##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




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Form 10-Q



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|                                                 |  |                                                                                                  
|------------------------------------------------ |  | -------------------------------------------------------------------------------------------------
|(Mark One)                                       |  |                                                                                                  
|þ                                                |  | QUARTERLY REPORT PURSUANT TO SECTION 13
    OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934. 
|                                                
|For the quarterly period ended June 30,
    2002
|                                                
|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

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)




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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

The number of shares of the registrants
common stock outstanding as of July 31, 2002 was
410.5 million shares.



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TABLE OF CONTENTS



|                              |                                                                                               |                                                                                          |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------- |  |  |  |  |  | 
|PART I: FINANCIAL INFORMATION
|                              | Item 1. Condensed Consolidated Financial Statements                                          
|                              |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands)                                    
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts)
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)                          
|                              |                                                                                               | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                                    
|                              | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                              | Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|PART II: OTHER INFORMATION   
|                              | Item 1. Legal Proceedings                                                                    
|                              | Item 4. Submission of Matters to a Vote of Security Holders                                  
|                              | Item 5. Other Information                                                                    
|                              | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURE                    
|EXHIBIT 10.1                 
|EXHIBIT 10.2                 
|EXHIBIT 10.3                 
|EXHIBIT 99.1                 



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##### Table of Contents



VERITAS Software Corporation

INDEX

|                                   |  |                                                                                                                   |    |      |    | 
|---------------------------------- |  | ----------------------------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|                                   |  |                                                                                                                   |    | Page
|                                   |  |                                                                                                                   |    |     
|PART I:  FINANCIAL
    INFORMATION
|Item 1.                            |  | Condensed Consolidated Financial Statements                                                                       |    |      |    | 
|                                   |  | Condensed Consolidated Balance Sheets
    as of June 30, 2002 and December 31, 2001                               |    |      | 2  | 
|                                   |  | Condensed Consolidated Statements of
    Operations for the Three and Six Months Ended June 30, 2002
    and 2001 |    |      | 3  | 
|                                   |  | Condensed Consolidated Statements of
    Cash Flows for the Six Months Ended June 30, 2002 and 2001               |    |      | 4  | 
|                                   |  | Notes to Condensed Consolidated
    Financial Statements                                                          |    |      | 5  | 
|Item 2.                            |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations                         |    |      | 14 | 
|Item 3.                            |  | Quantitative and Qualitative Disclosures About
    Market Risk                                                    |    |      | 40 | 
|PART II:  OTHER
    INFORMATION   
|Item 1.                            |  | Legal Proceedings                                                                                                 |    |      | 44 | 
|Item 4.                            |  | Submission of Matters to a Vote of Security
    Holders                                                           |    |      | 44 | 
|Item 5.                            |  | Other Information                                                                                                 |    |      | 45 | 
|Item 6.                            |  | Exhibits and Reports on Form 8-K                                                                                  |    |      | 45 | 
|Signature                          |  |                                                                                                                   | 46 |     

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


(In thousands)


|                                         |                                                                                                                                  |                                            |           |              |           |  |           |            |           | 
|---------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | --------- | ------------ | --------- |  | --------- | ---------- | --------- | 
|                                         |                                                                                                                                  | June 30,                                   |           | December 31,
|                                         |                                                                                                                                  | 2002                                       |           | 2001        
|                                         |                                                                                                                                  |                                            |           |             
|                                         |                                                                                                                                  | (Unaudited)                                |           |             
|ASSETS                                  
|Current assets:                          |                                                                                                                                  |                                            |           |              |           |  |           |           
|                                         | Cash and cash equivalents                                                                                                        |                                            | $         | 746,995      |           |  | $         | 538,419    |          
|                                         | Short-term investments                                                                                                           |                                            |           | 1,288,510    |           |  |           | 1,156,441  |          
|                                         | Accounts receivable, net of allowance for
    doubtful accounts of $12,827 at June 30, 2002 and $12,616 at
    December 31, 2001 |                                            |           | 137,436      |           |  |           | 176,635    |          
|                                         | Deferred income taxes                                                                                                            |                                            |           | 123,481      |           |  |           | 124,527    |          
|                                         | Other current assets                                                                                                             |                                            |           | 68,067       |           |  |           | 66,466     |          
|                                         |                                                                                                                                  |                                            |           |              |           |  |           |           
|                                         |                                                                                                                                  | Total current assets                       |           |              | 2,364,489 |  |           |            | 2,062,488 | 
|Property and equipment, net              |                                                                                                                                  |                                            | 227,737   |              |           |  | 225,763   |           
|Other intangibles, net                   |                                                                                                                                  |                                            | 137,172   |              |           |  | 209,722   |           
|Goodwill, net                            |                                                                                                                                  |                                            | 1,202,814 |              |           |  | 1,202,814 |           
|Other non-current assets                 |                                                                                                                                  |                                            | 30,583    |              |           |  | 52,451    |           
|Deferred income taxes                    |                                                                                                                                  |                                            | 71,685    |              |           |  | 45,375    |           
|                                         |                                                                                                                                  |                                            |           |              |           |  |           |           
|                                         |                                                                                                                                  | Total assets                               |           | $            | 4,034,480 |  |           | $          | 3,798,613 | 
|                                         |                                                                                                                                  |                                            |           |              |           |  |           |           
|LIABILITIES AND STOCKHOLDERS
    EQUITY
|Current liabilities:                     |                                                                                                                                  |                                            |           |              |           |  |           |           
|                                         | Accounts payable                                                                                                                 |                                            | $         | 46,475       |           |  | $         | 32,244     |          
|                                         | Accrued compensation and benefits                                                                                                |                                            |           | 81,925       |           |  |           | 89,637     |          
|                                         | Accrued acquisition and restructuring costs                                                                                      |                                            |           | 11,595       |           |  |           | 12,093     |          
|                                         | Other accrued liabilities                                                                                                        |                                            |           | 81,274       |           |  |           | 80,833     |          
|                                         | Income taxes payable                                                                                                             |                                            |           | 98,290       |           |  |           | 63,735     |          
|                                         | Deferred revenue                                                                                                                 |                                            |           | 275,666      |           |  |           | 239,110    |          
|                                         |                                                                                                                                  |                                            |           |              |           |  |           |           
|                                         |                                                                                                                                  | Total current liabilities                  |           |              | 595,225   |  |           |            | 517,652   | 
|Convertible subordinated notes           |                                                                                                                                  |                                            | 451,849   |              |           |  | 444,408   |           
|Deferred and other income taxes          |                                                                                                                                  |                                            | 113,100   |              |           |  | 113,100   |           
|                                         |                                                                                                                                  |                                            |           |              |           |  |           |           
|                                         |                                                                                                                                  | Total liabilities                          |           |              | 1,160,174 |  |           |            | 1,075,160 | 
|Stockholders equity:                    |                                                                                                                                  |                                            |           |              |           |  |           |           
|                                         | Common stock                                                                                                                     |                                            |           | 429          |           |  |           | 423        |          
|                                         | Additional paid-in capital                                                                                                       |                                            |           | 6,312,568    |           |  |           | 6,228,914  |          
|                                         | Accumulated deficit                                                                                                              |                                            |           | (1,733,016   | )         |  |           | (1,803,528 | )        
|                                         | Accumulated other comprehensive loss                                                                                             |                                            |           | (3,611       | )         |  |           | (292       | )        
|                                         | Treasury stock, at cost; 18,675 shares at
    June 30, 2002 and at December 31, 2001                                             |                                            |           | (1,702,064   | )         |  |           | (1,702,064 | )        
|                                         |                                                                                                                                  |                                            |           |              |           |  |           |           
|                                         |                                                                                                                                  | Total stockholders equity                 |           |              | 2,874,306 |  |           |            | 2,723,453 | 
|                                         |                                                                                                                                  |                                            |           |              |           |  |           |           
|                                         |                                                                                                                                  | Total liabilities and stockholders equity |           | $            | 4,034,480 |  |           | $          | 3,798,613 | 
|                                         |                                                                                                                                  |                                            |           |              |           |  |           |           

See accompanying notes to the condensed
consolidated financial statements.

2



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##### Table of Contents



VERITAS Software Corporation






CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS


(In thousands, except per share
amounts)


|                                                                   |                                      |                          |         |                  |         |      |          |         |         |   |         |         |         |   |          |         |         | 
|------------------------------------------------------------------ | ------------------------------------ | ------------------------ | ------- | ---------------- | ------- | ---- | -------- | ------- | ------- | - | ------- | ------- | ------- | - | -------- | ------- | ------- | 
|                                                                   |                                      |                          |         |                 
|                                                                   |                                      | Three Months Ended       |         | Six Months Ended
|                                                                   |                                      | June 30,                 |         | June 30,        
|                                                                   |                                      |                          |         |                 
|                                                                   |                                      | 2002                     |         | 2001             |         | 2002 |          | 2001   
|                                                                   |                                      |                          |         |                  |         |      |          |        
|                                                                   |                                      |                          |         |                 
|                                                                   |                                      | (Unaudited)              |         | (Unaudited)     
|Net revenue:                                                       |                                      |                          |         |                  |         |      |          |         |         |   |         |         |         |   |          |        
|                                                                   | User license fees                    |                          | $       | 241,876          |         |      | $        | 293,680 |         |   | $       | 501,587 |         |   | $        | 602,697 |        
|                                                                   | Services                             |                          |         | 122,814          |         |      |          | 96,543  |         |   |         | 233,552 |         |   |          | 174,967 |        
|                                                                   |                                      |                          |         |                  |         |      |          |         |         |   |         |         |         |   |          |        
|                                                                   |                                      | Total net revenue        |         |                  | 364,690 |      |          |         | 390,223 |   |         |         | 735,139 |   |          |         | 777,664 | 
|Cost of revenue:                                                   |                                      |                          |         |                  |         |      |          |         |         |   |         |         |         |   |          |        
|                                                                   | User license fees                    |                          |         | 8,778            |         |      |          | 9,711   |         |   |         | 17,972  |         |   |          | 20,379  |        
|                                                                   | Services                             |                          |         | 44,852           |         |      |          | 34,361  |         |   |         | 86,007  |         |   |          | 66,031  |        
|                                                                   | Amortization of developed technology |                          |         | 16,903           |         |      |          | 15,713  |         |   |         | 33,806  |         |   |          | 31,504  |        
|                                                                   |                                      |                          |         |                  |         |      |          |         |         |   |         |         |         |   |          |        
|                                                                   |                                      | Total cost of revenue    |         |                  | 70,533  |      |          |         | 59,785  |   |         |         | 137,785 |   |          |         | 117,914 | 
|                                                                   |                                      |                          |         |                  |         |      |          |         |         |   |         |         |         |   |          |        
|Gross profit                                                       |                                      |                          | 294,157 |                  |         |      | 330,438  |         |         |   | 597,354 |         |         |   | 659,750  |        
|Operating expenses:                                                |                                      |                          |         |                  |         |      |          |         |         |   |         |         |         |   |          |        
|                                                                   | Selling and marketing                |                          |         | 126,731          |         |      |          | 145,716 |         |   |         | 253,694 |         |   |          | 288,521 |        
|                                                                   | Research and development             |                          |         | 67,701           |         |      |          | 59,881  |         |   |         | 132,885 |         |   |          | 116,106 |        
|                                                                   | General and administrative           |                          |         | 34,612           |         |      |          | 28,486  |         |   |         | 67,725  |         |   |          | 54,390  |        
|                                                                   | Amortization of other intangibles    |                          |         | 18,016           |         |      |          | 18,124  |         |   |         | 36,032  |         |   |          | 36,170  |        
|                                                                   | Amortization of goodwill             |                          |         |                 |         |      |          | 203,619 |         |   |         |        |         |   |          | 406,799 |        
|                                                                   |                                      |                          |         |                  |         |      |          |         |         |   |         |         |         |   |          |        
|                                                                   |                                      | Total operating expenses |         |                  | 247,060 |      |          |         | 455,826 |   |         |         | 490,336 |   |          |         | 901,986 | 
|                                                                   |                                      |                          |         |                  |         |      |          |         |         |   |         |         |         |   |          |        
|Income (loss) from operations                                      |                                      |                          | 47,097  |                  |         |      | (125,388 | )       |         |   | 107,018 |         |         |   | (242,236 | )      
|Interest and other income, net                                     |                                      |                          | 13,708  |                  |         |      | 17,212   |         |         |   | 26,861  |         |         |   | 35,840   |        
|Interest expense                                                   |                                      |                          | (7,462  | )                |         |      | (7,325   | )       |         |   | (15,383 | )       |         |   | (14,295  | )      
|Loss on strategic investments                                      |                                      |                          | (14,802 | )                |         |      |         |         |         |   | (14,802 | )       |         |   |         |        
|                                                                   |                                      |                          |         |                  |         |      |          |         |         |   |         |         |         |   |          |        
|Income (loss) before income taxes                                  |                                      |                          | 38,541  |                  |         |      | (115,501 | )       |         |   | 103,694 |         |         |   | (220,691 | )      
|Provision for income taxes                                         |                                      |                          | 12,495  |                  |         |      | 13,475   |         |         |   | 33,182  |         |         |   | 64,384   |        
|                                                                   |                                      |                          |         |                  |         |      |          |         |         |   |         |         |         |   |          |        
|Net income (loss)                                                  |                                      | $                        | 26,046  |                  |         | $    | (128,976 | )       |         | $ | 70,512  |         |         | $ | (285,075 | )      
|                                                                   |                                      |                          |         |                  |         |      |          |         |         |   |         |         |         |   |          |        
|Net income (loss) per share  basic                                |                                      | $                        | 0.06    |                  |         | $    | (0.32    | )       |         | $ | 0.17    |         |         | $ | (0.72    | )      
|                                                                   |                                      |                          |         |                  |         |      |          |         |         |   |         |         |         |   |          |        
|Number of shares used in computing per share
    amounts  basic   |                                      |                          | 409,465 |                  |         |      | 398,017  |         |         |   | 407,776 |         |         |   | 396,432  |        
|                                                                   |                                      |                          |         |                  |         |      |          |         |         |   |         |         |         |   |          |        
|Net income (loss) per share 
    diluted                          |                                      | $                        | 0.06    |                  |         | $    | (0.32    | )       |         | $ | 0.17    |         |         | $ | (0.72    | )      
|                                                                   |                                      |                          |         |                  |         |      |          |         |         |   |         |         |         |   |          |        
|Number of shares used in computing per share
    amounts  diluted |                                      |                          | 418,719 |                  |         |      | 398,017  |         |         |   | 420,289 |         |         |   | 396,432  |        
|                                                                   |                                      |                          |         |                  |         |      |          |         |         |   |         |         |         |   |          |        

See accompanying notes to the condensed
consolidated financial statements.

3



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##### Table of Contents



VERITAS Software Corporation






CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS


(In thousands)


|                                                              |                                                                                              |                                                                  |                                           |          |          |         |         |          |          |         | 
|------------------------------------------------------------- | -------------------------------------------------------------------------------------------- | ---------------------------------------------------------------- | ----------------------------------------- | -------- | -------- | ------- | ------- | -------- | -------- | ------- | 
|                                                              |                                                                                              |                                                                 
|                                                              |                                                                                              | Six Months Ended                                                
|                                                              |                                                                                              | June 30,                                                        
|                                                              |                                                                                              |                                                                 
|                                                              |                                                                                              | 2002                                                             |                                           | 2001    
|                                                              |                                                                                              |                                                                  |                                           |         
|                                                              |                                                                                              |                                                                 
|                                                              |                                                                                              | (Unaudited)                                                     
|Cash flows from operating activities:                         |                                                                                              |                                                                  |                                           |          |          |         |         |         
|                                                              | Net income (loss)                                                                            |                                                                  | $                                         | 70,512   |          |         | $       | (285,075 | )       
|                                                              | Adjustments to reconcile net income
    (loss) to net cash provided by operating activities: |                                                                  |                                           |          |          |         |         |          |         
|                                                              |                                                                                              | Depreciation and amortization                                    |                                           |          | 52,046   |         |         |          | 39,664   |        
|                                                              |                                                                                              | Amortization of other intangibles                                |                                           |          | 36,032   |         |         |          | 36,170   |        
|                                                              |                                                                                              | Amortization of goodwill                                         |                                           |          |         |         |         |          | 406,799  |        
|                                                              |                                                                                              | Amortization of developed technology                             |                                           |          | 33,806   |         |         |          | 31,504   |        
|                                                              |                                                                                              | Amortization of original issue discount on
    convertible notes |                                           |          | 7,941    |         |         |          | 7,365    |        
|                                                              |                                                                                              | Provision for doubtful accounts                                  |                                           |          | 2,031    |         |         |          | 1,682    |        
|                                                              |                                                                                              | Tax benefits from stock plans                                    |                                           |          | 19,593   |         |         |          | 83,841   |        
|                                                              |                                                                                              | Loss on strategic investments                                    |                                           |          | 14,802   |         |         |          |         |        
|                                                              |                                                                                              | Gain on sale of assets                                           |                                           |          | (62      | )       |         |          |         |        
|                                                              |                                                                                              | Deferred income taxes                                            |                                           |          | (26,290  | )       |         |          | (26,967  | )      
|                                                              | Changes in operating assets and liabilities, net
    of effects of business acquisitions:    |                                                                  |                                           |          |          |         |         |          |         
|                                                              |                                                                                              | Accounts receivable                                              |                                           |          | 37,168   |         |         |          | (4,363   | )      
|                                                              |                                                                                              | Other assets                                                     |                                           |          | 7,272    |         |         |          | 7,343    |        
|                                                              |                                                                                              | Accounts payable                                                 |                                           |          | 14,231   |         |         |          | (5,025   | )      
|                                                              |                                                                                              | Accrued compensation and benefits                                |                                           |          | (7,712   | )       |         |          | 8,914    |        
|                                                              |                                                                                              | Accrued acquisition and restructuring costs                      |                                           |          | (605     | )       |         |          | (27,165  | )      
|                                                              |                                                                                              | Other accrued liabilities                                        |                                           |          | 7,708    |         |         |          | (2,109   | )      
|                                                              |                                                                                              | Income taxes payable                                             |                                           |          | 34,555   |         |         |          | 1,031    |        
|                                                              |                                                                                              | Deferred revenue                                                 |                                           |          | 36,556   |         |         |          | 27,563   |        
|                                                              |                                                                                              |                                                                  |                                           |          |          |         |         |         
|                                                              |                                                                                              |                                                                  | Net cash provided by operating activities |          |          | 339,584 |         |          |          | 301,172 | 
|Cash flows from investing activities:                         |                                                                                              |                                                                  |                                           |          |          |         |         |         
|                                                              | Purchases of investments                                                                     |                                                                  |                                           | (903,899 | )        |         |         | (642,407 | )       
|                                                              | Sales and maturities of investments                                                          |                                                                  |                                           | 768,756  |          |         |         | 389,720  |         
|                                                              | Purchases of property and equipment                                                          |                                                                  |                                           | (53,139  | )        |         |         | (87,190  | )       
|                                                              | Business acquisitions                                                                        |                                                                  |                                           |         |          |         |         | (21,000  | )       
|                                                              | Strategic investments in businesses                                                          |                                                                  |                                           |         |          |         |         | (13,110  | )       
|                                                              | Payments made for 2001 businesses acquisitions                                               |                                                                  |                                           | (7,267   | )        |         |         |         |         
|                                                              |                                                                                              |                                                                  |                                           |          |          |         |         |         
|                                                              |                                                                                              | Net cash used for investing activities                           |                                           |          | (195,549 | )       |         |          | (373,987 | )      
|Cash flows from financing activities:                         |                                                                                              |                                                                  |                                           |          |          |         |         |         
|                                                              | Proceeds from issuance of common stock                                                       |                                                                  |                                           | 63,567   |          |         |         | 57,475   |         
|                                                              |                                                                                              |                                                                  |                                           |          |          |         |         |         
|                                                              |                                                                                              | Net cash provided by financing activities                        |                                           |          | 63,567   |         |         |          | 57,475   |        
|Effect of exchange rate changes                               |                                                                                              |                                                                  | 974                                       |          |          |         | (3,200  | )       
|                                                              |                                                                                              |                                                                  |                                           |          |          |         |         |         
|Net increase (decrease) in cash and cash
    equivalents      |                                                                                              |                                                                  | 208,576                                   |          |          |         | (18,540 | )       
|Cash and cash equivalents at beginning of period              |                                                                                              |                                                                  | 538,419                                   |          |          |         | 886,558 |         
|                                                              |                                                                                              |                                                                  |                                           |          |          |         |         |         
|Cash and cash equivalents at end of period                    |                                                                                              | $                                                                | 746,995                                   |          |          | $       | 868,018 |         
|                                                              |                                                                                              |                                                                  |                                           |          |          |         |         |         
|Supplemental disclosures:                                     |                                                                                              |                                                                  |                                           |          |          |         |         |         
|                                                              | Cash paid for interest                                                                       |                                                                  | $                                         | 5,992    |          |         | $       | 6,005    |         
|                                                              | Cash paid for income taxes                                                                   |                                                                  | $                                         | 6,661    |          |         | $       | 7,513    |         
|Supplemental schedule of non-cash financing
    transactions: |                                                                                              |                                                                  |                                           |          |          |         |         |         
|                                                              | Issuance of common stock for conversion of notes                                             |                                                                  | $                                         | 500      |          |         | $       | 82       |         

See accompanying notes to condensed consolidated
financial statements.

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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 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 notes thereto
included in VERITAS Software Corporations Annual Report on
Form 10-K for the year ended December 31, 2001.

2.     Use of
Estimates

The preparation of financial statements in
conformity with generally accepted accounting principles
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.     Comparative
Information

The Company has reclassified certain comparative
information to conform with current period financial
presentation.

4.     Change in
Accounting Principals

On January 1, 2002, the Company adopted
Statement of Financial Accounting Standard (SFAS)
142, Goodwill and Other Intangible Assets,SFAS 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets,and the Financial Accounting Standards Board
(FASB) staff issued Topic No. D-103, Income
Statement Characterization of Reimbursements Received for
Out-of-Pocket Expenses Incurred(Topic D-103).

SFAS 142 requires that goodwill and
intangible assets with indefinite useful lives no longer be
amortized, but instead be tested for impairment at least
annually. SFAS 142 also requires that intangible assets
with estimable useful lives be amortized over their respective
estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS 144. In the
second quarter of 2002, the Company completed the transitional
goodwill impairment test required by SFAS 142 and did not
record an impairment charge upon completion of the test. The
Company has not yet determined the date of the annual goodwill
impairment test. The Company does not expect to record an
impairment charge upon completion of the next annual impairment
test, but there can be no assurance that at the time the test is
completed a significant impairment charge may not be recorded.

SFAS 144 supersedes SFAS 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of,and APB Opinion No. 30, Reporting
the Results of Operation-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions. SFAS 144
establishes a single accounting model for long-lived assets to
be disposed of by sale, whether they were previously held and
used or newly acquired, and it also broadens the presentation of
discontinued operations to include more disposal transactions.
The adoption of SFAS 144 did not have a material impact on
the Companys consolidated financial position, results of
operations or cash flows.

Topic D-103 requires companies to record
certain reimbursements received for out-of-pocket expenses as
revenue instead of an offset to the related expense. Upon
application of Topic D-103, comparative financial

5



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##### Table of Contents



VERITAS Software Corporation


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

statements for prior periods must be reclassified
to comply with the guidance in this announcement. The adoption
of Topic D-103 did not have a material impact on the
Companys financial position, results of operations or cash
flows, and as a result the Company did not reclassify prior
period results.

5.     Strategic
Investments

The Company holds investments in common and
preferred stock of publicly traded and privately-held companies.
The total carrying amount of the Companys strategic
investments was $11.3 million as of June 30, 2002, and
was included in other non-current assets. In the second quarter
of 2002, the Company recorded impairment losses on strategic
investments of $14.8 million. The losses represented
write-downs of the Companys carrying amount of the
investments and were determined by reviewing the following:



| |   |                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------
| |  | actual or proposed rounds of financing of the
    investee, subsequent to the Companys investment date;  
|
| |  | cash position of the investee and its cash burn
    rate;                                                 
|
| |  | investees ability to obtain additional
    financing;                                                    
|
| |  | investees actual operating results compared
    to its forecasted results;                               
|
| |  | status of the investees product development
    and its competitive position;                            
|
| |  | investees management experience and
    employee headcount additions or reductions;                      
|
| |  | current industry and economic trends relevant to
    the business of the investee;                        
|
| |  | if privately-held, the market value of common
    stock of the investees publicly traded competitors; and
|
| |  | if publicly traded, the market value of the
    investees common stock.                                  

6.     Net Income
(Loss) Per Share

The following table sets forth the computation of
basic and diluted net income (loss) per share (in
thousands, except per share amounts):

|                                    |                                                                                             |                    |      |                  |  |      |       |          |   |   |      |         |  |   |       |          |  
|----------------------------------- | ------------------------------------------------------------------------------------------- | ------------------ | ---- | ---------------- |  | ---- | ----- | -------- | - | - | ---- | ------- |  | - | ----- | -------- | -
|                                    |                                                                                             |                    |      |                 
|                                    |                                                                                             | Three Months Ended |      | Six Months Ended
|                                    |                                                                                             | June 30,           |      | June 30,        
|                                    |                                                                                             |                    |      |                 
|                                    |                                                                                             | 2002               |      | 2001             |  | 2002 |       | 2001    
|                                    |                                                                                             |                    |      |                  |  |      |       |         
|Numerator:                          |                                                                                             |                    |      |                  |  |      |       |          |   |   |      |         |  |   |       |         
|                                    | Net income (loss)                                                                           |                    | $    | 26,046           |  |      | $     | (128,976 | ) |   | $    | 70,512  |  |   | $     | (285,075 | )
|                                    |                                                                                             |                    |      |                  |  |      |       |          |   |   |      |         |  |   |       |         
|Denominator:                        |                                                                                             |                    |      |                  |  |      |       |          |   |   |      |         |  |   |       |         
|                                    | Denominator for basic net income (loss) per
    share  weighted-average shares outstanding |                    |      | 409,465          |  |      |       | 398,017  |   |   |      | 407,776 |  |   |       | 396,432  |  
|                                    | Potential common shares                                                                     |                    |      | 9,254            |  |      |       |         |   |   |      | 12,513  |  |   |       |         |  
|                                    |                                                                                             |                    |      |                  |  |      |       |          |   |   |      |         |  |   |       |         
|                                    | Denominator for diluted net income
    (loss) per share                                     |                    |      | 418,719          |  |      |       | 398,017  |   |   |      | 420,289 |  |   |       | 396,432  |  
|                                    |                                                                                             |                    |      |                  |  |      |       |          |   |   |      |         |  |   |       |         
|Basic net income (loss) per share   |                                                                                             | $                  | 0.06 |                  |  | $    | (0.32 | )        |   | $ | 0.17 |         |  | $ | (0.72 | )       
|                                    |                                                                                             |                    |      |                  |  |      |       |          |   |   |      |         |  |   |       |         
|Diluted net income (loss) per share |                                                                                             | $                  | 0.06 |                  |  | $    | (0.32 | )        |   | $ | 0.17 |         |  | $ | (0.72 | )       
|                                    |                                                                                             |                    |      |                  |  |      |       |          |   |   |      |         |  |   |       |         

For the three and six months ended June 30,
2002, potential common shares consist of employee stock options
using the treasury method. The following table sets forth the
potential common shares that were

6



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##### Table of Contents



VERITAS Software Corporation


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

excluded from the net income (loss) per
share computations (in thousands) as their effect would be
antidilutive:

|                                      |  |              |        |            |  |      |        |      |  |  |        |  |  |  |        | 
|------------------------------------- |  | ------------ | ------ | ---------- |  | ---- | ------ | ---- |  |  | ------ |  |  |  | ------ | 
|                                      |  |              |        |           
|                                      |  | Three Months |        | Six Months
|                                      |  | Ended        |        | Ended     
|                                      |  | June 30,     |        | June 30,  
|                                      |  |              |        |           
|                                      |  | 2002         |        | 2001       |  | 2002 |        | 2001
|                                      |  |              |        |            |  |      |        |     
|Employee stock options outstanding(1) |  |              | 36,684 |            |  |      | 57,278 |      |  |  | 28,018 |  |  |  | 55,531 | 
|5.25% convertible subordinated notes  |  |              | 6,695  |            |  |      | 6,748  |      |  |  | 6,695  |  |  |  | 6,749  | 
|1.856% convertible subordinated notes |  |              | 12,981 |            |  |      | 12,981 |      |  |  | 12,981 |  |  |  | 12,982 | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | For the three and six months ended June 30,
    2002, employee stock options were excluded from the computation
    of diluted net income per share because the exercise price of
    these options was greater than the average market price of the
    Companys common stock during the period, and therefore the
    effect is antidilutive. For the three and six months ended
    June 30, 2001, all employee stock options were excluded
    from the computation of diluted net loss per share because the
    effect would have been antidilutive.

The weighted average exercise price of the
employee stock options with exercise prices exceeding the
average fair value of the Companys common stock for the
three and six months ended June 30, 2002 was $65.06 and
$99.27 per share, respectively. The weighted average exercise
price of all employee stock options outstanding for the three
and six months ended June 30, 2001 was $97.84 and $76.88
per share, respectively.

7.     Goodwill and
Other Intangible Assets

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

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

|         |  |                                     |           |              |  |              |           |  |  |   |           | 
|-------- |  | ----------------------------------- | --------- | ------------ |  | ------------ | --------- |  |  | - | --------- | 
|         |  |                                    
|         |  | June 30, 2002 and December 31, 2001
|         |  |                                    
|         |  | Gross                               |           |             
|         |  | Carrying                            |           | Accumulated  |  | Net Carrying
|         |  | Amount                              |           | Amortization |  | Amount      
|         |  |                                     |           |              |  |             
|Goodwill |  | $                                   | 3,293,744 |              |  | $            | 2,090,930 |  |  | $ | 1,202,814 | 
|         |  |                                     |           |              |  |              |           |  |  |   |           | 

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

|                                              |  |                |         |              |  |              |         |  |  |   |         | 
|--------------------------------------------- |  | -------------- | ------- | ------------ |  | ------------ | ------- |  |  | - | ------- | 
|                                              |  |               
|                                              |  | June 30, 2002 
|                                              |  |               
|                                              |  | Gross Carrying |         | Accumulated  |  | Net Carrying
|                                              |  | Amount         |         | Amortization |  | Amount      
|                                              |  |                |         |              |  |             
|Developed technology                          |  | $              | 250,826 |              |  | $            | 187,665 |  |  | $ | 63,161  | 
|Distribution channels                         |  |                | 234,800 |              |  |              | 180,992 |  |  |   | 53,808  | 
|Trademarks                                    |  |                | 24,350  |              |  |              | 18,769  |  |  |   | 5,581   | 
|Other intangible assets                       |  |                | 29,700  |              |  |              | 22,482  |  |  |   | 7,218   | 
|                                              |  |                |         |              |  |              |         |  |  |   |         | 
|Intangibles related to business acquisitions  |  |                | 539,676 |              |  |              | 409,908 |  |  |   | 129,768 | 
|Convertible subordinated notes issuance costs |  |                | 14,506  |              |  |              | 7,102   |  |  |   | 7,404   | 
|                                              |  |                |         |              |  |              |         |  |  |   |         | 
|Total other intangibles assets                |  | $              | 554,182 |              |  | $            | 417,010 |  |  | $ | 137,172 | 
|                                              |  |                |         |              |  |              |         |  |  |   |         | 

7



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##### Table of Contents



VERITAS Software Corporation


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                              |  |                   |         |              |  |              |         |  |  |   |         | 
|--------------------------------------------- |  | ----------------- | ------- | ------------ |  | ------------ | ------- |  |  | - | ------- | 
|                                              |  |                  
|                                              |  | December 31, 2001
|                                              |  |                  
|                                              |  | Gross Carrying    |         | Accumulated  |  | Net Carrying
|                                              |  | Amount            |         | Amortization |  | Amount      
|                                              |  |                   |         |              |  |             
|Developed technology                          |  | $                 | 258,027 |              |  | $            | 159,425 |  |  | $ | 98,602  | 
|Distribution channels                         |  |                   | 234,800 |              |  |              | 151,642 |  |  |   | 83,158  | 
|Trademarks                                    |  |                   | 24,350  |              |  |              | 15,724  |  |  |   | 8,626   | 
|Other intangible assets                       |  |                   | 29,700  |              |  |              | 18,726  |  |  |   | 10,974  | 
|                                              |  |                   |         |              |  |              |         |  |  |   |         | 
|Intangibles related to business acquisitions  |  |                   | 546,877 |              |  |              | 345,517 |  |  |   | 201,360 | 
|Convertible subordinated notes issuance costs |  |                   | 14,506  |              |  |              | 6,144   |  |  |   | 8,362   | 
|                                              |  |                   |         |              |  |              |         |  |  |   |         | 
|Total other intangibles assets                |  | $                 | 561,383 |              |  | $            | 351,661 |  |  | $ | 209,722 | 
|                                              |  |                   |         |              |  |              |         |  |  |   |         | 

The total amortization expense related to
goodwill and other intangible assets is set forth in the table
below (in thousands):

|                        |  |                    |        |                  |  |      |         |      |  |   |        |  |  |   |         | 
|----------------------- |  | ------------------ | ------ | ---------------- |  | ---- | ------- | ---- |  | - | ------ |  |  | - | ------- | 
|                        |  |                    |        |                 
|                        |  | Three Months Ended |        | Six Months Ended
|                        |  | June 30,           |        | June 30,        
|                        |  |                    |        |                 
|                        |  | 2002               |        | 2001             |  | 2002 |         | 2001
|                        |  |                    |        |                  |  |      |         |     
|Goodwill                |  | $                  |       |                  |  | $    | 203,619 |      |  | $ |       |  |  | $ | 406,799 | 
|Developed technology    |  |                    | 16,903 |                  |  |      | 15,713  |      |  |   | 33,806 |  |  |   | 31,504  | 
|Distribution channels   |  |                    | 14,675 |                  |  |      | 14,675  |      |  |   | 29,350 |  |  |   | 29,350  | 
|Trademarks              |  |                    | 1,522  |                  |  |      | 1,522   |      |  |   | 3,045  |  |  |   | 3,044   | 
|Other intangible assets |  |                    | 1,819  |                  |  |      | 1,927   |      |  |   | 3,637  |  |  |   | 3,776   | 
|                        |  |                    |        |                  |  |      |         |      |  |   |        |  |  |   |         | 
|Total amortization      |  | $                  | 34,919 |                  |  | $    | 237,456 |      |  | $ | 69,838 |  |  | $ | 474,473 | 
|                        |  |                    |        |                  |  |      |         |      |  |   |        |  |  |   |         | 

The total expected future annual amortization
related to other intangible assets is set forth in the table
below (in thousands):

|      |  |              |         | 
|----- |  | ------------ | ------- | 
|      |  | Future      
|Year  |  | Amortization
|      |  |             
|2002  |  | $            | 68,386  | 
|2003  |  |              | 60,137  | 
|2004  |  |              | 1,245   | 
|      |  |              |         | 
|Total |  | $            | 129,768 | 
|      |  |              |         | 

8



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##### Table of Contents



VERITAS Software Corporation


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The adjusted net income per share excluding
amortization of goodwill is as follows (in thousands):

|                                              |                          |                    |        |                  |  |      |          |         |  |   |        |   |  |   |          |         | 
|--------------------------------------------- | ------------------------ | ------------------ | ------ | ---------------- |  | ---- | -------- | ------- |  | - | ------ | - |  | - | -------- | ------- | 
|                                              |                          |                    |        |                 
|                                              |                          | Three Months Ended |        | Six Months Ended
|                                              |                          | June 30,           |        | June 30,        
|                                              |                          |                    |        |                 
|                                              |                          | 2002               |        | 2001             |  | 2002 |          | 2001   
|                                              |                          |                    |        |                  |  |      |          |        
|Net income (loss)                             |                          | $                  | 26,046 |                  |  | $    | (128,976 | )       |  | $ | 70,512 |   |  | $ | (285,075 | )      
|Add back:                                     |                          |                    |        |                  |  |      |          |         |  |   |        |   |  |   |          |        
|                                              | Amortization of goodwill |                    |        |                 |  |      |          | 203,619 |  |   |        |  |  |   |          | 406,799 | 
|                                              |                          |                    |        |                  |  |      |          |         |  |   |        |   |  |   |          |        
|Adjusted net income                           |                          | $                  | 26,046 |                  |  | $    | 74,643   |         |  | $ | 70,512 |   |  | $ | 121,724  |        
|                                              |                          |                    |        |                  |  |      |          |         |  |   |        |   |  |   |          |        
|Basic and diluted net income (loss) per share |                          | $                  | 0.06   |                  |  | $    | (0.32    | )       |  | $ | 0.17   |   |  | $ | (0.72    | )      
|Add back:                                     |                          |                    |        |                  |  |      |          |         |  |   |        |   |  |   |          |        
|                                              | Amortization of goodwill |                    |        |                 |  |      |          | 0.51    |  |   |        |  |  |   |          | 1.03    | 
|                                              |                          |                    |        |                  |  |      |          |         |  |   |        |   |  |   |          |        
|Adjusted basic net income per share           |                          | $                  | 0.06   |                  |  | $    | 0.19     |         |  | $ | 0.17   |   |  | $ | 0.31     |        
|                                              |                          |                    |        |                  |  |      |          |         |  |   |        |   |  |   |          |        
|Adjusted diluted net income per share         |                          | $                  | 0.06   |                  |  | $    | 0.18     |         |  | $ | 0.17   |   |  | $ | 0.29     |        
|                                              |                          |                    |        |                  |  |      |          |         |  |   |        |   |  |   |          |        

8.     Comprehensive
Income (Loss)

The following are the components of comprehensive
income (loss) (in thousands):

|                                               |                                                 |                    |        |                  |   |      |          |        |   |   |        |        |   |   |          |        |  
|---------------------------------------------- | ----------------------------------------------- | ------------------ | ------ | ---------------- | - | ---- | -------- | ------ | - | - | ------ | ------ | - | - | -------- | ------ | -
|                                               |                                                 |                    |        |                 
|                                               |                                                 | Three Months Ended |        | Six Months Ended
|                                               |                                                 | June 30,           |        | June 30,        
|                                               |                                                 |                    |        |                 
|                                               |                                                 | 2002               |        | 2001             |   | 2002 |          | 2001  
|                                               |                                                 |                    |        |                  |   |      |          |       
|Net income (loss)                              |                                                 | $                  | 26,046 |                  |   | $    | (128,976 | )      |   | $ | 70,512 |        |   | $ | (285,075 | )     
|Other comprehensive income (loss), net of tax: |                                                 |                    |        |                  |   |      |          |        |   |   |        |        |   |   |          |       
|                                               | Foreign currency translation adjustments        |                    |        | (4,780           | ) |      |          | 2,420  |   |   |        | (5,513 | ) |   |          | 2,374  |  
|                                               | Derivative financial instrument adjustments     |                    |        | 6,031            |   |      |          | (6,421 | ) |   |        | 4,540  |   |   |          | (5,574 | )
|                                               | Unrealized gain (loss) on marketable securities |                    |        | (1,598           | ) |      |          | 2,281  |   |   |        | 4,292  |   |   |          | 184    |  
|                                               |                                                 |                    |        |                  |   |      |          |        |   |   |        |        |   |   |          |       
|Comprehensive income (loss)                    |                                                 | $                  | 25,699 |                  |   | $    | (130,696 | )      |   | $ | 73,831 |        |   | $ | (288,091 | )     
|                                               |                                                 |                    |        |                  |   |      |          |        |   |   |        |        |   |   |          |       

The components of accumulated other comprehensive
loss are (in thousands):

|                                            |  |          |        |              |  |   |        |  
|------------------------------------------- |  | -------- | ------ | ------------ |  | - | ------ | -
|                                            |  | June 30, |        | December 31,
|                                            |  | 2002     |        | 2001        
|                                            |  |          |        |             
|Foreign currency translation adjustments    |  | $        | (3,316 | )            |  | $ | (8,829 | )
|Derivative financial instrument adjustments |  |          | (2,194 | )            |  |   | 2,346  |  
|Unrealized gain on marketable securities    |  |          | 1,899  |              |  |   | 6,191  |  
|                                            |  |          |        |              |  |   |        |  
|Accumulated other comprehensive loss        |  | $        | (3,611 | )            |  | $ | (292   | )
|                                            |  |          |        |              |  |   |        |  

9.     Derivative
Financial Instruments

In September 2000, the Company entered into a
three-year cross currency interest rate swap transaction
(swap) for the purpose of hedging fixed interest
rate, foreign currency denominated cash flows under an
inter-company loan receivable. Under the terms of this
derivative financial instrument, Euro denominated fixed
principal and interest payments to be received under the
inter-company loan will be swapped for U.S. dollar-fixed
principal and interest payments. As of June 30, 2002,
fifteen monthly payments of $4.3 million remained to be
swapped at a forward exchange rate of 0.89070 U.S. dollar
per Euro. The fair market value of the swap at June 30,
2002 was ($5.2) million. As a result of entering into the
swap, the

9



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##### Table of Contents



VERITAS Software Corporation


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Company has mitigated its exposure to foreign
currency exchange rate fluctuations. The gains or losses on the
foreign currency loan receivable will be offset by the gains or
losses on the swap. Because the Company is receiving fixed
interest payments under the swap, it is still subject to
fluctuations in value due to changes in U.S. dollar
interest rates. As of June 30, 2002 the impact of these
fluctuations was not significant. This cash flow hedge was
deemed to be perfectly effective as of June 30, 2002.

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
of its build-to-suit lease agreements. Under the terms of these
interest rate swaps, the Company makes payments based on a
stated fixed rate and will receive interest payments based on
the 3-month London Inter Bank Offer Rate (LIBOR).
The Companys payments on its build-to-suit lease
agreements are based upon a 3-month LIBOR plus a credit spread.
If the Companys credit spread remains consistent and other
critical terms of the interest rate swap or the hedged item do
not change, the interest rate swap will be considered perfectly
effective with all changes in the fair value included in other
comprehensive income. If the Companys credit spread
changes or other 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 June 30, 2002, the fair value of the interest rate
swaps was ($4.0) million. 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.

10.     Segment
Information

The Company operates in one segment, storage
software solutions. The Companys products and services are
sold throughout the world, through original equipment
manufacturers, direct sales channels and 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 of product channels and
the geographic regions of the segment and does not receive
discrete financial information about asset allocation, expense
allocation or profitability from the Companys storage
software products or services.



| |                                          
| | -----------------------------------------
| | Geographic Information (in
    thousands)

|                      |               |                    |   |                  |         |      |   |         |         |  |   |         |         |  |   |         |         | 
|--------------------- | ------------- | ------------------ | - | ---------------- | ------- | ---- | - | ------- | ------- |  | - | ------- | ------- |  | - | ------- | ------- | 
|                      |               |                    |   |                 
|                      |               | Three Months Ended |   | Six Months Ended
|                      |               | June 30,           |   | June 30,        
|                      |               |                    |   |                 
|                      |               | 2002               |   | 2001             |         | 2002 |   | 2001   
|                      |               |                    |   |                  |         |      |   |        
|User license fees(1): |               |                    |   |                  |         |      |   |         |         |  |   |         |         |  |   |        
|                      | United States |                    | $ | 161,072          |         |      | $ | 196,322 |         |  | $ | 329,461 |         |  | $ | 417,360 |        
|                      | Europe(2)     |                    |   | 52,167           |         |      |   | 68,342  |         |  |   | 112,403 |         |  |   | 131,386 |        
|                      | Other(3)      |                    |   | 28,637           |         |      |   | 29,016  |         |  |   | 59,723  |         |  |   | 53,951  |        
|                      |               |                    |   |                  |         |      |   |         |         |  |   |         |         |  |   |        
|                      |               | Total              |   |                  | 241,876 |      |   |         | 293,680 |  |   |         | 501,587 |  |   |         | 602,697 | 
|                      |               |                    |   |                  |         |      |   |         |         |  |   |         |         |  |   |        
|Services(1):          |               |                    |   |                  |         |      |   |         |         |  |   |         |         |  |   |        
|                      | United States |                    |   | 94,649           |         |      |   | 76,721  |         |  |   | 181,391 |         |  |   | 140,658 |        
|                      | Europe(2)     |                    |   | 19,940           |         |      |   | 13,928  |         |  |   | 37,647  |         |  |   | 23,487  |        
|                      | Other(3)      |                    |   | 8,225            |         |      |   | 5,894   |         |  |   | 14,514  |         |  |   | 10,822  |        
|                      |               |                    |   |                  |         |      |   |         |         |  |   |         |         |  |   |        
|                      |               | Total              |   |                  | 122,814 |      |   |         | 96,543  |  |   |         | 233,552 |  |   |         | 174,967 | 
|                      |               |                    |   |                  |         |      |   |         |         |  |   |         |         |  |   |        
|                      |               | Total net revenue  |   | $                | 364,690 |      |   | $       | 390,223 |  |   | $       | 735,139 |  |   | $       | 777,664 | 
|                      |               |                    |   |                  |         |      |   |         |         |  |   |         |         |  |   |        

10



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VERITAS Software Corporation


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                      |               |          |   |              |           |  |   |           |           | 
|--------------------- | ------------- | -------- | - | ------------ | --------- |  | - | --------- | --------- | 
|                      |               | June 30, |   | December 31,
|                      |               | 2002     |   | 2001        
|                      |               |          |   |             
|Long-lived assets(4): |               |          |   |              |           |  |   |          
|                      | United States |          | $ | 1,511,913    |           |  | $ | 1,592,060 |          
|                      | Europe(2)     |          |   | 43,086       |           |  |   | 33,945    |          
|                      | Other(3)      |          |   | 12,724       |           |  |   | 12,294    |          
|                      |               |          |   |              |           |  |   |          
|                      |               | Total    |   | $            | 1,567,723 |  |   | $         | 1,638,299 | 
|                      |               |          |   |              |           |  |   |          



---



|    |                                                                                                                                                                                                     
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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.                                                                                                                        
|   
|(4) | Long-lived assets include all long-term assets
    except those specifically excluded under SFAS 131, such as
    deferred income taxes. Reconciliation to total assets reported
    (in thousands):

|                                |                           |          |           |              |  |   |           |           | 
|------------------------------- | ------------------------- | -------- | --------- | ------------ |  | - | --------- | --------- | 
|                                |                           | June 30, |           | December 31,
|                                |                           | 2002     |           | 2001        
|                                |                           |          |           |             
|Total long-lived assets         |                           | $        | 1,567,723 |              |  | $ | 1,638,299 |          
|Other assets, including current |                           |          | 2,466,757 |              |  |   | 2,160,314 |          
|                                |                           |          |           |              |  |   |           |          
|                                | Total consolidated assets |          | $         | 4,034,480    |  |   | $         | 3,798,613 | 
|                                |                           |          |           |              |  |   |           |          

No customer represented 10% or more of the
Companys net revenue for the three and six months ended
June 30, 2002 or for the three and six months ended
June 30, 2001.



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

The Company markets and distributes its software
products both as individual software products and as integrated
product suites, also referred to as application solutions. The
Company derives its user license fees from the sale of its core
technologies, including data protection and file system and
volume management products, from its emerging technologies,
including cluster and replication and SAN products, and from its
application solutions, which include technologies from both its
core and emerging technologies. User license fees from core
technologies were $212.6 million for the three months ended
June 30, 2002 and $252.2 million for the three months
ended June 30, 2001. User license fees from core
technologies were $438.5 million for the six months ended
June 30, 2002 and $510.5 million for the six months
ended June 30, 2001. User license fees from emerging
technologies were $29.3 million for the three months ended
June 30, 2002 and $41.5 million for the three months
ended June 30, 2001. User license fees from emerging
technologies were $63.1 million for the six months ended
June 30, 2002 and $92.2 million for the six months
ended June 30, 2001.

User license fees from application solutions, as
stand-alone products, were $46.2 million for the three
months ended June 30, 2002 and $61.9 million for the
three months ended June 30, 2001. User license fees from
application solutions, as stand-alone products, were
$99.0 million for the six months ended June 30, 2002
and $133.3 million for the six months ended June 30,
2001. User license fees generated by application solutions are
allocated between core technology products and emerging
technology products.

11.     Credit
Facility

During 2001, the Company extended and amended the
terms of its $50.0 million unsecured credit facility, which
it holds with a syndicate of financial institutions. At
June 30, 2002, no amount was outstanding and the credit
facility is due to expire in September 2002. Borrowings under
the credit facility bear interest at 1.0% to 1.5% over LIBOR,
and are subject to the Companys compliance with financial
and other covenants. The

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VERITAS Software Corporation


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

credit agreement requires the Company to maintain
specified financial covenants such as earnings before interest,
taxes, depreciation and amortization (EBITDA), debt
on EBITDA and quick ratio, all of which the Company was in
compliance with as of June 30, 2002.

During the first quarter of 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 ($8.3 million USD). At
June 30, 2002, no amount was outstanding. The short-term
credit facility is due to expire in March 2003. Borrowings under
the short-term credit facility bear interest at Tokyo Inter Bank
Offer Rate (TIBOR) plus 0.5%. There are no covenants
on the credit facility and the loan has been guaranteed by
VERITAS Software Global Corporation, a wholly-owned subsidiary
of the Company.

12.     Commitments
and Contingencies



| |                             
| | ----------------------------
| | Facilities Lease Commitments

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. The development
and acquisition of the properties have been financed by a third
party through a syndicate of financial institutions. The Company
has accounted for these agreements as operating leases in
accordance with SFAS 13, Accounting for Leases,as
amended.

During 2001, the Company amended its existing
lease agreement, originally signed in 1999, for new corporate
campus facilities in Mountain View, California. The facilities
of 425,000 square feet provide space for sales, marketing,
administration and research and development functions. The lease
term for these facilities is five years beginning in March 2000,
with an option to extend the lease term for two successive
periods of one year each, if agreed to by the financial
institutions. The Company has the option to purchase the
property (land and facilities) for the termination value of
$145.5 million or, at the end of the lease, to arrange for
the sale of the property to a third party while the Company
retains an obligation to the owner for the difference between
the sales price and the guaranteed residual value up to
$129.0 million if the sales price is less than this amount,
subject to certain provisions of the lease. In addition, the
Company is entitled to any proceeds from a sale of the property
in excess of the termination value. The Company occupies these
facilities and began making lease payments in the second quarter
of 2001. Monthly lease payments under this operating lease are
based on LIBOR using 30-day to 180-day LIBOR contracts.

During 2001, the Company amended its existing
lease agreement, originally signed in 2000, for its facilities
in Roseville, Minnesota. The Company improved and expanded its
existing facilities of 62,000 square feet and developed adjacent
property adding 142,000 square feet completed in 2001. The
facilities provide space for technical support and research and
development functions. The lease term for these facilities is
five years beginning in March 2000, with an option to extend the
lease term for two successive periods of one year each, if
agreed to by the financial institutions. The Company has the
option to purchase the property (land and facilities) for the
termination value of $41.3 million or, at the end of the
lease, to arrange for the sale of the property to a third party
while the Company retains an obligation to the owner for the
difference between the sales price and the guaranteed residual
value up to $35.1 million if the sales price is less than
this amount, subject to certain provisions of the lease. In
addition, the Company is entitled to any proceeds from a sale of
the property in excess of the termination value. The Company now
occupies these facilities and began making lease payments in
2001. Monthly lease payments under this operating lease are
based on LIBOR using 30-day to 180-day LIBOR contracts.

During 2001, the Company amended its existing
lease agreement, originally signed in 2000, for the lease of 65
acres of land and subsequent improvements for new research and
development campus facilities in Milpitas, California. The
Company plans to develop the site in two phases, with the first
phase of

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VERITAS Software Corporation


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

466,000 square feet to be completed in the
third quarter of 2002. The facilities will provide space for
research and development and general corporate functions. The
lease term for the first phase is five years beginning in July
2000, with an option to extend the lease term for two successive
periods of one year each, if agreed to by the financial
institutions. The Company has the option to purchase the
property (land and first phase facilities) for the termination
value of $194.3 million or, at the end of the lease, to
arrange for the sale of the property to a third party while the
Company retains an obligation to the owner for the difference
between the sales price and the guaranteed residual value up to
$180.5 million if the sales price is less than this amount,
subject to certain provisions of the lease. In addition, the
Company is entitled to any proceeds from a sale of the property
in excess of the termination value. The Company anticipates
beginning the lease payments in the third quarter of 2002 for
the first phase and to commence occupying the new campus
facilities in the first quarter of 2003. Monthly lease payments
under this operating lease are based on LIBOR using 30-day to
180-day LIBOR contracts. The Company is currently analyzing its
development schedule for the second phase of the campus, but at
this time no commitments have been made with respect to the
start of construction.

The Company has evaluated the expected fair value
of the properties at the end of the lease terms by reviewing
current real estate market conditions and indicators of
expectations for the market in the future. In the event that the
Company determines it is probable that the expected fair value
of any of the properties at the end of the lease terms will be
less than the respective termination values, the Company will
accrue the expected loss on a straight-line basis over the
remaining lease term. Currently, the Company does not believe it
is probable that the fair market value of the properties at the
end of the lease terms will be less than the termination values.

The three lease agreements listed above require
that the Company maintain specified financial covenants such as
EBITDA, debt on EBITDA and quick ratio, all of which the Company
was in compliance with as of June 30, 2002. In addition,
all the properties covered by the leases are subject to a deed
of trust in favor of the lessor in order to secure the
Companys obligations under the leases.

13



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

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. The following discussion contains
forward-looking statements regarding our expectations, beliefs,
plans, intentions or strategies regarding the future, which
involve many risks and uncertainties. These forward-looking
statements include statements regarding expansion to our
international operations, effects of business combinations and
acquisitions, changes in products and services revenue, revenue
mix, products and services gross margin, expense and impairment
estimates and future commitments. In some cases, forward-looking
statements are identified by words such as believe,
anticipate, expect, intend,
plan, will, may and similar
expressions. All 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. The actual results
that we achieve may differ materially from those anticipated by
any forward-looking statement due to risks and uncertainties
including those described below under Factors That May
Affect Future Results.

Unless expressly stated or the content otherwise
requires, the terms we, our,
us and VERITAS refer to VERITAS Software
Corporation and its subsidiaries.

Overview

VERITAS is a leading independent supplier of
storage software products and services. Storage software
includes storage management and data protection software as well
as clustering, replication and storage area networking software.
We develop and sell products for most popular operating systems,
including various versions of Windows, UNIX and Linux. We also
develop and sell products that support a wide variety of
servers, storage devices, databases and network solutions.
Customers use our software solutions in a wide variety of
industries, and include many leading global corporations and
e-commerce businesses. We also provide a full range of services
to assist our customers in assessing, architecting and
implementing their storage software solutions.

We derive user license fee revenue from shipments
of our software products to end-user customers through a
combination of original equipment manufacturers, direct sales
channels and indirect sales channels such as resellers,
value-added resellers, hardware distributors, application
software vendors and systems integrators. Some original
equipment manufacturers incorporate our products into their
products, some bundle our products with their products and some
license our products to third parties as optional products. In
general, we receive a user license fee for each sublicense of
our products granted by an original equipment manufacturer to
its customer.

Our services revenue consists of fees derived
from maintenance, technical support, consulting and training
services. Original equipment manufacturer maintenance agreements
covering our products provide for technical and emergency
support and minor unspecified product upgrades for a fixed
annual fee. Maintenance agreements covering products that are
licensed through channels other than original equipment
manufacturers provide for technical support and unspecified
product upgrades for an annual fee based on the number of user
licenses purchased and the level of service subscribed.

International Sales and Operations

Our international sales are generated primarily
through our international sales subsidiaries. International
revenue, most of which is collectible in foreign currencies,
accounted for approximately 30% of our total revenue for the
three months ended June 30, 2002 and 30% of our total
revenue for the three months ended June 30, 2001. Our
international revenue accounted for approximately 31% of our
total revenue for the six months ended June 30, 2002
and 28% of our total revenue for the six months ended
June 30, 2001. Our international revenue decreased 7% from
$117.2 million for the three months ended June 30,
2001 to $109.0 million for the three months ended
June 30, 2002. Our international revenue increased 2% from
$219.6 million for the six months ended June 30,
2001 to $224.3 million for the six months ended
June 30, 2002. User license and service revenue is
attributed to geographic regions based on location of our
customers.

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##### Table of Contents



We believe that our success depends upon
continued expansion of our international operations. We
currently have sales and service offices and resellers located
in North America, Europe, Asia-Pacific, South America and the
Middle East, and a development center in India. International
expansion will require us to establish additional foreign
offices, hire additional personnel and recruit new international
resellers, resulting in the diversion of significant management
attention and the expenditure of financial resources. To the
extent that we are unable to meet these additional requirements,
growth in international sales will be limited, which would have
an adverse effect on our business, operating results and
financial condition.

Seagate Technology Transaction

On November 22, 2000, we completed a
multi-party transaction with Seagate Technology, which we refer
to as Seagate, and Suez Acquisition Company (Cayman) Limited,
which we refer to as SAC, a company formed by a group of private
equity firms led by Silver Lake Partners. The transaction was
structured as a leveraged buyout of Seagate pursuant to which
Seagate sold all of its operating assets to SAC, and SAC assumed
and indemnified Seagate and us for substantially all liabilities
arising in connection with those operating assets. We did not
acquire Seagates disc drive business or any other Seagate
operating business. At the closing, and after the operating
assets and liabilities of Seagate had been transferred to SAC, a
wholly-owned subsidiary of ours merged with and into Seagate,
following which Seagate became our wholly-owned subsidiary and
was renamed VERITAS Software Technology Corporation.

We issued approximately 109.4 million shares
of our common stock to the Seagate stockholders in exchange for
approximately 128.1 million shares of our common stock and
certain non-operating assets and liabilities held by Seagate.
The transaction resulted in a decrease of approximately
18.7 million shares of our outstanding common stock. At the
closing of the transaction, we recorded the non-operating assets
and liabilities assumed from Seagate at their fair values. In
addition, we accrued $40.0 million of direct transaction
costs.

Acquisition-related costs are summarized below
(in millions):

|                                      |  |             |       |  
|------------------------------------- |  | ----------- | ----- | -
|                                      |  | Direct     
|                                      |  | Transaction
|                                      |  | Costs      
|                                      |  |            
|Provision accrued at acquisition date |  | $           | 40.0  |  
|Cash payments                         |  |             | (8.6  | )
|                                      |  |             |       |  
|Balance at December 31, 2000.         |  |             | 31.4  |  
|Cash payments                         |  |             | (26.0 | )
|Reversals                             |  |             | (5.0  | )
|                                      |  |             |       |  
|Balance at December 31, 2001.         |  |             | 0.4   |  
|Cash payments                         |  |             | (0.1  | )
|                                      |  |             |       |  
|Balance at June 30, 2002.             |  | $           | 0.3   |  
|                                      |  |             |       |  

In the third quarter of 2001, we reversed
$5.0 million of attorneys fees originally accrued in
relation to the Delaware lawsuit captioned In re Seagate
Technology, Inc. Shareholders Litigation,which we will not
have to pay as a result of a Delaware Chancery Court ruling that
approved the settlement of the lawsuit and the subsequent
distribution of $50.0 million of additional consideration
to the former Seagate stockholders that was paid by SAC. We
anticipate that the remaining $0.3 million of accrued
acquisition-related costs will be paid in 2002.

15



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##### Table of Contents



For the three months ended June 30, 2002 and
2001, the transaction had no impact on our consolidated
statements of operations. The impacts of the decrease of
approximately 18.7 million shares of our outstanding common
stock our net income per share is outlined in the following
table:

|                                                             |                                  |              |      |            |  |      |       |      |  |   |      |      |  |   |       |      | 
|------------------------------------------------------------ | -------------------------------- | ------------ | ---- | ---------- |  | ---- | ----- | ---- |  | - | ---- | ---- |  | - | ----- | ---- | 
|                                                             |                                  |              |      |           
|                                                             |                                  | Three Months |      | Six Months
|                                                             |                                  | Ended        |      | Ended     
|                                                             |                                  | June 30,     |      | June 30,  
|                                                             |                                  |              |      |           
|                                                             |                                  | 2002         |      | 2001       |  | 2002 |       | 2001
|                                                             |                                  |              |      |            |  |      |       |     
|Net income (loss) per share 
    basic and diluted          |                                  | $            | 0.06 |            |  | $    | (0.32 | )    |  | $ | 0.17 |      |  | $ | (0.72 | )   
|Addback:                                                     |                                  |              |      |            |  |      |       |      |  |   |      |      |  |   |       |     
|                                                             | Reduction of 18.7 million shares |              |      | 0.00       |  |      |       | 0.01 |  |   |      | 0.00 |  |   |       | 0.03 | 
|                                                             |                                  |              |      |            |  |      |       |      |  |   |      |      |  |   |       |     
|Adjusted net income (loss) per share 
    basic and diluted |                                  | $            | 0.06 |            |  | $    | (0.31 | )    |  | $ | 0.17 |      |  | $ | (0.69 | )   
|                                                             |                                  |              |      |            |  |      |       |      |  |   |      |      |  |   |       |     

As of June 30, 2002 and December 31,
2001, the transaction had impacts on our consolidated balance
sheets. The impact on our assets and liabilities as of
June 30, 2002 and December 31, 2001 were as follows:



| |   |                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | other current assets included $21.3 million
    of indemnification receivable from SAC;                                                                                                      
|
| |  | other non-current assets included
    $18.0 million of indemnification receivable from SAC;                                                                                                  
|
| |  | accrued acquisition and restructuring costs
    included $0.3 million of direct transaction costs at
    June 30, 2002 and $0.4 million of direct transaction
    costs at December 31, 2001;
|
| |  | income taxes payable included an additional
    $21.3 million; and                                                                                                                           
|
| |  | deferred and other income taxes included an
    additional $113.1 million.                                                                                                                   

As of June 30, 2002 and December 31,
2001, deferred and other income taxes payable recorded in
connection with the Seagate transaction totaled $134.4 million
and related to certain tax liabilities that we expect to pay
after the merger. Certain of Seagates federal and state
tax returns for various fiscal years are under examination by
tax authorities. We believe that adequate amounts for tax
liabilities have been provided for any final assessments that
may result from these examinations.

Business Combinations

As of June 30, 2002, as a result of the
acquisition of Network & Storage Management Group business
of Seagate Software, Inc. (NSMG) in 1999 and three
acquisitions of privately-held companies in 2001, we had the
following acquisition-related accruals (in millions):

|                                      |  |      |       |              |  |       |      |   |  |   |       |  
|------------------------------------- |  | ---- | ----- | ------------ |  | ----- | ---- | - |  | - | ----- | -
|                                      |  |      |       | 2001         |  |      
|                                      |  | NSMG |       | Acquisitions |  | Total
|                                      |  |      |       |              |  |      
|Provision accrued at acquisition date |  | $    | 43.4  |              |  | $     |     |   |  | $ | 43.4  |  
|Cash payments                         |  |      | (19.5 | )            |  |       |     |   |  |   | (19.5 | )
|Non-cash charges                      |  |      | (11.7 | )            |  |       |     |   |  |   | (11.7 | )
|                                      |  |      |       |              |  |       |      |   |  |   |       |  
|Balance at December 31, 1999          |  |      | 12.2  |              |  |       |     |   |  |   | 12.2  |  
|Cash payments                         |  |      | (4.7  | )            |  |       |     |   |  |   | (4.7  | )
|                                      |  |      |       |              |  |       |      |   |  |   |       |  
|Balance at December 31, 2000          |  |      | 7.5   |              |  |       |     |   |  |   | 7.5   |  
|Provision accrued at acquisition date |  |      |      |              |  |       | 1.9  |   |  |   | 1.9   |  
|Cash payments                         |  |      | (1.2  | )            |  |       | (1.1 | ) |  |   | (2.3  | )
|                                      |  |      |       |              |  |       |      |   |  |   |       |  
|Balance at December 31, 2001          |  |      | 6.3   |              |  |       | 0.8  |   |  |   | 7.1   |  
|Cash payments                         |  |      |      |              |  |       | (0.4 | ) |  |   | (0.4  | )
|                                      |  |      |       |              |  |       |      |   |  |   |       |  
|Balance at June 30, 2002              |  | $    | 6.3   |              |  | $     | 0.4  |   |  | $ | 6.7   |  
|                                      |  |      |       |              |  |       |      |   |  |   |       |  

16



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The remaining acquisition-related costs accrual
of $6.7 million is anticipated to be utilized primarily for
servicing operating lease payments or negotiated buyout of
operating lease commitments, the lease terms of which will
expire at various times through the year 2013.

In addition, we recorded restructuring charges
related to the NSMG acquisition. These restructuring charges
consisted of cancellation of facilities leases and other
contracts, involuntary termination benefits relating to the
salary and fringe benefit expense for terminated employees in
research and development, and write-off of redundant equipment
and leasehold improvements.

Restructuring costs are summarized below
(in millions):

|                                      |  |                       |      |                      |  |                     |      |       |  |   |      |   |  |   |      |  
|------------------------------------- |  | --------------------- | ---- | -------------------- |  | ------------------- | ---- | ----- |  | - | ---- | - |  | - | ---- | -
|                                      |  |                       |      |                      |  | Write-off of        |      |      
|                                      |  | Cancellation of       |      |                      |  | Redundant Equipment |      |      
|                                      |  | Facilities Leases and |      | Involuntary          |  | and Leasehold       |      |      
|                                      |  | Other Contracts       |      | Termination Benefits |  | Improvements        |      | Total
|                                      |  |                       |      |                      |  |                     |      |      
|Provision accrued at acquisition date |  | $                     | 8.8  |                      |  | $                   | 1.3  |       |  | $ | 0.9  |   |  | $ | 11.0 |  
|Cash payments                         |  |                       |     |                      |  |                     | (0.9 | )     |  |   |     |   |  |   | (0.9 | )
|Non-cash charges                      |  |                       |     |                      |  |                     |     |       |  |   | (0.9 | ) |  |   | (0.9 | )
|                                      |  |                       |      |                      |  |                     |      |       |  |   |      |   |  |   |      |  
|Balance at December 31, 1999          |  |                       | 8.8  |                      |  |                     | 0.4  |       |  |   |     |   |  |   | 9.2  |  
|Cash payments                         |  |                       | (0.2 | )                    |  |                     |     |       |  |   |     |   |  |   | (0.2 | )
|Reversals                             |  |                       | (3.9 | )                    |  |                     | (0.4 | )     |  |   |     |   |  |   | (4.3 | )
|                                      |  |                       |      |                      |  |                     |      |       |  |   |      |   |  |   |      |  
|Balance at December 31, 2000          |  |                       | 4.7  |                      |  |                     |     |       |  |   |     |   |  |   | 4.7  |  
|Cash payments                         |  |                       |     |                      |  |                     |     |       |  |   |     |   |  |   |     |  
|                                      |  |                       |      |                      |  |                     |      |       |  |   |      |   |  |   |      |  
|Balance at December 31, 2001          |  |                       | 4.7  |                      |  |                     |     |       |  |   |     |   |  |   | 4.7  |  
|Cash payments                         |  |                       | (0.3 | )                    |  |                     |     |       |  |   |     |   |  |   | (0.3 | )
|                                      |  |                       |      |                      |  |                     |      |       |  |   |      |   |  |   |      |  
|Balance at June 30, 2002              |  | $                     | 4.4  |                      |  | $                   |     |       |  | $ |     |   |  | $ | 4.4  |  
|                                      |  |                       |      |                      |  |                     |      |       |  |   |      |   |  |   |      |  

We anticipate that the remaining restructuring
charge accrual of $4.4 million will be utilized for
servicing operating lease payments or negotiated buyout of
operating lease commitments, the lease terms of which will
expire at various times through 2012.



| |                                                                                                       
| | ------------------------------------------------------------------------------------------------------
| | Accounting Pronouncements Affecting the
    Accounting Treatment of Previous Business
    Combinations

For the three and six months ended June 30,
2001, we incurred net losses due to the amortization of
developed technology, goodwill and other intangibles mainly
related to the acquisitions of NSMG, TeleBackup Systems, Inc.
(TeleBackup) and NuView Inc., (NuView)
in 1999. On January 1, 2002, upon adoption of
SFAS 142, Goodwill and Other Intangible Assets,the
quarterly charges related to the amortization of developed
technology, goodwill and other intangibles have changed. Because
of these changes, we no longer amortize goodwill related to
business combinations and as a result we became profitable in
the three and six months ended June 30, 2002. Refer to the
New Accounting Pronouncementssection in this
Item 2 for a discussion on the impacts of the adoption of
SFAS 142 on our financial statements.

Critical Accounting Policies

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



| |   |                                 
| | - | --------------------------------
| |  | Revenue recognition;            
|
| |  | Impairment of goodwill;         
|
| |  | Impairment of long-lived assets;

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| |   |                                     
| | - | ------------------------------------
| |  | Accounting for income taxes; and    
|
| |  | Impairment of strategic investments.

These policies, and our procedures related to
these policies, are described in detail below and under specific
areas within the discussion and analysis of our financial
condition and result of operations. In addition, please refer to
the notes to the consolidated financial statements in our
Form 10-K for further discussion of our accounting policies.



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

We derive revenue from primarily two sources:
software licenses and services. Service revenue includes
contracts for software maintenance and technical support,
consulting and training.

We apply the provisions of Statement of Position
(SOP) 97-2, Software Revenue Recognition(as amended by SOP 98-4 and SOP 98-9) and related
interpretations to all transactions to recognize revenue.

We allocate revenue on software arrangements
involving multiple elements to each element based on the
relative fair values of the elements. The determination of fair
value of each element in multiple element arrangements is based
on the price charged when the same element is sold separately.
For non-site license software arrangements, we use historical
renewal rates to determine the price for maintenance and
technical support and for site license software arrangements, we
use the stated renewal rate generally included in the
arrangement.

The elements of a typical software arrangement
include software licenses, software media and maintenance. Some
arrangements include training and consulting. Software licenses
are sold as site licenses or on a per copy basis. Site licenses
give the customer the right to copy the software on a limited or
unlimited basis during a specified term.

Maintenance includes updates (unspecified product
upgrades and enhancements) on a when-and-if-available basis,
telephone support and bug fixes or patches. Maintenance revenue
is recognized ratably over the maintenance term. Training
consists of courses taught by our instructors at our facility or
at the customers site. Various courses are offered that
are specific to the licensed products. Training fees are based
on a per course basis and revenue is recognized when the
customer has completed the course. Consulting consists primarily
of product installation, which does not involve customization of
the software; storage architecture assistance; and disaster
recovery assessments. Installation services provided by us are
not mandatory. Installation can be performed by the customer, a
third party or us. Consulting fees are based on a daily rate.

We have analyzed all of the elements included in
our multiple-element software arrangements and have determined
that we have to allocate revenue to maintenance, training and
consulting. Accordingly, assuming all other revenue recognition
criteria are met, revenue from perpetual licenses is recognized
upon delivery of the software license and media using the
residual method in accordance with SOP 98-9. Revenue from
maintenance is recognized ratably over the maintenance term.
Revenue for consulting and training is recognized as the
services are performed.

We define revenue recognition criteria as follows:

Persuasive Evidence of an Arrangement Exists.It is our customary practice to have a
written contract, which is signed by both the customer and us,
or a purchase order or amendment to the written contract from
those customers that have previously negotiated a standard
end-user license arrangement or volume purchase agreement, prior
to recognizing revenue on an arrangement.

Delivery Has Occurred.Our software is physically delivered
to our customers, with standard transfer terms as FOB shipping
point. If undelivered products or services exist that are
essential to the functionality of the delivered product in an
arrangement, delivery is not considered to have occurred.

The Vendors Fee is Fixed or
Determinable.The fees our customers
pay for our products are negotiated at the outset of an
arrangement, and are generally based on the specific volume of
product to be delivered. Therefore, except in cases in which we
grant extended payment terms to a specific customer, the fees are

18



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considered to be fixed or determinable at the
inception of the arrangement. Arrangements with payment terms
extending beyond 90 days from the invoice date are not
considered to be fixed or determinable. Revenue from such
arrangements is recognized as the fees become due and payable.


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 collection. New
customers are subject to a credit review process that evaluates
the customers financial position and ultimately its
ability to pay. If it is determined from the outset of an
arrangement that collection is not probable based upon our
credit review process, revenue is recognized on a cash-collected
basis.

Additionally, we generally recognize revenue from
licensing of software products through our indirect sales
channel when the reseller, value added reseller, hardware
distributor, application software vendor or system integrator
sells the software products to its customers. For licensing of
our software to original equipment manufacturers, royalty
revenue is recognized when the original equipment manufacturer
reports to us the sale of software to an end user customer. In
addition to license royalties, some original equipment
manufacturers pay an annual flat fee and/or support royalties
for the right to sell maintenance to the end user. We recognize
revenue from original equipment manufacturer fees and/or support
royalties ratably over the term of the support agreement.

Our arrangements do not generally include
acceptance clauses. However, if an arrangement includes an
acceptance provision, we defer the revenue and recognize it upon
acceptance, except for government contracts, as acceptance terms
are standard. Acceptance occurs upon the earlier of receipt of a
written customer acceptance or expiration of the acceptance
period.



| |                       
| | ----------------------
| | Impairment of Goodwill

Since January 1, 2002, we no longer amortize
goodwill. Instead, we will test it for impairment at least
annually in accordance with the provisions of SFAS 142,
Goodwill and Other Intangible Assets.

In the second quarter of 2002, we completed the
transitional goodwill impairment test required by SFAS 142.
We did not record an impairment charge upon completion of the
test.

We will review our goodwill for impairment at
least once a year, at the same time every year, or when an event
or a change in facts and circumstances indicate the fair value
of our reporting unit may be below its carrying amount. Events
or changes in facts and circumstances that we consider as
impairment indicators include the following:



| |   |                                                                                         
| | - | ----------------------------------------------------------------------------------------
| |  | significant underperformance of our business
    relative to expected operating results;
|
| |  | significant adverse economic and industry trends;                                       
|
| |  | significant adverse legal action;                                                       
|
| |  | loss of key personnel; and                                                              
|
| |  | expectations that a reporting unit will be sold
    or otherwise disposed of.           

The goodwill impairment test will consist of the
two-step process as follows:

Step 1.We will
compare the fair value of our reporting unit to its carrying
amount, including the existing goodwill and intangible assets.
If the carrying amount of our reporting unit exceeds its fair
value, an indication exists that the reporting units
goodwill may be impaired and we will perform the second step of
the impairment test. If the fair value of our reporting unit
exceeds its carrying amount, no further work is needed.

Step 2.We will
compare the implied fair value of the reporting units
goodwill, determined by allocating the reporting units
fair value to all of its assets and its liabilities in a manner
similar to a purchase price allocation, to its carrying amount.
If the carrying amount of the reporting units goodwill
exceeds its fair value, an impairment loss will be recognized in
an amount equal to that excess.

We have not yet determined the date of the annual
goodwill impairment test.

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

We review our long-lived assets, including
property and equipment and other intangibles, for impairment
when events or changes in facts and circumstances indicate that
their carrying amount may not be recoverable. Events or changes
in facts and circumstances that we consider as impairment
indicators include the following:



| |   |                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------
| |  | significant adverse change in our business that
    could affect the value of the asset;              
|
| |  | significant adverse economic and industry trends;                                                     
|
| |  | significant decrease in the market value of the
    asset;                                            
|
| |  | significant change in the extent that we use an
    asset or changes in the manner that we use it; and
|
| |  | significant changes to the asset since we
    acquired it.                                            

When we determine that one or more impairment
indicators are present, 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 recognize an impairment
loss. The impairment loss would be the excess of the carrying
amount of the asset over its fair value.

As of June 30, 2002, we had not recorded an
impairment loss on our long-lived assets. We do not expect to
record an impairment loss on these 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. We must also assess the likelihood that deferred tax
assets will be realized from future taxable income and, based on
this assessment, establish a valuation allowance if required. As
of June 30, 2002, we determined the valuation allowance to
be $71.4 million based upon uncertainties related to our
ability to recover two main components of our deferred tax
assets. These two components are tax benefits of certain assets
acquired in the NSMG acquisition and tax benefits from employee
stock option activity.

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 will
have a material impact on our financial statements.



| |                                        
| | ---------------------------------------
| | Impairment of Strategic
    Investments

We hold investments in common and preferred stock
of publicly traded and privately-held companies. We make
investments in development-stage companies that we believe
provide us with strategic opportunities, access to new
technologies and emerging markets, and create opportunities for
additional sales of our products and services. We review our
strategic investments quarterly to determine if there has been a
decline in their fair value that is other than temporary. We
consider the following elements in our review:



| |   |                                                                                               
| | - | ----------------------------------------------------------------------------------------------
| |  | actual or proposed rounds of financing of the
    investee, subsequent to our investment date;
|
| |  | cash position of the investee and its cash burn
    rate;                                     
|
| |  | investees ability to obtain additional
    financing;                                        
|
| |  | investees actual operating results compared
    to its forecasted results;                   
|
| |  | status of the investees product development
    and its competitive position;                
|
| |  | investees management experience and
    employee headcount additions or reductions;          

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| |   |                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------
| |  | current industry and economic trends relevant to
    the business of the investee;                        
|
| |  | if privately-held, the market value of common
    stock of the investees publicly traded competitors; and
|
| |  | if publicly traded, the market value of the
    investees common stock.                                  

At June 30, 2002, we recorded impairment
losses of $14.8 million on our strategic investments when
we determined that there had been a decline in the fair value of
our investments that was other than temporary.

Results of Operations

The following tables set forth the percentage of
total net revenue represented by specified items from our
condensed consolidated statements of operations for the three
months ended June 30, 2002 and 2001, and the six months
ended June 30, 2002 and 2001, respectively, and the
percentage changes between the comparable periods:

|                                  |                                      |                          |    |                    |     |                  |     |    |     |  |      |      |     |  
|--------------------------------- | ------------------------------------ | ------------------------ | -- | ------------------ | --- | ---------------- | --- | -- | --- |  | ---- | ---- | --- | -
|                                  |                                      |                          |    |                   
|                                  |                                      | Percentage of            |    |                   
|                                  |                                      | Total Net                |    |                   
|                                  |                                      | Revenue                  |    |                   
|                                  |                                      |                          |    |                   
|                                  |                                      |                          |    | Period-to-Period  
|                                  |                                      | Three Months             |    | Percentage Change 
|                                  |                                      | Ended                    |    |                   
|                                  |                                      | June 30,                 |    | Three Months Ended
|                                  |                                      |                          |    | June 30, 2002     
|                                  |                                      | 2002                     |    | 2001               |     | Compared to 2001
|                                  |                                      |                          |    |                    |     |                 
|Net revenue:                      |                                      |                          |    |                    |     |                  |     |    |     |  |      |     
|                                  | User license fees                    |                          |    | 66                 | %   |                  |     | 75 | %   |  |      | (18  | )% 
|                                  | Services                             |                          |    | 34                 |     |                  |     | 25 |     |  |      | 27   |    
|                                  |                                      |                          |    |                    |     |                  |     |    |     |  |      |     
|                                  |                                      | Total net revenue        |    |                    | 100 |                  |     |    | 100 |  |      |      | (7  | )
|Cost of revenue:                  |                                      |                          |    |                    |     |                  |     |    |     |  |      |     
|                                  | User license fees                    |                          |    | 2                  |     |                  |     | 3  |     |  |      | (10  | )  
|                                  | Services                             |                          |    | 12                 |     |                  |     | 8  |     |  |      | 31   |    
|                                  | Amortization of developed technology |                          |    | 5                  |     |                  |     | 4  |     |  |      | 8    |    
|                                  |                                      |                          |    |                    |     |                  |     |    |     |  |      |     
|                                  |                                      | Total cost of revenue    |    |                    | 19  |                  |     |    | 15  |  |      |      | 18  |  
|                                  |                                      |                          |    |                    |     |                  |     |    |     |  |      |     
|Gross profit                      |                                      |                          | 81 |                    |     |                  | 85  |    |     |  | (11  | )   
|Operating expenses:               |                                      |                          |    |                    |     |                  |     |    |     |  |      |     
|                                  | Selling and marketing                |                          |    | 35                 |     |                  |     | 38 |     |  |      | (13  | )  
|                                  | Research and development             |                          |    | 19                 |     |                  |     | 15 |     |  |      | 13   |    
|                                  | General and administrative           |                          |    | 9                  |     |                  |     | 7  |     |  |      | 22   |    
|                                  | Amortization of other intangibles    |                          |    | 5                  |     |                  |     | 5  |     |  |      | 1    |    
|                                  | Amortization of goodwill             |                          |    |                   |     |                  |     | 52 |     |  |      | (100 | )  
|                                  |                                      |                          |    |                    |     |                  |     |    |     |  |      |     
|                                  |                                      | Total operating expenses |    |                    | 68  |                  |     |    | 117 |  |      |      | (46 | )
|                                  |                                      |                          |    |                    |     |                  |     |    |     |  |      |     
|Income (loss) from operations     |                                      |                          | 13 |                    |     |                  | (32 | )  |     |  | (138 | )   
|Interest and other income, net    |                                      |                          | 4  |                    |     |                  | 4   |    |     |  | (20  | )   
|Interest expense                  |                                      |                          | (2 | )                  |     |                  | (2  | )  |     |  | 2    |     
|Loss on strategic investments     |                                      |                          | (4 | )                  |     |                  |    |    |     |  | N/A  |     
|                                  |                                      |                          |    |                    |     |                  |     |    |     |  |      |     
|Income (loss) before income taxes |                                      |                          | 11 |                    |     |                  | (30 | )  |     |  | (133 | )   
|Provision for income taxes        |                                      |                          | 4  |                    |     |                  | 3   |    |     |  | (7   | )   
|                                  |                                      |                          |    |                    |     |                  |     |    |     |  |      |     
|Net income (loss)                 |                                      |                          | 7  | %                  |     |                  | (33 | )% |     |  | (120 | )   
|                                  |                                      |                          |    |                    |     |                  |     |    |     |  |      |     

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|                                  |                                      |                   |                          |                   |     |                  |     |    |     |     |      |      |    |     |  
|--------------------------------- | ------------------------------------ | ----------------- | ------------------------ | ----------------- | --- | ---------------- | --- | -- | --- | --- | ---- | ---- | -- | --- | -
|                                  |                                      |                   |                          |                  
|                                  |                                      | Percentage of     |                          |                  
|                                  |                                      | Total Net         |                          |                  
|                                  |                                      | Revenue           |                          |                  
|                                  |                                      |                   |                          |                  
|                                  |                                      |                   |                          | Period-to-Period 
|                                  |                                      | Six Months        |                          | Percentage Change
|                                  |                                      | Ended             |                          |                  
|                                  |                                      | June 30,          |                          | Six Months Ended 
|                                  |                                      |                   |                          | June 30, 2002    
|                                  |                                      | 2002              |                          | 2001              |     | Compared to 2001
|                                  |                                      |                   |                          |                   |     |                 
|Net revenue:                      |                                      |                   |                          |                   |     |                  |     |    |     |     |      |     
|                                  | User license fees                    |                   |                          | 68                | %   |                  |     | 78 | %   |     |      | (17  | )%
|                                  | Services                             |                   |                          | 32                |     |                  |     | 22 |     |     |      | 33   |   
|                                  |                                      |                   |                          |                   |     |                  |     |    |     |     |      |     
|                                  |                                      | Total net revenue |                          |                   | 100 |                  |     |    | 100 |     |      |      | (5 | )  
|Cost of revenue:                  |                                      |                   |                          |                   |     |                  |     |    |     |     |      |     
|                                  | User license fees                    |                   |                          | 2                 |     |                  |     | 3  |     |     |      | (12  | ) 
|                                  | Services                             |                   |                          | 12                |     |                  |     | 8  |     |     |      | 30   |   
|                                  | Amortization of developed technology |                   |                          | 5                 |     |                  |     | 4  |     |     |      | 7    |   
|                                  |                                      |                   |                          |                   |     |                  |     |    |     |     |      |     
|                                  |                                      |                   | Total cost of revenue    |                   |     | 19               |     |    |     | 15  |      |      |    | 17  |  
|                                  |                                      |                   |                          |                   |     |                  |     |    |     |     |      |     
|Gross profit                      |                                      |                   | 81                       |                   |     |                  | 85  |    |     |     | (9   | )   
|Operating expenses:               |                                      |                   |                          |                   |     |                  |     |    |     |     |      |     
|                                  | Selling and marketing                |                   |                          | 35                |     |                  |     | 37 |     |     |      | (12  | ) 
|                                  | Research and development             |                   |                          | 18                |     |                  |     | 15 |     |     |      | 14   |   
|                                  | General and administrative           |                   |                          | 9                 |     |                  |     | 7  |     |     |      | 25   |   
|                                  | Amortization of other intangibles    |                   |                          | 5                 |     |                  |     | 5  |     |     |      |     |   
|                                  | Amortization of goodwill             |                   |                          |                  |     |                  |     | 52 |     |     |      | (100 | ) 
|                                  |                                      |                   |                          |                   |     |                  |     |    |     |     |      |     
|                                  |                                      |                   | Total operating expenses |                   |     | 67               |     |    |     | 116 |      |      |    | (46 | )
|                                  |                                      |                   |                          |                   |     |                  |     |    |     |     |      |     
|Income (loss) from operations     |                                      |                   | 14                       |                   |     |                  | (31 | )  |     |     | (144 | )   
|Interest and other income, net    |                                      |                   | 4                        |                   |     |                  | 4   |    |     |     | (25  | )   
|Interest expense                  |                                      |                   | (2                       | )                 |     |                  | (2  | )  |     |     | 8    |     
|Loss on strategic investments     |                                      |                   | (2                       | )                 |     |                  |    |    |     |     | N/A  |     
|                                  |                                      |                   |                          |                   |     |                  |     |    |     |     |      |     
|Income (loss) before income taxes |                                      |                   | 14                       |                   |     |                  | (29 | )  |     |     | (147 | )   
|Provision for income taxes        |                                      |                   | 4                        |                   |     |                  | 8   |    |     |     | (48  | )   
|                                  |                                      |                   |                          |                   |     |                  |     |    |     |     |      |     
|Net income (loss)                 |                                      |                   | 10                       | %                 |     |                  | (37 | )% |     |     | (125 | )   
|                                  |                                      |                   |                          |                   |     |                  |     |    |     |     |      |     



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

Total net revenue decreased 7% from
$390.2 million for the three months ended June 30,
2001 to $364.7 million for the three months ended
June 30, 2002, and decreased 5% from $777.7 million
for the six months ended June 30, 2001 to
$735.1 million for the six months ended June 30, 2002.
We expect total net revenue to remain stable or decrease in the
third quarter of 2002 compared to the second quarter of 2002.
Our revenue is comprised of user license fees and services
revenue.

User License Fees.User license fees decreased 18% from
$293.7 million for the three months ended June 30,
2001 to $241.9 million for the three months ended
June 30, 2002, and decreased 17% from $602.7 million
for the six months ended June 30, 2001 to
$501.6 million for the six months ended June 30, 2002.
The decrease was primarily due to weaker general economic
conditions that resulted in fewer large end-user transactions
and less user license fees from original equipment
manufacturers. In the third quarter of 2002, we expect user
license fees to remain stable or decrease as compared to the
second quarter of 2002.

We market and distribute our software products
both as individual software products and as integrated products
suites, also referred to as application solutions. We derive our
user license fees from the sale of our

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core technologies, including data protection and
file system and volume management products, from our emerging
technologies, including cluster and replication and SAN
products, and from our application solutions, which include
technologies from both our core and emerging technologies. User
license fees from our core technologies decreased 16% from
$252.2 million for the three months ended
June 30, 2001 to $212.6 million for the
three months ended June 30, 2002, and decreased 14%
from $510.5 million for the six months ended
June 30, 2001 to $438.5 million for the
six months ended June 30, 2002. User license fees from
our core technologies accounted for 88% of user license fees for
the three months ended June 30, 2002 and 86% for the
three months ended June 30, 2001, and accounted for
87% of user license fees for the six months ended
June 30, 2002 and 85% for the six months ended
June 30, 2002. User license fees from our emerging
technologies decreased 30% from $41.5 million for the
three months ended June 30, 2001 to $29.3 million
for the three months ended June 30, 2002, and
decreased 32% from $92.2 million for the six months
ended June 30, 2001 to $63.1 million for the
six months ended June 30, 2002. User license fees from
our emerging technologies accounted for 12% of user license fees
for the three months ended June 30, 2002 and 14% for
the three months ended June 30, 2001, and accounted
for 13% of user license fees for the six months ended
June 30, 2002 and 15% for the six months ended
June 30, 2001.


User license fees from our application solutions
decreased 25% from $61.9 million for the three months
ended June 30, 2001 to $46.2 million for the
three months ended June 30, 2002, and decreased 26%
from $133.3 million for the six months ended
June 30, 2001 to $99.0 million for the six months
ended June 30, 2002. The user license fees generated by
application solutions are allocated between core technology and
emerging technology products. Most of our application solutions
include a major component of emerging technologies.

In the three and six months ended
June 30, 2002 and 2001, we recorded a number of large
end-user transactions. For end-user transactions valued at
$250,000 or more, our user license fees decreased 29% from
$58.7 million for the three months ended June 30,
2001 to $41.9 million for the three months ended
June 30, 2002, and decreased 13% from $144.3 million
for the six months ended June 30, 2001 to
$125.7 million for the six months ended June 30,
2002.

Our user license fees from original equipment
manufacturers decreased 29% from $52.7 million for the
three months ended June 30, 2001 to $37.4 million
for the three months ended June 30, 2002, and
decreased 21% from $100.0 million for the six months
ended June 30, 2001 to $79.3 million for the
six months ended June 30, 2002. User license fees from
original equipment manufacturers accounted for 16% of user
license fees for the three months ended June 30, 2002
and 18% for the three months ended June 30, 2001, and
accounted for 16% for the six months ended June 30,
2002 and 17% for the six months ended June 30, 2001.

Service Revenue.We
derive our service revenue primarily from contracts for software
maintenance and technical support and, to a lesser extent, from
consulting and training services. Service revenue increased 27%
from $96.5 million for the three months ended
June 30, 2001 to $122.8 million for the
three months ended June 30, 2002, and increased 33%
from $175.0 million for the six months ended
June 30, 2001 to $233.6 million for the
six months ended June 30, 2002. The increase was
primarily due to the continued strength of our customer support
and our investment in expanding our professional consulting and
training businesses. Service revenue represented 34% of total
net revenue for the three months ended June 30, 2002 and
32% for the six months ended June 30, 2002. We expect
service revenue to remain stable or increase in absolute dollars
in the third quarter of 2002.



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

Cost of revenue increased 18% from
$59.8 million for the three months ended June 30,
2001 to $70.5 million for the three months ended
June 30, 2002, and increased 17% from $117.9 million
for the six months ended June 30, 2001 to
$137.8 million for the six months ended June 30,
2002. Gross margin on user license fees, excluding amortization
of developed technology, is substantially higher than gross
margin on service revenue, reflecting the low materials,
packaging and other costs of software products compared with the
relatively high personnel costs associated with providing
maintenance, technical support, consulting and training
services. Gross margin on service revenue varies depending upon
the mix of maintenance, technical

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support, consulting and training services. We
expect total gross margin to fluctuate in the future, reflecting
mix between license and service revenue and timing differences
between increased organizational investments and the recognition
of revenue expected from these investments.


Cost of User License Fees (including
amortization of developed technology).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 the acquisitions of NSMG, TeleBackup and NuView in
1999. Cost of user license fees increased slightly from
$25.4 million for the three months ended June 30,
2001 to $25.7 million for the three months ended
June 30, 2002, and decreased slightly from
$51.9 million for the six months ended June 30,
2001 to $51.8 million for the six months ended
June 30, 2002. Gross margin on user license fees decreased
slightly from 91% for the three months ended June 30,
2001 to 89% for the three months ended June 30, 2002,
and decreased slightly from 91% for the six months ended
June 30, 2001 to 90% for the six months ended
June 30, 2002. If we excluded the amortization of developed
technology from the cost of user license fees, the gross margin
on user license fees would have been 96% for the three and six
months ended June 30, 2002 and 97% for the three and
six months ended June 30, 2001. The gross margin on
user license fees may vary from period to period based on the
license revenue mix because some products carry higher royalty
rates than others. In the third quarter of 2002, we expect gross
margin on user license fees to remain stable as a percentage of
user license fee revenue.

Cost of Service
Revenue.Cost of service revenue
consists primarily of personnel-related costs in providing
maintenance, technical support, consulting and training to
customers. Cost of service revenue increased 31% from
$34.4 million for the three months ended June 30,
2001 to $44.9 million for the three months ended
June 30, 2002, and increased 30% from $66.0 million
for the six months ended June 30, 2001 to
$86.0 million for the six months ended June 30,
2002. Gross margin on service revenue decreased slightly from
64% for the three months ended June 30, 2001 to 63%
for the three months ended June 30, 2002, and
increased slightly from 62% for the six months ended
June 30, 2001 to 63% for the six months ended
June 30, 2002. In the third quarter of 2002, we expect the
costs of service revenue to continue to increase in absolute
dollars and we expect the gross margin on service revenue to
remain stable or decrease slightly as a percentage of service
revenue.

Amortization of Developed
Technology.Amortization of developed
technology increased 8% from $15.7 million for the
three months ended June 30, 2001 to $16.9 million
for the three months ended June 30, 2002, and
increased 7% from $31.5 million for the six months
ended June 30, 2001 to $33.8 million for the
six months ended June 30, 2002. These amounts mainly
represent the amortization of the developed technology recorded
upon the acquisitions of NSMG, TeleBackup and NuView in 1999.
The increase in 2002 relates to an acquisition that occurred in
the fourth quarter of 2001. The useful life of the developed
technology acquired is two to four years and we expect the
amortization to be approximately $16.5 million per quarter
through the first quarter of 2003.



| |                   
| | ------------------
| | Operating Expenses

Total operating expenses decreased 46% from
$455.8 million for the three months ended
June 30, 2001 to $247.1 million for the
three months ended June 30, 2002, and decreased 46%
from $902.0 million for the six months ended
June 30, 2001 to $490.3 million for the
six months ended June 30, 2002. The three and
six month decreases relate primarily to the adoption of
SFAS 142, which requires that goodwill is no longer
amortized. We believe that the percentage decrease in total
operating expenses in this period is not necessarily indicative
of future results. Our operating expenses include selling and
marketing expenses, research and development expenses, general
and administrative expenses, and amortization of goodwill and
other intangibles.

Selling and
Marketing.Selling and marketing
expenses consist primarily of salaries, related benefits,
commissions, consultant fees and other costs associated with our
sales and marketing efforts. Selling and marketing expenses
decreased 13% from $145.7 million for the three months
ended June 30, 2001 to $126.7 million for the
three months ended June 30, 2002, and decreased 12%
from $288.5 million for the six months ended
June 30, 2001 to $253.7 million for the
six months ended June 30, 2002. The decrease in

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absolute dollars for the three and six months
ended June 30, 2002 was primarily attributable to decreased
compensation and sales commissions and, to a lesser extent,
decreased advertising and promotion costs. As a percentage of
net revenue, selling and marketing expenses decreased from 38%
for the three months ended June 30, 2001 to 35% for
the three months ended June 30, 2002, and decreased from
37% for the six months ended June 30, 2001 to 35% for
the six months ended June 30, 2002. In the third
quarter of 2002, we intend to continue to maintain our
investments in sales and marketing and accordingly, we expect
our selling and marketing expenses to remain relatively stable
in absolute dollars.


Research and
Development.Research and development
expenses consist primarily of salaries, related benefits,
third-party consultant fees and other engineering related costs.
Research and development expenses increased 13% from
$59.9 million for the three months ended June 30, 2001
to $67.7 million for the three months ended
June 30, 2002, and increased 14% from $116.1 million
for the six months ended June 30, 2001 to
$132.9 million for the six months ended June 30,
2002. The increase in absolute dollars for the three and
six months ended June 30, 2002 was due primarily to
increased staffing levels associated with additional employees
and, to a lesser extent, costs associated with depreciation and
amortization of new equipment purchased for expansion of
development efforts for new technology. As a percentage of net
revenue, research and development expenses increased from 15%
for the three months ended June 30, 2001 to 19% for
the three months ended June 30, 2002, and increased from
15% for the six months ended June 30, 2001 to 18% for
the six months ended June 30, 2002. We believe that a
significant level of research and development investment is
required for us to remain competitive. In the third quarter of
2002, we expect these expenses to continue to increase in
absolute dollars. We expect research and development expenses to
fluctuate from time to time to the extent that we make periodic
incremental investments in research and development.

General and
Administrative.General and
administrative expenses consist primarily of salaries, related
benefits and fees for professional services, such as legal and
accounting services. General and administrative expenses
increased 22% from $28.5 million for the three months
ended June 30, 2001 to $34.6 million for the
three months ended June 30, 2002, and increased 25%
from $54.4 million for the six months ended
June 30, 2001 to $67.7 million for the six months
ended June 30, 2002. The increase in absolute dollars for
the three and six months ended June 30, 2002 was
primarily due to an increase in additional personnel costs
related to additional employees, and to a lesser extent,
expenses associated with outside services. As a percentage of
net revenue, general and administrative expenses increased from
7% for the three and six months ended June 30, 2002 to
9% for the three and six months ended June 30, 2002.
In the third quarter of 2002, we expect general and
administrative expenses to increase in absolute dollars.

Amortization of Other
Intangibles.Amortization of other
intangibles was $18.0 million for the three months
ended June 30, 2002, and $18.1 million for the
three months ended June 30, 2001. Amortization of
other intangibles was $36.0 million for the six months
ended June 30, 2002, and $36.2 million for the
six months ended June 30, 2001. This amount
principally represents amortization of distribution channels,
trademarks and other intangible assets recorded upon the
acquisitions of NSMG, TeleBackup and NuView in 1999. The
estimated useful life of our other intangibles is two to four
years. We expect the amortization related to other intangibles
to be approximately $18.0 million per quarter through the
first quarter of 2003.

Amortization of
Goodwill.Amortization of goodwill
decreased from $203.6 million for the three months
ended June 30, 2001 to zero for the three months ended
June 30, 2002, and decreased from $406.8 million for
the six months ended June 30, 2001 to zero for the
six months ended June 30, 2002. Effective
January 1, 2002, we adopted the provisions of
SFAS 142, Goodwill and Other Intangible Assets,which requires that goodwill and other intangible assets
determined to have an indefinite useful life no longer be
amortized, but continue to be evaluated for impairment. Refer to
the New Accounting Pronouncementssection in this
Item 2 for the impacts of the adoption of SFAS 142 on
our financial statements.

Interest and Other Income, Net.Interest and other income, net
decreased 20% from $17.2 million for the three months
ended June 30, 2001 to $13.7 million for the three
months ended June 30, 2002, and decreased 25% from
$35.8 million for the six months ended June 30,
2001 to $26.9 million for the six months

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ended June 30, 2002. The decrease was due
principally to the fall in short-term interest rates in 2002.
This decrease exceeded the interest income earned on the higher
level of funds we had available for investment, which were
generated primarily from the net cash provided by operating
activities.


Interest Expense.Interest expense consisted primarily of interest recorded under
the 1.856% convertible subordinated notes due 2006 issued in
August 1999 and the 5.25% convertible subordinated notes due
2004 issued in October 1997. Interest expense increased 2% from
$7.3 million for the three months ended June 30,
2001 to $7.5 million for the three months ended
June 30, 2002, and increased 8% from $14.3 million for
the six months ended June 30, 2001 to
$15.4 million for the six months ended June 30,
2002. The increases were due primarily to amortization of the
original issue discount on the 1.856% convertible notes.

Loss on Strategic
Investments.In the second quarter of
2002, we recognized impairment losses of $14.8 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 and were determined by using
the factors outlined in our Critical Accounting Policysection in this Item 2.

Income Taxes.We had
effective tax rates of 32% for the three months ended
June 30, 2002, compared to negative 12% for the
three months ended June 30, 2001. We had effective tax
rates of 32% for the six months ended June 30, 2002,
compared to negative 29% for the six months ended
June 30, 2001. The change in the effective tax rate from a
negative rate in 2001 to a positive rate in 2002 is due
primarily to the effect of our becoming profitable, as a result
of the amortization of goodwill no longer being expensed. Refer
to the New Accounting Pronouncementssection in this
Item 2 for the impacts of the adoption of SFAS 142 on
our consolidated financial statements. Our June 30, 2002
and 2001 effective tax rates differed from the combined federal
and state statutory rates due primarily to differences
attributable to acquisition-related charges that were
non-deductible for tax purposes.

New Accounting Pronouncements

In July 2001, the FASB issued SFAS 141,
Business Combinations,and SFAS 142, Goodwill and
Other Intangible Assets.

SFAS 141, effective July 2001, requires that
the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. SFAS 141
also specifies criteria that intangible assets acquired in a
purchase method business combination must meet to be recognized
and reported apart from goodwill, noting that any purchase price
allocable to an assembled workforce may not be accounted for
separately. Upon adoption of SFAS 142 on January 1, 2002,
we evaluated our existing intangible assets and goodwill that
were acquired in prior purchase business combinations, and made
necessary reclassifications in order to conform with the new
criteria in SFAS 141 for recognition apart from goodwill.
Also, we reassessed the useful lives and residual values of all
intangible assets acquired, and made necessary amortization
adjustments by March 31, 2002. No impairment or loss was
recognized and the adoption of SFAS 141 did not have a
material impact on our financial position, results of operations
or cash flows.

SFAS 142 requires that goodwill and
intangible assets with indefinite useful lives no longer be
amortized, but instead be tested for impairment at least
annually in accordance with the provisions of SFAS 142.
SFAS 142 also requires that intangible assets with
estimable useful lives be amortized over their respective
estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets.In the second quarter of 2002, we completed the
transitional goodwill impairment test required by SFAS 142
and did not record an impairment charge upon completion of the
test. We have not yet determined the date of the annual goodwill
impairment test. We do not expect to record an impairment charge
upon completion of the annual impairment test, but there can be
no assurance that at the time the test is completed a
significant impairment charge may not be recorded.

In August 2001, FASB issued SFAS 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets.SFAS 144 supersedes SFAS 121 and APB
Opinion No. 30, Reporting the Results of Operation-

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Reporting the Effects of Disposal of a Segment
of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions. SFAS 144 established a single accounting model for
long-lived assets to be disposed of by sale, whether they were
previously held and used or newly acquired, and it also broadens
the presentation of discontinued operations to include more
disposal transactions. We adopted SFAS 144 as of
January 1, 2002. The adoption of SFAS 144 did not have
a material impact on our financial position, results of
operations or cash flows.


In December 2001, the FASB staff issued Topic
No. D-103, Income Statement Characterization of
Reimbursements Received for Out-of-Pocket Expenses
Incurred(Topic D-103). Topic D-103
requires companies to record certain reimbursements received for
out-of-pocket expenses as revenue instead of an offset to the
related expense. Upon application of Topic D-103,
comparative financial statements for prior periods must be
reclassified to comply with the guidance in this announcement.
We adopted the provisions of Topic D-103 as of
January 1, 2002. The adoption of Topic D-103 did not
have a material impact on our financial position, results of
operations or cash flows, and as a result, we did not reclassify
prior period results.

Liquidity and Capital Resources



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

Our cash, cash equivalents and short-term
investments totaled $2,035.5 million at June 30, 2002 and
represented 76% of our net tangible assets. Our cash, cash
equivalents and short-term investments totaled
$1,694.9 million at December 31, 2001 and represented
71% of our net tangible assets. Cash and cash equivalents are
highly liquid with original maturities of ninety days or less.
Short-term investments consist mainly of money market funds,
investment grade commercial paper, medium-term notes, corporate
notes and bonds, government securities (taxable and
non-taxable), asset-backed securities and market auction
preferreds.

Operating activities provided cash of
$339.6 million in the six months ended June 30, 2002,
primarily from net income after adjustments to exclude non-cash
charges, including amortization of intangibles related to
acquisition activities, depreciation and amortization, tax
benefits from stock plans, loss on strategic investments, an
increase in deferred revenue, an increase in income taxes
payable and a decrease in accounts receivable. These items were
partially offset by a decrease in accrued compensation and
benefits and an increase in deferred income taxes. Operating
activities provided cash of $301.2 million for the six months
ended June 30, 2001, primarily from income after
adjustments to exclude non-cash charges, including amortization
of intangibles related to acquisition activities, depreciation
and amortization, tax benefits from stock plans, and an increase
in deferred revenue. These elements were partially offset by a
decrease in accrued restructuring and acquisition costs and an
increase in deferred income taxes.

Investing activities used cash of
$195.5 million in the six months ended June 30, 2002,
due primarily to the net purchases of short-term investments of
$135.1 million, and for the purchases of property and
equipment of $53.1 million. Investing activities used cash
of $374.0 million in the six months ended June 30,
2001, due primarily to the net purchases of short and long-term
investments of $252.7 million, and for the purchases of
property and equipment of $87.2 million.

Financing activities provided cash of
$63.6 million in the six months ended June 30, 2002,
and $57.5 million in the six months ended June 30,
2001, arising primarily from the issuance of common stock under
our employee stock plans.



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

In October 1997, we issued $100.0 million,
aggregate principal amount at maturity, of 5.25% convertible
subordinated notes due in 2004 (the 5.25% notes),
for which we received net proceeds of $97.5 million. We and
our wholly-owned subsidiary, VERITAS Operating Corporation, are
co-obligors on the 5.25% notes and are unconditionally, jointly
and severally liable for all payments under the notes. As of
June 30, 2002, a total principal amount of
$36.0 million had been converted into approximately
3.7 million shares of our common stock. Based on the
aggregate principal amount at maturity of $64.0 million
outstanding as of June 30, 2002,

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the 5.25% notes provide for semi-annual interest
payments of $1.7 million each May 1 and
November 1. The 5.25% notes are convertible into shares of
our common stock at any time prior to the close of business on
the maturity date, unless previously redeemed or repurchased, at
a conversion price of $9.56 per share, subject to adjustment in
certain events, equivalent to a conversion rate of
104.65 shares of common stock per $1,000 principal amount
at maturity. On or after November 5, 2002, the 5.25% notes
will be redeemable over a period of time until maturity at our
option at declining premiums to par. The debt issuance costs are
being amortized over the term of the 5.25% notes using the
interest method.


In August 1999, we and our wholly-owned
subsidiary, VERITAS Operating Corporation, issued
$465.8 million, aggregate principal amount at maturity, of
1.856% convertible subordinated notes due in 2006 (the
1.856% notes) for which we received net proceeds of
approximately $334.1 million. The interest rate of 1.856%
together with the accrual of original issue discount, represent
a yield to maturity of 6.5%. We and VERITAS Operating
Corporation are co-obligors on the 1.856% notes and are
unconditionally, jointly and severally liable for all payments
under the notes. As of June 30, 2002, a total principal
amount of $1.1 million had been converted into
approximately 29,400 shares of our common stock. Based on the
aggregate principal amount at maturity of $464.7 million
outstanding as of June 30, 2002, the 1.856% notes provide
for semi-annual interest payments of $4.3 million each
February 13 and August 13. The 1.856% notes are
convertible into shares of our common stock at any time prior to
the close of business on the maturity date, unless previously
redeemed or repurchased, at a conversion price of $35.80 per
share, subject to adjustment in certain events, equivalent to a
conversion rate of 27.934 shares of common stock per $1,000
principal amount at maturity. On or after August 16, 2002,
the 1.856% notes will be redeemable over a period of time until
maturity at our option at the issuance price plus accrued
original issue discount and any accrued interest. The debt
issuance costs are being amortized over the term of the 1.856%
notes using the interest method.

We will require substantial amounts of cash to
fund scheduled payments of principal and interest on our
indebtedness, including the 5.25% notes and the 1.856% notes,
future capital expenditures and any increased working capital
requirements. If we are unable to meet our cash requirements out
of cash flow from operations, we cannot assure you that we will
be able to obtain alternative financing. The degree to which we
will be leveraged could impair our ability to obtain financing
necessary for working capital, acquisitions or other purposes,
and could make us more vulnerable to industry downturns and
competitive pressure.



| |            
| | -----------
| | Commitments

During 2001, we extended and amended the terms of
our $50.0 million unsecured credit facility, which we hold
with a syndicate of financial institutions. At June 30,
2002, no amount was outstanding and the credit facility is due
to expire in September 2002. Borrowings under the credit
facility bear interest at 1.0% to 1.5% over LIBOR, and are
subject to our compliance with financial and other covenants.
The credit agreement requires that we maintain specified
financial covenants such as EBITDA, debt on EBITDA and quick
ratio, all of which we were in compliance with as of
June 30, 2002.

During the first quarter of 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 ($8.3 million USD). At June 30, 2002, no
amount was outstanding. The short-term credit facility is due to
expire in March 2003. Borrowings under the short-term credit
facility bear interest at TIBOR plus 0.5%. There are no
covenants on the credit facility and the loan has been
guaranteed by VERITAS Software Global Corporation, our
wholly-owned subsidiary.

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 June 2001 respectively. The development and acquisition
of the properties have been financed by a third party through a
syndicate of financial institutions. We have accounted for these
agreements as operating leases in accordance with SFAS 13,
Accounting for Leases,as amended.

During 2001, we amended our existing lease
agreement, originally signed in the second quarter of 1999, for
new corporate campus facilities in Mountain View, California.
The facilities of 425,000 square feet provide space for sales,
marketing, administration and research and development
functions. The lease term for these facilities is five years
beginning in March 2000, with an option to extend the lease term
for two successive

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periods of one year each, if agreed to by the
financial institutions. We have the option to purchase the
property (land and facilities) for the termination value of
$145.5 million or, at the end of the lease, to arrange for
the sale of the property to a third party while we retain an
obligation to the owner for the difference between the sales
price and the guaranteed residual value up to
$129.0 million if the sales price is less than this amount,
subject to certain provisions of the lease. In addition, we are
entitled to any proceeds from a sale of the property in excess
of the termination value. We occupy these facilities and began
making lease payments in the second quarter of 2001. Monthly
lease payments under this operating lease are based on LIBOR
using 30-day to 180-day LIBOR contracts.


During 2001, we amended our existing lease
agreement, originally signed in 2000, for our facilities in
Roseville, Minnesota. We improved and expanded our existing
facilities of 62,000 square feet and developed adjacent
property adding 142,000 square feet completed in 2001. The
facilities provide space for technical support and research and
development functions. The lease term for these facilities is
five years beginning in March 2000, with an option to extend the
lease term for two successive periods of one year each, if
agreed to by the financial institutions. We have the option to
purchase the property (land and facilities) for the termination
value of $41.3 million or, at the end of the lease, to
arrange for the sale of the property to a third party while we
retain an obligation to the owner for the difference between the
sales price and the guaranteed residual value up to
$35.1 million if the sales price is less than this amount,
subject to certain provisions of the lease. In addition, we are
entitled to any proceeds from a sale of the property in excess
of the termination value. We now occupy these facilities and
began making lease payments in 2001. Monthly lease payments
under this operating lease are based on LIBOR using 30-day to
180-day LIBOR contracts.

During 2001, we amended our existing lease
agreement, originally signed in 2000, for the lease of 65 acres
of land and subsequent improvements for new research and
development campus facilities in Milpitas, California. We plan
to develop the site in two phases, with the first phase of
466,000 square feet to be completed in the third quarter of
2002. The facilities will provide space for research and
development and general corporate functions. The lease term for
the first phase is five years beginning in July 2000, with an
option to extend the lease term for two successive periods of
one year each, if agreed to by the financial institutions. We
have the option to purchase the property (land and first phase
facilities) for the termination value of $194.3 million or,
at the end of the lease, to arrange for the sale of the property
to a third party while we retain an obligation to the owner for
the difference between the sales price and the guaranteed
residual value up to $180.5 million if the sales price is
less than this amount, subject to certain provisions of the
lease. In addition, we are entitled to any proceeds from a sale
of the property in excess of the termination value. We
anticipate to begin the lease payments in the third quarter of
2002 for the first phase and to commence occupying the new
campus facilities in the first quarter of 2003. Monthly lease
payments under this operating lease are based on LIBOR using
30-day to 180-day LIBOR contracts. We are currently analyzing
our development schedule for the second phase of the campus, but
at this time no commitments have been made with respect to the
start of construction.

We have evaluated the expected fair value of the
properties at the end of the lease terms by reviewing current
real estate market conditions and indicators of expectations for
the market in the future. In the event that we determine it is
probable that the expected fair value of any of the properties
at the end of the lease terms will be less than the respective
termination values, we will accrue the expected loss on a
straight-line basis over the remaining lease term. Currently, we
do not believe it is probable that the fair market value of the
properties at the end of the lease terms will be less than the
termination values.

The three lease agreements listed above require
that we maintain specified financial covenants such as EBITDA,
debt on EBITDA and quick ratio, all of which we were in
compliance with as of June 30, 2002. In addition, all the
properties covered by the leases are subject to a deed of trust
in favor of the lessor in order to secure our obligations under
the leases.

We currently have operating leases for our
facilities and rental equipment through 2023. In addition to our
basic rent, we are responsible for all taxes, insurance and
utilities related to the facilities. The table below

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shows our commitments related to our approximate
minimum lease payments for our facilities and rental equipment
as of June 30, 2002 (in millions):


|                                   |  |             |       | 
|---------------------------------- |  | ----------- | ----- | 
|                                   |  | Operating  
|                                   |  | Lease      
|                                   |  | Commitments
|                                   |  |            
|Six months ended December 31, 2002 |  | $           | 39.4  | 
|2003                               |  |             | 74.9  | 
|2004                               |  |             | 69.8  | 
|2005                               |  |             | 46.9  | 
|2006                               |  |             | 36.4  | 
|2007 and thereafter                |  |             | 166.1 | 
|                                   |  |             |       | 
|Balance at June 30, 2002           |  | $           | 433.5 | 
|                                   |  |             |       | 

We believe that our existing and planned
facilities may exceed our near-term needs due to slower than
anticipated growth in the number of our employees as a result of
ongoing economic weakness. We are currently performing an
evaluation of our needs based on our projected headcount growth.
This evaluation may result in additional expenses, costs and
accounting charges related to us eliminating all or portions of
any excess capacity in our facilities.

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



| |                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------
| | Our revenue and revenue and earnings
    expectations may fluctuate, causing the market price of our
    securities to decline

We may experience a shortfall in revenue in any
given quarter or lower our published expectations about future
revenue or earnings. Any such development could cause the market
price of our securities to fall substantially. Our revenue in
general, and our license revenue in particular, is difficult to
forecast and is likely to fluctuate significantly from quarter
to quarter due to a number of factors, many of which are outside
of our control. These factors include:



| |   |                                                                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the possibility that our customers may cancel,
    defer or limit purchases as a result of reduced information
    technology budgets or the current weak and uncertain economic
    and industry conditions;                                        
|
| |  | the possibility of a worsening of already weak
    economic and industry conditions;                                                                                                                                                                 
|
| |  | the timing and magnitude of our sales through our
    original equipment manufacturer customers, including
    Hewlett-Packard, IBM, Microsoft, Oracle and Sun Microsystems;                                                                         
|
| |  | the possibility that a slowdown in sales by our
    original equipment manufacturer customers could result in
    reduced demand for our products and services;                                                                                      
|
| |  | the unpredictability of the timing and magnitude
    of sales to the retail channel by our resellers and sales by our
    direct sales force, both of which tend to generate sales later
    in a quarter than original equipment manufacturer sales;

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| |   |                                                                                                                                                                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the lengthy amount of time between introducing
    software products and services and recognizing revenue for sales
    of these products and services;                                                                                                                                                                                          
|
| |  | the introduction, timing and market acceptance of
    new products and services, which may slow in weak and uncertain
    economic conditions;                                                                                                                                                                                                   
|
| |  | changes in data storage and networking technology
    or introduction of new operating system upgrades by our original
    equipment manufacturer customers, which could require us to
    modify our products and services or to develop new products or
    services;                                                                          
|
| |  | the overall demand for our products and services,
    which is likely to be lower in weak and uncertain economic and
    industry conditions;                                                                                                                                                                                                    
|
| |  | the mix of sales of our products and services,
    which fluctuates based on customer needs, economic and industry
    conditions and other unpredictable circumstances;                                                                                                                                                                         
|
| |  | the relative growth rates of the Windows NT, UNIX
    and Linux markets;                                                                                                                                                                                                                                                                         
|
| |  | the rate of adoption of storage area networks and
    network attached storage appliance technology and the timing and
    magnitude of sales of our storage area networking products and
    related services;                                                                                                                                  
|
| |  | the rate at which our customers renew their
    service and maintenance contracts with us;                                                                                                                                                                                                                                                       
|
| |  | changes in our pricing policies and distribution
    terms or those of our competitors;                                                                                                                                                                                                                                                          
|
| |  | the timing and amount of revenue attributable to
    our end-user customers whose businesses are substantially
    dependent on the Internet or the telecommunications markets,
    whose ability to purchase our products may be adversely affected
    by their inability to raise additional capital or to meet their
    business objectives;
|
| |  | the possibility that our customers may defer
    purchases in anticipation of new products or product updates by
    us or by our competitors; and                                                                                                                                                                                               
|
| |  | the possibility that our customers may cancel,
    defer or limit purchases as a result of the threat of terrorism
    or military actions taken by the United States or its allies in
    reaction to that threat.                                                                                                                              

In the current uncertain economic environment,
our revenue, and our license revenue in particular, is extremely
difficult to forecast. You should not rely on the results of any
prior periods as an indication of our future performance. If we
have a shortfall in revenue in any given quarter, we may not be
able to reduce our operating expenses quickly in response.
Therefore, any significant shortfall in revenue could have an
immediate adverse effect on our operating results for that
quarter. In addition, it is possible that in some future periods
our operating results may be below the expectations of
securities analysts or investors. If this occurs, the price of
our common stock may decline.



| |                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------
| | Our revenue fluctuates in part because we
    depend on large orders from end-user customers for a significant
    portion of our revenue

We depend on large orders from end-user
customers, which entail lengthy sales cycles, for a significant
portion of our revenue. Our revenue for a quarter could
fluctuate significantly based on whether a large sale near the
end of a quarter is completed or delayed. Sales to our end-user
customers generally range in value from a few thousand to
several million dollars. The effort to close these large sales
is typically complex and lengthy. Therefore, our revenue for a
given period is likely to be affected by the timing of these
large orders, which makes it difficult for us to predict that
revenue. In previous quarters, increases in revenue were
partially attributable to a greater number of these large
end-user transactions. This trend may not continue. For example,
in the three and six month periods ended June 30, 2002, the
number of large end-user transactions

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declined and these transactions contributed to a
smaller percentage of our revenue than in prior periods. Factors
that could delay these large orders include:




| |   |                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------
| |  | time needed for end-user customers to evaluate
    our software;                                                                    
|
| |  | customer budget restrictions or more lengthy
    approval processes, particularly in uncertain economic and
    industry conditions;
|
| |  | customer internal review and testing procedures;
    and                                                                            
|
| |  | engineering work needed to integrate our software
    with customers systems.                                                      



| |                                                                                         
| | ----------------------------------------------------------------------------------------
| | Our business could be adversely affected if
    we fail to manage our growth effectively

If we fail to manage our growth effectively, our
business and operating results could be adversely affected,
which could cause the market price of our securities to fall. We
expect to continue to grow our operations domestically and
internationally, and to increase our headcount. If we fail to
manage this growth and our future anticipated growth, we may
experience higher operating expenses, and we may be unable to
meet the expectations of securities analysts or investors with
respect to future operating results. To manage this growth we
must:



| |   |                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------
| |  | improve our financial and management controls,
    reporting systems and procedures and proprietary information
    control procedures;
|
| |  | continue to add and integrate new senior
    management personnel;                                                                     
|
| |  | improve our licensing models and procedures;                                                                                           
|
| |  | hire and train qualified employees;                                                                                                    
|
| |  | retain qualified employees and manage employee
    performance;                                                                        
|
| |  | control expenses;                                                                                                                      
|
| |  | integrate geographically dispersed operations; and                                                                                     
|
| |  | invest in our internal networking, data center,
    applications, infrastructure and facilities.                                       



| |                                                                            
| | ---------------------------------------------------------------------------
| | To grow our business, we need to attract
    and retain qualified employees

Our future growth and success depends on our
ability to hire and retain qualified employees and to manage our
employee base effectively. If we are unable to hire and retain
qualified employees, our business and operating results could be
adversely affected. Conversely, if we fail to manage employee
performance or reduce staffing levels when necessary, our costs
would be excessive and our business and operating results could
be adversely affected. We need to hire additional sales,
technical, and senior management personnel to support the
planned expansion of our business and to meet the anticipated
increased customer demand for our products and services.
Competition for people with the skills we require is intense,
particularly in the San Francisco Bay area where our
headquarters are located, and the high cost of living in this
area makes our recruiting and compensation costs higher. We
cannot assure you that we will be successful in hiring or
retaining qualified personnel.

We have historically granted stock options to our
employees as an important component of our total compensation
package. Our 1993 Equity Incentive Plan will expire in
October 2003. If we fail to obtain stockholder approval of a new
stock option plan, as occurred this year, we may not be able to
grant stock options to employees as planned, which could harm
employee retention and recruitment. In addition, many
outstanding stock options have exercise prices that are
significantly above our current trading prices. If this
continues, the advantage of those stock options as a performance
incentive would decline. Furthermore, potential changes in
practices regarding accounting for stock plans could result in
significant accounting charges, which could harm our operating
results and impair our ability to use stock options for
compensation

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purposes. If we are unable to use stock options
as a meaningful component of our total compensation package, we
may be unsuccessful in attracting or retaining personnel or we
may have to pay higher cash compensation.




| |                                                                  
| | -----------------------------------------------------------------
| | The loss of key personnel could adversely
    affect our business

Our future anticipated growth and success depends
on the continued service of our key sales, technical and senior
management personnel. Many of our key personnel have been with
us for a number of years, and we cannot assure you that we will
be able to retain them. The loss of key personnel can result in
significant disruption to our ongoing operations, and new
personnel must spend a significant amount of time learning our
business and our systems in addition to performing their regular
duties. Even though we have entered into employment agreements
with some key management personnel, these agreements cannot
prevent their departure. We have not obtained nor do we intend
to obtain key person life insurance covering any of our
personnel.



| |                                                                           
| | --------------------------------------------------------------------------
| | We face intense competition, which could
    cause us to lose market share

We have a number of competitors in the markets
for our various products. If existing or new competitors gain
market share in any of these markets, our business and operating
results could be adversely affected. Our principal competitors
are internal development groups with original equipment
manufacturers that provide storage management functions to
support their systems, as well as hardware and software vendors
that offer backup and file system and volume management,
clustering and replication, and storage area networking products.

Many of our competitors have greater financial,
technical, sales, marketing and other resources than we do. 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 expect to face additional competition
from these companies in the future.



| |                                                                                                             
| | ------------------------------------------------------------------------------------------------------------
| | We distribute our products through multiple
    distribution channels, each of which is subject to
    risks

We sell our products through original equipment
manufacturers, through direct sales and through a retail
distribution channel. If we fail to manage our distribution
channels successfully, they may conflict with one another or
otherwise not function as we anticipate, and our business and
operating results could be adversely affected.

Retail distribution.Some of our software products are sold
primarily in the retail channel, which poses different
challenges than we face in selling most of our products,
including:



| |   |                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------
| |  | the VERITAS brand does not have high recognition
    in the retail channel;                                                                   
|
| |  | retail distribution typically involves shorter
    product life cycles;                                                                       
|
| |  | the retail channel has higher risks of product
    returns, higher marketing expenses and less predictable market
    demand; and             
|
| |  | our retail distributors have no obligation to
    continue selling our products and may terminate their
    relationships with us at any time.

Direct sales.We
also depend on our direct sales force to sell our products. This
involves a number of risks, including:



| |   |                                                                             
| | - | ----------------------------------------------------------------------------
| |  | longer sales cycles for direct sales efforts;                               
|
| |  | our need to hire, train, retain and motivate our
    direct sales force; and

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| |   |                                                                                    
| | - | -----------------------------------------------------------------------------------
| |  | the length of time it takes our new sales
    representatives to become productive.

Original equipment manufacturers.A portion of our revenue comes from
our original equipment manufacturer customers that incorporate
our storage software into systems they sell. Risks associated
with our original equipment manufacturer customers include:



| |   |                                                                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | we have no control over the shipping dates or
    volumes of systems they ship;                                                                                                                                               
|
| |  | they have no obligation to recommend or offer our
    software products;                                                                                                                                                      
|
| |  | they have no minimum sales requirements and can
    terminate our relationship at any time;                                                                                                                                   
|
| |  | a significant period of time may elapse before we
    realize any associated revenue, due to development work that we
    must generally undertake under the agreement with our original
    equipment manufacturer customers;
|
| |  | significant time may be needed for the sales and
    marketing organizations within these customers and distributors
    to become familiar with and gain confidence in our products;                                         
|
| |  | they could choose to develop their own storage
    products and incorporate those products into their systems
    instead of our products;                                                                                    
|
| |  | they could develop enhancements to and derivative
    products from our products; and                                                                                                                                         
|
| |  | they could change their own base products, which
    could make it difficult for us to adapt our products to theirs.                                                                                                          

Finally, our original equipment manufacturer
customers compete with one another. If one of our original
equipment manufacturer customers views the products we have
developed for another original equipment manufacturer as
competing with its products, it might decide to stop doing
business with us, which could adversely affect our business and
our operating results.



| |                                                                                                         
| | --------------------------------------------------------------------------------------------------------
| | Some of our original equipment manufacturer
    agreements may not result in increased product
    sales

We have important original equipment manufacturer
agreements with Hewlett-Packard, IBM, Microsoft and Sun
Microsystems. Unlike some of our other original equipment
manufacturer agreements under which we sell off-the-shelf
versions of our products, under these agreements we develop
unique or limited functionality versions of our products to be
included in these original equipment manufacturers systems
software and products. If we are unable to leverage these
relationships to increase product sales, we will have expended
significant resources without generating corresponding revenue,
which could adversely affect our business and our operating
results. These relationships require our personnel to develop
expertise with respect to the original equipment
manufacturers products and markets and to cooperate
closely with their personnel. We cannot assure you that we will
be able to attract and retain qualified employees to work with
our original equipment manufacturer customers or to develop and
improve the products designed for these customers.



| |                                                                                                          
| | ---------------------------------------------------------------------------------------------------------
| | We face uncertainties in porting products
    to new operating systems and in developing new
    products

Many of our products operate primarily on the
UNIX computer operating system. We are currently redesigning, or
porting, these products to operate on the Windows NT operating
system. We are also developing new products for UNIX and for
Windows NT. In addition, we entered into an agreement with IBM
under which we will port our complete set of storage products to
AIX/ Monterey for IBM POWER PC and the Intel IA-64
processor-system. Although our storage management software suite
is now available on IBM AIX, we may not be successful in porting
our other storage products to IBM AIX. We may not accomplish any
of this work quickly or cost-effectively, and it is not clear
what the relative growth rates of these operating systems will
be. These activities 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. For example, our porting
and development work for the Windows NT market has required us
to hire additional personnel with expertise on these platforms
and to devote engineering resources to these projects. For some
operating systems, we must obtain from the owner of the

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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 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.




| |                                                                                          
| | -----------------------------------------------------------------------------------------
| | Sales of a small number of product lines
    make up a substantial portion of our revenue

We derive and expect to derive a substantial
majority of our revenue from a limited number of software
products. For the six months ended June 30, 2002, we
derived approximately $438.5 million, or 87%, of our user
license fees from our core technologies, including data
protection and file system and volume management products. If
our customers do not continue to purchase these products as a
result of competition, technological change, budget constraints
or other factors, our revenue would decrease and our business
and operating results would be adversely affected.



| |                                                                        
| | -----------------------------------------------------------------------
| | We derive a significant amount of revenue
    from only a few customers

Although for the three and six months ended
June 30, 2002 and 2001, no single customer accounted for
greater than 10% of our total net revenue, we typically derive
significant revenue from a small number of customers, including
our original equipment manufacturer customers. If any of these
customers were to reduce purchases of products or services from
us, our business would be adversely affected unless we were able
to increase sales to other customers substantially. Many of
these customers have announced that their own businesses are
slowing, which could adversely affect their demand for our
products and services. In addition, many of our customers may
believe that they have sufficient storage products to meet their
current needs, which would reduce demand for our products and
services. We do not have a contract with any of these customers
that requires the customer to purchase any specified number of
software licenses from us. Therefore, we cannot be sure that
these customers will continue to purchase our products at
current levels.



| |                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------
| | Our success depends on our ability to
    develop new and enhanced products that achieve widespread market
    acceptance

Our future success depends on our ability to
address the rapidly changing needs of our customers by
developing and introducing new products, product updates and
services on a timely basis, by extending the operation of our
products on new platforms and by keeping pace with technological
developments and emerging industry standards. In order to grow
our business, we are committing substantial resources to
developing new software products and services, including
software products and services for the storage area networking
market and the network attached storage appliance market. Each
of these markets is new and unproven, and industry standards for
these markets are evolving and changing. If these markets do not
develop as anticipated, or 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.



| |                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------
| | Our international sales and operations
    create special problems that could adversely affect our
    operating results

An investment in our securities may be riskier
than an investment in other businesses because we expect to
derive an increasing percentage of our revenue from customers
located outside of the U.S. We have significant operations
outside of the U.S., including engineering, sales, customer
support and production operations, and we plan to expand our
international operations. Our foreign operations are subject to
risks, including:



| |   |                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------
| |  | potential loss of proprietary information due to
    piracy, misappropriation or weaker laws regarding intellectual
    property protection;
|
| |  | imposition of foreign laws and other governmental
    controls, including trade restrictions;                                               

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| |   |                                                                                                                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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;
|
| |  | difficulties in hedging foreign currency
    transaction exposures;                                                                                                                                                                                                                  
|
| |  | longer payment cycles for sales in foreign
    countries and difficulties in collecting accounts receivable;                                                                                                                                                                         
|
| |  | difficulties in staffing and managing our foreign
    operations, including difficulties related to administering our
    stock option plan in foreign countries and difficulties related
    to the new organizational structure in Europe that we
    implemented in 2001;         
|
| |  | 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 or terrorism, particularly in
    areas in which we have facilities.                                                                                                                                                                                                

In addition, our foreign sales are denominated in
local currency, creating risk of foreign currency translation
gains and losses that could adversely affect our business and
operating results. 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 customers are located.
Future changes in domestic or international tax regulations
could affect our anticipated ability to continue to realize
these tax benefits.



| |                                                                           
| | --------------------------------------------------------------------------
| | Our growth strategy is risky because it
    includes business acquisitions

As part of our growth 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
    core business;                                                                                                                                                                                                                 
|
| |  | integration of acquired business operations and
    employees with our existing business, including coordination of
    geographically dispersed operations, which in the past has take
    longer and was more complex than initially expected for some
    acquired companies;
|
| |  | incorporation of acquired business technology
    into our existing product lines, including consolidating
    technology with duplicative functionality or designed on
    different technological architecture;                                                               
|
| |  | loss or termination of employees, including
    costly litigation resulting from the termination of those
    employees;                                                                                                                                                        
|
| |  | dilution of our then-current stockholders
    percentage ownership;                                                                                                                                                                                                            
|
| |  | 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.                                                                                                                                                                       



| |                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As a result of the Seagate Technology
    leveraged buyout and merger transaction, our subsidiary may be
    liable to third parties for liabilities resulting from
    Seagates operations before the transaction

In November 2000, Seagate Technology became our
subsidiary. As part of that transaction, Suez Acquisition
(Cayman) Company, or SAC, acquired the operating assets of
Seagate Technology. SAC assumed and agreed to indemnify us for
substantially all liabilities arising in connection with Seagate

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Technologys operations prior to the
transaction. However, governmental organizations or other third
parties may seek recourse against our subsidiary or us for these
liabilities. As a result, our subsidiary could receive claims
related to a wide range of possible liabilities. Some areas of
potential liability for our Seagate Technology subsidiary
include:




| |   |                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------
| |  | tax liabilities;                                                                                                   
|
| |  | environmental cleanup costs and liabilities for
    claims made under federal, state or foreign environmental laws;
|
| |  | obligations under federal, state and foreign
    pension and retirement benefit laws;                              
|
| |  | litigation relating to the leveraged buyout; and                                                                   
|
| |  | Seagate Technologys 2000 restructuring, or
    its patent litigation.                                             

Any such claim, with or without merit, could be
time consuming to defend, result in costly litigation and divert
management attention. Moreover, if SAC is unable or unwilling to
indemnify us as agreed, we could incur unexpected costs. The
Internal Revenue Service is currently auditing past tax returns
of Seagate Technology. We can predict neither the outcome of
these audits, nor the amount of any liability we might incur
arising from these audits.



| |                                                                                                     
| | ----------------------------------------------------------------------------------------------------
| | The Seagate merger consideration may be
    subject to recovery under fraudulent conveyance
    laws

The leveraged buyout of assets from Seagate
Technology and our acquisition of the remaining corporate assets
may in the future be challenged by a creditor of Seagate
Technology as a fraudulent transfer. If the court were to
determine that a fraudulent transfer had occurred, one of the
remedial actions it could take would be to order that the
transaction be unwound. Because we have integrated Seagate
Technology into our business, unwinding the acquisition would be
extremely costly for us. In addition, any litigation in
connection with this matter could be costly in terms of time and
resources and could divert the attention of management from our
core business.



| |                                        
| | ---------------------------------------
| | Our effective tax rate may
    increase

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 domestic and international revenue and
income before taxes. We are also subject to changing tax laws,
regulations and interpretations in multiple jurisdictions in
which we operate. We do not have a 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. In addition, in
November 2000, we acquired Seagate Technology, which has
significant tax audit and tax litigation activity. We believe
that we have meritorious defenses against asserted deficiencies
and that the likely outcome of a re-determination of these
asserted deficiencies by the tax settlement authorities will not
result in an additional provision for income taxes. If SAC is
unable to or is unwilling to indemnify us for any of these
deficiencies, we could experience a material adverse effect on
our business and operating results.



| |                                                                                                              
| | -------------------------------------------------------------------------------------------------------------
| | Our strategy of investing in
    development-stage companies involves a number of risks and
    uncertainties

We have invested in development-stage companies
and each of these investments involves risks and uncertainties,
including:



| |   |                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------
| |  | diversion of managements attention from our
    core business;                                           
|
| |  | failure to leverage our relationship with these
    companies to access new technologies or new markets;  
|
| |  | inability to value investments appropriately or
    to predict changes to the future value of investments;
|
| |  | inability to manage investments effectively; and                                                          
|
| |  | loss of cash invested.                                                                                    

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We
incur or may incur significant accounting charges that,
individually or in aggregate, could create net losses under
generally accepted accounting principles

We incur or may incur significant accounting
charges that, individually or in aggregate, could create losses
under generally accepted accounting principles in future
periods. Examples of these charges are:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Amortization of developed technology and other
    intangibles.We are currently
    incurring significant charges related to the amortization of
    developed technology and other intangibles. We expect the total
    amortization charge to be approximately $34.5 million per
    quarter through the first quarter of 2003. The quarterly
    amortization charge could increase as a result of future
    business combinations or impairment of our other intangibles.
    While we do not expect to record other intangibles impairment
    charges, we cannot be sure that we will not have to record
    impairment in the future. As of June 30, 2002, the total
    carrying amount of our other intangibles was $137.2 million;
|
| |  | Impairment of
    goodwill.On January 1, 2002, we
    adopted SFAS 142 and, as a result, we no longer amortize
    goodwill related to business combinations but test it for
    impairment at least annually. While we do not expect to record
    goodwill impairment charges, we cannot be sure that we will not
    have to record impairment in the future. As of June 30,
    2002, the total carrying amount of our goodwill was
    $1,202.8 million;                                                                                                                                                                                                                                                                                
|
| |  | Loss on strategic
    investments.In the third quarter of
    2001 and in the second quarter of 2002, we recorded losses on
    strategic investments. Future losses will depend on the results
    of our quarterly reviews to determine if there has been a
    decline in the fair value that is other than temporary. As of
    June 30, 2002, the total carrying amount of our strategic
    investments was $11.3 million;                                                                                                                                                                                                                                                                                                             
|
| |  | Stock-based
    compensation.We apply APB
    Opinion 25 and related interpretations in accounting for
    our stock option and stock purchase plans. Because the exercise
    price of options granted under our stock plans are generally
    equal to the market value of our common stock on the date of
    grant, no compensation cost has been recognized for grants under
    our stock option and stock purchase plans. Potential changes in
    practices regarding accounting for stock plans could result in
    significant accounting charges; and                                                                                                                                                                             
|
| |  | Restructuring
    charges.We regularly perform
    evaluations of our operations and activities. Based on one of
    these evaluations, we may have excess capacity in our domestic
    and foreign facilities. Any decision to restructure our
    operations, to exit any activity or to eliminate any excess
    capacity could result in significant accounting charges.
    Restructuring charges could also result from future business
    combinations.                                                                                                                                                                                                                                                                              



| |                                                                                   
| | ----------------------------------------------------------------------------------
| | We have a significant amount of debt that
    we may be unable to service or repay

In October 1997, we issued $100.0 million in
aggregate principal amount at maturity of 5.25% convertible
subordinated notes due 2004, of which $64.0 million was
outstanding as of June 30, 2002. In August 1999, we issued
$465.8 million in aggregate principal amount at maturity of
1.856% convertible subordinated notes due 2006, of which
$387.8 million was outstanding as of June 30, 2002. As
of June 30, 2002, the annual interest payments on our
outstanding 5.25% notes were $3.4 million and the
annual interest payments on our outstanding 1.856% notes were
$8.6 million, all of which we plan to fund from cash flows
from operations. We will need to generate substantial amounts of
cash from our operations to fund interest payments and to repay
the principal amount of debt when it matures, while at the same
time funding capital expenditures and our other working capital
needs. If we do not have sufficient cash to pay our debts as
they come due, we could be in default of those debts. For
example, if we do not make timely payments, the notes could be
declared immediately due and payable. Our substantial leverage
could also increase our vulnerability to adverse economic and
industry conditions because it makes it more difficult for us to
raise capital if needed. In addition, any changes in accounting
rules regarding our operating leases and built-to-suit
facilities may affect our debt levels and operating expenses in
the future.



| |                                                              
| | -------------------------------------------------------------
| | We may not be able to protect our
    proprietary information

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

38



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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 to obtain or use information that we
regard as proprietary.




| |                                                                      
| | ---------------------------------------------------------------------
| | Third parties may claim that we infringe
    their proprietary rights

We may from time to time 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 and copyright infringement claims. We have
received several trademark claims in the past and may receive
more claims in the future based on the name VERITAS, which is a
word commonly used in trade names throughout Europe and the
western hemisphere. 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;                                                                                                                                                        
|
| |  | 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.



| |                                                            
| | -----------------------------------------------------------
| | We might experience significant defects in
    our products

Software products frequently contain errors or
failures, especially when first introduced or when new versions
are released. We might experience significant errors or failures
in our products, or they might not work with other hardware or
software as expected, which could delay the development or
release of new products or new versions of products, or which
could adversely affect market acceptance of our products. Our
end-user customers use our products for applications that are
critical to their businesses, and they have a greater
sensitivity to product defects than the market for software
products generally. If we were to experience significant delays
in the release of new products or new versions of products, or
if customers were dissatisfied with product functionality or
performance, we could lose revenue or be subject to liability
for service or warranty costs, and our business and operating
results could be adversely affected.



| |                                                                  
| | -----------------------------------------------------------------
| | Natural disasters or power outages could
    disrupt our business

We must protect our business and our network
infrastructure against damage from earthquake, flood, hurricane
and similar events. Many of our operations are subject to these
risks, particularly our operations

39



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located in California. In addition, our
operations have been and could be further disrupted by temporary
power losses in our California facilities due to power
shortages. A natural disaster or other unanticipated problem
could 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.




| |                                                                                            
| | -------------------------------------------------------------------------------------------
| | Some provisions in our charter documents
    may prevent or deter certain corporate actions

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.

We also have in place a stockholder rights plan
that is designed to discourage coercive takeover offers.



| |                                                                                                       
| | ------------------------------------------------------------------------------------------------------
| | 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
adversely affected by a number of factors, including:



| |   |                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | announcements of our quarterly operating results
    or those of our competitors or our original equipment
    manufacturer customers;                                                               
|
| |  | rumors, announcements or press articles regarding
    management changes, changes in our operations, SEC or Nasdaq
    inquiries, or changes in practices regarding accounting for
    stock options;
|
| |  | changes in earnings estimates by securities
    analysts;                                                                                                                                            
|
| |  | announcements of planned acquisitions by us or by
    our competitors;                                                                                                                               
|
| |  | the gain or loss of a significant customer;                                                                                                                                                          
|
| |  | announcements of new products by us, our
    competitors or our original equipment manufacturer customers; 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

Foreign Currency Risk

We transact business in various foreign
currencies and we have established a foreign currency hedging
program, utilizing foreign currency forward exchange contracts
(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

40



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with unrealized gains and losses included in
other income (expense). The unrealized gain (loss) on the
outstanding forward contracts at June 30, 2002 was
immaterial to our consolidated financial statements.


Our outstanding forward contracts as of
June 30, 2002 are presented in the table below. All forward
contract amounts are representative of the expected payments to
be made under these instruments. All forward contracts mature in
61 days or less as of June 30, 2002 (dollars in
thousands):

|                             |  |                 |                |                 |  |                   |             |   |  |  |       |  
|---------------------------- |  | --------------- | -------------- | --------------- |  | ----------------- | ----------- | - |  |  | ----- | -
|                             |  |                 |                |                 |  | Fair Market Value
|                             |  | Local Currency  |                |                 |  | at June 30, 2002 
|                             |  | Contract Amount |                | Contract Amount |  | (US $)           
|                             |  |                 |                |                 |  |                  
|Contracts to Sell US $       |  |                 |                |                 |  |                   |             |   |  |  |       |  
|British pound                |  |                 | 31,162.0 GB    | P               |  |                   | 47,450.4 US | D |  |  | 56.1  |  
|Japanese yen                 |  |                 | 15,300.0 JP    | Y               |  |                   | 128.0 US    | D |  |  | (0.3  | )
|Contracts to Buy US $        |  |                 |                |                 |  |                   |             |   |  |  |       |  
|Brazilian reals              |  |                 | 3,144.0 BR     | L               |  |                   | 1,065.8 US  | D |  |  | (45.2 | )
|Mexican peso                 |  |                 | 14,540.0 MX    | N               |  |                   | 1,446.0 US  | D |  |  | (10.9 | )
|Contracts to Sell Euro
     |  |                 |                |                 |  |                   |             |   |  |  |       |  
|Danish krone                 |  |                 | 4,240.0 DK     | K               |  |                   | 570.7 EU    | R |  |  | 0.3   |  
|Norwegian krone              |  |                 | 4,312.0 NO     | K               |  |                   | 583.8 EU    | R |  |  | (2.3  | )
|Singapore dollar             |  |                 | 1,544.0 SG     | D               |  |                   | 887.7 EU    | R |  |  | (0.6  | )
|Swedish krona                |  |                 | 15,230.0 SE    | K               |  |                   | 1,667.9 EU  | R |  |  | 10.3  |  
|Swiss franc                  |  |                 | 1,121.0 CH     | F               |  |                   | 764.4 EU    | R |  |  | (1.1  | )
|US dollar                    |  |                 | 42,468.0 US    | D               |  |                   | 41,799.4 EU | R |  |  | 57.1  |  
|Contracts to Buy Euro
      |  |                 |                |                 |  |                   |             |   |  |  |       |  
|Australian dollar            |  |                 | 9,220.0 AU     | D               |  |                   | 5,253.7 EU  | R |  |  | (10.9 | )
|British pound                |  |                 | 41,870.0 GB    | P               |  |                   | 64,775.1 EU | R |  |  | 11.5  |  
|Hong Kong dollar             |  |                 | 21,570.0 HK    | D               |  |                   | 2,806.6 EU  | R |  |  | 0.8   |  
|Japanese yen                 |  |                 | 1,481,700.0 JP | Y               |  |                   | 12,767.2 EU | R |  |  | 219.8 |  
|South African rand           |  |                 | 5,625.0 ZA     | R               |  |                   | 550.2 EU    | R |  |  | 0.9   |  
|UAE dirham                   |  |                 | 4,484.0 AE     | D               |  |                   | 1,242.0 EU  | R |  |  | 8.1   |  
|Contracts to Buy GBP $       |  |                 |                |                 |  |                   |             |   |  |  |       |  
|South African rand           |  |                 | 3,142.0 ZA     | R               |  |                   | 198.7 GB    | P |  |  | 0.5   |  
|UAE dirham                   |  |                 | 5,103.0 AE     | D               |  |                   | 912.6 GB    | P |  |  | 5.1   |  

Interest Rate Risk

We are exposed to interest rate risk, primarily
on our investment portfolio and long-term debt obligations. Our
primary investment objective is to preserve principal while at
the same time maximizing yields without significantly increasing
risk. Our portfolio includes money markets funds, investment
grade commercial paper, medium-term notes, corporate notes and
bonds, government agency securities (taxable and non-taxable),
asset-backed securities and market auction preferreds. The
diversity of our portfolio helps us to achieve our investment
objective. As of June 30, 2002, approximately 63% of our
investment portfolio is composed of investments with original
maturities of one year or less and approximately 44% of our
investment portfolio matures less than 90 days from the
date of purchase.

Long-term debt of $451.8 million consists of
our 5.25% notes of $64.0 million and our 1.856% notes of
$387.8 million. The interest rate of 1.856% on the 1.856%
notes, together with the accrual of original issue discount,
represents a yield to maturity of 6.5%. The nominal interest
rate on these notes is fixed and the notes provide for
semi-annual interest payments of approximately $1.7 million
each May 1 and November 1 for the 5.25% notes and
approximately $4.3 million each February 13 and
August 13 for the 1.856% notes. The notes

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are convertible into our common stock at any time
prior to the close of business on the maturity date, unless
previously redeemed or repurchased, subject to adjustment in
certain events.


The following table presents the amounts of our
cash equivalents, investments and long-term debt, according to
maturity date, that may be subject to interest rate risk and the
average interest rates as of June 30, 2002 by year of
maturity (dollars in thousands):

|                                                   |                       |                     |   |            |   |       |   |            |   |           |   |           |   |  |   |           |   |  |   |         |  
|-------------------------------------------------- | --------------------- | ------------------- | - | ---------- | - | ----- | - | ---------- | - | --------- | - | --------- | - |  | - | --------- | - |  | - | ------- | -
|                                                   |                       |                     |   |            |   |      
|                                                   |                       | 2002 Amortized Cost |   |            |   |      
|                                                   |                       |                     |   |            |   |      
|                                                   |                       |                     |   | Due in     |   |       |   |            |   | 2001     
|                                                   |                       | Due in              |   | 2003 and   |   |       |   | 2002       |   | Amortized
|                                                   |                       | 2002                |   | Thereafter |   | Total |   | Fair Value |   | Cost     
|                                                   |                       |                     |   |            |   |       |   |            |   |          
|Cash equivalents and short-term Investments:       |                       |                     |   |            |   |       |   |            |   |           |   |           |   |  |   |           |   |  |   |        
|                                                   | Fixed rate            |                     | $ | 965,978    |   |       | $ | 790,527    |   |           | $ | 1,756,505 |   |  | $ | 1,771,703 |   |  | $ | 823,681 |  
|                                                   | Average fixed rate    |                     |   | 2.39       | % |       |   | 3.23       | % |           |   | 2.77      | % |  |   | 2.74      | % |  |   | 6.45    | %
|                                                   | Variable rate         |                     | $ | 162,425    |   |       |   |           |   |           | $ | 162,425   |   |  | $ | 162,425   |   |  | $ | 26,382  |  
|                                                   | Average variable rate |                     |   | 2.01       | % |       |   |           |   |           |   | 2.01      | % |  |   | 2.01      | % |  |   | 6.51    | %
|Total cash equivalents and short-term investments: |                       |                     |   |            |   |       |   |            |   |           |   |           |   |  |   |           |   |  |   |        
|                                                   | Investments           |                     | $ | 1,128,403  |   |       | $ | 790,527    |   |           | $ | 1,918,930 |   |  | $ | 1,934,128 |   |  | $ | 850,063 |  
|                                                   | Average rate          |                     |   | 2.34       | % |       |   | 3.23       | % |           |   | 2.70      | % |  |   | 2.68      | % |  |   | 6.45    | %
|Long-term investments:                             |                       |                     |   |            |   |       |   |            |   |           |   |           |   |  |   |           |   |  |   |        
|                                                   | Fixed rate            |                     |   |           |   |       |   |           |   |           |   |          |   |  |   |          |   |  | $ | 56,138  |  
|                                                   | Average fixed rate    |                     |   |           |   |       |   |           |   |           |   |          |   |  |   |          |   |  |   | 6.58    | %
|Long-term debt:                                    |                       |                     |   |            |   |       |   |            |   |           |   |           |   |  |   |           |   |  |   |        
|                                                   | Fixed rate            |                     |   |           |   |       | $ | 451,849    |   |           | $ | 451,849   |   |  | $ | 533,269   |   |  | $ | 456,587 |  
|                                                   | Average fixed rate    |                     |   |           |   |       |   | 6.32       | % |           |   | 6.32      | % |  |   | 6.32      | % |  |   | 6.23    | %

In September 2000, we entered into a three-year
cross currency interest rate swap for the purpose of hedging
fixed interest rate, foreign currency denominated cash flows
under an inter-company loan receivable. Under the terms of this
derivative financial instrument, Euro denominated fixed
principal and interest payments to be received under the
inter-company loan will be swapped for U.S. dollar-fixed
principal and interest payments. As of June 30, 2002,
15 monthly payments of
4.3 million
remained to be swapped at a forward exchange rate of
0.89070 U.S. dollar per Euro. The fair market value of
the swap at June 30, 2002 was $(5.2) million. As a
result of entering into the swap, we have mitigated our exposure
to foreign currency exchange rate fluctuations. The gains or
losses on the foreign currency loan receivable will be offset by
the gains or losses on the swap. Because we are receiving fixed
interest payments under the swap, it is still subject to
fluctuations in value due to changes in U.S. dollar
interest rates. As of June 30, 2002, the impact of these
fluctuations was not significant. This hedge was deemed to be
perfectly effective as of June 30, 2002.

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 our
build-to-suit lease 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.
The payments on our build-to-suit lease agreements are based
upon a 3-month LIBOR plus a credit spread. If our credit spread
remains consistent and other critical terms of the interest rate
swap or the hedged item do not change, the interest rate swap
will be considered perfectly effective with all changes in the
fair value included in other comprehensive income. If our credit
spread changes or other 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 June 30, 2002, the fair value of the interest rate
swaps was $(4.0) 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

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and the Company receives 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.


Equity Price Risk

We are exposed to equity price risk on the
marketable portion of our portfolio of equity securities
investments. We typically do not attempt to reduce or eliminate
our market exposure on these equity securities. These
investments are in companies in the high-technology industry. As
of June 30, 2002, we held one marketable equity security,
representing a total market value of $0.4 million. Assuming
a 10% adverse change, our marketable equity securities
investments would decrease in value by less than
$0.1 million. If our marketable equity security investments
as of June 30, 2002 had been valued using prices as of
July 31, 2002, the value of these securities would have
decreased by less then $0.1 million, or 16%. This estimate
is not necessarily indicative of future performance and actual
results may differ materially.

We also make 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 was other than temporary. During the second
quarter of 2002, we recognized impairment losses of
$14.8 million on our strategic investments when we
determined that there had been a decline in the fair value of
the investment that was other than temporary. The losses
represented write-downs of the carrying amount of our
investments and were determined by using, among other factors,
an investees significant decline in stock value, its
inability to obtain additional private financing, and the
uncertainty of its financial conditions. We cannot assure you
that our investment will have the above mentioned results, or
even that we will not lose all or any part of these investments.

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PART II:     OTHER
INFORMATION




Item 1.     Legal
Proceedings

On October 23, 2001, Storage Computer
Corporation filed an action against the Registrant in the United
States District Court for the Northern District of Texas
alleging infringement of one of Storage Computer
Corporations patents. On November 30, 2001, Storage
Computer Corporation filed an amended complaint to add VERITAS
Software Global Corporation, a subsidiary of the Registrant, as
a defendant. On February 6, 2002, Storage Computer
Corporation filed an action alleging infringement of a second
patent held by Storage Computer Corporation. On March 21,
2002, Storage Computer Corporation filed an action alleging
infringement of a third patent held by Storage Computer
Corporation. The United States District Court for the Northern
District of Texas has subsequently consolidated all of these
actions. The Registrant and its subsidiary filed answers to
these consolidated actions denying all material allegations of
Storage Computer Corporations complaints, and filed
counterclaims for declaratory judgment of invalidity and
non-infringement of the patents-in-suit. Storage Computer
Corporation is claiming that the following products of the
Registrant infringe upon one or more of Storage Computer
Corporations patents: VERITAS Volume Manager release 3.01
and later (individually or as part of a suite of products);
VERITAS SANPoint Direct; VERITAS SANPoint Foundation Suite; and
VERITAS SANPoint Foundation Suite HA. Storage Computer
Corporation is seeking unspecified damages, treble damages,
costs of suit and attorneys fees, and a permanent
injunction from further alleged infringement. The Registrant
believes that it has adequate defenses and counterclaims
relative to the claims of infringement asserted against it and
intends to vigorously defend this action.




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

At the annual meeting of stockholders held by the
Registrant on May 14, 2002 (the Annual
Meeting), each of the following individuals was elected to
the Registrants classified board of directors as
Class A directors to hold office for a term of three years
or until his successor is duly elected or qualified or until his
resignation or removal:

|                   |  |           |             |          |  |  |            | 
|------------------ |  | --------- | ----------- | -------- |  |  | ---------- | 
|                   |  |           |             | Votes   
|                   |  | Votes For |             | Withheld
|                   |  |           |             |         
|Mark Leslie        |  |           | 331,277,796 |          |  |  | 7,179,625  | 
|David J. Roux      |  |           | 333,712,299 |          |  |  | 4,745,122  | 
|Geoffrey W. Squire |  |           | 279,229,741 |          |  |  | 59,227,680 | 

In addition, the following individuals
terms of office as directors continued after the Annual Meeting:

|                 |  |                  |  |                   
|---------------- |  | ---------------- |  | ------------------
|Gary L. Bloom    |  | Steven D. Brooks |  | William H. Janeway
|Stephen J. Luczo |  | Joseph D. Rizzi  |  | Fred van den Bosch

The following proposals were also approved at the
Annual Meeting:

|                                                                                                               |  |           |             |               |  |             |             |           |  |  |           |  |  |  |            | 
|-------------------------------------------------------------------------------------------------------------- |  | --------- | ----------- | ------------- |  | ----------- | ----------- | --------- |  |  | --------- |  |  |  | ---------- | 
|                                                                                                               |  |           |             |               |  |             |             | Broker   
|                                                                                                               |  | Votes For |             | Votes Against |  | Abstentions |             | Non-Votes
|                                                                                                               |  |           |             |               |  |             |             |          
|Approve the VERITAS 2002 Employee Stock Purchase
    Plan                                                      |  |           | 156,151,045 |               |  |             | 116,706,351 |           |  |  | 2,736,303 |  |  |  | 62,863,722 | 
|Approve the VERITAS 2002 Directors Stock Option
    Plan                                                       |  |           | 233,698,576 |               |  |             | 39,567,089  |           |  |  | 2,328,034 |  |  |  | 62,863,722 | 
|Ratify the appointment of KPMG LLP as independent
    accountants for the fiscal year ending December 31, 2002 |  |           | 324,725,853 |               |  |             | 11,860,432  |           |  |  | 1,871,136 |  |  |  | 0          | 

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The following proposal was not approved at the
Annual Meeting:

|                                               |  |           |            |               |  |             |             |           |  |  |           |  |  |  |            | 
|---------------------------------------------- |  | --------- | ---------- | ------------- |  | ----------- | ----------- | --------- |  |  | --------- |  |  |  | ---------- | 
|                                               |  |           |            |               |  |             |             | Broker   
|                                               |  | Votes For |            | Votes Against |  | Abstentions |             | Non-Votes
|                                               |  |           |            |               |  |             |             |          
|Approve the VERITAS 2002 Equity Incentive Plan |  |           | 79,982,326 |               |  |             | 193,415,789 |           |  |  | 2,195,584 |  |  |  | 62,863,722 | 




Item 5.     Other
Information

The Audit Committee of the Registrant has
approved its auditors, KPMG LLP, to perform audit services
related to the consolidated financial statements for the year
ending December 31, 2002, and quarterly reviews of the unaudited
consolidated financial statements for the periods ending June
30, September 30 and December 31, 2002. In addition, the Audit
Committee has approved the following non-audit services
anticipated to be performed by KPMG LLP through the end of 2002:
statutory audit services related to international subsidiaries;
regulatory compliance reviews related to international stock
plans; tax consulting services; and general accounting advice.




Item 6.     Exhibits
and Reports on Form 8-K

(a) Exhibits

|        |       |                     |  |                                                                                                                                                                                                                                                                                                                                                                                                 |  |       |  |        |  |          |  |  |  |  |  |  |  |  |   | 
|------- | ----- | ------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----- |  | ------ |  | -------- |  |  |  |  |  |  |  |  | - | 
|        |       |                     |  |                                                                                                                                                                                                                                                                                                                                                                                                 |  |      
|        |       |                     |  | Incorporated by Reference                                                                                                                                                                                                                                                                                                                                                                       |  |      
|Exhibit |       |                     |  |                                                                                                                                                                                                                                                                                                                                                                                                 |  | Filed
|Number  |       | Exhibit Description |  | Form                                                                                                                                                                                                                                                                                                                                                                                            |  | Date  |  | Number |  | Herewith
|        |       |                     |  |                                                                                                                                                                                                                                                                                                                                                                                                 |  |       |  |        |  |         
|        | 10.01 |                     |  | VERITAS Participation Agreement Third Amendment
    dated January 16, 2002 by and among VSGC, the various
    parties thereto from time to time, Wells Fargo Bank Northwest,
    National Association as Owner Trustee, the various
    banks and other lending institutions which are parties thereto
    from time to time as Holders or Lenders
    and ABN Amro Bank N.V. as Agent. |  |       |  |        |  |          |  |  |  |  |  |  |  |  | X | 
|        | 10.02 |                     |  | First Amendment to Credit Agreement and Other
    Intercreditor Agreements dated March 1, 2002 by and among
    Bank of America, N.A. as Agent, the various banks
    and other lending institutions which are parties thereto from
    time to time as Lenders and Wells Fargo Bank
    Northwest, National Association as Owner Trustee                                                 |  |       |  |        |  |          |  |  |  |  |  |  |  |  | X | 
|        | 10.03 |                     |  | Consent Letter Agreement regarding Roseville,
    Minnesota Facility dated March 1, 2002 by and among Bank of
    America, N.A. as Agent, VERITAS, VSGC, VOC, VERITAS
    Software Technology Corporation and VERITAS Software Technology
    Holding Corporation                                                                                                                             |  |       |  |        |  |          |  |  |  |  |  |  |  |  | X | 
|        | 99.1  |                     |  | Certification of Chief Executive Officer and
    Chief Financial Officer Pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                          |  |       |  |        |  |          |  |  |  |  |  |  |  |  | X | 

(b) Reports on Form 8-K

|               |         |         |  |             |      |  |  |                                                                                                                   
|-------------- | ------- | ------- |  | ----------- | ---- |  |  | ------------------------------------------------------------------------------------------------------------------
|Date of Report |         | Item(s) |  | Description
|               |         |         |  |            
|               | 4/17/02 |         |  |             | 5, 7 |  |  | VERITAS announced financial results for its first
    quarter ended March 31, 2002 and included the press release.

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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 August 14, 2002



| |                                             
| | --------------------------------------------
| | VERITAS SOFTWARE CORPORATION                
|
| | /s/ KENNETH E. LONCHAR                      
| |                                             
| | Kenneth E. Lonchar                          
| | Executive Vice President and                
| | Chief Financial Officer                     
| | (Principal Financial and Accounting Officer)

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EXHIBIT INDEX

|        |       |                     |  |                                                                                                                                                                                                                                                                                                                                                                                                 |  |       |  |        |  |          |  |  |  |  |  |  |  |  |   | 
|------- | ----- | ------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----- |  | ------ |  | -------- |  |  |  |  |  |  |  |  | - | 
|        |       |                     |  |                                                                                                                                                                                                                                                                                                                                                                                                 |  |      
|        |       |                     |  | Incorporated by Reference                                                                                                                                                                                                                                                                                                                                                                       |  |      
|Exhibit |       |                     |  |                                                                                                                                                                                                                                                                                                                                                                                                 |  | Filed
|Number  |       | Exhibit Description |  | Form                                                                                                                                                                                                                                                                                                                                                                                            |  | Date  |  | Number |  | Herewith
|        |       |                     |  |                                                                                                                                                                                                                                                                                                                                                                                                 |  |       |  |        |  |         
|        | 10.01 |                     |  | VERITAS Participation Agreement Third Amendment
    dated January 16, 2002 by and among VSGC, the various
    parties thereto from time to time, Wells Fargo Bank Northwest,
    National Association as Owner Trustee, the various
    banks and other lending institutions which are parties thereto
    from time to time as Holders or Lenders
    and ABN Amro Bank N.V. as Agent. |  |       |  |        |  |          |  |  |  |  |  |  |  |  | X | 
|        | 10.02 |                     |  | First Amendment to Credit Agreement and Other
    Intercreditor Agreements dated March 1, 2002 by and among
    Bank of America, N.A. as Agent, the various banks
    and other lending institutions which are parties thereto from
    time to time as Lenders and Wells Fargo Bank
    Northwest, National Association as Owner Trustee                                                 |  |       |  |        |  |          |  |  |  |  |  |  |  |  | X | 
|        | 10.03 |                     |  | Consent Letter Agreement regarding Roseville,
    Minnesota Facility dated March 1, 2002 by and among Bank of
    America, N.A. as Agent, VERITAS, VSGC, VOC, VERITAS
    Software Technology Corporation and VERITAS Software Technology
    Holding Corporation                                                                                                                             |  |       |  |        |  |          |  |  |  |  |  |  |  |  | X | 
|        | 99.1  |                     |  | Certification of Chief Executive Officer and
    Chief Financial Officer Pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                          |  |       |  |        |  |          |  |  |  |  |  |  |  |  | X | 

(b) Reports on Form 8-K

|               |         |         |  |             |      |  |  |                                                                                                                   
|-------------- | ------- | ------- |  | ----------- | ---- |  |  | ------------------------------------------------------------------------------------------------------------------
|Date of Report |         | Item(s) |  | Description
|               |         |         |  |            
|               | 4/17/02 |         |  |             | 5, 7 |  |  | VERITAS announced financial results for its first
    quarter ended March 31, 2002 and included the press release.

47