##### 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 September 30,
    2003                                       
|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

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

The number of
shares of the registrants common stock outstanding as of
October 31, 2003 was 427,576,471 shares.



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TABLE OF CONTENTS



|                              |                                                                                               |  |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|INDEX                        
|PART I: FINANCIAL INFORMATION
|                              | Item 1. Condensed Consolidated Financial Statements                                          
|                              | CONDENSED CONSOLIDATED BALANCE SHEETS                                                        
|                              | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS                                              
|                              | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS                                              
|                              | 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                           
|                              | Item 4. Controls and Procedures                                                              
|PART II: OTHER INFORMATION   
|                              | Item 1. Legal Proceedings                                                                    
|                              | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURE                    
|EXHIBIT INDEX                
|EXHIBIT 31.01                
|EXHIBIT 31.02                
|EXHIBIT 32.01                



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##### Table of Contents



VERITAS SOFTWARE CORPORATION






INDEX


|                              |  |                                                                                                                         |    |      |    | 
|----------------------------- |  | ----------------------------------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|                              |  |                                                                                                                         |    | Page
|                              |  |                                                                                                                         |    |     
|PART I: FINANCIAL INFORMATION
|Item 1.                       |  | Condensed Consolidated Financial Statements                                                                             |    |      | 2  | 
|                              |  | Condensed Consolidated Balance Sheets
    as of September 30, 2003 and December 31, 2002                                |    |      | 2  | 
|                              |  | Condensed Consolidated Statements of
    Operations for the Three and Nine Months Ended
    September 30, 2003 and 2002 |    |      | 3  | 
|                              |  | Condensed Consolidated Statements of
    Cash Flows for the Nine Months Ended September 30, 2003 and
    2002           |    |      | 4  | 
|                              |  | Notes to Condensed Consolidated
    Financial Statements                                                                |    |      | 5  | 
|Item 2.                       |  | Managements Discussion and Analysis of
    Financial Condition and                                                     |    |      |    | 
|                              |  | Results of Operations                                                                                                   |    |      | 24 | 
|Item 3.                       |  | Quantitative and Qualitative Disclosures About
    Market Risk                                                          |    |      | 55 | 
|Item 4.                       |  | Controls and Procedures                                                                                                 |    |      | 58 | 
|PART II: OTHER INFORMATION   
|Item 1.                       |  | Legal Proceedings                                                                                                       |    |      | 59 | 
|Item 6.                       |  | Exhibits and Reports on Form 8-K                                                                                        |    |      | 60 | 
|Signature                     |  |                                                                                                                         | 61 |     

1



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##### Table of Contents






PART I: FINANCIAL INFORMATION






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

VERITAS SOFTWARE CORPORATION






CONDENSED CONSOLIDATED BALANCE
SHEETS


|                                            |                                                                                                                                       |                            |           |              |           |   |           |            |           | 
|------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | --------- | ------------ | --------- | - | --------- | ---------- | --------- | 
|                                            |                                                                                                                                       | September 30,              |           | December 31,
|                                            |                                                                                                                                       | 2003                       |           | 2002        
|                                            |                                                                                                                                       |                            |           |             
|                                            |                                                                                                                                       |                           
|                                            |                                                                                                                                       | (Unaudited)               
|                                            |                                                                                                                                       | (In thousands)            
|ASSETS                                     
|Current assets:                             |                                                                                                                                       |                            |           |              |           |   |           |           
|                                            | Cash and cash equivalents                                                                                                             |                            | $         | 722,612      |           |   | $         | 764,062    |          
|                                            | Short-term investments                                                                                                                |                            |           | 1,566,441    |           |   |           | 1,477,259  |          
|                                            | Accounts receivable, net of allowance for
    doubtful accounts of $10,495 at September 30, 2003 and
    $11,308 at December 31, 2002 |                            |           | 144,729      |           |   |           | 170,204    |          
|                                            | Other current assets                                                                                                                  |                            |           | 79,557       |           |   |           | 74,178     |          
|                                            | Deferred income taxes                                                                                                                 |                            |           | 60,808       |           |   |           | 59,995     |          
|                                            |                                                                                                                                       |                            |           |              |           |   |           |           
|                                            |                                                                                                                                       | Total current assets       |           |              | 2,574,147 |   |           |            | 2,545,698 | 
|Property and equipment, net                 |                                                                                                                                       |                            | 568,952   |              |           |   | 230,261   |           
|Other intangibles, net                      |                                                                                                                                       |                            | 90,052    |              |           |   | 72,594    |           
|Goodwill, net                               |                                                                                                                                       |                            | 1,763,056 |              |           |   | 1,196,593 |           
|Other non-current assets                    |                                                                                                                                       |                            | 37,388    |              |           |   | 45,071    |           
|Deferred income taxes                       |                                                                                                                                       |                            | 131,093   |              |           |   | 127,863   |           
|                                            |                                                                                                                                       |                            |           |              |           |   |           |           
|                                            |                                                                                                                                       | $                          | 5,164,688 |              |           | $ | 4,218,080 |           
|                                            |                                                                                                                                       |                            |           |              |           |   |           |           
|                                           
|LIABILITIES AND STOCKHOLDERS
    EQUITY   
|Current liabilities:                        |                                                                                                                                       |                            |           |              |           |   |           |           
|                                            | Accounts payable                                                                                                                      |                            | $         | 29,859       |           |   | $         | 33,823     |          
|                                            | Accrued compensation and benefits                                                                                                     |                            |           | 100,447      |           |   |           | 97,233     |          
|                                            | Accrued acquisition and restructuring costs                                                                                           |                            |           | 33,918       |           |   |           | 37,742     |          
|                                            | Other accrued liabilities                                                                                                             |                            |           | 83,180       |           |   |           | 94,352     |          
|                                            | Income taxes payable                                                                                                                  |                            |           | 203,636      |           |   |           | 123,569    |          
|                                            | Deferred revenue                                                                                                                      |                            |           | 323,020      |           |   |           | 280,314    |          
|                                            |                                                                                                                                       |                            |           |              |           |   |           |           
|                                            |                                                                                                                                       | Total current liabilities  |           |              | 774,060   |   |           |            | 667,033   | 
|Convertible subordinated notes              |                                                                                                                                       |                            | 520,000   |              |           |   | 460,252   |           
|Long-term debt                              |                                                                                                                                       |                            | 380,630   |              |           |   |          |           
|Accrued acquisition and restructuring costs |                                                                                                                                       |                            | 65,053    |              |           |   | 72,402    |           
|Other long-term liabilities                 |                                                                                                                                       |                            | 21,874    |              |           |   | 21,526    |           
|Deferred and other income taxes             |                                                                                                                                       |                            | 113,100   |              |           |   | 113,100   |           
|                                            |                                                                                                                                       |                            |           |              |           |   |           |           
|                                            |                                                                                                                                       | Total liabilities          |           |              | 1,874,717 |   |           |            | 1,334,313 | 
|Stockholders equity:                       |                                                                                                                                       |                            |           |              |           |   |           |           
|                                            | Common stock                                                                                                                          |                            |           | 455          |           |   |           | 431        |          
|                                            | Additional paid-in capital                                                                                                            |                            |           | 6,882,347    |           |   |           | 6,334,581  |          
|                                            | Accumulated deficit                                                                                                                   |                            |           | (1,576,861   | )         |   |           | (1,745,712 | )        
|                                            | Deferred stock-based compensation                                                                                                     |                            |           | (9,678       | )         |   |           |           |          
|                                            | Accumulated other comprehensive income (loss)                                                                                         |                            |           | 12,011       |           |   |           | (3,469     | )        
|                                            | Treasury stock, at cost; 28,609 shares at
    September 30, 2003 and 18,675 shares at December 31,
    2002                           |                            |           | (2,018,303   | )         |   |           | (1,702,064 | )        
|                                            |                                                                                                                                       |                            |           |              |           |   |           |           
|                                            |                                                                                                                                       | Total stockholders equity |           |              | 3,289,971 |   |           |            | 2,883,767 | 
|                                            |                                                                                                                                       |                            |           |              |           |   |           |           
|                                            |                                                                                                                                       | $                          | 5,164,688 |              |           | $ | 4,218,080 |           
|                                            |                                                                                                                                       |                            |           |              |           |   |           |           

See accompanying notes to condensed consolidated
financial statements.

2



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##### Table of Contents



VERITAS SOFTWARE CORPORATION






CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS


|                                                                                     |                                      |                                          |                                                                                        |                   |         |         |         |         |         |         |         |         |           |           |         |         |           |         | 
|------------------------------------------------------------------------------------ | ------------------------------------ | ---------------------------------------- | -------------------------------------------------------------------------------------- | ----------------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | --------- | --------- | ------- | ------- | --------- | ------- | 
|                                                                                     |                                      |                                          |                                                                                        |                  
|                                                                                     |                                      | Three Months Ended                       |                                                                                        | Nine Months Ended
|                                                                                     |                                      | September 30,                            |                                                                                        | September 30,    
|                                                                                     |                                      |                                          |                                                                                        |                  
|                                                                                     |                                      | 2003                                     |                                                                                        | 2002              |         | 2003    |         | 2002   
|                                                                                     |                                      |                                          |                                                                                        |                   |         |         |         |        
|                                                                                     |                                      |                                          |                                                                                        |                  
|                                                                                     |                                      | (Unaudited)                              |                                                                                        | (Unaudited)      
|                                                                                     |                                      |                                         
|                                                                                     |                                      | (In thousands, except per share amounts)
|Net revenue:                                                                         |                                      |                                          |                                                                                        |                   |         |         |         |         |         |         |         |         |           |           |         |        
|                                                                                     | User license fees                    |                                          | $                                                                                      | 290,219           |         |         | $       | 240,699 |         |         | $       | 805,745 |           |           | $       | 742,286 |          
|                                                                                     | Services                             |                                          |                                                                                        | 160,722           |         |         |         | 124,985 |         |         |         | 452,438 |           |           |         | 358,537 |          
|                                                                                     |                                      |                                          |                                                                                        |                   |         |         |         |         |         |         |         |         |           |           |         |        
|                                                                                     |                                      | Total net revenue                        |                                                                                        |                   | 450,941 |         |         |         | 365,684 |         |         |         | 1,258,183 |           |         |         | 1,100,823 |        
|Cost of revenue:                                                                     |                                      |                                          |                                                                                        |                   |         |         |         |         |         |         |         |         |           |           |         |        
|                                                                                     | User license fees                    |                                          |                                                                                        | 11,177            |         |         |         | 8,250   |         |         |         | 34,311  |           |           |         | 26,222  |          
|                                                                                     | Services                             |                                          |                                                                                        | 54,733            |         |         |         | 46,686  |         |         |         | 152,867 |           |           |         | 132,693 |          
|                                                                                     | Amortization of developed technology |                                          |                                                                                        | 5,043             |         |         |         | 16,457  |         |         |         | 30,379  |           |           |         | 50,264  |          
|                                                                                     |                                      |                                          |                                                                                        |                   |         |         |         |         |         |         |         |         |           |           |         |        
|                                                                                     |                                      | Total cost of revenue                    |                                                                                        |                   | 70,953  |         |         |         | 71,393  |         |         |         | 217,557   |           |         |         | 209,179   |        
|                                                                                     |                                      |                                          |                                                                                        |                   |         |         |         |         |         |         |         |         |           |           |         |        
|                                                                                     |                                      |                                          | Gross profit                                                                           |                   |         | 379,988 |         |         |         | 294,291 |         |         |           | 1,040,626 |         |         |           | 891,644 | 
|Operating expenses:                                                                  |                                      |                                          |                                                                                        |                   |         |         |         |         |         |         |         |         |           |           |         |        
|                                                                                     | Selling and marketing                |                                          |                                                                                        | 138,968           |         |         |         | 122,042 |         |         |         | 384,120 |           |           |         | 375,736 |          
|                                                                                     | Research and development             |                                          |                                                                                        | 77,964            |         |         |         | 69,182  |         |         |         | 221,931 |           |           |         | 202,067 |          
|                                                                                     | General and administrative           |                                          |                                                                                        | 38,396            |         |         |         | 35,179  |         |         |         | 115,451 |           |           |         | 102,905 |          
|                                                                                     | Amortization of other intangibles    |                                          |                                                                                        | 2,454             |         |         |         | 18,016  |         |         |         | 32,895  |           |           |         | 54,048  |          
|                                                                                     | In-process research and development  |                                          |                                                                                        |                  |         |         |         |        |         |         |         | 19,400  |           |           |         |        |          
|                                                                                     |                                      |                                          |                                                                                        |                   |         |         |         |         |         |         |         |         |           |           |         |        
|                                                                                     |                                      | Total operating expenses                 |                                                                                        |                   | 257,782 |         |         |         | 244,419 |         |         |         | 773,797   |           |         |         | 734,756   |        
|                                                                                     |                                      |                                          |                                                                                        |                   |         |         |         |         |         |         |         |         |           |           |         |        
|                                                                                     |                                      |                                          | Income from operations                                                                 |                   |         | 122,206 |         |         |         | 49,872  |         |         |           | 266,829   |         |         |           | 156,888 | 
|Interest and other income, net                                                       |                                      |                                          | 16,677                                                                                 |                   |         |         | 10,619  |         |         |         | 36,346  |         |           |           | 37,480  |        
|Interest expense                                                                     |                                      |                                          | (9,249                                                                                 | )                 |         |         | (7,606  | )       |         |         | (24,785 | )       |           |           | (22,988 | )      
|Loss on extinguishment of debt                                                       |                                      |                                          | (4,714                                                                                 | )                 |         |         |        |         |         |         | (4,714  | )       |           |           |        |        
|Loss on strategic investments                                                        |                                      |                                          |                                                                                       |                   |         |         |        |         |         |         | (3,518  | )       |           |           | (14,802 | )      
|                                                                                     |                                      |                                          |                                                                                        |                   |         |         |         |         |         |         |         |         |           |           |         |        
|                                                                                     |                                      |                                          | Income before income taxes and cumulative effect
    of change in accounting principle |                   |         | 124,920 |         |         |         | 52,885  |         |         |           | 270,158   |         |         |           | 156,578 | 
|Provision for income taxes                                                           |                                      |                                          | 41,085                                                                                 |                   |         |         | 16,659  |         |         |         | 95,058  |         |           |           | 49,841  |        
|                                                                                     |                                      |                                          |                                                                                        |                   |         |         |         |         |         |         |         |         |           |           |         |        
|                                                                                     |                                      |                                          | Income before cumulative effect of change in
    accounting principle                  |                   |         | 83,835  |         |         |         | 36,226  |         |         |           | 175,100   |         |         |           | 106,737 | 
|Cumulative effect of change in accounting
    principle, net of tax                  |                                      |                                          | 6,249                                                                                  |                   |         |         |        |         |         |         | 6,249   |         |           |           |        |        
|                                                                                     |                                      |                                          |                                                                                        |                   |         |         |         |         |         |         |         |         |           |           |         |        
|                                                                                     |                                      |                                          | Net income                                                                             |                   | $       | 77,586  |         |         | $       | 36,226  |         |         | $         | 168,851   |         |         | $         | 106,737 | 
|                                                                                     |                                      |                                          |                                                                                        |                   |         |         |         |         |         |         |         |         |           |           |         |        
|Income per share before cumulative effect of
    change in accounting principle:     |                                      |                                          |                                                                                        |                   |         |         |         |         |         |         |         |         |           |           |         |        
|                                                                                     | Basic                                |                                          | $                                                                                      | 0.20              |         |         | $       | 0.09    |         |         | $       | 0.42    |           |           | $       | 0.26    |          
|                                                                                     |                                      |                                          |                                                                                        |                   |         |         |         |         |         |         |         |         |           |           |         |        
|                                                                                     | Diluted                              |                                          | $                                                                                      | 0.19              |         |         | $       | 0.09    |         |         | $       | 0.41    |           |           | $       | 0.25    |          
|                                                                                     |                                      |                                          |                                                                                        |                   |         |         |         |         |         |         |         |         |           |           |         |        
|Cumulative effect of change in accounting
    principle:                             |                                      |                                          |                                                                                        |                   |         |         |         |         |         |         |         |         |           |           |         |        
|                                                                                     | Basic                                |                                          | $                                                                                      | 0.02              |         |         | $       |        |         |         | $       | 0.02    |           |           | $       |        |          
|                                                                                     |                                      |                                          |                                                                                        |                   |         |         |         |         |         |         |         |         |           |           |         |        
|                                                                                     | Diluted                              |                                          | $                                                                                      | 0.01              |         |         | $       |        |         |         | $       | 0.02    |           |           | $       |        |          
|                                                                                     |                                      |                                          |                                                                                        |                   |         |         |         |         |         |         |         |         |           |           |         |        
|Net income per share:                                                                |                                      |                                          |                                                                                        |                   |         |         |         |         |         |         |         |         |           |           |         |        
|                                                                                     | Basic                                |                                          | $                                                                                      | 0.18              |         |         | $       | 0.09    |         |         | $       | 0.40    |           |           | $       | 0.26    |          
|                                                                                     |                                      |                                          |                                                                                        |                   |         |         |         |         |         |         |         |         |           |           |         |        
|                                                                                     | Diluted                              |                                          | $                                                                                      | 0.18              |         |         | $       | 0.09    |         |         | $       | 0.39    |           |           | $       | 0.25    |          
|                                                                                     |                                      |                                          |                                                                                        |                   |         |         |         |         |         |         |         |         |           |           |         |        
|Number of shares used in computing per share
    amounts  basic                     |                                      |                                          | 425,153                                                                                |                   |         |         | 410,898 |         |         |         | 418,314 |         |           |           | 408,827 |        
|                                                                                     |                                      |                                          |                                                                                        |                   |         |         |         |         |         |         |         |         |           |           |         |        
|Number of shares used in computing per share
    amounts  diluted                   |                                      |                                          | 440,815                                                                                |                   |         |         | 416,587 |         |         |         | 430,587 |         |           |           | 418,823 |        
|                                                                                     |                                      |                                          |                                                                                        |                   |         |         |         |         |         |         |         |         |           |           |         |        
|Pro forma amounts with the change in accounting
    principle applied retroactively: |                                      |                                          |                                                                                        |                   |         |         |         |         |         |         |         |         |           |           |         |        
|                                                                                     | Net income                           |                                          |                                                                                        | N/A               |         |         | $       | 35,387  |         |         |         | N/A     |           |           | $       | 104,628 |          
|                                                                                     |                                      |                                          |                                                                                        |                   |         |         |         |         |         |         |         |         |           |           |         |        
|                                                                                     | Net income per share  basic         |                                          |                                                                                        | N/A               |         |         | $       | 0.09    |         |         |         | N/A     |           |           | $       | 0.26    |          
|                                                                                     |                                      |                                          |                                                                                        |                   |         |         |         |         |         |         |         |         |           |           |         |        
|                                                                                     | Net income per share  diluted       |                                          |                                                                                        | N/A               |         |         | $       | 0.08    |         |         |         | N/A     |           |           | $       | 0.25    |          
|                                                                                     |                                      |                                          |                                                                                        |                   |         |         |         |         |         |         |         |         |           |           |         |        

See accompanying notes to condensed consolidated
financial statements.

3



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##### Table of Contents



VERITAS SOFTWARE CORPORATION






CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS


|                                                 |                                                                                       |                                                                                           |                                             |                                                         |         |         |          |            |         |        |          |  
|------------------------------------------------ | ------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------- | ------------------------------------------- | ------------------------------------------------------- | ------- | ------- | -------- | ---------- | ------- | ------ | -------- | -
|                                                 |                                                                                       |                                                                                          
|                                                 |                                                                                       | Nine Months Ended                                                                        
|                                                 |                                                                                       | September 30,                                                                            
|                                                 |                                                                                       |                                                                                          
|                                                 |                                                                                       | 2003                                                                                      |                                             | 2002                                                   
|                                                 |                                                                                       |                                                                                           |                                             |                                                        
|                                                 |                                                                                       |                                                                                          
|                                                 |                                                                                       | (Unaudited)                                                                              
|                                                 |                                                                                       | (In thousands)                                                                           
|Cash flows from operating activities:            |                                                                                       |                                                                                           |                                             |                                                         |         |         |          |           
|                                                 | Net income                                                                            |                                                                                           | $                                           | 168,851                                                 |         |         | $        | 106,737    |        
|                                                 | Adjustments to reconcile net income to net cash
    provided by operating activities: |                                                                                           |                                             |                                                         |         |         |          |            |        
|                                                 |                                                                                       | Cumulative effect of change in accounting
    principle, net of tax                       |                                             |                                                         | 6,249   |         |          |            |        |       
|                                                 |                                                                                       | Depreciation and amortization                                                             |                                             |                                                         | 83,546  |         |          |            | 80,087  |       
|                                                 |                                                                                       | Amortization of other intangibles                                                         |                                             |                                                         | 32,895  |         |          |            | 54,048  |       
|                                                 |                                                                                       | Amortization of developed technology                                                      |                                             |                                                         | 30,379  |         |          |            | 50,264  |       
|                                                 |                                                                                       | Amortization of original issue discount on
    convertible notes                          |                                             |                                                         | 10,696  |         |          |            | 12,099  |       
|                                                 |                                                                                       | In-process research and development                                                       |                                             |                                                         | 19,400  |         |          |            |        |       
|                                                 |                                                                                       | Provision for doubtful accounts                                                           |                                             |                                                         | 1,446   |         |          |            | 4,017   |       
|                                                 |                                                                                       | Stock-based compensation                                                                  |                                             |                                                         | 1,405   |         |          |            |        |       
|                                                 |                                                                                       | Tax benefits from stock plans                                                             |                                             |                                                         | 24,869  |         |          |            | 19,593  |       
|                                                 |                                                                                       | Loss on extinguishment of debt                                                            |                                             |                                                         | 4,714   |         |          |            |        |       
|                                                 |                                                                                       | Loss on strategic investments                                                             |                                             |                                                         | 3,518   |         |          |            | 14,802  |       
|                                                 |                                                                                       | Gain on sale of assets                                                                    |                                             |                                                         | (824    | )       |          |            | (62     | )     
|                                                 |                                                                                       | Deferred income taxes                                                                     |                                             |                                                         | (21,545 | )       |          |            | (39,437 | )     
|                                                 |                                                                                       | Changes in operating assets and liabilities, net
    of effects of business acquisitions: |                                             |                                                         |         |         |          |            |         |       
|                                                 |                                                                                       |                                                                                           | Accounts receivable                         |                                                         |         | 31,766  |          |            |         | 57,490 |         
|                                                 |                                                                                       |                                                                                           | Other assets                                |                                                         |         | (4,283  | )        |            |         | 9,980  |         
|                                                 |                                                                                       |                                                                                           | Accounts payable                            |                                                         |         | (12,052 | )        |            |         | (2,228 | )       
|                                                 |                                                                                       |                                                                                           | Accrued compensation and benefits           |                                                         |         | (8,158  | )        |            |         | (8,075 | )       
|                                                 |                                                                                       |                                                                                           | Accrued acquisition and restructuring costs |                                                         |         | (19,621 | )        |            |         | (1,414 | )       
|                                                 |                                                                                       |                                                                                           | Other accrued liabilities                   |                                                         |         | (10,694 | )        |            |         | 4,533  |         
|                                                 |                                                                                       |                                                                                           | Income taxes payable                        |                                                         |         | 73,227  |          |            |         | 60,570 |         
|                                                 |                                                                                       |                                                                                           | Deferred revenue                            |                                                         |         | 39,376  |          |            |         | 17,663 |         
|                                                 |                                                                                       |                                                                                           |                                             |                                                         |         |         |          |           
|                                                 |                                                                                       |                                                                                           |                                             | Net cash provided by operating activities               |         |         | 455,160  |            |         |        | 440,667  |  
|Cash flows from investing activities:            |                                                                                       |                                                                                           |                                             |                                                         |         |         |          |           
|                                                 | Purchases of investments                                                              |                                                                                           |                                             | (1,367,387                                              | )       |         |          | (1,258,682 | )      
|                                                 | Sales and maturities of investments                                                   |                                                                                           |                                             | 1,382,723                                               |         |         |          | 1,122,807  |        
|                                                 | Purchases of property and equipment                                                   |                                                                                           |                                             | (58,437                                                 | )       |         |          | (83,704    | )      
|                                                 | Business acquisitions, net of cash acquired                                           |                                                                                           |                                             | (398,650                                                | )       |         |          |           |        
|                                                 | Payments made for prior year business and
    technology acquisitions                 |                                                                                           |                                             | (4,238                                                  | )       |         |          | (7,267     | )      
|                                                 |                                                                                       |                                                                                           |                                             |                                                         |         |         |          |           
|                                                 |                                                                                       |                                                                                           |                                             | Net cash used in investing activities                   |         |         | (445,989 | )          |         |        | (226,846 | )
|Cash flows from financing activities:            |                                                                                       |                                                                                           |                                             |                                                         |         |         |          |           
|                                                 | Net proceeds from issuance of convertible
    subordinated notes                      |                                                                                           |                                             | 508,300                                                 |         |         |          |           |        
|                                                 | Redemption of convertible subordinated notes                                          |                                                                                           |                                             | (391,671                                                | )       |         |          |           |        
|                                                 | Repurchase of common stock                                                            |                                                                                           |                                             | (316,239                                                | )       |         |          |           |        
|                                                 | Proceeds from issuance of common stock                                                |                                                                                           |                                             | 132,510                                                 |         |         |          | 80,422     |        
|                                                 |                                                                                       |                                                                                           |                                             |                                                         |         |         |          |           
|                                                 |                                                                                       |                                                                                           |                                             | Net cash provided by (used in) financing
    activities |         |         | (67,100  | )          |         |        | 80,422   |  
|Effect of exchange rate changes                  |                                                                                       |                                                                                           | 16,479                                      |                                                         |         |         | (1,091   | )         
|                                                 |                                                                                       |                                                                                           |                                             |                                                         |         |         |          |           
|                                                 | Net increase (decrease) in cash and cash
    equivalents                              |                                                                                           |                                             | (41,450                                                 | )       |         |          | 293,152    |        
|Cash and cash equivalents at beginning of period |                                                                                       |                                                                                           | 764,062                                     |                                                         |         |         | 538,419  |           
|                                                 |                                                                                       |                                                                                           |                                             |                                                         |         |         |          |           
|                                                 |                                                                                       | Cash and cash equivalents at end of period                                                |                                             | $                                                       | 722,612 |         |          | $          | 831,571 |       
|                                                 |                                                                                       |                                                                                           |                                             |                                                         |         |         |          |           
|Supplemental disclosures:                        |                                                                                       |                                                                                           |                                             |                                                         |         |         |          |           
|                                                 | Cash paid for interest                                                                |                                                                                           | $                                           | 10,570                                                  |         |         | $        | 10,304     |        
|                                                 |                                                                                       |                                                                                           |                                             |                                                         |         |         |          |           
|                                                 | Cash paid for income taxes                                                            |                                                                                           | $                                           | 19,748                                                  |         |         | $        | 14,000     |        
|                                                 |                                                                                       |                                                                                           |                                             |                                                         |         |         |          |           
|Supplemental schedule of non-cash transactions:  |                                                                                       |                                                                                           |                                             |                                                         |         |         |          |           
|                                                 | Increase in property and equipment upon adoption
    of FIN 46                        |                                                                                           | $                                           | 366,849                                                 |         |         | $        |           |        
|                                                 |                                                                                       |                                                                                           |                                             |                                                         |         |         |          |           
|                                                 | Increase in long-term debt upon adoption of FIN 46                                    |                                                                                           | $                                           | 380,630                                                 |         |         | $        |           |        
|                                                 |                                                                                       |                                                                                           |                                             |                                                         |         |         |          |           
|                                                 | Issuance of common stock for conversion of notes                                      |                                                                                           | $                                           | 80,038                                                  |         |         | $        | 500        |        
|                                                 |                                                                                       |                                                                                           |                                             |                                                         |         |         |          |           

See accompanying notes to condensed consolidated
financial statements.

4



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##### Table of Contents



VERITAS SOFTWARE CORPORATION






NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS


(Unaudited)


1.     Basis of
Presentation

The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by
generally accepted accounting principles for annual financial
statements. In the opinion of management, all adjustments,
consisting only of normal recurring adjustments, considered
necessary for a fair presentation have been included. The
results for the interim periods presented are not necessarily
indicative of the results that may be expected for any future
period. The following information should be read in conjunction
with the consolidated financial statements and accompanying
notes included in VERITAS Software Corporations Annual
Report on Form 10-K for the year ended December 31,
2002.

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 to current period financial presentation.

4.     Accounting for
Stock-Based Compensation

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

5



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##### Table of Contents



VERITAS SOFTWARE CORPORATION


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

of accounting under SFAS No. 123,
Accounting for Stock-Based Compensation (in thousands,
except per share amounts):

|                                 |             |                                                                                                                                 |   |                   |        |      |   |         |        |  |   |         |         |  |   |          |         | 
|-------------------------------- | ----------- | ------------------------------------------------------------------------------------------------------------------------------- | - | ----------------- | ------ | ---- | - | ------- | ------ |  | - | ------- | ------- |  | - | -------- | ------- | 
|                                 |             |                                                                                                                                 |   |                  
|                                 |             | Three Months Ended                                                                                                              |   | Nine Months Ended
|                                 |             | September 30,                                                                                                                   |   | September 30,    
|                                 |             |                                                                                                                                 |   |                  
|                                 |             | 2003                                                                                                                            |   | 2002              |        | 2003 |   | 2002   
|                                 |             |                                                                                                                                 |   |                   |        |      |   |        
|Net income (loss):               |             |                                                                                                                                 |   |                   |        |      |   |         |        |  |   |         |         |  |   |         
|                                 | As reported |                                                                                                                                 | $ | 77,586            |        |      | $ | 36,226  |        |  | $ | 168,851 |         |  | $ | 106,737  |        
|                                 | Add:        |                                                                                                                                 |   |                   |        |      |   |         |        |  |   |         |         |  |   |          |        
|                                 |             | Stock-based employee compensation expense
    included in net income, net of tax                                                |   |                   | 190    |      |   |         |       |  |   |         | 941     |  |   |          |        | 
|                                 | Less:       |                                                                                                                                 |   |                   |        |      |   |         |        |  |   |         |         |  |   |          |        
|                                 |             | Total stock-based employee compensation expense
    determined under the fair value based method for all awards, net
    of tax |   |                   | 76,639 |      |   |         | 70,730 |  |   |         | 238,174 |  |   |          | 213,544 | 
|                                 |             |                                                                                                                                 |   |                   |        |      |   |         |        |  |   |         |         |  |   |         
|                                 | Pro forma   |                                                                                                                                 | $ | 1,137             |        |      | $ | (34,504 | )      |  | $ | (68,382 | )       |  | $ | (106,807 | )      
|                                 |             |                                                                                                                                 |   |                   |        |      |   |         |        |  |   |         |         |  |   |         
|Basic income (loss) per share:   |             |                                                                                                                                 |   |                   |        |      |   |         |        |  |   |         |         |  |   |         
|                                 | As reported |                                                                                                                                 | $ | 0.18              |        |      | $ | 0.09    |        |  | $ | 0.40    |         |  | $ | 0.26     |        
|                                 |             |                                                                                                                                 |   |                   |        |      |   |         |        |  |   |         |         |  |   |         
|                                 | Pro forma   |                                                                                                                                 | $ |                  |        |      | $ | (0.08   | )      |  | $ | (0.16   | )       |  | $ | (0.26    | )      
|                                 |             |                                                                                                                                 |   |                   |        |      |   |         |        |  |   |         |         |  |   |         
|Diluted income (loss) per share: |             |                                                                                                                                 |   |                   |        |      |   |         |        |  |   |         |         |  |   |         
|                                 | As reported |                                                                                                                                 | $ | 0.18              |        |      | $ | 0.09    |        |  | $ | 0.39    |         |  | $ | 0.25     |        
|                                 |             |                                                                                                                                 |   |                   |        |      |   |         |        |  |   |         |         |  |   |         
|                                 | Pro forma   |                                                                                                                                 | $ |                  |        |      | $ | (0.08   | )      |  | $ | (0.16   | )       |  | $ | (0.26    | )      
|                                 |             |                                                                                                                                 |   |                   |        |      |   |         |        |  |   |         |         |  |   |         

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

|                               |  |                    |            |                   |  |      |            |      |  |  |            |  |  |  |            | 
|------------------------------ |  | ------------------ | ---------- | ----------------- |  | ---- | ---------- | ---- |  |  | ---------- |  |  |  | ---------- | 
|                               |  |                    |            |                  
|                               |  | Three Months Ended |            | Nine Months Ended
|                               |  | September 30,      |            | September 30,    
|                               |  |                    |            |                  
|                               |  | 2003               |            | 2002              |  | 2003 |            | 2002
|                               |  |                    |            |                   |  |      |            |     
|Risk-free interest rate        |  |                    | 2.65%      |                   |  |      | 3.82%      |      |  |  | 2.69%      |  |  |  | 3.94%      | 
|Dividend yield                 |  |                    | 0%         |                   |  |      | 0%         |      |  |  | 0%         |  |  |  | 0%         | 
|Weighted average expected life |  |                    | 4.0  years |                   |  |      | 5.0  years |      |  |  | 4.6  years |  |  |  | 5.0  years | 
|Volatility of common stock     |  |                    | 90%        |                   |  |      | 90%        |      |  |  | 90%        |  |  |  | 90%        | 

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

|                               |  |                    |                 |                   |  |      |                 |      |  |  |                 |  |  |  |                 | 
|------------------------------ |  | ------------------ | --------------- | ----------------- |  | ---- | --------------- | ---- |  |  | --------------- |  |  |  | --------------- | 
|                               |  |                    |                 |                  
|                               |  | Three Months Ended |                 | Nine Months Ended
|                               |  | September 30,      |                 | September 30,    
|                               |  |                    |                 |                  
|                               |  | 2003               |                 | 2002              |  | 2003 |                 | 2002
|                               |  |                    |                 |                   |  |      |                 |     
|Risk-free interest rate        |  |                    | 1.06-1.87%      |                   |  |      | 1.65-2.28%      |      |  |  | 1.06-1.87%      |  |  |  | 1.65-2.98%      | 
|Dividend yield                 |  |                    | 0%              |                   |  |      | 0%              |      |  |  | 0%              |  |  |  | 0%              | 
|Weighted average expected life |  |                    | 6 to 24  months |                   |  |      | 6 to 24  months |      |  |  | 6 to 24  months |  |  |  | 6 to 24  months | 
|Volatility of common stock     |  |                    | 90%             |                   |  |      | 90%             |      |  |  | 90%             |  |  |  | 90%             | 

6



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##### Table of Contents



VERITAS SOFTWARE CORPORATION


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

5.     New Accounting
Pronouncements

In May 2003, the Financial Accounting Standards
Board (FASB) issued SFAS No. 150, Accounting
for Certain Financial Instruments with Characteristics of both
Liabilities and Equity. SFAS No. 150 establishes
standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities
and equity. SFAS No. 150 is effective for financial
instruments entered into or modified after May 31, 2003 and
otherwise is effective on July 1, 2003. The adoption of
SFAS No. 150 did not have a material effect on the
Companys financial position, results of operations or cash
flows.

In April 2003, the FASB issued SFAS No. 149,
Amendment of Statement 133 on Derivative Instruments and
Hedging Activities, which amends and clarifies financial
accounting and reporting for derivative instruments, including
certain derivative instruments embedded in other contracts and
for hedging activities under SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities. In
particular, SFAS No. 149 (1) clarifies under what
circumstances a contract with an initial net investment meets
the characteristic of a derivative, (2) clarifies when a
derivative contains a financing component, (3) amends the
definition of an underlying to conform it to language used in
FASB Interpretation No. (FIN) 45,
Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others, and (4) amends certain other existing
pronouncements. SFAS No. 149 is effective for contracts
entered into or modified after June 30, 2003 and for
hedging relationships designated after June 30, 2003, with
certain exceptions. The adoption of SFAS No. 149 did not
have a material effect on the Companys financial position,
results of operations or cash flows.

In January 2003, the FASB issued FIN 46,
Consolidation of Variable Interest Entities, as amended,
which addresses the consolidation of variable interest entities.
FIN 46 provides guidance for determining when an entity that is
the primary beneficiary of a variable interest entity or
equivalent structure should consolidate the variable interest
entity into the entitys financial statements. The
provisions of FIN 46 are to be applied no later than the
beginning of the first interim or annual reporting period
beginning after December 15, 2003 for variable interest
entities created before February 1, 2003. The Company
currently has three build-to-suit operating leases, commonly
referred to as synthetic leases, which were entered into prior
to February 1, 2003. Each synthetic lease is owned by a
trust that has no voting rights, no employees, no financing
activity other than the lease with the Company, no ability to
absorb losses and no right to participate in gains realized on
the sale of the related property. The Company has determined
that the trusts under the leasing structures qualify as variable
interest entities for purposes of FIN 46. Consequently, the
Company is considered the primary beneficiary and consolidated
the trusts into the Companys financial statements
beginning July 1, 2003. As a result of consolidating these
entities in the third quarter of 2003, the Company reported a
cumulative effect of change in accounting principle in
accordance with APB 20, Accounting Changes, with a charge
of $6.2 million which equals the amount of depreciation
expense that would have been recorded had these trusts been
consolidated from the date the properties were available for
occupancy, net of tax. In addition, on July 1, 2003, the
Company recorded property and equipment, net of accumulated
depreciation, equal to $366.8 million, long-term debt in
the amount of $369.2 million and non-controlling interest
of $11.4 million for a total of $380.6 million of
long-term debt on the balance sheet. Depreciation expense
related to these properties is approximately $1.6 million
per quarter and approximately $4.2 million per quarter of
rent expense previously classified as operating expense has been
classified as interest expense in the statements of operations
beginning July 1, 2003.

In November 2002, the FASB issued FIN 45,
Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others. FIN 45 requires that the Company recognize the fair
value for guarantee and indemnification arrangements issued or
modified by the Company after December 31, 2002, if these
arrangements are within the scope of the Interpretation. In
addition, the Company must continue to monitor the conditions
that are subject to the guarantees and indemnifications, as
required under previously existing generally accepted accounting
principles, in order to identify if a loss has

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VERITAS SOFTWARE CORPORATION


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

occurred. If the Company determines it is
probable that a loss has occurred, then any such estimable loss
would be recognized under those guarantees and indemnifications.
Some of the software licenses granted by the Company contain
provisions that indemnify licensees of the Companys
software from damages and costs resulting from claims alleging
that the Companys software infringes the intellectual
property rights of a third party. The Company has historically
received only a limited number of requests for indemnification
under these provisions and has not been required to make
material payments pursuant to these provisions. Accordingly, the
Company has not recorded a liability related to these
indemnification provisions. The Company does not have any
guarantees or indemnification arrangements other than the
indemnification clause in some of its software licenses, the
guarantee on a credit facility discussed in Note 16 and the
guarantee on its three build-to-suit lease agreements for
buildings in Mountain View, Roseville and Milpitas discussed in
Note 17. The Company adopted FIN 45 effective
January 1, 2003. The adoption of FIN 45 did not have a
material impact on the Companys financial position,
results of operations or cash flows.

In June 2002, the FASB issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal
Activities. SFAS No. 146 supersedes Emerging Issues
Task Force (EITF) Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and other
Costs to Exit an Activity (Including Certain Costs Incurred in a
Restructuring). SFAS No. 146 addresses the recognition,
measurement, and reporting of costs that are associated with
exit and disposal activities. These costs include those related
to terminating a contract that is not a capital lease and
termination benefits that employees who are involuntarily
terminated receive under the terms of a one-time benefit
arrangement that is not an ongoing benefit arrangement or an
individual deferred-compensation contract. The provisions of
SFAS No. 146 require that the liability for costs
associated with an exit or disposal activity be recorded at fair
value and that they be recognized when the liability is incurred
rather than at the date of the commitment to an exit plan as
prescribed under EITF Issue No. 94-3. SFAS No. 146 is
applied prospectively for exit or disposal activities that are
initiated after December 31, 2002 and accordingly,
liabilities recognized prior to the initial application of SFAS
No. 146 will continue to be accounted for in accordance
with EITF Issue No. 94-3. The Company adopted SFAS
No. 146 effective January 1, 2003.

In June 2001, the FASB issued SFAS No. 143,
Accounting for Asset Retirement Obligations. SFAS
No. 143 addresses the financial accounting and reporting
for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs.
SFAS No. 143 applies to legal obligations associated with
the retirement of long-lived assets that result from the
acquisition, construction, development or normal use of the
assets. SFAS No. 143 requires that the fair value of a
liability for an asset retirement obligation be recognized in
the period in which it is incurred if a reasonable estimate of
fair value can be made. The fair value of the liability is added
to the carrying amount of the associated asset, and this
additional carrying amount is expensed over the life of the
asset. The Company adopted SFAS No. 143 effective
January 1, 2003. The adoption of SFAS No. 143 did not
have a material effect on the Companys financial position,
results of operations or cash flows.

8



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##### Table of Contents



VERITAS SOFTWARE CORPORATION


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

6.     Net Income per
Share

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

|                             |                                                                                      |                    |      |                   |  |      |      |         |  |   |      |         |  |   |      |         | 
|---------------------------- | ------------------------------------------------------------------------------------ | ------------------ | ---- | ----------------- |  | ---- | ---- | ------- |  | - | ---- | ------- |  | - | ---- | ------- | 
|                             |                                                                                      |                    |      |                  
|                             |                                                                                      | Three Months Ended |      | Nine Months Ended
|                             |                                                                                      | September 30,      |      | September 30,    
|                             |                                                                                      |                    |      |                  
|                             |                                                                                      | 2003               |      | 2002              |  | 2003 |      | 2002   
|                             |                                                                                      |                    |      |                   |  |      |      |        
|Numerator:                   |                                                                                      |                    |      |                   |  |      |      |         |  |   |      |         |  |   |      |        
|                             | Net income                                                                           |                    | $    | 77,586            |  |      | $    | 36,226  |  |   | $    | 168,851 |  |   | $    | 106,737 | 
|                             |                                                                                      |                    |      |                   |  |      |      |         |  |   |      |         |  |   |      |        
|Denominator:                 |                                                                                      |                    |      |                   |  |      |      |         |  |   |      |         |  |   |      |        
|                             | Denominator for basic net income per
    share  weighted-average shares outstanding |                    |      | 425,153           |  |      |      | 410,898 |  |   |      | 418,314 |  |   |      | 408,827 | 
|                             | Potential common shares                                                              |                    |      | 15,662            |  |      |      | 5,689   |  |   |      | 12,273  |  |   |      | 9,996   | 
|                             |                                                                                      |                    |      |                   |  |      |      |         |  |   |      |         |  |   |      |        
|                             | Denominator for diluted net income per share                                         |                    |      | 440,815           |  |      |      | 416,587 |  |   |      | 430,587 |  |   |      | 418,823 | 
|                             |                                                                                      |                    |      |                   |  |      |      |         |  |   |      |         |  |   |      |        
|Basic net income per share   |                                                                                      | $                  | 0.18 |                   |  | $    | 0.09 |         |  | $ | 0.40 |         |  | $ | 0.26 |        
|                             |                                                                                      |                    |      |                   |  |      |      |         |  |   |      |         |  |   |      |        
|Diluted net income per share |                                                                                      | $                  | 0.18 |                   |  | $    | 0.09 |         |  | $ | 0.39 |         |  | $ | 0.25 |        
|                             |                                                                                      |                    |      |                   |  |      |      |         |  |   |      |         |  |   |      |        

For the three and nine months ended
September 30, 2003 and 2002, potential common shares
consist of employee stock options using the treasury method. The
following table sets forth the potential common shares that were
excluded from the net income per share computations as their
effect would be antidilutive (in thousands):

|                                         |  |                    |        |                   |  |      |        |      |  |  |        |  |  |  |        | 
|---------------------------------------- |  | ------------------ | ------ | ----------------- |  | ---- | ------ | ---- |  |  | ------ |  |  |  | ------ | 
|                                         |  |                    |        |                  
|                                         |  | Three Months Ended |        | Nine Months Ended
|                                         |  | September 30,      |        | September 30,    
|                                         |  |                    |        |                  
|                                         |  | 2003               |        | 2002              |  | 2003 |        | 2002
|                                         |  |                    |        |                   |  |      |        |     
|Employee stock options outstanding(1)    |  |                    | 24,196 |                   |  |      | 44,723 |      |  |  | 34,938 |  |  |  | 35,547 | 
|5.25% convertible subordinated notes(2)  |  |                    |       |                   |  |      | 6,695  |      |  |  |       |  |  |  | 6,695  | 
|1.856% convertible subordinated notes(2) |  |                    |       |                   |  |      | 12,981 |      |  |  |       |  |  |  | 12,981 | 
|0.25% convertible subordinated notes(3)  |  |                    | 11,274 |                   |  |      |       |      |  |  | 11,274 |  |  |  |       | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | For the three months ended September 30,
    2003 and 2002, 24,196 and 44,723 shares issuable upon exercise
    of employee stock options, respectively, and for the nine months
    ended September 30, 2003 and 2002, 34,938 and 35,547 shares
    issuable upon exercise of employee stock options, respectively,
    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 respective periods, and therefore the effect is
    antidilutive.
|   
|(2) | For the three and nine months ended
    September 30, 2002, 6,695 potential common shares issuable
    upon the conversion of the Companys 5.25% convertible
    subordinated notes and 12,981 potential common shares issuable
    upon the conversion of the Companys 1.856% convertible
    subordinated notes, respectively, were excluded from the
    computation of diluted net income per share because the impact
    of adding back after tax interest expense associated with the
    convertible subordinated notes, and including the potential
    common shares, would be antidilutive.
|   
|(3) | For the three and nine months ended
    September 30, 2003, 11,274 potential common shares related
    to the Companys 0.25% convertible subordinated notes were
    excluded from the computation of diluted net income per share
    because the impact would be antidilutive.                                                                                                                                                                                                                                                                                                                       

9



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##### Table of Contents



VERITAS SOFTWARE CORPORATION


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The weighted average exercise prices of the
employee stock options with exercise prices exceeding the
average fair value of the Companys common stock was $75.49
and $61.72 per share for the three and nine months ended
September 30, 2003, respectively. The weighted average
exercise prices of the employee stock options with exercise
prices exceeding the average fair value of the Companys
common stock was $55.58 and $66.04 per share for the three and
nine months ended September 30, 2002, respectively.

7.     Business
Combinations



| |                       
| | ----------------------
| | Geodesic Systems, Inc.

On August 1, 2003, the Company acquired
selected assets of Geodesic Systems, Inc.
(Geodesic), a privately held provider of application
reliability management software. The acquisition was accounted
for using the purchase accounting method. Purchased developed
technology and patents are being amortized over a period of
three years. The acquisition of Geodesic was not material to the
Companys condensed consolidated financial statements.



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

On June 30, 2003, the Company acquired all
of the outstanding common stock of Precise Software Solutions
Ltd. (Precise), a provider of application
performance management products. The Company acquired Precise in
order to expand its product and service offerings across
storage, databases and application management. The Precise
acquisition was accounted for using the purchase method of
accounting for total purchase consideration of
$715.5 million, which included 7.3 million shares of
common stock valued at $210.6 million, $397.8 million
of cash, $94.0 million relating to the assumption of
Precise options exercisable for 4.4 million shares of the
Companys common stock and $13.1 million of
acquisition-related costs. The fair value of the Companys
common stock issued was determined using an average price of
$28.68, which was the average trading price from June 25,
2003 through July 1, 2003, the five trading days
surrounding the date the merger consideration was finalized. The
fair value of the Companys stock options assumed was
determined using the Black-Scholes option pricing model and the
following assumptions: estimated contractual life of six months
to five years, risk-free interest rate of 0.96% to 2.49%,
expected volatility of 90% and no expected dividend yield. Upon
the assumption by the Company of the outstanding Precise
options, each Precise option became exercisable for 0.6741
shares of the Companys common stock.

10



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VERITAS SOFTWARE CORPORATION


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Under the purchase method of accounting, the
total estimated purchase price was allocated to Precises
net tangible and identifiable intangible assets based upon their
estimated fair value as of the date of the completion of the
acquisition. The following represents the allocation of the
aggregate purchase price to the acquired net assets of Precise
(in thousands):

|                                                  |       |   |         |         | 
|------------------------------------------------- | ----- | - | ------- | ------- | 
|Cash, cash equivalents and short-term investments |       | $ | 149,627 |        
|Other current assets                              |       |   | 11,527  |        
|Long-term assets                                  |       |   | 8,629   |        
|Current liabilities                               |       |   | (29,103 | )      
|Goodwill                                          |       |   | 512,452 |        
|Developed technology                              |       |   | 27,641  |        
|Customer contracts                                |       |   | 15,200  |        
|Patented technology                               |       |   | 11,600  |        
|Other intangible assets                           |       |   | 7,500   |        
|Unearned stock-based compensation                 |       |   | 7,317   |        
|In-process research and development               |       |   | 15,300  |        
|Net deferred and other income taxes payable       |       |   | (22,232 | )      
|                                                  |       |   |         |        
|                                                  | Total |   | $       | 715,458 | 
|                                                  |       |   |         |        

The Company does not expect future adjustments to
the purchase price allocation to be material. Goodwill
represents the excess of the purchase price over the fair value
of tangible and identifiable intangible assets acquired.
Goodwill is not amortized which is consistent with the guidance
in SFAS No. 142, Goodwill and Other Intangible
Assets. Developed technology, customer contracts and
patented technology are being amortized over their estimated
useful lives of four years and other intangible assets are being
amortized over their estimated useful lives of one to four
years. The weighted average amortization period for all
purchased intangible assets is 3.7 years.

In connection with the acquisition of Precise,
the Company allocated approximately $15.3 million of the
purchase price to in-process technology that has not yet reached
technological feasibility and has no alternative future use.
This amount has been expensed as a non-recurring, non-tax
deductible charge in the statements of operations for the nine
months ended September 30, 2003.

In order to value purchased in-process research
and development (IPR&D), research projects in
areas for which technological feasibility had not been
established were identified. The value of these projects was
determined by estimating the expected cash flows from the
projects once commercially viable and discounting the net cash
flows back to their present value, using adjusted discount rates
based on the percentage of completion of the in-process projects.

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

The estimated revenues are based on the
Companys projection of each in-process project and the
business projections were compared and found to be consistent
with industry analysts forecasts of growth in
substantially all of the relevant markets. Estimated total
revenues from the IPR&D product areas are expected to peak
in the year ending December 31, 2005 and decline from 2006
into 2007 as other new products are expected to become available.

11



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##### Table of Contents



VERITAS SOFTWARE CORPORATION


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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

Discount Rate.Discounting the expected net cash
flows back to their present value is based on the industry
weighted average cost of capital (WACC). The Company
believes the industry WACC is approximately 15%. The discount
rate used to discount the expected net cash flows from IPR&D
is 28%. The discount rate used is higher than the industry WACC
due to inherent uncertainties surrounding the successful
development of IPR&D, market acceptance of the technology,
the useful life of such technology and the uncertainty of
technological advances which could potentially impact the
estimates described above.

Percentage of Completion.The percentage of completion for
in-process Precise technology was determined using costs
incurred to date on each project as compared to the remaining
research and development to be completed as well as major
milestones to bring each project to technological feasibility.
The percentage of completion for projects under development
ranged from 40-65%.

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

Acquisition-related costs of $13.1 million
consist of $9.2 million associated with investment banking
and other professional fees, $3.3 million for terminating
and satisfying existing lease commitments and $0.6 million
for severance-related costs. Total cash outlays for
acquisition-related costs were approximately $8.5 million
for investment banking and other professional fees,
$0.3 million for severance and less than $0.1 million
for leases through September 30, 2003.

The results of operations of Precise are included
in the Companys consolidated financial statements from the
date of acquisition. The following table presents pro forma
results of operations and gives effect to the acquisition of
Precise as if the acquisition was consummated at the beginning
of each fiscal year. The unaudited pro forma results of
operations are not necessarily indicative of what would have
occurred had the acquisition been made as of the beginning of
each period or of the results that may occur in the future. Net
income for each period presented excludes the write-off of
acquired in-process research and development of
$15.3 million and includes amortization of intangible
assets related to the acquisition of $4.7 million per
quarter and amortization of deferred compensation of
$0.6 million per quarter. The unaudited pro forma
information is as follows (in thousands, except per share
amounts):

|                                                                      |  |                    |         |                   |  |      |         |      |  |   |           |  |  |   |           | 
|--------------------------------------------------------------------- |  | ------------------ | ------- | ----------------- |  | ---- | ------- | ---- |  | - | --------- |  |  | - | --------- | 
|                                                                      |  |                    |         |                  
|                                                                      |  | Three Months Ended |         | Nine Months Ended
|                                                                      |  | September 30,      |         | September 30,    
|                                                                      |  |                    |         |                  
|                                                                      |  | 2003               |         | 2002              |  | 2003 |         | 2002
|                                                                      |  |                    |         |                   |  |      |         |     
|Total net revenue                                                     |  | $                  | 450,941 |                   |  | $    | 385,034 |      |  | $ | 1,290,025 |  |  | $ | 1,155,487 | 
|Income before cumulative effect of change in
    accounting principle |  | $                  | 83,835  |                   |  | $    | 34,101  |      |  | $ | 160,360   |  |  | $ | 99,526    | 
|Net income                                                            |  | $                  | 77,586  |                   |  | $    | 34,101  |      |  | $ | 154,111   |  |  | $ | 99,526    | 
|Net income per share  basic                                          |  | $                  | 0.18    |                   |  | $    | 0.08    |      |  | $ | 0.37      |  |  | $ | 0.24      | 
|Net income per share  diluted                                        |  | $                  | 0.18    |                   |  | $    | 0.08    |      |  | $ | 0.35      |  |  | $ | 0.23      | 



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

On January 27, 2003, the Company acquired
all of the outstanding capital stock of Jareva Technologies,
Inc. (Jareva), a privately held provider of
automated server provisioning products that enable businesses to
automatically deploy additional servers without manual
intervention. The Company acquired Jareva to integrate
Jarevas technology into the Companys software
products to enable the Companys customers to optimize
their investments in server hardware by deploying new server
resources on demand. The Jareva acquisition was accounted for
using the purchase accounting method for total purchase
consideration of

12



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##### Table of Contents



VERITAS SOFTWARE CORPORATION


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

$68.7 million, which included
$58.7 million of cash, $6.8 million relating to the
assumption of options exercisable for 426,766 shares of the
Companys common stock and $3.2 million of
acquisition-related costs. The purchase price was allocated to
goodwill of $51.3 million, developed technology of
$9.1 million, other intangibles of $1.9 million,
in-process research and development of $4.1 million, net
deferred tax liabilities of $6.1 million, deferred
stock-based compensation of $4.6 million and net tangible
assets of $3.8 million. The weighted average amortization
period for all purchased intangible assets is 3.3 years.
The acquired in-process research and development of
$4.1 million was written off and the related charge is
included in income from operations for the nine months ended
September 30, 2003. Acquisition-related costs consist of
$2.7 million associated with terminating and satisfying
remaining lease commitments, partially offset by sublease income
net of related sublease costs and direct transaction costs of
$0.5 million for legal and other professional fees. Total
cash outlays for acquisition-related costs were
$1.0 million through September 30, 2003. The results
of operations of Jareva are included in the Companys
consolidated financial statements from the date of acquisition.
The pro forma impact on the Companys results of operations
is not significant.



|   |                                     
|-- | ------------------------------------
|8. | Goodwill and Other Intangible Assets

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

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

|          |                          |                                 |   |              |           |  |   |           |           | 
|--------- | ------------------------ | ------------------------------- | - | ------------ | --------- |  | - | --------- | --------- | 
|          |                          | September 30,                   |   | December 31,
|          |                          | 2003                            |   | 2002        
|          |                          |                                 |   |             
|Goodwill: |                          |                                 |   |              |           |  |   |          
|          | Gross carrying amount    |                                 | $ | 3,851,918    |           |  | $ | 3,285,455 |          
|          | Accumulated amortization |                                 |   | 2,088,862    |           |  |   | 2,088,862 |          
|          |                          |                                 |   |              |           |  |   |          
|          |                          | Net carrying amount of goodwill |   | $            | 1,763,056 |  |   | $         | 1,196,593 | 
|          |                          |                                 |   |              |           |  |   |          

As of September 30, 2003, goodwill includes
$512.5 million related to the acquisition of Precise on
June 30, 2003 and $51.3 million related to the
acquisition of Jareva on January 27, 2003.

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

|                                              |                                              |                                |         |              |         |              |         |         |         |   |        |        |        | 
|--------------------------------------------- | -------------------------------------------- | ------------------------------ | ------- | ------------ | ------- | ------------ | ------- | ------- | ------- | - | ------ | ------ | ------ | 
|                                              |                                              |                               
|                                              |                                              | September 30, 2003            
|                                              |                                              |                               
|                                              |                                              | Gross                          |         |             
|                                              |                                              | Carrying                       |         | Accumulated  |         | Net Carrying
|                                              |                                              | Amount                         |         | Amortization |         | Amount      
|                                              |                                              |                                |         |              |         |             
|Developed technology                          |                                              | $                              | 287,949 |              |         | $            | 231,777 |         |         | $ | 56,172 |       
|Distribution channels                         |                                              |                                | 234,800 |              |         |              | 234,800 |         |         |   |       |       
|Trademarks                                    |                                              |                                | 26,650  |              |         |              | 24,638  |         |         |   | 2,012  |       
|Other intangible assets                       |                                              |                                | 51,734  |              |         |              | 31,484  |         |         |   | 20,250 |       
|                                              |                                              |                                |         |              |         |              |         |         |         |   |        |       
|                                              | Intangibles related to business acquisitions |                                |         | 601,133      |         |              |         | 522,699 |         |   |        | 78,434 |       
|Convertible subordinated notes issuance costs |                                              |                                | 12,301  |              |         |              | 683     |         |         |   | 11,618 |       
|                                              |                                              |                                |         |              |         |              |         |         |         |   |        |       
|                                              |                                              | Total other intangibles assets |         | $            | 613,434 |              |         | $       | 523,382 |   |        | $      | 90,052 | 
|                                              |                                              |                                |         |              |         |              |         |         |         |   |        |       

13



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VERITAS SOFTWARE CORPORATION


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

|                                              |                                              |                                |         |              |         |              |         |         |         |   |        |        |        | 
|--------------------------------------------- | -------------------------------------------- | ------------------------------ | ------- | ------------ | ------- | ------------ | ------- | ------- | ------- | - | ------ | ------ | ------ | 
|                                              |                                              |                               
|                                              |                                              | December 31, 2002             
|                                              |                                              |                               
|                                              |                                              | Gross                          |         |             
|                                              |                                              | Carrying                       |         | Accumulated  |         | Net Carrying
|                                              |                                              | Amount                         |         | Amortization |         | Amount      
|                                              |                                              |                                |         |              |         |             
|Developed technology                          |                                              | $                              | 236,508 |              |         | $            | 200,265 |         |         | $ | 36,243 |       
|Distribution channels                         |                                              |                                | 234,800 |              |         |              | 210,342 |         |         |   | 24,458 |       
|Trademarks                                    |                                              |                                | 24,350  |              |         |              | 21,813  |         |         |   | 2,537  |       
|Other intangible assets                       |                                              |                                | 28,520  |              |         |              | 25,612  |         |         |   | 2,908  |       
|                                              |                                              |                                |         |              |         |              |         |         |         |   |        |       
|                                              | Intangibles related to business acquisitions |                                |         | 524,178      |         |              |         | 458,032 |         |   |        | 66,146 |       
|Convertible subordinated notes issuance costs |                                              |                                | 14,506  |              |         |              | 8,058   |         |         |   | 6,448  |       
|                                              |                                              |                                |         |              |         |              |         |         |         |   |        |       
|                                              |                                              | Total other intangibles assets |         | $            | 538,684 |              |         | $       | 466,090 |   |        | $      | 72,594 | 
|                                              |                                              |                                |         |              |         |              |         |         |         |   |        |       

The total amortization expense of intangible
assets related to business acquisitions is set forth in the
table below (in thousands):

|                        |                    |                    |       |                   |  |      |        |        |  |   |        |        |  |   |        |         | 
|----------------------- | ------------------ | ------------------ | ----- | ----------------- |  | ---- | ------ | ------ |  | - | ------ | ------ |  | - | ------ | ------- | 
|                        |                    |                    |       |                  
|                        |                    | Three Months Ended |       | Nine Months Ended
|                        |                    | September 30,      |       | September 30,    
|                        |                    |                    |       |                  
|                        |                    | 2003               |       | 2002              |  | 2003 |        | 2002  
|                        |                    |                    |       |                   |  |      |        |       
|Developed technology    |                    | $                  | 5,420 |                   |  | $    | 16,519 |        |  | $ | 31,512 |        |  | $ | 50,326 |        
|Distribution channels   |                    |                    |      |                   |  |      | 14,675 |        |  |   | 24,458 |        |  |   | 44,025 |        
|Trademarks              |                    |                    | 288   |                   |  |      | 1,522  |        |  |   | 2,825  |        |  |   | 4,567  |        
|Other intangible assets |                    |                    | 2,329 |                   |  |      | 1,857  |        |  |   | 5,872  |        |  |   | 5,594  |        
|                        |                    |                    |       |                   |  |      |        |        |  |   |        |        |  |   |        |        
|                        | Total amortization |                    | $     | 8,037             |  |      | $      | 34,573 |  |   | $      | 64,667 |  |   | $      | 104,512 | 
|                        |                    |                    |       |                   |  |      |        |        |  |   |        |        |  |   |        |        

For the three and nine months ended
September 30, 2003, total amortization expense for
developed technology and other intangibles includes
$0.5 million and $1.4 million, respectively, that is
included in cost of user license fees. For the three and nine
months ended September 30, 2002, the total amortization
expense for developed technology and other intangibles includes
$0.1 million and $0.2 million, respectively, that is
included in cost of user license fees.

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

|     |       |              |        |        | 
|---- | ----- | ------------ | ------ | ------ | 
|     |       | Future      
|Year |       | Amortization
|     |       |             
|2003 |       | $            | 7,783  |       
|2004 |       |              | 22,963 |       
|2005 |       |              | 20,282 |       
|2006 |       |              | 18,362 |       
|2007 |       |              | 8,872  |       
|2008 |       |              | 172    |       
|     |       |              |        |       
|     | Total |              | $      | 78,434 | 
|     |       |              |        |       



|   |                      
|-- | ---------------------
|9. | Strategic Investments

The Company holds investments in common and
preferred stock of several privately-held companies. The total
carrying amount of the Companys strategic investments was
$5.4 million at September 30, 2003 and
$10.3 million at December 31, 2002. These strategic
investments are included in other non-current assets. The

14



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##### Table of Contents



VERITAS SOFTWARE CORPORATION


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Company recorded no impairment losses on
strategic investments for the three months ended
September 30, 2003 and $3.5 million of impairment
losses for the nine months ended September 30, 2003. For
the three months ended September 30, 2002, the Company
recorded no impairment losses on strategic investments and for
the nine months ended September 30, 2002, the Company
recorded impairment losses of $14.8 million. The losses
realized represent write-downs of the Companys carrying
amount of the investments, as the Company deemed such losses to
be other than temporary, and were determined by using, among
other factors, the market value of the investees stock,
its inability to obtain additional private financing, its cash
position and current burn rate, the status and competitive
position of the investees products and the uncertainty of
its financial condition.

10.     Facility
Restructure Reserve

In the fourth quarter of 2002, the Companys
board of directors approved a facility restructuring plan to
exit and consolidate certain of its facilities located in 17
metropolitan areas worldwide related to facilities that were or
are expected to be vacated. In connection with this facilities
restructuring plan, the Company recorded a restructuring charge
to operating expenses of $98.2 million in the fourth
quarter of 2002. This restructuring charge is comprised of
$86.9 million associated with terminating and satisfying
remaining lease commitments, partially offset by sublease income
net of related sublease costs, and $11.3 million for asset
write-offs. Total cash outlays under this restructuring plan are
expected to be approximately $86.9 million.

Restructuring costs will generally be paid over
the remaining lease terms, ending at various dates through 2021,
or over a shorter period as the Company may negotiate with its
lessors. The Company expects the majority of costs will be paid
by the year ending December 31, 2008.

The Company began vacating facilities during the
fourth quarter of 2002 and expects to vacate all excess
facilities associated with this restructuring by
January 31, 2004. The Company is in the process of seeking
suitable subtenants for these facilities. The Companys
estimates of the facility restructure charge may vary
significantly, depending in part on factors that are beyond the
Companys control, including the commercial real estate
market in the applicable metropolitan areas, the Companys
ability to obtain subleases related to these facilities and the
time period to do so, the sublease rental market rates and the
outcome of negotiations with lessors regarding terminations of
some of the leases. Adjustments to the facility restructure
reserve will be made if actual lease exit costs or sublease
income differ from amounts currently expected. As a portion of
the facilities restructure reserve relates to international
locations, the reserve will be affected by exchange rate
fluctuations. The impact of exchange rate fluctuations is
recorded in accumulated other comprehensive income (loss) on the
balance sheet.

The portion of the reserve expected to be
utilized through September 30, 2004 of $19.2 million
has been classified in the current portion of accrued
acquisition and restructuring charges. The portion of the
reserve expected to be utilized in periods subsequent to
September 30, 2004 of $65.1 million has been
classified in the

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VERITAS SOFTWARE CORPORATION


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

non-current portion of accrued acquisition and
restructuring charges. The components of the restructuring
reserve and movements within these components through
September 30, 2003 were as follows (in millions):

|                         |                               |             |      |            |  |       |      |      |  |   |      |      | 
|------------------------ | ----------------------------- | ----------- | ---- | ---------- |  | ----- | ---- | ---- |  | - | ---- | ---- | 
|                         |                               | Net Rent    |      | Asset      |  |      
|                         |                               | Commitments |      | Write-Offs |  | Total
|                         |                               |             |      |            |  |      
|Provision accrued        |                               | $           | 86.9 |            |  | $     | 11.3 |      |  | $ | 98.2 |     
|Cash payments            |                               |             | (0.2 | )          |  |       |     |      |  |   | (0.2 | )   
|Impact of exchange rates |                               |             | 0.6  |            |  |       | 0.1  |      |  |   | 0.7  |     
|                         |                               |             |      |            |  |       |      |      |  |   |      |     
|                         | Balance at December 31, 2002  |             |      | 87.3       |  |       |      | 11.4 |  |   |      | 98.7 | 
|Cash payments            |                               |             | (7.7 | )          |  |       |     |      |  |   | (7.7 | )   
|Asset write-offs         |                               |             |     |            |  |       | (8.0 | )    |  |   | (8.0 | )   
|Adjustment               |                               |             | 0.8  |            |  |       | (0.8 | )    |  |   |     |     
|Impact of exchange rates |                               |             | 1.1  |            |  |       | 0.2  |      |  |   | 1.3  |     
|                         |                               |             |      |            |  |       |      |      |  |   |      |     
|                         | Balance at September 30, 2003 |             | $    | 81.5       |  |       | $    | 2.8  |  |   | $    | 84.3 | 
|                         |                               |             |      |            |  |       |      |      |  |   |      |     

11.     Convertible
Subordinated Notes

In August 2003, the Company issued
$520.0 million of 0.25% convertible subordinated notes due
August 1, 2013 (the 0.25% Notes), for which the
Company received net proceeds of approximately
$508.3 million, to several initial purchasers in a private
offering.

The 0.25% Notes were issued at their face value
and provide for semi-annual interest payments of
$0.7 million each February 1 and August 1,
beginning February 1, 2004. The 0.25% Notes are
convertible, under the specified circumstances discussed below,
into shares of the Companys common stock at a conversion
rate of 21.6802 shares per $1,000 principal amount of notes,
which is equivalent to a conversion price of approximately
$46.13 per share. The conversion rate is subject to adjustment
upon the occurrence of specified events. The specified
circumstances under which the 0.25% Notes are convertible prior
to maturity are: (1) during any quarterly conversion period
(which periods begin on the eleventh trading day of each fiscal
quarter and end on the eleventh trading day of the following
fiscal quarter) prior to August 1, 2010, if the closing
sale price of the Companys common stock for at least 20
trading days in the 30 trading day period ending on the first
day of such conversion period exceeds 120% of the conversion
price of the notes on that first day, (2) during the period
beginning August 1, 2010 through the maturity date of the
notes, if the closing sale price of the Companys common
stock is more than 120% of the then current conversion price,
(3) during the five consecutive business day period
following any five consecutive trading day period in which the
average of the trading prices for the 0.25% Notes was less than
95% of the average of the sale price of the Companys
common stock multiplied by the then current conversion rate of
the notes, (4) the Companys corporate credit rating
assigned by Standard & Poors falls below B- (and if
Moodys has assigned a corporate credit rating to the
Company and such rating is lower than B3) or if both such
ratings are withdrawn, (5) the Company calls the notes for
redemption or (6) upon the occurrence of corporate
transactions specified in the indenture governing the notes.
Upon any conversion of notes by a holder, the Company shall have
the option to satisfy its conversion obligation in shares of its
common stock, in cash or a combination thereof. It is the
intention of the Company to satisfy the principal portion of the
obligation in cash and the remainder, if any, in shares of its
common stock. On or after August 5, 2006, the Company has
the option to redeem all or a portion of the 0.25% Notes at a
redemption price equal to 100% of the principal amount, plus
accrued and unpaid interest. On August 1, 2006 and
August 1, 2008, or upon the occurrence of a fundamental
change involving the Company, holders of the 0.25% Notes may
require the Company to repurchase their notes at a repurchase
price equal to 100% of the principal amount, plus accrued and
unpaid interest. Upon a fundamental change, the Company will
have the option to pay the repurchase price in cash, shares of
common stock or a combination thereof.

16



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VERITAS SOFTWARE CORPORATION


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

In August 2003, all of the Companys
outstanding 5.25% convertible subordinated notes due 2004
(5.25% Notes) converted into 6.7 million shares
of common stock at a conversion price of $9.56 per share. In
August 2003, a portion of the Companys outstanding 1.856%
convertible subordinated notes due 2006 (1.856%
Notes) converted into 0.5 million shares of common
stock at an effective conversion price of $31.35 per share. The
remaining outstanding principal amount of the 1.856% Notes was
redeemed by the Company in August 2003 for $391.8 million
in cash, including $0.1 million of accrued interest. In
connection with the redemption of the 1.856% Notes for cash, the
Company recorded a loss on extinguishment of debt of
approximately $4.7 million in the third quarter of 2003
related to the unamortized portion of debt issuance costs. This
charge is classified as a non-operating expense in the
Companys statement of operations.

12.     Common
Stock

In July 2003, the Companys board of
directors authorized a program to repurchase the Companys
common stock in an amount up to $300.0 million plus the
market value at the time of repurchase of any shares issued upon
conversion of the 1.856% Notes. In the third quarter of 2003,
the Company repurchased 9.9 million shares of common stock
for an aggregate purchase price of approximately
$316.2 million.

13.     Comprehensive
Income

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

|                                        |                                                 |                      |        |                   |        |      |        |        |        |   |         |        |         |   |         |        |         | 
|--------------------------------------- | ----------------------------------------------- | -------------------- | ------ | ----------------- | ------ | ---- | ------ | ------ | ------ | - | ------- | ------ | ------- | - | ------- | ------ | ------- | 
|                                        |                                                 |                      |        |                  
|                                        |                                                 | Three Months Ended   |        | Nine Months Ended
|                                        |                                                 | September 30,        |        | September 30,    
|                                        |                                                 |                      |        |                  
|                                        |                                                 | 2003                 |        | 2002              |        | 2003 |        | 2002  
|                                        |                                                 |                      |        |                   |        |      |        |       
|Net income                              |                                                 | $                    | 77,586 |                   |        | $    | 36,226 |        |        | $ | 168,851 |        |         | $ | 106,737 |       
|Other comprehensive income, net of tax: |                                                 |                      |        |                   |        |      |        |        |        |   |         |        |         |   |         |       
|                                        | Foreign currency translation adjustments        |                      |        | 1,507             |        |      |        | 100    |        |   |         | 16,119 |         |   |         | 5,613  |        
|                                        | Derivative financial instrument adjustments     |                      |        | 766               |        |      |        | (2,165 | )      |   |         | 360    |         |   |         | (6,705 | )      
|                                        | Unrealized (gain) loss on marketable securities |                      |        | (884              | )      |      |        | 1,484  |        |   |         | (999   | )       |   |         | (2,808 | )      
|                                        |                                                 |                      |        |                   |        |      |        |        |        |   |         |        |         |   |         |       
|                                        |                                                 | Comprehensive income |        | $                 | 78,975 |      |        | $      | 35,645 |   |         | $      | 184,331 |   |         | $      | 102,837 | 
|                                        |                                                 |                      |        |                   |        |      |        |        |        |   |         |        |         |   |         |       

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

|                                            |                                               |               |        |              |  |   |        |        |  
|------------------------------------------- | --------------------------------------------- | ------------- | ------ | ------------ |  | - | ------ | ------ | -
|                                            |                                               | September 30, |        | December 31,
|                                            |                                               | 2003          |        | 2002        
|                                            |                                               |               |        |             
|Foreign currency translation adjustments    |                                               | $             | 19,132 |              |  | $ | 3,013  |       
|Derivative financial instrument adjustments |                                               |               | (9,446 | )            |  |   | (9,806 | )     
|Unrealized gain on marketable securities    |                                               |               | 2,325  |              |  |   | 3,324  |       
|                                            |                                               |               |        |              |  |   |        |       
|                                            | Accumulated other comprehensive income (loss) |               | $      | 12,011       |  |   | $      | (3,469 | )
|                                            |                                               |               |        |              |  |   |        |       

14.     Derivative
Financial Instruments

In September 2000, the Company entered into a
cross currency interest rate swap for the purpose of hedging
fixed interest rate, foreign currency denominated cash flows
under an intercompany loan receivable. Under the terms of this
derivative financial instrument, Euro denominated fixed
principal and interest payments to be received under the
intercompany loan were swapped for U.S. dollar-fixed
principal and interest payments. As of September 30, 2003,
the intercompany loan was paid in full and the derivative
financial instrument was settled.

17



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VERITAS SOFTWARE CORPORATION


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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 the
fixed rate and will receive interest payments based on the
3-month London Inter Bank Offered 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 to be
highly 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 September 30, 2003, the fair value of the interest
rate swaps was $(9.4) million and was recorded in other
long-term liabilities. As a result of entering into the interest
rate swaps, the Company has mitigated its exposure to variable
cash flows associated with interest rate fluctuations. Because
the rental payments on the leases are based on the 3-month LIBOR
and the Company receives 3-month LIBOR from the interest rate
swap counter-party, the Company has eliminated any impact to
raising interest rates related to its rent payments under the
build-to-suit lease agreements. On July 1, 2003, the
Company began accounting for its variable interest rate debt in
accordance with FIN 46 (Note 5). In accordance with
SFAS No. 133, the Company had designated the interest rate
swap as a cash flow hedge of rent expense. However, with the
adoption of FIN 46, the Company redesignated the interest
rate swap as a cash flow hedge of variability in interest
expense and it remains highly effective with all changes in the
fair value included in other comprehensive income.

As of September 30, 2003, the total gross
notional amount of the Companys forward contracts was
approximately $161.2 million, all hedging intercompany
accounts of certain of its international subsidiaries. The
forward contracts had a term of 31 days or less and settled
on October 31, 2003. All foreign currency transactions and
all outstanding forward contracts are marked-to-market at the
end of the period with unrealized gains and losses included in
other income. The unrealized gain (loss) on the outstanding
forward contracts at September 30, 2003 was immaterial to
the Companys consolidated financial statements.

15.     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 use discrete
financial information about asset allocation, expense allocation
or profitability from the Companys storage software
products or services.

18



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VERITAS SOFTWARE CORPORATION


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



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

|                      |               |                         |                   |                   |         |         |   |         |         |         |   |         |         |           |   |         |         |           | 
|--------------------- | ------------- | ----------------------- | ----------------- | ----------------- | ------- | ------- | - | ------- | ------- | ------- | - | ------- | ------- | --------- | - | ------- | ------- | --------- | 
|                      |               |                         |                   |                  
|                      |               | Three Months Ended      |                   | Nine Months Ended
|                      |               | September 30,           |                   | September 30,    
|                      |               |                         |                   |                  
|                      |               | 2003                    |                   | 2002              |         | 2003    |   | 2002   
|                      |               |                         |                   |                   |         |         |   |        
|User license fees(1): |               |                         |                   |                   |         |         |   |         |         |         |   |         |         |           |   |        
|                      | United States |                         | $                 | 174,490           |         |         | $ | 155,311 |         |         | $ | 497,946 |         |           | $ | 484,772 |        
|                      | Europe(2)     |                         |                   | 78,506            |         |         |   | 54,848  |         |         |   | 206,896 |         |           |   | 167,251 |        
|                      | Other(3)      |                         |                   | 37,223            |         |         |   | 30,540  |         |         |   | 100,903 |         |           |   | 90,263  |        
|                      |               |                         |                   |                   |         |         |   |         |         |         |   |         |         |           |   |        
|                      |               | Total user license fees |                   |                   | 290,219 |         |   |         | 240,699 |         |   |         | 805,745 |           |   |         | 742,286 |          
|                      |               |                         |                   |                   |         |         |   |         |         |         |   |         |         |           |   |        
|Services(1):          |               |                         |                   |                   |         |         |   |         |         |         |   |         |         |           |   |        
|                      | United States |                         |                   | 114,126           |         |         |   | 90,272  |         |         |   | 321,505 |         |           |   | 271,662 |        
|                      | Europe(2)     |                         |                   | 31,535            |         |         |   | 24,255  |         |         |   | 90,484  |         |           |   | 61,902  |        
|                      | Other(3)      |                         |                   | 15,061            |         |         |   | 10,458  |         |         |   | 40,449  |         |           |   | 24,973  |        
|                      |               |                         |                   |                   |         |         |   |         |         |         |   |         |         |           |   |        
|                      |               | Total services          |                   |                   | 160,722 |         |   |         | 124,985 |         |   |         | 452,438 |           |   |         | 358,537 |          
|                      |               |                         |                   |                   |         |         |   |         |         |         |   |         |         |           |   |        
|                      |               |                         | Total net revenue |                   | $       | 450,941 |   |         | $       | 365,684 |   |         | $       | 1,258,183 |   |         | $       | 1,100,823 | 
|                      |               |                         |                   |                   |         |         |   |         |         |         |   |         |         |           |   |        

|                      |               |               |   |              |           |  |   |           |           | 
|--------------------- | ------------- | ------------- | - | ------------ | --------- |  | - | --------- | --------- | 
|                      |               | September 30, |   | December 31,
|                      |               | 2003          |   | 2002        
|                      |               |               |   |             
|Long-lived assets(4): |               |               |   |              |           |  |   |          
|                      | United States |               | $ | 1,923,659    |           |  | $ | 1,429,261 |          
|                      | Europe(2)     |               |   | 49,768       |           |  |   | 55,049    |          
|                      | Other(3)      |               |   | 448,633      |           |  |   | 15,138    |          
|                      |               |               |   |              |           |  |   |          
|                      |               | Total         |   | $            | 2,422,060 |  |   | $         | 1,499,448 | 
|                      |               |               |   |              |           |  |   |          



---



|    |                                                                                                                                                                                                                                                                                  
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 No. 131,
    Disclosures about Segments of an Enterprise and Related
    Information, such as deferred income taxes. Reconciliation to
    total assets reported (in thousands):

|                                |                           |               |           |              |  |   |           |           | 
|------------------------------- | ------------------------- | ------------- | --------- | ------------ |  | - | --------- | --------- | 
|                                |                           | September 30, |           | December 31,
|                                |                           | 2003          |           | 2002        
|                                |                           |               |           |             
|Total long-lived assets         |                           | $             | 2,422,060 |              |  | $ | 1,499,448 |          
|Other assets, including current |                           |               | 2,742,628 |              |  |   | 2,718,632 |          
|                                |                           |               |           |              |  |   |           |          
|                                | Total consolidated assets |               | $         | 5,164,688    |  |   | $         | 4,218,080 | 
|                                |                           |               |           |              |  |   |           |          

For the three months ended September 30,
2003, no customer represented 10% or more of the Companys
net revenue. For the nine months ended September 30, 2003,
Ingram Micro, Inc. a distributor that sells the Companys
products and services through resellers, accounted for 10% of
the Companys net revenue. Ingram Micro, Inc. represented
approximately 12% of the Companys net revenue for the
three months ended September 30, 2002 and approximately 10%
of the Companys net revenue for the nine months ended
September 30, 2002.

19



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##### Table of Contents



VERITAS SOFTWARE CORPORATION


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



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

The Company derives its user license fees from
the sale of its core technology products, including data
protection and file system and volume management products and
from its emerging technology products, including cluster and
replication and storage area networking products. User license
fees from core technology products were $229.8 million and
$667.1 million for the three and nine months ended
September 30, 2003, respectively, and $210.7 million
and $649.2 million for the three and nine months ended
September 30, 2002, respectively. User license fees from
emerging technology products were $60.4 million and
$138.6 million for the three and nine months ended
September 30, 2003, respectively, which includes acquired
application performance management products of
$11.5 million for each of the three and nine months ended
September 30, 2003, and $30.0 million and
$93.1 million for the three and nine months ended
September 30, 2002, respectively.

16.     Credit
Facility

During 2002, the Companys Japanese
subsidiary entered into a short-term credit facility with a
multinational Japanese bank in the amount of 1.0 billion
Japanese yen ($8.9 million USD). At September 30,
2003, no amount was outstanding. The short-term credit facility
was renewed in March 2003 and is due to expire in March 2004.
Borrowings under the short-term credit facility bear interest at
Tokyo Inter Bank Offered Rate (TIBOR) plus 0.5%.
There are no covenants on the short-term credit facility and the
loan has been guaranteed by VERITAS Software Global LLC, a
wholly-owned subsidiary of the Company.

17.     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, and began
occupying the Milpitas facility in April 2003. The Mountain View
facility includes 425,000 square feet and is used as the
Companys corporate headquarters and for research and
development functions. The Milpitas facility includes 466,000
square feet and is primarily used for research and development
and general corporate functions. The Roseville facility includes
204,000 square feet and provides space for technical support and
research and development functions. A syndicate of financial
institutions financed the acquisition and development of these
properties. Prior to July 1, 2003, the Company accounted
for these properties as operating leases in accordance with SFAS
No. 13, Accounting for Leases, as amended. On
July 1, 2003, the Company adopted FIN 46. Under
FIN 46, the lessors of the facilities are considered
variable interest entities, and the Company is considered the
primary beneficiary. Accordingly, the Company began
consolidating these variable interest entities on July 1,
2003 and has included their property and equipment and long-term
debt on its balance sheet at September 30, 2003 and the
results of their operations in its statement of operations from
July 1, 2003 (Note 5).

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

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VERITAS SOFTWARE CORPORATION


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

guaranteed residual value up to an aggregate
$344.6 million if the sales price is less than this amount,
subject to the specific terms of the debt agreements. In
addition, the Company is entitled to any proceeds from a sale of
the facilities in excess of the termination values.

In January 2002, the Company entered into two
three-year pay fixed, receive floating, interest rate swaps for
the purpose of hedging the cash payments related to the
Roseville, Minnesota and Mountain View, California agreements
(Note 14). Under the terms of these interest rate swaps,
the Company makes payments based on the fixed rate and will
receive interest payments based on the 3-month LIBOR rate. For
the three and nine months ended September 30, 2003, the
Companys aggregate payments, including the payments on the
interest rate swaps, were $4.3 million and
$12.5 million, respectively. The payments for the three
months ended September 30, 2003 were included in interest
expense in the consolidated statements of operations in
accordance with FIN 46. For the three and nine months ended
September 30, 2002, the Companys aggregate payments
were $4.3 million and $12.6 million, respectively. The
payments made during the six months ended June 30, 2003 and
the nine months ended September 30, 2002 were classified as
rent expense and included in operating expenses, in accordance
with SFAS No. 13.

The Company reviews long-lived assets related to
these debt agreements for impairment in accordance with SFAS
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. In accordance with SFAS No. 144, if
the Company determines that one or more impairment indicators
are present, indicating the carrying amount may not be
recoverable, the carrying amount would be compared 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, the fair value would be compared to the book value of
the asset. If the fair value is less than the book value, an
impairment loss would be recognized. The impairment loss would
be the excess of the carrying amount of the asset over its fair
value. To date, no impairment losses have been recorded.

The agreements for the facilities described above
require that the Company maintain specified financial covenants,
all of which the Company was in compliance with as of
September 30, 2003. The specified financial covenants as of
September 30, 2003 require the Company to maintain a
minimum rolling four quarter EBITDA of $400.0 million, a
minimum ratio of cash and cash equivalents to current
liabilities of 1.2 to 1, and a leverage ratio of total funded
indebtedness to rolling four quarter EBITDA of not more than
2.25 to 1. For purposes of these financial covenants, EBITDA
represents the Companys net income for the applicable
period, plus interest expense, taxes, depreciation and
amortization and all non-cash restructuring charges for
acquisitions occurring within a four year period, less software
development expenses classified as capital expenditures. In
order to secure the obligation under each agreement, each of the
facilities is subject to a deed of trust in favor of the
financial institutions that financed the development and
acquisition of the respective facility. Bank of America, N.A.
was the agent for the syndicate of banks that funded the
development of the Mountain View, California and Roseville,
Minnesota facilities, and ABN AMRO Bank, N.V. was the agent for
the syndicate of banks that funded the development of the
Milpitas, California facility.

Acquired
Technology

On October 1, 2002, the Company acquired
volume replicator software technology for $6.0 million and
contingent payments of up to another $6.0 million based on
future revenues generated by the acquired technology. The
payments will be paid quarterly over 40 quarters, in amounts
between $150,000 and $300,000. The Company issued a promissory
note payable in the principal amount of $5.0 million,
representing the present value of the Companys minimum
payment obligations under the purchase agreement for the
acquired technology, which are payable quarterly commencing in
the first quarter of 2003 and ending in the fourth quarter of
2012. The contingent payments in excess of the quarterly minimum
obligations will be paid as they may become due. The outstanding
balance of the note payable was $4.7 million as of
September 30, 2003 and $5.0 million as of
December 31, 2002 and is included in other long-term
liabilities.

21



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VERITAS SOFTWARE CORPORATION


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Legal
Proceedings

In response to subpoenas issued by the Securities
and Exchange Commission in the investigation entitled In the
Matter of AOL/ Time Warner, the Company continues to furnish
information requested by the SEC, including information relating
to the transactions it entered into with AOL in September 2000
and other transactions. The outcome of this investigation cannot
be predicted at this time. The Company will continue its efforts
to cooperate with the SECs investigation.

After the Company announced in January 2003 that
it would restate financial results as a result of transactions
entered into with AOL in September 2000, numerous separate
complaints purporting to be class actions were filed in the
United States District Court for the Northern District of
California alleging that the Company and some of its officers
and directors violated provisions of the Securities Exchange Act
of 1934. The complaints contain varying allegations, including
that the Company made materially false and misleading statements
with respect to its 2000, 2001 and 2002 financial results
included in its filings with the SEC, press releases and other
public disclosures. On May 2, 2003, a lead plaintiff and
lead counsel were appointed. A consolidated complaint was filed
by the lead plaintiff on July 18, 2003. In addition,
several complaints purporting to be derivative actions have been
filed in California state court against some of the
Companys directors and officers. These complaints are
based on the same facts and circumstances as the class actions
and generally allege that the named directors and officers
breached their fiduciary duties by failing to oversee adequately
the Companys financial reporting. The state court
complaints have also been consolidated. All of the complaints
generally seek an unspecified amount of damages. The cases are
still in the preliminary stages, and it is not possible for the
Company to quantify the extent of its potential liability, if
any. An unfavorable outcome in any of these cases could have a
material adverse effect on its business, financial condition,
results of operations and cash flow. In addition, defending any
litigation may be costly and divert managements attention
from the day-to-day operations of the Companys business.

On January 10, 2003, Raytheon Company sued
the Company along with Brocade Communications Systems, Oracle
Corporation, Overland Storage Inc., Qualstar Corp., QLogic
Corporation, Ricoh Corporation and Spectra Logic Corporation in
the United States District Court for the Eastern District of
Texas. Raytheon is alleging infringement of US Patent
No. 5,412,791, or 791 patent, entitled Mass Data
Storage Library, and is seeking damages and an injunction
against all defendants. The Company believes that it has
numerous defenses and counterclaims to the claims of
infringement asserted against it and intends to defend itself
vigorously. The Company filed an answer to Raytheons
complaint on March 7, 2003, denying all material
allegations in the complaint and asserting counterclaims seeking
to have Raytheons 791 patent declared invalid and
not infringed by the Company. A trial date is currently
scheduled for June 2004.

On October 23, 2001, Storage Computer
Corporation initiated litigation against the Company in the
United States District Court for the Northern District of Texas
alleging infringement of one of Storage Computer
Corporations patents. Currently, Storage Computer
Corporation is alleging the Company infringes two of their
US patents. The Company has denied all material allegations
in the complaints, has filed counterclaims for declaratory
judgment of invalidity and non-infringement of the
patents-in-suit and has alleged their infringement of one of the
Companys patents. Storage Computer Corporation is seeking
damages of approximately $50.0 million, treble damages,
costs of suit and attorneys fees and a permanent
injunction from further alleged infringement. The Company
believes that it has numerous defenses and counterclaims
relative to the claims of infringement and the damages claims
asserted against it and intends to vigorously defend this
action. The trial date scheduled for November 2003 was recently
stayed by the court pending the outcome of both parties
summary judgment motions.

The Company is also party to various other legal
proceedings that have arisen in the ordinary course of business.
While the Company currently believes that the ultimate outcome
of these proceedings, individually and in the aggregate, will
not have a material adverse effect on its financial position or
overall trends in results of operations, litigation is subject
to inherent uncertainties. Were an unfavorable ruling to occur,
there exists

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VERITAS SOFTWARE CORPORATION


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

the possibility of a material adverse impact on
the results of operations of the period in which the ruling
occurs. The estimate of the potential impact on the
Companys financial position or overall results of
operations for the above legal proceedings could change in the
future.

For each of the matters noted, the Company does
not believe that it is probable that a liability has been
incurred nor does it believe that the amount of any loss can be
reasonably estimated. Accordingly, no liability has been accrued
for these matters.

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

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

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

Overview

VERITAS is a leading independent supplier of
storage software products and services. Storage software
includes storage management, data protection and high
availability software. With our recent acquisition of Precise
Software Solutions Ltd., we also offer application performance
management 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,
applications and network solutions. Our customers include many
leading global corporations and small and medium enterprises
around the world operating in a wide variety of industries. 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 direct sales channels and indirect sales channels
such as resellers, value-added resellers, distributors, original
equipment manufacturers, application software vendors, strategic
partner resellers and systems integrators. Some original
equipment manufacturers incorporate our products into their
products, some bundle our products with their products, some
resell our 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.

Our services revenue consists of fees derived
from maintenance and 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 sales 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, a majority of which is collectible in foreign
currencies, accounted for approximately 36% of our total revenue
for the three months ended September 30, 2003 and 33% of
our total revenue for the three months ended September 30,
2002. Our international revenue accounted for approximately 35%
of our total revenue for the nine months ended
September 30, 2003 and 31% of our total revenue for the
nine months ended September 30, 2002. Our international
revenue increased 35% to $162.3 million for the three
months ended

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September 30, 2003 from $120.1 million
for the three months ended September 30, 2002. Our
international revenue increased 27% to $438.7 million for
the nine months ended September 30, 2003 from
$344.4 million for the nine months ended September 30,
2002. Over the long-term, we expect that our international
revenue will increase relative to total revenue as a result of
the lower penetration of our products existing in these markets
and our increasing focus on developing international revenue
opportunities.


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, Africa
and the Middle East, and research and development centers in
India and Israel. 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.

Business Combinations

Geodesic
Systems, Inc.

On August 1, 2003, we acquired selected
assets of Geodesic Systems, Inc., or Geodesic, a privately held
provider of application reliability management software. The
acquisition was accounted for using the purchase accounting
method. Purchased developed technology and patents are being
amortized over a period of three years. The acquisition of
Geodesic was not material to our business, operating results or
financial condition.

Precise
Software Solutions Ltd.

On June 30, 2003, we acquired all of the
outstanding common stock of Precise Software Solutions Ltd., or
Precise, a provider of application performance management
products. We acquired Precise in order to expand our product and
service offerings across storage, databases and application
management. The Precise acquisition was accounted for using the
purchase method of accounting for total purchase consideration
of $715.5 million, which included 7.3 million shares
of common stock valued at $210.6 million,
$397.8 million of cash, $94.0 million relating to the
assumption of Precise options exercisable for 4.4 million
shares of our common stock and $13.1 million of
acquisition-related costs. The fair value of stock options
assumed includes $7.3 million which represents the portion
of the intrinsic value of Precises unvested options
applicable to the remaining vesting period. Upon the assumption
of the outstanding Precise options, each Precise option became
exercisable for 0.6741 shares of our common stock. Our balance
sheet as of September 30, 2003 includes balances as a
result of our acquisition of Precise. The results of operations
of Precise have been included in our consolidated statements of
operations beginning July 1, 2003.

In connection with the acquisition of Precise, we
allocated approximately $15.3 million of the purchase price
to in-process technology that has not yet reached technological
feasibility and has no alternative future use. This amount has
been expensed as a non-recurring, non-tax deductible charge in
our statements of operations for the three and nine months ended
September 30, 2003.

Jareva
Technologies, Inc.

On January 27, 2003, we acquired all of the
outstanding capital stock of Jareva Technologies, Inc., or
Jareva, a privately held provider of automated server
provisioning products that enable businesses to automatically
deploy additional servers without manual intervention. We
acquired Jareva to integrate its technology into our software
products to enable our customers to optimize their investments
in server hardware by deploying new server resources on demand.
The Jareva acquisition was accounted for using the purchase
accounting method for total purchase consideration of
$68.7 million, which included $58.7 million of cash,
$6.8 million relating to the assumption of options
exercisable for 426,766 shares of our common stock and
$3.2 million of acquisition-related costs. The acquired
in-process research and development of $4.1 million was
written off and the related charge is included in income from
operations for the nine months ended September 30, 2003.

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NSMG

On May 28, 1999, we acquired the Network
Storage Management Group business of Seagate Software, Inc., or
NSMG. We incurred acquisition-related costs of
$43.4 million. In addition, as a result of the NSMG
acquisition, we recorded a restructure charge of
$11.0 million in 1999 related to exit costs associated with
duplicative facilities that we planned to vacate. In the fourth
quarter of 2002, we recorded an additional reserve of
$4.2 million due to a decline in real estate market
conditions that resulted in higher actual exit costs than
estimated associated with these duplicative facilities. As of
December 31, 2002, we had a remaining accrual of
$10.5 million for duplicative facility related costs and
for the three and nine months ended September 30, 2003,
cash outlays for these costs were $1.2 million and
$3.1 million, respectively and the impact of exchange rates
was $0.1 million and $(0.3) million, respectively. The
impact of exchange rates in 2003 is the result of transferring
the acquisition and acquisition-related restructuring charge
accrual to a foreign subsidiary. The remaining acquisition and
acquisition-related restructuring charge accrual as of
September 30, 2003 of $7.7 million is anticipated to
be utilized for servicing operating lease payments or negotiated
buyouts of operating lease commitments, the lease terms of which
will expire at various times through the year 2013.

Seagate Technology Transaction

On November 22, 2000, we completed a
multi-party transaction with Seagate Technology, or Seagate, and
Suez Acquisition Company (Cayman) Limited, or 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.

For the three and nine months ended
September 30, 2003 and 2002, the Seagate transaction had no
significant impact on our net income. As of September 30,
2003 and December 31, 2002, the transaction affected our
consolidated balance sheet, 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;
|
| |  | income taxes payable included an additional
    $21.3 million; and                         
|
| |  | deferred and other income taxes included an
    additional $113.1 million.                 

As of September 30, 2003 and
December 31, 2002, 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. 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. The timing of the settlement
of these examinations is uncertain. To the extent the
settlements of these audits and the amounts reimbursed by SAC
are different from the amounts recorded, the difference will be
recorded as a component of income tax expense or benefit and may
significantly affect our effective tax rate for the period in
which the settlements take place.

Facility Restructure Reserve

In the fourth quarter of 2002, our board of
directors approved a facility restructuring plan to exit and
consolidate certain of our facilities located in 17 metropolitan
areas worldwide. The facility restructuring plan was adopted to
address overcapacity in our facilities as a result of lower than
planned headcount growth in these metropolitan areas. In
connection with this facility restructuring plan, we recorded a
restructuring charge to operating expenses of $98.2 million
in the fourth quarter of 2002. This restructuring charge is
comprised of

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$86.9 million associated with terminating
and satisfying remaining lease commitments, partially offset by
sublease income net of related sublease costs, and
$11.3 million for asset write-offs. Total net cash outlays
under this restructuring plan are expected to be approximately
$86.9 million.


Restructuring costs will generally be paid over
the remaining lease terms, ending at various dates through 2021,
or over a shorter period as we may negotiate with our lessors.
We expect that the majority of costs will be paid by the year
ending December 31, 2008.

During the fourth quarter of 2002, we began
vacating excess facilities and expect to vacate all excess
facilities associated with this restructuring by
January 31, 2004. We began realizing cost savings from the
exiting of these facilities during the third quarter of 2003. We
are in the process of seeking suitable subtenants for these
facilities. Our estimates of the facility restructure charge may
vary significantly, depending in part, on factors that are
beyond our control, including the commercial real estate market
in the applicable metropolitan areas, our ability to obtain
subleases related to these facilities and the time period to do
so, the sublease rental market rates and the outcome of
negotiations with lessors regarding terminations of some of the
leases. Adjustments to the facility restructure reserve will be
made if actual lease exit costs or sublease income differ from
amounts currently expected. Because a portion of the facilities
restructure reserve relates to international locations, the
reserve will be affected by exchange rate fluctuations.

The components of the restructuring reserve and
movements within these components through September 30,
2003 were as follows (in millions):

|                         |                               |             |      |            |  |       |      |      |  |   |      |      | 
|------------------------ | ----------------------------- | ----------- | ---- | ---------- |  | ----- | ---- | ---- |  | - | ---- | ---- | 
|                         |                               | Net Rent    |      | Asset      |  |      
|                         |                               | Commitments |      | Write-Offs |  | Total
|                         |                               |             |      |            |  |      
|Provision accrued        |                               | $           | 86.9 |            |  | $     | 11.3 |      |  | $ | 98.2 |     
|Cash payments            |                               |             | (0.2 | )          |  |       |     |      |  |   | (0.2 | )   
|Impact of exchange rates |                               |             | 0.6  |            |  |       | 0.1  |      |  |   | 0.7  |     
|                         |                               |             |      |            |  |       |      |      |  |   |      |     
|                         | Balance at December 31, 2002  |             |      | 87.3       |  |       |      | 11.4 |  |   |      | 98.7 | 
|Cash payments            |                               |             | (7.7 | )          |  |       |     |      |  |   | (7.7 | )   
|Asset write-offs         |                               |             |     |            |  |       | (8.0 | )    |  |   | (8.0 | )   
|Adjustment               |                               |             | 0.8  |            |  |       | (0.8 | )    |  |   |     |     
|Impact of exchange rates |                               |             | 1.1  |            |  |       | 0.2  |      |  |   | 1.3  |     
|                         |                               |             |      |            |  |       |      |      |  |   |      |     
|                         | Balance at September 30, 2003 |             | $    | 81.5       |  |       | $    | 2.8  |  |   | $    | 84.3 | 
|                         |                               |             |      |            |  |       |      |      |  |   |      |     

Critical Accounting Policies

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



| |   |                                                 
| | - | ------------------------------------------------
| |  | Revenue recognition;                            
|
| |  | Impairment of long-lived assets;                
|
| |  | Restructuring expenses and related accruals; and
|
| |  | Accounting for income taxes.                    

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 results of operations. In addition, please refer
to the notes to the consolidated financial statements in our
most recent annual report on Form 10-K for further
discussion of our accounting policies.

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| |                    
| | -------------------
| | 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 services.

We apply the provisions of Statement of Position,
or 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.

For software arrangements involving multiple
elements, we allocate and defer revenue for the undelivered
elements based on their relative fair value and recognize the
difference between the total arrangement fee and the amount
deferred for the undelivered elements as revenue. 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. To determine the price when sold separately,
for the maintenance and technical support elements, we use
historical renewal rates for per-copy deals and stated renewal
rates for site licenses.

A typical arrangement includes software licenses,
software media and maintenance and technical support. Some
arrangements include training and consulting services. 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 and technical support includes
updates (unspecified product upgrades and enhancements) on a
when-and-if-available basis, telephone support, and bug fixes or
patches. Maintenance and technical support 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 specific to
the license products. Training fees are based on a per course
basis or on an annual value-pass, which allows for unlimited
courses to be taken by one individual over a one-year term.
Revenue is recognized when the customer has completed the
course. For value-passes, the revenue is recognized ratably over
the one-year term. Consulting consists primarily of product
installation services, which does not involve customization of
the software. Installation services provided by us are not
mandatory and can be performed by the customer, a third party,
or us. Consulting fees are based on a computed daily rate.
Revenue from consulting is recognized as the services are
performed.

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

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 prior to recognizing revenue on an
    arrangement.                                                                                                                                                                                                                                                                                                                               
|
| | Delivery Has Occurred.Our software is usually physically
    delivered to our customers with standard transfer terms as FOB
    shipping point. It is occasionally delivered electronically,
    through an FTP download or a load and leave, where a
    VERITAS employee physically loads the software and does not
    leave any tangible property with the customer. 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 fee our customers
    pay for the products is negotiated at the outset of an
    arrangement, and is generally based on the specific volume of
    product to be delivered. Therefore, except in cases where we
    grant extended payment terms to a specific customer, the fees
    are considered to be fixed or determinable at the inception of
    the arrangement. Arrangements with                                                                                                                    

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 where we have a history of successful collection. New
    customers are subjected to a credit review process that
    evaluates the customers financial position and ultimately
    their ability to pay. If it is determined from the outset of an
    arrangement that collection is not probable based upon our
    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 and technical support to the
end user. We recognize revenue from original equipment
manufacturer support royalties and fees 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.

Certain of our customers are also our suppliers.
Occasionally, in the normal course of business, we purchase and
use goods or services for our operations from these suppliers at
or about the same time we license our software to them. We
identify and review the significant transactions to confirm that
they are separately negotiated at terms we consider to be
arms length. In cases where the transactions are not
separately negotiated, we assess the fair value of either of the
goods or services involved in the transaction to support the
recognition of the transaction. If we cannot determine fair
value of either of the goods or services involved within
reasonable limits, we record the transaction on a net basis. Our
non-monetary transactions have not been material to our
financial statements.



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

We review our goodwill for impairment when events
indicate that its carrying amount may not be recoverable or at
least once a year. We are required to test our goodwill for
impairment at the reporting unit level. We have determined that
we have only one reporting unit. The test for goodwill
impairment is a two-step process:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Step 1  We compare the carrying amount
    of our reporting unit, which is the book value of our entire
    company, to the fair value of our reporting unit, which
    corresponds to our market capitalization. If the carrying amount
    of our reporting unit exceeds its fair value, we have to perform
    the second step of the process. If not, no further work is
    needed.                                                                                                                
|
| | Step 2  We allocate the fair value of
    our reporting unit to all assets and liabilities of our
    reporting unit as if the reporting unit had been acquired in a
    business combination at the date of the impairment test. We then
    compare the implied fair value of our reporting unit goodwill to
    its carrying amount. If the carrying amount of our reporting
    units goodwill exceeds its fair value, an impairment loss
    will be recognized in an amount equal to that excess.

We completed this test during the fourth quarter
of 2002 and were not required to record an impairment loss on
goodwill.

We review our long-lived assets, including
property and equipment and other intangibles, for impairment
when events indicate that their carrying amount may not be
recoverable. When we determine that one or more impairment
indicators are present for an asset, we compare the carrying
amount of the asset to net future undiscounted cash flows that
the asset is expected to generate. If the carrying amount of the
asset is greater

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than the net future undiscounted cash flows that
the asset is expected to generate, we would compare the fair
value to the book value of the asset. If the fair value is less
than the book value, we would recognize an impairment loss. The
impairment loss would be the excess of the carrying amount of
the asset over its fair value.


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



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

We do not expect to record an impairment loss on
our long-lived assets in the near future.



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

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

We applied the provisions of Emerging Issues Task
Force, or EITF, Issue No. 94-3, Liability Recognition
for Certain Employee Termination Benefits and other Costs to
Exit an Activity (Including Certain Costs Incurred in a
Restructuring), and EITF Issue No. 88-10, Costs
Associated with Lease Modification or Termination, to all of
our restructuring activities initiated before January 1,
2003. For exit restructuring activities initiated on or after
January 1, 2003, we will apply the provisions of Statement
of Financial Accounting Standards, or SFAS, No. 146,
Accounting for Costs Associated with Exit or Disposal
Activities, outlined in our New Accounting
Pronouncementssection in Note 5 of the notes to
the condensed consolidated financial statements, which appears
elsewhere in this quarterly report on Form 10-Q.

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

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

Our estimates involve a number of risks and
uncertainties, some of which are beyond our control, including
future real estate market conditions and our ability to
successfully enter into subleases or lease termination
agreements upon terms as favorable as those assumed under our
restructuring plan. Actual results may differ significantly from
our estimates and may require adjustments to our restructuring
accruals and operating results in future periods. For example,
if actual proceeds from sublease agreements were to differ from
our estimate of proceeds from sublease agreements included in
our facility restructuring plan by 10%, the facility
restructuring charge recorded in operating expenses during the
fourth quarter of 2002 would have been different by
approximately $6.0 million.



| |                            
| | ---------------------------
| | 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

30



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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
September 30, 2003, we determined the valuation allowance
to be $103.1 million, which includes $22.9 million
related to the acquisition of Precise, based upon uncertainties
related to our ability to recover certain deferred tax assets.
The valuation allowance related to Precise deferred tax assets
will be credited to goodwill if realized. These deferred tax
assets are in specific geographical or jurisdictional locations
or are related to losses on strategic investments that will only
be realized with the generation of future capital gains within a
limited time period.


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.

Results of Operations



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

|                  |                   |                                   |       |       |  |                   |       |       |  |      |     |          |  |   |       |         |  |   |       |         |  |  |     |     | 
|----------------- | ----------------- | --------------------------------- | ----- | ----- |  | ----------------- | ----- | ----- |  | ---- | --- | -------- |  | - | ----- | ------- |  | - | ----- | ------- |  |  | --- | --- | 
|                  |                   |                                   |       |       |  |                   |       |       |  |     
|                  |                   | Three Months                      |       |       |  |                   |       |      
|                  |                   | Ended                             |       |       |  | Nine Months Ended |       |      
|                  |                   | September 30,                     |       |       |  | September 30,     |       |      
|                  |                   |                                   |       |       |  |                   |       |      
|                  |                   | 2003                              |       | 2002  |  | % Change          |       | 2003  |  | 2002 |     | % Change
|                  |                   |                                   |       |       |  |                   |       |       |  |      |     |         
|                  |                   |                                  
|                  |                   | (In millions, except percentages)
|User license fees |                   | $                                 | 290.2 |       |  | $                 | 240.7 |       |  |      | 21% |          |  | $ | 805.7 |         |  | $ | 742.3 |         |  |  | 9%  |    
|Services          |                   |                                   | 160.7 |       |  |                   | 125.0 |       |  |      | 29% |          |  |   | 452.4 |         |  |   | 358.5 |         |  |  | 26% |    
|                  |                   |                                   |       |       |  |                   |       |       |  |      |     |          |  |   |       |         |  |   |       |         |  |  |     |    
|                  | Total net revenue |                                   | $     | 450.9 |  |                   | $     | 365.7 |  |      |     | 23%      |  |   | $     | 1,258.1 |  |   | $     | 1,100.8 |  |  |     | 14% | 
|                  |                   |                                   |       |       |  |                   |       |       |  |      |     |          |  |   |       |         |  |   |       |         |  |  |     |    

Total net revenue increased 23% for the three
months ended September 30, 2003 over the same period in
2002 and 14% for the nine months ended September 30, 2003
over the same period in 2002. The increase in revenue is
attributable to growth in user license fees for our core and
emerging products, an increased sales penetration of
international markets, and the continued growth of our services
businesses. The benefit to revenue from fluctuations in currency
rates contributed approximately 3% to revenue growth for the
three and nine months ended September 30, 2003 over the
same periods in 2002. We expect total net revenue will increase
during the fourth quarter of 2003 as a result of continued
growth in our license and services revenues and the fact that we
tend to experience a higher volume of license transactions and
associated revenue in the fourth quarter as a result of our
customers spending patterns.



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

|                               |  |                                   |       |      |  |               |       |      |  |      |     |          |  |   |       |  |  |   |       |  |  |  |    | 
|------------------------------ |  | --------------------------------- | ----- | ---- |  | ------------- | ----- | ---- |  | ---- | --- | -------- |  | - | ----- |  |  | - | ----- |  |  |  | -- | 
|                               |  |                                   |       |      |  |               |       |     
|                               |  | Three Months                      |       |      |  | Nine Months   |       |     
|                               |  | Ended                             |       |      |  | Ended         |       |     
|                               |  | September 30,                     |       |      |  | September 30, |       |     
|                               |  |                                   |       |      |  |               |       |     
|                               |  | 2003                              |       | 2002 |  | % Change      |       | 2003 |  | 2002 |     | % Change
|                               |  |                                   |       |      |  |               |       |      |  |      |     |         
|                               |  |                                  
|                               |  | (In millions, except percentages)
|User license fees              |  | $                                 | 290.2 |      |  | $             | 240.7 |      |  |      | 21% |          |  | $ | 805.7 |  |  | $ | 742.3 |  |  |  | 9% | 
|As a percentage of net revenue |  |                                   | 64%   |      |  |               | 66%   |      |  |      |     |          |  |   | 64%   |  |  |   | 67%   |  |  |  |    | 

We derive user license fees from the sale of our
core technology products, including data protection and file
system and volume management products, and from our emerging
technology products, including cluster and replication, storage
area networking and application performance management products.
Revenue from core technology products comprises the majority of
user license fees and was 79% and 88% of total user license fees
for the three months ended September 30, 2003 and 2002,
respectively, and 83% and 87% for the nine months ended
September 30, 2003 and 2002, respectively.

31



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The increase in user license fees in the third
quarter of 2003 over the same period in 2002 reflects increases
in revenue from both core and emerging technology products.
Revenue from core products grew 9% in the third quarter of 2003
over the same period in 2002 and 3% for the nine months ended
2003 versus the same period in 2002. Revenue from emerging
technology products grew 101% in the third quarter of 2003 over
the same period in 2002 and 49% for the nine months ended
September 30, 2003 versus the same period in 2002. Revenue
from emerging technology products increased due to improved
market penetration of clustering and replication products and
also included $11.5 million from application performance
management products acquired with Precise.

|                                      |                       |                                       |   |       |       |               |   |       |       |      |  |          |     |  |   |       |       |  |   |       |       |  |  |     |    | 
|------------------------------------- | --------------------- | ------------------------------------- | - | ----- | ----- | ------------- | - | ----- | ----- | ---- |  | -------- | --- |  | - | ----- | ----- |  | - | ----- | ----- |  |  | --- | -- | 
|                                      |                       |                                       |   |       |       |               |   |      
|                                      |                       | Three Months                          |   |       |       | Nine Months   |   |      
|                                      |                       | Ended                                 |   |       |       | Ended         |   |      
|                                      |                       | September 30,                         |   |       |       | September 30, |   |      
|                                      |                       |                                       |   |       |       |               |   |      
|                                      |                       | 2003                                  |   | 2002  |       | % Change      |   | 2003  |       | 2002 |  | % Change
|                                      |                       |                                       |   |       |       |               |   |       |       |      |  |         
|                                      |                       |                                      
|                                      |                       | (In millions, except percentages)    
|User license fees:                    |                       |                                       |   |       |       |               |   |       |       |      |  |          |     |  |   |       |       |  |   |       |       |  |  |    
|                                      | Core technologies     |                                       | $ | 229.8 |       |               | $ | 210.7 |       |      |  | 9%       |     |  | $ | 667.1 |       |  | $ | 649.2 |       |  |  | 3%  |   
|                                      | Emerging technologies |                                       |   | 60.4  |       |               |   | 30.0  |       |      |  | 101%     |     |  |   | 138.6 |       |  |   | 93.1  |       |  |  | 49% |   
|                                      |                       |                                       |   |       |       |               |   |       |       |      |  |          |     |  |   |       |       |  |   |       |       |  |  |    
|                                      |                       | Total user license fees               |   | $     | 290.2 |               |   | $     | 240.7 |      |  |          | 21% |  |   | $     | 805.7 |  |   | $     | 742.3 |  |  |     | 9% | 
|                                      |                       |                                       |   |       |       |               |   |       |       |      |  |          |     |  |   |       |       |  |   |       |       |  |  |    
|As a percentage of user license fees: |                       |                                       |   |       |       |               |   |       |       |      |  |          |     |  |   |       |       |  |   |       |       |  |  |    
|                                      | Core technologies     |                                       |   | 79%   |       |               |   | 88%   |       |      |  |          |     |  |   | 83%   |       |  |   | 87%   |       |  |  |     |   
|                                      | Emerging technologies |                                       |   | 21%   |       |               |   | 12%   |       |      |  |          |     |  |   | 17%   |       |  |   | 13%   |       |  |  |     |   
|                                      |                       |                                       |   |       |       |               |   |       |       |      |  |          |     |  |   |       |       |  |   |       |       |  |  |    
|                                      |                       | Total percentage of user license fees |   |       | 100%  |               |   |       | 100%  |      |  |          |     |  |   |       | 100%  |  |   |       | 100%  |  |  |     |    | 

Our user license fees from original equipment
manufacturers decreased slightly in the third quarter of 2003 to
$38.3 million from $38.5 million during the third
quarter of 2002 and decreased 9% to $107.2 million for the
nine months ended September 30, 2003 from
$117.8 million for the nine months ended September 30,
2002. The user license fees from original equipment
manufacturers accounted for 13% of user license fees in the
third quarter of 2003 and 16% of user license fees in the third
quarter of 2002 and accounted for 13% for the nine months ended
September 30, 2003 and 16% for the nine months ended
September 30, 2002. The decrease in 2003 compared to 2002
reflects reduced hardware sales by original equipment
manufacturers as their customers reduced technology spending in
the weaker economic environment. We expect revenue from original
equipment manufacturers to continue decreasing as a percentage
of our total revenue as a result of increased offerings of
competitive software products by original equipment
manufacturers as well as the trend toward less bundling of
storage software with storage hardware.



| |                
| | ---------------
| | Service Revenue

|                               |  |                                   |       |      |  |               |       |      |  |      |     |          |  |   |       |  |  |   |       |  |  |  |     | 
|------------------------------ |  | --------------------------------- | ----- | ---- |  | ------------- | ----- | ---- |  | ---- | --- | -------- |  | - | ----- |  |  | - | ----- |  |  |  | --- | 
|                               |  |                                   |       |      |  |               |       |     
|                               |  | Three Months                      |       |      |  | Nine Months   |       |     
|                               |  | Ended                             |       |      |  | Ended         |       |     
|                               |  | September 30,                     |       |      |  | September 30, |       |     
|                               |  |                                   |       |      |  |               |       |     
|                               |  | 2003                              |       | 2002 |  | % Change      |       | 2003 |  | 2002 |     | % Change
|                               |  |                                   |       |      |  |               |       |      |  |      |     |         
|                               |  |                                  
|                               |  | (In millions, except percentages)
|Service revenue                |  | $                                 | 160.7 |      |  | $             | 125.0 |      |  |      | 29% |          |  | $ | 452.4 |  |  | $ | 358.5 |  |  |  | 26% | 
|As a percentage of net revenue |  |                                   | 36%   |      |  |               | 34%   |      |  |      |     |          |  |   | 36%   |  |  |   | 33%   |  |  |  |     | 

We derive our service revenue primarily from
contracts for software maintenance and technical support and, to
a lesser extent, consulting and training services. The increase
in service revenue in the third quarter and the first nine
months of 2003 over the same periods in 2002 was due primarily
to renewal of service and support contracts on existing
licenses, growth in international service revenue and, to a
lesser extent, an increase in demand for consulting and training
services. We expect our service revenue to increase in absolute
dollars primarily as a result of our continued focus on
increasing renewals of maintenance and technical support
contracts on existing licenses and an increasing demand for our
consulting and training services.

32



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##### Table of Contents





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

|                               |  |                                   |      |      |  |               |      |      |  |      |    |          |  |   |       |  |  |   |       |  |  |  |    | 
|------------------------------ |  | --------------------------------- | ---- | ---- |  | ------------- | ---- | ---- |  | ---- | -- | -------- |  | - | ----- |  |  | - | ----- |  |  |  | -- | 
|                               |  |                                   |      |      |  |               |      |     
|                               |  | Three Months                      |      |      |  | Nine Months   |      |     
|                               |  | Ended                             |      |      |  | Ended         |      |     
|                               |  | September 30,                     |      |      |  | September 30, |      |     
|                               |  |                                   |      |      |  |               |      |     
|                               |  | 2003                              |      | 2002 |  | % Change      |      | 2003 |  | 2002 |    | % Change
|                               |  |                                   |      |      |  |               |      |      |  |      |    |         
|                               |  |                                  
|                               |  | (In millions, except percentages)
|Cost of revenue                |  | $                                 | 70.9 |      |  | $             | 71.4 |      |  |      | (1 | )%       |  | $ | 217.6 |  |  | $ | 209.2 |  |  |  | 4% | 
|As a percentage of net revenue |  |                                   | 16%  |      |  |               | 20%  |      |  |      |    |          |  |   | 17%   |  |  |   | 19%   |  |  |  |    | 

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 and technical support, consulting and
training services. Cost of service revenue varies depending upon
the mix of maintenance and technical support, consulting and
training services. We expect gross margin to fluctuate in the
future, reflecting changes in royalty rates on licensed
technologies, the mix of license and service revenue and the
timing differences between increasing our organizational
investments and the recognition of revenue that we expect as a
result of these investments.



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

|                           |                                                                      |                                   |   |      |      |               |   |      |      |      |  |          |     |    |   |      |      |  |   |      |      |  |  |     |     |   
|-------------------------- | -------------------------------------------------------------------- | --------------------------------- | - | ---- | ---- | ------------- | - | ---- | ---- | ---- |  | -------- | --- | -- | - | ---- | ---- |  | - | ---- | ---- |  |  | --- | --- | --
|                           |                                                                      |                                   |   |      |      |               |   |     
|                           |                                                                      | Three Months                      |   |      |      | Nine Months   |   |     
|                           |                                                                      | Ended                             |   |      |      | Ended         |   |     
|                           |                                                                      | September 30,                     |   |      |      | September 30, |   |     
|                           |                                                                      |                                   |   |      |      |               |   |     
|                           |                                                                      | 2003                              |   | 2002 |      | % Change      |   | 2003 |      | 2002 |  | % Change
|                           |                                                                      |                                   |   |      |      |               |   |      |      |      |  |         
|                           |                                                                      |                                  
|                           |                                                                      | (In millions, except percentages)
|Cost of user license fees: |                                                                      |                                   |   |      |      |               |   |      |      |      |  |          |     |    |   |      |      |  |   |      |      |  |  |    
|                           | User license fees                                                    |                                   | $ | 11.2 |      |               | $ | 8.2  |      |      |  | 37%      |     |    | $ | 34.3 |      |  | $ | 26.2 |      |  |  | 31% |    
|                           | Amortization of developed technology                                 |                                   |   | 5.0  |      |               |   | 16.5 |      |      |  | (70      | )%  |    |   | 30.4 |      |  |   | 50.3 |      |  |  | (40 | )% 
|                           |                                                                      |                                   |   |      |      |               |   |      |      |      |  |          |     |    |   |      |      |  |   |      |      |  |  |    
|                           |                                                                      | Total cost of user license fees   |   | $    | 16.2 |               |   | $    | 24.7 |      |  |          | (34 | )% |   | $    | 64.7 |  |   | $    | 76.5 |  |  |     | (15 | )%
|Gross margin:              |                                                                      |                                   |   |      |      |               |   |      |      |      |  |          |     |    |   |      |      |  |   |      |      |  |  |    
|                           | User license fees including amortization of
    developed technology |                                   |   | 94%  |      |               |   | 90%  |      |      |  |          |     |    |   | 92%  |      |  |   | 90%  |      |  |  |     |    

Cost of user license fees consists primarily of
amortization of developed technology, royalties, media, manuals
and distribution costs. Amortization of developed technology is
related primarily to the acquisition of NSMG and other
acquisitions completed during 1999 and the first and second
quarters of 2003. Amortization of developed technology decreased
in the third quarter and first nine months of 2003 compared to
the same periods in 2002 primarily due to the intangibles
related to the NSMG acquisition reaching full amortization in
May 2003. In addition, during the fourth quarter of 2002, we
sold some of our technology and wrote-off the related net book
value of developed technology, which impacted the decrease in
the first nine months of 2003 compared to 2002. The gross margin
on user license fees may vary from period to period based on the
license revenue mix because some of our products carry higher
royalty rates than others. Excluding the amortization of
developed technology, we expect gross margins on user license
fees to remain relatively constant in the fourth quarter of 2003.



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

|                        |  |                                   |      |      |  |               |      |      |  |      |     |          |  |   |       |  |  |   |       |  |  |  |     | 
|----------------------- |  | --------------------------------- | ---- | ---- |  | ------------- | ---- | ---- |  | ---- | --- | -------- |  | - | ----- |  |  | - | ----- |  |  |  | --- | 
|                        |  |                                   |      |      |  |               |      |     
|                        |  | Three Months                      |      |      |  | Nine Months   |      |     
|                        |  | Ended                             |      |      |  | Ended         |      |     
|                        |  | September 30,                     |      |      |  | September 30, |      |     
|                        |  |                                   |      |      |  |               |      |     
|                        |  | 2003                              |      | 2002 |  | % Change      |      | 2003 |  | 2002 |     | % Change
|                        |  |                                   |      |      |  |               |      |      |  |      |     |         
|                        |  |                                  
|                        |  | (In millions, except percentages)
|Cost of service revenue |  | $                                 | 54.7 |      |  | $             | 46.7 |      |  |      | 17% |          |  | $ | 152.9 |  |  | $ | 132.7 |  |  |  | 15% | 
|Gross margin            |  |                                   | 66%  |      |  |               | 63%  |      |  |      |     |          |  |   | 66%   |  |  |   | 63%   |  |  |  |     | 

33



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##### Table of Contents



Cost of service revenue consists primarily of
personnel-related costs in providing maintenance and technical
support, consulting and training to customers. The gross margin
improvement in the third quarter and first nine months of 2003
over the same periods in 2002 was the result of our increased
productivity and higher service revenue growth due to support
fees from a larger installed customer base. We expect gross
margin on service revenue to remain stable or increase slightly
as a result of the reduction in labor costs associated with
technical support services by increasing our use of lower cost
personnel located in our facilities in India.



| |                                     
| | ------------------------------------
| | Amortization of Developed Technology

|                                     |  |                                   |     |      |  |               |      |      |  |      |     |          |  |   |      |  |  |   |      |  |  |  |     |   
|------------------------------------ |  | --------------------------------- | --- | ---- |  | ------------- | ---- | ---- |  | ---- | --- | -------- |  | - | ---- |  |  | - | ---- |  |  |  | --- | --
|                                     |  |                                   |     |      |  |               |      |     
|                                     |  | Three Months                      |     |      |  | Nine Months   |      |     
|                                     |  | Ended                             |     |      |  | Ended         |      |     
|                                     |  | September 30,                     |     |      |  | September 30, |      |     
|                                     |  |                                   |     |      |  |               |      |     
|                                     |  | 2003                              |     | 2002 |  | % Change      |      | 2003 |  | 2002 |     | % Change
|                                     |  |                                   |     |      |  |               |      |      |  |      |     |         
|                                     |  |                                  
|                                     |  | (In millions, except percentages)
|Amortization of developed technology |  | $                                 | 5.0 |      |  | $             | 16.5 |      |  |      | (70 | )%       |  | $ | 30.4 |  |  | $ | 50.3 |  |  |  | (40 | )%
|As a percentage of net revenue       |  |                                   | 1%  |      |  |               | 5%   |      |  |      |     |          |  |   | 2%   |  |  |   | 5%   |  |  |  |     |   

Amortization of developed technology is related
primarily to the acquisition of NSMG and other acquisitions
completed during 1999 and the first and second quarters of 2003.
Amortization of developed technology decreased in the third
quarter and first nine months of 2003 compared to the same
periods in 2002 primarily due to the intangibles related to the
NSMG acquisition reaching full amortization in May 2003. In
addition, during the fourth quarter of 2002, we sold some of our
technology and wrote-off the related net book value of developed
technology which impacted the decrease in the first half of 2003
compared to 2002. We expect amortization of developed technology
to decline in the fourth quarter of 2003 to approximately
$4.4 million per quarter, including the amortization
related to the January 2003 acquisition of Jareva and the June
2003 acquisition of Precise.



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

|                               |  |                                   |       |      |  |               |       |      |  |      |    |          |  |   |       |  |  |   |       |  |  |  |    | 
|------------------------------ |  | --------------------------------- | ----- | ---- |  | ------------- | ----- | ---- |  | ---- | -- | -------- |  | - | ----- |  |  | - | ----- |  |  |  | -- | 
|                               |  |                                   |       |      |  |               |       |     
|                               |  | Three Months                      |       |      |  | Nine Months   |       |     
|                               |  | Ended                             |       |      |  | Ended         |       |     
|                               |  | September 30,                     |       |      |  | September 30, |       |     
|                               |  |                                   |       |      |  |               |       |     
|                               |  | 2003                              |       | 2002 |  | % Change      |       | 2003 |  | 2002 |    | % Change
|                               |  |                                   |       |      |  |               |       |      |  |      |    |         
|                               |  |                                  
|                               |  | (In millions, except percentages)
|Operating expenses             |  | $                                 | 257.8 |      |  | $             | 244.4 |      |  |      | 6% |          |  | $ | 773.8 |  |  | $ | 734.8 |  |  |  | 5% | 
|As a percentage of net revenue |  |                                   | 57%   |      |  |               | 67%   |      |  |      |    |          |  |   | 62%   |  |  |   | 67%   |  |  |  |    | 

Our operating expenses include selling and
marketing expenses, research and development expenses, general
and administrative expenses, amortization of other intangibles
and in-process research and development expense. The increase in
total operating expenses in the third quarter and first nine
months of 2003 over the same periods in 2002 was primarily the
result of increases in selling and marketing expenses, research
and development, general and administrative expenses and the
write-off of in-process research and development related to the
acquisitions of Precise and Jareva in the second quarter and
first quarter of 2003, respectively, partially offset by a
decrease in amortization of other intangibles. Changes in
currency rates, primarily due to the weakening of the
U.S. Dollar versus the Euro, contributed approximately 4%
and 3% to the expense growth for the third quarter and first
nine months of 2003, respectively, versus the same periods in
2002. During the fourth quarter of 2003, we expect our operating
margin to increase compared to the third quarter of 2003 due to
the expected increase in net revenue.

34



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##### Table of Contents





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

|                               |  |                                   |       |      |  |               |       |      |  |      |     |          |  |   |       |  |  |   |       |  |  |  |    | 
|------------------------------ |  | --------------------------------- | ----- | ---- |  | ------------- | ----- | ---- |  | ---- | --- | -------- |  | - | ----- |  |  | - | ----- |  |  |  | -- | 
|                               |  |                                   |       |      |  |               |       |     
|                               |  | Three Months                      |       |      |  | Nine Months   |       |     
|                               |  | Ended                             |       |      |  | Ended         |       |     
|                               |  | September 30,                     |       |      |  | September 30, |       |     
|                               |  |                                   |       |      |  |               |       |     
|                               |  | 2003                              |       | 2002 |  | % Change      |       | 2003 |  | 2002 |     | % Change
|                               |  |                                   |       |      |  |               |       |      |  |      |     |         
|                               |  |                                  
|                               |  | (In millions, except percentages)
|Selling and marketing          |  | $                                 | 139.0 |      |  | $             | 122.0 |      |  |      | 14% |          |  | $ | 384.1 |  |  | $ | 375.7 |  |  |  | 2% | 
|As a percentage of net revenue |  |                                   | 31%   |      |  |               | 33%   |      |  |      |     |          |  |   | 31%   |  |  |   | 34%   |  |  |  |    | 

Selling and marketing expenses consist primarily
of salaries, related benefits, commissions, consultant fees and
other costs associated with our sales and marketing efforts. The
increase in selling and marketing expense in the third quarter
and first nine months of 2003 over the same periods in 2002 is
primarily the result of an increase in staffing levels primarily
related to the Precise acquisition. For the fourth quarter of
2003, we expect selling and marketing expenses to increase in
absolute dollars as a result of our investments in international
sales and marketing efforts.



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

|                               |  |                                   |      |      |  |               |      |      |  |      |     |          |  |   |       |  |  |   |       |  |  |  |     | 
|------------------------------ |  | --------------------------------- | ---- | ---- |  | ------------- | ---- | ---- |  | ---- | --- | -------- |  | - | ----- |  |  | - | ----- |  |  |  | --- | 
|                               |  |                                   |      |      |  |               |      |     
|                               |  | Three Months                      |      |      |  | Nine Months   |      |     
|                               |  | Ended                             |      |      |  | Ended         |      |     
|                               |  | September 30,                     |      |      |  | September 30, |      |     
|                               |  |                                   |      |      |  |               |      |     
|                               |  | 2003                              |      | 2002 |  | % Change      |      | 2003 |  | 2002 |     | % Change
|                               |  |                                   |      |      |  |               |      |      |  |      |     |         
|                               |  |                                  
|                               |  | (In millions, except percentages)
|Research and development       |  | $                                 | 78.0 |      |  | $             | 69.2 |      |  |      | 13% |          |  | $ | 221.9 |  |  | $ | 202.1 |  |  |  | 10% | 
|As a percentage of net revenue |  |                                   | 17%  |      |  |               | 19%  |      |  |      |     |          |  |   | 18%   |  |  |   | 18%   |  |  |  |     | 

Research and development expenses consist
primarily of salaries, related benefits, third-party consultant
fees, stock-based compensation expense and other engineering
related costs. The increase in research and development expense
in the third quarter and first nine months of 2003 over the same
periods in 2002 is primarily the result of an increase in
staffing levels. The increase in headcount is due primarily to
the acquisition of Jareva in January 2003 and Precise in June
2003. We believe that a significant level of research and
development investment is required to remain competitive and
expect research and development expenses to increase in absolute
dollars as a result of this investment, partially offset by an
increased use of research and development personnel in India,
where labor costs are lower.



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

|                               |  |                                   |      |      |  |               |      |      |  |      |   |          |  |   |       |   |  |   |       |   |  |  |    |  
|------------------------------ |  | --------------------------------- | ---- | ---- |  | ------------- | ---- | ---- |  | ---- | - | -------- |  | - | ----- | - |  | - | ----- | - |  |  | -- | -
|                               |  |                                   |      |      |  |               |      |     
|                               |  | Three Months                      |      |      |  | Nine Months   |      |     
|                               |  | Ended                             |      |      |  | Ended         |      |     
|                               |  | September 30,                     |      |      |  | September 30, |      |     
|                               |  |                                   |      |      |  |               |      |     
|                               |  | 2003                              |      | 2002 |  | % Change      |      | 2003 |  | 2002 |   | % Change
|                               |  |                                   |      |      |  |               |      |      |  |      |   |         
|                               |  |                                  
|                               |  | (In millions, except percentages)
|General and administrative     |  | $                                 | 38.4 |      |  | $             | 35.2 |      |  |      | 9 | %        |  | $ | 115.5 |   |  | $ | 102.9 |   |  |  | 12 | %
|As a percentage of net revenue |  |                                   | 9    | %    |  |               | 10   | %    |  |      |   |          |  |   | 9     | % |  |   | 9     | % |  |  |    |  

General and administrative expenses consist
primarily of salaries, related benefits and fees for
professional services, such as legal and accounting services.
The increase in general and administrative expense in the third
quarter and first nine months of 2003 over the same periods in
2002 is primarily the result of an increase in staffing levels,
expenses associated with outside services, primarily legal and
consulting, and increases in facility costs related to new
facilities in Milpitas, California and Reading, UK in the first
quarter of 2003. We expect general and administrative expenses
as a percentage of net revenue to remain relatively stable for
the remainder of 2003.

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

|                                  |  |                                   |     |      |  |               |      |      |  |      |     |          |  |   |      |   |  |   |      |   |  |  |     |   
|--------------------------------- |  | --------------------------------- | --- | ---- |  | ------------- | ---- | ---- |  | ---- | --- | -------- |  | - | ---- | - |  | - | ---- | - |  |  | --- | --
|                                  |  |                                   |     |      |  |               |      |     
|                                  |  | Three Months                      |     |      |  | Nine Months   |      |     
|                                  |  | Ended                             |     |      |  | Ended         |      |     
|                                  |  | September 30,                     |     |      |  | September 30, |      |     
|                                  |  |                                   |     |      |  |               |      |     
|                                  |  | 2003                              |     | 2002 |  | % Change      |      | 2003 |  | 2002 |     | % Change
|                                  |  |                                   |     |      |  |               |      |      |  |      |     |         
|                                  |  |                                  
|                                  |  | (In millions, except percentages)
|Amortization of other intangibles |  | $                                 | 2.5 |      |  | $             | 18.0 |      |  |      | (86 | )%       |  | $ | 32.9 |   |  | $ | 54.0 |   |  |  | (39 | )%
|As a percentage of net revenue    |  |                                   | 1   | %    |  |               | 5    | %    |  |      |     |          |  |   | 3    | % |  |   | 5    | % |  |  |     |   

Amortization of other intangibles principally
represents amortization of distribution channels, trademarks and
other intangibles recorded upon the acquisitions completed
during 1999 and the first and second quarters of 2003. The
estimated useful life of our other intangibles is six months to
five years, with the majority of intangibles being amortized
over two to four years. Other intangibles related to the 1999
acquisitions were fully amortized in May 2003. We expect
amortization of other intangibles in the fourth quarter of 2003
to be approximately $2.4 million per quarter because we
will realize the full impact of fully amortized intangibles,
partially offset by the impact of the January 2003 acquisition
of Jareva and June 2003 acquisition of Precise.



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

|                                                 |  |                                   |   |      |  |               |   |      |  |      |   |          |  |   |      |   |  |   |   |  |  |  |     |  
|------------------------------------------------ |  | --------------------------------- | - | ---- |  | ------------- | - | ---- |  | ---- | - | -------- |  | - | ---- | - |  | - | - |  |  |  | --- | -
|                                                 |  |                                   |   |      |  |               |   |     
|                                                 |  | Three Months                      |   |      |  | Nine Months   |   |     
|                                                 |  | Ended                             |   |      |  | Ended         |   |     
|                                                 |  | September 30,                     |   |      |  | September 30, |   |     
|                                                 |  |                                   |   |      |  |               |   |     
|                                                 |  | 2003                              |   | 2002 |  | % Change      |   | 2003 |  | 2002 |   | % Change
|                                                 |  |                                   |   |      |  |               |   |      |  |      |   |         
|                                                 |  |                                  
|                                                 |  | (In millions, except percentages)
|Write-off of in-process research and development |  | $                                 |  |      |  | $             |  |      |  |      |  |          |  | $ | 19.4 |   |  | $ |  |  |  |  | 100 | %
|As a percentage of net revenue                   |  |                                   |  |      |  |               |  |      |  |      |   |          |  |   | 2    | % |  |   |  |  |  |  |     |  

In connection with the acquisition of Precise in
June 2003, we allocated $15.3 million of the purchase price
to in-process technology that has not yet reached technological
feasibility and has no alternative future use. In order to value
purchased in-process research and development, or IPR&D,
research projects in areas for which technological feasibility
had not been established were identified. The value of these
projects was determined by estimating the expected cash flows
from the projects once commercially viable and discounting the
net cash flows back to their present value, using adjusted
discount rates based on the percentage of completion of the
in-process projects.

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

The estimated revenues are based on our
projection of each in-process project and the business
projections were compared and found to be consistent with
industry analysts forecasts of growth in substantially all
of the relevant markets. Estimated total revenues from the
IPR&D product areas are expected to peak in the year ending
December 31, 2005 and decline from 2006 into 2007 as other
new products are expected to become available.

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

Discount Rate.Discounting the expected net cash
flows back to their present value is based on the industry
weighted average cost of capital, or WACC. We believe the
industry WACC is approximately 15%. The discount rate used to
discount the expected net cash flows from IPR&D is 28%. The
discount rate used is higher than the industry WACC due to
inherent uncertainties surrounding the successful development of
IPR&D, market acceptance of the technology, the useful life
of such technology and the uncertainty of technological advances
which could potentially impact the estimates described above.

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Percentage of Completion.The percentage of completion for
in-process Precise technology was determined using costs
incurred to date on each project as compared to the remaining
research and development to be completed as well as major
milestones to bring each project to technological feasibility.
The percentage of completion for projects under development
ranged from 40-65%.

Upon the acquisition of Jareva in January 2003,
we recorded a charge to IPR&D of $4.1 million. We
obtained an outside valuation for this acquisition, and values
were assigned to developed technology, IPR&D and other
intangibles. The fair value of the IPR&D for the acquisition
of Jareva was determined using the income approach, which
discounts expected future cash flows from projects under
development to their net present value. Each project was
analyzed to determine the characteristics and applications of
the technology; the complexity, cost and time to complete the
remaining development efforts; any alternative future use or
current technological feasibility; and the stage of completion.
Two IPR&D projects were identified and valued at the time of
our acquisition of Jareva. The projected future cash flows from
the projects under development were based on our estimates of
revenues and operating profits related to the projects. Revenues
on the projects related to IPR&D were estimated to begin in
2003 through 2007, with the majority of the revenues occurring
in 2006 and 2007. Costs to complete these two research and
development projects were estimated at $1.3 million. At the
date of acquisition, the development of the related products was
estimated at 52% complete, with an expected completion date of
June 2003 for both projects. Both IPR&D projects were
completed as of June 30, 2003. The risk-adjusted discount
rate applied to after-tax cash flows was 38%, compared to an
estimated weighted average cost of capital of 18%. We believe
the amounts determined for IPR&D are representative of the
fair value and do not exceed the amounts an independent third
party would pay for the projects assumed.

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



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

|                               |  |                                   |      |      |  |               |      |      |  |      |    |          |  |   |      |   |  |   |      |   |  |  |    |   
|------------------------------ |  | --------------------------------- | ---- | ---- |  | ------------- | ---- | ---- |  | ---- | -- | -------- |  | - | ---- | - |  | - | ---- | - |  |  | -- | --
|                               |  |                                   |      |      |  |               |      |     
|                               |  | Three Months                      |      |      |  | Nine Months   |      |     
|                               |  | Ended                             |      |      |  | Ended         |      |     
|                               |  | September 30,                     |      |      |  | September 30, |      |     
|                               |  |                                   |      |      |  |               |      |     
|                               |  | 2003                              |      | 2002 |  | % Change      |      | 2003 |  | 2002 |    | % Change
|                               |  |                                   |      |      |  |               |      |      |  |      |    |         
|                               |  |                                  
|                               |  | (In millions, except percentages)
|Interest and other income, net |  | $                                 | 16.7 |      |  | $             | 10.6 |      |  |      | 58 | %        |  | $ | 36.3 |   |  | $ | 37.5 |   |  |  | (3 | )%
|As a percentage of net revenue |  |                                   | 4    | %    |  |               | 3    | %    |  |      |    |          |  |   | 3    | % |  |   | 3    | % |  |  |    |   

The increase in interest and other income in the
third quarter of 2003 compared to 2002 is due to the one-time
gain on the settlement of a cross currency interest rate swap.
The decrease in interest and other income for the first nine
months of 2003 compared to 2002 is primarily due to lower
interest rates and the appreciation of the Euro against the
U.S. Dollar experienced since the third quarter of 2002.
This decrease was partially offset by the higher level of funds
available for investment in 2003, which was generated primarily
from the net cash provided by operating activities, a
$2.2 million gain on the sale of one of our investments and
the gain on the settlement of the cross currency interest rate
swap.



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

|                               |  |                                   |     |      |  |               |     |      |  |      |    |          |  |   |      |   |  |   |      |   |  |  |   |  
|------------------------------ |  | --------------------------------- | --- | ---- |  | ------------- | --- | ---- |  | ---- | -- | -------- |  | - | ---- | - |  | - | ---- | - |  |  | - | -
|                               |  |                                   |     |      |  |               |     |     
|                               |  | Three Months                      |     |      |  | Nine Months   |     |     
|                               |  | Ended                             |     |      |  | Ended         |     |     
|                               |  | September 30,                     |     |      |  | September 30, |     |     
|                               |  |                                   |     |      |  |               |     |     
|                               |  | 2003                              |     | 2002 |  | % Change      |     | 2003 |  | 2002 |    | % Change
|                               |  |                                   |     |      |  |               |     |      |  |      |    |         
|                               |  |                                  
|                               |  | (In millions, except percentages)
|Interest expense               |  | $                                 | 9.2 |      |  | $             | 7.6 |      |  |      | 21 | %        |  | $ | 24.8 |   |  | $ | 23.0 |   |  |  | 8 | %
|As a percentage of net revenue |  |                                   | 2   | %    |  |               | 2   | %    |  |      |    |          |  |   | 2    | % |  |   | 2    | % |  |  |   |  

For the three and nine months ended
September 30, 2003, interest expense consisted of interest
recorded under the 0.25% convertible subordinated notes issued
in August 2003, interest recorded under the 1.856% convertible
subordinated notes issued in August 1999 and partially redeemed
for cash and partially converted

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to common stock in August 2003, interest recorded
under the 5.25% convertible subordinated notes issued in October
1997 and converted to common stock in August 2003, and
commencing July 2003, interest of approximately
$4.1 million per quarter as a result of the adoption of
Financial Accounting Standards Board, or FASB, Interpretation
No., or FIN, 46, Consolidation of Variable Interest
Entities, which requires us to consolidate the properties
from our build-to-suit lease agreements and related debt in our
financial statements. Previously, interest on the build-to-suit
lease agreements was recorded as rent expense in operating
expenses. We expect interest expense in the future to be
approximately $4.5 million per quarter representing the
interest on the 0.25% convertible subordinated notes and the
interest on the build-to-suit lease agreements. For the three
and nine months ended September 30, 2002, interest expense
consisted primarily of interest recorded under the 1.856% and
5.25% convertible subordinated notes.




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

|                               |  |                                   |     |      |  |               |   |      |  |      |     |          |  |   |     |  |  |   |   |  |  |  |     |  
|------------------------------ |  | --------------------------------- | --- | ---- |  | ------------- | - | ---- |  | ---- | --- | -------- |  | - | --- |  |  | - | - |  |  |  | --- | -
|                               |  |                                   |     |      |  |               |   |     
|                               |  | Three Months                      |     |      |  | Nine Months   |   |     
|                               |  | Ended                             |     |      |  | Ended         |   |     
|                               |  | September 30,                     |     |      |  | September 30, |   |     
|                               |  |                                   |     |      |  |               |   |     
|                               |  | 2003                              |     | 2002 |  | % Change      |   | 2003 |  | 2002 |     | % Change
|                               |  |                                   |     |      |  |               |   |      |  |      |     |         
|                               |  |                                  
|                               |  | (In millions, except percentages)
|Loss on extinguishment of debt |  | $                                 | 4.7 |      |  | $             |  |      |  |      | 100 | %        |  | $ | 4.7 |  |  | $ |  |  |  |  | 100 | %
|As a percentage of net revenue |  |                                   | (1  | )%   |  |               |  |      |  |      |     |          |  |   |    |  |  |   |  |  |  |  |     |  

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



| |                              
| | -----------------------------
| | Loss on Strategic Investments

|                               |  |                                   |   |      |  |               |   |      |  |      |   |          |  |   |     |  |  |   |      |   |  |  |     |   
|------------------------------ |  | --------------------------------- | - | ---- |  | ------------- | - | ---- |  | ---- | - | -------- |  | - | --- |  |  | - | ---- | - |  |  | --- | --
|                               |  |                                   |   |      |  |               |   |     
|                               |  | Three Months                      |   |      |  | Nine Months   |   |     
|                               |  | Ended                             |   |      |  | Ended         |   |     
|                               |  | September 30,                     |   |      |  | September 30, |   |     
|                               |  |                                   |   |      |  |               |   |     
|                               |  | 2003                              |   | 2002 |  | % Change      |   | 2003 |  | 2002 |   | % Change
|                               |  |                                   |   |      |  |               |   |      |  |      |   |         
|                               |  |                                  
|                               |  | (In millions, except percentages)
|Loss on strategic investments  |  | $                                 |  |      |  | $             |  |      |  |      |  |          |  | $ | 3.5 |  |  | $ | 14.8 |   |  |  | (76 | )%
|As a percentage of net revenue |  |                                   |  |      |  |               |  |      |  |      |   |          |  |   |    |  |  |   | 1    | % |  |  |     |   

With the decline in general economic conditions
beginning in 2001, some of the companies in which we have
invested have experienced extreme volatility and instability in
their business and operating results. During the first quarter
of 2003, we recognized impairment losses 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. For the three months ended
September 30, 2003, we determined that there was no further
impairment, other than temporary, on our strategic investments.



| |             
| | ------------
| | Income Taxes

|                               |  |                                   |      |      |  |               |      |      |  |      |     |          |  |   |      |   |  |   |      |   |  |  |    |  
|------------------------------ |  | --------------------------------- | ---- | ---- |  | ------------- | ---- | ---- |  | ---- | --- | -------- |  | - | ---- | - |  | - | ---- | - |  |  | -- | -
|                               |  |                                   |      |      |  |               |      |     
|                               |  | Three Months                      |      |      |  | Nine Months   |      |     
|                               |  | Ended                             |      |      |  | Ended         |      |     
|                               |  | September 30,                     |      |      |  | September 30, |      |     
|                               |  |                                   |      |      |  |               |      |     
|                               |  | 2003                              |      | 2002 |  | % Change      |      | 2003 |  | 2002 |     | % Change
|                               |  |                                   |      |      |  |               |      |      |  |      |     |         
|                               |  |                                  
|                               |  | (In millions, except percentages)
|Income taxes                   |  | $                                 | 41.1 |      |  | $             | 16.7 |      |  |      | 146 | %        |  | $ | 95.1 |   |  | $ | 49.8 |   |  |  | 91 | %
|As a percentage of net revenue |  |                                   | 9    | %    |  |               | 5    | %    |  |      |     |          |  |   | 8    | % |  |   | 5    | % |  |  |    |  

Our effective tax rates for the three months
ended September 30, 2003 and 2002 were 33% and 32%,
respectively, and 35% and 32%, respectively, for the nine months
ended September 30, 2003 and 2002. Our effective tax rates
for the third quarter and first nine months of 2003 and 2002
differed from the federal statutory rate due primarily to
differences attributable to acquisition-related charges,
including in-process

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research and development, that were
non-deductible for tax purposes and to foreign earnings which
are taxed at rates different from the federal statutory rate.




| |                                                                    
| | -------------------------------------------------------------------
| | Cumulative Effect of Change in Accounting
    Principle, net of tax

|                                                                    |  |                                   |     |      |  |               |   |      |  |      |     |          |  |   |     |  |  |   |   |  |  |  |     |  
|------------------------------------------------------------------- |  | --------------------------------- | --- | ---- |  | ------------- | - | ---- |  | ---- | --- | -------- |  | - | --- |  |  | - | - |  |  |  | --- | -
|                                                                    |  |                                   |     |      |  |               |   |     
|                                                                    |  | Three Months                      |     |      |  | Nine Months   |   |     
|                                                                    |  | Ended                             |     |      |  | Ended         |   |     
|                                                                    |  | September 30,                     |     |      |  | September 30, |   |     
|                                                                    |  |                                   |     |      |  |               |   |     
|                                                                    |  | 2003                              |     | 2002 |  | % Change      |   | 2003 |  | 2002 |     | % Change
|                                                                    |  |                                   |     |      |  |               |   |      |  |      |     |         
|                                                                    |  |                                  
|                                                                    |  | (In millions, except percentages)
|Cumulative effect of change in accounting
    principle, net of tax |  | $                                 | 6.2 |      |  | $             |  |      |  |      | 100 | %        |  | $ | 6.2 |  |  | $ |  |  |  |  | 100 | %
|As a percentage of net revenue                                      |  |                                   | 1   | %    |  |               |  |      |  |      |     |          |  |   |    |  |  |   |  |  |  |  |     |  

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

New Accounting Pronouncements

In May 2003, the FASB issued SFAS No. 150,
Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity. SFAS
No. 150 establishes standards for how an issuer classifies
and measures certain financial instruments with characteristics
of both liabilities and equity. SFAS No. 150 is effective
for financial instruments entered into or modified after
May 31, 2003 and otherwise is effective on July 1,
2003. The adoption of SFAS No. 150 did not have a material
effect on our financial position, results of operations or cash
flows.

In April 2003, the FASB issued SFAS No. 149,
Amendment of Statement 133 on Derivative Instruments and
Hedging Activities, which amends and clarifies financial
accounting and reporting for derivative instruments, including
certain derivative instruments embedded in other contracts and
for hedging activities under SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities. In
particular, SFAS No. 149 (1) clarifies under what
circumstances a contract with an initial net investment meets
the characteristic of a derivative, (2) clarifies when a
derivative contains a financing component, (3) amends the
definition of an underlying to conform it to language used in
FIN 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, and (4) amends certain other
existing pronouncements. SFAS No. 149 is effective for
contracts entered into or modified after June 30, 2003 and
for hedging relationships designated after June 30, 2003,
with certain exceptions. The adoption of SFAS No. 149 did
not have a material effect on our financial position, results of
operations or cash flows.

In January 2003, the FASB issued FIN 46,
Consolidation of Variable Interest Entities, which
addresses the consolidation of variable interest entities. FIN
46 provides guidance for determining when an entity that is the
primary beneficiary of a variable interest entity or equivalent
structure should consolidate the variable interest entity into
the entitys financial statements. The provisions of FIN 46
are to be applied no later than the beginning of the first
interim or annual reporting period beginning after
December 15, 2003 for variable interest entities created
before February 1, 2003 and still existing on June 15,
2003. We currently have three build-to-suit operating leases,
commonly referred to as synthetic leases, which were entered
into prior to February 1, 2003. Each synthetic lease is
owned by a trust that has no voting rights, no employees, no

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financing activity other than the lease with us,
no ability to absorb losses and no right to participate in gains
realized on the sale of the related property. We have determined
that the trusts under the leasing structures qualify as variable
interest entities for purposes of FIN 46. Consequently, we are
considered the primary beneficiary and consolidated the trusts
into our financial statements beginning July 1, 2003. As a
result of consolidating these entities in the third quarter of
2003, we reported a cumulative effect of change in accounting
principle in accordance with APB No. 20, Accounting
Changes, with a charge of $6.2 million which equals the
amount of depreciation expense that would have been recorded had
these trusts been consolidated from the date the properties were
available for occupancy, net of tax. In addition, on
July 1, 2003, we recorded property and equipment, net of
accumulated depreciation, equal to $366.8 million,
long-term debt in the amount of $369.2 million and
non-controlling interest of $11.4 million for a total of
$380.6 million of long-term debt on the balance sheet.
Depreciation expense related to these properties is
approximately $1.6 million per quarter and
$4.2 million per quarter of rent expense previously
classified as operating expense has been classified as interest
expense in the statements of operations beginning July 1,
2003.


In November 2002, the FASB issued FIN 45,
Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others. FIN 45 requires that we recognize the fair value for
guarantee and indemnification arrangements issued or modified by
us after December 31, 2002, if these arrangements are
within the scope of the Interpretation. In addition, we must
continue to monitor the conditions that are subject to the
guarantees and indemnifications, as required under previously
existing generally accepted accounting principles, in order to
identify if a loss has occurred. If we determine it is probable
that a loss has occurred then any such estimable loss would be
recognized under those guarantees and indemnifications. Some of
the software licenses granted by us contain provisions that
indemnify licensees of our software from damages and costs
resulting from claims alleging that our software infringes the
intellectual property rights of a third party. We have
historically received only a limited number of requests for
indemnification under these provisions and have not been
required to make material payments pursuant to these provisions.
Accordingly, we have not recorded a liability related to these
indemnification provisions. We do not have any guarantees or
indemnification arrangements other than the indemnification
clause in some of our software licenses, the guarantee on a
credit facility discussed in Note 16 to our condensed
consolidated financial statements and the guarantee on our three
build-to-suit lease agreements for buildings in Mountain View,
Roseville and Milpitas discussed in Note 17 to our
condensed consolidated financial statements. We adopted FIN 45
effective January 1, 2003. The adoption of FIN 45 did not
have a material impact on our financial position, results of
operations or cash flows.

In June 2002, the FASB issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal
Activities. SFAS No. 146 supersedes Emerging Issues
Task Force, or EITF, Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and other
Costs to Exit an Activity (Including Certain Costs Incurred in a
Restructuring). SFAS No. 146 addresses the recognition,
measurement, and reporting of costs that are associated with
exit and disposal activities. These costs include those related
to terminating a contract that is not a capital lease and
termination benefits that employees who are involuntarily
terminated receive under the terms of a one-time benefit
arrangement that is not an ongoing benefit arrangement or an
individual deferred-compensation contract. The provisions of
SFAS No. 146 require that the liability for costs
associated with an exit or disposal activity be recorded at fair
value and that they be recognized when the liability is incurred
rather than at the date of the commitment to an exit plan as
prescribed under EITF Issue No. 94-3. SFAS No. 146 is
applied prospectively for exit or disposal activities that are
initiated after December 31, 2002 and accordingly,
liabilities recognized prior to the initial application of SFAS
No. 146 will continue to be accounted for in accordance
with EITF Issue No. 94-3. We adopted SFAS No. 146
effective January 1, 2003.

In June 2001, the FASB issued SFAS No. 143,
Accounting for Asset Retirement Obligations. SFAS
No. 143 addresses the financial accounting and reporting
for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs.
SFAS No. 143 applies to legal obligations associated with
the retirement of long-lived assets that result from the
acquisition, construction, development or normal use of the
assets. SFAS No. 143 requires that the fair value of a
liability for an asset retirement obligation be recognized in
the period in which it is incurred if a reasonable estimate of
fair value can be made.

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The fair value of the liability is added to the
carrying amount of the associated asset, and this additional
carrying amount is expensed over the life of the asset. We
adopted SFAS No. 143 effective January 1, 2003. The
adoption of SFAS No. 143 did not have a material effect on
our financial position, results of operations or cash flows.


Liquidity and Capital Resources



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

Our cash, cash equivalents and short-term
investments totaled $2,289.1 million at September 30,
2003 and represented 69% of our net tangible assets. Our cash,
cash equivalents and short-term investments totaled
$2,241.3 million at December 31, 2002 and represented
77% of our net tangible assets. Cash and cash equivalents are
highly liquid with original maturities of 90 days or less.
Short-term investments consist mainly of commercial paper,
medium-term notes, corporate notes, government agency securities
(taxable and non-taxable), asset-backed securities and market
auction preferreds.

Operating activities, provided cash of
$455.2 million for the nine months ended September 30,
2003, primarily due to net income of $168.9 million,
adjusted for depreciation and amortization of
$83.5 million, amortization of other intangibles, developed
technology and original issue discount on convertible notes of
$74.0 million, in-process research and development expense
of $19.4 million, tax benefits from stock plans of
$24.9 million, a decrease in accounts receivable of
$31.8 million, an increase in income taxes payable of
$73.2 million and an increase in deferred revenue of
$39.4 million which were partially offset by deferred
income taxes of $21.5 million and decreases in accounts
payable of $12.1 million, accrued acquisition and
restructuring costs of $19.6 million and other accrued
liabilities of $10.7 million. Operating activities provided
cash of $440.7 million for the nine months ended
September 30, 2002, primarily due to net income of
$106.7 million, adjusted for depreciation and amortization
of $80.1 million, amortization of other intangibles,
developed technology and original issue discount on convertible
notes of $116.4 million, tax benefits from stock plans of
$19.6 million, loss on strategic investments of
$14.8 million, a decrease in accounts receivable of
$57.5 million, an increase in income taxes payable of
$60.6 million and an increase in deferred revenue of
$17.7 million, partially offset by deferred income taxes of
$39.4 million. We expect cash flows from operating
activities to increase in the fourth quarter of 2003.

Investing activities used cash of
$446.0 million for the nine months ended September 30,
2003, primarily due to the acquisitions of Precise and Jareva,
net of cash acquired, for $398.7 million and purchases of
property and equipment of $58.4 million, partially offset
by net sales of short-term investments of $15.3 million.
Investing activities used cash of $226.8 million for the
nine months ended September 30, 2002, primarily due to the
net purchases of short-term investments of $135.9 million,
purchases of property and equipment of $83.7 million and
payment made for purchases of businesses and technologies of
$7.3 million.

Financing activities used cash of
$67.1 million for the nine months ended September 30,
2003 as a result of the redemption of $391.7 million of our
1.856% convertible subordinated notes and the repurchase of
$316.2 million of our common stock pursuant to a stock
repurchase program, partially offset by net proceeds from
issuance of convertible subordinated notes of
$508.3 million and the issuance of $132.5 million of
common stock under our employee stock plans. Financing
activities provided cash of $80.4 million for the nine
months ended September 30, 2002 as a result of the issuance
of common stock under our employee stock plans.

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

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

In August 2003, we issued $520.0 million of
0.25% convertible subordinated notes due August 1, 2013, or
0.25% notes, for which we received net proceeds of approximately
$508.3 million, to several initial purchasers in a private
offering.

The 0.25% notes were issued at their face value
and provide for semi-annual interest payments of
$0.7 million each February 1 and August 1,
beginning February 1, 2004. The 0.25% notes are
convertible, under the specified circumstances discussed below,
into shares of our common stock at a conversion rate of 21.6802
shares per $1,000 principal amount of notes, which is equivalent
to a conversion price of approximately $46.13 per share. The
conversion rate is subject to adjustment upon the occurrence of
specified events. The specified circumstances under which the
0.25% notes are convertible prior to maturity are:
(1) during any quarterly conversion period (which periods
begin on the eleventh trading day of each fiscal quarter and end
on the eleventh trading day of the following fiscal quarter)
prior to August 1, 2010, if the closing sale price of our
common stock for at least 20 trading days in the 30 trading day
period ending on the first day of such conversion period exceeds
120% of the conversion price of the notes on that first day,
(2) during the period beginning August 1, 2010 through
the maturity date of the notes, if the closing sale price of our
common stock is more than 120% of the then current conversion
price, (3) during the five consecutive business day period
following any five consecutive trading day period in which the
average of the trading prices for the 0.25% notes was less than
95% of the average of the sale price of our common stock
multiplied by the then current conversion rate of the notes,
(4) our corporate credit rating assigned by Standard &
Poors falls below B-(and if Moodys has assigned a
corporate credit rating to us and such rating is lower than B3)
or if both such ratings are withdrawn, (5) we call the
notes for redemption or (6) upon the occurrence of
corporate transactions specified in the indenture governing the
notes. Upon any conversion of notes by a holder, we shall have
the option to satisfy the conversion obligation in shares of our
common stock, in cash or a combination thereof. It is our
intention to satisfy the principal portion of the obligation in
cash and the remainder, if any, in shares of our common stock.
On or after August 5, 2006, we have the option to redeem
all or a portion of the 0.25% notes at a redemption price equal
to 100% of the principal amount, plus accrued and unpaid
interest. On August 1, 2006 and August 1, 2008, or
upon the occurrence of a fundamental change involving us,
holders of the 0.25% notes may require us to repurchase their
notes at a repurchase price equal to 100% of the principal
amount, plus accrued and unpaid interest. Upon a fundamental
change, we will have the option to pay the repurchase price in
cash, shares of common stock or a combination thereof.

In August 2003, all of our outstanding 5.25%
convertible subordinated notes due 2004, or 5.25% notes,
converted into 6.7 million shares of common stock at a
conversion price of $9.56 per share. In August 2003, a portion
of our outstanding 1.856% convertible subordinated notes due
2006, or 1.856% notes, converted into 0.5 million shares of
common stock at an effective conversion price of $31.35 per
share. The remaining outstanding principal amount of 1.856%
notes was redeemed in August 2003 for $391.8 million in
cash including $0.1 million of accrued interest. In
connection with the redemption of the 1.856% notes for cash, we
recorded a loss on extinguishment of debt of approximately
$4.7 million in the third quarter of 2003 related to the
unamortized portion of debt issuance costs. This charge is
classified as a non-operating expense in our statement of
operations.

At September 30, 2003, we had a ratio of
long-term debt to total capitalization of approximately 21%. The
degree to which we will be leveraged could materially and
adversely affect our ability to obtain financing for working
capital, acquisitions or other purposes and could make us more
vulnerable to industry downturns and competitive pressures. We
will require substantial amounts of cash to fund scheduled
payments of principal and interest on our indebtedness, future
capital expenditures and any increased working capital
requirements. 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.

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



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

During 2002, our Japanese subsidiary entered into
a short-term credit facility with a multinational Japanese bank
in the amount of 1.0 billion Japanese yen
($8.9 million USD). At September 30, 2003, no amount
was outstanding. The short-term credit facility was renewed in
March 2003 and is due to expire in March 2004. Borrowings under
the short-term credit facility bear interest at Tokyo Inter Bank
Offered Rate, or TIBOR, plus 0.5%. There are no covenants on the
short-term credit facility and the loan has been guaranteed by
VERITAS Software Global LLC, one of our wholly-owned
subsidiaries.



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

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, and began occupying the
Milpitas facility in April 2003. The Mountain View facility
includes 425,000 square feet and is used as our corporate
headquarters and for research and development functions. The
Milpitas facility includes 466,000 square feet and is primarily
used for research and development and general corporate
functions. The Roseville facility includes 204,000 square feet
and provides space for technical support and research and
development functions. A syndicate of financial institutions
financed the acquisition and development of these properties.
Prior to July 1, 2003, we accounted for these properties as
operating leases in accordance with SFAS No. 13,
Accounting for Leases, as amended. On July 1, 2003,
we adopted FIN 46. Under FIN 46, the lessors of the
facilities are considered variable interest entities, and we are
considered the primary beneficiary. Accordingly, we began
consolidating these variable interest entities on July 1,
2003 and have included their property and equipment and
long-term debt on our balance sheet at September 30, 2003
and the results of their operations in our statement of
operations from July 1, 2003.

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

In January 2002, we entered into two three-year
pay fixed, receive floating, interest rate swaps for the purpose
of hedging the cash payments related to the Roseville, Minnesota
and Mountain View, California agreements. Under the terms of
these interest rate swaps, we make payments based on the fixed
rate and will receive interest payments based on the 3-month
LIBOR rate. For the three and nine months ended
September 30, 2003, our aggregate payments, including the
payments on the interest rate swaps, were $4.3 million and
$12.5 million, respectively. The payments for the three
months ended September 30, 2003 were included in interest
expense in the consolidated statements of operations in
accordance with FIN 46. For the three and nine months ended
September 30, 2002, our aggregate payments were
$4.3 million and $12.6 million, respectively. The
payments made during the six months ended June 30, 2003 and
the nine months ended September 30, 2002 were classified as
rent expense and included in operating expenses, in accordance
with SFAS No. 13.

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We review long-lived assets related to these debt
agreements for impairment in accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets. In accordance with SFAS No. 144, if we
determine that one or more impairment indicators are present,
indicating the carrying amount may not be recoverable, the
carrying amount would be compared 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,
the fair value would be compared to the book value of the asset.
If the fair value is less than the book value, an impairment
loss would be recognized. The impairment loss would be the
excess of the carrying amount of the asset over its fair value.
To date, no impairment losses have been recorded.

If we choose to exercise the purchase option for
the properties subject to the three build-to-suit lease
agreements, the aggregate purchase price would be approximately
$380.6 million. Payment of the purchase price for these
properties would significantly reduce the amount of cash, cash
equivalents and short-term investments available for funding our
research and development efforts, geographic expansion and
strategic acquisitions in the future.

The agreements for the facilities described above
require that we maintain specified financial covenants, all of
which we were in compliance with as of September 30, 2003.
The specified financial covenants as of September 30, 2003
require us to maintain a minimum rolling four quarter EBITDA of
$400.0 million, a minimum ratio of cash and cash
equivalents to current liabilities of 1.2 to 1, and a leverage
ratio of total funded indebtedness to rolling four quarter
EBITDA of not more than 2.25 to 1. For purposes of these
financial covenants, EBITDA represents our net income for the
applicable period, plus interest expense, taxes, depreciation
and amortization and all non-cash restructuring charges for
acquisitions occurring within a four year period, less software
development expenses classified as capital expenditures. In
order to secure the obligations under each agreement, each of
the facilities is subject to a deed of trust in favor of the
financial institutions that financed the acquisition and
development of the respective facility. Bank of America, N.A.
was the agent for the syndicate of banks that funded the
development of the Mountain View, California and Roseville,
Minnesota facilities, and ABN AMRO Bank, N.V. was the agent for
the syndicate of banks that funded the development of the
Milpitas, California facility.

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 shows our
commitments related to our approximate minimum lease payments
for our facilities and rental equipment as of September 30,
2003 (in millions):

|                                      |                   |             |       |       | 
|------------------------------------- | ----------------- | ----------- | ----- | ----- | 
|                                      |                   | Operating  
|                                      |                   | Lease      
|                                      |                   | Commitments
|                                      |                   |            
|Three months ending December 31, 2003 |                   | $           | 15.7  |      
|2004                                  |                   |             | 50.6  |      
|2005                                  |                   |             | 40.7  |      
|2006                                  |                   |             | 35.6  |      
|2007                                  |                   |             | 33.7  |      
|2008 and thereafter                   |                   |             | 172.6 |      
|                                      |                   |             |       |      
|                                      | Total commitments |             | $     | 348.9 | 
|                                      |                   |             |       |      

The table above does not include payments
pursuant to our three build-to-suit lease agreements which, upon
adoption of FIN 46 on July 1, 2003, are now classified as
long-term debt.



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

On October 1, 2002, we acquired volume
replicator software technology for $6.0 million and
contingent payments of up to another $6.0 million based on
future revenues generated by the acquired technology. The
payments will be paid quarterly over 40 quarters, in amounts
between $150,000 and $300,000. We issued a promissory note
payable in the principal amount of $5.0 million,
representing the present value of our minimum payment
obligations under the purchase agreement for the acquired
technology, which are payable quarterly commencing in the first
quarter of 2003 and ending in the fourth quarter of 2012. The
contingent

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payments in excess of the quarterly minimum
obligations will be paid as they may become due. The balance
outstanding of the note payable was $4.7 million as of
September 30, 2003 and $5.0 million as of
December 31, 2002 and is included in other long-term
liabilities.


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

Factors That May Affect Future
Results

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



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

Our revenue is difficult to forecast and is
likely to fluctuate from quarter to quarter due to many factors
outside of our control. Any significant revenue shortfall or
lowered forecasts could cause the market price of our securities
to decline substantially. Factors that could affect our revenue
include, but are not limited to:



| |   |                                                                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the possibility that our customers may cancel,
    defer or limit purchases as a result of reduced information
    technology budgets or weak and uncertain economic and industry
    conditions;                                           
|
| |  | the possibility that our customers may defer
    purchases of our products in anticipation of new products or
    product updates from us or our competitors;                                                                               
|
| |  | the possibility that original equipment
    manufacturers will introduce, market and sell products that
    compete with our products;                                                                                                      
|
| |  | the unpredictability of the timing and magnitude
    of our sales through direct sales channels, value-added
    resellers and distributors, which tend to occur later in a
    quarter than sales through original equipment manufacturers;
|
| |  | the timing of new product introductions by us and
    the market acceptance of new products, which may be delayed as a
    result of weak and uncertain economic and industry conditions;                                                   
|
| |  | the seasonal nature of our sales;                                                                                                                                                                                                           
|
| |  | the rate of adoption and long sales cycles of
    storage area networks and storage resource management technology;                                                                                                                         
|
| |  | changes in our pricing and distribution terms or
    those of our competitors; and                                                                                                                                                          
|
| |  | the possibility that our business will be
    adversely affected as a result of the threat of terrorism,
    terrorism or military actions taken by the United States or its
    allies.                                                    

You should not rely on the results of prior
periods as an indication of our future performance. Our
operating expense levels are based, in significant part, on our
expectations of future revenue. If we have a shortfall in
revenue 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,
if we fail to manage our business effectively over the long
term, we may experience high operating expenses, and our
operating results may be below the expectations of securities
analysts or investors, which could cause the price of our common
stock to decline.

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| |                                                                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Because we derive approximately 80% of our
    license and service revenue from sales of our data protection,
    file system and volume management products, any decline in
    demand for these products could severely harm our ability to
    generate revenue.

We derive a substantial majority of our revenue
from a small number of software products, including data
protection, file system and volume management products. For the
three and nine months ended September 30, 2003, we derived
approximately 79% and 83%, respectively, of our user license
fees from these core products, and a similar percentage of our
service revenue from associated maintenance and technical
support. As a result, we are particularly vulnerable to
fluctuations in demand for these products, whether as a result
of competition, product obsolescence, technological change,
budget constraints or other factors. If our revenue derived from
these software products were to decline significantly, our
business and operating results would be adversely affected. In
addition, because our software products are concentrated within
the market for data storage, a decline in the demand for storage
devices, storage software applications or storage capacity could
result in a significant reduction in our revenue and adversely
affect our business and operating results.



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

We sell our products primarily through indirect
sales channels, original equipment manufacturers and direct
sales channels. If we fail to manage our distribution channels
successfully, our distribution channels may conflict with one
another or otherwise fail to perform as we anticipate, which
could reduce our sales and increase our expenses, as well as
weaken our competitive position.

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



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

Original Equipment
Manufacturers.A portion of our
revenue is derived from sales through original equipment
manufacturers that incorporate our products into their products.
Our reliance on this channel involves many risks, including:



| |   |                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our lack of control over the shipping dates or
    volume of systems shipped;                                                                                                                                                                  
|
| |  | the original equipment manufacturers are not
    subject to minimum sales requirements or any obligation to offer
    our products to their customers;                                                                                         
|
| |  | the original equipment manufacturers may
    terminate their arrangements with us at any time;                                                                                                                                                 
|
| |  | the development work that we must generally
    undertake under our agreements with original equipment
    manufacturers may require us to invest significant resources and
    incur significant costs with little or no associated revenue;  
|
| |  | the time and expense required for the sales and
    marketing organizations of our original equipment manufacturer
    customers to become familiar with our products make it more
    difficult to introduce those products to the market; and
|
| |  | our original equipment manufacturer customers are
    able to develop, market and distribute their own storage
    products and market and distribute storage products of our
    competitors, which could reduce our sales.                   

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



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



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

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

Many of our original equipment manufacturer
customers offer software products that compete with our products
or have announced their intention to focus on developing or
acquiring their own storage software products. For example, EMC
Corp., a provider of data storage hardware, recently acquired
Legato Systems Inc., which develops and markets software
products that compete with our products, and announced that it
has signed a definitive agreement to acquire Documentum, Inc., a
provider of enterprise content management solutions. Storage
hardware companies such as EMC may choose not to offer our
products to their customers or limit our access to their
hardware platforms. End-user customers may prefer to purchase
storage software and hardware that is manufactured by the same
company because of perceived advantages in price, technical
support, compatibility or other issues. In addition, software
vendors may choose to bundle their software, such as an
operating system, with their own or other vendors storage
software. They may also limit our access to standard product
interfaces for their software and inhibit our ability to develop
products for their platform.

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



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

Our future success depends on our ability to
address the rapidly changing needs of our customers by
developing, acquiring and introducing new products, product
updates and services on a timely basis. We must also extend the
operation of our products to new platforms and keep pace with
technological developments and emerging industry standards. We
intend to commit substantial resources to developing new
software products and services, including software products and
services for the storage area networking market and the storage
resource management market. Each of these markets is new and
unproven, and industry standards for these markets are evolving
and changing. They also may require development of new channels.
If these markets do not develop as anticipated, or 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.

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



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

We derive a substantial portion 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
international 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 and employment restrictions;                                                                                                                                                                         
|
| |  | fluctuations in currency exchange rates and
    economic instability such as higher interest rates and
    inflation, which could reduce our customers ability to
    obtain financing for software products or which could make our
    products more expensive in those countries;
|
| |  | limitations on future growth or inability to
    maintain current levels of revenue from international sales if
    we do not invest sufficiently in our international operations;                                                                                                   
|
| |  | difficulties in hedging foreign currency
    transaction exposures;                                                                                                                                                                                                                  
|
| |  | longer payment cycles for sales in foreign
    countries and difficulties in collecting accounts receivable;                                                                                                                                                                         
|
| |  | difficulties in staffing and managing our
    international operations, including difficulties related to
    administering our stock option plan in some foreign countries;                                                                                                         
|
| |  | difficulties in coordinating the activities of
    our geographically dispersed and culturally diverse operations;                                                                                                                                                                   
|
| |  | seasonal reductions in business activity in the
    summer months in Europe and in other periods in other countries;                                                                                                                                                                 
|
| |  | competition from local suppliers;                                                                                                                                                                                                                                                    
|
| |  | costs and delays associated with developing
    software in multiple languages; and                                                                                                                                                                                                  
|
| |  | political unrest, war or terrorism, particularly
    in areas in which we have facilities.                                                                                                                                                                                           

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



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

Software products frequently contain errors or
failures, especially when first introduced or when new versions
are released. Our end-user customers use our products in
applications that are critical to their businesses, including
for data backup and recovery, and may have a greater sensitivity
to product defects than the market for software products
generally. If a customer loses critical data as a result of an
error in or failure of our software products or as a result of
the customers misuse of our software products, the
customer could suffer significant damages and seek to recover
those damages from us. Although our software licenses

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generally contain protective provisions limiting
our liability, a court could rule that these provisions are
unenforceable. If a customer is successful in proving its
damages and a court does not enforce our protective provisions,
we could be liable for the damages suffered by our customers,
which could adversely affect our operating results.


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



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

Our future success depends upon the continued
service of our key management, technical and sales personnel.
Our officers and other key personnel are employees-at-will, and
we cannot assure you that we will be able to retain them. Key
personnel have left our company over the years, and there may be
additional departures of key personnel over time. The loss of
any key employee could result in significant disruptions to our
operations, and the integration of replacement personnel could
be time consuming, may cause additional disruptions to our
operations and may be unsuccessful. We do not carry key person
life insurance covering any of our personnel.

Whether we are able to execute effectively on our
business strategy will depend in large part on how well key
management and other personnel perform in their positions and
are integrated within our company. We have in the past and may
from time to time in the future restructure parts of our
organization in order to better align our organizational
structure with our business model. Significant organizational
restructurings can be difficult to accomplish and can adversely
affect the timeliness of product releases, the successful
implementation and completion of company initiatives and the
results of our operations.



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

Our 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 required by market conditions,
our costs would be excessive and our business and operating
results could be adversely affected. We may need to hire
additional sales, technical and senior management personnel to
support our business and to meet customer demand for our
products and services. Competition for people with the skills
that 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. In addition, stock-based compensation, such as
stock options, has historically been an important incentive for
employees in the software industry. If we are unable to get
stockholder approval for future increases in the number of
shares of common stock authorized under our stock plans or if
changes in accounting rules cause us to reduce the amount of
stock-based compensation awarded to employees, then it may
become more difficult for us to attract and retain employees. We
cannot assure you that we will be successful in hiring or
retaining qualified personnel, and if we are unable to do so,
our ability to manage and operate our business could be
adversely affected.



| |                                                                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We incur considerable expenses to develop
    products for operating systems that are owned by others and who
    generally are not required to cooperate with us in our
    development efforts. This may cause us to incur higher expenses
    or fail to expand our product lines and revenues.

Many of our products operate primarily on the
Windows, UNIX and Linux computer operating systems. We continue
to develop new products for these operating systems. We may not
accomplish our development efforts quickly or cost-effectively,
and it is not clear what the relative growth rates of these
operating systems

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will be. Our development efforts require
substantial capital investment, the devotion of substantial
employee resources and the cooperation of the owners of the
operating systems to or for which the products are being ported
or developed. If the market for a particular operating system
does not develop as anticipated, or demand for our products and
services in such market does not materialize or occurs more
slowly than we expect, we will have expended substantial
resources and capital without realizing sufficient revenue, and
our business and operating results could be adversely affected.


In addition, for some operating systems, we must
obtain from the owner of the operating system a source code
license to portions of the operating system software to port
some of our products to or develop products for the operating
system. Operating system owners have no obligation to assist in
these porting or development efforts. If they do not grant us a
license or if they do not renew our license, we may not be able
to expand our product line into other areas.



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

We derive significant revenue from Ingram Micro,
Inc., a distributor that sells our products and services through
resellers. For the three and nine months ended
September 30, 2003, Ingram Micro accounted for 9% and 10%,
respectively, of our net revenue. If this distributor were to
reduce purchases of our products or services, our revenues would
decline unless we were able to substantially increase sales
through other distributors or direct sales to customers. Our
contract with Ingram Micro does not require them to purchase any
specified number of software licenses from us. Accordingly, we
cannot be sure that Ingram Micro will continue to market and
sell our products at current levels.



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

In response to subpoenas issued by the Securities
and Exchange Commission in the investigation entitled In the
Matter of AOL/Time Warner, we have been cooperating with the
SECs requests for information, including information
relating to transactions we entered into with AOL in September
2000 and other transactions. The investigation may continue to
require significant management attention and accounting and
legal resources, which could adversely affect our ability to
manage our business and result in significant accounting and
legal expenses. If the SEC or other governmental agency were to
pursue an action against us in connection with this matter, we
would be required to devote additional management attention and
incur additional accounting and legal expenses, which could
further adversely affect our business, results of operations and
cash flows.



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

After we announced in January 2003 that we would
restate financial results as a result of transactions entered
into with AOL Time Warner in September 2000, numerous separate
complaints purporting to be class actions were filed in federal
court alleging that we and some of our officers and directors
violated provisions of the Securities Exchange Act of 1934. The
complaints contain varying allegations, including that we made
materially false and misleading statements with respect to our
2000, 2001 and 2002 financial results included in our filings
with the SEC, press releases and other public disclosures. In
addition, several complaints purporting to be derivative actions
have been filed in state court against some of our directors and
officers. These complaints are based on the same facts and
circumstances as the class actions and generally allege that the
named directors and officers breached their fiduciary duties by
failing to oversee adequately our financial reporting. All of
the complaints generally seek an unspecified amount of damages.
The cases are still in the preliminary stages, and it is not
possible for us to quantify the extent of our potential
liability, if any. An

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unfavorable outcome in any of these cases could
have a material adverse effect on our business, results of
operations and cash flows. In addition, the expense of defending
any litigation may be costly and divert managements
attention from the day-to-day operations of our business, which
would adversely affect our business, results of operations and
cash flows.




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

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



| |   |                                                                                                                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | diversion of managements attention from our
    business;                                                                                                                                                                                                                                                           
|
| |  | integration of acquired business operations and
    employees into our existing business, including coordination of
    geographically dispersed operations, which in the past has taken
    longer and was more complex than initially expected for Precise
    Software Solutions Ltd and other acquired companies;
|
| |  | incorporation of acquired products and 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.                                                                                                                                                                                                            

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



| |                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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
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. The main area of potential
liability for our Seagate Technology subsidiary relates to tax
liabilities. Any such claim, with or without merit, could be
time consuming to defend, result in costly litigation and divert
managements attention. Moreover, if SAC is unable or
unwilling to indemnify us as agreed, we could incur unexpected
costs. For example, 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.



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

Our effective tax rate could be adversely
affected by several factors, many of which are outside of our
control. Our effective tax rate is directly affected by the
relative proportions of revenue and income before

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taxes in the various domestic and international
jurisdictions in which we operate. We are also subject to
changing tax laws, regulations and interpretations in multiple
jurisdictions in which we operate as well as the requirements of
certain tax rulings. In particular, we are subject to a number
of tax rulings from the country of Israel related to the
activities of Precise. Failure to comply with the terms and
conditions of such rulings could significantly impact our
effective tax rate. 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. Our effective tax
rate is also influenced by the tax effects of purchase
accounting for acquisitions and non-recurring charges, which may
cause fluctuations between reporting periods. In addition, in
November 2000, we acquired Seagate Technology, which has certain
federal and state tax returns for various fiscal years 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. The timing of the
settlement of these examinations is uncertain. To the extent the
settlements of these audits and the amounts reimbursed by SAC,
as required by the Seagate acquisition agreement, are different
from the amounts recorded, the difference will be recorded as a
component of income tax expense or benefit and may significantly
affect our effective tax rate for the period in which the
settlements take place.




| |                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We may incur additional significant
    accounting charges that, individually or in the aggregate, could
    reduce earnings and create net losses under generally accepted
    accounting principles.

We may incur additional 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, Other
    Intangibles and Original Issue Discount on Convertible Notes.We incur significant charges related
    to the amortization of developed technology, other intangibles
    and original issue discount on convertible notes. For the
    quarter ended September 30, 2003, we incurred a charge of
    approximately $8.7 million relating to amortization of
    developed technology, other intangibles and original issue
    discount on convertible notes and expect this charge to be
    approximately $8.8 million for the quarter ending
    December 31, 2003, including the impact of our recent
    acquisitions. 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
    September 30, 2003, the total net carrying amount of our
    other intangible assets was $90.1 million;
|
| |  | Impairment of Goodwill.We do not amortize goodwill related to
    business combinations, but instead we 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 September 30, 2003,
    the total net carrying amount of our goodwill was
    $1,763.1 million;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | Loss on Strategic Investments.In the third quarter of 2001, the
    second quarter of 2002 and the first quarter of 2003, 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 of our strategic
    investments that is other than temporary. As of
    September 30, 2003, the total carrying amount of our
    strategic investments was $5.4 million;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | Stock-based Compensation.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, we generally
    recognize no compensation cost for grants under our stock option
    plans. The FASB has voted to require companies to record a
    charge to earnings for employee stock option grants, but the
    methodology for valuing stock options and the timing for
    issuance of final rules have not been finalized. Any change in
    practice regarding accounting for stock options could result in
    significant accounting charges; and                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | Restructuring Charges.We regularly perform evaluations of
    our operations and activities. 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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

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| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | combinations. As a result of an evaluation of our
    facilities requirements, our board of directors approved in the
    fourth quarter of 2002 a restructuring plan to exit and
    consolidate certain of our facilities located in 17 metropolitan
    areas worldwide. In connection with this restructuring plan, we
    recorded a restructuring charge of approximately
    $98.2 million during the fourth quarter of 2002. As of
    September 30, 2003, the total carrying amount of our
    facility restructure reserve was $84.3 million.



| |                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If our assumptions about our ability to
    terminate or sublet our facilities are incorrect, the total
    costs of our facilities restructuring may be larger than we
    anticipated.

In the fourth quarter of 2002, our board of
directors approved a restructuring plan to exit and consolidate
some of our facilities based on our evaluation that our existing
and planned facilities would exceed our near-term facilities
needs due to slower than anticipated growth in the number of our
employees as a result of weak and uncertain economic and
industry conditions. In connection with this restructuring plan,
we recorded a restructuring charge of approximately
$98.2 million during the fourth quarter of 2002. Our
restructuring plan includes assumptions related to our ability
to enter sublease and/or lease termination arrangements
regarding some of our facilities. We cannot predict if, or when,
we will be able to successfully enter sublease and/or lease
termination arrangements for these facilities or if the actual
terms of these arrangements will be as favorable as those
assumed under our restructuring plan. Should we be unable to
execute our restructuring plan under terms as favorable as those
assumed under the restructuring plan, we may be required to
materially increase our restructuring charge in future periods.
We also cannot predict if our evaluation of our needs is
accurate or if weak and uncertain economic and industry
conditions will continue once we begin to implement our
restructuring plan. We may find that our facility requirements
are greater than estimated under our plan, which could
necessitate procuring facilities at rates higher and at costs in
addition to facilities that have been vacated by us. In
addition, we cannot assure you that our restructuring program
will achieve the anticipated benefits or will be completed in
accordance with the contemplated timetable.



| |                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------
| | Our debt would be expensive to repay, and
    any default may impair our ability to borrow or raise
    capital.

In August 2003, we issued $520.0 million of
0.25% convertible subordinated notes due 2013. In addition, in
accordance with FIN 46 we recorded indebtedness of
$380.6 million as of July 1, 2003, including
$11.4 million of non-controlling interest, relating to
three build-to-suit lease arrangements, commonly referred to as
synthetic leases, for office buildings in Mountain View,
California, Roseville, Minnesota and Milpitas, California. 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 or is redeemed, while at the same
time funding capital expenditures and our other working capital
needs. If we do not have sufficient cash to pay interest or
principal on our debts as they come due, we could be in default
of those debts. For example, if we do not make timely payments,
our debts could be declared immediately due and payable, in
which event we would be required to immediately repay the debts
in their entirety. A default could result in a reduction of our
credit rating and make it more difficult for us to raise capital
and adversely affect the trading price of our common stock. In
addition, repayment of our debts upon a default would
significantly reduce the amount of cash, cash equivalents and
short-term investments available for funding our research and
development efforts, geographic expansion and strategic
acquisitions in the future. Our outstanding debt could also
increase our vulnerability to adverse economic and industry
conditions by making it more difficult for us to raise capital
if needed.



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

We rely on a combination of copyright, patent,
trademark and trade secret laws, confidentiality procedures,
contractual provisions and other measures to protect our
proprietary information. All of these measures afford only
limited protection. These measures may be invalidated,
circumvented or challenged, and others may develop technologies
or processes that are similar or superior to our technology. We
may not have the proprietary information controls and procedures
in place that we need to protect our proprietary information
adequately. In addition, because we license the source code for
some of our products to third

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parties, there is a higher likelihood of
misappropriation or other misuse of our intellectual property.
We also license some of our products under shrink-wrap license
agreements that are not signed by licensees and therefore may be
unenforceable under the laws of some jurisdictions. Despite our
efforts to protect our proprietary rights, unauthorized parties
may attempt to copy our products or obtain or use information
that we regard as proprietary.




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

From time to time, we receive claims that we have
infringed the intellectual property rights of others. As the
number of products in the software industry increases and the
functionality of these products further overlap, we believe that
we may become increasingly subject to infringement claims,
including patent and copyright infringement claims. We have
received several trademark claims in the past and may receive
more claims in the future from third parties who may also be
using the VERITAS name. 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.



| |                                                                                                          
| | ---------------------------------------------------------------------------------------------------------
| | Natural disasters could disrupt our
    business and result in loss of revenue or in higher
    expenses.

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 located in California. 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
    and our stockholder rights plan may prevent or deter an
    acquisition of VERITAS.

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



| |   |                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------
| |  | our board of directors is authorized to issue
    preferred stock with any rights it may determine;                                            
|
| |  | our board of directors is classified into three
    groups, with each group of directors to hold office for three
    years;                   
|
| |  | our stockholders are not entitled to cumulate
    votes for directors and may not take any action by written
    consent without a meeting; and

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| |   |                                                                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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. In
general, our stockholder rights plan provides our existing
stockholders (other than an existing stockholder that becomes an
acquiring person) with rights to acquire shares of our common
stock at 50% of its trading price if a person or entity
acquires, or announces its intention to acquire, 15% or more of
the outstanding shares of our common stock, unless our board of
directors elects to redeem these rights.

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



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

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



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

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






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

Foreign Currency Risk

We transact business in various foreign
currencies and have established a foreign currency hedging
program, utilizing foreign currency forward exchange contracts,
or forward contracts, to hedge certain foreign currency
transaction exposures. Under this program, increases or
decreases in our foreign currency transactions are offset by
gains and losses on the forward contracts, so as to mitigate the
possibility of foreign currency transaction gains and losses. We
do not use forward contracts for speculative or trading
purposes. All foreign currency transactions and all outstanding
forward contracts are marked-to-market at the end of the period
with unrealized gains and losses included in other income
(expense). The unrealized gain (loss) on the outstanding forward
contracts at September 30, 2003 was immaterial to our
consolidated financial statements.

55



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Our outstanding forward contracts as of
September 30, 2003 are presented in the table below. All
forward contract amounts are representative of the expected
payments to be made under these instruments. As of
September 30, 2003, all forward contracts mature in
35 days or less (in thousands):

|                             |                      |                 |  |                 |  |               |  |     |  |  |  |          |  |  |  |     |  |  |  |        |  
|---------------------------- | -------------------- | --------------- |  | --------------- |  | ------------- |  | --- |  |  |  | -------- |  |  |  | --- |  |  |  | ------ | -
|                             |                      |                 |  |                 |  |               |  |    
|                             |                      | Local Currency  |  |                 |  |               |  |    
|                             |                      | Contract Amount |  |                 |  |               |  |    
|                             |                      |                 |  |                 |  |               |  |    
|                             |                      |                 |  |                 |  | Fair Marke)t 
|                             |                      |                 |  | Contract Amount |  | Value at     
|                             |                      |                 |  |                 |  | September 0,3
|                             |                      |                 |  |                 |  | 2003         
|                             |                      |                 |  |                 |  | (US$         
|                             |                      |                 |  |                 |  |              
|Contracts to Buy US $        |                      |                 |  |                 |  |               |  |     |  |  |  |          |  |  |  |     |  |  |  |       
|                             | British pound        |                 |  | 5,000.0         |  |               |  | GBP |  |  |  | 8,283.7  |  |  |  | USD |  |  |  | 37.9   |  
|                             | Euro                 |                 |  | 12,891.0        |  |               |  | EUR |  |  |  | 14,783.2 |  |  |  | USD |  |  |  | 259.4  |  
|                             | Indian rupee         |                 |  | 258,700.0       |  |               |  | INR |  |  |  | 5,698.2  |  |  |  | USD |  |  |  | (44.8  | )
|                             | Mexican peso         |                 |  | 10,246.0        |  |               |  | MXN |  |  |  | 932.8    |  |  |  | USD |  |  |  | (1.8   | )
|Contracts to Sell US $       |                      |                 |  |                 |  |               |  |     |  |  |  |          |  |  |  |     |  |  |  |       
|                             | Brazilian real       |                 |  | 7,000.0         |  |               |  | BRL |  |  |  | 2,348.2  |  |  |  | USD |  |  |  | (43.7  | )
|                             | Canadian dollar      |                 |  | 7,400.0         |  |               |  | CAD |  |  |  | 5,457.6  |  |  |  | USD |  |  |  | (24.7  | )
|Contracts to Buy Euro
      |                      |                 |  |                 |  |               |  |     |  |  |  |          |  |  |  |     |  |  |  |       
|                             | Australian dollar    |                 |  | 812.0           |  |               |  | AUD |  |  |  | 475.8    |  |  |  | EUR |  |  |  | (1.5   | )
|                             | British pound        |                 |  | 628.0           |  |               |  | GBP |  |  |  | 906.6    |  |  |  | EUR |  |  |  | 5.9    |  
|                             | Danish krona         |                 |  | 1,535.0         |  |               |  | DKK |  |  |  | 206.7    |  |  |  | EUR |  |  |  |       |  
|                             | Malaysian ringgit    |                 |  | 1,924.0         |  |               |  | MYR |  |  |  | 452.9    |  |  |  | EUR |  |  |  | (20.7  | )
|                             | South African rand   |                 |  | 2,284.0         |  |               |  | ZAR |  |  |  | 275.9    |  |  |  | EUR |  |  |  | 6.4    |  
|                             | South Korean won     |                 |  | 579,900.0       |  |               |  | KRW |  |  |  | 441.2    |  |  |  | EUR |  |  |  | (9.5   | )
|                             | Swedish krona        |                 |  | 11,900.0        |  |               |  | SEK |  |  |  | 1,327.8  |  |  |  | EUR |  |  |  | (15.6  | )
|                             | United States dollar |                 |  | 8,104.0         |  |               |  | USD |  |  |  | 7,070.3  |  |  |  | EUR |  |  |  | (136.1 | )
|Contracts to Sell Euro
     |                      |                 |  |                 |  |               |  |     |  |  |  |          |  |  |  |     |  |  |  |       
|                             | British pound        |                 |  | 45,640.0        |  |               |  | GBP |  |  |  | 65,899.6 |  |  |  | EUR |  |  |  | 897.8  |  
|                             | Hong Kong dollar     |                 |  | 4,780.0         |  |               |  | HKD |  |  |  | 537.6    |  |  |  | EUR |  |  |  | 9.4    |  
|                             | Indian rupee         |                 |  | 136,200.0       |  |               |  | INR |  |  |  | 2,562.4  |  |  |  | EUR |  |  |  | 12.5   |  
|                             | Japanese yen         |                 |  | 2,274,000.0     |  |               |  | JPY |  |  |  | 17,741.8 |  |  |  | EUR |  |  |  | 283.1  |  
|                             | Singapore dollars    |                 |  | 4,390.0         |  |               |  | SGD |  |  |  | 2,209.5  |  |  |  | EUR |  |  |  | 37.3   |  
|                             | UAE dirham           |                 |  | 14,824.0        |  |               |  | AED |  |  |  | 3,513.0  |  |  |  | EUR |  |  |  | 58.8   |  
|Contracts to Buy GBP £       |                      |                 |  |                 |  |               |  |     |  |  |  |          |  |  |  |     |  |  |  |       
|                             | United States dollar |                 |  | 4,720.0         |  |               |  | USD |  |  |  | 2,853.0  |  |  |  | GBP |  |  |  | (25.1  | )

In September 2000, we entered into a three-year
cross currency interest rate swap transaction, or swap, for the
purpose of hedging fixed interest rate, foreign currency
denominated cash flows under an intercompany loan receivable.
Under the terms of this derivative financial instrument, Euro
denominated fixed principal and interest payments to be received
under the inter-company loan will be swapped for
U.S. dollar-fixed principal and interest payments. As of
September 30, 2003, the intercompany loan was paid in full
and the derivative financial instrument was settled.

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 agreements. Under the terms of these interest rate
swaps, we make payments based on the fixed rate and will receive
interest payments based on the 3-month London Inter Bank Offered
Rate, or LIBOR. The payments on our build-to-suit lease
agreements are based upon a 3-month LIBOR plus a credit spread.
If 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 to be highly 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

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the derivative recorded in the statement of
operations. The interest rate swaps settle the first day of
January, April, July and October until expiration. As of
September 30, 2003, the fair value of the interest rate
swaps was $(9.4) million. As a result of entering into the
interest rate swaps, we have mitigated our exposure to variable
cash flows associated with interest rate fluctuations. Because
the rental payments on the leases are based on the 3-month LIBOR
and we receive 3-month LIBOR from the interest rate swap
counter-party, we have eliminated any impact to raising interest
rates related to our rent payments under the build-to-suit lease
agreements. This hedge was deemed to be highly effective as of
September 30, 2003. On July 1, 2003, we began
accounting for our variable interest rate debt in accordance
with FIN 46. In accordance with SFAS No. 133, we had
designated the interest rate swap as a cash flow hedge of rent
expense. However, with the adoption of FIN 46, we
redesignated the interest rate swap as a cash flow hedge of
variability in interest expense, and it remains highly effective
with all changes in the fair value included in other
comprehensive income.


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 primarily includes money market funds,
commercial paper, corporate notes, government securities
(taxable and non-taxable), asset-backed securities and market
auction preferred. The diversity of our portfolio helps us to
achieve our investment objective.

Long-term debt consists of $520.0 million of
our 0.25% convertible subordinated notes due August 1, 2013
and $380.6 million of our long-term debt. The nominal
interest rate on the convertible subordinated notes is fixed and
the notes provide for semi-annual interest payments of
approximately $0.7 million each February 1 and
August 1, beginning February 1, 2004. The notes are
convertible, under specified conditions, into shares of our
common stock unless previously redeemed or repurchased and are
subject to adjustment under the terms of the notes. The
long-term debt consist of the three build-to-suit agreements.
The interest rates on the build-to-suit agreements are variable
based on a 3-month LIBOR plus a credit spread and provide for
quarterly interest payments in January, April, July, and October.

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 September 30, 2003 by year of
maturity (in thousands, except percentages):

|                                                  |                       |                |         |            |  |       |           |            |  |           |           |           |  |   |           |           |  |   |           |           | 
|------------------------------------------------- | --------------------- | -------------- | ------- | ---------- |  | ----- | --------- | ---------- |  | --------- | --------- | --------- |  | - | --------- | --------- |  | - | --------- | --------- | 
|                                                  |                       |                |         |            |  |      
|                                                  |                       | Amortized Cost |         |            |  |      
|                                                  |                       |                |         |            |  |      
|                                                  |                       |                |         | Due in     |  |       |           |            |  | 2002     
|                                                  |                       |                |         | 2004 and   |  |       |           | 2003       |  | Amortized
|                                                  |                       | Due in 2003    |         | Thereafter |  | Total |           | Fair Value |  | Cost     
|                                                  |                       |                |         |            |  |       |           |            |  |          
|Cash equivalents and short-term investments:      |                       |                |         |            |  |       |           |            |  |           |           |           |  |   |           |           |  |   |           |          
|                                                  | Fixed rate            |                | $       | 249,781    |  |       | $         | 968,741    |  |           | $         | 1,218,522 |  |   | $         | 1,222,461 |  |   | $         | 1,778,702 | 
|                                                  | Average fixed rate    |                |         | 1.36%      |  |       |           | 2.22%      |  |           |           | 2.04%     |  |   |           | 2.05%     |  |   |           | 2.26%     | 
|                                                  | Variable rate         |                | $       | 391,809    |  |       | $         | 128,076    |  |           | $         | 519,885   |  |   | $         | 519,975   |  |   | $         | 288,575   | 
|                                                  | Average variable rate |                |         | 1.23%      |  |       |           | 2.51%      |  |           |           | 1.55%     |  |   |           | 1.55%     |  |   |           | 1.73%     | 
|Total cash equivalents and short-term investments |                       | $              | 641,590 |            |  | $     | 1,096,817 |            |  | $         | 1,738,407 |           |  | $ | 1,742,436 |           |  | $ | 2,067,277 |          
|                                                  | Average rate          |                |         | 1.28%      |  |       |           | 2.25%      |  |           |           | 1.90%     |  |   |           | 1.90%     |  |   |           | 2.18%     | 
|Long-term debt:                                   |                       |                |         |            |  |       |           |            |  |           |           |           |  |   |           |           |  |   |           |          
|                                                  | Fixed rate            |                | $       |           |  |       | $         | 520,000    |  |           | $         | 520,000   |  |   | $         | 520,000   |  |   | $         | 460,252   | 
|                                                  | Average fixed rate    |                |         |           |  |       |           | 0.25%      |  |           |           | 0.25%     |  |   |           | 0.25%     |  |   |           | 6.33%     | 
|                                                  | Variable rate (1)     |                | $       |           |  |       | $         | 380,632    |  |           | $         | 380,632   |  |   | $         | 380,632   |  |   | $         |          | 
|                                                  | Average variable rate |                |         |           |  |       |           | 2.39%      |  |           |           | 2.39%     |  |   |           | 2.39%     |  |   |           |          | 

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---



|    |                                                                                                                                                                                                                                                               
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | $186.4 million of the variable rate
    long-term debt is, in effect, a fixed rate as the result of the
    interest rate swaps entered into by the Company. Including the
    effect of these interest rate swaps, the average fixed rate
    would be 6.11%.

Equity Price Risk

We have made investments in development-stage
companies that we believe provide strategic opportunities for
us. We intend that these investments will provide access to new
technologies and emerging markets, and create opportunities for
additional sales of our products and services. We recognize
impairment losses on our strategic investments when we determine
that there has been a decline in the fair value of the
investment that was other than temporary. During the nine months
ended September 30, 2003, we recognized impairment losses
of $3.5 million on our strategic investments when we
determined that there had been a decline in the fair value of
the investments that were 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. As of
September 30, 2003, we determined that there was no further
impairment in these investments. We cannot assure you that our
investments will have the above mentioned results, or even that
we will not lose all or any part of these investments.






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

Disclosure Controls and Procedures

Regulations under the Securities Exchange Act of
1934 require public companies, including our company, to
maintain disclosure controls and procedures, which
are defined to mean a companys controls and other
procedures that are designed to ensure that information required
to be disclosed in the reports that it files or submits under
the Securities Exchange Act of 1934 are recorded, processed,
summarized and reported, within the time periods specified in
the Securities and Exchange Commissions rules and forms.
Our chief executive officer and chief financial officer
evaluated our disclosure controls and procedures as of
September 30, 2003 and concluded that our disclosure
controls and procedures were effective for the purposes for
which they were designed.

Internal Control over Financial
Reporting

Regulations under the Securities Exchange Act of
1934 require public companies, including our company, to
evaluate any change in our internal control over financial
reporting, which is defined as a process to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for
external purposes in accordance with generally accepted
accounting principles in the United States. In connection with
their evaluation of our disclosure controls and procedures as of
September 30, 2003, our chief executive officer and chief
financial officer did not identify any change in our internal
control over financial reporting during the three month period
ended September 30, 2003 that materially affected, or is
reasonably likely to materially affect, our internal control
over financial reporting.

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PART II: OTHER INFORMATION






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

In response to subpoenas issued by the Securities
and Exchange Commission in the investigation entitled In the
Matter of AOL/Time Warner, we continue to furnish
information requested by the SEC, including information relating
to the transactions we entered into with AOL in September 2000
and other transactions. We cannot predict the outcome of this
investigation at this time. We will continue our efforts to
cooperate with the SECs investigation.

After we announced in January 2003 that we would
restate financial results as a result of transactions entered
into with AOL in September 2000, numerous separate complaints
purporting to be class actions were filed in the United States
District Court for the Northern District of California alleging
that VERITAS and some of our officers and directors violated
provisions of the Securities Exchange Act of 1934. The
complaints contain varying allegations, including that we made
materially false and misleading statements with respect to our
2000, 2001 and 2002 financial results included in our filings
with the SEC, press releases and other public disclosures. On
May 2, 2003, a lead plaintiff and lead counsel were
appointed. A consolidated complaint was filed by the lead
plaintiff on July 18, 2003. In addition, several complaints
purporting to be derivative actions have been filed in
California state court against some of our directors and
officers. These complaints are based on the same facts and
circumstances as the class actions and generally allege that the
named directors and officers breached their fiduciary duties by
failing to oversee adequately our financial reporting. The state
court complaints have also been consolidated. All of the
complaints generally seek an unspecified amount of damages. The
cases are still in the preliminary stages, and it is not
possible for us to quantify the extent of our potential
liability, if any. An unfavorable outcome in any of these cases
could have a material adverse effect on our business, financial
condition, results of operations and cash flow. In addition,
defending any litigation may be costly and divert
managements attention from the day-to-day operations of
our business.

On January 10, 2003, Raytheon Company sued
VERITAS along with Brocade Communications Systems, Oracle
Corporation, Overland Storage Inc., Qualstar Corp., QLogic
Corporation, Ricoh Corporation and Spectra Logic Corporation in
the United States District Court for the Eastern District of
Texas. Raytheon is alleging infringement of US Patent
No. 5,412,791, or 791 patent, entitled Mass Data
Storage Library, and is seeking damages and an injunction
against all defendants. We believe that we have numerous
defenses and counterclaims to the claims of infringement
asserted against us and we intend to vigorously defend
ourselves. We filed an answer to Raytheons complaint on
March 7, 2003, denying all material allegations in the
complaint and asserting counterclaims seeking to have
Raytheons 791 patent declared invalid and not
infringed by us. A trial date is currently scheduled for June
2004.

On October 23, 2001, Storage Computer
Corporation initiated litigation against VERITAS in the United
States District Court for the Northern District of Texas
alleging infringement of one of Storage Computer
Corporations patents. Currently, Storage Computer
Corporation is alleging we infringe two of their US patents. We
have denied all material allegations in the complaints, have
filed counterclaims for declaratory judgment of invalidity and
non-infringement of the patents-in-suit and have alleged their
infringement of one of our patents. Storage Computer Corporation
is seeking damages of approximately $50.0 million, treble
damages, costs of suit and attorneys fees and a permanent
injunction from further alleged infringement. We believe that we
have numerous defenses and counterclaims relative to the claims
of infringement and the damages claims asserted against us and
intend to vigorously defend this action. The trial date
scheduled for November 2003 was recently stayed by the court
pending the outcome of both parties summary judgment
motions.

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

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|        |                                     
|------- | ------------------------------------
|Item 6. | Exhibits and Reports on
    Form 8-K



| |     |         
| | --- | --------
| | (a) | Exhibits

|        |       |                     |  |                                                                                                                                         |  |       |  |        |  |          |  |  |  |  |  |  |  |  |   | 
|------- | ----- | ------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------- |  | ----- |  | ------ |  | -------- |  |  |  |  |  |  |  |  | - | 
|        |       |                     |  |                                                                                                                                         |  |      
|        |       |                     |  | Incorporated by Reference                                                                                                               |  |      
|Exhibit |       |                     |  |                                                                                                                                         |  | Filed
|Number  |       | Exhibit Description |  | Form                                                                                                                                    |  | Date  |  | Number |  | Herewith
|        |       |                     |  |                                                                                                                                         |  |       |  |        |  |         
|        | 31.01 |                     |  | Certification of Chief Executive Officer pursuant
    to Section 302 of the Sarbanes-Oxley Act of 2002                                  |  |       |  |        |  |          |  |  |  |  |  |  |  |  | X | 
|        | 31.02 |                     |  | Certification of Chief Financial Officer pursuant
    to Section 302 of the Sarbanes-Oxley Act of 2002                                  |  |       |  |        |  |          |  |  |  |  |  |  |  |  | X | 
|        | 32.01 |                     |  | Certifications of Chief Executive Officer and
    Chief Financial Officer pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002 |  |       |  |        |  |          |  |  |  |  |  |  |  |  | X | 



| |     |                    
| | --- | -------------------
| | (b) | Reports on Form 8-K

|        |         |         |  |             |      |  |  |                                                                                                                                                                                                    
|------- | ------- | ------- |  | ----------- | ---- |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Date of |         |         |  |            
|Report  |         | Item(s) |  | Description
|        |         |         |  |            
|        | 6/30/03 |         |  |             | 2, 7 |  |  | VERITAS announced the closing of its acquisition
    of Precise Software Solutions Ltd.                                                                                                            
|        | 7/28/03 |         |  |             | 5, 7 |  |  | VERITAS announced its redemption of its
    outstanding convertible subordinated notes and its authorization
    for a stock repurchase.                                                           
|        | 7/28/03 |         |  |             | 5, 7 |  |  | VERITAS announced a new offering of convertible
    subordinated notes and the pricing of the convertible notes.                                                                                   
|        | 8/18/03 |         |  |             | 5    |  |  | VERITAS announced the completion of the
    redemption of two series of convertible subordinated notes and
    an increase in the authorized number of shares to be repurchased
    by the company.
|        | 8/25/03 |         |  |             | 5, 7 |  |  | VERITAS announced the closing of the sale of an
    additional amount of convertible subordinated notes.                                                                                           

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##### Table of Contents






SIGNATURE

Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned thereunto duly
authorized on November 14, 2003.



| |                                                 
| | ------------------------------------------------
| | VERITAS SOFTWARE CORPORATION                    
|
| | /s/ EDWIN J. GILLIS                             
| |                                                 
| | Edwin J. Gillis                                 
| | Executive Vice President, Finance               
| | and Chief Financial Officer                     
| | (Principal Financial and Accounting
    Officer)

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##### Table of Contents






EXHIBIT INDEX

|        |       |                     |  |                                                                                                                                         |  |       |  |        |  |          |  |  |  |  |  |  |  |  |   | 
|------- | ----- | ------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------- |  | ----- |  | ------ |  | -------- |  |  |  |  |  |  |  |  | - | 
|        |       |                     |  |                                                                                                                                         |  |      
|        |       |                     |  | Incorporated by Reference                                                                                                               |  |      
|Exhibit |       |                     |  |                                                                                                                                         |  | Filed
|Number  |       | Exhibit Description |  | Form                                                                                                                                    |  | Date  |  | Number |  | Herewith
|        |       |                     |  |                                                                                                                                         |  |       |  |        |  |         
|        | 31.01 |                     |  | Certification of Chief Executive Officer pursuant
    to Section 302 of the Sarbanes-Oxley Act of 2002                                  |  |       |  |        |  |          |  |  |  |  |  |  |  |  | X | 
|        | 31.02 |                     |  | Certification of Chief Financial Officer pursuant
    to Section 302 of the Sarbanes-Oxley Act of 2002                                  |  |       |  |        |  |          |  |  |  |  |  |  |  |  | X | 
|        | 32.01 |                     |  | Certifications of Chief Executive Officer and
    Chief Financial Officer pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002 |  |       |  |        |  |          |  |  |  |  |  |  |  |  | X | 

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