storage Management product category increased
$28.2 million primarily due to increases in our storage
foundation suite and storage resource management products,
including the introduction of Storage Foundation Suite 4.0
during the first quarter of 2004. User license fees across our
Utility Computing Infrastructure product category increased by
$3.3 million and $15.8 million for the three and nine
months ended

30



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##### Table of Contents



September 30, 2004, respectively, due
primarily to increases in clustering, Database Editions/
Advanced Cluster and APM products.


User license fees from OEMs accounted for 15% and
13% of user license fees for the three and nine months ended
September 30, 2004 and 12% for the three and nine months
ended September 30, 2003.

Unfilled license orders were approximately
$36.9 million and $47.9 million at September 30,
2004 and 2003, respectively. Unfilled license orders represent
cancelable and non-cancelable license orders that have been
received from our customers for the license of our software
products but have not been shipped as of the end of the
applicable fiscal period. We generally ship our software
products within 30 days after acceptance of customer
orders. In some cases, we have discretion over the timing of
product shipments, which affects the timing of revenue
recognition for software license orders. In those cases, we
consider a number of factors, including: the effect of the
related license revenue on our business plan; the delivery dates
requested by customers and resellers; the amount of software
license orders received in the quarter; the amount of software
license orders shipped in the quarter; the degree to which
software license orders received are concentrated at the end of
a quarter; and our operational capacity to fulfill software
license orders at the end of a quarter. We do not believe that
unfilled license orders are a consistent or reliable indicator
of future results.

Deferred license revenue was approximately
$10.2 million and $15.7 million at September 30,
2004 and 2003, respectively. Deferred license revenue represents
license orders for our software products that have been billed
to and paid by our customers and for which revenue will
generally be earned within the next year. Deferred license
revenue excludes license orders that have not been paid by our
customers and that do not otherwise satisfy our revenue
recognition criteria; these license orders were approximately
$29.0 million and $6.7 million at September 30,
2004 and 2003, respectively.



| |                 
| | ----------------
| | Services Revenue

|                               |  |                                   |       |      |  |                   |       |      |  |      |    |          |  |   |       |   |  |   |       |   |  |  |    |  
|------------------------------ |  | --------------------------------- | ----- | ---- |  | ----------------- | ----- | ---- |  | ---- | -- | -------- |  | - | ----- | - |  | - | ----- | - |  |  | -- | -
|                               |  |                                   |       |      |  |                   |       |     
|                               |  | Three Months Ended                |       |      |  | Nine Months Ended |       |     
|                               |  | September 30,                     |       |      |  | September 30,     |       |     
|                               |  |                                   |       |      |  |                   |       |     
|                               |  | 2004                              |       | 2003 |  | % Change          |       | 2004 |  | 2003 |    | % Change
|                               |  |                                   |       |      |  |                   |       |      |  |      |    |         
|                               |  |                                  
|                               |  | (In millions, except percentages)
|Services revenue               |  | $                                 | 209.3 |      |  | $                 | 164.8 |      |  |      | 27 | %        |  | $ | 607.8 |   |  | $ | 463.1 |   |  |  | 31 | %
|As a percentage of net revenue |  |                                   | 42    | %    |  |                   | 37    | %    |  |      |    |          |  |   | 41    | % |  |   | 37    | % |  |  |    |  

We derive our services revenue primarily from
contracts for software maintenance and technical support and, to
a lesser extent, consulting and education and training services.
The increase in services revenue for the three and nine months
ended September 30, 2004 over 2003 was due primarily to the
increase in software maintenance and technical support revenue
of 30% and 34%, respectively, as a result of a larger installed
base of customers, greater focus on renewing customer support
contracts, particularly internationally. We expect our services
revenue to increase in absolute dollars over time as we continue
to grow our installed base of customers, continue our focus on
renewing our software maintenance and technical support
contracts, and increase demand for our consulting and education
and training services.

Deferred services revenue was approximately
$408.0 million and $297.3 million at
September 30, 2004 and 2003, respectively. Maintenance and
technical support is generally recognized over the maintenance
and support period of twelve months. Training or consulting
services is generally recognized over the period the specific
services are delivered. The increase in deferred services
revenue is the result of significant growth in our installed
base of customers under software maintenance and technical
support contracts and our continued focus on maintenance and
technical support contract renewals.

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| |                
| | ---------------
| | Cost of Revenue

|                               |  |                                   |      |      |  |                   |      |      |  |      |   |          |  |   |       |   |  |   |       |   |  |  |   |  
|------------------------------ |  | --------------------------------- | ---- | ---- |  | ----------------- | ---- | ---- |  | ---- | - | -------- |  | - | ----- | - |  | - | ----- | - |  |  | - | -
|                               |  |                                   |      |      |  |                   |      |      |  |     
|                               |  | Three Months                      |      |      |  |                   |      |     
|                               |  | Ended                             |      |      |  | Nine Months Ended |      |     
|                               |  | September 30,                     |      |      |  | September 30,     |      |     
|                               |  |                                   |      |      |  |                   |      |     
|                               |  | 2004                              |      | 2003 |  | % Change          |      | 2004 |  | 2003 |   | % Change
|                               |  |                                   |      |      |  |                   |      |      |  |      |   |         
|                               |  |                                  
|                               |  | (In millions, except percentages)
|Cost of revenue                |  | $                                 | 78.3 |      |  | $                 | 75.5 |      |  |      | 4 | %        |  | $ | 237.2 |   |  | $ | 231.6 |   |  |  | 2 | %
|As a percentage of net revenue |  |                                   | 16   | %    |  |                   | 17   | %    |  |      |   |          |  |   | 16    | % |  |   | 19    | % |  |  |   |  

Gross margin on user license fees, excluding
amortization of developed technology, is substantially higher
than gross margin on services revenue, reflecting the low
materials, packaging and other costs of software products
compared with the relatively high personnel costs associated
with providing maintenance and technical support, consulting and
education services. Cost of services varies depending upon the
mix of maintenance and technical support, consulting and
education services. We expect gross margin to fluctuate in the
future, reflecting changes in royalty rates on licensed
technologies, the mix of license and services revenue and the
timing of continued investment in our services organization and
the recognition of revenue that we expect as a result of those
investments.



| |                                                                               
| | ------------------------------------------------------------------------------
| | Cost of User License Fees (including
    amortization of developed technology)

|                           |                                                                      |                                   |   |      |     |               |   |      |      |      |  |          |     |    |   |      |      |  |   |      |      |  |  |     |     |   
|-------------------------- | -------------------------------------------------------------------- | --------------------------------- | - | ---- | --- | ------------- | - | ---- | ---- | ---- |  | -------- | --- | -- | - | ---- | ---- |  | - | ---- | ---- |  |  | --- | --- | --
|                           |                                                                      |                                   |   |      |     |               |   |     
|                           |                                                                      | Three Months                      |   |      |     | Nine Months   |   |     
|                           |                                                                      | Ended                             |   |      |     | Ended         |   |     
|                           |                                                                      | September 30,                     |   |      |     | September 30, |   |     
|                           |                                                                      |                                   |   |      |     |               |   |     
|                           |                                                                      | 2004                              |   | 2003 |     | % Change      |   | 2004 |      | 2003 |  | % Change
|                           |                                                                      |                                   |   |      |     |               |   |      |      |      |  |         
|                           |                                                                      |                                  
|                           |                                                                      | (In millions, except percentages)
|Cost of user license fees: |                                                                      |                                   |   |      |     |               |   |      |      |      |  |          |     |    |   |      |      |  |   |      |      |  |  |    
|                           | User license fees                                                    |                                   | $ | 5.1  |     |               | $ | 11.5 |      |      |  | (56      | )%  |    | $ | 23.5 |      |  | $ | 35.1 |      |  |  | (33 | )% 
|                           | Amortization of developed technology                                 |                                   |   | 4.4  |     |               |   | 5.0  |      |      |  | (13      | )%  |    |   | 12.3 |      |  |   | 30.4 |      |  |  | (60 | )% 
|                           |                                                                      |                                   |   |      |     |               |   |      |      |      |  |          |     |    |   |      |      |  |   |      |      |  |  |    
|                           |                                                                      | Total cost of user license fees   |   | $    | 9.5 |               |   | $    | 16.5 |      |  |          | (43 | )% |   | $    | 35.8 |  |   | $    | 65.5 |  |  |     | (45 | )%
|                           |                                                                      |                                   |   |      |     |               |   |      |      |      |  |          |     |    |   |      |      |  |   |      |      |  |  |    
|Gross margin:              |                                                                      |                                   |   |      |     |               |   |      |      |      |  |          |     |    |   |      |      |  |   |      |      |  |  |    
|                           | User license fees including amortization of
    developed technology |                                   |   | 97   | %   |               |   | 94   | %    |      |  |          |     |    |   | 96   | %    |  |   | 92   | %    |  |  |     |    

Cost of user license fees consists primarily of
amortization of developed technology, royalties, media, manuals
and distribution costs. The amortization of developed technology
is related primarily to acquisitions completed during 2003 and
2004. Excluding amortization of developed technology from the
cost of user license fees, the gross margin on user license fees
would have been 98% and 97% for the three and nine months ended
September 30, 2004, respectively, and 96% for the three and
nine months ended September 30, 2003. The increase is
primarily the result of lower royalty rates in 2004. The gross
margin on user license fees may vary from period to period based
on the license revenue mix because some of our products carry
higher royalty rates than others. Excluding the amortization of
developed technology, we expect gross margins on user license
fees to remain relatively constant.

The decrease in amortization of developed
technology for the nine months ended September 30, 2004
over 2003 was primarily the result of the developed technology
related to the 1999 acquisitions reaching full amortization in
the second quarter of 2003. This decrease was partially offset
by the amortization of developed technology related to the
Precise, Ejasent and Invio acquisitions. We expect amortization
of developed technology to be approximately $7 million in
the fourth quarter of 2004 for our current intangible assets,
including the amortization of developed technology acquired from
KVS.

32



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| |                 
| | ----------------
| | Cost of Services

|                 |  |                                   |      |      |  |                   |      |      |  |      |    |          |  |   |       |   |  |   |       |   |  |  |    |  
|---------------- |  | --------------------------------- | ---- | ---- |  | ----------------- | ---- | ---- |  | ---- | -- | -------- |  | - | ----- | - |  | - | ----- | - |  |  | -- | -
|                 |  |                                   |      |      |  |                   |      |     
|                 |  | Three Months Ended                |      |      |  | Nine Months Ended |      |     
|                 |  | September 30,                     |      |      |  | September 30,     |      |     
|                 |  |                                   |      |      |  |                   |      |     
|                 |  | 2004                              |      | 2003 |  | % Change          |      | 2004 |  | 2003 |    | % Change
|                 |  |                                   |      |      |  |                   |      |      |  |      |    |         
|                 |  |                                  
|                 |  | (In millions, except percentages)
|Cost of services |  | $                                 | 68.8 |      |  | $                 | 58.9 |      |  |      | 17 | %        |  | $ | 201.4 |   |  | $ | 166.1 |   |  |  | 21 | %
|Gross margin     |  |                                   | 67   | %    |  |                   | 64   | %    |  |      |    |          |  |   | 67    | % |  |   | 64    | % |  |  |    |  

Cost of services consists primarily of
personnel-related costs in providing maintenance and technical
support, consulting and education to customers. The gross margin
improvement for the three and nine months ended
September 30, 2004 over 2003 was primarily the result of
the increase in maintenance and support revenues of 30% and 34%
for the three and nine months ended September 30, 2004 over
2003, respectively, while related expenses increased only 12%
and 19% for the three and nine months ended September 30,
2004 over 2003, respectively, as we continued to take advantage
of the larger installed customer base. We expect gross margin on
services revenue to be relatively flat for the remainder of 2004.



| |                      
| | ---------------------
| | Selling and Marketing

|                               |  |                                   |       |      |  |                   |       |      |  |      |    |          |  |   |       |   |  |   |       |   |  |  |    |  
|------------------------------ |  | --------------------------------- | ----- | ---- |  | ----------------- | ----- | ---- |  | ---- | -- | -------- |  | - | ----- | - |  | - | ----- | - |  |  | -- | -
|                               |  |                                   |       |      |  |                   |       |     
|                               |  | Three Months Ended                |       |      |  | Nine Months Ended |       |     
|                               |  | September 30,                     |       |      |  | September 30,     |       |     
|                               |  |                                   |       |      |  |                   |       |     
|                               |  | 2004                              |       | 2003 |  | % Change          |       | 2004 |  | 2003 |    | % Change
|                               |  |                                   |       |      |  |                   |       |      |  |      |    |         
|                               |  |                                  
|                               |  | (In millions, except percentages)
|Selling and marketing          |  | $                                 | 153.0 |      |  | $                 | 136.2 |      |  |      | 12 | %        |  | $ | 447.7 |   |  | $ | 373.3 |   |  |  | 20 | %
|As a percentage of net revenue |  |                                   | 31    | %    |  |                   | 30    | %    |  |      |    |          |  |   | 31    | % |  |   | 30    | % |  |  |    |  

Selling and marketing expenses consist primarily
of salaries, related benefits, commissions, consultant fees and
other costs associated with our sales and marketing efforts. The
increase for the three and nine months ended September 30,
2004 over 2003 of $16.8 million and $74.4 million,
respectively, was primarily the result of an increase in sales
commissions, compensation and benefit costs due to an increase
in personnel partially resulting from our 2003 and 2004
acquisitions, investments in sales capacity in our international
markets and higher sales commissions resulting from the increase
in total net revenues. Selling and marketing expenses remained
relatively consistent with the same period in 2003 when measured
as a percentage of total net revenue. We expect selling and
marketing expenses to continue to grow in absolute dollars, and
to remain relatively constant as a percentage of total net
revenues, for the remainder of 2004.



| |                         
| | ------------------------
| | Research and Development

|                               |  |                                   |      |      |  |                   |      |      |  |      |    |          |  |   |       |   |  |   |       |   |  |  |    |  
|------------------------------ |  | --------------------------------- | ---- | ---- |  | ----------------- | ---- | ---- |  | ---- | -- | -------- |  | - | ----- | - |  | - | ----- | - |  |  | -- | -
|                               |  |                                   |      |      |  |                   |      |     
|                               |  | Three Months Ended                |      |      |  | Nine Months Ended |      |     
|                               |  | September 30,                     |      |      |  | September 30,     |      |     
|                               |  |                                   |      |      |  |                   |      |     
|                               |  | 2004                              |      | 2003 |  | % Change          |      | 2004 |  | 2003 |    | % Change
|                               |  |                                   |      |      |  |                   |      |      |  |      |    |         
|                               |  |                                  
|                               |  | (In millions, except percentages)
|Research and development       |  | $                                 | 87.2 |      |  | $                 | 77.4 |      |  |      | 13 | %        |  | $ | 250.7 |   |  | $ | 219.4 |   |  |  | 14 | %
|As a percentage of net revenue |  |                                   | 18   | %    |  |                   | 17   | %    |  |      |    |          |  |   | 17    | % |  |   | 18    | % |  |  |    |  

Research and development expenses consist
primarily of salaries, related benefits, third-party consultant
fees and other engineering related costs. The increase of
$9.8 million and $31.3 million for the three and nine
months ended September 30, 2004 over 2003, respectively,
was primarily the result of increases in compensation costs from
an increase in staffing levels and an increase in outside
services used to supplement engineering personnel. We believe
that a significant level of research and development investment
is required to remain competitive and we expect to continue to
invest in research and development for the remainder of 2004 at
current levels as a percentage of revenue, including continued
investments in our operations in India.

33



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| |                           
| | --------------------------
| | General and Administrative

|                               |  |                                   |      |      |  |                   |      |      |  |      |    |          |  |   |       |   |  |   |       |   |  |  |    |  
|------------------------------ |  | --------------------------------- | ---- | ---- |  | ----------------- | ---- | ---- |  | ---- | -- | -------- |  | - | ----- | - |  | - | ----- | - |  |  | -- | -
|                               |  |                                   |      |      |  |                   |      |     
|                               |  | Three Months Ended                |      |      |  | Nine Months Ended |      |     
|                               |  | September 30,                     |      |      |  | September 30,     |      |     
|                               |  |                                   |      |      |  |                   |      |     
|                               |  | 2004                              |      | 2003 |  | % Change          |      | 2004 |  | 2003 |    | % Change
|                               |  |                                   |      |      |  |                   |      |      |  |      |    |         
|                               |  |                                  
|                               |  | (In millions, except percentages)
|General and administrative     |  | $                                 | 49.5 |      |  | $                 | 39.2 |      |  |      | 26 | %        |  | $ | 143.7 |   |  | $ | 117.0 |   |  |  | 23 | %
|As a percentage of net revenue |  |                                   | 10   | %    |  |                   | 9    | %    |  |      |    |          |  |   | 10    | % |  |   | 9     | % |  |  |    |  

General and administrative expenses consist
primarily of salaries, related benefits and fees for
professional services, such as legal and accounting services.
The increase of $10.3 million and $26.7 million for
the three and nine months ended September 30, 2004 over
2003, respectively, was primarily the result of an increase in
compensation and benefit costs, costs associated with our recent
restatement and compliance with our corporate governance
initiatives, including those required under the Sarbanes-Oxley
Act of 2002. We expect general and administrative expenses to
remain relatively constant as a percentage of revenue for the
remainder of 2004.



| |                                      
| | -------------------------------------
| | Amortization of Other
    Intangibles

|                                  |  |                                   |     |      |  |               |     |      |  |      |     |          |  |   |     |   |  |   |      |   |  |  |     |   
|--------------------------------- |  | --------------------------------- | --- | ---- |  | ------------- | --- | ---- |  | ---- | --- | -------- |  | - | --- | - |  | - | ---- | - |  |  | --- | --
|                                  |  |                                   |     |      |  |               |     |     
|                                  |  | Three Months                      |     |      |  | Nine Months   |     |     
|                                  |  | Ended                             |     |      |  | Ended         |     |     
|                                  |  | September 30,                     |     |      |  | September 30, |     |     
|                                  |  |                                   |     |      |  |               |     |     
|                                  |  | 2004                              |     | 2003 |  | % Change      |     | 2004 |  | 2003 |     | % Change
|                                  |  |                                   |     |      |  |               |     |      |  |      |     |         
|                                  |  |                                  
|                                  |  | (In millions, except percentages)
|Amortization of other intangibles |  | $                                 | 1.4 |      |  | $             | 2.5 |      |  |      | (43 | )%       |  | $ | 6.2 |   |  | $ | 32.9 |   |  |  | (81 | )%
|As a percentage of net revenue    |  |                                   | 0   | %    |  |               | 1   | %    |  |      |     |          |  |   | 0   | % |  |   | 3    | % |  |  |     |   

Amortization of other intangibles principally
represents amortization of distribution channels, trademarks and
other intangibles related to acquisitions. The decrease in
amortization of other intangibles for the nine months ended
September 30, 2004 over 2003 was primarily due to the
intangibles related to 1999 acquisitions reaching full
amortization during the second quarter of 2003. The amortization
of other intangibles also includes intangibles from the
acquisitions of Jareva, Precise, Ejasent and Invio, which are
being amortized over the estimated useful lives of two to five
years. We expect amortization of other intangibles to be
approximately $3 million for the fourth quarter of 2004 for
our current intangible assets, including the amortization of
developed technology acquired from KVS.



| |                                        
| | ---------------------------------------
| | In-Process Research and
    Development

In connection with our acquisition of Ejasent in
January 2004 and KVS in September 2004, we allocated
$0.4 million and $11.5 million, respectively, of the
purchase price to IPR&D, which represents technology we
identified as having not reached technological feasibility and
having no alternative future use. In connection with our
acquisition of Jareva in January 2003 and Precise in June 2003,
we allocated $4.1 million and $15.3 million,
respectively, of the purchase price to IPR&D.



| |                        
| | -----------------------
| | Restructuring Reversals

In the third quarter of 2004, in connection with
our acquisition of KVS, we reversed $9.6 million of accrued
restructuring costs related to previously restructured
facilities to be occupied by KVS personnel.



| |                                   
| | ----------------------------------
| | Interest and Other Income,
    Net

|                               |  |               |      |                                   |  |               |     |      |  |      |    |          |  |   |      |   |  |   |      |   |  |  |   |  
|------------------------------ |  | ------------- | ---- | --------------------------------- |  | ------------- | --- | ---- |  | ---- | -- | -------- |  | - | ---- | - |  | - | ---- | - |  |  | - | -
|                               |  |               |      |                                   |  |               |     |     
|                               |  | Three Months  |      |                                   |  | Nine Months   |     |     
|                               |  | Ended         |      |                                   |  | Ended         |     |     
|                               |  | September 30, |      |                                   |  | September 30, |     |     
|                               |  |               |      |                                   |  |               |     |     
|                               |  | 2004          |      | 2003                              |  | % Change      |     | 2004 |  | 2003 |    | % Change
|                               |  |               |      |                                   |  |               |     |      |  |      |    |         
|                               |  |               |      |                                   |  |              
|                               |  |               |      | (In millions, except percentages) |  |              
|Interest and other income, net |  | $             | 13.7 |                                   |  | $             | 8.7 |      |  |      | 58 | %        |  | $ | 35.4 |   |  | $ | 33.6 |   |  |  | 6 | %
|As a percentage of net revenue |  |               | 3    | %                                 |  |               | 2   | %    |  |      |    |          |  |   | 2    | % |  |   | 3    | % |  |  |   |  

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Interest and other income, net, includes interest
income and realized gains and losses on our cash equivalents and
investments held and, to a lesser extent, foreign currency
exchange gains or losses. The increase in interest and other
income of $5.0 and $1.8 million for the three and nine
months ended September 30, 2004 over 2003, respectively, is
due primarily to an increase in interest income due to higher
average cash equivalents and investments balances and an
increase in interest rates.



| |                 
| | ----------------
| | Interest Expense

|                               |  |                                   |     |      |  |               |     |      |  |      |     |          |  |   |      |   |  |   |      |   |  |  |     |   
|------------------------------ |  | --------------------------------- | --- | ---- |  | ------------- | --- | ---- |  | ---- | --- | -------- |  | - | ---- | - |  | - | ---- | - |  |  | --- | --
|                               |  |                                   |     |      |  |               |     |     
|                               |  | Three Months                      |     |      |  | Nine Months   |     |     
|                               |  | Ended                             |     |      |  | Ended         |     |     
|                               |  | September 30,                     |     |      |  | September 30, |     |     
|                               |  |                                   |     |      |  |               |     |     
|                               |  | 2004                              |     | 2003 |  | % Change      |     | 2004 |  | 2003 |     | % Change
|                               |  |                                   |     |      |  |               |     |      |  |      |     |         
|                               |  |                                  
|                               |  | (In millions, except percentages)
|Interest expense               |  | $                                 | 6.5 |      |  | $             | 9.2 |      |  |      | (30 | )%       |  | $ | 18.2 |   |  | $ | 24.8 |   |  |  | (27 | )%
|As a percentage of net revenue |  |                                   | 1   | %    |  |               | 2   | %    |  |      |     |          |  |   | 1    | % |  |   | 2    | % |  |  |     |   

Interest expense for the three and nine months
ended September 30, 2004 consisted of interest recorded
under the 0.25% convertible subordinated notes issued in
August 2003 and interest of approximately $4 million per
quarter, beginning in July 2003, as a result of our adoption of
Financial Accounting Standards Board, or FASB, Interpretation
Number, or FIN, 46, Consolidation of Variable Interest
Entities, which required us to consolidate the properties
from our build-to-suit lease agreements and related debt in our
financial statements. Previously, interest on the build-to-suit
lease agreements was recorded as rent expense in cost of revenue
and operating expenses. Interest expense for the three and nine
months ended September 30, 2003 also consisted of interest
recorded under the 1.856% convertible subordinated notes
issued in August 1999 that were partially redeemed for cash and
partially converted to common stock in August 2003 and interest
recorded under the 5.25% convertible subordinated notes
issued in October 1997 that were converted to common stock in
August 2003. We expect interest expense for the fourth quarter
of 2004 to be approximately $6 million representing the
interest on the 0.25% convertible subordinated notes and
the interest on the build-to-suit lease agreements.



| |                                   
| | ----------------------------------
| | Loss on Extinguishment of
    Debt

In August 2003 we redeemed $391.7 million of
our outstanding 1.856% convertible subordinated notes for
cash. In connection with this cash redemption, we recorded a
loss on extinguishment of debt of $4.7 million representing
the unamortized portion of debt issuance costs at the time of
redemption.



| |                                         
| | ----------------------------------------
| | Gain (Loss) on Strategic
    Investments

For the nine months ended September 30,
2004, we recognized a gain on strategic investments of
$7.5 million related to the sale of one of our investments.
For the nine months ended September 30, 2003, we recognized
impairment losses of $3.5 million on our strategic
investments when we determined that there had been a decline in
the fair value of these investments that was other than
temporary. These losses represented write-downs of the carrying
amount of our investments.



| |                           
| | --------------------------
| | Provision for Income Taxes

|                               |  |                    |      |                                   |  |                   |      |      |  |      |   |          |  |   |       |   |  |   |      |   |  |  |    |  
|------------------------------ |  | ------------------ | ---- | --------------------------------- |  | ----------------- | ---- | ---- |  | ---- | - | -------- |  | - | ----- | - |  | - | ---- | - |  |  | -- | -
|                               |  |                    |      |                                   |  |                   |      |     
|                               |  | Three Months Ended |      |                                   |  | Nine Months Ended |      |     
|                               |  | September 30,      |      |                                   |  | September 30,     |      |     
|                               |  |                    |      |                                   |  |                   |      |     
|                               |  | 2004               |      | 2003                              |  | % Change          |      | 2004 |  | 2003 |   | % Change
|                               |  |                    |      |                                   |  |                   |      |      |  |      |   |         
|                               |  |                    |      |                                   |  |                  
|                               |  |                    |      | (In millions, except percentages) |  |                  
|Income taxes                   |  | $                  | 36.4 |                                   |  | $                 | 36.3 |      |  |      | 0 | %        |  | $ | 121.8 |   |  | $ | 88.9 |   |  |  | 37 | %
|As a percentage of net revenue |  |                    | 7    | %                                 |  |                   | 8    | %    |  |      |   |          |  |   | 8     | % |  |   | 7    | % |  |  |    |  
|Effective tax rate             |  |                    | 27   | %                                 |  |                   | 33   | %    |  |      |   |          |  |   | 30    | % |  |   | 35   | % |  |  |    |  

Our effective tax rate for the third quarter of
2004 differed from the combined federal and state statutory
rates due primarily to the tax effect of international
operations. The decrease in our effective tax rates for the
three and nine months ended September 30, 2004 over 2003 is
primarily due to differences attributable to the

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restructuring reversals in 2004 and
acquisition-related charges in 2003, including in-process
research and development, that were non-deductible for tax
purposes.




| |                                                                    
| | -------------------------------------------------------------------
| | Cumulative Effect of Change in Accounting
    Principle, Net of Tax

We currently have three build-to-suit operating
leases, commonly referred to as synthetic leases, which were
entered into prior to February 1, 2003. Each synthetic
lease is owned by a trust that has no voting rights, no
employees, no financing activity other than the lease with us,
no ability to absorb losses and no right to participate in gains
realized on the sale of the related property. We have determined
that the trusts under the leasing structures qualify as variable
interest entities for purposes of FIN 46, Consolidation
of Variable Interest Entities. Consequently, we are
considered the primary beneficiary and consolidated the trusts
into our financial statements beginning July 1, 2003. As a
result of consolidating these entities in the third quarter of
2003, we reported a cumulative effect of change in accounting
principle in accordance with Accounting Principles Board, or
APB, Opinion No. 20, Accounting Changes, with a
charge of $6.2 million which equals the amount of
depreciation expense that would have been recorded had these
trusts been consolidated from the date the properties were
available for occupancy, net of tax.

Accrued Acquisition and Restructuring
Costs

In the fourth quarter of 2002, our board of
directors approved a facility restructuring plan to exit and
consolidate certain of our facilities located in 17 metropolitan
areas worldwide. The facility restructuring plan was adopted to
address overcapacity in our facilities as a result of lower than
planned headcount growth in these metropolitan areas. In
connection with this facility restructuring plan, we recorded a
net restructuring charge, or the 2002 Facility Accrual, to
operating expenses of $96.1 million in the fourth quarter
of 2002. The 2002 Facility Accrual was originally comprised of
(i) $86.9 million associated with terminating and
satisfying remaining lease commitments, partially offset by
sublease income net of related sublease costs and
(ii) write-offs of $9.2 million for net assets.

In the third quarter of 2004, we acquired KVS
and, as a result, reversed $9.6 million of the 2002
Facility Accrual related to previously restructured facilities
to be occupied by KVS personnel. In addition, cash outlays of
$4.0 million and the impact of foreign exchange rates of
$0.4 million were recognized in the third quarter of 2004.
As of September 30, 2004, the remaining balance of the 2002
Facility Accrual was $55.0 million. Restructuring costs
will generally be paid over the remaining lease terms, ending at
various dates through 2022, or over a shorter period as we may
negotiate with our lessors. The majority of costs are expected
to be paid by the year ending December 31, 2010.

We are in the process of seeking suitable
subtenants for these facilities. The estimates related to the
2002 Facility Accrual may vary significantly depending, in part,
on factors that are beyond our control, including the commercial
real estate market in the applicable metropolitan areas, our
ability to obtain subleases related to these facilities and the
time period to do so, the sublease rental market rates and the
outcome of negotiations with lessors regarding terminations of
some of the leases. Adjustments to the 2002 Facility Accrual
will be made if actual lease exit costs or sublease income
differ from amounts currently expected. Because a portion of the
2002 Facility Accrual relates to international locations, the
accrual will be affected by exchange rate fluctuations.

As of September 30, 2004, accrued
acquisition and restructuring costs consisted of the 2002
Facility Accrual discussed above, acquisition related costs
discussed in Note 5 of the Notes to Condensed Consolidated
Financial Statements and other accrued acquisition and
restructuring charges incurred from 1999 through 2003, net of
cash payments made.

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The components of the accrued acquisition and
restructuring costs and movements within these components
through September 30, 2004 were as follows:

|                              |                              |               |     |             |   |               |     |            |   |       |      |      |   |   |     |      |   |   |      |       |  
|----------------------------- | ---------------------------- | ------------- | --- | ----------- | - | ------------- | --- | ---------- | - | ----- | ---- | ---- | - | - | --- | ---- | - | - | ---- | ----- | -
|                              |                              | Direct        |     | Involuntary |   |               |     |            |   |      
|                              |                              | Transaction   |     | Termination |   | Facilities    |     | Asset      |   |      
|                              |                              | Costs         |     | Benefits    |   | Related Costs |     | Write-offs |   | Total
|                              |                              |               |     |             |   |               |     |            |   |      
|                              |                              |              
|                              |                              | (In millions)
|Balance at December 31, 2003  |                              | $             | 0.6 |             |   | $             |    |            |   | $     | 91.4 |      |   | $ | 2.1 |      |   | $ | 94.1 |      
|                              | Additions                    |               |     | 2.1         |   |               |     | 11.5       |   |       |      |     |   |   |     |     |   |   |      | 13.6  |  
|                              | Cash payments                |               |     | (1.8        | ) |               |     | (11.4      | ) |       |      | (5.1 | ) |   |     |     |   |   |      | (18.3 | )
|                              | Non-cash charges             |               |     |            |   |               |     |           |   |       |      |     |   |   |     | (2.1 | ) |   |      | (2.1  | )
|                              | Impact of exchange rates     |               |     |            |   |               |     |           |   |       |      | 0.7  |   |   |     |     |   |   |      | 0.7   |  
|                              |                              |               |     |             |   |               |     |            |   |       |      |      |   |   |     |      |   |   |      |      
|Balance at March 31, 2004     |                              |               | 0.9 |             |   |               | 0.1 |            |   |       | 87.0 |      |   |   |    |      |   |   | 88.0 |      
|                              | Cash payments                |               |     | (0.4        | ) |               |     |           |   |       |      | (5.0 | ) |   |     |     |   |   |      | (5.4  | )
|                              | Impact of exchange rates     |               |     |            |   |               |     |           |   |       |      | 0.3  |   |   |     |     |   |   |      | 0.3   |  
|                              |                              |               |     |             |   |               |     |            |   |       |      |      |   |   |     |      |   |   |      |      
|Balance at June 30, 2004      |                              |               | 0.5 |             |   |               | 0.1 |            |   |       | 82.3 |      |   |   |    |      |   |   | 82.9 |      
|                              | Additions                    |               |     | 4.2         |   |               |     | 0.1        |   |       |      | 2.1  |   |   |     |     |   |   |      | 6.4   |  
|                              | Cash payments                |               |     | (0.8        | ) |               |     |           |   |       |      | (5.1 | ) |   |     |     |   |   |      | (5.9  | )
|                              | Restructuring reversals, net |               |     |            |   |               |     |           |   |       |      | (9.6 | ) |   |     |     |   |   |      | (9.6  | )
|                              | Other                        |               |     |            |   |               |     |           |   |       |      | (0.4 | ) |   |     |     |   |   |      | (0.4  | )
|                              | Impact of exchange rates     |               |     |            |   |               |     |           |   |       |      | (0.5 | ) |   |     |     |   |   |      | (0.5  | )
|                              |                              |               |     |             |   |               |     |            |   |       |      |      |   |   |     |      |   |   |      |      
|Balance at September 30, 2004 |                              | $             | 3.9 |             |   | $             | 0.2 |            |   | $     | 68.8 |      |   | $ |    |      |   | $ | 72.9 |      
|                              |                              |               |     |             |   |               |     |            |   |       |      |      |   |   |     |      |   |   |      |      

Recent Accounting Pronouncements

In September 2004, the EITF reached a consensus
on EITF Issue No. 04-8, The Effect of Contingently
Convertible Debt on Diluted Earnings per Share,that all
issued securities that have embedded conversion features that
are contingently exercisable upon occurrence of a market-price
condition should be included in the calculation of diluted
earnings per share, regardless of whether the market price
trigger has been met. This consensus also applies to instruments
with embedded conversion features that are contingently
exercisable upon the occurrence of a market price condition or
upon the occurrence of another contingency. The FASB is
presently in the process of amending certain aspects of
SFAS No. 128, Earnings per Share, and it is expected
to require that share settlement be assumed in the diluted
earnings per share calculation for contracts that can be settled
in stock or cash. The consensus in EITF Issue No. 04-8 will
become effective in the period when the proposed amendment to
SFAS No. 128 becomes effective. We do not believe that
EITF Issue No. 04-8 will have a material effect on the
Companys diluted per share calculation and we will
evaluate the impact of the amendments to SFAS No. 128
once issued.

In March 2004, FASB issued EITF Issue
No. 03-1, The Meaning of Other-Than-Temporary Impairment
and Its Application to Certain Investments. EITF Issue
No. 03-1 includes new guidance for evaluating and recording
impairment losses on debt and equity investments, as well as new
disclosure requirements for investments that are deemed to be
temporarily impaired. In September 2004, the FASB delayed the
accounting provisions of EITF Issue No. 03-1; however, the
disclosure requirements are effective for our annual period
ending December 31, 2004. We will evaluate the impact of
EITF Issue No. 03-1 once final guidance is issued.

Liquidity and Capital Resources



| |           
| | ----------
| | Cash Flows

Our largest source of operating cash flows is
cash collections from our customers for purchases of software
licenses and maintenance and technical support. Our standard
payment terms for both license and support invoices are net
30 days from the date of invoice. Our primary uses of cash
for operating activities

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include personnel and facilities related
expenditures, income tax payments and technology costs as well
as costs associated with outside support and services.


Cash flows provided by operating activities for
the nine months ended September 30, 2004 decreased
$21.1 million compared to the same period a year ago. Our
net income for the nine months ended September 30, 2004 was
significantly higher than 2003; however, this was offset by
lower non-cash charges such as amortization of developed
technology and other intangibles and write-off of in-process
research and development. In addition, there was a higher amount
of cash paid for income taxes for the nine months ended
September 30, 2004 compared to 2003.

Cash flows used for investing activities consist
primarily of net purchases of investments, property and
equipment and businesses and technology. Cash flows used for
investing activities included net purchases of investments of
$230.5 million for the nine months ended September 30,
2004 compared to net sales of $15.6 million for the nine
months ended September 30, 2003 and an increase of
$27.4 million for purchases of property and equipment for
the nine months ended September 30, 2004 over 2003. In
addition, purchases of businesses and technology were
$325.1 million for the nine months ended September 30,
2004, primarily related to the acquisitions of Ejasent, Invio
and KVS, compared to $402.4 million for the nine months
ended September 30, 2003, primarily related to the
acquisitions of Jareva and Precise.

Cash flows from financing activities consist
primarily of proceeds related to the issuance of common stock
under our employee stock plans of $80.2 million for the
nine months ended September 30, 2004 and
$132.5 million for the nine months ended September 30,
2003 offset by $70.9 million used for the repurchase of our
common stock for the nine months ended September 30, 2004
and $316.2 million used for the repurchase of our common
stock for the nine months ended September 30, 2003. In
addition, in 2003 we generated $116.6 million of cash from
the issuance of new convertible subordinated notes, net of the
redemption of the then-outstanding convertible subordinated
notes.

In July 2004, our board of directors authorized a
program to repurchase our common stock in an amount of up to
$500.0 million over the next 12 to 18 months. We
expect to purchase these shares of common stock from time to
time on the open market or in privately negotiated transactions.
Depending on market conditions and other factors, these
purchases may be commenced or suspended from time to time
without prior notice. The stock repurchase program is primarily
intended to reduce the dilution resulting from our employee
stock plans. In the third quarter of 2004, we repurchased
5.4 million shares of common stock for an aggregate
purchase price of $94.3 million, of which
$23.4 million was paid to the Companys agent in
October 2004. Between October 1 and October 31, 2004,
the Company repurchased an additional 7.6 million shares of
common stock for an aggregate purchase price of
$155.7 million.

We continue to evaluate alternative uses of our
cash including, but not limited to, exercising our purchase
option for the properties subject to the build-to-suit lease
arrangements, repurchasing additional amounts of our common
stock and strategic acquisitions, any of which could reduce the
amount of available cash and cash equivalents.



| |                                   
| | ----------------------------------
| | Convertible Subordinated
    Notes

In August 2003, we issued $520.0 million of
0.25% convertible subordinated notes due August 1,
2013, or 0.25% Notes, for which we received net proceeds of
approximately $508.2 million, to several initial purchasers
in a private offering. The 0.25% Notes were issued at their face
value and provide for semi-annual interest payments of
$0.7 million each February 1 and August 1, beginning
February 1, 2004. Effective as of January 28, 2004,
the 0.25% Notes began accruing additional interest at a
rate of 0.25% as a result of our registration statement having
not been declared effective by the SEC on or before the 180th
day following the original issuance of the 0.25% Notes and
the 0.25% Notes continued to accrue additional interest at
that rate until April 27, 2004, the 90th day following such
registration default. As of April 27, 2004, the
0.25% Notes began to accrue additional interest at a rate
of 0.50% and will continue to accrue such additional interest
until the date on which the registration statement is declared
effective. The 0.25% Notes are convertible, under specified
circumstances, into shares of our common stock at a conversion
rate of 21.6802 shares per $1,000 principal amount of
notes, which is equivalent to a conversion price of
approximately $46.13 per share;

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provided that, pursuant to the terms of a
supplemental indenture dated as of October 25, 2004, we
will be required to deliver cash to holders upon conversion,
except to the extent that our conversion obligation exceeds the
principal amount of the notes converted, in which case, we will
have the option to satisfy the excess (and only the excess) in
cash and/or shares of common stock.


At September 30, 2004, we had a ratio of
long-term debt to total capitalization of approximately 12%. The
degree to which we are leveraged could materially and adversely
affect our ability to obtain financing for working capital,
acquisitions or other purposes and could make us more vulnerable
to industry downturns and competitive pressures. We will require
substantial amounts of cash to fund scheduled payments of
principal and interest on our indebtedness, future capital
expenditures and any increased working capital requirements.



| |               
| | --------------
| | Long-Term Debt

In 1999 and 2000, we entered into three
build-to-suit lease agreements for office buildings in Mountain
View, California, Roseville, Minnesota and Milpitas, California.
We began occupying the Roseville and Mountain View facilities in
May and 2001, respectively, and began occupying the Milpitas
facility in April 2003. A syndicate of financial institutions
financed the acquisition and development of these properties.
Prior to July 1, 2003, we accounted for these properties as
operating leases in accordance with SFAS No. 13,
Accounting for Leases, as amended. On July 1, 2003,
we adopted FIN 46. Under FIN 46, the lessors of the
facilities are considered variable interest entities, and we are
considered the primary beneficiary. Accordingly, we began
consolidating the variable interest entities on July 1,
2003 and have included the property and equipment and long-term
debt on our balance sheet at September 30, 2004 and
December 31, 2003 and the results of their operations in
our consolidated statement of operations for the three and nine
months ended September 30, 2004. As of September 30,
2004, approximately $380.6 million of debt has been
classified as current as the lease terms for the Mountain View
and Roseville facilities expire in March 2005 and lease terms
for Milpitas facilities expire in July 2005.

Interest only payments under our debt agreements
relating to the facilities are generally paid quarterly and are
equal to the termination value of the outstanding debt
obligations multiplied by our cost of funds, which is based on
London Inter Bank Offered Rate, or LIBOR, using 30-day to
180-day LIBOR contracts and adjusted for our credit spread. The
termination values of the debt agreements are approximately
$145.2 million, $41.2 million and $194.2 million
for the Mountain View, Roseville and Milpitas leases,
respectively. The terms of these debt agreements are five years
with an option to extend the lease terms for two successive
periods of one year each, if agreed to by the financial
institutions that financed the facilities. The terms of these
debt agreements began March 2000 for the Mountain View and
Roseville facilities and July 2000 for the Milpitas facility. We
have the option to purchase the three facilities for the
aggregate termination value of $380.6 million or, at the
end of the term, to arrange for the sale of the properties to
third parties while we retain an obligation to the financial
institutions that financed the facilities in an amount equal to
the difference between the sales price and the guaranteed
residual value up to an aggregate $344.6 million if the
sales price is less than this amount, subject to the specific
terms of the debt agreements. In addition, we are entitled to
any proceeds from a sale of the facilities in excess of the
termination values. Payment of the purchase price for these
properties would reduce the amount of cash, cash equivalents and
short-term investments available for funding our research and
development efforts, geographic expansion and strategic
acquisitions in the future.

In January 2002, we entered into two three-year
pay fixed, receive floating, interest rate swaps for the purpose
of hedging the cash payments related to the Mountain View,
California and Roseville, Minnesota agreements. Under the terms
of these interest rate swaps, we make payments based on the
fixed rate and will receive interest payments based on the
3-month LIBOR rate. For the three months ended
September 30, 2004 and 2003, the aggregate payments,
including the net payments on the interest rate swaps, were
$4.3 million and for the nine months ended
September 30, 2004 and 2003, the aggregate payments,
including the net payments on the interest rate swaps, were
$12.3 million and $12.5 million, respectively. The
payments for the three months ended September 30, 2004 and
2003 and for the nine months ended September 30, 2004 were
included in interest expense in the consolidated statements of
operations in accordance with FIN 46. The payments made for
the six months ended June 30, 2003 were classified as rent
expense and included in cost of

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revenue and operating expenses, in accordance
with SFAS No. 13. We expect future interest expense
from the build-to-suit agreements to be approximately
$4 million per quarter.


The agreements for each of the facilities
described above require that we maintain specified financial
covenants, all of which we were in compliance with as of
September 30, 2004. The specified financial covenants as of
September 30, 2004 require us to maintain a minimum rolling
four quarter earnings before interest, taxes, depreciation and
amortization of EBITDA of $500.0 million, a minimum ratio
of cash and cash equivalents and accounts receivable to current
liabilities plus the debt consolidated under the build-to-suit
lease agreements of 1.2 to 1, and a leverage ratio of total
funded indebtedness to rolling four quarter EBITDA of not more
than 2 to 1. For purposes of these financial covenants, EBITDA
represents our net income for the applicable period, plus
interest expense, taxes, depreciation and amortization and all
non-cash restructuring charges, less software development
expenses classified as capital expenditures. In order to secure
the obligation under each agreement, each of the facilities is
subject to a deed of trust in favor of the financial
institutions that financed the acquisition and development of
the respective facility. Bank of America, N.A. was the agent for
the syndicate of banks that funded the development of the
Mountain View, California and Roseville, Minnesota facilities,
and ABN AMRO Bank, N.V. was the agent for the syndicate of banks
that funded the development of the Milpitas, California facility.



| |                
| | ---------------
| | Credit Facility

During 2002, our Japanese subsidiary entered into
a short-term credit facility with a multinational Japanese bank
in the amount of 1.0 billion Japanese yen
($9.0 million USD). At September 30, 2004, no amount
was outstanding. The short-term credit facility was renewed in
March 2004 and is due to expire in March 2005. Borrowings under
the short-term credit facility bear interest at Tokyo Inter Bank
Offered Rate, plus 0.5%. There are no covenants on the
short-term credit facility and the loan has been guaranteed by
VERITAS Software Global LLC, one of our wholly-owned
subsidiaries.



| |                                    
| | -----------------------------------
| | Acquired Technology
    Commitments

On October 1, 2002, we acquired volume
replicator software technology for $6.0 million and
contingent payments of up to another $6.0 million based on
future revenues generated by the acquired technology. The
contingent payments will be paid quarterly over 40 quarters, in
amounts between $150,000 and $300,000, which includes interest.
We issued a promissory note payable in the principal amount of
$5.0 million, representing the present value of our minimum
payment obligations under the purchase agreement for the
acquired technology, which are payable quarterly commencing in
the first quarter of 2003 and ending in the fourth quarter of
2012. The contingent payments in excess of the quarterly minimum
obligations will be paid as they may become due. The outstanding
balance of the note payable was $4.3 million as of
September 30, 2004 and $4.6 million as of
December 31, 2003 and is included in other long-term
liabilities.

We believe that our current cash, cash
equivalents and short-term investment balances and cash flow
from operations will be sufficient to meet our working capital
and capital expenditure requirements for at least the next
12 months. After that time, we may require additional funds
to support our working capital requirements or for other
purposes and may seek to raise such additional funds through
public or private equity financing or from other sources. We
cannot assure you that additional financing will be available at
all or that if available, we will be able to obtain it on terms
favorable to us.

Factors That May Affect Future
Results

In addition to the other information in this
quarterly report on Form 10-Q, you should consider
carefully the following factors in evaluating VERITAS and our
business.

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| |                                                                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we experience lower-than-anticipated
    revenue in any particular quarter, or if we announce that we
    expect lower revenue or earnings than previously forecasted, the
    market price of our securities could decline.

Our revenue is difficult to forecast and is
likely to fluctuate from quarter to quarter due to many factors
outside of our control. Any significant revenue shortfall or
lowered revenue or earnings forecast could cause the market
price of our securities to decline substantially. Factors that
could lower our revenue or affect our revenue and earnings
forecast include:



| |   |                                                                                                                                                                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the possibility that our customers may cancel,
    defer or limit purchases as a result of reduced IT budgets or
    weak and uncertain economic and industry conditions;                                                                                                                                                                  
|
| |  | the possibility that our customers may defer
    purchases of our products in anticipation of new products or
    product updates from us or our competitors;                                                                                                                                                                              
|
| |  | changes in the competitive landscape due to
    mergers, acquisitions or strategic alliances that could allow
    our competitors to gain market share;                                                                                                                                                                                    
|
| |  | the possibility that our strategic partners will
    introduce, market and sell products that compete with our
    products;                                                                                                                                                                                                               
|
| |  | the unpredictability of the timing and magnitude
    of our sales through direct sales channels and indirect sales
    channels, including value-added resellers, or VARs, and other
    distributors, which tend to occur later in a quarter than
    revenues received through our original equipment manufacturer,
    or OEM, partners;
|
| |  | our operational capacity to fulfill software
    license orders received at the end of a quarter;                                                                                                                                                                                                                                          
|
| |  | the timing of new product introductions by us and
    the market acceptance of new products, which may be delayed as a
    result of weak and uncertain economic and industry conditions;                                                                                                                                                  
|
| |  | the seasonal nature of our sales;                                                                                                                                                                                                                                                                                                          
|
| |  | the rate of adoption and long sales cycles for
    new solutions such as utility computing, storage resource
    management technology and replication;                                                                                                                                                                                    
|
| |  | changes in our pricing and distribution terms or
    those of our competitors; and                                                                                                                                                                                                                                                         
|
| |  | the possibility that our business will be
    adversely affected as a result of the threat of terrorism,
    terrorism or military actions taken by the United States or its
    allies.                                                                                                                                                   

You should not rely on the results of prior
periods as an indication of our future performance. Our
operating expense levels are based, in significant part, on our
expectations of future revenue. If we have a shortfall in
revenue or orders in any given quarter, we may not be able to
reduce our operating expenses quickly in response. Therefore,
any significant shortfall in revenue or orders could have an
immediate adverse effect on our operating results for that
quarter. In addition, if we fail to manage our business
effectively, we may experience high operating expenses, and our
operating results may fall below the expectations of securities
analysts or investors.



| |                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Because we derive a majority of our license
    revenue from sales of a few product lines, any decline in demand
    for these products could severely harm our ability to generate
    revenue.

We derive a majority of our revenue from a small
number of software products, including our NetBackup and Backup
Exec data protection products. In addition, our software
products are concentrated within the market for data storage.
For example, for the nine months ended September 30, 2004,
we derived approximately 55% of our user license fees from the
NetBackup and Backup Exec products. As a result, we are
particularly vulnerable to fluctuations in demand for these
products, whether as a result of competition, product
obsolescence, technological change, budget constraints of our
potential customers or other factors. If our revenue derived
from these software products were to decline significantly, our
business and operating results would be adversely affected. In
addition, because our software products are concentrated within
the

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market for data storage, a decline in the demand
for storage devices, storage software applications or storage
capacity could result in a significant reduction in our revenue
and adversely affect our business and operating results.




| |                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we fail to manage our distribution
    channels effectively, or if our partners choose not to market
    and sell our products to their customers, our sales could
    decline.

We market our products and related services both
directly to end-users and through a variety of indirect sales
channels, which include VARs, distributors, system integrators
and OEMs. If we fail to manage our distribution channels
successfully, our distribution channels may conflict with one
another or otherwise fail to perform as we anticipate which
could reduce our sales and increase our expenses, as well as
weaken our competitive position.

Direct Sales.A
significant portion of our revenue is derived from sales by our
direct sales force to end-users. This sales channel involves
special risks, including:



| |   |                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | longer sales cycles associated with direct sales
    efforts;                                                                                               
|
| |  | we may have difficulty hiring, training,
    retaining and motivating our direct sales force; and                                                           
|
| |  | sales representatives require a substantial
    amount of training to become productive, and training must be
    updated to cover new and revised products.

Indirect Sales
Channels.A significant portion of our
revenue is also derived from sales through indirect sales
channels, including distributors that sell our products to
end-users and other resellers. This channel involves a number of
special risks, including:



| |   |                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our lack of control over the timing of delivery
    of our products to end-users;                                                                
|
| |  | our resellers and distributors are not subject to
    minimum sales requirements or any obligation to market our
    products to their customers;
|
| |  | our resellers and distributors may terminate
    their relationships with us at any time; and                                                    
|
| |  | our resellers and distributors may market and
    distribute competing products.                                                                 

OEMs.A portion of
our revenue is derived from sales through our OEM partners that
incorporate our products into their products. Our reliance on
this sales channel involves many risks, including:



| |   |                                                                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our lack of control over the shipping dates or
    volume of systems shipped;                                                                                                                                                
|
| |  | our OEM partners are not subject to minimum sales
    requirements or any obligation to market our products to their
    customers;                                                                                          
|
| |  | our OEM partners may terminate or renegotiate
    their arrangements with us and new terms may be less favorable
    in recognition of our increasingly competitive relationship with
    certain partners;                  
|
| |  | the development work that we must generally
    undertake under our agreements with our OEM partners may require
    us to invest significant resources and incur significant costs
    with little or no associated revenue;
|
| |  | the time and expense required for the sales and
    marketing organizations of our OEM partners to become familiar
    with our products may make it more difficult to introduce those
    products to the market; and       
|
| |  | our OEM partners may develop, market and
    distribute their own products and market and distribute products
    of our competitors, which could reduce our sales.                                                          

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| |                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We face intense competition, and our
    competitors may gain market share in the markets for our
    products, which could adversely affect the growth of our
    business and cause our revenues to decline.

We have many competitors in the markets for our
products. If existing or new competitors gain market share in
any of these markets, we may experience a decline in revenues,
which could adversely affect our business and operating results.
Our competitors include the internal development groups of our
strategic partners. These groups develop storage management
software and utility computing infrastructure for the storage
and server hardware products marketed by the strategic partners.
We also face competition from software vendors that offer
products that directly compete with our products or bundle their
software products with storage software offered by another
vendor.

Many of our strategic partners and storage
hardware vendors offer software products that compete with our
products or have announced their intention to focus on
developing or acquiring their own storage software products.
Storage hardware companies may choose not to offer our products
to their customers or limit our access to their hardware
platforms. End-user customers may prefer to purchase storage
software and hardware that is manufactured by the same company
because of greater product breadth offered by the company,
perceived advantages in price, technical support, compatibility
or other issues. In addition, software vendors may choose to
bundle their software, such as an operating system, with their
own or other vendors storage software. They may also limit
our access to standard product interfaces for their software and
inhibit our ability to develop products for their platform.

Many of our competitors have greater financial,
technical, sales, marketing and other resources than we do and
consequentially may have an ability to influence customers to
purchase their products that compete with ours. Our future and
existing competitors could introduce products with superior
features, scalability and functionality at lower prices than our
products, and could also bundle existing or new products with
other more established products in order to compete with us. Our
competitors could also gain market share by acquiring or forming
strategic alliances with our other competitors. Finally, because
new distribution methods offered by the Internet and electronic
commerce have removed many of the barriers to entry historically
faced by start-up companies in the software industry, we may
face additional sources of competition in the future.



| |                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we are unable to develop new and
    enhanced products that achieve widespread market acceptance, we
    may be unable to recover product development costs, and our
    earnings and revenue may decline.

Our future success depends on our ability to
address the rapidly changing needs of our customers by
developing, acquiring and introducing new products, product
updates and services on a timely basis. We must also extend the
operation of our products to new platforms and keep pace with
technological developments and emerging industry standards. We
intend to commit substantial resources to developing new
software products and services, including software products and
services for the utility computing infrastructure, the storage
area networking and the storage resource management markets.
Each of these markets is new and unproven, and industry
standards for these markets are evolving and changing. They also
may require development of new channels. If these markets do not
develop as anticipated, or if demand for our products and
services in these markets does not materialize or occurs more
slowly than we expect, we will have expended substantial
resources and capital without realizing sufficient revenue, and
our business and operating results could be adversely affected.

We have provided standards-setting organizations
and various partners with access to our standard product
interfaces through our VERITAS Enabled Program. If these
standards-setting organizations or our partners do not accept
our standard product interfaces for use with other products, or
if our partners are able to use our standard product interfaces
to improve their competitive position against us, then our
business and operating results could be adversely affected.



| |                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our international sales and operations
    involve special risks that could increase our expenses,
    adversely affect our operating results and require increased
    time and attention of our management.

We derive a substantial portion of our revenue
from customers located outside of the U.S. and have significant
operations outside of the U.S., including engineering, sales,
customer support and production

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operations. We plan to expand our international
operations and our planned growth is contingent upon the
successful expansion of our international revenue. Our
international operations are subject to risks in addition to
those faced by our domestic operations, including:




| |   |                                                                                                                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | potential loss of proprietary information due to
    piracy, misappropriation or laws that may be less protective of
    our intellectual property rights;                                                                                                                           
|
| |  | imposition of foreign laws and other governmental
    controls, including trade and employment restrictions;                                                                                                                                                                         
|
| |  | fluctuations in currency exchange rates and
    economic instability such as higher interest rates and
    inflation, which could reduce our customers ability to
    obtain financing for software products or which could make our
    products more expensive in those countries;
|
| |  | limitations on future growth or inability to
    maintain current levels of revenue from international sales if
    we do not invest sufficiently in our international operations;                                                                                                   
|
| |  | difficulties in hedging foreign currency
    transaction exposures;                                                                                                                                                                                                                  
|
| |  | longer payment cycles for sales in foreign
    countries and difficulties in collecting accounts receivable;                                                                                                                                                                         
|
| |  | difficulties in staffing, managing and operating
    our international operations, including difficulties related to
    administering our stock plans in some foreign countries;                                                                                                    
|
| |  | difficulties in coordinating the activities of
    our geographically dispersed and culturally diverse operations;                                                                                                                                                                   
|
| |  | seasonal reductions in business activity in the
    summer months in Europe and in other periods in other countries;                                                                                                                                                                 
|
| |  | costs and delays associated with developing
    software in multiple languages; and                                                                                                                                                                                                  
|
| |  | political unrest, war or terrorism, particularly
    in areas in which we have facilities.                                                                                                                                                                                           

In addition, we receive significant tax benefits
from sales to our non-U.S. customers. These benefits are
contingent upon existing tax regulations in both the U.S. and in
the countries in which our international operations are located.
Future changes in domestic or international tax regulations
could adversely affect our ability to continue to realize these
tax benefits.



| |                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------
| | Our products may contain significant
    defects, which may subject us to liability for damages suffered
    by end-users.

Software products frequently contain errors or
failures, especially when first introduced or when new versions
are released. Our end-user customers use our products in
applications that are critical to their businesses, including
for data backup and recovery, and may have a greater sensitivity
to defects in our products than to defects in other, less
critical software products. If a customer loses critical data as
a result of an error in or failure of our software products or
as a result of the customers misuse of our software
products, the customer could suffer significant damages and seek
to recover those damages from us. Although our software licenses
generally contain protective provisions limiting our liability,
a court could rule that these provisions are unenforceable. If a
customer is successful in proving its damages and a court does
not enforce our protective provisions, we could be liable for
the damages suffered by our customers and other related
expenses, which could adversely affect our operating results.

In addition, product defects could cause delays
in new product releases or product upgrades, or our products
might not work in combination with other hardware or software,
which could adversely affect market acceptance of our products.
If our customers were dissatisfied with product functionality or
performance, or if we were to experience significant delays in
the release of new products or new versions of products, we
could lose competitive position and revenue and our business and
operating results could be adversely affected.

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| |                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------
| | If we lose key personnel or fail to
    integrate replacement personnel successfully, our ability to
    manage our business could be impaired.

Our future success depends upon the continued
service of our key management, technical, sales and other
critical personnel. Whether we are able to execute effectively
on our business strategy will depend in large part on how well
key management and other personnel perform in their positions
and are integrated within our company. Our officers and other
key personnel are employees-at-will, and we cannot assure you
that we will be able to retain them. Key personnel have left our
company over the years, and there may be additional departures
of key personnel from time to time. The loss of any key employee
could result in significant disruptions to our operations,
including adversely affecting the timeliness of product
releases, the successful implementation and completion of
company initiatives and the results of our operations. In
addition, the integration of replacement personnel could be time
consuming, may cause additional disruptions to our operations
and may be unsuccessful.



| |                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we are unable to attract and retain
    qualified employees and manage our employee base effectively, we
    may be unable to develop new and enhanced products, expand our
    business or increase our revenue.

We believe that our success depends in part on
our ability to hire and retain qualified employees. As our
company grows, and our customers demand for our products
and services increase, we will need to hire additional
management, technical, sales and other personnel. However,
competition for people with the specific skills that we require
is significant. If we are unable to hire and retain qualified
employees, or conversely, if we fail to manage employee
performance or reduce staffing levels when required by market
conditions, our business and operating results could be
adversely affected.

Historically, we have provided stock-based
compensation, such as stock option grants and the availability
of discounted shares in our Employee Stock Purchase Plan, as an
important incentive for our employees. The volatility in our
stock price may from time to time adversely affect our ability
to retain or attract key employees. In addition, if we are
unable to obtain stockholder approval for anticipated future
increases in the number of shares of common stock authorized
under our stock plans, or if changes in accounting rules require
us to treat all stock-based compensation as an expense, we may
reduce the amount of stock-based compensation awarded to
employees. Reductions in our stock-based compensation practices
may make it more difficult for us to attract and retain
employees, which may negatively affect our ability to manage and
operate our business.



| |                                                                                                                                                                                                                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We incur considerable expenses to develop
    products for operating systems that are either owned by others
    or that are part of the Open Source Community. If we do not
    receive cooperation in our development efforts from others and
    access to operating system technologies, we may face higher
    expenses or fail to expand our product lines and
    revenues.

Many of our products operate primarily on the
Windows, UNIX and Linux computer operating systems. As part of
our efforts to develop products for operating systems that are
part of the Open Source Community, we may have to license
portions of our products on a royalty free basis or may have to
expose our source code. We continue to develop new products for
these operating systems. We may not accomplish our development
efforts quickly or cost-effectively, and it is not clear what
the relative growth rates of these operating systems will be.
Our development efforts require substantial capital investment,
the devotion of substantial employee resources and the
cooperation of the owners of the operating systems to or for
which the products are being ported or developed. If the market
for a particular operating system does not develop as
anticipated, or demand for our products and services in such
market does not materialize or occurs more slowly than we
expect, we may have expended substantial resources and capital
without realizing sufficient revenue, and our business and
operating results could be adversely affected.

In addition, for some operating systems, we must
obtain from the owner of the operating system a source code
license to portions of the operating system software to port
some of our products to or develop products for the operating
system. Operating system owners have no obligation to assist in
these porting or development

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efforts. If they do not grant us a license or if
they do not renew our license, we may not be able to expand our
product line into other areas.




| |                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------
| | We derive a large amount of revenue from
    one of our distributors, the loss of which could cause our
    revenues to decline.

We derive a large amount of revenue from a
distributor that sells our products and services through
resellers. For the three and nine months ended
September 30, 2004, this distributor accounted for less
than 10% of our net revenue. If this distributor were to reduce
purchases of our products or services, our revenues would
decline unless we were able to increase sales through other
distributors or direct sales to customers. Our contract does not
require this distributor to purchase any specified amount of our
product or services. Accordingly, we cannot be sure that this
distributor will continue to market and sell our products and
services at current levels.



| |                                                                                                                                                                                                                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Cooperating with the SEC in its
    investigation of our transactions with AOL Time Warner and its
    recent inquiries regarding our past accounting practices has
    required, and may continue to require, a large amount of
    management time and attention, as well as accounting and legal
    expense, which may reduce net income or interfere with our
    ability to manage our business.

Since the third quarter of 2002, we have received
subpoenas and other requests for information issued by the SEC
in the investigation entitled In the Matter of AOL/ Time
Warner. We continue to furnish information requested by the
SEC and otherwise cooperate with regard to this investigation.
In addition, in the first quarter of 2004, we voluntarily
disclosed to the staff of the SEC past accounting practices
applicable to our 2002 and 2001 financial statements that were
not in compliance with GAAP, and we subsequently restated our
financial statements for 2002 and 2001, the interim periods for
2002 and 2001 and the interim periods ended March, June and
September 2003. We and our audit committee continue to cooperate
with the SEC in its review of these matters. The SECs
investigation and inquiries may continue to require significant
management attention and accounting and legal resources, which
could adversely affect our business, results of operations and
cash flows.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We have been named as a party to several
    class action and derivative action lawsuits, and we may be named
    in additional litigation, all of which could require significant
    management time and attention and result in significant legal
    expenses. An unfavorable outcome in one or more of these
    lawsuits could have a material adverse effect on our business,
    financial condition, results of operations and cash
    flows.

After we announced in January 2003 that we would
restate our financial results as a result of transactions
entered into with AOL Time Warner in September 2000, numerous
separate complaints purporting to be class actions were filed in
federal court alleging that we and some of our officers and
directors violated provisions of the Securities Exchange Act of
1934. Several similar complaints purporting to be derivative
actions have been filed in state court against some of our
directors and officers. In addition, after we announced in July
2004 that we expected our results of operations for the fiscal
quarter ended June 30, 2004 to fall below guidance earlier
provided by us, several separate complaints purporting to be
class actions were filed in federal court alleging that we and
some of our officers violated federal securities laws. The
expense of defending such litigation may be costly and divert
managements attention from the day-to-day operations of
our business, which could adversely affect our business, results
of operations and cash flows. In addition, an unfavorable
outcome in such litigation could have a material adverse effect
on our business, results of operations and cash flows.



| |                                                                                                                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We have received notification from The
    Nasdaq Stock Market that our securities may be delisted if we
    are unable to comply with certain filing deadlines, which
    delisting could materially and adversely affect the liquidity
    and trading price of our common stock.

Due to our delinquency in filing our annual
report on Form 10-K for the year ended December 31,
2003, and our quarterly report on Form 10-Q for the quarter
ended March 31, 2004, we have received a written
determination from The Nasdaq Stock Market stating, among other
things, that we must timely file all periodic reports with the
SEC and Nasdaq for all reporting periods ending on or before
June 30, 2005. Should

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we fail to comply with this requirement, our
securities could be delisted, which would materially and
adversely affect the liquidity and trading price of our common
stock.




| |                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our business strategy includes possible
    growth through business acquisitions, which involve special
    risks that could increase our expenses, cause our stock price to
    decline and divert the time and attention of
    management.

As part of our business strategy, we have in the
past acquired and expect in the future to acquire other
businesses, business units and technologies. Acquisitions
involve a number of special risks and challenges, including:



| |   |                                                                                                                                                                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | diversion of managements attention from our
    business;                                                                                                                                                                                                                                                                           
|
| |  | integration of acquired business operations and
    employees into our existing business, including coordination of
    geographically dispersed operations, which in the past has taken
    longer and has been more complex than initially expected;                                                                               
|
| |  | incorporation of acquired products and business
    technology into our existing product lines, including
    consolidating technology with duplicative functionality or
    designed on different technological architecture, and our
    ability to sell the acquired products through our existing or
    acquired sales channels;
|
| |  | loss or termination of employees, including
    costly litigation resulting from the termination of those
    employees;                                                                                                                                                                                                             
|
| |  | dilution of our then-current stockholders
    percentage ownership;                                                                                                                                                                                                                                                                 
|
| |  | dilution of earnings if synergies with the
    acquired business are not achieved;                                                                                                                                                                                                                                                   
|
| |  | assumption of liabilities of the acquired
    business, including costly litigation related to alleged
    liabilities of the acquired business;                                                                                                                                                                                     
|
| |  | presentation of a unified corporate image to our
    customers and our employees; and                                                                                                                                                                                                                                                
|
| |  | risk of impairment charges related to potential
    write-down of acquired assets in future acquisitions.                                                                                                                                                                                                                            

Acquisitions of businesses, business units and
technologies are inherently risky and create many challenges. We
cannot provide any assurance that our previous or any future
acquisitions will achieve the desired objectives.



| |                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------
| | Our effective tax rate may increase or
    fluctuate, which could increase our income tax expense and
    reduce our net income.

Our effective tax rate could be adversely
affected by several factors, many of which are outside of our
control. Our effective tax rate is directly affected by the
relative proportions of revenue and income before taxes in the
various domestic and international jurisdictions in which we
operate. We are also subject to changing tax laws, regulations
and interpretations in multiple jurisdictions in which we
operate as well as the requirements of certain tax rulings. On
October 22, 2004, the American Jobs Creation Act of 2004
(the Act) was signed into law. We are presently evaluating the
impact of the Act on our future effective tax rate. We do not
have a substantial history of audit activity from various taxing
authorities and while we believe we are in compliance with all
federal, state and international tax laws, there are various
interpretations of their application that could result in
additional tax assessments. Our effective tax rate is also
influenced by the tax effects of purchase accounting for
acquisitions and non-recurring charges, which may cause
fluctuations between reporting periods, and may also be
influenced by tax assessments against acquired entities with
respect to tax periods prior to the acquisition, which may
significantly affect our effective tax rate for the period in
which the settlements take place.

47



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| |                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Changes to current accounting policies
    could have a significant effect on our reported financial
    results or the way in which we conduct our
    business.

We prepare our financial statements in conformity
with accounting principles generally accepted in the U.S., which
are subject to interpretation by the American Institute of
Certified Public Accountants, the Public Company Accounting
Oversight Board, the SEC and various other bodies formed to
interpret and create appropriate accounting policies. A change
in these policies could have a significant effect on our
reported results and may even retroactively affect previously
reported transactions. Our accounting policies that recently
have been or may in the future be affected by changes in the
accounting rules are as follows:



| |   |                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------
| |  | software revenue recognition;                                                                                                                     
|
| |  | accounting for stock-based compensation;                                                                                                          
|
| |  | accounting for variable interest entities;                                                                                                        
|
| |  | accounting for goodwill and other intangible
    assets; and                                                                                      
|
| |  | accounting issues related to certain features of
    contingently convertible debt instruments and their effect on
    diluted earnings per share.

Changes in these or other rules, or the
questioning of current practices, may have a significant adverse
effect on our reported financial results or in the way in which
we conduct our business. See our discussion above under
Critical Accounting Policies and Estimates for
additional information about our critical accounting policies
and estimates and associated risks.



| |                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we do not protect our proprietary
    information and prevent third parties from making unauthorized
    use of our products and technology, our revenues could be
    harmed.

We rely on a combination of copyright, patent,
trademark and trade secret laws, confidentiality procedures,
contractual provisions and other measures to protect our
proprietary information. All of these measures afford only
limited protection. These measures may be invalidated,
circumvented or challenged, and others may develop technologies
or processes that are similar or superior to our technology. We
may not have the proprietary information controls and procedures
in place that we need to protect our proprietary information
adequately. In addition, because we license the source code for
some of our products to third parties, there is a higher
likelihood of misappropriation or other misuse of our
intellectual property. We also license some of our products
under shrink-wrap license agreements that are not signed by
licensees and therefore may be unenforceable under the laws of
some jurisdictions. Despite our efforts to protect our
proprietary rights, unauthorized parties may attempt to copy our
products or obtain or use information that we regard as
proprietary, which could harm our revenues.



| |                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Third parties claiming that we infringe
    their proprietary rights could cause us to incur significant
    legal expenses and prevent us from selling our
    products.

From time to time, we receive claims that we have
infringed the intellectual property rights of others. As the
number of products in the software industry increases and the
functionality of these products further overlap, we believe that
we may become increasingly subject to infringement claims,
including patent, copyright and trademark infringement claims.
We have received several trademark claims in the past and may
receive more claims in the future from third parties who may
also be using the VERITAS name or another names that may be
similar to one of our trademarks or service marks. We have also
received patent infringement claims in the past and may receive
more claims in the future based on allegations that our products
infringe upon patents held by third parties. In addition, former
employers of our former, current or future employees may assert
claims that such employees have improperly disclosed to us the
confidential or proprietary information of these former
employers. Any such claim, with or without merit, could:



| |   |                             
| | - | ----------------------------
| |  | be time consuming to defend;
|
| |  | result in costly litigation;

48



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| |   |                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | divert managements attention from our core
    business;                                                                                                                          
|
| |  | require us to stop selling, to delay shipping or
    to redesign our product; and                                                                                                  
|
| |  | require us to pay monetary amounts as damages,
    for royalty or licensing arrangements or to satisfy
    indemnification obligations that we have with some of our
    customers.

In addition, we license and use software from
third parties in our business. These third party software
licenses may not continue to be available to us on acceptable
terms. Also, these third parties may from time to time receive
claims that they have infringed the intellectual property rights
of others, including patent and copyright infringement claims,
which may affect our ability to continue licensing this
software. Our inability to use any of this third party software
could result in shipment delays or other disruptions in our
business, which could materially and adversely affect our
operating results.



| |                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Any disruption in our operations caused by
    a catastrophic natural disaster or other events outside of our
    control could have a material adverse effect on our business,
    resulting in a loss of revenue or in higher
    expenses.

Our business is highly automated and any
disruptions or failures in our operations due to a catastrophic
natural disaster, such as an earthquake or a flood, or to
manmade problems, such as inadvertent errors, malicious software
programs or terrorism, may result in a loss of revenue or in
higher expenses, harming our operating results. Most of our
primary operations, which include a significant portion of our
research and development activities and other critical business
operations, are located near San Francisco, California, an
area known for seismic activity. A catastrophic event, such as a
major earthquake, which results in the destruction or disruption
of our primary operations, could severely and adversely affect
our business, including both our primary data center and other
internal operations and our ability to communicate with our
customers or sell our products over the Internet.

In our highly automated environment, we have
tightly integrated systems that support our enterprise,
including our financial accounting and e-commerce systems.
Maintaining the integrity and security of this enterprise is an
issue of critical importance for VERITAS and our customers. Any
hardware or software failure or breach in security due to
inadvertent error, malicious software programs, such as viruses
and worms, break-ins or unauthorized tampering with our computer
systems could, if wide-spread and destructive, have a negative
effect on our internal operations and could adversely affect our
business. We take significant and costly measures which have
been effective in protecting our enterprise from such events,
however, there is no assurance that these measures will be
equally as effective in the future. In addition, other events
outside of our control, such as war or acts of terrorism, could
have a material adverse and potentially devastating effect on
our business, operating results and financial condition.



| |                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------
| | Some provisions in our charter documents
    and our stockholder rights plan may prevent or deter an
    acquisition of VERITAS.

Some of the provisions in our charter documents
may deter or prevent certain corporate actions, such as a
merger, tender offer or proxy contest, which could affect the
market value of our securities. These provisions include:



| |   |                                                                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our board of directors is authorized to issue
    preferred stock with any rights it may determine;                                                                                                      
|
| |  | our board of directors is classified into three
    groups, with each group of directors to hold office for three
    years;                                                                             
|
| |  | our stockholders are not entitled to cumulate
    votes for directors and may not take any action by written
    consent without a meeting; and                                                          
|
| |  | special meetings of our stockholders may be
    called only by our board of directors, by the chairman of the
    board or by our chief executive officer, and may not be called
    by our stockholders.

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We also have in place a stockholder rights plan
that is designed to discourage coercive takeover offers. In
general, our stockholder rights plan provides our existing
stockholders (other than an existing stockholder that becomes an
acquiring person) with rights to acquire shares of our common
stock at 50% of its trading price if a person or entity
acquires, or announces its intention to acquire, 15% or more of
the outstanding shares of our common stock, unless our board of
directors elects to redeem these rights.

Our board of directors could utilize the
provisions of our charter documents and stockholder rights plan
to resist an offer from a third party to acquire VERITAS,
including an offer to acquire our common stock at a premium to
its trading price or an offer that is otherwise considered
favorable by our stockholders.



| |                                                                                                        
| | -------------------------------------------------------------------------------------------------------
| | Our stock price may be volatile in the
    future, and you could lose the value of your
    investment.

The market price of our common stock has
experienced significant fluctuations and may continue to
fluctuate significantly, and you could lose the value of your
investment. The market price of our common stock may be affected
by a number of factors, including:



| |   |                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------
| |  | announcements of our quarterly operating results
    and revenue and earnings forecasts or those of our competitors
    or our customers;   
|
| |  | rumors, announcements or press articles regarding
    changes in our management, organization, operations or prior
    financial statements;
|
| |  | inquiries by the SEC, Nasdaq, law enforcement or
    other regulatory bodies;                                                               
|
| |  | changes in revenues and earnings estimates by
    securities analysts;                                                                      
|
| |  | announcements of planned acquisitions by us or by
    our competitors;                                                                      
|
| |  | gain or loss of a significant customer;                                                                                                     
|
| |  | announcements of new products by us, our
    competitors or our OEM customers; and                                                          
|
| |  | acts of terrorism, the threat of war and economic
    slowdowns in general.                                                                 

The stock market in general, and the market
prices of stocks of other technology companies in particular,
have experienced extreme price volatility, which has adversely
affected and may continue to adversely affect the market price
of our common stock for reasons unrelated to our business or
operating results.






|        |                                                               
|------- | --------------------------------------------------------------
|Item 3. | Quantitative and Qualitative Disclosures
    About Market Risk

We are subject to market risk associated with
changes in foreign currency exchange rates, interest rates and
our equity investments, as discussed more fully below. In order
to manage the volatility relating to our more significant market
risks, we enter into various hedging arrangements described
below. We do not execute transactions or hold derivative
financial instruments for speculative trading purposes. We do
not anticipate any material changes in our primary market risk
exposures for the remainder of fiscal 2004.

Foreign Currency Risk

We transact business in various foreign
currencies and have established a foreign currency hedging
program, utilizing foreign currency forward exchange contracts,
or forward contracts, to hedge certain foreign currency
transaction exposures. Under this program, increases or
decreases in our foreign currency transactions are offset by
gains and losses on the forward contracts, so as to mitigate the
possibility of foreign currency transaction gains and losses. We
do not use forward contracts for speculative or trading
purposes. All foreign currency transactions and all outstanding
forward contracts are marked-to-market at the end of the period
with unrealized gains and losses included in other income
(expense). The unrealized gain (loss) on the outstanding forward
contracts at September 30, 2004 was immaterial to our
consolidated financial statements.

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Our outstanding forward contracts as of
September 30, 2004 are presented in the table below. All
forward contract amounts are representative of the expected
payments to be made under these instruments. As of
September 30, 2004, all forward contracts mature in
31 days or less:

|                             |                             |                 |  |                 |  |                   |  |              |  |  |  |       |  
|---------------------------- | --------------------------- | --------------- |  | --------------- |  | ----------------- |  | ------------ |  |  |  | ----- | -
|                             |                             |                 |  |                 |  | Fair Market Value
|                             |                             | Local Currency  |  |                 |  | at September 30, 
|                             |                             | Contract Amount |  | Contract Amount |  | 2004 (US$)       
|                             |                             |                 |  |                 |  |                  
|                             |                             |                
|                             |                             | (In thousands) 
|Contracts to Buy US $        |                             |                 |  |                 |  |                   |  |              |  |  |  |      
|                             | Argentine peso              |                 |  | 2,000.0 ARS     |  |                   |  | 662.3 USD    |  |  |  | (8.7  | )
|                             | Brazilian real              |                 |  | 8,550.0 BRL     |  |                   |  | 2,933.1 USD  |  |  |  | (55.6 | )
|                             | Canadian dollar             |                 |  | 4,550.0 CAD     |  |                   |  | 3,566.8 USD  |  |  |  | (40.6 | )
|                             | Australian dollar           |                 |  | 870.0 AUD       |  |                   |  | 621.2 USD    |  |  |  | (11.9 | )
|Contracts to Sell US $       |                             |                 |  |                 |  |                   |  |              |  |  |  |      
|                             | Euro                        |                 |  | 29,000.0 EUR    |  |                   |  | 35,668.3 USD |  |  |  | 396.1 |  
|                             | Israel shekel               |                 |  | 9,025.0 ILS     |  |                   |  | 2,015.1 USD  |  |  |  | (0.6  | )
|                             | Mexican peso                |                 |  | 7,200.0 MXN     |  |                   |  | 627.5 USD    |  |  |  | 5.1   |  
|                             | Singapore dollar            |                 |  | 20,650.0 SGD    |  |                   |  | 12,178.9 USD |  |  |  | 83.5  |  
|                             | Indian rupee                |                 |  | 19,000.0 INR    |  |                   |  | 408.2 USD    |  |  |  | 5.3   |  
|                             | British pound               |                 |  | 8,100.0 GBP     |  |                   |  | 14,626.0 USD |  |  |  | 51.2  |  
|                             | Japanese yen                |                 |  | 33,500.0 JPY    |  |                   |  | 301.1 USD    |  |  |  | 3.3   |  
|Contracts to Buy Euro
      |                             |                 |  |                 |  |                   |  |              |  |  |  |      
|                             | United Arab Emirates dirham |                 |  | 23,600.0 AED    |  |                   |  | 5,214.9 EUR  |  |  |  | 58.3  |  
|                             | Indian rupee                |                 |  | 164,900.0 INR   |  |                   |  | 2,874.8 EUR  |  |  |  | (13.0 | )
|                             | Japanese yen                |                 |  | 2,400,000.0 JPY |  |                   |  | 17,516.8 EUR |  |  |  | (24.8 | )
|Contracts to Sell Euro
     |                             |                 |  |                 |  |                   |  |              |  |  |  |      
|                             | Danish krona                |                 |  | 3,880.0 DKK     |  |                   |  | 521.4 EUR    |  |  |  | 0.0   |  
|                             | Swedish krona               |                 |  | 8,300.0 SEK     |  |                   |  | 915.8 EUR    |  |  |  | 2.9   |  
|                             | British pound               |                 |  | 3,000.0 GBP     |  |                   |  | 4,403.7 EUR  |  |  |  | (39.1 | )
|                             | South African rand          |                 |  | 8,550.0 ZAR     |  |                   |  | 1,080.6 EUR  |  |  |  | (17.9 | )
|                             | Swiss franc                 |                 |  | 950.0 CHF       |  |                   |  | 613.1 EUR    |  |  |  | 0.0   |  
|Contracts to Buy SGD $       |                             |                 |  |                 |  |                   |  |              |  |  |  |      
|                             | Hong Kong dollar            |                 |  | 13,780.0 HKD    |  |                   |  | 2,995.3 SGD  |  |  |  | 10.9  |  
|                             | New Zealand dollar          |                 |  | 1,750.0 NZD     |  |                   |  | 1,973.3 SGD  |  |  |  | (14.2 | )
|Contracts to Sell SGD $      |                             |                 |  |                 |  |                   |  |              |  |  |  |      
|                             | Indian rupee                |                 |  | 61,000.0 INR    |  |                   |  | 2,223.8 SGD  |  |  |  | 6.8   |  
|                             | South Korean won            |                 |  | 5,130,000.0 KRW |  |                   |  | 7,511.0 SGD  |  |  |  | (6.4  | )
|                             | Taiwanese dollar            |                 |  | 12,750.0 TWD    |  |                   |  | 635.3 SGD    |  |  |  | (2.0  | )
|                             | Euro                        |                 |  | 1,200.0 EUR     |  |                   |  | 2,504.1 SGD  |  |  |  | 5.3   |  
|Contracts to Buy GBP £       |                             |                 |  |                 |  |                   |  |              |  |  |  |      
|                             | Australian dollar           |                 |  | 1,850.0 AUD     |  |                   |  | 732.3 GBP    |  |  |  | (18.9 | )

Interest Rate Risk

We are exposed to interest rate risk primarily on
our investment portfolio and the build-to-suit lease agreement
for the facility located in Milpitas, California. Our primary
investment objective is to preserve principal while at the same
time maximizing yields without significantly increasing risk.
Our portfolio primarily includes money market funds, commercial
paper, corporate notes, government securities (taxable

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and non-taxable), asset-backed securities and
auction market securities. The diversity of our portfolio helps
us to achieve our investment objective.


Debt obligations consist of $520.0 million
of our 0.25% convertible subordinated notes due
August 1, 2013 and $380.6 million of our debt related
to our build-to-suit lease agreements. The interest rate on the
0.25% Notes is fixed and the notes provide for semi-annual
interest payments of approximately $0.7 million each
February 1 and August 1, beginning February 1, 2004.
Effective as of January 28, 2004, the 0.25% Notes
began accruing additional interest at a rate of 0.25% as a
result of our registration statement having not been declared
effective by the SEC on or before the 180th day following the
original issuance of the 0.25% Notes and the
0.25% Notes continued to accrue such additional interest
until April 27, 2004, the 90th day following such
registration default. As of April 27, 2004, the
0.25% Notes began to accrue additional interest at a rate
of 0.50% and will continue to accrue such additional interest
until the date on which the registration statement is declared
effective. The 0.25% Notes are convertible, under specified
conditions, into shares of our common stock unless previously
redeemed or repurchased and the conversion price is subject to
adjustment under the terms of the notes; provided that, as a
result of a supplemental indenture we entered into on
October 25, 2004, we now have the obligation to satisfy our
conversion obligations under the notes in cash, unless the value
of our conversion obligation exceeds the principal amount of the
notes being converted by a holder, in which case we shall have
the option to deliver cash and/or shares of common stock to the
extent (and only to the extent) of such excess. Long-term debt
consists of the three build-to-suit agreements. The interest
rates on the build-to-suit agreements are variable based on a
3-month LIBOR plus a credit spread and provide for quarterly
interest payments in January, April, July and October (see
Managements Discussion and Analysis of Financial
Condition and Results of Operations 
Long-Term Debt for more information regarding debt
payout).

In January 2002, we entered into two three-year
pay fixed, receive floating, interest rate swaps for the purpose
of hedging cash flows on variable interest rate debt of two of
our build-to-suit agreements. Under the terms of these interest
rate swaps, we make payments based on the fixed rate and will
receive interest payments based on the 3-month London Inter Bank
Offered Rate, or LIBOR. The payments on our build-to-suit lease
agreements are based upon a 3-month LIBOR plus a credit spread.
If critical terms of the interest rate swaps or the hedged item
do not change, the interest rate swaps will be considered to be
highly effective with all changes in the fair value included in
other comprehensive income. If critical terms of the interest
rate swaps or the hedged item change, the hedge may become
partially or fully ineffective, which could result in all or a
portion of the changes in fair value of the derivative recorded
in the statement of operations. The interest rate swaps settle
the first day of January, April, July and October until
expiration. As of September 30, 2004, the fair value of the
interest rate swaps was $(3.1) million. As a result of
entering into the interest rate swaps, we have mitigated our
exposure to variable cash flows associated with interest rate
fluctuations. Because the rental payments on the leases are
based on the 3-month LIBOR and we receive 3-month LIBOR from the
interest rate swap counter-party, we have eliminated any impact
to raising interest rates related to our rent payments under the
build-to-suit lease agreements. This hedge was deemed to be
highly effective as of September 30, 2004. On July 1,
2003, we began accounting for our variable interest rate debt in
accordance with FIN 46. In accordance with
SFAS No. 133, we had designated the interest rate swap
as a cash flow hedge of the variability embedded in the rent
expense as it is based on the 3-month LIBOR. However, with the
adoption of FIN 46, we redesignated the interest rate swap
as a cash flow hedge of variability in interest expense and it
remains highly effective with all changes in the fair value
included in other comprehensive income.

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The following table presents the amounts of our
cash equivalents, short-term investments and debt obligations,
according to maturity date, that may be subject to interest rate
risk and the average interest rates as of September 30,
2004 by year of maturity:

|                                                  |                       |                                    |         |            |   |       |           |            |   |           |           |           |   |   |           |           |   |   |           |           |  
|------------------------------------------------- | --------------------- | ---------------------------------- | ------- | ---------- | - | ----- | --------- | ---------- | - | --------- | --------- | --------- | - | - | --------- | --------- | - | - | --------- | --------- | -
|                                                  |                       |                                    |         |            |   |      
|                                                  |                       | Amortized Cost                     |         |            |   |      
|                                                  |                       |                                    |         |            |   |      
|                                                  |                       |                                    |         | Due in     |   |       |           |            |   | 2003     
|                                                  |                       | Due in                             |         | 2005 and   |   |       |           | 2004       |   | Amortized
|                                                  |                       | 2004                               |         | Thereafter |   | Total |           | Fair Value |   | Cost     
|                                                  |                       |                                    |         |            |   |       |           |            |   |          
|                                                  |                       |                                   
|                                                  |                       | (In thousands, except percentages)
|Cash equivalents and short-term investments(1):   |                       |                                    |         |            |   |       |           |            |   |           |           |           |   |   |           |           |   |   |           |          
|                                                  | Fixed rate            |                                    | $       | 290,797    |   |       | $         | 1,394,079  |   |           | $         | 1,684,876 |   |   | $         | 1,678,881 |   |   | $         | 1,235,767 |  
|                                                  | Average fixed rate    |                                    |         | 1.78       | % |       |           | 2.81       | % |           |           | 2.63      | % |   |           | 2.64      | % |   |           | 2.11      | %
|                                                  | Variable rate         |                                    | $       | 242,033    |   |       | $         | 169,694    |   |           | $         | 411,727   |   |   | $         | 411,704   |   |   | $         | 509,727   |  
|                                                  | Average variable rate |                                    |         | 1.78       | % |       |           | 1.77       | % |           |           | 1.77      | % |   |           | 1.77      | % |   |           | 1.40      | %
|Total cash equivalents and short-term investments |                       | $                                  | 532,830 |            |   | $     | 1,563,773 |            |   | $         | 2,096,603 |           |   | $ | 2,090,585 |           |   | $ | 1,745,494 |          
|                                                  | Average rate          |                                    |         | 1.78       | % |       |           | 2.70       | % |           |           | 2.46      | % |   |           | 2.47      | % |   |           | 1.90      | %
|Debt obligations:                                 |                       |                                    |         |            |   |       |           |            |   |           |           |           |   |   |           |           |   |   |           |          
|                                                  | Fixed rate            |                                    | $       | 111        |   |       | $         | 524,141    |   |           | $         | 524,252   |   |   | $         | 524,252   |   |   | $         | 524,578   |  
|                                                  | Average fixed rate(2) |                                    |         | 3.68       | % |       |           | 0.28       | % |           |           | 0.28      | % |   |           | 0.28      | % |   |           | 0.28      | %
|                                                  | Variable rate(3)      |                                    | $       |           |   |       | $         | 380,630    |   |           | $         | 380,630   |   |   | $         | 380,630   |   |   | $         | 380,630   |  
|                                                  | Average variable rate |                                    |         |           |   |       |           | 2.45       | % |           |           | 2.45      | % |   |           | 2.45      | % |   |           | 2.45      | %



---



|    |                                                                                                                                                                                                                                                                                                                                                                                 
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | For purposes of the above table, cash equivalents
    consist of commercial paper and government securities.                                                                                                                                                                                                                                                                    
|   
|(2) | Not included in the average fixed rate is the
    amortization of the underwriting and issuance costs for the
    $520.0 million convertible subordinated notes. If this was
    included, our average fixed rate for these notes would be 1.04%
    for 2005 and thereafter.                                                                                                   
|   
|(3) | $186.4 million of the variable rate
    long-term debt is, in effect, a fixed rate as the result of the
    interest rate swaps (see Note 13, Derivative
    Financial Instruments in the Notes to Condensed
    Consolidated Financial Statements) entered into by VERITAS.
    Including the effect of these interest rate swaps, the average
    fixed rate would be 6.14%.

Equity Price Risk

We have made investments in development-stage
companies that we believe provide strategic opportunities for
us. We intend that these investments will provide access to new
technologies and emerging markets, and create opportunities for
additional sales of our products and services. We recognize
impairment losses on our strategic investments when we determine
that there has been a decline in the fair value of the
investment that is other than temporary. For the nine months
ended September 30, 2004, we realized a gain of
$7.5 million on the sale of a strategic investment. For the
three and nine months ended September 30, 2004, we recorded
no impairment losses and for the nine months ended
September 30, 2003, we recognized impairment losses of
$3.5 million on our strategic investments when we
determined that there had been a decline in the fair value of
the investments that was other-than-temporary. The losses
realized represent other-than-temporary declines in the fair
value of our investments and were determined based on the value
of the investees stock, its inability to obtain additional
private financing, its cash position and current burn rate, the
status and competitive position of the investees products
and the uncertainty of its financial condition, among other
factors. As of September 30, 2004, our strategic
investments had a carrying value of $2.7 million, and we
determined that there was no further impairment in these
investments at that date. We cannot assure you that our
investments will have the above mentioned results, or that we
will not lose all or any part of these investments.

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|        |                        
|------- | -----------------------
|Item 4. | Controls and Procedures

Our disclosure controls and procedures are
designed to provide reasonable assurance that information
required to be disclosed in our reports filed under the
Securities Exchange Act of 1934, such as this quarterly report
on Form 10-Q, is recorded, processed, summarized and
reported within the time periods specified in the SEC rules and
forms. Our disclosure controls and procedures are also designed
to ensure that such information is accumulated and communicated
to our management to allow timely decisions regarding required
disclosure. Our internal controls are designed to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of our financial statements in
conformity with generally accepted accounting principles.

Our disclosure controls and procedures are not
capable of preventing all instances of error or 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 will be attained. Our disclosure controls and
procedures can be circumvented by the individual acts of some
persons, by collusion of two or more people or by management
override of the control. Because of the inherent limitations in
a cost-effective control system, misstatements due to error or
fraud may occur and may not be detected on a timely basis.

Our chief executive officer and chief financial
officer, with the assistance of our disclosure committee,
conducted an evaluation of the effectiveness of our disclosure
controls and procedures as of September 30, 2004. Our
evaluation process included the identification, review and
evaluation of the effectiveness of our disclosure controls and
procedures as of September 30, 2004. In addition, we sought
to identify any changes to our internal controls during the
quarter ended September 30, 2004 that had or could have a
material effect on our internal controls, any significant
deficiencies or material weaknesses in our internal controls and
any acts of fraud involving personnel who had a significant role
in our internal controls. We perform this type of evaluation on
a quarterly basis so that the conclusions concerning the
effectiveness of our disclosure controls can be reported in our
quarterly reports on Form 10-Q and annual report on
Form 10-K.

Based on an evaluation of the effectiveness of
our disclosure controls and procedures as of September 30,
2004, our chief executive officer and chief financial officer
have concluded that our disclosure controls and procedures are
effective to provide reasonable assurance that material
information required to be included in our Exchange Act reports,
including this report on Form 10-Q, is made known to them
on a timely basis. Although we regularly implement improvements
to our internal controls systems, there have been no changes in
our internal control over financial reporting during the quarter
ended September 30, 2004 that have materially affected, or
are reasonably likely to materially affect, our internal control
over financial reporting.

Appearing as exhibits to this periodic report are
the certifications of our chief executive officer and chief
financial officer required in accordance with Section 302
of the Sarbanes-Oxley Act of 2002. The disclosures set forth in
this Item 4 contain information concerning the evaluation
of our disclosure controls and procedures, and changes in
internal control over financial reporting, referred to in
paragraphs 4(b) and (c) of the certifications. This
Item 4 should be read in conjunction with the
certifications for a more complete understanding of the topics
presented.




PART II: OTHER INFORMATION






|        |                  
|------- | -----------------
|Item 1. | Legal Proceedings

SEC Related Matters

SEC Investigation.As previously disclosed, since the third quarter of 2002, we
have received subpoenas issued by the Securities Exchange
Commission in the investigation entitled In the Matter of
AOL/ Time Warner. The SEC has requested information
concerning the facts and circumstances surrounding our
transactions with AOL Time Warner, or AOL, and related
accounting and disclosure matters. Our transactions with AOL,
entered into in September 2000, involved a software and services
purchase by AOL at a stated value of $50.0 million and the
purchase by us of advertising services from AOL at a stated
value of $20.0 million. In March 2003, we restated our
financial statements for 2001 and 2000 to reflect a reduction in

54



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##### Table of Contents



revenues and expenses of $20.0 million. The
restatement included an additional reduction in revenues and
expenses of $1.0 million related to two other
contemporaneous transactions with other parties entered into in
2000 that involved software licenses and the purchase of on-line
advertising services.


In March 2004, we announced our intention to
restate our financial statements for 2002 and 2001 and revise
our previously announced financial results for 2003. The
decision resulted from the findings of an investigation into
past accounting practices that concluded on March 12, 2004.
The investigation resulted from concerns raised by an employee
in late 2003, which led to a detailed review of the matter in
accordance with our corporate governance processes, including
the reporting of the matter to the audit committee of our board
of directors, and to KPMG LLP, our independent registered public
accounting firm. The audit committee retained independent
counsel to investigate issues relating to these past accounting
practices, and the audit committees counsel retained
independent accountants to assist with the investigation. In the
first quarter of 2004, we voluntarily disclosed to the staff of
the SEC past accounting practices applicable to our 2002 and
2001 financial statements that were not in compliance with GAAP.
For more information regarding the audit committees
investigation and the restatement of our financial statements
for 2002 and 2001, including the corresponding interim periods
for 2002 and 2001 and the interim periods ended March, June and
September 2003, see Managements Discussion and
Analysis of Financial Condition and Results of
Operations  Restatement of Consolidated Financial
Statements, Financial Statements and Supplementary
Data  Selected Quarterly Results of Operations,
Controls and Procedures and Note 2 of the Notes
to Consolidated Financial Statements of our annual report on
Form 10-K for the year ended December 31, 2003.

We and our audit committee continue to cooperate
with the SEC in its review of these matters. At this time, we
cannot predict the outcome of the SECs review.

Litigation

After we announced in January 2003 that we would
restate our financial results as a result of transactions
entered into with AOL in September 2000, numerous separate
complaints purporting to be class actions were filed in the
United States District Court for the Northern District of
California alleging that we and some of our officers and
directors violated provisions of the Securities Exchange Act of
1934. The complaints contain varying allegations, including that
we made materially false and misleading statements with respect
to our 2000, 2001 and 2002 financial results included in our
filings with the SEC, press releases and other public
disclosures. On May 2, 2003, a lead plaintiff and lead
counsel were appointed. A consolidated complaint entitled In
Re VERITAS Software Corporation Securities Litigationwas
filed by the lead plaintiff on July 18, 2003. On
December 10, 2003, the District Court granted the
defendants motion to dismiss the consolidated complaint,
with leave to amend. On May 19, 2004, the District Court
granted the defendants motion to dismiss the
plaintiffs first amended complaint, with leave to amend.
On June 30, 2004, a second amended complaint was filed with
the Court in this matter and defendants have filed a motion to
dismiss the second amended complaint. The second amended
complaint seeks an unspecified amount of damages.

In addition, in 2003 several complaints
purporting to be derivative actions were filed in California
state court against some of our directors and officers. These
complaints are generally based on the same facts and
circumstances alleged in In Re VERITAS Software Corporation
Securities Litigation, referenced above, and allege that the
named directors and officers breached their fiduciary duties by
failing to oversee adequately our financial reporting. The state
court complaints have been consolidated into the action In Re
VERITAS Software Corporation Derivative Litigation, which
was filed on May 8, 2003 in the Superior Court of
Santa Clara County. The consolidated complaint seeks an
unspecified amount of damages.

On August 2, 2004, we received a copy of an
amended complaint in Stichting Pensioenfonds ABP v. AOL Time
Warner, et. al. in which we were named as a defendant. The
case was originally filed in the U.S. District Court for the
Southern District of New York in July 2003 against Time
Warner (formerly, AOL Time Warner), current and former officers
and directors of Time Warner and AOL, and Time Warners
outside auditor, Ernst & Young LLP. In adding us as a
defendant, the plaintiff alleges that we aided and abetted AOL
in alleged common law fraud and also alleges that we engaged in
common law fraud as part of a civil conspiracy. The allegations
against us are based on the factual allegations in the second
amended consolidated

55



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##### Table of Contents



class action complaint and other filings in the
matter entitled In Re VERITAS Software Corporation Securities
Litigation, referenced above. The plaintiff seeks an
unspecified amount of compensatory and punitive damages.


On July 7, 2004, a purported class action
complaint entitled Paul Kuck, et al. v. VERITAS
Software Corporation, et al. was filed in the United
States District Court for the District of Delaware. The lawsuit
alleges violations of federal securities laws in connection with
our announcement on July 6, 2004 that we expected our
results of operations for the fiscal quarter ended June 30,
2004 to fall below estimates that were earlier provided by us.
The complaint generally seeks an unspecified amount of damages.
Subsequently, additional purported class action complaints have
been filed in Delaware federal court against the same defendants
named in the Kuck lawsuit. These complaints are based on the
same facts and circumstances as the Kuck lawsuit.

The foregoing cases are still in the preliminary
stages, and it is not possible for us to quantify the extent of
our potential liability, if any. An unfavorable outcome in any
of these matters could have a material adverse effect on our
business, financial condition, results of operations and cash
flow. In addition, defending any litigation may be costly and
divert managements attention from the day-to-day
operations of our business.

In addition to the legal proceedings listed
above, we are also party to various other legal proceedings that
have arisen in the ordinary course of our business. While we
currently believe that the ultimate outcome of these
proceedings, individually and in the aggregate, will not have a
material adverse effect on our financial position or overall
trends in results of operations, litigation is subject to
inherent uncertainties. Were an unfavorable ruling to occur,
there exists the possibility of a material adverse impact on our
results of operations and cash flows for the period in which the
ruling occurs. The estimate of the potential impact on our
financial position or overall results of operations for the
above discussed legal proceedings could change in the future.






|        |                                                                
|------- | ---------------------------------------------------------------
|Item 2. | Unregistered Sales of Equity Securities and
    Use of Proceeds

During the quarter ended September 30, 2004,
we repurchased 5.4 million shares of our common stock for
an aggregate purchase price of $94.3 million, of which
$23.4 million was paid to our agent in October 2004.
Between October 1 and October 31, 2004, we repurchased
an additional 7.6 million shares of common stock for an
aggregate purchase price of $155.7 million. The monthly
repurchases of our common stock for the quarter ended
September 30, 2004 are set forth below.

ISSUER PURCHASES OF EQUITY
SECURITIES*

|                                                 |  |                                          |       |                        |  |                          |       |                        |  |  |       |  |  |   |         | 
|------------------------------------------------ |  | ---------------------------------------- | ----- | ---------------------- |  | ------------------------ | ----- | ---------------------- |  |  | ----- |  |  | - | ------- | 
|                                                 |  |                                          |       |                        |  |                          |       | (d) Maximum Number    
|                                                 |  |                                          |       |                        |  | (c) Total Number of      |       | (or Approximate Dollar
|                                                 |  | (a) Total Number                         |       |                        |  | Shares Purchased as Part |       | Value) Shares That May
|                                                 |  | of Shares                                |       | (b) Average Price Paid |  | of Publicly Announced    |       | Yet Be Purchased Under
|Period                                           |  | Purchased                                |       | Per Share              |  | Plans or Programs        |       | the Plans or Program  
|                                                 |  |                                          |       |                        |  |                          |       |                       
|                                                 |  |                                         
|                                                 |  | (In thousands, except per share amounts)
|Month 1:                                         |  |                                          |       |                        |  |                          |       |                        |  |  |       |  |  |   |         | 
|July 1, 2004 through July 31, 2004               |  |                                          |      |                        |  |                          | N/A   |                        |  |  |      |  |  |   |        | 
|Month 2:                                         |  |                                          |       |                        |  |                          |       |                        |  |  |       |  |  |   |         | 
|August 1, 2004 through August 31, 2004           |  |                                          |      |                        |  |                          | N/A   |                        |  |  |      |  |  | $ | 500,000 | 
|Month 3:                                         |  |                                          |       |                        |  |                          |       |                        |  |  |       |  |  |   |         | 
|September 1, 2004 through September 30,
    2004 |  |                                          | 5,400 |                        |  | $                        | 17.46 |                        |  |  | 5,400 |  |  | $ | 405,710 | 
|                                                 |  |                                          |       |                        |  |                          |       |                        |  |  |       |  |  |   |         | 
|Total                                            |  |                                          | 5,400 |                        |  | $                        | 17.46 |                        |  |  | 5,400 |  |  | $ | 405,710 | 
|                                                 |  |                                          |       |                        |  |                          |       |                        |  |  |       |  |  |   |         | 



|  |                                                                                                                                                                                                                                                                                                            
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | On July 27, 2004, the Company issued a press
    release announcing that in July 2004, the board of directors had
    approved a stock repurchase program. Under the stock repurchase
    program, we are authorized to repurchase up to $500 million
    of our common stock over a 12 to 18 month period.

56



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##### Table of Contents








|        |                                                        
|------- | -------------------------------------------------------
|Item 4. | Submission of Matters to a Vote of Security
    Holders

At our annual meeting of stockholders held on
August 25, 2004, each of the individuals listed below was
elected to our board of directors as a Class C director to
hold office for a term of three years or until his successor is
duly elected or qualified or until his resignation or removal.
The following is a tabulation of votes with respect to each
nominee:

|              |  |           |             |                |  |  |            | 
|------------- |  | --------- | ----------- | -------------- |  |  | ---------- | 
|Nominee       |  | Votes For |             | Votes Withheld
|              |  |           |             |               
|Michael Brown |  |           | 332,146,278 |                |  |  | 39,410,377 | 
|Kurt J. Lauk  |  |           | 354,860,251 |                |  |  | 16,696,404 | 

In addition to Mr. Brown and Dr. Lauk,
the Companys board of directors is currently comprised of:
Gary L. Bloom; William Pade; David J. Roux; Geoffrey W. Squire;
Carolyn M. Ticknor; and V. Paul Unruh.

The following proposals were also approved at our
annual meeting:

|                                                                                                               |  |           |             |               |  |             |             |           |  |  |           |  |  |  |            | 
|-------------------------------------------------------------------------------------------------------------- |  | --------- | ----------- | ------------- |  | ----------- | ----------- | --------- |  |  | --------- |  |  |  | ---------- | 
|                                                                                                               |  |           |             |               |  |             |             | Broker   
|                                                                                                               |  | Votes For |             | Votes Against |  | Abstentions |             | Non-Votes
|                                                                                                               |  |           |             |               |  |             |             |          
|Approve the Amendment and Restatement of the
    VERITAS Software Corporation 2003 Stock Incentive Plan        |  |           | 185,025,551 |               |  |             | 120,420,855 |           |  |  | 2,475,480 |  |  |  | 63,634,769 | 
|Ratify the appointment of KPMG LLP as independent
    accountants for the fiscal year ending December 31, 2004 |  |           | 368,700,564 |               |  |             | 567,865     |           |  |  | 2,288,226 |  |  |  | 0          | 






|        |         
|------- | --------
|Item 6. | Exhibits



| |         
| | --------
| | Exhibits

|        |       |                     |  |                                                                                                                                                                                     |  |       |       |        |  |          |          |  |  |  |       |  |  |  |   | 
|------- | ----- | ------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----- | ----- | ------ |  | -------- | -------- |  |  |  | ----- |  |  |  | - | 
|        |       |                     |  |                                                                                                                                                                                     |  |      
|        |       |                     |  | Incorporated by Reference                                                                                                                                                           |  |      
|Exhibit |       |                     |  |                                                                                                                                                                                     |  | Filed
|Number  |       | Exhibit Description |  | Form                                                                                                                                                                                |  | Date  |       | Number |  | Herewith
|        |       |                     |  |                                                                                                                                                                                     |  |       |       |        |  |         
|        | 2.01  |                     |  | Share Purchase Agreement, dated as of
    August 30, 2004, by and among VERITAS Software Corporation,
    KVault Software Limited and certain shareholders named therein            |  |       |       |        |  |          |          |  |  |  |       |  |  |  | X | 
|        | 3.01  |                     |  | Amended and Restated Certificate of Incorporation
    of VERITAS Holding Corporation                                                                                                |  |       | 8-A   |        |  |          | 06/02/99 |  |  |  | 3.01  |  |  |  |   | 
|        | 3.02  |                     |  | Certificate of Amendment of Amended and Restated
    Certificate of Incorporation of VERITAS Holding Corporation
    (changing name of corporation to VERITAS Software Corporation) |  |       | 8-A   |        |  |          | 06/02/99 |  |  |  | 3.02  |  |  |  |   | 
|        | 3.03  |                     |  | Certificate of Amendment of Amended and Restated
    Certificate of Incorporation of VERITAS                                                                                        |  |       | S-8   |        |  |          | 06/02/00 |  |  |  | 4.03  |  |  |  |   | 
|        | 3.04  |                     |  | Amended and Restated Bylaws of VERITAS                                                                                                                                              |  |       | S-4/A |        |  |          | 09/28/00 |  |  |  | 3.04  |  |  |  |   | 
|        | 4.01  |                     |  | First Supplemental Indenture, dated as of
    October 25, 2004, by and between VERITAS Software
    Corporation and U.S. Bank National Association Incorporated by
    reference    |  |       | 8-K   |        |  |          | 10/27/04 |  |  |  | 4.01  |  |  |  |   | 
|        | 10.01 |                     |  | VERITAS Software Corporation Amended and Restated
    2003 Stock Incentive Plan                                                                                                     |  |       | 8-K   |        |  |          | 08/31/04 |  |  |  | 10.01 |  |  |  |   | 
|        | 10.02 |                     |  | Form of Stock Option Agreement under VERITAS
    Software Corporation 2003 Stock Incentive Plan                                                                                     |  |       |       |        |  |          |          |  |  |  |       |  |  |  | X | 
|        | 10.03 |                     |  | Form of Stock Option Agreement for Executive
    Officers under VERITAS Software Corporation 2003 Stock Incentive
    Plan                                                          |  |       |       |        |  |          |          |  |  |  |       |  |  |  | X | 

57



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##### Table of Contents



|        |       |                     |  |                                                                                                                                         |  |       |  |        |  |          |  |  |  |  |  |  |  |  |   | 
|------- | ----- | ------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------- |  | ----- |  | ------ |  | -------- |  |  |  |  |  |  |  |  | - | 
|        |       |                     |  |                                                                                                                                         |  |      
|        |       |                     |  | Incorporated by Reference                                                                                                               |  |      
|Exhibit |       |                     |  |                                                                                                                                         |  | Filed
|Number  |       | Exhibit Description |  | Form                                                                                                                                    |  | Date  |  | Number |  | Herewith
|        |       |                     |  |                                                                                                                                         |  |       |  |        |  |         
|        | 10.04 |                     |  | Form of Restricted Stock Issuance Agreement under
    VERITAS Software Corporation 2003 Stock Incentive Plan                            |  |       |  |        |  |          |  |  |  |  |  |  |  |  | X | 
|        | 10.05 |                     |  | Form of RSU Award Agreement under VERITAS
    Software Corporation 2003 Stock Incentive Plan                                            |  |       |  |        |  |          |  |  |  |  |  |  |  |  | X | 
|        | 31.01 |                     |  | Certification of Chief Executive Officer pursuant
    to Section 302 of the Sarbanes-Oxley Act of 2002                                  |  |       |  |        |  |          |  |  |  |  |  |  |  |  | X | 
|        | 31.02 |                     |  | Certification of Chief Financial Officer pursuant
    to Section 302 of the Sarbanes-Oxley Act of 2002                                  |  |       |  |        |  |          |  |  |  |  |  |  |  |  | X | 
|        | 32.01 |                     |  | Certifications of Chief Executive Officer and
    Chief Financial Officer pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002 |  |       |  |        |  |          |  |  |  |  |  |  |  |  | X | 

58



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##### Table of Contents






SIGNATURE

Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned thereunto duly
authorized on November 5, 2004.



| |                             
| | ----------------------------
| | VERITAS SOFTWARE CORPORATION



| |     |                    
| | --- | -------------------
| | BY: | /s/ EDWIN J. GILLIS

| |                                                 
| | ------------------------------------------------
| |                                                 
| | EDWIN J. GILLIS                                 
| | Executive Vice President, Finance               
| | and Chief Financial Officer                     
| | (Principal Financial and Accounting
    Officer)

59



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##### Table of Contents



EXHIBIT INDEX

|        |       |                     |  |                                                                                                                                                                                     |  |       |       |        |  |          |          |  |  |  |       |  |  |  |   | 
|------- | ----- | ------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----- | ----- | ------ |  | -------- | -------- |  |  |  | ----- |  |  |  | - | 
|        |       |                     |  |                                                                                                                                                                                     |  |      
|        |       |                     |  | Incorporated by Reference                                                                                                                                                           |  |      
|Exhibit |       |                     |  |                                                                                                                                                                                     |  | Filed
|Number  |       | Exhibit Description |  | Form                                                                                                                                                                                |  | Date  |       | Number |  | Herewith
|        |       |                     |  |                                                                                                                                                                                     |  |       |       |        |  |         
|        | 2.01  |                     |  | Share Purchase Agreement, dated as of
    August 30, 2004, by and among VERITAS Software Corporation,
    KVault Software Limited and certain shareholders named therein            |  |       |       |        |  |          |          |  |  |  |       |  |  |  | X | 
|        | 3.01  |                     |  | Amended and Restated Certificate of Incorporation
    of VERITAS Holding Corporation                                                                                                |  |       | 8-A   |        |  |          | 06/02/99 |  |  |  | 3.01  |  |  |  |   | 
|        | 3.02  |                     |  | Certificate of Amendment of Amended and Restated
    Certificate of Incorporation of VERITAS Holding Corporation
    (changing name of corporation to VERITAS Software Corporation) |  |       | 8-A   |        |  |          | 06/02/99 |  |  |  | 3.02  |  |  |  |   | 
|        | 3.03  |                     |  | Certificate of Amendment of Amended and Restated
    Certificate of Incorporation of VERITAS                                                                                        |  |       | S-8   |        |  |          | 06/02/00 |  |  |  | 4.03  |  |  |  |   | 
|        | 3.04  |                     |  | Amended and Restated Bylaws of VERITAS                                                                                                                                              |  |       | S-4/A |        |  |          | 09/28/00 |  |  |  | 3.04  |  |  |  |   | 
|        | 4.01  |                     |  | First Supplemental Indenture, dated as of October
    25, 2004, by and between VERITAS Software Corporation and U.S.
    Bank National Association Incorporated by reference        |  |       | 8-K   |        |  |          | 10/27/04 |  |  |  | 4.01  |  |  |  |   | 
|        | 10.01 |                     |  | VERITAS Software Corporation Amended and Restated
    2003 Stock Incentive Plan Incorporated by reference                                                                           |  |       | 8-K   |        |  |          | 08/31/04 |  |  |  | 10.01 |  |  |  |   | 
|        | 10.02 |                     |  | Form of Stock Option Agreement under VERITAS
    Software Corporation 2003 Stock Incentive Plan                                                                                     |  |       |       |        |  |          |          |  |  |  |       |  |  |  | X | 
|        | 10.03 |                     |  | Form of Stock Option Agreement for Executive
    Officers under VERITAS Software Corporation 2003 Stock Incentive
    Plan                                                          |  |       |       |        |  |          |          |  |  |  |       |  |  |  | X | 
|        | 10.04 |                     |  | Form of Restricted Stock Issuance Agreement under
    VERITAS Software Corporation 2003 Stock Incentive Plan                                                                        |  |       |       |        |  |          |          |  |  |  |       |  |  |  | X | 
|        | 10.05 |                     |  | Form of RSU Award Agreement under VERITAS
    Software Corporation 2003 Stock Incentive Plan                                                                                        |  |       |       |        |  |          |          |  |  |  |       |  |  |  | X | 
|        | 31.01 |                     |  | Certification of Chief Executive Officer pursuant
    to Section 302 of the Sarbanes-Oxley Act of 2002                                                                              |  |       |       |        |  |          |          |  |  |  |       |  |  |  | X | 
|        | 31.02 |                     |  | Certification of Chief Financial Officer pursuant
    to Section 302 of the Sarbanes-Oxley Act of 2002                                                                              |  |       |       |        |  |          |          |  |  |  |       |  |  |  | X | 
|        | 32.01 |                     |  | Certifications of Chief Executive Officer and
    Chief Financial Officer pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002                                             |  |       |       |        |  |          |          |  |  |  |       |  |  |  | X |