##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




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Form 10-Q



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|           |  |                                                                                                 
|---------- |  | ------------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                                 
|þ          |  | QUARTERLY REPORT PURSUANT TO SECTION 13
    OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934 
|          
|           |  | For the quarterly period ended June 30,
    2004                                                
|          
|           |  | or                                                                                              
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934
|           |  | For the transition period
    from           to           .                                     

Commission file number: 000-26247

VERITAS Software Corporation

(Exact name of Registrant as Specified in Its
Charter)


|                                                                   |  |                                         
|------------------------------------------------------------------ |  | ----------------------------------------
|Delaware                                                           |  | 77-0507675                              
|(State or Other Jurisdiction of
    Incorporation or Organization) |  | (I.R.S. Employer
    Identification No.)

350 Ellis Street

Mountain View, California 94043


(650) 527-8000


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


Registrants Telephone Number, including
Area Code)




---

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

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

The number of shares of the registrants
common stock outstanding as of July 30, 2004 was
432,828,668 shares.



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VERITAS SOFTWARE CORPORATION

INDEX

|                                   |  |                                                                                                                   |    |      |    | 
|---------------------------------- |  | ----------------------------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|                                   |  |                                                                                                                   |    | Page
|                                   |  |                                                                                                                   |    |     
|PART I:  FINANCIAL
    INFORMATION
|Item 1.                            |  | Condensed Consolidated
    Financial Statements                                                                   |    |      | 2  | 
|                                   |  | Condensed Consolidated
    Balance Sheets as of June 30, 2004 and December 31,
    2003                           |    |      | 2  | 
|                                   |  | Condensed Consolidated
    Statements of Operations for the Three and Six Months Ended
    June 30, 2004 and 2003 |    |      | 3  | 
|                                   |  | Condensed Consolidated
    Statements of Cash Flows for the Six Months Ended June 30,
    2004 and 2003           |    |      | 4  | 
|                                   |  | Notes to Condensed
    Consolidated Financial Statements                                                          |    |      | 5  | 
|Item 2.                            |  | Managements Discussion
    and Analysis of Financial Condition and Results of Operations                         |    |      | 20 | 
|Item 3.                            |  | Quantitative and Qualitative
    Disclosures About Market Risk                                                    |    |      | 47 | 
|Item 4.                            |  | Controls and Procedures                                                                                           |    |      | 50 | 
|PART II:  OTHER
    INFORMATION   
|Item 1.                            |  | Legal Proceedings                                                                                                 |    |      | 51 | 
|Item 6.                            |  | Exhibits and Reports on
    Form 8-K                                                                              |    |      | 53 | 
|Signature                          |  |                                                                                                                   | 54 |     
|EXHIBIT 31.01                     
|EXHIBIT 31.02                     
|EXHIBIT 32.01                     



1



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##### Table of Contents






PART I: FINANCIAL INFORMATION






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

VERITAS SOFTWARE CORPORATION



CONDENSED CONSOLIDATED BALANCE
SHEETS


|                                            |                                                                                                    |                            |           |              |           |   |           |            |           | 
|------------------------------------------- | -------------------------------------------------------------------------------------------------- | -------------------------- | --------- | ------------ | --------- | - | --------- | ---------- | --------- | 
|                                            |                                                                                                    | June 30,                   |           | December 31,
|                                            |                                                                                                    | 2004                       |           | 2003        
|                                            |                                                                                                    |                            |           |             
|                                            |                                                                                                    | (Unaudited)                |           |             
|                                            |                                                                                                    |                           
|                                            |                                                                                                    | (In thousands)            
|ASSETS                                     
|Current assets:                             |                                                                                                    |                            |           |              |           |   |           |           
|                                            | Cash and cash equivalents                                                                          |                            | $         | 1,048,618    |           |   | $         | 823,171    |          
|                                            | Short-term investments                                                                             |                            |           | 1,701,487    |           |   |           | 1,679,844  |          
|                                            | Accounts receivable, net of allowance for
    doubtful accounts of $5,865 and $7,479, respectively |                            |           | 171,498      |           |   |           | 250,098    |          
|                                            | Other current assets                                                                               |                            |           | 66,841       |           |   |           | 60,254     |          
|                                            | Deferred income taxes                                                                              |                            |           | 36,333       |           |   |           | 30,302     |          
|                                            |                                                                                                    |                            |           |              |           |   |           |           
|                                            |                                                                                                    | Total current assets       |           |              | 3,024,777 |   |           |            | 2,843,669 | 
|Property and equipment, net                 |                                                                                                    |                            | 569,264   |              |           |   | 572,977   |           
|Other intangibles, net                      |                                                                                                    |                            | 86,139    |              |           |   | 81,344    |           
|Goodwill                                    |                                                                                                    |                            | 1,809,309 |              |           |   | 1,755,591 |           
|Other non-current assets                    |                                                                                                    |                            | 23,707    |              |           |   | 25,385    |           
|Deferred income taxes                       |                                                                                                    |                            | 83,201    |              |           |   | 69,500    |           
|                                            |                                                                                                    |                            |           |              |           |   |           |           
|                                            |                                                                                                    | $                          | 5,596,397 |              |           | $ | 5,348,466 |           
|                                            |                                                                                                    |                            |           |              |           |   |           |           
|                                           
|LIABILITIES AND STOCKHOLDERS
    EQUITY   
|Current liabilities:                        |                                                                                                    |                            |           |              |           |   |           |           
|                                            | Accounts payable                                                                                   |                            | $         | 39,098       |           |   | $         | 38,289     |          
|                                            | Accrued compensation and benefits                                                                  |                            |           | 110,797      |           |   |           | 124,655    |          
|                                            | Accrued acquisition and restructuring costs                                                        |                            |           | 22,789       |           |   |           | 25,051     |          
|                                            | Other accrued liabilities                                                                          |                            |           | 67,412       |           |   |           | 83,184     |          
|                                            | Current portion of long-term debt                                                                  |                            |           | 186,373      |           |   |           |           |          
|                                            | Income taxes payable                                                                               |                            |           | 159,058      |           |   |           | 141,623    |          
|                                            | Deferred revenue                                                                                   |                            |           | 422,584      |           |   |           | 398,772    |          
|                                            |                                                                                                    |                            |           |              |           |   |           |           
|                                            |                                                                                                    | Total current liabilities  |           |              | 1,008,111 |   |           |            | 811,574   | 
|Convertible subordinated notes              |                                                                                                    |                            | 520,000   |              |           |   | 520,000   |           
|Long-term debt                              |                                                                                                    |                            | 194,257   |              |           |   | 380,630   |           
|Accrued acquisition and restructuring costs |                                                                                                    |                            | 60,080    |              |           |   | 69,019    |           
|Other long-term liabilities                 |                                                                                                    |                            | 24,881    |              |           |   | 23,649    |           
|                                            |                                                                                                    |                            |           |              |           |   |           |           
|                                            |                                                                                                    | Total liabilities          |           |              | 1,807,329 |   |           |            | 1,804,872 | 
|                                            |                                                                                                    |                            |           |              |           |   |           |           
|Stockholders equity:                       |                                                                                                    |                            |           |              |           |   |           |           
|                                            | Common stock                                                                                       |                            |           | 461          |           |   |           | 458        |          
|                                            | Additional paid-in capital                                                                         |                            |           | 7,013,156    |           |   |           | 6,941,798  |          
|                                            | Accumulated deficit                                                                                |                            |           | (1,191,558   | )         |   |           | (1,378,076 | )        
|                                            | Deferred stock-based compensation                                                                  |                            |           | (12,183      | )         |   |           | (8,455     | )        
|                                            | Accumulated other comprehensive income (loss)                                                      |                            |           | (2,505       | )         |   |           | 6,172      |          
|                                            | Treasury stock, at cost; 28,609 shares at
    June 30, 2004 and December 31, 2003                  |                            |           | (2,018,303   | )         |   |           | (2,018,303 | )        
|                                            |                                                                                                    |                            |           |              |           |   |           |           
|                                            |                                                                                                    | Total stockholders equity |           |              | 3,789,068 |   |           |            | 3,543,594 | 
|                                            |                                                                                                    |                            |           |              |           |   |           |           
|                                            |                                                                                                    | $                          | 5,596,397 |              |           | $ | 5,348,466 |           
|                                            |                                                                                                    |                            |           |              |           |   |           |           

See accompanying notes to condensed consolidated
financial statements.

2



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##### Table of Contents



VERITAS SOFTWARE CORPORATION



CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS


|                                                                   |                                      |                                          |                            |                  |         |         |         |         |         |         |         |         |         |         |         |         |         |         |        | 
|------------------------------------------------------------------ | ------------------------------------ | ---------------------------------------- | -------------------------- | ---------------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | ------ | 
|                                                                   |                                      |                                          |                            |                 
|                                                                   |                                      | Three Months Ended                       |                            | Six Months Ended
|                                                                   |                                      | June 30,                                 |                            | June 30,        
|                                                                   |                                      |                                          |                            |                 
|                                                                   |                                      | 2004                                     |                            | 2003             |         | 2004    |         | 2003   
|                                                                   |                                      |                                          |                            |                  |         |         |         |        
|                                                                   |                                      |                                         
|                                                                   |                                      | (Unaudited)                             
|                                                                   |                                      | (In thousands, except per share amounts)
|Net revenue:                                                       |                                      |                                          |                            |                  |         |         |         |         |         |         |         |         |         |         |         |        
|                                                                   | User license fees                    |                                          | $                          | 269,916          |         |         | $       | 252,801 |         |         | $       | 572,325 |         |         | $       | 500,256 |        
|                                                                   | Services                             |                                          |                            | 215,118          |         |         |         | 155,567 |         |         |         | 398,456 |         |         |         | 298,248 |        
|                                                                   |                                      |                                          |                            |                  |         |         |         |         |         |         |         |         |         |         |         |        
|                                                                   |                                      | Total net revenue                        |                            |                  | 485,034 |         |         |         | 408,368 |         |         |         | 970,781 |         |         |         | 798,504 |        
|Cost of revenue:                                                   |                                      |                                          |                            |                  |         |         |         |         |         |         |         |         |         |         |         |        
|                                                                   | User license fees                    |                                          |                            | 8,878            |         |         |         | 11,716  |         |         |         | 18,397  |         |         |         | 23,633  |        
|                                                                   | Services(1)                          |                                          |                            | 66,812           |         |         |         | 54,807  |         |         |         | 132,655 |         |         |         | 107,109 |        
|                                                                   | Amortization of developed technology |                                          |                            | 4,055            |         |         |         | 10,554  |         |         |         | 7,879   |         |         |         | 25,336  |        
|                                                                   |                                      |                                          |                            |                  |         |         |         |         |         |         |         |         |         |         |         |        
|                                                                   |                                      | Total cost of revenue                    |                            |                  | 79,745  |         |         |         | 77,077  |         |         |         | 158,931 |         |         |         | 156,078 |        
|                                                                   |                                      |                                          |                            |                  |         |         |         |         |         |         |         |         |         |         |         |        
|                                                                   |                                      |                                          | Gross profit               |                  |         | 405,289 |         |         |         | 331,291 |         |         |         | 811,850 |         |         |         | 642,426 |       
|Operating expenses:                                                |                                      |                                          |                            |                  |         |         |         |         |         |         |         |         |         |         |         |        
|                                                                   | Selling and marketing(1)             |                                          |                            | 151,580          |         |         |         | 121,843 |         |         |         | 294,618 |         |         |         | 237,141 |        
|                                                                   | Research and development(1)          |                                          |                            | 83,580           |         |         |         | 71,468  |         |         |         | 163,504 |         |         |         | 142,056 |        
|                                                                   | General and administrative(1)        |                                          |                            | 46,389           |         |         |         | 39,638  |         |         |         | 94,138  |         |         |         | 77,817  |        
|                                                                   | Amortization of other intangibles    |                                          |                            | 2,409            |         |         |         | 12,250  |         |         |         | 4,803   |         |         |         | 30,441  |        
|                                                                   | In-process research and development  |                                          |                            |                 |         |         |         | 15,300  |         |         |         | 400     |         |         |         | 19,400  |        
|                                                                   |                                      |                                          |                            |                  |         |         |         |         |         |         |         |         |         |         |         |        
|                                                                   |                                      | Total operating expenses                 |                            |                  | 283,958 |         |         |         | 260,499 |         |         |         | 557,463 |         |         |         | 506,855 |        
|                                                                   |                                      |                                          |                            |                  |         |         |         |         |         |         |         |         |         |         |         |        
|                                                                   |                                      |                                          | Income from operations     |                  |         | 121,331 |         |         |         | 70,792  |         |         |         | 254,387 |         |         |         | 135,571 |       
|Interest and other income, net                                     |                                      |                                          | 10,438                     |                  |         |         | 13,891  |         |         |         | 21,764  |         |         |         | 24,903  |        
|Interest expense                                                   |                                      |                                          | (6,000                     | )                |         |         | (7,798  | )       |         |         | (11,702 | )       |         |         | (15,536 | )      
|Gain (loss) on strategic investments                               |                                      |                                          |                           |                  |         |         |        |         |         |         | 7,496   |         |         |         | (3,518  | )      
|                                                                   |                                      |                                          |                            |                  |         |         |         |         |         |         |         |         |         |         |         |        
|                                                                   |                                      |                                          | Income before income taxes |                  |         | 125,769 |         |         |         | 76,885  |         |         |         | 271,945 |         |         |         | 141,420 |       
|Provision for income taxes                                         |                                      |                                          | 39,299                     |                  |         |         | 31,251  |         |         |         | 85,427  |         |         |         | 52,682  |        
|                                                                   |                                      |                                          |                            |                  |         |         |         |         |         |         |         |         |         |         |         |        
|                                                                   |                                      |                                          |                            | Net income       |         | $       | 86,470  |         |         | $       | 45,634  |         |         | $       | 186,518 |         |         | $       | 88,738 | 
|                                                                   |                                      |                                          |                            |                  |         |         |         |         |         |         |         |         |         |         |         |        
|Net income per share  basic                                       |                                      | $                                        | 0.20                       |                  |         | $       | 0.11    |         |         | $       | 0.43    |         |         | $       | 0.21    |        
|                                                                   |                                      |                                          |                            |                  |         |         |         |         |         |         |         |         |         |         |         |        
|Number of shares used in computing per share
    amounts  basic   |                                      |                                          | 431,943                    |                  |         |         | 415,621 |         |         |         | 431,329 |         |         |         | 414,270 |        
|                                                                   |                                      |                                          |                            |                  |         |         |         |         |         |         |         |         |         |         |         |        
|Net income per share  diluted                                     |                                      | $                                        | 0.20                       |                  |         | $       | 0.11    |         |         | $       | 0.42    |         |         | $       | 0.21    |        
|                                                                   |                                      |                                          |                            |                  |         |         |         |         |         |         |         |         |         |         |         |        
|Number of shares used in computing per share
    amounts  diluted |                                      |                                          | 442,361                    |                  |         |         | 427,939 |         |         |         | 443,622 |         |         |         | 424,275 |        
|                                                                   |                                      |                                          |                            |                  |         |         |         |         |         |         |         |         |         |         |         |        



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|    |                                                          
|--- | ---------------------------------------------------------
|(1) | Amortization of stock-based compensation consists
    of:

|                           |                                                |   |     |       |  |   |     |     |  |   |       |       |  |   |     |     | 
|-------------------------- | ---------------------------------------------- | - | --- | ----- |  | - | --- | --- |  | - | ----- | ----- |  | - | --- | --- | 
|Services                   |                                                | $ | 66  |       |  | $ |    |     |  | $ | 303   |       |  | $ |    |    
|Selling and marketing      |                                                |   | 981 |       |  |   |    |     |  |   | 3,862 |       |  |   |    |    
|Research and development   |                                                |   | 614 |       |  |   | 416 |     |  |   | 1,836 |       |  |   | 730 |    
|General and administrative |                                                |   | 24  |       |  |   |    |     |  |   | 768   |       |  |   |    |    
|                           |                                                |   |     |       |  |   |     |     |  |   |       |       |  |   |     |    
|                           | Total amortization of stock-based compensation |   | $   | 1,685 |  |   | $   | 416 |  |   | $     | 6,769 |  |   | $   | 730 | 
|                           |                                                |   |     |       |  |   |     |     |  |   |       |       |  |   |     |    

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


|                                                                 |                                                                                           |                                                                 |                                           |            |         |          |        |           |         |          |  
|---------------------------------------------------------------- | ----------------------------------------------------------------------------------------- | --------------------------------------------------------------- | ----------------------------------------- | ---------- | ------- | -------- | ------ | --------- | ------- | -------- | -
|                                                                 |                                                                                           |                                                                
|                                                                 |                                                                                           | Six Months Ended June 30,                                      
|                                                                 |                                                                                           |                                                                
|                                                                 |                                                                                           | 2004                                                            |                                           | 2003      
|                                                                 |                                                                                           |                                                                 |                                           |           
|                                                                 |                                                                                           |                                                                
|                                                                 |                                                                                           | (Unaudited)                                                    
|                                                                 |                                                                                           | (In thousands)                                                 
|Cash flows from operating activities:                            |                                                                                           |                                                                 |                                           |            |         |          |        |          
|                                                                 | Net income                                                                                |                                                                 | $                                         | 186,518    |         |          | $      | 88,738    |        
|                                                                 | Adjustments to reconcile net income to net cash
    provided by operating activities:     |                                                                 |                                           |            |         |          |        |           |        
|                                                                 |                                                                                           | Depreciation and amortization                                   |                                           |            | 59,731  |          |        |           | 61,899  |         
|                                                                 |                                                                                           | Amortization of developed technology                            |                                           |            | 7,879   |          |        |           | 25,336  |         
|                                                                 |                                                                                           | Amortization of other intangibles                               |                                           |            | 4,803   |          |        |           | 30,441  |         
|                                                                 |                                                                                           | In-process research and development                             |                                           |            | 400     |          |        |           | 19,400  |         
|                                                                 |                                                                                           | Provision for (recovery of) allowance for
    doubtful accounts |                                           |            | (836    | )        |        |           | 1,475   |         
|                                                                 |                                                                                           | Stock-based compensation                                        |                                           |            | 6,769   |          |        |           | 730     |         
|                                                                 |                                                                                           | Tax benefits from stock plans                                   |                                           |            | 8,618   |          |        |           | 11,065  |         
|                                                                 |                                                                                           | (Gain) loss on strategic investments                            |                                           |            | (7,496  | )        |        |           | 3,518   |         
|                                                                 |                                                                                           | (Gain) loss on sale and disposal of assets                      |                                           |            | 909     |          |        |           | (428    | )       
|                                                                 |                                                                                           | Deferred income taxes                                           |                                           |            | (18,923 | )        |        |           | (23,359 | )       
|                                                                 | Changes in operating assets and liabilities, net
    of effects of business acquisitions: |                                                                 |                                           |            |         |          |        |           |        
|                                                                 |                                                                                           | Accounts receivable                                             |                                           |            | 77,729  |          |        |           | 52,712  |         
|                                                                 |                                                                                           | Other assets                                                    |                                           |            | (8,053  | )        |        |           | 6,200   |         
|                                                                 |                                                                                           | Accounts payable                                                |                                           |            | 863     |          |        |           | (929    | )       
|                                                                 |                                                                                           | Accrued compensation and benefits                               |                                           |            | (13,911 | )        |        |           | (14,398 | )       
|                                                                 |                                                                                           | Accrued acquisition and restructuring costs                     |                                           |            | (12,888 | )        |        |           | (10,193 | )       
|                                                                 |                                                                                           | Other liabilities                                               |                                           |            | (10,268 | )        |        |           | (6,133  | )       
|                                                                 |                                                                                           | Income taxes payable                                            |                                           |            | 17,517  |          |        |           | 50,164  |         
|                                                                 |                                                                                           | Deferred revenue                                                |                                           |            | 21,633  |          |        |           | 25,656  |         
|                                                                 |                                                                                           |                                                                 |                                           |            |         |          |        |          
|                                                                 |                                                                                           |                                                                 | Net cash provided by operating activities |            |         | 320,994  |        |           |         | 321,894  |  
|Cash flows from investing activities:                            |                                                                                           |                                                                 |                                           |            |         |          |        |          
|                                                                 | Purchases of investments                                                                  |                                                                 |                                           | (1,651,284 | )       |          |        | (930,935  | )      
|                                                                 | Sales and maturities of investments                                                       |                                                                 |                                           | 1,624,392  |         |          |        | 1,160,013 |        
|                                                                 | Purchases of property and equipment                                                       |                                                                 |                                           | (53,005    | )       |          |        | (34,998   | )      
|                                                                 | Purchase of businesses and technology, net of
    cash acquired                           |                                                                 |                                           | (68,987    | )       |          |        | (333,739  | )      
|                                                                 | Payments made for prior year business and
    technology acquisitions                     |                                                                 |                                           |           |         |          |        | (4,152    | )      
|                                                                 |                                                                                           |                                                                 |                                           |            |         |          |        |          
|                                                                 |                                                                                           |                                                                 | Net cash used for investing activities    |            |         | (148,884 | )      |           |         | (143,811 | )
|Cash flows from financing activities:                            |                                                                                           |                                                                 |                                           |            |         |          |        |          
|                                                                 | Additional issuance costs for convertible
    subordinated debt                           |                                                                 |                                           | (170       | )       |          |        |          |        
|                                                                 | Proceeds from issuance of common stock                                                    |                                                                 |                                           | 52,249     |         |          |        | 58,984    |        
|                                                                 |                                                                                           |                                                                 |                                           |            |         |          |        |          
|                                                                 |                                                                                           |                                                                 | Net cash provided by financing activities |            |         | 52,079   |        |           |         | 58,984   |  
|Effect of exchange rate changes on cash and cash
    equivalents |                                                                                           |                                                                 | 1,258                                     |            |         |          | 15,889 |          
|                                                                 |                                                                                           |                                                                 |                                           |            |         |          |        |          
|                                                                 | Net increase in cash and cash equivalents                                                 |                                                                 |                                           | 225,447    |         |          |        | 252,956   |        
|                                                                 | Cash and cash equivalents at beginning of period                                          |                                                                 |                                           | 823,171    |         |          |        | 764,062   |        
|                                                                 |                                                                                           |                                                                 |                                           |            |         |          |        |          
|                                                                 | Cash and cash equivalents at end of period                                                |                                                                 | $                                         | 1,048,618  |         |          | $      | 1,017,018 |        
|                                                                 |                                                                                           |                                                                 |                                           |            |         |          |        |          
|Supplemental disclosures:                                        |                                                                                           |                                                                 |                                           |            |         |          |        |          
|                                                                 | Cash paid for interest                                                                    |                                                                 | $                                         | 8,855      |         |          | $      | 5,992     |        
|                                                                 |                                                                                           |                                                                 |                                           |            |         |          |        |          
|                                                                 | Cash paid for income taxes                                                                |                                                                 | $                                         | 88,674     |         |          | $      | 15,808    |        
|                                                                 |                                                                                           |                                                                 |                                           |            |         |          |        |          

See accompanying notes to condensed consolidated
financial statements.

4



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##### Table of Contents



VERITAS SOFTWARE CORPORATION



NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS


(Unaudited)




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

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



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

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



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

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

|                   |             |                                                                                                              |   |                  |         |      |   |         |         |   |   |         |          |   |   |         |          |  
|------------------ | ----------- | ------------------------------------------------------------------------------------------------------------ | - | ---------------- | ------- | ---- | - | ------- | ------- | - | - | ------- | -------- | - | - | ------- | -------- | -
|                   |             |                                                                                                              |   |                 
|                   |             | Three Months Ended                                                                                           |   | Six Months Ended
|                   |             | June 30,                                                                                                     |   | June 30,        
|                   |             |                                                                                                              |   |                 
|                   |             | 2004                                                                                                         |   | 2003             |         | 2004 |   | 2003   
|                   |             |                                                                                                              |   |                  |         |      |   |        
|                   |             |                                                                                                             
|                   |             | (In thousands, except per share amounts)                                                                    
|Net income (loss): |             |                                                                                                              |   |                  |         |      |   |         |         |   |   |         |          |   |   |        
|                   | As reported |                                                                                                              | $ | 86,470           |         |      | $ | 45,634  |         |   | $ | 186,518 |          |   | $ | 88,738  |         
|                   | Add:        |                                                                                                              |   |                  |         |      |   |         |         |   |   |         |          |   |   |         |         
|                   |             | Stock-based compensation expense included in net
    income, net of tax                                      |   |                  | 1,112   |      |   |         | 279     |   |   |         | 4,468    |   |   |         | 489      |  
|                   | Less:       |                                                                                                              |   |                  |         |      |   |         |         |   |   |         |          |   |   |         |         
|                   |             | Total stock-based compensation expense determined
    under the fair value method for all awards, net of tax |   |                  | (76,313 | )    |   |         | (76,513 | ) |   |         | (147,429 | ) |   |         | (152,047 | )
|                   |             |                                                                                                              |   |                  |         |      |   |         |         |   |   |         |          |   |   |        
|                   | Pro forma   |                                                                                                              | $ | 11,269           |         |      | $ | (30,600 | )       |   | $ | 43,557  |          |   | $ | (62,820 | )       
|                   |             |                                                                                                              |   |                  |         |      |   |         |         |   |   |         |          |   |   |        

5



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##### Table of Contents



VERITAS SOFTWARE CORPORATION


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

|                                 |             |                                          |   |                  |  |      |   |       |   |  |   |      |  |  |   |       |  
|-------------------------------- | ----------- | ---------------------------------------- | - | ---------------- |  | ---- | - | ----- | - |  | - | ---- |  |  | - | ----- | -
|                                 |             |                                          |   |                 
|                                 |             | Three Months Ended                       |   | Six Months Ended
|                                 |             | June 30,                                 |   | June 30,        
|                                 |             |                                          |   |                 
|                                 |             | 2004                                     |   | 2003             |  | 2004 |   | 2003 
|                                 |             |                                          |   |                  |  |      |   |      
|                                 |             |                                         
|                                 |             | (In thousands, except per share amounts)
|Basic income (loss) per share:   |             |                                          |   |                  |  |      |   |       |   |  |   |      |  |  |   |      
|                                 | As reported |                                          | $ | 0.20             |  |      | $ | 0.11  |   |  | $ | 0.43 |  |  | $ | 0.21  |  
|                                 |             |                                          |   |                  |  |      |   |       |   |  |   |      |  |  |   |      
|                                 | Pro forma   |                                          | $ | 0.03             |  |      | $ | (0.07 | ) |  | $ | 0.10 |  |  | $ | (0.15 | )
|                                 |             |                                          |   |                  |  |      |   |       |   |  |   |      |  |  |   |      
|Diluted income (loss) per share: |             |                                          |   |                  |  |      |   |       |   |  |   |      |  |  |   |      
|                                 | As reported |                                          | $ | 0.20             |  |      | $ | 0.11  |   |  | $ | 0.42 |  |  | $ | 0.21  |  
|                                 |             |                                          |   |                  |  |      |   |       |   |  |   |      |  |  |   |      
|                                 | Pro forma   |                                          | $ | 0.03             |  |      | $ | (0.07 | ) |  | $ | 0.10 |  |  | $ | (0.15 | )
|                                 |             |                                          |   |                  |  |      |   |       |   |  |   |      |  |  |   |      

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

Also, beginning with the third quarter of fiscal
2003, the Company decreased its estimate of the expected life of
new options granted to its employees from 5 years to
4 years. The Company bases its expected life assumption on
historical experience as well as the terms and vesting periods
of the options granted. The reduction in the estimated expected
life was a result of an analysis of the Companys
historical experience.

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

|                               |  |                    |            |                  |  |      |            |      |  |  |            |  |  |  |            | 
|------------------------------ |  | ------------------ | ---------- | ---------------- |  | ---- | ---------- | ---- |  |  | ---------- |  |  |  | ---------- | 
|                               |  |                    |            |                 
|                               |  | Three Months Ended |            | Six Months Ended
|                               |  | June 30,           |            | June 30,        
|                               |  |                    |            |                 
|                               |  | 2004               |            | 2003             |  | 2004 |            | 2003
|                               |  |                    |            |                  |  |      |            |     
|Risk-free interest rate        |  |                    | 3.36%      |                  |  |      | 2.57%      |      |  |  | 2.74%      |  |  |  | 2.74%      | 
|Dividend yield                 |  |                    | 0%         |                  |  |      | 0%         |      |  |  | 0%         |  |  |  | 0%         | 
|Weighted average expected life |  |                    | 4.0  years |                  |  |      | 5.0  years |      |  |  | 4.0  years |  |  |  | 5.0  years | 
|Volatility of common stock     |  |                    | 52%        |                  |  |      | 90%        |      |  |  | 54%        |  |  |  | 90%        | 

The fair value of the employees purchase
rights under the employee stock purchase plan is estimated on
the date of grant using the Black-Scholes option-pricing model.
There were no grants under the employee stock purchase plan for
the three months ended June 30, 2004 and 2003.

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

6



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##### Table of Contents



VERITAS SOFTWARE CORPORATION


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

options. For the six months ended June 30,
2004, $4.3 million was expensed in the statement of
operations as a result of this modification.



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

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

|                             |                                                                                      |                                          |      |                    |  |      |      |         |  |   |      |         |  |   |      |         | 
|---------------------------- | ------------------------------------------------------------------------------------ | ---------------------------------------- | ---- | ------------------ |  | ---- | ---- | ------- |  | - | ---- | ------- |  | - | ---- | ------- | 
|                             |                                                                                      |                                          |      |                   
|                             |                                                                                      | Three Months Ended                       |      | Three Months Ended
|                             |                                                                                      | June 30,                                 |      | June 30,          
|                             |                                                                                      |                                          |      |                   
|                             |                                                                                      | 2004                                     |      | 2003               |  | 2004 |      | 2003   
|                             |                                                                                      |                                          |      |                    |  |      |      |        
|                             |                                                                                      |                                         
|                             |                                                                                      | (In thousands, except per share amounts)
|Numerator:                   |                                                                                      |                                          |      |                    |  |      |      |         |  |   |      |         |  |   |      |        
|                             | Net income                                                                           |                                          | $    | 86,470             |  |      | $    | 45,634  |  |   | $    | 186,518 |  |   | $    | 88,738  | 
|                             |                                                                                      |                                          |      |                    |  |      |      |         |  |   |      |         |  |   |      |        
|Denominator:                 |                                                                                      |                                          |      |                    |  |      |      |         |  |   |      |         |  |   |      |        
|                             | Denominator for basic net income per
    share  weighted-average shares outstanding |                                          |      | 431,943            |  |      |      | 415,621 |  |   |      | 431,329 |  |   |      | 414,270 | 
|                             | Potential common shares                                                              |                                          |      | 10,418             |  |      |      | 12,318  |  |   |      | 12,293  |  |   |      | 10,005  | 
|                             |                                                                                      |                                          |      |                    |  |      |      |         |  |   |      |         |  |   |      |        
|                             | Denominator for diluted net income per share                                         |                                          |      | 442,361            |  |      |      | 427,939 |  |   |      | 443,622 |  |   |      | 424,275 | 
|                             |                                                                                      |                                          |      |                    |  |      |      |         |  |   |      |         |  |   |      |        
|Basic net income per share   |                                                                                      | $                                        | 0.20 |                    |  | $    | 0.11 |         |  | $ | 0.43 |         |  | $ | 0.21 |        
|                             |                                                                                      |                                          |      |                    |  |      |      |         |  |   |      |         |  |   |      |        
|Diluted net income per share |                                                                                      | $                                        | 0.20 |                    |  | $    | 0.11 |         |  | $ | 0.42 |         |  | $ | 0.21 |        
|                             |                                                                                      |                                          |      |                    |  |      |      |         |  |   |      |         |  |   |      |        

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

|                                         |  |                    |        |                  |  |      |        |      |  |  |        |  |  |  |        | 
|---------------------------------------- |  | ------------------ | ------ | ---------------- |  | ---- | ------ | ---- |  |  | ------ |  |  |  | ------ | 
|                                         |  |                    |        |                 
|                                         |  | Three Months Ended |        | Six Months Ended
|                                         |  | June 30,           |        | June 30,        
|                                         |  |                    |        |                 
|                                         |  | 2004               |        | 2003             |  | 2004 |        | 2003
|                                         |  |                    |        |                  |  |      |        |     
|                                         |  |                   
|                                         |  | (In thousands)    
|Employee stock options outstanding(1)    |  |                    | 39,961 |                  |  |      | 34,572 |      |  |  | 31,726 |  |  |  | 38,363 | 
|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) | These employee stock options were excluded from
    the computation of diluted net income per share because the
    exercise price was greater than the average market price of the
    Companys common stock during the period, and therefore the
    effect is antidilutive.                                                                                                                    
|   
|(2) | Potential common shares issuable upon the
    conversion of the Companys 5.25% and
    1.856% convertible subordinated notes 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) | 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 specified circumstances under which the
    0.25% notes are convertible prior to maturity have not been
    met (see Note 9).                                                                                     

The weighted average exercise prices of employee
stock options with exercise prices exceeding the average fair
value of the Companys common stock was $56.70 and
$61.92 per share for the three months ended June 30,
2004 and 2003, respectively and $63.93 and $58.45 per share
for the six months ended June 30, 2004 and 2003,
respectively.

7



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##### Table of Contents



VERITAS SOFTWARE CORPORATION


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



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



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

On January 20, 2004, the Company acquired
all of the outstanding capital stock of Ejasent, Inc.
(Ejasent), a privately held provider of application
virtualization technology for utility computing. The Company
acquired Ejasent to add important application migration
technology, which allows IT personnel to move an application
from one server to another without disrupting or terminating the
application, to the Companys growing utility computing
portfolio. The Ejasent acquisition was accounted for using the
purchase method of accounting for total purchase consideration
of $61.4 million, which included $47.8 million in cash
and $13.6 million of acquisition-related costs. The
purchase price was allocated to goodwill of $53.7 million,
developed technology of $10.2 million, other intangibles of
$1.9 million, in-process research and development
(IPR&D) of $0.4 million, net deferred tax
liabilities of $4.6 million and net tangible liabilities of
$0.2 million. The weighted average amortization period for
all purchased intangible assets is 4.4 years.
Acquisition-related costs consist of $11.5 million of
change in control bonuses and direct transaction costs of
$2.1 million for legal and other professional fees. Total
cash outlays for acquisition-related costs were
$13.3 million through June 30, 2004. The results of
operations of Ejasent were included in the Companys
consolidated financial statements from the date of acquisition.
The pro forma impact of the acquisition on the Companys
results of operations is not significant.



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

On June 30, 2003, the Company acquired all
of the outstanding common stock of Precise Software Solutions
Ltd. (Precise), a provider of application
performance management products. The Company acquired Precise in
order to expand its product and service offerings across
storage, databases and application management. The Precise
acquisition was accounted for using the purchase method of
accounting for total purchase consideration of
$715.1 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s outstanding vested and unvested stock options for
4.4 million shares of the Companys common stock and
$12.7 million of acquisition-related costs. The purchase
price was allocated to goodwill of $509.7 million,
developed technology of $27.6 million, other intangibles of
$34.3 million, IPR&D of $15.3 million, net
deferred tax liabilities of $21.4 million, deferred
stock-based compensation of $7.3 million and net tangible
assets of $142.3 million. The weighted average amortization
period for all purchased intangible assets is 3.7 years.
The acquired IPR&D of $15.3 million was written off and
the related charge was expensed in the statement of operations
in the second quarter of 2003. Acquisition-related costs of
$12.7 million consist of $9.0 million associated with
investment banking and other professional fees,
$3.3 million for terminating and satisfying existing lease
commitments and $0.4 million for severance-related costs.
Total cash outlays for acquisition-related costs were
approximately $8.8 million for investment banking and other
professional fees, $0.4 million for severance and
$0.5 million for leases through June 30, 2004.

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 fiscal year 2003. 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
the period or of the results that may occur in the future. Net
income excludes the write-off of acquired IPR&D of
$15.3 million and includes amortization of intangible

8



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##### Table of Contents



VERITAS SOFTWARE CORPORATION


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

assets related to the acquisition of
$4.7 million per quarter and amortization of deferred
compensation of $0.5 million per quarter. The unaudited pro
forma information is as follows:

|                               |  |                                          |         |                  |  |   |         | 
|------------------------------ |  | ---------------------------------------- | ------- | ---------------- |  | - | ------- | 
|                               |  | Three Months Ended                       |         | Six Months Ended
|                               |  | June 30, 2003                            |         | June 30, 2003   
|                               |  |                                          |         |                 
|                               |  |                                         
|                               |  | (In thousands, except per share amounts)
|Total net revenue              |  | $                                        | 418,055 |                  |  | $ | 830,346 | 
|Net income                     |  | $                                        | 32,113  |                  |  | $ | 72,235  | 
|Net income per share  basic   |  | $                                        | 0.08    |                  |  | $ | 0.17    | 
|Net income per share  diluted |  | $                                        | 0.07    |                  |  | $ | 0.17    | 



| |                          
| | -------------------------
| | 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 method of accounting 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 the
Companys common stock and $3.2 million of
acquisition-related costs. The purchase price was allocated to
goodwill of $51.3 million, developed technology of
$9.1 million, other intangibles of $1.9 million,
IPR&D of $4.1 million, net deferred tax liabilities of
$6.1 million, deferred stock-based compensation of
$4.6 million and net tangible assets of $3.8 million.
The weighted average amortization period for all purchased
intangible assets is 3.3 years. The acquired IPR&D of
$4.1 million was written off and the related charge was
expensed in the statement of operations in the first quarter of
2003. Acquisition-related costs of $3.2 million consist of
$2.7 million associated with terminating and satisfying
remaining lease commitments, partially offset by sublease income
net of related sublease costs, and direct transaction costs of
$0.5 million for legal and other professional fees. Total
cash outlays for acquisition-related costs were
$1.8 million through June 30, 2004. 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.



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

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

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

|          |                                 |                                 |   |              |           |  |   |            |           | 
|--------- | ------------------------------- | ------------------------------- | - | ------------ | --------- |  | - | ---------- | --------- | 
|          |                                 | June 30,                        |   | December 31,
|          |                                 | 2004                            |   | 2003        
|          |                                 |                                 |   |             
|          |                                 |                                
|          |                                 | (In thousands)                 
|Goodwill: |                                 |                                 |   |              |           |  |   |           
|          | Gross carrying amount           |                                 | $ | 3,895,936    |           |  | $ | 3,842,218  |          
|          | Less  accumulated amortization |                                 |   | (2,086,627   | )         |  |   | (2,086,627 | )        
|          |                                 |                                 |   |              |           |  |   |           
|          |                                 | Net carrying amount of goodwill |   | $            | 1,809,309 |  |   | $          | 1,755,591 | 
|          |                                 |                                 |   |              |           |  |   |           

During the first quarter of 2004, the Company
acquired Ejasent (see Note 5), which increased goodwill by
$53.7 million.

9



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##### Table of Contents



VERITAS SOFTWARE CORPORATION


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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

|                                              |                                     |                         |         |              |         |              |         |         |         |   |        |        |        | 
|--------------------------------------------- | ----------------------------------- | ----------------------- | ------- | ------------ | ------- | ------------ | ------- | ------- | ------- | - | ------ | ------ | ------ | 
|                                              |                                     |                        
|                                              |                                     | June 30, 2004          
|                                              |                                     |                        
|                                              |                                     | Gross                   |         |             
|                                              |                                     | Carrying                |         | Accumulated  |         | Net Carrying
|                                              |                                     | Amount                  |         | Amortization |         | Amount      
|                                              |                                     |                         |         |              |         |             
|                                              |                                     |                        
|                                              |                                     | (In thousands)         
|Developed technology                          |                                     | $                       | 299,749 |              |         | $            | 245,677 |         |         | $ | 54,072 |       
|Distribution channels                         |                                     |                         | 234,800 |              |         |              | 234,800 |         |         |   |       |       
|Trademarks                                    |                                     |                         | 26,650  |              |         |              | 25,500  |         |         |   | 1,150  |       
|Other intangible assets                       |                                     |                         | 60,612  |              |         |              | 38,502  |         |         |   | 22,110 |       
|                                              |                                     |                         |         |              |         |              |         |         |         |   |        |       
|                                              | Intangibles related to acquisitions |                         |         | 621,811      |         |              |         | 544,479 |         |   |        | 77,332 |       
|Convertible subordinated notes issuance costs |                                     |                         | 12,571  |              |         |              | 3,764   |         |         |   | 8,807  |       
|                                              |                                     |                         |         |              |         |              |         |         |         |   |        |       
|                                              |                                     | Total other intangibles |         | $            | 634,382 |              |         | $       | 548,243 |   |        | $      | 86,139 | 
|                                              |                                     |                         |         |              |         |              |         |         |         |   |        |       

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

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

|                        |                            |                    |       |                  |  |      |        |        |  |   |       |        |  |   |        |        | 
|----------------------- | -------------------------- | ------------------ | ----- | ---------------- |  | ---- | ------ | ------ |  | - | ----- | ------ |  | - | ------ | ------ | 
|                        |                            |                    |       |                 
|                        |                            | Three Months Ended |       | Six Months Ended
|                        |                            | June 30,           |       | June 30,        
|                        |                            |                    |       |                 
|                        |                            | 2004               |       | 2003             |  | 2004 |        | 2003  
|                        |                            |                    |       |                  |  |      |        |       
|                        |                            |                   
|                        |                            | (In thousands)    
|Developed technology    |                            | $                  | 4,433 |                  |  | $    | 10,887 |        |  | $ | 8,634 |        |  | $ | 25,985 |       
|Distribution channels   |                            |                    |      |                  |  |      | 9,783  |        |  |   |      |        |  |   | 24,458 |       
|Trademarks              |                            |                    | 288   |                  |  |      | 1,015  |        |  |   | 575   |        |  |   | 2,537  |       
|Other intangible assets |                            |                    | 2,519 |                  |  |      | 1,612  |        |  |   | 4,788 |        |  |   | 3,668  |       
|                        |                            |                    |       |                  |  |      |        |        |  |   |       |        |  |   |        |       
|                        | Total amortization expense |                    | $     | 7,240            |  |      | $      | 23,297 |  |   | $     | 13,997 |  |   | $      | 56,648 | 
|                        |                            |                    |       |                  |  |      |        |        |  |   |       |        |  |   |        |       

Total amortization expense for developed
technology and other intangibles includes approximately
$0.8 million and $0.5 million, respectively, for the
three months ended June 30, 2004 and 2003 and approximately
$1.3 million and $0.9 million, respectively, for the
six months ended June 30, 2004 and 2003 that is included in
cost of user license fees.

10



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##### Table of Contents



VERITAS SOFTWARE CORPORATION


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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

|     |       |                |        |        | 
|---- | ----- | -------------- | ------ | ------ | 
|     |       | Future        
|     |       | Amortization  
|     |       |               
|     |       | (In thousands)
|2004 |       | $              | 13,346 |       
|2005 |       |                | 25,942 |       
|2006 |       |                | 23,910 |       
|2007 |       |                | 12,077 |       
|2008 |       |                | 1,912  |       
|2009 |       |                | 145    |       
|     |       |                |        |       
|     | Total |                | $      | 77,332 | 
|     |       |                |        |       



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

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



|   |                            
|-- | ---------------------------
|8. | Accrued Restructuring Costs

In the fourth quarter of 2002, the Companys
board of directors approved a facility restructuring plan to
exit and consolidate certain of its facilities located in 17
metropolitan areas worldwide. The facility restructuring plan
was adopted to address overcapacity in the Companys
facilities as a result of lower than planned headcount growth in
these metropolitan areas. In connection with this facility
restructuring plan, the Company recorded a net restructuring
charge to operating expenses of $96.1 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 $9.2 million for net
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 completed vacating facilities as of
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.

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VERITAS SOFTWARE CORPORATION


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Adjustments to the accrued restructuring costs
will be made if actual lease exit costs or sublease income
differ from amounts currently expected. As a portion of the
accrued restructuring costs relate to international locations,
the accrual will be affected by exchange rate fluctuations. The
impact of exchange rate fluctuations is recorded in accumulated
other comprehensive income on the balance sheet.

The portion of the accrual expected to be
utilized through June 30, 2005 of $16.7 million has
been classified in the current portion of accrued acquisition
and restructuring costs. The portion of the accrual expected to
be utilized in periods subsequent to June 30, 2005 of
$56.3 million has been classified in the non-current
portion of accrued acquisition and restructuring costs. The
components of the accrued restructuring costs and movements
within these components through June 30, 2004 were as
follows:

|                             |  |               |      |            |  |       |      |   |  |   |      |  
|---------------------------- |  | ------------- | ---- | ---------- |  | ----- | ---- | - |  | - | ---- | -
|                             |  | Facilities    |      | Asset      |  |      
|                             |  | Related Costs |      | Write-offs |  | Total
|                             |  |               |      |            |  |      
|                             |  |              
|                             |  | (In millions)
|Balance at December 31, 2003 |  | $             | 79.8 |            |  | $     | 2.1  |   |  | $ | 81.9 |  
|Cash payments                |  |               | (3.8 | )          |  |       |     |   |  |   | (3.8 | )
|Asset write-offs             |  |               |     |            |  |       | (2.1 | ) |  |   | (2.1 | )
|Impact of exchange rates     |  |               | 0.6  |            |  |       |     |   |  |   | 0.6  |  
|                             |  |               |      |            |  |       |      |   |  |   |      |  
|Balance at March 31, 2004    |  |               | 76.6 |            |  |       |     |   |  |   | 76.6 |  
|Cash payments                |  |               | (3.8 | )          |  |       |     |   |  |   | (3.8 | )
|Impact of exchange rates     |  |               | 0.2  |            |  |       |     |   |  |   | 0.2  |  
|                             |  |               |      |            |  |       |      |   |  |   |      |  
|Balance at June 30, 2004     |  | $             | 73.0 |            |  | $     |     |   |  | $ | 73.0 |  
|                             |  |               |      |            |  |       |      |   |  |   |      |  

Included in total accrued acquisition and
restructuring costs of $82.9 million as of June 30,
2004 are the $73.0 million balance related to the facility
restructuring plan discussed above, the remaining acquisition
costs to be paid in connection with the Companys
acquisitions (see Note 5) and the remaining
restructuring costs to be paid for other restructuring plans.



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

In August 2003, the Company issued
$520.0 million of 0.25% convertible subordinated notes
due August 1, 2013 (the 0.25% Notes), to
several initial purchasers in a private offering, for which the
Company received net proceeds of approximately
$508.2 million. The 0.25% Notes were issued at their
face value and provide for semi-annual interest payments of
$0.7 million each February 1 and August 1, beginning
February 1, 2004. Effective as of January 28, 2004,
the 0.25% Notes began accruing additional interest at a
rate of 0.25% as a result of the Companys registration
statement having not been declared effective by the SEC on or
before the 180th day following the original issuance of the
0.25% Notes and the 0.25% Notes continued to accrue
such additional interest until April 27, 2004, the 90th day
following such registration default. As of April 27, 2004,
the 0.25% Notes began to accrue additional interest at a
rate of 0.50% and will accrue such additional interest until the
registration statement is declared effective or until the
Company is no longer required to maintain the effectiveness of
the registration statement. The 0.25% Notes are
convertible, under specified circumstances, into shares of the
Companys common stock at a conversion rate of
21.6802 shares per $1,000 principal amount of notes, which
is equivalent to a conversion price of approximately
$46.13 per share.



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

In 1999 and 2000, the Company entered into three
build-to-suit lease agreements for office buildings in Mountain
View, California, Roseville, Minnesota and Milpitas, California.
The Company began occupying the Roseville and Mountain View
facilities in May and June 2001, respectively, and began
occupying the Milpitas

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VERITAS SOFTWARE CORPORATION


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

facility in April 2003. The Mountain View
facility includes 425,000 square feet and serves as the
Companys corporate headquarters and for research and
development functions. The Milpitas facility includes
466,000 square feet and is primarily used for technical
support, sales and general corporate functions. The Roseville
facility includes 204,000 square feet and provides space
for technical support and research and development functions. A
syndicate of financial institutions financed the acquisition and
development of these properties. Prior to July 1, 2003, the
Company accounted for these properties as operating leases in
accordance with SFAS No. 13, Accounting for
Leases, as amended. On July 1, 2003, the Company
adopted Financial Accounting Standards Board, or FASB,
Interpretation Number (FIN) 46. Under
FIN 46, the lessors of the facilities are considered
variable interest entities, and the Company is considered the
primary beneficiary. Accordingly, the Company began
consolidating these variable interest entities on July 1,
2003 and has included the property and equipment and long-term
debt on its balance sheet at June 30, 2004 and
December 31, 2003 and the results of their operations in
its consolidated statement of operations for the three and six
months ended June 30, 2004. As of June 30, 2004,
approximately $186.4 million of debt has been classified as
current as the lease terms for Mountain View and Roseville
facilities expire in March 2005.

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

In January 2002, the Company entered into two
three-year pay fixed, receive floating, interest rate swaps for
the purpose of hedging the cash payments related to the Mountain
View, California and Roseville, Minnesota agreements (see
Note 12). Under the terms of these interest rate swaps, the
Company makes payments based on the fixed rate and will receive
interest payments based on the 3-month LIBOR rate. For the three
months ended June 30, 2004 and 2003, the aggregate
payments, including the net payments on the interest rate swaps,
were $4.0 million and $4.1 million, respectively and
for the six months ended June 30, 2004 and 2003, the
aggregate payments, including the net payments on the interest
rate swaps, were $8.0 million and $8.2 million,
respectively. The payments for the three and six months
ended June 30, 2004 were included in interest expense in
the consolidated statement of operations in accordance with
FIN 46. The payments made for the three and six months
ended June 30, 2003 were classified as rent expense and
included in cost of revenue and operating expenses, in
accordance with SFAS No. 13.

The agreements for the facilities described above
require that the Company maintain specified financial covenants,
all of which the Company was in compliance with as of
June 30, 2004. The specified financial covenants as of
June 30, 2004 require the Company to maintain a minimum
rolling four quarters earning before interest, taxes,
depreciation and amortization (EBITDA) of
$400.0 million, a minimum ratio of cash and cash
equivalents and accounts receivable to current liabilities plus
the debt consolidated under the build-to-suit lease agreements
of 1.2 to 1, and a leverage ratio of total funded
indebtedness to rolling four quarter EBITDA of not more than 2
to 1. For purposes of these financial covenants, EBITDA
represents the Companys net income for the applicable
period, plus interest expense, taxes, depreciation and
amortization

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VERITAS SOFTWARE CORPORATION


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

and all non-cash restructuring charges, less
software development expenses classified as capital
expenditures. In order to secure the obligation under each
agreement, each of the facilities is subject to a deed of trust
in favor of the financial institutions that financed the
development and acquisition of the respective facility. Bank of
America, N.A. was the agent for the syndicate of banks that
funded the development of the Mountain View, California and
Roseville, Minnesota facilities, and ABN AMRO Bank, N.V. was the
agent for the syndicate of banks that funded the development of
the Milpitas, California facility.



|    |                     
|--- | --------------------
|11. | Comprehensive Income

The following are the components of comprehensive
income:

|                                               |                                                 |                      |        |                  |        |      |        |        |        |   |         |        |         |   |        |        |         | 
|---------------------------------------------- | ----------------------------------------------- | -------------------- | ------ | ---------------- | ------ | ---- | ------ | ------ | ------ | - | ------- | ------ | ------- | - | ------ | ------ | ------- | 
|                                               |                                                 |                      |        |                 
|                                               |                                                 | Three Months Ended   |        | Six Months Ended
|                                               |                                                 | June 30,             |        | June 30,        
|                                               |                                                 |                      |        |                 
|                                               |                                                 | 2004                 |        | 2003             |        | 2004 |        | 2003  
|                                               |                                                 |                      |        |                  |        |      |        |       
|                                               |                                                 |                     
|                                               |                                                 | (In thousands)      
|Net income                                     |                                                 | $                    | 86,470 |                  |        | $    | 45,634 |        |        | $ | 186,518 |        |         | $ | 88,738 |       
|Other comprehensive income (loss), net of tax: |                                                 |                      |        |                  |        |      |        |        |        |   |         |        |         |   |        |       
|                                               | Foreign currency translation adjustments        |                      |        | 23               |        |      |        | 10,729 |        |   |         | (2,105 | )       |   |        | 14,639 |        
|                                               | Derivative financial instrument adjustments     |                      |        | 2,423            |        |      |        | 323    |        |   |         | 3,343  |         |   |        | (248   | )      
|                                               | Unrealized gain (loss) on marketable securities |                      |        | (11,210          | )      |      |        | 82     |        |   |         | (9,915 | )       |   |        | (114   | )      
|                                               |                                                 |                      |        |                  |        |      |        |        |        |   |         |        |         |   |        |       
|                                               |                                                 | Comprehensive income |        | $                | 77,706 |      |        | $      | 56,768 |   |         | $      | 177,841 |   |        | $      | 103,015 | 
|                                               |                                                 |                      |        |                  |        |      |        |        |        |   |         |        |         |   |        |       

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

|                                                |                                               |                |        |              |   |   |        |       | 
|----------------------------------------------- | --------------------------------------------- | -------------- | ------ | ------------ | - | - | ------ | ----- | 
|                                                |                                               | June 30,       |        | December 31,
|                                                |                                               | 2004           |        | 2003        
|                                                |                                               |                |        |             
|                                                |                                               |               
|                                                |                                               | (In thousands)
|Foreign currency translation adjustments        |                                               | $              | 11,351 |              |   | $ | 13,456 |      
|Derivative financial instrument adjustments     |                                               |                | (4,439 | )            |   |   | (7,782 | )    
|Unrealized gain (loss) on marketable securities |                                               |                | (9,417 | )            |   |   | 498    |      
|                                                |                                               |                |        |              |   |   |        |      
|                                                | Accumulated other comprehensive income (loss) |                | $      | (2,505       | ) |   | $      | 6,172 | 
|                                                |                                               |                |        |              |   |   |        |      



|    |                                 
|--- | --------------------------------
|12. | Derivative Financial Instruments

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

In January 2002, the Company entered into two
three-year pay fixed, receive floating, interest rate swaps for
the purpose of hedging cash flows on variable interest rate debt
related to Mountain View, California and Roseville, Minnesota
build-to-suit lease agreements. Under the terms of these
interest rate swaps, the Company makes payments based on the
fixed rate and will receive interest payments based on the
3-month LIBOR. The Companys payments on its build-to-suit
lease agreements are based upon a 3-month LIBOR plus a credit
spread. If critical terms of the interest rate swap or the
hedged item do not change, the interest rate swap will be
considered to be highly effective with all changes in the fair
value included in other comprehensive income. If critical terms
of the interest rate swap or the hedged item change, the hedge
may become partially or fully ineffective, which could result in
all or a portion of the changes in fair value of the

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VERITAS SOFTWARE CORPORATION


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

derivative recorded in the statement of
operations. The interest rate swaps settle the first day of
January, April, July and October until expiration. As of
June 30, 2004, the fair value of the interest rate swaps
was $(4.4) 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 (see Note 10). In accordance
with SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, the Company had
designated the interest rate swap as a cash flow hedge of the
variability embedded in the rent expense as it was based on a
3-month LIBOR. However, with the adoption of FIN 46, the
Company redesignated the interest rate swap as a cash flow hedge
of variability in interest expense and it remains highly
effective with all changes in the fair value included in other
comprehensive income.

As of June 30, 2004, the total gross
notional amount of the Companys forward contracts was
approximately $101.9 million, all hedging intercompany
accounts of certain of its international subsidiaries. The
forward contracts had terms of 32 days or less and settled
on July 30, 2004. All foreign currency transactions and all
outstanding forward contracts are marked-to-market at the end of
the period with unrealized gains and losses included in other
income. The unrealized gain (loss) and fair market value of the
outstanding forward contracts at June 30, 2004 were not
material to the Companys consolidated financial statements.



|    |                    
|--- | -------------------
|13. | Segment Information

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



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

|                      |               |                         |                   |                  |         |         |   |         |         |         |   |         |         |         |   |         |         |         | 
|--------------------- | ------------- | ----------------------- | ----------------- | ---------------- | ------- | ------- | - | ------- | ------- | ------- | - | ------- | ------- | ------- | - | ------- | ------- | ------- | 
|                      |               |                         |                   |                 
|                      |               | Three Months Ended      |                   | Six Months Ended
|                      |               | June 30,                |                   | June 30,        
|                      |               |                         |                   |                 
|                      |               | 2004                    |                   | 2003             |         | 2004    |   | 2003   
|                      |               |                         |                   |                  |         |         |   |        
|                      |               |                        
|                      |               | (In thousands)         
|User license fees(1): |               |                         |                   |                  |         |         |   |         |         |         |   |         |         |         |   |        
|                      | United States |                         | $                 | 142,751          |         |         | $ | 152,377 |         |         | $ | 315,261 |         |         | $ | 310,268 |        
|                      | Europe(2)     |                         |                   | 89,545           |         |         |   | 68,024  |         |         |   | 179,244 |         |         |   | 126,288 |        
|                      | Other(3)      |                         |                   | 37,620           |         |         |   | 32,400  |         |         |   | 77,820  |         |         |   | 63,700  |        
|                      |               |                         |                   |                  |         |         |   |         |         |         |   |         |         |         |   |        
|                      |               | Total user license fees |                   |                  | 269,916 |         |   |         | 252,801 |         |   |         | 572,325 |         |   |         | 500,256 |        
|                      |               |                         |                   |                  |         |         |   |         |         |         |   |         |         |         |   |        
|Services(1):          |               |                         |                   |                  |         |         |   |         |         |         |   |         |         |         |   |        
|                      | United States |                         |                   | 146,006          |         |         |   | 112,702 |         |         |   | 271,745 |         |         |   | 213,655 |        
|                      | Europe(2)     |                         |                   | 50,833           |         |         |   | 29,265  |         |         |   | 91,833  |         |         |   | 59,193  |        
|                      | Other(3)      |                         |                   | 18,279           |         |         |   | 13,600  |         |         |   | 34,878  |         |         |   | 25,400  |        
|                      |               |                         |                   |                  |         |         |   |         |         |         |   |         |         |         |   |        
|                      |               | Total services          |                   |                  | 215,118 |         |   |         | 155,567 |         |   |         | 398,456 |         |   |         | 298,248 |        
|                      |               |                         |                   |                  |         |         |   |         |         |         |   |         |         |         |   |        
|                      |               |                         | Total net revenue |                  | $       | 485,034 |   |         | $       | 408,368 |   |         | $       | 970,781 |   |         | $       | 798,504 | 
|                      |               |                         |                   |                  |         |         |   |         |         |         |   |         |         |         |   |        

15



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##### Table of Contents



VERITAS SOFTWARE CORPORATION


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

|                      |               |                                 |                           |              |           |           |   |           |           |           | 
|--------------------- | ------------- | ------------------------------- | ------------------------- | ------------ | --------- | --------- | - | --------- | --------- | --------- | 
|                      |               | June 30,                        |                           | December 31,
|                      |               | 2004                            |                           | 2003        
|                      |               |                                 |                           |             
|                      |               |                                
|                      |               | (In thousands)                 
|Long-lived assets(4): |               |                                 |                           |              |           |           |   |          
|                      | United States |                                 | $                         | 1,960,425    |           |           | $ | 1,902,181 |          
|                      | Europe(2)     |                                 |                           | 484,906      |           |           |   | 483,315   |          
|                      | Other(3)      |                                 |                           | 10,574       |           |           |   | 13,723    |          
|                      |               |                                 |                           |              |           |           |   |          
|                      |               | Total                           |                           |              | 2,455,905 |           |   |           | 2,399,219 |          
|                      |               | Other assets, including current |                           |              | 3,140,492 |           |   |           | 2,949,247 |          
|                      |               |                                 |                           |              |           |           |   |          
|                      |               |                                 | Total consolidated assets |              | $         | 5,596,397 |   |           | $         | 5,348,466 | 
|                      |               |                                 |                           |              |           |           |   |          



---



|    |                                                                                                                                             
|--- | --------------------------------------------------------------------------------------------------------------------------------------------
|(1) | License and services revenues are attributed to
    geographic regions based on location of customers.                                      
|   
|(2) | Europe includes the Middle East and Africa.                                                                                                 
|   
|(3) | Other includes Canada, Latin America, Japan and
    the Asia Pacific region.                                                                
|   
|(4) | Long-lived assets include all long-term assets
    except those specifically excluded under SFAS No. 131,
    such as deferred income taxes.

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



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

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

|                   |                                  |                                   |   |                  |       |      |   |       |       |  |   |       |       |  |   |       |       | 
|------------------ | -------------------------------- | --------------------------------- | - | ---------------- | ----- | ---- | - | ----- | ----- |  | - | ----- | ----- |  | - | ----- | ----- | 
|                   |                                  |                                   |   |                 
|                   |                                  | Three Months Ended                |   | Six Months Ended
|                   |                                  | June 30,                          |   | June 30,        
|                   |                                  |                                   |   |                 
|                   |                                  | 2004                              |   | 2003             |       | 2004 |   | 2003 
|                   |                                  |                                   |   |                  |       |      |   |      
|                   |                                  |                                  
|                   |                                  | (In millions, except percentages)
|User license fees: |                                  |                                   |   |                  |       |      |   |       |       |  |   |       |       |  |   |      
|                   | Data protection                  |                                   | $ | 151.3            |       |      | $ | 147.2 |       |  | $ | 313.1 |       |  | $ | 286.5 |      
|                   | Storage management               |                                   |   | 74.3             |       |      |   | 64.1  |       |  |   | 158.2 |       |  |   | 125.3 |      
|                   | Utility computing infrastructure |                                   |   | 44.3             |       |      |   | 41.5  |       |  |   | 101.0 |       |  |   | 88.5  |      
|                   |                                  |                                   |   |                  |       |      |   |       |       |  |   |       |       |  |   |      
|                   |                                  | Total user license fees           |   | $                | 269.9 |      |   | $     | 252.8 |  |   | $     | 572.3 |  |   | $     | 500.3 | 
|                   |                                  |                                   |   |                  |       |      |   |       |       |  |   |       |       |  |   |      



|    |                
|--- | ---------------
|14. | Credit Facility

During 2002, the Companys Japanese
subsidiary entered into a short-term credit facility with a
multinational Japanese bank in the amount of 1.0 billion
Japanese yen ($9.3 million USD). At June 30, 2004, no
amount was outstanding. The short-term credit facility was
renewed in March 2004 and is due to expire in March 2005.
Borrowings under the short-term credit facility bear interest at
Tokyo Inter Bank Offered Rate

16



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##### Table of Contents



VERITAS SOFTWARE CORPORATION


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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.



|    |                              
|--- | -----------------------------
|15. | Commitments and Contingencies



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

On October 1, 2002, the Company acquired
volume replicator software technology for $6.0 million and
contingent payments of up to another $6.0 million based on
future revenues generated by the acquired technology. The
contingent payments will be paid quarterly over 40 quarters, in
amounts between $150,000 and $300,000. The Company issued a
promissory note payable in the principal amount of
$5.0 million, representing the present value of the
Companys minimum payment obligations under the purchase
agreement for the acquired technology, which are payable
quarterly commencing in the first quarter of 2003 and ending in
the fourth quarter of 2012. The contingent payments in excess of
the quarterly minimum obligations will be paid as they may
become due. The outstanding balance of the note payable was
$4.5 million as of June 30, 2004 and $4.6 million
as of December 31, 2003 and is included in other long-term
liabilities.

SEC Related Matters

SEC Investigation.As previously disclosed, since the third quarter of 2002, the
Company has received subpoenas issued by the Securities Exchange
Commission in the investigation entitled In the Matter of
AOL/ Time Warner. The SEC has requested information
concerning the facts and circumstances surrounding the
Companys transactions with AOL Time Warner
(AOL), and related accounting and disclosure
matters. The Companys transactions with AOL, entered into
in September 2000, involved a software and services purchase by
AOL at a stated value of $50.0 million and the purchase by
the Company of advertising services from AOL at a stated value
of $20.0 million. In March 2003, the Company restated its
financial statements for 2001 and 2000 to reflect a reduction in
revenues and expenses of $20.0 million. The restatement
included an additional reduction in revenues and expenses of
$1.0 million related to two other contemporaneous
transactions with other parties entered into in 2000 that
involved software licenses and the purchase of on-line
advertising services.

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

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

17



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##### Table of Contents



VERITAS SOFTWARE CORPORATION


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Litigation

After the Company announced in January 2003 that
it would restate its financial results as a result of
transactions entered into with AOL in September 2000, numerous
separate complaints purporting to be class actions were filed in
the United States District Court for the Northern District of
California alleging that the Company and some of its officers
and directors violated provisions of the Securities Exchange Act
of 1934. The complaints contain varying allegations, including
that the Company made materially false and misleading statements
with respect to its 2000, 2001 and 2002 financial results
included in its filings with the SEC, press releases and other
public disclosures. On May 2, 2003, a lead plaintiff and
lead counsel were appointed. A consolidated complaint entitled
In Re VERITAS Software Corporation Securities Litigationwas filed by the lead plaintiff on July 18, 2003. On
December 10, 2003, the District Court granted the
defendants motion to dismiss the consolidated complaint,
with leave to amend. On May 19, 2004, the District Court
granted the defendants motion to dismiss the
plaintiffs first amended complaint, with leave to amend.
On June 30, 2004, an amended complaint was filed with the
Court in this matter. In 2003 several complaints purporting to
be derivative actions were filed in California state court
against some of the Companys directors and officers. These
complaints are 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 been consolidated into the action In Re
VERITAS Software Corporation Derivative Litigation, which
was filed on May 8, 2003 in the Superior Court of
Santa Clara County and is currently pending. 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.

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

On October 23, 2001, Storage Computer
Corporation sued VERITAS in the United States District Court for
the Northern District of Texas for alleged patent infringement.
VERITAS denied such claims of infringement and countersued for,
among other things, infringement of certain of its patents. On
March 12, 2004, the Court granted VERITAS dispositive
motions for summary judgment of non-infringement under the
patents asserted by Storage Computer Corporation. Storage
Computer Corporation subsequently filed a notice of appeal. On
June 18, 2004, the Court dismissed Storage Computer
Corporations notice of appeal. As of August 4, 2004,
the parties have reached a settlement of all claims and have
moved for a dismissal of the matter with prejudice.

In addition to the legal proceedings listed
above, the Company is also party to various other legal
proceedings that have arisen in the ordinary course of 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 the possibility of a material adverse impact on the
Companys results of operations and cash flows for the
period in which the ruling occurs. The estimate of the potential
impact on the Companys financial position or overall
results of operations for the above discussed legal proceedings
could change in the future.

18



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##### Table of Contents



VERITAS SOFTWARE CORPORATION


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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.



|    |                  
|--- | -----------------
|16. | Subsequent Events

In July 2004, the Company acquired all of the
outstanding capital stock of Invio Software, Inc.
(Invio), a privately held supplier of information
technology (IT) process automation technology. The
Company acquired Invio to extend the capability of software
products that enable utility computing by offering customers a
tool for standardizing and automating IT service delivery in key
areas such as storage provisioning, server provisioning and data
protection. The Invio acquisition will be accounted for using
the purchase method of accounting for cash consideration of
approximately $35 million.

In July 2004, the Companys board of
directors authorized a program by which the Company may
repurchase up to $500.0 million of the Companys
common stock over the next 12 to 18 months.

19



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##### Table of Contents








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

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

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

Overview

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



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

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

We generate revenues, income and cash flows by
licensing software products and selling related services to our
customers, which include many leading global corporations and
small and medium-sized enterprises around the world operating in
a wide variety of industries. We market our products and related
services both directly and through a variety of indirect sales
channels, which include value added resellers, or VARs,
distributors, system integrators, or SIs, and original equipment
manufacturers, or OEMs. Specifically, the channel mix for the
three and six months ended June 30, 2004 was 55% and
57%, respectively, from sales to end-users and through VARs, and
45% and 43%, respectively, from other indirect sales channels,
which includes 13% and 11%, respectively, from our OEM partners.

We invest significantly in research and
development activities and for the three and six months
ended June 30, 2004, we spent $83.6 million and
$163.5 million, respectively, on research and development.
Our research and development efforts have been directed toward
developing new products for UNIX, Linux and Windows, developing
new features and functionality for existing products,
integrating products across our existing product lines, porting
new and existing products to different operating systems and
expanding our product portfolio into new markets such as
application performance management, server provisioning and
centralized service level management.

20



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##### Table of Contents



In the fourth quarter of 2003, we revised our
revenue reporting categories to more closely align with how we
manage our business. Historically, we categorized our revenue
between Core and Emerging technologies. We believe the new
revenue categories will provide investors with better insight
into our results. These new categories are Data Protection,
Storage Management and Utility Computing Infrastructure. Our
revenue performance in these categories is described in the
User License Fees section of MD&A.



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

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

We expect to continue to grow the company
organically and through acquisitions. In 2003, we completed two
acquisitions that provided us with essential components of our
utility computing infrastructure product strategy, including
application performance management software and server
provisioning technology. In January 2004, we completed the
acquisition of Ejasent, Inc., which added application migration
technology and in July 2004, we completed the acquisition of
Invio Software, Inc., which added IT process automation
technology to our utility computing infrastructure portfolio. We
will continue to evaluate new strategic acquisitions in the
future.

Our revenue from international sales continues to
increase primarily as a result of our increased investment in
our international geographies, market strength in the emerging
market areas in Europe and Asia and a favorable impact of
changes in foreign currency exchange rates related to the weaker
U.S. dollar. For the three and six months ended
June 30, 2004, revenue from international sales, consisting
of sales of licenses and services to customers located outside
the U.S., increased 37% and 40% from the three and six months
ended June 30, 2003, respectively, and represented 40% of
our total revenue for the three and six months ended
June 30, 2004.



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

In the second quarter of 2004, our operating
results were affected by several factors, including IT spending
trends, lower than expected demand for our products in the
U.S. enterprise portion of our business, the growing need
of enterprises to effectively manage storage and computing
infrastructure, the strength of our product offerings and the
contribution of our recent acquisitions. In the first half of
2004, we experienced stronger IT spending in our customer base,
resulting in stronger demand for our products and growth in our
user license fees compared to the same period last year,
especially in our international regions. The acquisition of
Precise and the integration of the acquired products into our
product offerings contributed to our growth, as did our
increased sales penetration in international markets and the
favorable impact of changes in foreign currency exchange rates.
Additionally, our services revenue grew significantly due to new
service contracts associated with user license fees as well as
our success in increasing support contract renewals within our
customer base.

For the three months ended June 30, 2004,
total revenue from sales in the U.S., consisting of sales of
licenses and services to customers located in the U.S.,
increased 9% from the three months ended June 30, 2003.
License revenue decreased by 6% from $152.4 million for the
three months ended June 30, 2003 to $142.8 million for
the three months ended June 30, 2004 as we saw customer
buying patterns in enterprise accounts become more cautious
leading to longer sales cycles and a smaller average deal size.
U.S. services revenue increased by 30% from
$112.7 million for the three months ended June 30,
2003 to $146.0 million for the three months ended
June 30, 2004 primarily as a result of strong maintenance
renewal rates and $7.0 million of U.S. retroactive
maintenance revenue from one of our OEM partners.

For the six months ended June 30, 2004,
total revenue from sales in the U.S. increased 12% from the six
months ended June 30, 2003 and represented approximately
60% of our total revenue for the first half of 2004.

21



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##### Table of Contents



For the three and six months ended June 30,
2004, net revenue was $485.0 million and
$970.8 million, respectively, an increase of 19% and 22%,
respectively, from the three and six months ended June 30,
2003. Revenue from user license fees for the three and six
months ended June 30, 2004 was $269.9 million and
$572.3 million, respectively, an increase of 7% and 14%,
respectively, from 2003, and representing 56% and 59% of total
revenue, respectively. Services revenue for the three and six
months ended June 30, 2004 was $215.1 million and
$398.5 million, respectively, an increase of 38% and 34%
from 2003, and representing 44% and 41% of total net revenue,
respectively. Diluted net income per share for the three and six
months ended June 30, 2004 was $0.20 and $0.42,
respectively, up from $0.11 and $0.21 for the three and six
months ended June 30, 2003, primarily as a result of
earnings leverage from revenue growth and a reduction in
acquisition-related expenses, such as amortization of
intangibles and in-process research and development.

We continue to generate cash from operations and
to retain a significant balance of cash and short-term
investments. As of June 30, 2004, we had
$2,750.1 million in cash, cash equivalents and short-term
investments, which represented 74% of our tangible assets. We
generated $321.0 million of cash from operating activities
for the six months ended June 30, 2004. We utilize cash in
ways that management believes will provide an optimal return on
investment. Principal uses of our cash include acquisitions of
businesses and technologies and purchases of property and
equipment.

Recent Acquisitions

In July 2004, we acquired all of the outstanding
capital stock of Invio, a privately held supplier of IT process
automation technology. We acquired Invio to extend the
capability of software products that enable utility computing by
offering customers a tool for standardizing and automating IT
service delivery in key areas such as storage provisioning,
server provisioning and data protection. We will account for the
Invio acquisition using the purchase method of accounting for
cash consideration of approximately $35 million.

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

In June 2003, we acquired Precise Software
Solutions Ltd., a provider of application performance management
products. We acquired Precise to expand our product and service
offerings across storage, databases and application performance
management. We accounted for the Precise acquisition using the
purchase method of accounting for total purchase consideration
of $715.1 million. We have included the results of
operations of Precise in our consolidated financial statements
beginning July 1, 2003. In connection with the acquisition
of Precise, we allocated approximately $15.3 million of the
purchase price to IPR&D that had not yet reached
technological feasibility and had no alternative future use. We
have expensed this amount in our condensed consolidated
statement of operations for the three and six months ended
June 30, 2003.

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

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Critical Accounting Policies and
Estimates

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



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

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



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

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



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

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

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

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

23



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contract revenue and contract costs. Otherwise,
consulting revenue is recognized when the services are complete.




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

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



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

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



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

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



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

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



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

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

24



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##### Table of Contents





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

Delivery of our software products is a
prerequisite to the recognition of software license revenue. We
consider delivery complete when the software products have been
shipped and the customer has access to license keys. If
arrangements include an acceptance provision, we defer revenue
and recognize it upon the earlier of receipt of written customer
acceptance or expiration of the acceptance period. In some
cases, we have discretion over the timing of product shipments,
which affects the timing of revenue recognition for software
license orders. In those cases, we consider a number of factors,
including: the effect of the related license revenue on our
business plan; the delivery dates requested by customers and
resellers; the amount of software license orders received in the
quarter; the amount of software license orders shipped in the
quarter; the degree to which software license orders received
are concentrated at the end of a quarter; and our operational
capacity to fulfill software license orders at the end of a
quarter.



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

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

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

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



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

We review our goodwill for impairment annually or
whenever events or changes in circumstances suggest that the
carrying amount may not be recoverable. We are required to test
our goodwill for impairment at the reporting unit level. We have
determined that we have only one reporting unit. The test for
goodwill impairment is a two-step process:



| |                                                                                                                                                                                                                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Step 1- We compare the carrying amount of our
    reporting unit, which is the book value of our entire company,
    to the fair value of our reporting unit, which corresponds to
    our market capitalization. If the carrying amount of our
    reporting unit exceeds its fair value, we have to perform the
    second step of the process. If not, no further work is required.

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| |                                                                                                                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Step 2- We compare the implied fair value of our
    reporting units goodwill to its carrying amount. If the
    carrying amount of our reporting units goodwill exceeds
    its fair value, an impairment loss will be recognized in an
    amount equal to that excess.

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

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

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



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

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



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

We are required to estimate our income taxes in
each federal, state and international jurisdiction in which we
operate. This process requires that we estimate the current tax
exposure as well as assess temporary differences between the
accounting and tax treatment of assets and liabilities,
including items such as accruals and allowances not currently
deductible for tax purposes. The income tax effects of the
differences we identify are classified as current or long-term
deferred tax assets and liabilities in our consolidated balance
sheets. Our judgments, assumptions and estimates relative to the
current provision for income tax take into account current tax
laws, our interpretation of current tax laws and possible
outcomes of current and future audits conducted by foreign and
domestic tax authorities. Changes in tax laws or our
interpretation of tax laws and the resolution of current and
future tax audits could significantly impact the amounts
provided for income taxes in our balance sheet and results of
operations. We must also assess the likelihood that deferred tax
assets will be realized from future taxable income and, based on
this assessment, establish a valuation allowance, if required.
As of June 30, 2004, we determined the valuation allowance
to be $138.4 million based upon uncertainties related to
our ability to recover certain deferred tax assets. These
deferred tax assets are in specific geographical or
jurisdictional locations or are related to losses on strategic
investments that will only be realized with the generation of
future capital gains within a limited time period. Our
determination of our valuation allowance is based upon a number
of assumptions, judgments and estimates, including forecasted
earnings, future taxable income and the relative proportions of
revenue and income before taxes in the various

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##### Table of Contents



domestic and international jurisdictions in which
we operate. Future results may vary from these estimates, and at
this time it is not practicable to determine if we will need to
establish an additional valuation allowance and if it would have
a material impact on our financial statements.


Results of Operations



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

|                  |  |                                   |       |      |  |                |       |      |  |      |    |          |  |   |       |  |  |   |       |  |  |  |    |  
|----------------- |  | --------------------------------- | ----- | ---- |  | -------------- | ----- | ---- |  | ---- | -- | -------- |  | - | ----- |  |  | - | ----- |  |  |  | -- | -
|                  |  |                                   |       |      |  |                |       |     
|                  |  | Three Months                      |       |      |  | Six Months     |       |     
|                  |  | Ended June 30,                    |       |      |  | Ended June 30, |       |     
|                  |  |                                   |       |      |  |                |       |     
|                  |  | 2004                              |       | 2003 |  | % Change       |       | 2004 |  | 2003 |    | % Change
|                  |  |                                   |       |      |  |                |       |      |  |      |    |         
|                  |  |                                  
|                  |  | (In millions, except percentages)
|Total net revenue |  | $                                 | 485.0 |      |  | $              | 408.4 |      |  |      | 19 | %        |  | $ | 970.8 |  |  | $ | 798.5 |  |  |  | 22 | %

For the three and six months ended June 30,
2004, our total net revenue increased by $76.6 million or
19% and $172.3 million or 22%, respectively, due primarily
to the growth in user license fees, which grew by 7% and 14%,
increased sales penetration of international markets which grew
by 37% and 40% and the continued growth of our services
businesses which grew by 38% and 34% for the three and six
months ended June 30, 2004 over 2003, respectively. During
2003 and 2004, as part of our strategy to increase our net
revenues, we continued expanding our product portfolio and
offerings, increased the computer platforms supported by our
software and continued to invest in sales and service capacity
internationally. Although net revenue decreased by
$0.7 million from the first to second quarter of 2004
primarily due to weaker than expected sales of our products in
the U.S. enterprise market, we expect net revenue to be
relatively flat or slightly up in the third quarter of 2004 and
to increase in the fourth quarter of 2004. This expectation
assumes consistent penetration of international markets, the
benefit of new product offerings, continued growth of services
revenue and assuming improved general economic conditions result
in stronger IT spending.

For the three months ended June 30, 2004, we
completed and recognized revenue for 15 transactions valued at
over $1.0 million, including services, and 202 transactions
valued at over $100,000. For the three months ended
June 30, 2003, we completed and recognized revenue for 11
transactions valued at over $1.0 million, including
services, and 221 transactions valued at over $100,000.



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

Our international sales consist of sales of
licenses and services to customer locations outside the United
States and are generated primarily through our international
sales subsidiaries. International revenue, a majority of which
is collectible in foreign currencies, accounted for
approximately 40% and 35% of our total revenue for the three
months ended June 30, 2004 and 2003, respectively, and 40%
and 34% for the six months ended June 30, 2004 and 2003,
respectively. Our international revenue increased 37% to
$196.3 million and 40% to $383.8 million for the three
and six months ended June 30, 2004 over 2003. During 2003
and through the second quarter of 2004, we saw continued
strength in the emerging markets in Europe, Asia-Pacific and
Japan. Additionally, during 2004 our international sales
benefited from favorable foreign currency exchange rate
movements relative to the weaker U.S. dollar. Excluding the
benefit from foreign currency movement, the increase in
international sales would have been 30% from the three months
ended June 30, 2003 to 2004 and 31% from the six months
ended June 30, 2003 to 2004. We expect that our
international revenue will increase in absolute dollars and as a
percent of total revenue for the remainder of 2004 because of
the continued expansion of international markets and the focus
and increased investment by our company in these markets.

We believe that a key component of our growth
strategy is the continued expansion of our international
operations. We currently have sales and services offices and
resellers located in Europe, Asia-Pacific and Japan, Latin
America, Canada, Africa and the Middle East, and research and
development centers in India, the United Kingdom 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
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.

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

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

|                                      |                                  |                                   |   |       |       |                |   |       |       |      |  |          |   |   |   |       |       |   |   |       |       |   |  |    |    |  
|------------------------------------- | -------------------------------- | --------------------------------- | - | ----- | ----- | -------------- | - | ----- | ----- | ---- |  | -------- | - | - | - | ----- | ----- | - | - | ----- | ----- | - |  | -- | -- | -
|                                      |                                  |                                   |   |       |       |                |   |      
|                                      |                                  | Three Months                      |   |       |       | Six Months     |   |      
|                                      |                                  | Ended June 30,                    |   |       |       | Ended June 30, |   |      
|                                      |                                  |                                   |   |       |       |                |   |      
|                                      |                                  | 2004                              |   | 2003  |       | % Change       |   | 2004  |       | 2003 |  | % Change
|                                      |                                  |                                   |   |       |       |                |   |       |       |      |  |         
|                                      |                                  |                                   |   |      
|                                      |                                  | (In millions, except percentages) |   |      
|User license fees:                    |                                  |                                   |   |       |       |                |   |       |       |      |  |          |   |   |   |       |       |   |   |       |       |   |  |   
|                                      | Data protection                  |                                   | $ | 151.3 |       |                | $ | 147.2 |       |      |  | 3        | % |   | $ | 313.1 |       |   | $ | 286.5 |       |   |  | 9  | % 
|                                      | Storage management               |                                   |   | 74.3  |       |                |   | 64.1  |       |      |  | 16       |   |   |   | 158.2 |       |   |   | 125.3 |       |   |  | 26 |   
|                                      | Utility computing infrastructure |                                   |   | 44.3  |       |                |   | 41.5  |       |      |  | 7        |   |   |   | 101.0 |       |   |   | 88.5  |       |   |  | 14 |   
|                                      |                                  |                                   |   |       |       |                |   |       |       |      |  |          |   |   |   |       |       |   |   |       |       |   |  |   
|                                      |                                  | Total user license fees           |   | $     | 269.9 |                |   | $     | 252.8 |      |  |          | 7 | % |   | $     | 572.3 |   |   | $     | 500.3 |   |  |    | 14 | %
|                                      |                                  |                                   |   |       |       |                |   |       |       |      |  |          |   |   |   |       |       |   |   |       |       |   |  |   
|As a percentage of user license fees: |                                  |                                   |   |       |       |                |   |       |       |      |  |          |   |   |   |       |       |   |   |       |       |   |  |   
|                                      | Data protection                  |                                   |   | 56    | %     |                |   | 58    | %     |      |  |          |   |   |   | 54    | %     |   |   | 57    | %     |   |  |    |   
|                                      | Storage management               |                                   |   | 28    |       |                |   | 25    |       |      |  |          |   |   |   | 28    |       |   |   | 25    |       |   |  |    |   
|                                      | Utility computing infrastructure |                                   |   | 16    |       |                |   | 17    |       |      |  |          |   |   |   | 18    |       |   |   | 18    |       |   |  |    |   
|                                      |                                  |                                   |   |       |       |                |   |       |       |      |  |          |   |   |   |       |       |   |   |       |       |   |  |   
|                                      |                                  | Total user license fees           |   |       | 100   | %              |   |       | 100   | %    |  |          |   |   |   |       | 100   | % |   |       | 100   | % |  |    |    |  
|                                      |                                  |                                   |   |       |       |                |   |       |       |      |  |          |   |   |   |       |       |   |   |       |       |   |  |   
|                                      |                                  | As a percentage of net revenue    |   |       | 56    | %              |   |       | 62    | %    |  |          |   |   |   |       | 59    | % |   |       | 63    | % |  |    |    |  
|                                      |                                  |                                   |   |       |       |                |   |       |       |      |  |          |   |   |   |       |       |   |   |       |       |   |  |   

For the three and six months ended June 30,
2004 compared to 2003, user license fees increased by
$17.1 million or 7% and $72.0 million or 14%,
respectively, due to increased user license fees in our Europe
and Asia-Pacific regions of 32% and 16%, respectively, for the
three months ended June 30, 2004 over 2003 and 42% and 22%
for the six months ended June 30, 2004 over 2003. These
increases were offset by a 6% decrease in U.S. user license
fees for the three months ended June 30, 2004 over 2003 and
a 2% increase for the six months ended June 30, 2004 over
2003, reflecting weaker than expected license revenue in the
U.S. enterprise market. User license fees increased across
each product category for the three and six months ended
June 30, 2004 over 2003 and remained relatively constant as
a percentage of total user license fees. Data protection
increased by $4.1 million and $26.6 million for the
three and six months ended June 30, 2004, respectively, due
primarily to increases in our core backup family of products,
including NetBackup 5.0 which was introduced during the
fourth quarter of 2003. Storage management increased
$10.2 million and $32.9 million for the three and six
months ended June 30, 2004, respectively, due primarily to
increases in our replication and storage resource management
products, including the introduction of Storage Foundation
Suite 4.0 which was introduced during the first quarter of
2004. Utility computing infrastructure increased by
$2.8 million and $12.5 million for the three and six
months ended June 30, 2004, respectively, due primarily to
increases in clustering, Database Editions/ Advanced Cluster and
the addition of APM products as a result of our acquisition of
Precise.

User license fees from OEMs accounted for 12% of
user license fees for the three and six months ended
June 30, 2004 and 2003.

Unfilled license orders were approximately
$40.6 million and $49.3 million at June 30, 2004
and 2003, respectively. Unfilled license orders represent
cancelable and non-cancelable license orders that have been
received from our customers for the license of our software
products but have not been shipped as of the end of the
applicable fiscal period. We generally ship our software
products within 30 days after acceptance of

28



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##### Table of Contents



customer orders. We do not believe that unfilled
license orders are a consistent or reliable indicator of future
results.


Deferred license revenue was approximately
$11.6 million and $9.2 million at June 30, 2004
and 2003, respectively. Deferred license revenue represents
license orders for our software products that have been billed
to and paid by our customers and for which revenue will
generally be earned within the next year. Deferred license
revenue excludes license orders that have not been paid by our
customers and that do not otherwise satisfy our revenue
recognition criteria; these license orders were approximately
$16.5 million and $4.0 million at June 30, 2004
and 2003, respectively.



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

|                               |  |                                   |       |      |  |                |       |      |  |      |    |          |  |   |       |   |  |   |       |   |  |  |    |  
|------------------------------ |  | --------------------------------- | ----- | ---- |  | -------------- | ----- | ---- |  | ---- | -- | -------- |  | - | ----- | - |  | - | ----- | - |  |  | -- | -
|                               |  |                                   |       |      |  |                |       |     
|                               |  | Three Months                      |       |      |  | Six Months     |       |     
|                               |  | Ended June 30,                    |       |      |  | Ended June 30, |       |     
|                               |  |                                   |       |      |  |                |       |     
|                               |  | 2004                              |       | 2003 |  | % Change       |       | 2004 |  | 2003 |    | % Change
|                               |  |                                   |       |      |  |                |       |      |  |      |    |         
|                               |  |                                  
|                               |  | (In millions, except percentages)
|Services revenue               |  | $                                 | 215.1 |      |  | $              | 155.6 |      |  |      | 38 | %        |  | $ | 398.5 |   |  | $ | 298.2 |   |  |  | 34 | %
|As a percentage of net revenue |  |                                   | 44    | %    |  |                | 38    | %    |  |      |    |          |  |   | 41    | % |  |   | 37    | % |  |  |    |  

We derive our services revenue primarily from
contracts for software maintenance and technical support and, to
a lesser extent, consulting and education and training services.
The increase in services revenue for the three and six months
ended June 30, 2004 over 2003 was due primarily to the
increase in software maintenance and technical support revenue
of 43% and 37%, respectively. The increase in software
maintenance and technical support revenue in the second quarter
of 2004 was the result of a larger installed base of customers,
greater focus on renewing customer support contracts,
particularly internationally, and $12.1 million of
retroactive maintenance revenue from one of our OEM partners,
which is non-recurring. We expect our services revenue to
increase in absolute dollars over time as we continue to grow
our installed base of customers, continue our focus on renewing
our software maintenance and technical support contracts, and
increase demand for our consulting and education and training
services.

Deferred services revenue, which in the case of
maintenance and technical support is generally recognized over
the maintenance and support period of twelve months, or in the
case of professional services, training or consulting services
is generally recognized over the period the specific services
are rendered, was approximately $411.0 million and
$287.7 million at June 30, 2004 and 2003,
respectively. The increase in deferred services revenue is the
result of significant growth in our installed base of customers
under software maintenance and technical support contracts and
our continued focus on maintenance and technical support
contract renewals.



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

|                               |  |                                   |      |      |  |                |      |      |  |      |   |          |  |   |       |   |  |   |       |   |  |  |   |  
|------------------------------ |  | --------------------------------- | ---- | ---- |  | -------------- | ---- | ---- |  | ---- | - | -------- |  | - | ----- | - |  | - | ----- | - |  |  | - | -
|                               |  |                                   |      |      |  |                |      |     
|                               |  | Three Months                      |      |      |  | Six Months     |      |     
|                               |  | Ended June 30,                    |      |      |  | Ended June 30, |      |     
|                               |  |                                   |      |      |  |                |      |     
|                               |  | 2004                              |      | 2003 |  | % Change       |      | 2004 |  | 2003 |   | % Change
|                               |  |                                   |      |      |  |                |      |      |  |      |   |         
|                               |  |                                  
|                               |  | (In millions, except percentages)
|Cost of revenue                |  | $                                 | 79.7 |      |  | $              | 77.1 |      |  |      | 3 | %        |  | $ | 158.9 |   |  | $ | 156.1 |   |  |  | 2 | %
|As a percentage of net revenue |  |                                   | 16   | %    |  |                | 19   | %    |  |      |   |          |  |   | 16    | % |  |   | 20    | % |  |  |   |  

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

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##### Table of Contents





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

|                           |                                                                      |                                   |   |      |      |                |   |      |      |      |  |          |     |    |   |      |      |  |   |      |      |  |  |     |     |   
|-------------------------- | -------------------------------------------------------------------- | --------------------------------- | - | ---- | ---- | -------------- | - | ---- | ---- | ---- |  | -------- | --- | -- | - | ---- | ---- |  | - | ---- | ---- |  |  | --- | --- | --
|                           |                                                                      |                                   |   |      |      |                |   |     
|                           |                                                                      | Three Months                      |   |      |      | Six Months     |   |     
|                           |                                                                      | Ended June 30,                    |   |      |      | Ended June 30, |   |     
|                           |                                                                      |                                   |   |      |      |                |   |     
|                           |                                                                      | 2004                              |   | 2003 |      | % Change       |   | 2004 |      | 2003 |  | % Change
|                           |                                                                      |                                   |   |      |      |                |   |      |      |      |  |         
|                           |                                                                      |                                  
|                           |                                                                      | (In millions, except percentages)
|Cost of user license fees: |                                                                      |                                   |   |      |      |                |   |      |      |      |  |          |     |    |   |      |      |  |   |      |      |  |  |    
|                           | User license fees                                                    |                                   | $ | 8.9  |      |                | $ | 11.7 |      |      |  | (24      | )%  |    | $ | 18.4 |      |  | $ | 23.6 |      |  |  | (22 | )% 
|                           | Amortization of developed technology                                 |                                   |   | 4.1  |      |                |   | 10.6 |      |      |  | (62      | )%  |    |   | 7.9  |      |  |   | 25.3 |      |  |  | (69 | )% 
|                           |                                                                      |                                   |   |      |      |                |   |      |      |      |  |          |     |    |   |      |      |  |   |      |      |  |  |    
|                           |                                                                      | Total cost of user license fees   |   | $    | 13.0 |                |   | $    | 22.3 |      |  |          | (42 | )% |   | $    | 26.3 |  |   | $    | 48.9 |  |  |     | (46 | )%
|                           |                                                                      |                                   |   |      |      |                |   |      |      |      |  |          |     |    |   |      |      |  |   |      |      |  |  |    
|Gross margin:              |                                                                      |                                   |   |      |      |                |   |      |      |      |  |          |     |    |   |      |      |  |   |      |      |  |  |    
|                           | User license fees including amortization of
    developed technology |                                   |   | 95   | %    |                |   | 91   | %    |      |  |          |     |    |   | 95   | %    |  |   | 90   | %    |  |  |     |    

Cost of user license fees consists primarily of
amortization of developed technology, royalties, media, manuals
and distribution costs. The amortization of developed technology
is related primarily to acquisitions completed during 1999 and
the first and second quarters of 2003. If we had excluded the
amortization of developed technology from the cost of user
license fees, the gross margin on user license fees would have
been 97% for the three and six months ended June 30, 2004
and 95% for the three and six months ended June 30, 2003.
The gross margin on user license fees may vary from period to
period based on the license revenue mix because some of our
products carry higher royalty rates than others. Excluding the
amortization of developed technology, we expect gross margins on
user license fees to remain relatively constant.

The decrease in amortization of developed
technology for the second quarter and first half of 2004 over
2003 was primarily the result of the developed technology
related to the 1999 acquisitions reaching full amortization in
2003. This decrease was partially offset by the amortization of
developed technology related to the Precise and Ejasent
acquisitions. We expect amortization of developed technology to
be approximately $4 million per quarter for the remainder
of 2004 for our current intangible assets.



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

|                 |  |                                   |      |      |  |                |      |      |  |      |    |          |  |   |       |   |  |   |       |   |  |  |    |  
|---------------- |  | --------------------------------- | ---- | ---- |  | -------------- | ---- | ---- |  | ---- | -- | -------- |  | - | ----- | - |  | - | ----- | - |  |  | -- | -
|                 |  |                                   |      |      |  |                |      |     
|                 |  | Three Months                      |      |      |  | Six Months     |      |     
|                 |  | Ended June 30,                    |      |      |  | Ended June 30, |      |     
|                 |  |                                   |      |      |  |                |      |     
|                 |  | 2004                              |      | 2003 |  | % Change       |      | 2004 |  | 2003 |    | % Change
|                 |  |                                   |      |      |  |                |      |      |  |      |    |         
|                 |  |                                  
|                 |  | (In millions, except percentages)
|Cost of services |  | $                                 | 66.8 |      |  | $              | 54.8 |      |  |      | 22 | %        |  | $ | 132.7 |   |  | $ | 107.1 |   |  |  | 24 | %
|Gross margin     |  |                                   | 69   | %    |  |                | 65   | %    |  |      |    |          |  |   | 67    | % |  |   | 64    | % |  |  |    |  

Cost of services consists primarily of
personnel-related costs in providing maintenance and technical
support, consulting and education to customers. The gross margin
improvement for the three and six months ended June 30,
2004 over 2003 was primarily the result of the increase in
maintenance and support revenues of 43% and 37% for the three
and six months ended June 30, 2004, respectively, while
related expenses increased only 18% and 23% for the three and
six months ended June 30, 2004, respectively, as we
continued to take advantage of the economies of
scale of the larger installed customer base. We expect
gross margin on services revenue to decrease to levels
comparable to 2003 for the remainder of 2004.



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

|                               |  |                                   |       |      |  |                |       |      |  |      |   |          |  |   |       |   |  |   |       |   |  |  |    |  
|------------------------------ |  | --------------------------------- | ----- | ---- |  | -------------- | ----- | ---- |  | ---- | - | -------- |  | - | ----- | - |  | - | ----- | - |  |  | -- | -
|                               |  |                                   |       |      |  |                |       |     
|                               |  | Three Months                      |       |      |  | Six Months     |       |     
|                               |  | Ended June 30,                    |       |      |  | Ended June 30, |       |     
|                               |  |                                   |       |      |  |                |       |     
|                               |  | 2004                              |       | 2003 |  | % Change       |       | 2004 |  | 2003 |   | % Change
|                               |  |                                   |       |      |  |                |       |      |  |      |   |         
|                               |  |                                  
|                               |  | (In millions, except percentages)
|Operating expenses             |  | $                                 | 284.0 |      |  | $              | 260.5 |      |  |      | 9 | %        |  | $ | 557.5 |   |  | $ | 506.9 |   |  |  | 10 | %
|As a percentage of net revenue |  |                                   | 59    | %    |  |                | 64    | %    |  |      |   |          |  |   | 57    | % |  |   | 63    | % |  |  |    |  

30



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Operating expenses for the three and six months
ended June 30, 2004 increased by $23.5 million and
$50.6 million, respectively, compared to the same periods
in 2003 due primarily to an increase in selling and marketing,
research and development and general and administrative
expenses. These expenses were commensurate with an overall
increase in operations offset by a decrease of $9.8 million
quarter over quarter and $25.6 million year over year for
amortization of other intangibles as a result of our 1999
acquisitions reaching full amortization in 2003 and a decrease
of $15.3 million quarter over quarter and
$19.0 million year over year of IPR&D. We believe that
the percentage changes in total operating expenses in these
periods are not necessarily indicative of future results. Our
operating expenses include selling and marketing expenses,
research and development expenses, general and administrative
expenses, amortization of other intangibles and IPR&D.



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

|                               |  |                                   |       |      |  |                |       |      |  |      |    |          |  |   |       |   |  |   |       |   |  |  |    |  
|------------------------------ |  | --------------------------------- | ----- | ---- |  | -------------- | ----- | ---- |  | ---- | -- | -------- |  | - | ----- | - |  | - | ----- | - |  |  | -- | -
|                               |  |                                   |       |      |  |                |       |     
|                               |  | Three Months                      |       |      |  | Six Months     |       |     
|                               |  | Ended June 30,                    |       |      |  | Ended June 30, |       |     
|                               |  |                                   |       |      |  |                |       |     
|                               |  | 2004                              |       | 2003 |  | % Change       |       | 2004 |  | 2003 |    | % Change
|                               |  |                                   |       |      |  |                |       |      |  |      |    |         
|                               |  |                                  
|                               |  | (In millions, except percentages)
|Selling and marketing          |  | $                                 | 151.6 |      |  | $              | 121.8 |      |  |      | 24 | %        |  | $ | 294.6 |   |  | $ | 237.1 |   |  |  | 24 | %
|As a percentage of net revenue |  |                                   | 31    | %    |  |                | 30    | %    |  |      |    |          |  |   | 30    | % |  |   | 30    | % |  |  |    |  

Selling and marketing expenses consist primarily
of salaries, related benefits, commissions, consultant fees and
other costs associated with our sales and marketing efforts. The
increase for the three and six months ended June 30, 2004
over 2003 of $29.8 million and $57.5 million,
respectively, was primarily the result of an increase in sales
commissions, compensation and benefit costs due to an increase
in personnel partially resulting from the Precise acquisition,
investments in sales capacity in our international markets and
higher sales commissions resulting from the increase in license
revenues. Although our selling and marketing expenses increased
as a percentage of user license fees from approximately 47% to
56% from the first to the second quarter of 2004, they remained
relatively consistent as a percentage of total revenues. We
expect selling and marketing expenses to continue to grow in
absolute dollars for 2004 and to remain constant as a percentage
of total net revenues for the second half of fiscal year 2004.



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

|                               |  |                                   |      |      |  |                |      |      |  |      |    |          |  |   |       |   |  |   |       |   |  |  |    |  
|------------------------------ |  | --------------------------------- | ---- | ---- |  | -------------- | ---- | ---- |  | ---- | -- | -------- |  | - | ----- | - |  | - | ----- | - |  |  | -- | -
|                               |  |                                   |      |      |  |                |      |     
|                               |  | Three Months                      |      |      |  | Six Months     |      |     
|                               |  | Ended June 30,                    |      |      |  | Ended June 30, |      |     
|                               |  |                                   |      |      |  |                |      |     
|                               |  | 2004                              |      | 2003 |  | % Change       |      | 2004 |  | 2003 |    | % Change
|                               |  |                                   |      |      |  |                |      |      |  |      |    |         
|                               |  |                                  
|                               |  | (In millions, except percentages)
|Research and development       |  | $                                 | 83.6 |      |  | $              | 71.5 |      |  |      | 17 | %        |  | $ | 163.5 |   |  | $ | 142.1 |   |  |  | 15 | %
|As a percentage of net revenue |  |                                   | 17   | %    |  |                | 18   | %    |  |      |    |          |  |   | 17    | % |  |   | 18    | % |  |  |    |  

Research and development expenses consist
primarily of salaries, related benefits, third-party consultant
fees and other engineering related costs. The increase of
$12.1 million and $21.4 million for the three and six
months ended June 30, 2004 over 2003, respectively, was
primarily the result of increases in compensation costs from an
increase in staffing levels partially due to the Precise
acquisition and an increase in outside services used to
supplement engineering personnel. We believe that a significant
level of research and development investment is required to
remain competitive and we expect to continue to invest in
research and development for the second half of 2004 at current
levels as a percentage of revenue, including continued
investments in our operations in India.



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

|                               |  |                                   |      |      |  |                |      |      |  |      |    |          |  |   |      |   |  |   |      |   |  |  |    |  
|------------------------------ |  | --------------------------------- | ---- | ---- |  | -------------- | ---- | ---- |  | ---- | -- | -------- |  | - | ---- | - |  | - | ---- | - |  |  | -- | -
|                               |  |                                   |      |      |  |                |      |     
|                               |  | Three Months                      |      |      |  | Six Months     |      |     
|                               |  | Ended June 30,                    |      |      |  | Ended June 30, |      |     
|                               |  |                                   |      |      |  |                |      |     
|                               |  | 2004                              |      | 2003 |  | % Change       |      | 2004 |  | 2003 |    | % Change
|                               |  |                                   |      |      |  |                |      |      |  |      |    |         
|                               |  |                                  
|                               |  | (In millions, except percentages)
|General and administrative     |  | $                                 | 46.4 |      |  | $              | 39.6 |      |  |      | 17 | %        |  | $ | 94.1 |   |  | $ | 77.8 |   |  |  | 21 | %
|As a percentage of net revenue |  |                                   | 10   | %    |  |                | 10   | %    |  |      |    |          |  |   | 10   | % |  |   | 10   | % |  |  |    |  

31



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General and administrative expenses consist
primarily of salaries, related benefits and fees for
professional services, such as legal and accounting services.
The increase of $6.8 million and $16.3 million for the
three and six months ended June 30, 2004 over 2003,
respectively, was primarily the result of an increase in
compensation and benefit costs, depreciation expense as a result
of consolidating certain leased buildings, costs associated with
our recent restatement and compliance with our corporate
governance initiatives, including those required under the
Sarbanes-Oxley Act of 2002. We expect general and administrative
expenses to remain relatively constant as a percentage of
revenue for the second half of 2004.



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

|                                  |  |                                   |     |      |  |                |      |      |  |      |     |          |  |   |     |   |  |   |      |   |  |  |     |   
|--------------------------------- |  | --------------------------------- | --- | ---- |  | -------------- | ---- | ---- |  | ---- | --- | -------- |  | - | --- | - |  | - | ---- | - |  |  | --- | --
|                                  |  |                                   |     |      |  |                |      |     
|                                  |  | Three Months                      |     |      |  | Six Months     |      |     
|                                  |  | Ended June 30,                    |     |      |  | Ended June 30, |      |     
|                                  |  |                                   |     |      |  |                |      |     
|                                  |  | 2004                              |     | 2003 |  | % Change       |      | 2004 |  | 2003 |     | % Change
|                                  |  |                                   |     |      |  |                |      |      |  |      |     |         
|                                  |  |                                  
|                                  |  | (In millions, except percentages)
|Amortization of other intangibles |  | $                                 | 2.4 |      |  | $              | 12.3 |      |  |      | (80 | )%       |  | $ | 4.8 |   |  | $ | 30.4 |   |  |  | (84 | )%
|As a percentage of net revenue    |  |                                   | 1   | %    |  |                | 3    | %    |  |      |     |          |  |   | 1   | % |  |   | 4    | % |  |  |     |   

Amortization of other intangibles principally
represents amortization of distribution channels, trademarks and
other intangibles related to acquisitions. The decrease in
amortization of other intangibles for the second quarter and
first half of 2004 over 2003 was primarily due to the
intangibles related to 1999 acquisitions reaching full
amortization during the second quarter of 2003. The amortization
of other intangibles also includes intangibles from the
acquisition of Precise, Jareva and Ejasent, which are being
amortized over the estimated useful lives of two to five years.
We expect amortization of other intangibles to be approximately
$2 million per quarter for the remainder of 2004 for our
current intangible assets.



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

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



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

|                               |  |                                   |      |      |  |                |      |      |  |      |     |          |  |   |      |   |  |   |      |   |  |  |     |   
|------------------------------ |  | --------------------------------- | ---- | ---- |  | -------------- | ---- | ---- |  | ---- | --- | -------- |  | - | ---- | - |  | - | ---- | - |  |  | --- | --
|                               |  |                                   |      |      |  |                |      |     
|                               |  | Three Months                      |      |      |  | Six Months     |      |     
|                               |  | Ended June 30,                    |      |      |  | Ended June 30, |      |     
|                               |  |                                   |      |      |  |                |      |     
|                               |  | 2004                              |      | 2003 |  | % Change       |      | 2004 |  | 2003 |     | % Change
|                               |  |                                   |      |      |  |                |      |      |  |      |     |         
|                               |  |                                  
|                               |  | (In millions, except percentages)
|Interest and other income, net |  | $                                 | 10.4 |      |  | $              | 13.9 |      |  |      | (25 | )%       |  | $ | 21.8 |   |  | $ | 24.9 |   |  |  | (13 | )%
|As a percentage of net revenue |  |                                   | 2    | %    |  |                | 3    | %    |  |      |     |          |  |   | 2    | % |  |   | 3    | % |  |  |     |   

Interest and other income, net, includes interest
income and realized gains and losses on our cash equivalents and
investments held and, to a lesser extent, foreign currency
exchange gains or losses. The decrease in interest and other
income of $3.5 and $3.1 million for the three and six
months ended June 30, 2004 over 2003, respectively, is due
primarily to foreign exchange losses in the first half of 2004,
losses realized on our available-for-sale investments in the
first half of 2004 compared to gains in 2003 partially offset by
higher interest income in 2004 from higher balances of cash,
cash equivalents and investments.



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

|                               |  |                                   |     |      |  |                |     |      |  |      |     |          |  |   |      |   |  |   |      |   |  |  |     |   
|------------------------------ |  | --------------------------------- | --- | ---- |  | -------------- | --- | ---- |  | ---- | --- | -------- |  | - | ---- | - |  | - | ---- | - |  |  | --- | --
|                               |  |                                   |     |      |  |                |     |      |  |     
|                               |  | Three Months                      |     |      |  |                |     |     
|                               |  | Ended                             |     |      |  | Six Months     |     |     
|                               |  | June 30,                          |     |      |  | Ended June 30, |     |     
|                               |  |                                   |     |      |  |                |     |     
|                               |  | 2004                              |     | 2003 |  | % Change       |     | 2004 |  | 2003 |     | % Change
|                               |  |                                   |     |      |  |                |     |      |  |      |     |         
|                               |  |                                  
|                               |  | (In millions, except percentages)
|Interest expense               |  | $                                 | 6.0 |      |  | $              | 7.8 |      |  |      | (23 | )%       |  | $ | 11.7 |   |  | $ | 15.5 |   |  |  | (25 | )%
|As a percentage of net revenue |  |                                   | 1   | %    |  |                | 2   | %    |  |      |     |          |  |   | 1    | % |  |   | 2    | % |  |  |     |   

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Interest expense for the three and six months
ended June 30, 2004 consisted of interest recorded under
the 0.25% convertible subordinated notes issued in August
2003 and interest of approximately $4 million per quarter,
beginning in July 2003, as a result of our adoption of Financial
Accounting Standards Board, or FASB, Interpretation Number, or
FIN, 46, Consolidation of Variable Interest Entities,
which required us to consolidate the properties from our
build-to-suit lease agreements and related debt in our financial
statements. Previously, interest on the build-to-suit lease
agreements was recorded as rent expense in cost of revenue and
operating expenses. Interest expense for the three and six
months ended June 30, 2003 consisted of interest recorded
under the 1.856% convertible subordinated notes issued in
August 1999 that were partially redeemed for cash and partially
converted to common stock in August 2003 and interest recorded
under the 5.25% convertible subordinated notes issued in
October 1997 that were converted to common stock in August 2003.
We expect interest expense for the third quarter of 2004 to be
approximately $6 million representing the interest on the
0.25% convertible subordinated notes, including the
additional interest as a result of our registration statement
having not been declared effective by the SEC on or before the
180th day following the original issuance date of the
0.25% convertible subordinated notes, and the interest on
the build-to-suit lease agreements.



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

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



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

|                               |  |                                   |      |      |  |                |      |      |  |      |    |          |  |   |      |   |  |   |      |   |  |  |    |  
|------------------------------ |  | --------------------------------- | ---- | ---- |  | -------------- | ---- | ---- |  | ---- | -- | -------- |  | - | ---- | - |  | - | ---- | - |  |  | -- | -
|                               |  |                                   |      |      |  |                |      |     
|                               |  | Three Months                      |      |      |  | Six Months     |      |     
|                               |  | Ended June 30,                    |      |      |  | Ended June 30, |      |     
|                               |  |                                   |      |      |  |                |      |     
|                               |  | 2004                              |      | 2003 |  | % Change       |      | 2004 |  | 2003 |    | % Change
|                               |  |                                   |      |      |  |                |      |      |  |      |    |         
|                               |  |                                  
|                               |  | (In millions, except percentages)
|Income taxes                   |  | $                                 | 39.3 |      |  | $              | 31.3 |      |  |      | 26 | %        |  | $ | 85.4 |   |  | $ | 52.7 |   |  |  | 62 | %
|As a percentage of net revenue |  |                                   | 8    | %    |  |                | 8    | %    |  |      |    |          |  |   | 9    | % |  |   | 7    | % |  |  |    |  
|Effective tax rate             |  |                                   | 31   | %    |  |                | 41   | %    |  |      |    |          |  |   | 31   | % |  |   | 37   | % |  |  |    |  

Our effective tax rate for the second quarter of
2004 differed from the combined federal and state statutory
rates due primarily to the tax effect of international
operations. The decrease in our effective tax rates for our
second quarter and first half of 2004 over 2003 is primarily due
to differences attributable to acquisition-related charges in
2003, including in-process research and development, that were
non-deductible for tax purposes.

Accrued Acquisition and Restructuring
Costs

In the fourth quarter of 2002, our board of
directors approved a facility restructuring plan to exit and
consolidate certain of our facilities located in 17 metropolitan
areas worldwide. The facility restructuring plan was adopted to
address overcapacity in our facilities as a result of lower than
planned headcount growth in these metropolitan areas. In
connection with this facility restructuring plan, we recorded a
net restructuring charge to operating expenses of
$96.1 million in the fourth quarter of 2002. This
restructuring charge is comprised of (i) $86.9 million
associated with terminating and satisfying remaining lease
commitments, partially offset by sublease income net of related
sublease costs and (ii) write-offs of $9.2 million for
net assets. 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 we may negotiate with our lessors.
We expect the majority of costs will be paid by the year ending
December 31, 2008.

33



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##### Table of Contents



During the fourth quarter of 2002, we began
vacating excess facilities and by January 31, 2004, we had
vacated all excess facilities associated with this
restructuring. 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 accrued restructuring costs will be made if
actual lease exit costs or sublease income differ from amounts
currently expected. Because a portion of the accrued
restructuring costs relates to international locations, the
accrual will be affected by exchange rate fluctuations.

In January 2004, we incurred acquisition related
costs of $13.6 million related to the acquisition of
Ejasent. As of December 31, 2003, accrued acquisition and
restructuring costs consisted of the facility restructuring plan
discussed above and other accrued acquisition and restructuring
charges incurred from 1999 through 2003, net of cash payments
made.

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

|                             |                          |               |     |             |   |               |     |            |   |       |      |      |   |   |     |      |   |   |      |       |  
|---------------------------- | ------------------------ | ------------- | --- | ----------- | - | ------------- | --- | ---------- | - | ----- | ---- | ---- | - | - | --- | ---- | - | - | ---- | ----- | -
|                             |                          | Direct        |     | Involuntary |   |               |     |            |   |      
|                             |                          | Transaction   |     | Termination |   | Facilities    |     | Asset      |   |      
|                             |                          | Costs         |     | Benefits    |   | Related Costs |     | Write-offs |   | Total
|                             |                          |               |     |             |   |               |     |            |   |      
|                             |                          |              
|                             |                          | (In millions)
|Balance at December 31, 2003 |                          | $             | 0.6 |             |   | $             |    |            |   | $     | 91.4 |      |   | $ | 2.1 |      |   | $ | 94.1 |      
|                             | Additions                |               |     | 2.1         |   |               |     | 11.4       |   |       |      | 0.1  |   |   |     |     |   |   |      | 13.6  |  
|                             | Cash payments            |               |     | (1.8        | ) |               |     | (11.3      | ) |       |      | (5.2 | ) |   |     |     |   |   |      | (18.3 | )
|                             | Non-cash charges         |               |     |            |   |               |     |           |   |       |      |     |   |   |     | (2.1 | ) |   |      | (2.1  | )
|                             | Impact of exchange rates |               |     |            |   |               |     |           |   |       |      | 0.7  |   |   |     |     |   |   |      | 0.7   |  
|                             |                          |               |     |             |   |               |     |            |   |       |      |      |   |   |     |      |   |   |      |      
|Balance at March 31, 2004    |                          |               | 0.9 |             |   |               | 0.1 |            |   |       | 87.0 |      |   |   |    |      |   |   | 88.0 |      
|                             | Cash payments            |               |     | (0.4        | ) |               |     |           |   |       |      | (5.0 | ) |   |     |     |   |   |      | (5.4  | )
|                             | Impact of exchange rates |               |     |            |   |               |     |           |   |       |      | 0.3  |   |   |     |     |   |   |      | 0.3   |  
|                             |                          |               |     |             |   |               |     |            |   |       |      |      |   |   |     |      |   |   |      |      
|Balance at June 30, 2004     |                          | $             | 0.5 |             |   | $             | 0.1 |            |   | $     | 82.3 |      |   | $ |    |      |   | $ | 82.9 |      
|                             |                          |               |     |             |   |               |     |            |   |       |      |      |   |   |     |      |   |   |      |      

Recent Accounting Pronouncements

In March 2004, the Financial Accounting Standards
Board, or FASB, issued EITF Issue No. 03-1, The Meaning
of Other-Than-Temporary Impairment and Its Application to
Certain Investments. EITF 03-1 includes new guidance
for evaluating and recording impairment losses on debt and
equity investments, as well as new disclosure requirements for
investments that are deemed to be temporarily impaired. The
accounting guidance of EITF 03-1 is effective for reporting
periods beginning after June 15, 2004, while the disclosure
requirements are effective for our annual financial statements
for the year ending December 31, 2004. We are currently
evaluating the impact of the application of EITF 03-1 on
our results of operations and financial position.

Liquidity and Capital Resources



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

Our largest source of operating cash flows is
cash collections from our customers for purchases of software
licenses and maintenance and technical support. Our standard
payment terms for both license and support invoices are net
30 days from the date of invoice. Our primary uses of cash
for operating activities include personnel and facilities
related expenditures, income tax payments and technology costs
as well as costs associated with outside support and services.

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Cash flows from operating activities for the six
months ended June 30, 2004 were comparable to the same
period in 2003 on an aggregate basis. Our net income for the six
months ended June 30, 2004 was significantly higher than
2003; however, this was offset by lower non-cash charges such as
amortization of developed technology and other intangibles and
write-off of in-process research and development. In addition,
there was a higher amount of cash paid for income taxes for the
six months ended June 30, 2004 compared to 2003.

Cash flows from investing activities consist
primarily of net purchases of investments, property and
equipment and businesses and technology. Cash flows from
investing activities for the six months ended June 30, 2004
were comparable to 2003 on an aggregate basis, however, net
purchases of investments were $26.9 million for the six
months ended June 30, 2004 compared to net sales of
$229.1 million for the six months ended June 30, 2003.
In addition, purchases of businesses and technology were
$69.0 million for the six months ended June 30, 2004,
primarily related to the acquisition of Ejasent, compared to
$333.7 million for the six months ended June 30, 2003,
primarily related to the acquisition of Jareva and the cash
portion of the Precise acquisition.

Cash flows from financing activities consist
primarily of proceeds related to the issuance of common stock
under our employee stock plans and were $52.1 million for
the six months ended June 30, 2004 and $59.0 million
for the six months ended June 30, 2003.

In July 2004, our board of directors authorized a
program to repurchase our common stock in an amount of up to
$500.0 million over the next 12 to 18 months. We
expect to purchase these shares of common stock from time to
time on the open market or in privately negotiated transactions.
Depending on market conditions and other factors, these
purchases may be commenced or suspended from time to time
without prior notice. The stock repurchase program is primarily
intended to reduce the dilution resulting from our employee
stock plans.

In July 2004, we acquired Invio for cash
consideration of approximately $35 million.

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



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

In August 2003, we issued $520.0 million of
0.25% convertible subordinated notes due August 1,
2013, or 0.25% Notes, for which we received net proceeds of
approximately $508.2 million, to several initial purchasers
in a private offering. The 0.25% Notes were issued at their
face value and provide for semi-annual interest payments of
$0.7 million each February 1 and August 1, beginning
February 1, 2004. Effective as of January 28, 2004,
the 0.25% Notes began accruing additional interest at a
rate of 0.25% as a result of our registration statement having
not been declared effective by the SEC on or before the 180th
day following the original issuance of the 0.25% Notes and
the 0.25% Notes continued to accrue additional interest at
that rate until April 27, 2004, the 90th day following such
registration default. As of April 27, 2004, the
0.25% Notes began to accrue additional interest at a rate
of 0.50% and will accrue such additional interest until the
registration statement is declared effective or until we are no
longer required to maintain the effectiveness of the
registration statement.

At June 30, 2004, we had a ratio of
long-term debt to total capitalization of approximately 16%. The
degree to which we are leveraged could materially and adversely
affect our ability to obtain financing for working capital,
acquisitions or other purposes and could make us more vulnerable
to industry downturns and competitive pressures. We will require
substantial amounts of cash to fund scheduled payments of
principal and interest on our indebtedness, future capital
expenditures and any increased working capital requirements.



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

In 1999 and 2000, we entered into three
build-to-suit lease agreements for office buildings in Mountain
View, California, Roseville, Minnesota and Milpitas, California.
We began occupying the Roseville and Mountain View facilities in
May and June 2001, respectively, and began occupying the
Milpitas facility in

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April 2003. A syndicate of financial institutions
financed the acquisition and development of these properties.
Prior to July 1, 2003, we accounted for these properties as
operating leases in accordance with SFAS No. 13,
Accounting for Leases, as amended. On July 1, 2003,
we adopted FIN 46. Under FIN 46, the lessors of the
facilities are considered variable interest entities, and we are
considered the primary beneficiary. Accordingly, we began
consolidating the variable interest entities on July 1,
2003 and have included the property and equipment and long-term
debt on our balance sheet at June 30, 2004 and
December 31, 2003 and the results of their operations in
our consolidated statement of operations for the three and six
months ended June 30, 2004. As of June 30, 2004,
approximately $186.4 million of debt has been classified as
current as the lease terms for the Mountain View and Roseville
facilities expire in March 2005.


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

In January 2002, we entered into two three-year
pay fixed, receive floating, interest rate swaps for the purpose
of hedging the cash payments related to the Mountain View,
California and Roseville, Minnesota agreements. Under the terms
of these interest rate swaps, we make payments based on the
fixed rate and will receive interest payments based on the
3-month LIBOR rate. For the three months ended June 30,
2004 and 2003, the aggregate payments, including the net
payments on the interest rate swaps, were $4.0 million and
$4.1 million, respectively, and for the six months ended
June 30, 2004 and 2003, the aggregate payments, including
the net payments on the interest rate swaps, were
$8.0 million and $8.2 million, respectively. The
payments for the three and six months ended June 30, 2004
were included in interest expense in the consolidated statements
of operations in accordance with FIN 46. The payments made
for the three and six months ended June 30, 2003 were
classified as rent expense and included in cost of revenue and
operating expenses, in accordance with SFAS No. 13. We
expect future interest expense from the build-to-suit agreements
to be approximately $4 million per quarter.

The agreements for each of the facilities
described above require that we maintain specified financial
covenants, all of which we were in compliance with as of
June 30, 2004. The specified financial covenants as of
June 30, 2004 require us to maintain a minimum rolling four
quarter earnings before interest, taxes, depreciation and
amortization of EBITDA of $400.0 million, a minimum ratio
of cash and cash equivalents and accounts receivable to current
liabilities plus the debt consolidated under the build-to-suit
lease agreements of 1.2 to 1, and a leverage ratio of total
funded indebtedness to rolling four quarter EBITDA of not more
than 2 to 1. For purposes of these financial covenants, EBITDA
represents our net income for the applicable period, plus
interest expense, taxes, depreciation and amortization and all
non-cash restructuring charges, less software development
expenses classified as capital expenditures. In order to secure
the obligation under each agreement, each of the facilities is
subject to a deed of trust in favor of the financial
institutions that financed the acquisition and development of
the respective facility. Bank of America, N.A. was the agent for
the syndicate of banks that funded the development of the
Mountain View, California and

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Roseville, Minnesota facilities, and ABN AMRO
Bank, N.V. was the agent for the syndicate of banks that funded
the development of the Milpitas, California facility.




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

During 2002, our Japanese subsidiary entered into
a short-term credit facility with a multinational Japanese bank
in the amount of 1.0 billion Japanese yen
($9.3 million USD). At June 30, 2004, no amount was
outstanding. The short-term credit facility was renewed in March
2004 and is due to expire in March 2005. Borrowings under the
short-term credit facility bear interest at Tokyo Inter Bank
Offered Rate, plus 0.5%. There are no covenants on the
short-term credit facility and the loan has been guaranteed by
VERITAS Software Global LLC, one of our wholly-owned
subsidiaries.



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

On October 1, 2002, we acquired volume
replicator software technology for $6.0 million and
contingent payments of up to another $6.0 million based on
future revenues generated by the acquired technology. The
contingent payments will be paid quarterly over 40 quarters, in
amounts between $150,000 and $300,000, which includes interest.
We issued a promissory note payable in the principal amount of
$5.0 million, representing the present value of our minimum
payment obligations under the purchase agreement for the
acquired technology, which are payable quarterly commencing in
the first quarter of 2003 and ending in the fourth quarter of
2012. The contingent payments in excess of the quarterly minimum
obligations will be paid as they may become due. The outstanding
balance of the note payable was $4.5 million as of
June 30, 2004 and $4.6 million as of December 31,
2003 and is included in other long-term liabilities.



| |                        
| | -----------------------
| | Contractual Commitments

The following table is a summary of the
contractual commitments, including principal and interest
payments, associated with our obligations as of June 30,
2004:

|                               |                               |                |        |        |  |      |         |         |  |      |        |            |  |       |        |        |  |   |        |        |  |   |         |         |  |   |         |           | 
|------------------------------ | ----------------------------- | -------------- | ------ | ------ |  | ---- | ------- | ------- |  | ---- | ------ | ---------- |  | ----- | ------ | ------ |  | - | ------ | ------ |  | - | ------- | ------- |  | - | ------- | --------- | 
|                               |                               | 2004           |        | 2005   |  | 2006 |         | 2007    |  | 2008 |        | Thereafter |  | Total
|                               |                               |                |        |        |  |      |         |         |  |      |        |            |  |      
|                               |                               |               
|                               |                               | (In thousands)
|Operating lease commitments    |                               | $              | 29,944 |        |  | $    | 50,213  |         |  | $    | 41,747 |            |  | $     | 36,861 |        |  | $ | 32,805 |        |  | $ | 163,190 |         |  | $ | 354,760 |          
|Convertible subordinated notes |                               |                | 650    |        |  |      | 1,300   |         |  |      | 1,300  |            |  |       | 1,300  |        |  |   | 1,300  |        |  |   | 525,308 |         |  |   | 531,158 |          
|Long-term debt                 |                               |                | 8,741  |        |  |      | 385,705 |         |  |      |       |            |  |       |       |        |  |   |       |        |  |   |        |         |  |   | 394,446 |          
|Other long-term liabilities    |                               |                | 450    |        |  |      | 600     |         |  |      | 600    |            |  |       | 600    |        |  |   | 600    |        |  |   | 2,400   |         |  |   | 5,250   |          
|                               |                               |                |        |        |  |      |         |         |  |      |        |            |  |       |        |        |  |   |        |        |  |   |         |         |  |   |         |          
|                               | Total contractual commitments |                | $      | 39,785 |  |      | $       | 437,818 |  |      | $      | 43,647     |  |       | $      | 38,761 |  |   | $      | 34,705 |  |   | $       | 690,898 |  |   | $       | 1,285,614 | 
|                               |                               |                |        |        |  |      |         |         |  |      |        |            |  |       |        |        |  |   |        |        |  |   |         |         |  |   |         |          

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

Factors That May Affect Future
Results

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

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

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



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

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

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

We derive a majority of our revenue from a small
number of software products, including our NetBackup and Backup
Exec data protection products. In addition, our software
products are concentrated within the market for data storage.
For example, for the first half of 2004, we derived
approximately 54% of our user license fees from the NetBackup
and Backup Exec products, and a similar percentage of our
services 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 of our potential customers or other factors.
If our revenue derived from these software products were to
decline significantly, our business and operating results would
be adversely affected. In addition, because our software
products are concentrated within the market for data storage, a
decline in the

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


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

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

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



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

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



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

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



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

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

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business and operating results. Our competitors
include the internal development groups of our strategic
partners. These groups develop storage management software and
utility computing infrastructure for the storage and server
hardware products marketed by the strategic partners. We also
face competition from software vendors that offer products that
directly compete with our products or bundle their software
products with storage software offered by another vendor.


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

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

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

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

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

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

We derive a substantial portion of our revenue
from customers located outside of the U.S. and have significant
operations outside of the U.S., including engineering, sales,
customer support and production operations. We plan to expand
our international operations and our planned growth is
contingent upon the

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successful expansion of our international
revenue. Our international operations are subject to risks in
addition to those faced by our domestic operations, including:




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

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

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

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

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

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

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

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

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

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

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

Many of our products operate primarily on the
Windows, UNIX and Linux computer operating systems. As part of
our efforts to develop products for operating systems that are
part of the Open Source Community, we may have to license
portions of our products on a royalty free basis or may have to
expose our source code. We continue to develop new products for
these operating systems. We may not accomplish our development
efforts quickly or cost-effectively, and it is not clear what
the relative growth rates of these operating systems will be.
Our development efforts require substantial capital investment,
the devotion of substantial employee resources and the
cooperation of the owners of the operating systems to or for
which the products are being ported or developed. If the market
for a particular operating system does not develop as
anticipated, or demand for our products and services in such
market does not materialize or occurs more slowly than we
expect, we 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

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


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

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

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

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

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

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

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

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

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


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

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



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

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

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

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

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

We prepare our financial statements in conformity
with accounting principles generally accepted in the U.S., which
are subject to interpretation by the American Institute of
Certified Public Accountants, the Public

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Company Accounting Oversight Board, the SEC and
various other bodies formed to interpret and create appropriate
accounting policies. A change in these policies could have a
significant effect on our reported results and may even
retroactively affect previously reported transactions. Our
accounting policies that recently have been or may in the future
be affected by changes in the accounting rules are as follows:




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

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

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

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

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

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



| |   |                                                                                  
| | - | ---------------------------------------------------------------------------------
| |  | be time consuming to defend;                                                     
|
| |  | result in costly litigation;                                                     
|
| |  | divert managements attention from our core
    business;                        
|
| |  | require us to stop selling, to delay shipping or
    to redesign our product; and

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| |   |                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | require us to pay monetary amounts as damages,
    for royalty or licensing arrangements, or to satisfy
    indemnification obligations that we have with some of our
    customers.

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

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

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

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

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

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



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

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

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person or entity acquires, or announces its
intention to acquire, 15% or more of the outstanding shares of
our common stock, unless our board of directors elects to redeem
these rights.


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

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

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



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

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






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

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

Foreign Currency Risk

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

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Our outstanding forward contracts as of
June 30, 2004 are presented in the table below. All forward
contract amounts are representative of the expected payments to
be made under these instruments. As of June 30, 2004, all
forward contracts mature in 32 days or less:

|                             |                             |                 |  |                 |  |               |  |          |  |             |  |        |  |  |  |     |  |  |  |       |  
|---------------------------- | --------------------------- | --------------- |  | --------------- |  | ------------- |  | -------- |  | ----------- |  | ------ |  |  |  | --- |  |  |  | ----- | -
|                             |                             |                 |  |                 |  |               |  |          |  | Fair Market
|                             |                             |                 |  |                 |  |               |  | Value at
|                             |                             | Local Currency  |  |                 |  | June 30, 2004
|                             |                             | Contract Amount |  | Contract Amount |  | (US$)        
|                             |                             |                 |  |                 |  |              
|                             |                             |                 |  |                 |  |               |  |          |  |            
|                             |                             |                
|                             |                             | (In thousands) 
|Contracts to Buy US $        |                             |                 |  |                 |  |               |  |          |  |             |  |        |  |  |  |     |  |  |  |      
|                             | Argentine peso              |                 |  | 1,900           |  |               |  | ARS      |  |             |  | 637    |  |  |  | USD |  |  |  | (2.0  | )
|                             | Brazilian real              |                 |  | 8,400           |  |               |  | BRL      |  |             |  | 2,642  |  |  |  | USD |  |  |  | (18.7 | )
|                             | Canadian dollar             |                 |  | 5,400           |  |               |  | CAD      |  |             |  | 4,007  |  |  |  | USD |  |  |  | 1.9   |  
|Contracts to Sell US $       |                             |                 |  |                 |  |               |  |          |  |             |  |        |  |  |  |     |  |  |  |      
|                             | Euro                        |                 |  | 25,600          |  |               |  | EUR      |  |             |  | 31,145 |  |  |  | USD |  |  |  | 48.6  |  
|                             | Israel shekel               |                 |  | 8,200           |  |               |  | ILS      |  |             |  | 1,818  |  |  |  | USD |  |  |  | 3.5   |  
|                             | Mexican peso                |                 |  | 3,300           |  |               |  | MXN      |  |             |  | 286    |  |  |  | USD |  |  |  | 0.4   |  
|                             | Singapore dollar            |                 |  | 31,000          |  |               |  | SGD      |  |             |  | 18,141 |  |  |  | USD |  |  |  | (20.7 | )
|Contracts to Buy Euro
      |                             |                 |  |                 |  |               |  |          |  |             |  |        |  |  |  |     |  |  |  |      
|                             | United Arab Emirates dirham |                 |  | 20,800          |  |               |  | AED      |  |             |  | 4,643  |  |  |  | EUR |  |  |  | (2.9  | )
|                             | Swiss franc                 |                 |  | 1,800           |  |               |  | CHF      |  |             |  | 1,184  |  |  |  | EUR |  |  |  | 1.0   |  
|                             | Indian rupee                |                 |  | 115,000         |  |               |  | INR      |  |             |  | 2,031  |  |  |  | EUR |  |  |  | (21.7 | )
|                             | Japanese yen                |                 |  | 2,300,000       |  |               |  | JPY      |  |             |  | 17,521 |  |  |  | EUR |  |  |  | 28.7  |  
|Contracts to Sell Euro
     |                             |                 |  |                 |  |               |  |          |  |             |  |        |  |  |  |     |  |  |  |      
|                             | Danish krona                |                 |  | 6,100           |  |               |  | DKK      |  |             |  | 823    |  |  |  | EUR |  |  |  | (2.1  | )
|                             | Swedish krona               |                 |  | 12,800          |  |               |  | SEK      |  |             |  | 1,399  |  |  |  | EUR |  |  |  | 1.2   |  
|                             | South African rand          |                 |  | 7,800           |  |               |  | ZAR      |  |             |  | 1,029  |  |  |  | EUR |  |  |  | 8.5   |  
|Contracts to Buy SGD $       |                             |                 |  |                 |  |               |  |          |  |             |  |        |  |  |  |     |  |  |  |      
|                             | Hong Kong dollar            |                 |  | 2,600           |  |               |  | HKD      |  |             |  | 570    |  |  |  | SGD |  |  |  | (0.1  | )
|Contracts to Sell SGD $      |                             |                 |  |                 |  |               |  |          |  |             |  |        |  |  |  |     |  |  |  |      
|                             | Australian dollar           |                 |  | 8,600           |  |               |  | AUD      |  |             |  | 10,278 |  |  |  | SGD |  |  |  | 0.2   |  
|                             | Indian rupee                |                 |  | 40,000          |  |               |  | INR      |  |             |  | 1,486  |  |  |  | SGD |  |  |  |      |  
|                             | South Korean won            |                 |  | 1,200,000       |  |               |  | KRW      |  |             |  | 1,777  |  |  |  | SGD |  |  |  | 0.6   |  

In January 2002, we entered into two three-year
pay fixed, receive floating, interest rate swaps for the purpose
of hedging cash flows on variable interest rate debt of two of
our build-to-suit agreements. Under the terms of these interest
rate swaps, we make payments based on the fixed rate and will
receive interest payments based on the 3-month London Inter Bank
Offered Rate, or LIBOR. The payments on our build-to-suit lease
agreements are based upon a 3-month LIBOR plus a credit spread.
If critical terms of the interest rate swaps or the hedged item
do not change, the interest rate swaps will be considered to be
highly effective with all changes in the fair value included in
other comprehensive income. If critical terms of the interest
rate swaps or the hedged item change, the hedge may become
partially or fully ineffective, which could result in all or a
portion of the changes in fair value of the derivative recorded
in the statement of operations. The interest rate swaps settle
the first day of January, April, July and October until
expiration. As of June 30, 2004, the fair value of the
interest rate swaps was $(4.4) 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 June 30, 2004. On July 1, 2003,
we began accounting for our variable interest rate debt in
accordance with FIN 46. In accordance with
SFAS No. 133, we had designated the interest rate swap
as a cash flow hedge of the

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


Interest Rate Risk

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

Debt obligations consist of $520.0 million
of our 0.25% convertible subordinated notes due
August 1, 2013 and $380.6 million of our debt related
to our build-to-suit lease agreements. The nominal interest rate
on the 0.25% Notes is fixed and the notes provide for
semi-annual interest payments of approximately $0.7 million
each February 1 and August 1, beginning
February 1, 2004. Effective as of January 28, 2004,
the 0.25% Notes began accruing additional interest at a
rate of 0.25% as a result of our registration statement having
not been declared effective by the SEC on or before the 180th
day following the original issuance of the 0.25% Notes and
the 0.25% Notes continued to accrue such additional
interest until April 27, 2004, the 90th day following such
registration default. As of April 27, 2004, the
0.25% Notes began to accrue additional interest at a rate
of 0.50% and will accrue such additional interest until the
registration statement is declared effective or we are no longer
required to maintain the effectiveness of the registration
statement. The 0.25% 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. Long-term debt consists of the three
build-to-suit agreements. The interest rates on the
build-to-suit agreements are variable based on a 3-month LIBOR
plus a credit spread and provide for quarterly interest payments
in January, April, July and October (see Managements
Discussion and Analysis of Financial Condition and Results of
Operations  Long-Term Debt for more
information regarding debt payout).

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

|                                                  |                       |                                    |         |            |   |       |           |            |   |           |           |           |   |   |           |           |   |   |           |           |  
|------------------------------------------------- | --------------------- | ---------------------------------- | ------- | ---------- | - | ----- | --------- | ---------- | - | --------- | --------- | --------- | - | - | --------- | --------- | - | - | --------- | --------- | -
|                                                  |                       |                                    |         |            |   |      
|                                                  |                       | Amortized Cost                     |         |            |   |      
|                                                  |                       |                                    |         |            |   |      
|                                                  |                       |                                    |         | Due in     |   |       |           |            |   | 2003     
|                                                  |                       | Due in                             |         | 2005 and   |   |       |           | 2004       |   | Amortized
|                                                  |                       | 2004                               |         | Thereafter |   | Total |           | Fair Value |   | Cost     
|                                                  |                       |                                    |         |            |   |       |           |            |   |          
|                                                  |                       |                                   
|                                                  |                       | (In thousands, except percentages)
|Cash equivalents and short-term investments(1):   |                       |                                    |         |            |   |       |           |            |   |           |           |           |   |   |           |           |   |   |           |          
|                                                  | Fixed rate            |                                    | $       | 301,608    |   |       | $         | 972,792    |   |           | $         | 1,274,400 |   |   | $         | 1,261,941 |   |   | $         | 1,235,767 |  
|                                                  | Average fixed rate    |                                    |         | 1.26       | % |       |           | 2.40       | % |           |           | 2.13      | % |   |           | 2.12      | % |   |           | 2.11      | %
|                                                  | Variable rate         |                                    | $       | 388,131    |   |       | $         | 294,345    |   |           | $         | 682,476   |   |   | $         | 680,978   |   |   | $         | 509,727   |  
|                                                  | Average variable rate |                                    |         | 1.45       | % |       |           | 1.48       | % |           |           | 1.46      | % |   |           | 1.46      | % |   |           | 1.40      | %
|Total cash equivalents and short-term investments |                       | $                                  | 689,739 |            |   | $     | 1,267,137 |            |   | $         | 1,956,876 |           |   | $ | 1,942,919 |           |   | $ | 1,745,494 |          
|                                                  | Average rate          |                                    |         | 1.37       | % |       |           | 2.18       | % |           |           | 1.90      | % |   |           | 1.89      | % |   |           | 1.90      | %
|Debt obligations:                                 |                       |                                    |         |            |   |       |           |            |   |           |           |           |   |   |           |           |   |   |           |          
|                                                  | Fixed rate            |                                    | $       | 330        |   |       | $         | 524,142    |   |           | $         | 524,472   |   |   | $         | 524,472   |   |   | $         | 524,578   |  
|                                                  | Average fixed rate(2) |                                    |         | 3.68       | % |       |           | 0.28       | % |           |           | 0.28      | % |   |           | 0.28      | % |   |           | 0.28      | %
|                                                  | Variable rate(3)      |                                    | $       |           |   |       | $         | 380,630    |   |           | $         | 380,630   |   |   | $         | 380,630   |   |   | $         | 380,630   |  
|                                                  | Average variable rate |                                    |         |           |   |       |           | 2.45       | % |           |           | 2.45      | % |   |           | 2.45      | % |   |           | 2.45      | %

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---



|    |                                                                                                                                                                                                                                                                                                                                                                                 
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | For purposes of the above table, cash equivalents
    consist of commercial paper and government securities.                                                                                                                                                                                                                                                                    
|   
|(2) | Not included in the average fixed rate is the
    amortization of the underwriting and issuance costs for the
    $520.0 million convertible subordinated notes. If this was
    included, our average fixed rate for these notes would be 1.04%
    for 2005 and thereafter.                                                                                                   
|   
|(3) | $186.4 million of the variable rate
    long-term debt is, in effect, a fixed rate as the result of the
    interest rate swaps (see Note 12, Derivative
    Financial Instruments in the Notes to Condensed
    Consolidated Financial Statements) entered into by VERITAS.
    Including the effect of these interest rate swaps, the average
    fixed rate would be 6.14%.

Equity Price Risk

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






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

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

Our disclosure controls and procedures are not
capable of preventing all instances of error or fraud. A control
system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of
the control system will be attained. Our disclosure controls and
procedures can be circumvented by the individual acts of some
persons, by collusion of two or more people or by management
override of the control. Because of the inherent limitations in
a cost-effective control system, misstatements due to error or
fraud may occur and may not be detected on a timely basis.

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

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

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




PART II: OTHER INFORMATION




Item 1.Legal
Proceedings

SEC Related Matters

SEC Investigation.As previously disclosed, since the third quarter of 2002, we
have received subpoenas issued by the Securities Exchange
Commission in the investigation entitled In the Matter of
AOL/Time Warner. The SEC has requested information
concerning the facts and circumstances surrounding our
transactions with AOL Time Warner, or AOL, and related
accounting and disclosure matters. Our transactions with AOL,
entered into in September 2000, involved a software and services
purchase by AOL at a stated value of $50.0 million and the
purchase by us of advertising services from AOL at a stated
value of $20.0 million. In March 2003, we restated our
financial statements for 2001 and 2000 to reflect a reduction in
revenues and expenses of $20.0 million. The restatement
included an additional reduction in revenues and expenses of
$1.0 million related to two other contemporaneous
transactions with other parties entered into in 2000 that
involved software licenses and the purchase of on-line
advertising services.

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

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

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Litigation

After we announced in January 2003 that we would
restate our financial results as a result of transactions
entered into with AOL in September 2000, numerous separate
complaints purporting to be class actions were filed in the
United States District Court for the Northern District of
California alleging that we and some of our officers and
directors violated provisions of the Securities Exchange Act of
1934. The complaints contain varying allegations, including that
we made materially false and misleading statements with respect
to our 2000, 2001 and 2002 financial results included in our
filings with the SEC, press releases and other public
disclosures. On May 2, 2003, a lead plaintiff and lead
counsel were appointed. A consolidated complaint entitled In
Re VERITAS Software Corporation Securities Litigationwas
filed by the lead plaintiff on July 18, 2003. On
December 10, 2003, the District Court granted the
defendants motion to dismiss the consolidated complaint,
with leave to amend. On May 19, 2004, the District Court
granted the defendants motion to dismiss the
plaintiffs first amended complaint, with leave to amend.
On June 30, 2004, an amended complaint was filed with the
Court in this matter. In addition, in 2003 several complaints
purporting to be derivative actions were filed in California
state court against some of our directors and officers. These
complaints are 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 been consolidated into the action In Re VERITAS Software
Corporation Derivative Litigation, which was filed on
May 8, 2003 in the Superior Court of Santa Clara
County and is currently pending. 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 matters could have a
material adverse effect on our business, financial condition,
results of operations and cash flow. In addition, defending any
litigation may be costly and divert managements attention
from the day-to-day operations of our business.

On July 7, 2004, a purported class action
complaint entitled Paul Kuck, et al. v. VERITAS Software
Corporation, et al. was filed in the United States
District Court for the District of Delaware. The lawsuit alleges
violations of federal securities laws in connection with our
announcement on July 6, 2004 that we expected our results
of operations for the fiscal quarter ended June 30, 2004 to
fall below estimates that were earlier provided by us. The
complaint generally seeks an unspecified amount of damages.
Subsequently, additional purported class action complaints have
been filed in Delaware federal court against the same defendants
named in the Kuck lawsuit. These complaints are based on the
same facts and circumstances as the Kuck lawsuit. These cases
are still in the preliminary stages, and it is not possible for
us to quantify the extent of our potential liability, if any. An
unfavorable outcome in any of these matters could have a
material adverse effect on our business, financial condition,
results of operations and cash flow. In addition, defending any
litigation may be costly and divert managements attention
from the day-to-day operations of our business.

On October 23, 2001, Storage Computer
Corporation sued VERITAS in the United States District Court for
the Northern District of Texas for alleged patent infringement.
VERITAS denied such claims of infringement and countersued for,
among other things, infringement of certain of its patents. On
March 12, 2004, the Court granted VERITAS dispositive
motions for summary judgment of non-infringement under the
patents asserted by Storage Computer Corporation. Storage
Computer Corporation subsequently filed a notice of appeal. On
June 18, 2004, the Court dismissed Storage Computer
Corporations notice of appeal. As of August 4, 2004,
the parties have reached a settlement of all claims and have
moved for a dismissal of the matter with prejudice.

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

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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
|        |    |     |  |                     |  |                                                                                                                                                                                     |  |       |       |        |  |         
|        | 3  | .01 |  |                     |  | Amended and Restated Certificate of Incorporation
    of VERITAS Holding Corporation                                                                                                |  |       | 8-A   |        |  |          | 06/02/99 |  |  |  | 3.01 |  |  |  |   | 
|        | 3  | .02 |  |                     |  | Certificate of Amendment of Amended and Restated
    Certificate of Incorporation of VERITAS Holding Corporation
    (changing name of corporation to VERITAS Software Corporation) |  |       | 8-A   |        |  |          | 06/02/99 |  |  |  | 3.02 |  |  |  |   | 
|        | 3  | .03 |  |                     |  | Certificate of Amendment of Amended and Restated
    Certificate of Incorporation of VERITAS                                                                                        |  |       | S-8   |        |  |          | 06/02/00 |  |  |  | 4.03 |  |  |  |   | 
|        | 3  | .04 |  |                     |  | Amended and Restated Bylaws of VERITAS                                                                                                                                              |  |       | S-4/A |        |  |          | 09/28/00 |  |  |  | 3.04 |  |  |  |   | 
|        | 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
|               |         |         |  |            
|               | 4/21/04 |         |  |             | 12 |  |  | VERITAS Software reports revenue for the quarter
    ended March 31, 2004.         
|               | 6/14/04 |         |  |             | 12 |  |  | VERITAS Software files 2003 10-K and 10-Q for the
    quarter ended March 31, 2004.

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SIGNATURE

Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned thereunto duly
authorized on August 9, 2004.



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



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

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

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EXHIBIT INDEX

|        |    |     |  |                     |  |                                                                                                                                                                                     |  |       |       |        |  |          |          |  |  |  |      |  |  |  |   | 
|------- | -- | --- |  | ------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----- | ----- | ------ |  | -------- | -------- |  |  |  | ---- |  |  |  | - | 
|        |    |     |  |                     |  |                                                                                                                                                                                     |  |      
|        |    |     |  |                     |  | Incorporated by Reference                                                                                                                                                           |  |      
|Exhibit |    |     |  |                     |  |                                                                                                                                                                                     |  | Filed
|Number  |    |     |  | Exhibit Description |  | Form                                                                                                                                                                                |  | Date  |       | Number |  | Herewith
|        |    |     |  |                     |  |                                                                                                                                                                                     |  |       |       |        |  |         
|        | 3  | .01 |  |                     |  | Amended and Restated Certificate of Incorporation
    of VERITAS Holding Corporation                                                                                                |  |       | 8-A   |        |  |          | 06/02/99 |  |  |  | 3.01 |  |  |  |   | 
|        | 3  | .02 |  |                     |  | Certificate of Amendment of Amended and Restated
    Certificate of Incorporation of VERITAS Holding Corporation
    (changing name of corporation to VERITAS Software Corporation) |  |       | 8-A   |        |  |          | 06/02/99 |  |  |  | 3.02 |  |  |  |   | 
|        | 3  | .03 |  |                     |  | Certificate of Amendment of Amended and Restated
    Certificate of Incorporation of VERITAS                                                                                        |  |       | S-8   |        |  |          | 06/02/00 |  |  |  | 4.03 |  |  |  |   | 
|        | 3  | .04 |  |                     |  | Amended and Restated Bylaws of VERITAS                                                                                                                                              |  |       | S-4/A |        |  |          | 09/28/00 |  |  |  | 3.04 |  |  |  |   | 
|        | 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 |