##### 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,
    2003                                                
|          
|or        
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934
|           |  | For the transition period
    from           to           .                                     

Commission file number: 000-26247

VERITAS Software Corporation

(Exact Name of Registrant as Specified in Its
Charter)


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

350 Ellis Street

Mountain View, California 94043


(650) 527-8000


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


Registrants Telephone Number, including
Area Code)




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

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

The number of shares of the registrants
common stock outstanding as of July 31, 2003 was
425,707,885 shares.



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TABLE OF CONTENTS



|                              |                                                                                               |  |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I: FINANCIAL INFORMATION
|                              | Item 1. Condensed Consolidated Financial Statements                                          
|                              | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                              | Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|                              | Item 4. Controls and Procedures                                                              
|PART II: OTHER INFORMATION   
|                              | Item 1. Legal Proceedings                                                                    
|                              | Item 4. Submission of Matters to a Vote of Security Holders                                  
|                              | Item 5. Other Information                                                                    
|                              | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURE                    
|EXHIBIT INDEX                
|EXHIBIT 4.01                 
|EXHIBIT 4.02                 
|EXHIBIT 10.01                
|EXHIBIT 10.02                
|EXHIBIT 10.03                
|EXHIBIT 31.01                
|EXHIBIT 31.02                
|EXHIBIT 32.01                
|EXHIBIT 99.01                



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##### Table of Contents



VERITAS SOFTWARE CORPORATION

INDEX

|                                   |  |                                                                                                               |    |      |    | 
|---------------------------------- |  | ------------------------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|                                   |  |                                                                                                               |    | Page
|                                   |  |                                                                                                               |    |     
|PART I:  FINANCIAL
    INFORMATION
|Item 1.                            |  | Condensed Consolidated Financial Statements:                                                                  |    |      |    | 
|                                   |  | Condensed Consolidated Balance Sheets as of
    June 30, 2003 and December 31, 2002                           |    |      | 2  | 
|                                   |  | Condensed Consolidated Statements of Operations
    for the Three and Six Months Ended June 30, 2003 and 2002 |    |      | 3  | 
|                                   |  | Condensed Consolidated Statements of Cash Flows
    for the Six Months Ended June 30, 2003 and 2002           |    |      | 4  | 
|                                   |  | Notes to Condensed Consolidated Financial
    Statements                                                      |    |      | 5  | 
|Item 2.                            |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations                     |    |      | 23 | 
|Item 3.                            |  | Quantitative and Qualitative Disclosures About
    Market Risk                                                |    |      | 56 | 
|Item 4.                            |  | Controls and Procedures                                                                                       |    |      | 59 | 
|PART II:  OTHER
    INFORMATION   
|Item 1.                            |  | Legal Proceedings                                                                                             |    |      | 59 | 
|Item 4.                            |  | Submission of Matters to a Vote of Security
    Holders                                                       |    |      | 60 | 
|Item 5.                            |  | Other Information                                                                                             |    |      | 60 | 
|Item 6.                            |  | Exhibits and Reports on Form 8-K                                                                              |    |      | 61 | 
|Signature                          |  |                                                                                                               | 62 |     

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,
|                                            |                                                                                                                                   | 2003                       |           | 2002        
|                                            |                                                                                                                                   |                            |           |             
|                                            |                                                                                                                                   |                           
|                                            |                                                                                                                                   | (Unaudited)               
|                                            |                                                                                                                                   | (In thousands)            
|ASSETS                                     
|Current assets:                             |                                                                                                                                   |                            |           |              |           |   |           |           
|                                            | Cash and cash equivalents                                                                                                         |                            | $         | 1,017,018    |           |   | $         | 764,062    |          
|                                            | Short-term investments                                                                                                            |                            |           | 1,353,932    |           |   |           | 1,477,259  |          
|                                            | Accounts receivable, net of allowance for
    doubtful accounts of $11,176 at June 30, 2003 and $11,308
    at December 31, 2002. |                            |           | 131,556      |           |   |           | 170,204    |          
|                                            | Other current assets                                                                                                              |                            |           | 72,641       |           |   |           | 74,178     |          
|                                            | Deferred income taxes                                                                                                             |                            |           | 60,781       |           |   |           | 59,995     |          
|                                            |                                                                                                                                   |                            |           |              |           |   |           |           
|                                            |                                                                                                                                   | Total current assets       |           |              | 2,635,928 |   |           |            | 2,545,698 | 
|Property and equipment, net                 |                                                                                                                                   |                            | 216,702   |              |           |   | 230,261   |           
|Other intangibles, net                      |                                                                                                                                   |                            | 88,823    |              |           |   | 72,594    |           
|Goodwill, net                               |                                                                                                                                   |                            | 1,733,122 |              |           |   | 1,196,593 |           
|Other non-current assets                    |                                                                                                                                   |                            | 19,653    |              |           |   | 26,624    |           
|Deferred income taxes                       |                                                                                                                                   |                            | 127,744   |              |           |   | 127,863   |           
|                                            |                                                                                                                                   |                            |           |              |           |   |           |           
|                                            |                                                                                                                                   | $                          | 4,821,972 |              |           | $ | 4,199,633 |           
|                                            |                                                                                                                                   |                            |           |              |           |   |           |           
|LIABILITIES AND STOCKHOLDERS
    EQUITY   
|Current liabilities:                        |                                                                                                                                   |                            |           |              |           |   |           |           
|                                            | Accounts payable                                                                                                                  |                            | $         | 40,847       |           |   | $         | 33,823     |          
|                                            | Accrued compensation and benefits                                                                                                 |                            |           | 97,645       |           |   |           | 97,233     |          
|                                            | Merger consideration payable                                                                                                      |                            |           | 64,496       |           |   |           |           |          
|                                            | Accrued acquisition and restructuring costs                                                                                       |                            |           | 47,662       |           |   |           | 37,742     |          
|                                            | Other accrued liabilities                                                                                                         |                            |           | 95,760       |           |   |           | 92,431     |          
|                                            | Income taxes payable                                                                                                              |                            |           | 180,781      |           |   |           | 123,569    |          
|                                            | Deferred revenue                                                                                                                  |                            |           | 309,710      |           |   |           | 280,314    |          
|                                            |                                                                                                                                   |                            |           |              |           |   |           |           
|                                            |                                                                                                                                   | Total current liabilities  |           |              | 836,901   |   |           |            | 665,112   | 
|Convertible subordinated notes              |                                                                                                                                   |                            | 468,740   |              |           |   | 460,252   |           
|Accrued acquisition and restructuring costs |                                                                                                                                   |                            | 71,266    |              |           |   | 77,402    |           
|Deferred and other income taxes             |                                                                                                                                   |                            | 113,100   |              |           |   | 113,100   |           
|                                            |                                                                                                                                   |                            |           |              |           |   |           |           
|                                            |                                                                                                                                   | Total liabilities          |           |              | 1,490,007 |   |           |            | 1,315,866 | 
|Stockholders equity:                       |                                                                                                                                   |                            |           |              |           |   |           |           
|                                            | Common stock                                                                                                                      |                            |           | 443          |           |   |           | 431        |          
|                                            | Additional paid-in capital                                                                                                        |                            |           | 6,696,150    |           |   |           | 6,334,581  |          
|                                            | Accumulated deficit                                                                                                               |                            |           | (1,654,447   | )         |   |           | (1,745,712 | )        
|                                            | Deferred stock-based compensation                                                                                                 |                            |           | (18,740      | )         |   |           |           |          
|                                            | Accumulated other comprehensive income (loss)                                                                                     |                            |           | 10,623       |           |   |           | (3,469     | )        
|                                            | Treasury stock, at cost; 18,675 shares at
    June 30, 2003 and December 31, 2002.                                                |                            |           | (1,702,064   | )         |   |           | (1,702,064 | )        
|                                            |                                                                                                                                   |                            |           |              |           |   |           |           
|                                            |                                                                                                                                   | Total stockholders equity |           |              | 3,331,965 |   |           |            | 2,883,767 | 
|                                            |                                                                                                                                   |                            |           |              |           |   |           |           
|                                            |                                                                                                                                   | $                          | 4,821,972 |              |           | $ | 4,199,633 |           
|                                            |                                                                                                                                   |                            |           |              |           |   |           |           

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,        
|                                                                   |                                      |                                          |                            |                 
|                                                                   |                                      | 2003                                     |                            | 2002             |         | 2003    |         | 2002   
|                                                                   |                                      |                                          |                            |                  |         |         |         |        
|                                                                   |                                      |                                          |                            |                 
|                                                                   |                                      | (Unaudited)                              |                            | (Unaudited)     
|                                                                   |                                      |                                         
|                                                                   |                                      | (In thousands, except per share amounts)
|Net revenue:                                                       |                                      |                                          |                            |                  |         |         |         |         |         |         |         |         |         |         |         |        
|                                                                   | User license fees                    |                                          | $                          | 260,962          |         |         | $       | 241,876 |         |         | $       | 515,526 |         |         | $       | 501,587 |        
|                                                                   | Services                             |                                          |                            | 151,894          |         |         |         | 122,814 |         |         |         | 291,716 |         |         |         | 233,552 |        
|                                                                   |                                      |                                          |                            |                  |         |         |         |         |         |         |         |         |         |         |         |        
|                                                                   |                                      | Total net revenue                        |                            |                  | 412,856 |         |         |         | 364,690 |         |         |         | 807,242 |         |         |         | 735,139 |        
|Cost of revenue:                                                   |                                      |                                          |                            |                  |         |         |         |         |         |         |         |         |         |         |         |        
|                                                                   | User license fees                    |                                          |                            | 11,716           |         |         |         | 8,778   |         |         |         | 23,134  |         |         |         | 17,972  |        
|                                                                   | Services                             |                                          |                            | 50,345           |         |         |         | 44,852  |         |         |         | 98,134  |         |         |         | 86,007  |        
|                                                                   | Amortization of developed technology |                                          |                            | 10,554           |         |         |         | 16,903  |         |         |         | 25,336  |         |         |         | 33,806  |        
|                                                                   |                                      |                                          |                            |                  |         |         |         |         |         |         |         |         |         |         |         |        
|                                                                   |                                      | Total cost of revenue                    |                            |                  | 72,615  |         |         |         | 70,533  |         |         |         | 146,604 |         |         |         | 137,785 |        
|                                                                   |                                      |                                          |                            |                  |         |         |         |         |         |         |         |         |         |         |         |        
|                                                                   |                                      |                                          | Gross profit               |                  |         | 340,241 |         |         |         | 294,157 |         |         |         | 660,638 |         |         |         | 597,354 |       
|Operating expenses:                                                |                                      |                                          |                            |                  |         |         |         |         |         |         |         |         |         |         |         |        
|                                                                   | Selling and marketing                |                                          |                            | 123,105          |         |         |         | 126,731 |         |         |         | 245,152 |         |         |         | 253,694 |        
|                                                                   | Research and development             |                                          |                            | 72,584           |         |         |         | 67,701  |         |         |         | 143,967 |         |         |         | 132,885 |        
|                                                                   | General and administrative           |                                          |                            | 38,902           |         |         |         | 34,612  |         |         |         | 77,055  |         |         |         | 67,725  |        
|                                                                   | Amortization of other intangibles    |                                          |                            | 12,250           |         |         |         | 18,016  |         |         |         | 30,441  |         |         |         | 36,032  |        
|                                                                   | In-process research and development  |                                          |                            | 15,300           |         |         |         |        |         |         |         | 19,400  |         |         |         |        |        
|                                                                   |                                      |                                          |                            |                  |         |         |         |         |         |         |         |         |         |         |         |        
|                                                                   |                                      | Total operating expenses                 |                            |                  | 262,141 |         |         |         | 247,060 |         |         |         | 516,015 |         |         |         | 490,336 |        
|                                                                   |                                      |                                          |                            |                  |         |         |         |         |         |         |         |         |         |         |         |        
|                                                                   |                                      |                                          | Income from operations     |                  |         | 78,100  |         |         |         | 47,097  |         |         |         | 144,623 |         |         |         | 107,018 |       
|Interest and other income, net                                     |                                      |                                          | 11,274                     |                  |         |         | 13,708  |         |         |         | 19,669  |         |         |         | 26,861  |        
|Interest expense                                                   |                                      |                                          | (7,798                     | )                |         |         | (7,462  | )       |         |         | (15,536 | )       |         |         | (15,383 | )      
|Loss on strategic investments                                      |                                      |                                          |                           |                  |         |         | (14,802 | )       |         |         | (3,518  | )       |         |         | (14,802 | )      
|                                                                   |                                      |                                          |                            |                  |         |         |         |         |         |         |         |         |         |         |         |        
|                                                                   |                                      |                                          | Income before income taxes |                  |         | 81,576  |         |         |         | 38,541  |         |         |         | 145,238 |         |         |         | 103,694 |       
|Provision for income taxes                                         |                                      |                                          | 32,837                     |                  |         |         | 12,495  |         |         |         | 53,973  |         |         |         | 33,182  |        
|                                                                   |                                      |                                          |                            |                  |         |         |         |         |         |         |         |         |         |         |         |        
|                                                                   |                                      |                                          |                            | Net income       |         | $       | 48,739  |         |         | $       | 26,046  |         |         | $       | 91,265  |         |         | $       | 70,512 | 
|                                                                   |                                      |                                          |                            |                  |         |         |         |         |         |         |         |         |         |         |         |        
|Net income per share  basic                                       |                                      | $                                        | 0.12                       |                  |         | $       | 0.06    |         |         | $       | 0.22    |         |         | $       | 0.17    |        
|                                                                   |                                      |                                          |                            |                  |         |         |         |         |         |         |         |         |         |         |         |        
|Number of shares used in computing per share
    amounts  basic   |                                      |                                          | 415,621                    |                  |         |         | 409,465 |         |         |         | 414,270 |         |         |         | 407,776 |        
|                                                                   |                                      |                                          |                            |                  |         |         |         |         |         |         |         |         |         |         |         |        
|Net income per share  diluted                                     |                                      | $                                        | 0.11                       |                  |         | $       | 0.06    |         |         | $       | 0.22    |         |         | $       | 0.17    |        
|                                                                   |                                      |                                          |                            |                  |         |         |         |         |         |         |         |         |         |         |         |        
|Number of shares used in computing per share
    amounts  diluted |                                      |                                          | 427,939                    |                  |         |         | 418,719 |         |         |         | 424,275 |         |         |         | 420,289 |        
|                                                                   |                                      |                                          |                            |                  |         |         |         |         |         |         |         |         |         |         |         |        

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,                                                                                 
|                                                 |                                                                                       |                                                                                          
|                                                 |                                                                                       | 2003                                                                                      |                                             | 2002                                     
|                                                 |                                                                                       |                                                                                           |                                             |                                          
|                                                 |                                                                                       |                                                                                          
|                                                 |                                                                                       | (Unaudited)                                                                              
|                                                 |                                                                                       | (In thousands)                                                                           
|Cash flows from operating activities:            |                                                                                       |                                                                                           |                                             |                                           |         |         |          |         
|                                                 | Net income                                                                            |                                                                                           | $                                           | 91,265                                    |         |         | $        | 70,512   |        
|                                                 | Adjustments to reconcile net income to net cash
    provided by operating activities: |                                                                                           |                                             |                                           |         |         |          |          |        
|                                                 |                                                                                       | Depreciation and amortization                                                             |                                             |                                           | 50,049  |         |          |          | 52,046  |       
|                                                 |                                                                                       | Amortization of other intangibles                                                         |                                             |                                           | 30,441  |         |          |          | 36,032  |       
|                                                 |                                                                                       | Amortization of developed technology                                                      |                                             |                                           | 25,336  |         |          |          | 33,806  |       
|                                                 |                                                                                       | Amortization of original issue discount on
    convertible notes                          |                                             |                                           | 8,488   |         |          |          | 7,941   |       
|                                                 |                                                                                       | In-process research and development                                                       |                                             |                                           | 19,400  |         |          |          |        |       
|                                                 |                                                                                       | Provision for doubtful accounts                                                           |                                             |                                           | 1,500   |         |          |          | 2,031   |       
|                                                 |                                                                                       | Stock-based compensation                                                                  |                                             |                                           | 1,122   |         |          |          |        |       
|                                                 |                                                                                       | Tax benefits from stock plans                                                             |                                             |                                           | 11,065  |         |          |          | 19,593  |       
|                                                 |                                                                                       | Loss on strategic investments                                                             |                                             |                                           | 3,518   |         |          |          | 14,802  |       
|                                                 |                                                                                       | Gain on sale of assets                                                                    |                                             |                                           | (1,389  | )       |          |          | (62     | )     
|                                                 |                                                                                       | Deferred income taxes                                                                     |                                             |                                           | (22,149 | )       |          |          | (26,290 | )     
|                                                 |                                                                                       | Changes in operating assets and liabilities, net
    of effects of business acquisitions: |                                             |                                           |         |         |          |          |         |       
|                                                 |                                                                                       |                                                                                           | Accounts receivable                         |                                           |         | 44,860  |          |          |         | 37,168 |         
|                                                 |                                                                                       |                                                                                           | Other assets                                |                                           |         | 6,361   |          |          |         | 7,272  |         
|                                                 |                                                                                       |                                                                                           | Accounts payable                            |                                           |         | (464    | )        |          |         | 14,231 |         
|                                                 |                                                                                       |                                                                                           | Accrued compensation and benefits           |                                           |         | (10,960 | )        |          |         | (7,712 | )       
|                                                 |                                                                                       |                                                                                           | Accrued acquisition and restructuring costs |                                           |         | (8,560  | )        |          |         | (605   | )       
|                                                 |                                                                                       |                                                                                           | Other accrued liabilities                   |                                           |         | (1,417  | )        |          |         | 7,708  |         
|                                                 |                                                                                       |                                                                                           | Income taxes payable                        |                                           |         | 50,372  |          |          |         | 34,555 |         
|                                                 |                                                                                       |                                                                                           | Deferred revenue                            |                                           |         | 26,066  |          |          |         | 36,556 |         
|                                                 |                                                                                       |                                                                                           |                                             |                                           |         |         |          |         
|                                                 |                                                                                       |                                                                                           |                                             | Net cash provided by operating activities |         |         | 324,904  |          |         |        | 339,584  |  
|Cash flows from investing activities:            |                                                                                       |                                                                                           |                                             |                                           |         |         |          |         
|                                                 | Purchases of investments                                                              |                                                                                           |                                             | (930,935                                  | )       |         |          | (903,899 | )      
|                                                 | Sales and maturities of investments                                                   |                                                                                           |                                             | 1,159,792                                 |         |         |          | 768,756  |        
|                                                 | Purchases of property and equipment                                                   |                                                                                           |                                             | (36,044                                   | )       |         |          | (53,139  | )      
|                                                 | Business acquisitions, net of cash acquired                                           |                                                                                           |                                             | (333,829                                  | )       |         |          |         |        
|                                                 | Payments made for prior year business and
    technology acquisitions                 |                                                                                           |                                             | (4,122                                    | )       |         |          | (7,267   | )      
|                                                 |                                                                                       |                                                                                           |                                             |                                           |         |         |          |         
|                                                 |                                                                                       |                                                                                           |                                             | Net cash used in investing activities     |         |         | (145,138 | )        |         |        | (195,549 | )
|Cash flows from financing activities:            |                                                                                       |                                                                                           |                                             |                                           |         |         |          |         
|                                                 | Proceeds from issuance of common stock                                                |                                                                                           |                                             | 58,984                                    |         |         |          | 63,567   |        
|                                                 |                                                                                       |                                                                                           |                                             |                                           |         |         |          |         
|                                                 |                                                                                       |                                                                                           |                                             | Net cash provided by financing activities |         |         | 58,984   |          |         |        | 63,567   |  
|Effect of exchange rate changes                  |                                                                                       |                                                                                           | 14,206                                      |                                           |         |         | 974      |         
|                                                 |                                                                                       |                                                                                           |                                             |                                           |         |         |          |         
|                                                 | Net increase in cash and cash equivalents                                             |                                                                                           |                                             | 252,956                                   |         |         |          | 208,576  |        
|Cash and cash equivalents at beginning of period |                                                                                       |                                                                                           | 764,062                                     |                                           |         |         | 538,419  |         
|                                                 |                                                                                       |                                                                                           |                                             |                                           |         |         |          |         
|                                                 | Cash and cash equivalents at end of period                                            |                                                                                           | $                                           | 1,017,018                                 |         |         | $        | 746,995  |        
|                                                 |                                                                                       |                                                                                           |                                             |                                           |         |         |          |         
|Supplemental disclosures:                        |                                                                                       |                                                                                           |                                             |                                           |         |         |          |         
|                                                 | Cash paid for interest                                                                |                                                                                           | $                                           | 5,992                                     |         |         | $        | 5,992    |        
|                                                 |                                                                                       |                                                                                           |                                             |                                           |         |         |          |         
|                                                 | Cash paid for income taxes                                                            |                                                                                           | $                                           | 15,808                                    |         |         | $        | 6,661    |        
|                                                 |                                                                                       |                                                                                           |                                             |                                           |         |         |          |         
|Supplemental schedule of non-cash transactions:  |                                                                                       |                                                                                           |                                             |                                           |         |         |          |         
|                                                 | Business acquisition for short-term payable                                           |                                                                                           | $                                           | 64,496                                    |         |         | $        |         |        
|                                                 |                                                                                       |                                                                                           |                                             |                                           |         |         |          |         
|                                                 | Issuance of common stock for conversion of notes                                      |                                                                                           | $                                           |                                          |         |         | $        | 500      |        
|                                                 |                                                                                       |                                                                                           |                                             |                                           |         |         |          |         

See accompanying notes to condensed consolidated
financial statements.

4



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##### Table of Contents



VERITAS SOFTWARE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS

(Unaudited)


1.     Basis of
Presentation

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

2.     Use of
Estimates

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

3.     Comparative
Information

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

4.     Accounting for
Stock-Based Compensation

The Company accounts for employee stock-based
compensation in accordance with Accounting Principles Board
Opinion (APB) 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 such plans is generally equal to the market value on the
date of grant, no compensation cost has been recognized for
grants under its stock option plans and stock purchase plans. In
accordance with APB 25, the Company does not recognize
compensation cost related to its employee stock purchase plan.
The following table illustrates the effect on net income and
earnings 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(in thousands, except per share
amounts):

|                   |             |                                                                                  |   |                  |     |      |   |        |   |  |   |        |     |  |   |        |   | 
|------------------ | ----------- | -------------------------------------------------------------------------------- | - | ---------------- | --- | ---- | - | ------ | - |  | - | ------ | --- |  | - | ------ | - | 
|                   |             |                                                                                  |   |                 
|                   |             | Three Months Ended                                                               |   | Six Months Ended
|                   |             | June 30,                                                                         |   | June 30,        
|                   |             |                                                                                  |   |                 
|                   |             | 2003                                                                             |   | 2002             |     | 2003 |   | 2002  
|                   |             |                                                                                  |   |                  |     |      |   |       
|Net income (loss): |             |                                                                                  |   |                  |     |      |   |        |   |  |   |        |     |  |   |       
|                   | As reported |                                                                                  | $ | 48,739           |     |      | $ | 26,046 |   |  | $ | 91,265 |     |  | $ | 70,512 |  
|                   | Add:        |                                                                                  |   |                  |     |      |   |        |   |  |   |        |     |  |   |        |  
|                   |             | Stock-based employee compensation expense
    included in net income, net of tax |   |                  | 452 |      |   |        |  |  |   |        | 752 |  |   |        |  | 

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,        
|                                 |             |                                                                                                                                 |   |                 
|                                 |             | 2003                                                                                                                            |   | 2002             |        | 2003 |   | 2002   
|                                 |             |                                                                                                                                 |   |                  |        |      |   |        
|                                 | Less:       |                                                                                                                                 |   |                  |        |      |   |         |        |  |   |         |         |  |   |         |        
|                                 |             | Total stock-based employee compensation expense
    determined under the fair value based method for all awards, net
    of tax |   |                  | 76,964 |      |   |         | 70,893 |  |   |         | 152,800 |  |   |         | 142,815 | 
|                                 |             |                                                                                                                                 |   |                  |        |      |   |         |        |  |   |         |         |  |   |        
|                                 | Pro forma   |                                                                                                                                 | $ | (27,773          | )      |      | $ | (44,847 | )      |  | $ | (60,783 | )       |  | $ | (72,303 | )      
|                                 |             |                                                                                                                                 |   |                  |        |      |   |         |        |  |   |         |         |  |   |        
|Basic income (loss) per share:   |             |                                                                                                                                 |   |                  |        |      |   |         |        |  |   |         |         |  |   |        
|                                 | As reported |                                                                                                                                 | $ | 0.12             |        |      | $ | 0.06    |        |  | $ | 0.22    |         |  | $ | 0.17    |        
|                                 |             |                                                                                                                                 |   |                  |        |      |   |         |        |  |   |         |         |  |   |        
|                                 | Pro forma   |                                                                                                                                 | $ | (0.07            | )      |      | $ | (0.11   | )      |  | $ | (0.15   | )       |  | $ | (0.18   | )      
|                                 |             |                                                                                                                                 |   |                  |        |      |   |         |        |  |   |         |         |  |   |        
|Diluted income (loss) per share: |             |                                                                                                                                 |   |                  |        |      |   |         |        |  |   |         |         |  |   |        
|                                 | As reported |                                                                                                                                 | $ | 0.11             |        |      | $ | 0.06    |        |  | $ | 0.22    |         |  | $ | 0.17    |        
|                                 |             |                                                                                                                                 |   |                  |        |      |   |         |        |  |   |         |         |  |   |        
|                                 | Pro forma   |                                                                                                                                 | $ | (0.07            | )      |      | $ | (0.11   | )      |  | $ | (0.15   | )       |  | $ | (0.18   | )      
|                                 |             |                                                                                                                                 |   |                  |        |      |   |         |        |  |   |         |         |  |   |        

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
during the three and six months ended June 30, 2003 and
2002: risk-free interest rates averaging 2.57% and 2.74% for the
three and six months ended June 30, 2003, respectively, and
4.44% and 4.45% for the three and six months ended June 30,
2002, respectively; a dividend yield of 0.0% for all periods; a
weighted-average expected life of 5 years for all periods;
and a volatility factor of the expected market price of the
Companys common stock of 0.90 for all periods.

The fair value of the employees purchase
rights under the employee purchase plan is estimated on the date
of grant using the Black-Scholes option-pricing model with the
following assumptions for these rights granted during the three
and six months ended June 30, 2003 and 2002: a dividend
yield of 0.0% for all periods; an expected life ranging from 6
to 24 months for all periods; an expected volatility factor
of 0.90 for all periods; and risk-free interest rates ranging
from 1.20% to 1.66% and 1.87% to 2.98% for the six months ended
June 30, 2003 and June 30, 2002, respectively.

5.     New Accounting
Pronouncements

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

In April 2003, the FASB issued SFAS No. 149,
Amendment of Statement 133 on Derivative Instruments and
Hedging Activities, which amends and clarifies financial
accounting and reporting for derivative instruments, including
certain derivative instruments embedded in other contracts and
for hedging activities under SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities. In
particular, SFAS No. 149 (1) clarifies under what
circumstances a contract with an initial net investment meets
the characteristic of a derivative, (2) clarifies when a
derivative contains a financing component, (3) amends the
definition of an underlying to conform it to language used in
FASB Interpretation No. FIN 45,
Guarantors

6



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##### Table of Contents



VERITAS SOFTWARE CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others, and (4) amends certain
other existing pronouncements. SFAS No. 149 is effective
for contracts entered into or modified after June 30, 2003
and for hedging relationships designated after June 30,
2003, except for those paragraphs related to guidance in SFAS
No. 133 implementation issues that have been cleared by the
FASB and have been effective for fiscal quarters that began
prior to June 15, 2003. Those paragraphs should continue to
be applied in accordance with their respective effective dates.
The Company does not expect the adoption of SFAS No. 149 to
have a material effect on the Companys financial position,
results of operations or cash flows.

In January 2003, the FASB issued FIN 46,
Consolidation of Variable Interest Entities, which
addresses the consolidation of variable interest entities.
FIN 46 provides guidance for determining when an entity
that is the primary beneficiary of a variable interest entity or
equivalent structure should consolidate the variable interest
entity into the entitys financial statements. The
provisions of FIN 46 are to be applied as of the beginning
of the first interim or annual reporting period beginning after
June 15, 2003 for variable interest entities created before
February 1, 2003 and still existing on June 15, 2003.
The Company currently has three build-to-suit operating leases,
commonly referred to as synthetic leases, which were entered
into prior to February 1, 2003. Each synthetic lease is
owned by a trust that has no voting rights, no employees, no
financing activity other than the lease with the Company, no
ability to absorb losses and no right to participate in gains
realized on the sale of the related property. The Company has
determined that the trusts under the leasing structures qualify
as variable interest entities for purposes of FIN 46.
Consequently, the Company is considered the primary beneficiary
and will consolidate the trusts into the Companys
financial statements beginning July 1, 2003. As a result of
consolidating these entities in the third quarter of 2003, the
Company expects to report a cumulative effect of change in
accounting principle in accordance with APB 20, Accounting
Changes, with a charge of $6.2 million which equals the
amount of depreciation expense that would have been recorded had
these trusts been consolidated from the date the properties were
available for occupancy, net of tax. In addition, on
July 1, 2003, the Company will record property and
equipment, net of accumulated depreciation, equal to
$369.1 million, long-term debt in the amount of
$369.2 million and noncontrolling interest of
$11.4 million on the balance sheet. Future depreciation
expense related to these properties will be approximately
$1.6 million per quarter and $4.1 million per quarter
of rent expense previously classified as operating expense will
be classified as interest expense in the statements of
operations beginning July 1, 2003.

In November 2002, the FASB issued FIN 45,
Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others. FIN 45 requires that the Company recognize the fair
value for guarantee and indemnification arrangements issued or
modified by the Company after December 31, 2002, if these
arrangements are within the scope of the Interpretation. In
addition, the Company must continue to monitor the conditions
that are subject to the guarantees and indemnifications, as
required under previously existing generally accepted accounting
principles, in order to identify if a loss has occurred. If the
Company determines it is probable that a loss has occurred, then
any such estimable loss would be recognized under those
guarantees and indemnifications. Some of the software licenses
granted by the Company contain provisions that indemnify
licensees of the Companys software from damages and costs
resulting from claims alleging that the Companys software
infringes the intellectual property rights of a third party. The
Company has historically received only a limited number of
requests for indemnification under these provisions and has not
been required to make material payments pursuant to these
provisions. Accordingly, the Company has not recorded a
liability related to these indemnification provisions. The
Company does not have any guarantees or indemnification
arrangements other than the indemnification clause in some of
its software licenses, the guarantee on a credit facility
discussed in Note 14 and the guarantee on its three
build-to-suit lease agreements for buildings in Mountain View,
Roseville and Milpitas discussed in Note 15. The Company
adopted FIN 45 effective January 1, 2003. The adoption
of FIN 45 did not have a material impact on the
Companys financial position, results of operations or cash
flows.

7



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##### Table of Contents



VERITAS SOFTWARE CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

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

6.     Net Income per
Share

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

|                             |                                                                                      |                                              |      |                  |         |      |      |         |         |   |      |         |         |   |      |         |         | 
|---------------------------- | ------------------------------------------------------------------------------------ | -------------------------------------------- | ---- | ---------------- | ------- | ---- | ---- | ------- | ------- | - | ---- | ------- | ------- | - | ---- | ------- | ------- | 
|                             |                                                                                      |                                              |      |                 
|                             |                                                                                      | Three Months Ended                           |      | Six Months Ended
|                             |                                                                                      | June 30,                                     |      | June 30,        
|                             |                                                                                      |                                              |      |                 
|                             |                                                                                      | 2003                                         |      | 2002             |         | 2003 |      | 2002   
|                             |                                                                                      |                                              |      |                  |         |      |      |        
|Numerator:                   |                                                                                      |                                              |      |                  |         |      |      |         |         |   |      |         |         |   |      |        
|                             | Net income                                                                           |                                              | $    | 48,739           |         |      | $    | 26,046  |         |   | $    | 91,265  |         |   | $    | 70,512  |        
|                             |                                                                                      |                                              |      |                  |         |      |      |         |         |   |      |         |         |   |      |        
|Denominator:                 |                                                                                      |                                              |      |                  |         |      |      |         |         |   |      |         |         |   |      |        
|                             | Denominator for basic net income per
    share  weighted-average shares outstanding |                                              |      | 415,621          |         |      |      | 409,465 |         |   |      | 414,270 |         |   |      | 407,776 |        
|                             | Potential common shares                                                              |                                              |      | 12,318           |         |      |      | 9,254   |         |   |      | 10,005  |         |   |      | 12,513  |        
|                             |                                                                                      |                                              |      |                  |         |      |      |         |         |   |      |         |         |   |      |        
|                             |                                                                                      | Denominator for diluted net income per share |      |                  | 427,939 |      |      |         | 418,719 |   |      |         | 424,275 |   |      |         | 420,289 | 
|                             |                                                                                      |                                              |      |                  |         |      |      |         |         |   |      |         |         |   |      |        
|Basic net income per share   |                                                                                      | $                                            | 0.12 |                  |         | $    | 0.06 |         |         | $ | 0.22 |         |         | $ | 0.17 |        
|                             |                                                                                      |                                              |      |                  |         |      |      |         |         |   |      |         |         |   |      |        
|Diluted net income per share |                                                                                      | $                                            | 0.11 |                  |         | $    | 0.06 |         |         | $ | 0.22 |         |         | $ | 0.17 |        
|                             |                                                                                      |                                              |      |                  |         |      |      |         |         |   |      |         |         |   |      |        

For the three and six months ended June 30,
2003 and 2002, potential common shares consist of employee stock
options using the treasury method. The following table sets
forth the potential common shares

8



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VERITAS SOFTWARE CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

|                                         |  |                    |        |                  |  |      |        |      |  |  |        |  |  |  |        | 
|---------------------------------------- |  | ------------------ | ------ | ---------------- |  | ---- | ------ | ---- |  |  | ------ |  |  |  | ------ | 
|                                         |  |                    |        |                 
|                                         |  | Three Months Ended |        | Six Months Ended
|                                         |  | June 30,           |        | June 30,        
|                                         |  |                    |        |                 
|                                         |  | 2003               |        | 2002             |  | 2003 |        | 2002
|                                         |  |                    |        |                  |  |      |        |     
|Employee stock options outstanding(1)    |  |                    | 34,572 |                  |  |      | 36,684 |      |  |  | 38,363 |  |  |  | 28,018 | 
|5.25% convertible subordinated notes(2)  |  |                    | 6,695  |                  |  |      | 6,695  |      |  |  | 6,695  |  |  |  | 6,695  | 
|1.856% convertible subordinated notes(2) |  |                    | 12,981 |                  |  |      | 12,981 |      |  |  | 12,981 |  |  |  | 12,981 | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | For the three months ended June 30, 2003 and
    2002, 34,572 and 36,684 employee stock options, respectively,
    and for the six months ended June 30, 2003 and 2002, 38,363
    and 28,018 employee stock options, respectively, were excluded
    from the computation of diluted net income per share because the
    exercise price of these options was greater than the average
    market price of the Companys common stock during the
    respective periods, and therefore the effect is antidilutive.                                          
|   
|(2) | For the three and six months ended June 30,
    2003 and 2002, 6,695 potential common shares related to the
    Companys 5.25% convertible subordinated notes and 12,981
    potential common shares related to the Companys 1.856%
    convertible subordinated notes, respectively, were excluded from
    the computation of diluted net income per share because the
    impact of adding back after tax interest expense associated with
    the convertible subordinated notes, and including the potential
    common shares, would be antidilutive.

The weighted average exercise prices of the
employee stock options with exercise prices exceeding the
average fair value of the Companys common stock was $61.92
and $58.45 per share for the three and six months ended
June 30, 2003, respectively. The weighted average exercise
prices of the employee stock options with exercise prices
exceeding the average fair value of the Companys common
stock was $65.06 and $99.27 per share for the three and six
months ended June 30, 2002, respectively.

7.     Business
Combinations



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

On June 30, 2003, in connection with the
Agreement and Plan of Merger and Amendment No. 1 to
Agreement and Plan of Merger, 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 $701.0 million, which
included 7.3 million shares of common stock valued at
$210.6 million, $397.8 million of cash of which $333.3
was paid on June 30, 2003 and $64.5 million was paid
in July 2003 and has been recorded as merger consideration
payable in the balance sheet, $79.5 million relating to the
assumption of Precise options exercisable for 4.4 million
shares of the Companys common stock and $13.1 million
of acquisition-related costs. The fair value of the
Companys common stock issued was determined using an
average price of $28.68, which was the average trading price
from June 25, 2003 through July 1, 2003, the five
trading days surrounding the date the merger consideration was
finalized. The fair value of the Companys stock options
assumed was determined using the Black-Scholes option pricing
model and the following assumptions: estimated contractual life
of 6 months to 5 years, risk-free interest rate of
0.96% to 2.49%, expected volatility of 90% and no expected
dividend yield. The fair value of stock options assumed is net
of $14.5 million which represents the portion of the
intrinsic value of Precises unvested options applicable to
the remaining vesting period. Upon the assumption by the Company
of the outstanding Precise options, each Precise option became
exercisable for 0.6741 shares of the Companys common
stock.

Under the purchase method of accounting, the
total estimated purchase price was allocated to Precises
net tangible and identifiable intangible assets based upon their
estimated fair value as of the date of the

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VERITAS SOFTWARE CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

completion of the acquisition. Based upon an
independent valuation prepared by Standard & Poors
Corporate Value Consulting, the following represents the
preliminary allocation of the aggregate purchase price to the
acquired net assets of Precise (in thousands):

|                                                  |       |   |         |         | 
|------------------------------------------------- | ----- | - | ------- | ------- | 
|Cash, cash equivalents and short-term investments |       | $ | 149,627 |        
|Other current assets                              |       |   | 11,527  |        
|Long-term assets                                  |       |   | 8,629   |        
|Current liabilities                               |       |   | (29,103 | )      
|Goodwill                                          |       |   | 493,220 |        
|Developed technology                              |       |   | 26,600  |        
|Customer contracts                                |       |   | 15,200  |        
|Patented technology                               |       |   | 11,600  |        
|Other intangible assets                           |       |   | 7,500   |        
|Unearned stock-based compensation                 |       |   | 14,475  |        
|In-process research and development               |       |   | 15,300  |        
|Net deferred and other income taxes payable       |       |   | (23,592 | )      
|                                                  |       |   |         |        
|                                                  | Total |   | $       | 700,983 | 
|                                                  |       |   |         |        

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

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

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

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

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

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##### Table of Contents



VERITAS SOFTWARE CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

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

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

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

Acquisition-related costs of $13.1 million
consist of $9.2 million associated with legal and other
professional fees, $3.3 million for terminating and
satisfying existing lease commitments and $0.6 million for
severance-related costs. Total cash outlays for
acquisition-related costs were approximately $2.0 million
for legal and other professional fees and no amounts for leases
or severance through June 30, 2003.

The results of operations of Precise are included
in the Companys consolidated financial statements from the
date of acquisition. The following table presents pro forma
results of operations and gives effect to the acquisition of
Precise as if the acquisition was consummated on January 1,
2002. The unaudited pro forma results of operations are not
necessarily indicative of what would have occurred had the
acquisition been made as of the beginning of each period or of
the results that may occur in the future. Net income for each
period presented excludes the write-off of acquired in-process
research and development of $15.3 million and includes
amortization of intangible assets related to the acquisition of
$4.7 million per quarter and amortization of deferred
compensation of $1.7 million per quarter. The unaudited pro
forma information is as follows (in thousands, except per share
amounts):

|                               |  |                    |         |                  |  |      |         |      |  |   |         |  |  |   |         | 
|------------------------------ |  | ------------------ | ------- | ---------------- |  | ---- | ------- | ---- |  | - | ------- |  |  | - | ------- | 
|                               |  |                    |         |                 
|                               |  | Three Months Ended |         | Six Months Ended
|                               |  | June 30,           |         | June 30,        
|                               |  |                    |         |                 
|                               |  | 2003               |         | 2002             |  | 2003 |         | 2002
|                               |  |                    |         |                  |  |      |         |     
|Total net revenue              |  | $                  | 422,543 |                  |  | $    | 382,910 |      |  | $ | 839,084 |  |  | $ | 770,453 | 
|Net income                     |  |                    | 35,903  |                  |  |      | 23,268  |      |  |   | 75,858  |  |  |   | 64,769  | 
|Net income per share  basic   |  |                    | 0.09    |                  |  |      | 0.06    |      |  |   | 0.18    |  |  |   | 0.16    | 
|Net income per share  diluted |  |                    | 0.08    |                  |  |      | 0.05    |      |  |   | 0.17    |  |  |   | 0.15    | 



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

On January 27, 2003, the Company acquired
all of the outstanding capital stock of Jareva Technologies,
Inc. (Jareva), a privately held provider of
automated server provisioning products that enable businesses to
automatically deploy additional servers without manual
intervention. The Company acquired Jareva to integrate
Jarevas technology into the Companys software
products to enable the Companys customers to optimize
their investments in server hardware by deploying new server
resources on demand. The Jareva acquisition was accounted for
using the purchase accounting method for total purchase
consideration of $63.3 million, which included
$58.7 million of cash, $1.4 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,
based on an independent valuation prepared by
Standard & Poors

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VERITAS SOFTWARE CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Corporate Value Consulting, to goodwill of
$43.3 million, developed technology of $9.1 million,
other intangibles of $1.9 million, in-process research and
development of $4.1 million, net deferred tax liabilities
of $4.3 million, deferred stock-based compensation of
$5.4 million and net tangible assets of $3.8 million.
The weighted average amortization period for all purchased
intangible assets is 3.3 years. For the three and six
months ended June 30, 2003, the Company recorded
amortization of developed technology of $0.5 million and
$0.8 million, respectively, amortization of other
intangibles of $0.3 million and $0.5 million,
respectively, and, included in research and development expense,
stock-based compensation expense of $0.7 million and
$1.1 million, respectively. The acquired in-process
research and development of $4.1 million was written off
and the related charge is included in income from operations for
the six months ended June 30, 2003. Acquisition-related
costs consist of $2.7 million associated with terminating
and satisfying remaining lease commitments, partially offset by
sublease income net of related sublease costs and direct
transaction costs of $0.5 million for legal and other
professional fees. Total cash outlays for acquisition-related
costs were $0.7 million through June 30, 2003. The
results of operations of Jareva are included in the
Companys consolidated financial statements from the date
of acquisition. The pro forma impact on the Companys
results of operations for the three and six months ended
June 30, 2003 and 2002 was not significant.

8.     Goodwill and
Other Intangible Assets

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

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

|          |                          |                                 |   |              |           |  |   |           |           | 
|--------- | ------------------------ | ------------------------------- | - | ------------ | --------- |  | - | --------- | --------- | 
|          |                          | June 30,                        |   | December 31,
|          |                          | 2003                            |   | 2002        
|          |                          |                                 |   |             
|Goodwill: |                          |                                 |   |              |           |  |   |          
|          | Gross carrying amount    |                                 | $ | 3,821,984    |           |  | $ | 3,285,455 |          
|          | Accumulated amortization |                                 |   | 2,088,862    |           |  |   | 2,088,862 |          
|          |                          |                                 |   |              |           |  |   |          
|          |                          | Net carrying amount of goodwill |   | $            | 1,733,122 |  |   | $         | 1,196,593 | 
|          |                          |                                 |   |              |           |  |   |          

As of June 30, 2003, goodwill includes
$493.2 million related to the acquisition of Precise on
June 30, 2003 and $43.3 million related to the
acquisition of Jareva on January 27, 2003.

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

|                                              |                                              |                                |         |              |         |              |         |         |         |   |        |        |        | 
|--------------------------------------------- | -------------------------------------------- | ------------------------------ | ------- | ------------ | ------- | ------------ | ------- | ------- | ------- | - | ------ | ------ | ------ | 
|                                              |                                              |                               
|                                              |                                              | June 30, 2003                 
|                                              |                                              |                               
|                                              |                                              | Gross                          |         |             
|                                              |                                              | Carrying                       |         | Accumulated  |         | Net Carrying
|                                              |                                              | Amount                         |         | Amortization |         | Amount      
|                                              |                                              |                                |         |              |         |             
|Developed technology                          |                                              | $                              | 271,208 |              |         | $            | 226,024 |         |         | $ | 45,184 |       
|Distribution channels                         |                                              |                                | 234,800 |              |         |              | 234,800 |         |         |   |       |       
|Trademarks                                    |                                              |                                | 26,650  |              |         |              | 24,350  |         |         |   | 2,300  |       
|Other intangible assets                       |                                              |                                | 65,334  |              |         |              | 29,488  |         |         |   | 35,846 |       
|                                              |                                              |                                |         |              |         |              |         |         |         |   |        |       
|                                              | Intangibles related to business acquisitions |                                |         | 597,992      |         |              |         | 514,662 |         |   |        | 83,330 |       
|Convertible subordinated notes issuance costs |                                              |                                | 14,506  |              |         |              | 9,013   |         |         |   | 5,493  |       
|                                              |                                              |                                |         |              |         |              |         |         |         |   |        |       
|                                              |                                              | Total other intangibles assets |         | $            | 612,498 |              |         | $       | 523,675 |   |        | $      | 88,823 | 
|                                              |                                              |                                |         |              |         |              |         |         |         |   |        |       

12



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##### Table of Contents



VERITAS SOFTWARE CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                              |                                              |                                |         |              |         |              |         |         |         |   |        |        |        | 
|--------------------------------------------- | -------------------------------------------- | ------------------------------ | ------- | ------------ | ------- | ------------ | ------- | ------- | ------- | - | ------ | ------ | ------ | 
|                                              |                                              |                               
|                                              |                                              | December 31, 2002             
|                                              |                                              |                               
|                                              |                                              | Gross                          |         |             
|                                              |                                              | Carrying                       |         | Accumulated  |         | Net Carrying
|                                              |                                              | Amount                         |         | Amortization |         | Amount      
|                                              |                                              |                                |         |              |         |             
|Developed technology                          |                                              | $                              | 235,508 |              |         | $            | 200,140 |         |         | $ | 35,368 |       
|Distribution channels                         |                                              |                                | 234,800 |              |         |              | 210,342 |         |         |   | 24,458 |       
|Trademarks                                    |                                              |                                | 24,350  |              |         |              | 21,813  |         |         |   | 2,537  |       
|Other intangible assets                       |                                              |                                | 29,520  |              |         |              | 25,737  |         |         |   | 3,783  |       
|                                              |                                              |                                |         |              |         |              |         |         |         |   |        |       
|                                              | Intangibles related to business acquisitions |                                |         | 524,178      |         |              |         | 458,032 |         |   |        | 66,146 |       
|Convertible subordinated notes issuance costs |                                              |                                | 14,506  |              |         |              | 8,058   |         |         |   | 6,448  |       
|                                              |                                              |                                |         |              |         |              |         |         |         |   |        |       
|                                              |                                              | Total other intangibles assets |         | $            | 538,684 |              |         | $       | 466,090 |   |        | $      | 72,594 | 
|                                              |                                              |                                |         |              |         |              |         |         |         |   |        |       

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

|                        |                    |                    |        |                  |  |      |        |        |  |   |        |        |  |   |        |        | 
|----------------------- | ------------------ | ------------------ | ------ | ---------------- |  | ---- | ------ | ------ |  | - | ------ | ------ |  | - | ------ | ------ | 
|                        |                    |                    |        |                 
|                        |                    | Three Months Ended |        | Six Months Ended
|                        |                    | June 30,           |        | June 30,        
|                        |                    |                    |        |                 
|                        |                    | 2003               |        | 2002             |  | 2003 |        | 2002  
|                        |                    |                    |        |                  |  |      |        |       
|Developed technology    |                    | $                  | 10,887 |                  |  | $    | 16,903 |        |  | $ | 25,985 |        |  | $ | 33,806 |       
|Distribution channels   |                    |                    | 9,783  |                  |  |      | 14,675 |        |  |   | 24,458 |        |  |   | 29,350 |       
|Trademarks              |                    |                    | 1,015  |                  |  |      | 1,522  |        |  |   | 2,537  |        |  |   | 3,045  |       
|Other intangible assets |                    |                    | 1,612  |                  |  |      | 1,919  |        |  |   | 3,668  |        |  |   | 3,737  |       
|                        |                    |                    |        |                  |  |      |        |        |  |   |        |        |  |   |        |       
|                        | Total amortization |                    | $      | 23,297           |  |      | $      | 35,019 |  |   | $      | 56,648 |  |   | $      | 69,938 | 
|                        |                    |                    |        |                  |  |      |        |        |  |   |        |        |  |   |        |       

For the three and six months ended June 30,
2003, total amortization expense for developed technology and
other intangibles includes $0.5 million and
$0.9 million, respectively, that is included in cost of
user license fees. For the three and six months ended
June 30, 2002, the total amortization expense for developed
technology and other intangibles includes $0.1 million and
$0.1 million, respectively, that is included in cost of
user license fees.

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

|     |       |              |        |        | 
|---- | ----- | ------------ | ------ | ------ | 
|     |       | Future      
|Year |       | Amortization
|     |       |             
|2003 |       | $            | 14,487 |       
|2004 |       |              | 22,263 |       
|2005 |       |              | 19,582 |       
|2006 |       |              | 17,954 |       
|2007 |       |              | 8,873  |       
|2008 |       |              | 171    |       
|     |       |              |        |       
|     | Total |              | $      | 83,330 | 
|     |       |              |        |       

9.     Strategic
Investments

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

13



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VERITAS SOFTWARE CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

10.     Facility
Restructure Reserve

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

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

The Company began vacating facilities during the
fourth quarter of 2002 and expects to vacate all excess
facilities associated with this restructuring by
December 31, 2003. The Company anticipates that it will
realize cost savings beginning in the third quarter of 2003. The
Company is in the process of seeking suitable subtenants for
these facilities. The Companys estimates of the facility
restructure charge may vary significantly, depending in part, on
factors that are beyond the Companys control, including
the commercial real estate market in the applicable metropolitan
areas, the Companys ability to obtain subleases related to
these facilities and the time period to do so, the sublease
rental market rates and the outcome of negotiations with lessors
regarding terminations of some of the leases. Adjustments to the
facility restructure reserve will be made if actual lease exit
costs or sublease income differ from amounts currently expected.
As a portion of the facilities restructure reserve relates to
international locations, the reserve will be affected by
exchange rate fluctuations. The impact of exchange rate
fluctuations is recorded in accumulated other comprehensive
income (loss) on the balance sheet.

14



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##### Table of Contents



VERITAS SOFTWARE CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The portion of the reserve expected to be
utilized through June 30, 2004 of $25.0 million has
been classified in the current portion of accrued acquisition
and restructuring charges. The portion of the reserve expected
to be utilized in periods subsequent to June 30, 2004 of
$66.4 million has been classified in the non-current
portion of accrued acquisition and restructuring charges. The
components of the restructuring reserve and movements within
these components through June 30, 2003 were as follows (in
millions):

|                         |                              |             |      |            |  |       |      |      |  |   |      |      | 
|------------------------ | ---------------------------- | ----------- | ---- | ---------- |  | ----- | ---- | ---- |  | - | ---- | ---- | 
|                         |                              | Net Rent    |      | Asset      |  |      
|                         |                              | Commitments |      | Write-Offs |  | Total
|                         |                              |             |      |            |  |      
|Provision accrued        |                              | $           | 86.9 |            |  | $     | 11.3 |      |  | $ | 98.2 |     
|Cash payments            |                              |             | (0.2 | )          |  |       |     |      |  |   | (0.2 | )   
|Impact of exchange rates |                              |             | 0.6  |            |  |       | 0.1  |      |  |   | 0.7  |     
|                         |                              |             |      |            |  |       |      |      |  |   |      |     
|                         | Balance at December 31, 2002 |             |      | 87.3       |  |       |      | 11.4 |  |   |      | 98.7 | 
|Cash payments            |                              |             | (2.7 | )          |  |       |     |      |  |   | (2.7 | )   
|Adjustment               |                              |             | 0.8  |            |  |       | (0.8 | )    |  |   |     |     
|Impact of exchange rates |                              |             | (0.4 | )          |  |       | (0.1 | )    |  |   | (0.5 | )   
|                         |                              |             |      |            |  |       |      |      |  |   |      |     
|                         | Balance at March 31, 2003.   |             |      | 85.0       |  |       |      | 10.5 |  |   |      | 95.5 | 
|Cash payments            |                              |             | (2.3 | )          |  |       |     |      |  |   | (2.3 | )   
|Asset write-offs         |                              |             |     |            |  |       | (3.6 | )    |  |   | (3.6 | )   
|Impact of exchange rates |                              |             | 1.5  |            |  |       | 0.3  |      |  |   | 1.8  |     
|                         |                              |             |      |            |  |       |      |      |  |   |      |     
|                         | Balance at June 30, 2003.    |             | $    | 84.2       |  |       | $    | 7.2  |  |   | $    | 91.4 | 
|                         |                              |             |      |            |  |       |      |      |  |   |      |     

11.     Comprehensive
Income

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

|                                        |                                                 |                      |        |                  |        |      |        |        |        |   |        |         |        |   |        |        |        | 
|--------------------------------------- | ----------------------------------------------- | -------------------- | ------ | ---------------- | ------ | ---- | ------ | ------ | ------ | - | ------ | ------- | ------ | - | ------ | ------ | ------ | 
|                                        |                                                 |                      |        |                 
|                                        |                                                 | Three Months Ended   |        | Six Months Ended
|                                        |                                                 | June 30,             |        | June 30,        
|                                        |                                                 |                      |        |                 
|                                        |                                                 | 2003                 |        | 2002             |        | 2003 |        | 2002  
|                                        |                                                 |                      |        |                  |        |      |        |       
|Net income                              |                                                 | $                    | 48,739 |                  |        | $    | 26,046 |        |        | $ | 91,265 |         |        | $ | 70,512 |       
|Other comprehensive income, net of tax: |                                                 |                      |        |                  |        |      |        |        |        |   |        |         |        |   |        |       
|                                        | Foreign currency translation adjustments        |                      |        | (10,568          | )      |      |        | (4,780 | )      |   |        | (14,612 | )      |   |        | (5,513 | )     
|                                        | Derivative financial instrument adjustments     |                      |        | (255             | )      |      |        | 6,031  |        |   |        | 406     |        |   |        | 4,540  |       
|                                        | Unrealized (gain) loss on marketable securities |                      |        | (82              | )      |      |        | (1,598 | )      |   |        | 114     |        |   |        | 4,292  |       
|                                        |                                                 |                      |        |                  |        |      |        |        |        |   |        |         |        |   |        |       
|                                        |                                                 | Comprehensive income |        | $                | 37,834 |      |        | $      | 25,699 |   |        | $       | 77,173 |   |        | $      | 73,831 | 
|                                        |                                                 |                      |        |                  |        |      |        |        |        |   |        |         |        |   |        |       

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

|                                            |                                               |          |         |              |  |   |        |        |  
|------------------------------------------- | --------------------------------------------- | -------- | ------- | ------------ |  | - | ------ | ------ | -
|                                            |                                               | June 30, |         | December 31,
|                                            |                                               | 2003     |         | 2002        
|                                            |                                               |          |         |             
|Foreign currency translation adjustments    |                                               | $        | 17,625  |              |  | $ | 3,013  |       
|Derivative financial instrument adjustments |                                               |          | (10,211 | )            |  |   | (9,806 | )     
|Unrealized gain on marketable securities    |                                               |          | 3,209   |              |  |   | 3,324  |       
|                                            |                                               |          |         |              |  |   |        |       
|                                            | Accumulated other comprehensive income (loss) |          | $       | 10,623       |  |   | $      | (3,469 | )
|                                            |                                               |          |         |              |  |   |        |       

15



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VERITAS SOFTWARE CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

12.     Derivative
Financial Instruments

In September 2000, the Company entered into a
three-year cross currency interest rate swap transaction, or
swap, for the purpose of hedging fixed interest rate, foreign
currency denominated cash flows under an inter-company loan
receivable. Under the terms of this derivative financial
instrument, Euro denominated fixed principal and interest
payments to be received under the inter-company loan will be
swapped for U.S. dollar-fixed principal and interest
payments. As of June 30, 2003, three monthly payments of
 4.3 million
remained to be swapped at a forward exchange rate of 0.89070
U.S. dollar per Euro. The fair market value of the swap at
June 30, 2003 was $(10.0) million. As a result of
entering into the swap, the Company has mitigated its exposure
to foreign currency exchange rate fluctuations. The gains or
losses on the foreign currency loan receivable will be offset by
the gains or losses on the swap. Because the Company is
receiving fixed interest payments under the swap, it is still
subject to fluctuations in value due to changes in
U.S. dollar interest rates. As of June 30, 2003, the
impact of these fluctuations was not significant. This hedge was
deemed to be highly effective as of June 30, 2003.

In January 2002, the Company entered into two
three-year pay fixed, receive floating, interest rate swaps for
the purpose of hedging cash flows on variable interest rate debt
of its build-to-suit lease agreements. Under the terms of these
interest rate swaps, the Company makes payments based on the
fixed rate and will receive interest payments based on the
3-month London Inter Bank Offered Rate (LIBOR). The
Companys payments on its build-to-suit lease agreements
are based upon a 3-month LIBOR plus a credit spread. If the
Companys credit spread remains consistent and other
critical terms of the interest rate swap or the hedged item do
not change, the interest rate swap will be considered to be
highly effective with all changes in the fair value included in
other comprehensive income. If the Companys credit spread
changes or other critical terms of the interest rate swap or the
hedged item change, the hedge may become partially or fully
ineffective, which could result in all or a portion of the
changes in fair value of the derivative recorded in the
statement of operations. The interest rate swaps settle the
first day of January, April, July and October until expiration.
As of June 30, 2003, the fair value of the interest rate
swaps were $(10.8) million. As a result of entering into
the interest rate swaps, the Company has mitigated its exposure
to variable cash flows associated with interest rate
fluctuations. Because the rental payments on the leases are
based on the 3-month LIBOR and the Company receives 3-month
LIBOR from the interest rate swap counter-party, the Company has
eliminated any impact to raising interest rates related to its
rent payments under the build-to-suit lease agreements.

As of June 30, 2003, the total gross
notional amount of the Companys forward contracts was
approximately $153.3 million, all hedging intercompany
accounts of certain of its international subsidiaries. The
forward contracts had a term of thirty-five days or less and
settled on July 31, 2003. All foreign currency transactions
and all outstanding forward contracts are marked-to-market at
the end of the period with unrealized gains and losses included
in other income. The unrealized gain (loss) on the
outstanding forward contracts at June 30, 2003 was
immaterial to the Companys consolidated financial
statements.

13.     Segment
Information

The Company operates in one segment, storage
software solutions. The Companys products and services are
sold throughout the world, through original equipment
manufacturers, direct sales channels and indirect sales
channels. The Companys chief operating decision maker, the
chief executive officer, evaluates the performance of the
Company based upon stand-alone revenue of product channels and
the geographic regions of the segment and does not use discrete
financial information about asset allocation, expense allocation
or profitability from the Companys storage software
products or services.

16



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VERITAS SOFTWARE CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



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

|                      |               |                         |                   |                  |         |         |   |         |         |         |   |         |         |         |   |         |         |         | 
|--------------------- | ------------- | ----------------------- | ----------------- | ---------------- | ------- | ------- | - | ------- | ------- | ------- | - | ------- | ------- | ------- | - | ------- | ------- | ------- | 
|                      |               |                         |                   |                 
|                      |               | Three Months Ended      |                   | Six Months Ended
|                      |               | June 30,                |                   | June 30,        
|                      |               |                         |                   |                 
|                      |               | 2003                    |                   | 2002             |         | 2003    |   | 2002   
|                      |               |                         |                   |                  |         |         |   |        
|User license fees(1): |               |                         |                   |                  |         |         |   |         |         |         |   |         |         |         |   |        
|                      | United States |                         | $                 | 159,205          |         |         | $ | 161,072 |         |         | $ | 323,456 |         |         | $ | 329,461 |        
|                      | Europe(2)     |                         |                   | 69,406           |         |         |   | 52,167  |         |         |   | 128,390 |         |         |   | 112,403 |        
|                      | Other(3)      |                         |                   | 32,351           |         |         |   | 28,637  |         |         |   | 63,680  |         |         |   | 59,723  |        
|                      |               |                         |                   |                  |         |         |   |         |         |         |   |         |         |         |   |        
|                      |               | Total user license fees |                   |                  | 260,962 |         |   |         | 241,876 |         |   |         | 515,526 |         |   |         | 501,587 |        
|                      |               |                         |                   |                  |         |         |   |         |         |         |   |         |         |         |   |        
|Services(1):          |               |                         |                   |                  |         |         |   |         |         |         |   |         |         |         |   |        
|                      | United States |                         |                   | 108,598          |         |         |   | 94,649  |         |         |   | 207,379 |         |         |   | 181,391 |        
|                      | Europe(2)     |                         |                   | 29,746           |         |         |   | 19,940  |         |         |   | 58,949  |         |         |   | 37,647  |        
|                      | Other(3)      |                         |                   | 13,550           |         |         |   | 8,225   |         |         |   | 25,388  |         |         |   | 14,514  |        
|                      |               |                         |                   |                  |         |         |   |         |         |         |   |         |         |         |   |        
|                      |               | Total services          |                   |                  | 151,894 |         |   |         | 122,814 |         |   |         | 291,716 |         |   |         | 233,552 |        
|                      |               |                         |                   |                  |         |         |   |         |         |         |   |         |         |         |   |        
|                      |               |                         | Total net revenue |                  | $       | 412,856 |   |         | $       | 364,690 |   |         | $       | 807,242 |   |         | $       | 735,139 | 
|                      |               |                         |                   |                  |         |         |   |         |         |         |   |         |         |         |   |        

|                      |               |          |   |              |           |  |   |           |           | 
|--------------------- | ------------- | -------- | - | ------------ | --------- |  | - | --------- | --------- | 
|                      |               | June 30, |   | December 31,
|                      |               | 2003     |   | 2002        
|                      |               |          |   |             
|Long-lived assets(4): |               |          |   |              |           |  |   |          
|                      | United States |          | $ | 1,969,017    |           |  | $ | 1,429,261 |          
|                      | Europe(2)     |          |   | 54,357       |           |  |   | 55,049    |          
|                      | Other(3)      |          |   | 15,273       |           |  |   | 15,138    |          
|                      |               |          |   |              |           |  |   |          
|                      |               | Total    |   | $            | 2,038,647 |  |   | $         | 1,499,448 | 
|                      |               |          |   |              |           |  |   |          



---



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

|                                |                           |          |           |              |  |   |           |           | 
|------------------------------- | ------------------------- | -------- | --------- | ------------ |  | - | --------- | --------- | 
|                                |                           | June 30, |           | December 31,
|                                |                           | 2003     |           | 2002        
|                                |                           |          |           |             
|Total long-lived assets         |                           | $        | 2,038,647 |              |  | $ | 1,499,448 |          
|Other assets, including current |                           |          | 2,783,325 |              |  |   | 2,700,185 |          
|                                |                           |          |           |              |  |   |           |          
|                                | Total consolidated assets |          | $         | 4,821,972    |  |   | $         | 4,199,633 | 
|                                |                           |          |           |              |  |   |           |          

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

17



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##### Table of Contents



VERITAS SOFTWARE CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



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

The Company derives its user license fees from
the sale of its core technology products, including data
protection and file system and volume management products and
from its emerging technology products, including cluster and
replication and storage area networking products. User license
fees from core technology products were $228.4 million and
$437.2 million for the three and six months ended
June 30, 2003, respectively, and $212.6 million and
$438.5 million for the three and six months ended
June 30, 2002, respectively. User license fees from
emerging technology products were $32.6 million and
$78.3 million for the three and six months ended
June 30, 2003, respectively, and $29.3 million and
$63.1 million for the three and six months ended
June 30, 2002, respectively.

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 ($8.4 million USD). At June 30, 2003, no
amount was outstanding. The short-term credit facility was
renewed in March 2003 and is due to expire in March 2004.
Borrowings under the short-term credit facility bear interest at
Tokyo Inter Bank Offered Rate (TIBOR) plus 0.5%.
There are no covenants on the short-term credit facility and the
loan has been guaranteed by VERITAS Software Global LLC, a
wholly-owned subsidiary of the Company.

15.     Commitments
and Contingencies



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

In 1999 and 2000, the Company entered into three
build-to-suit lease agreements for office buildings in Mountain
View, California, Roseville, Minnesota and Milpitas, California.
The Company began occupying the Roseville and Mountain View
facilities in May and June 2001, respectively, and began
occupying the Milpitas facility in April 2003. The development
and acquisition of the properties have been financed by a third
party through a syndicate of financial institutions. The Company
has accounted for these agreements as operating leases in
accordance with SFAS No. 13, Accounting for
Leases, as amended. Commencing July 1, 2003, the
Company will account for these agreements in accordance with
FIN 46 which will require the Company to consolidate these
entities into the consolidated financial statements (see
Note 5).

During 2001 and 2002, the Company amended its
existing lease agreement, originally signed in 1999, for new
corporate campus facilities in Mountain View, California. The
facilities of 425,000 square feet provide space for sales,
marketing, administration and research and development
functions. The lease term for these facilities is five years
beginning in March 2000, with an option to extend the lease term
for two successive periods of one year each, if agreed to by the
financial institutions. The Company has the option to purchase
the property (land and facilities) for the termination value of
$145.2 million or, at the end of the lease, to arrange for
the sale of the property to a third party while the Company
retains an obligation to the owner for the difference between
the sales price and the guaranteed residual value up to
$129.0 million if the sales price is less than this amount,
subject to certain provisions of the lease. In addition, the
Company is entitled to any proceeds from a sale of the property
in excess of the termination value. The Company now occupies
these facilities and began making lease payments in the second
quarter of 2001.

During 2001 and 2002, the Company amended its
existing lease agreement, originally signed in 2000, for its
facilities in Roseville, Minnesota. The Company improved and
expanded its existing facilities of 62,000 square feet and
developed adjacent property adding 142,000 square feet
completed in 2001. The facilities provide space for technical
support and research and development functions. The lease term
for these facilities is five years beginning in March 2000, with
an option to extend the lease term for two successive periods of
one year each, if agreed to by the financial institutions. The
Company has the option to purchase the property (land and
facilities) for the termination value of $41.3 million or,
at the end of the lease, to arrange

18



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VERITAS SOFTWARE CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

for the sale of the property to a third party
while the Company retains an obligation to the owner for the
difference between the sales price and the guaranteed residual
value up to $35.1 million if the sales price is less than
this amount, subject to certain provisions of the lease. In
addition, the Company is entitled to any proceeds from a sale of
the property in excess of the termination value. The Company now
occupies these facilities and began making lease payments in
2001.

During 2001 and 2002, the Company amended its
existing lease agreement, originally signed in 2000, for the
lease of 65 acres of land and subsequent improvements for
new research and development campus facilities in Milpitas,
California. The Company plans to develop the site in two phases.
The first phase of the project, comprising 466,000 square
feet and consisting of one completed building and two additional
structures, was completed in the third quarter of 2002. The
facilities will provide space for research and development and
general corporate functions. The lease term for the first phase
is five years beginning in July 2000, with an option to extend
the lease term for two successive periods of one year each, if
agreed to by the financial institutions. The Company has the
option to purchase the property (land and first phase
facilities) for the termination value of $194.3 million or,
at the end of the lease, to arrange for the sale of the property
to a third party while the Company retains an obligation to the
owner for the difference between the sales price and the
guaranteed residual value up to $180.5 million if the sales
price is less than this amount, subject to certain provisions of
the lease. In addition, the Company is entitled to any proceeds
from a sale of the property in excess of the termination value.
The Company began paying the lease payments in the third quarter
of 2002 and occupied a portion of the new campus facilities in
the second quarter of 2003. The Company is currently analyzing
its development schedule for the second phase of the campus, and
at this time no commitments have been made with respect to the
start of construction.

Lease payments under the Companys three
build-to-suit lease agreements are generally paid quarterly and
are equal to the termination value of the outstanding lease
obligations multiplied by the Companys cost of funds,
which is based on LIBOR using 30-day to 180-day LIBOR contracts
and adjusted for the Companys credit spread. In January
2002, the Company entered into two three-year pay fixed, receive
floating, interest rate swaps for the purpose of hedging the
cash payments related to the Roseville, Minnesota and Mountain
View, California 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 rate. For the three and six months ended
June 30, 2003, the Companys aggregate lease payments,
including the payments on the interest rate swaps, were
$4.1 million and $8.3 million, respectively. For the
three and six months ended June 30, 2002, the payments were
$4.2 million and $8.3 million, respectively.

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

The 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, 2003. The specified financial covenants as of
June 30, 2003 require the Company to maintain a minimum
rolling four quarter EBITDA of $400.0 million, a minimum
ratio of cash and cash equivalents to current liabilities of 1.2
to 1, and a leverage ratio of total funded indebtedness to
rolling four quarter EBITDA of not more than 3.0 to 1. For
purposes of these financial covenants, EBITDA represents the
Companys net income for the applicable period, plus
interest expense, taxes, depreciation and amortization and all
non-cash restructuring charges for acquisitions occurring within
a four year period, less software development expenses
classified as capital expenditures. In order to secure the
obligation under each agreement, each of the facilities is
subject to a deed of trust in favor

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VERITAS SOFTWARE CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

of the financial institutions that financed the
development and acquisition of the respective facility. Bank of
America, N.A. was the agent for the syndicate of banks that
funded the development of the Mountain View, California and
Roseville, Minnesota facilities, and ABN AMRO Bank, N.V. was the
agent for the syndicate of banks that funded the development of
the Milpitas, California facility.



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

On October 1, 2002, the Company acquired
volume replicator software technology for $6.0 million and
contingent payments of up to another $6.0 million based on
future revenues generated by the acquired technology. The
payments will be paid quarterly over 40 quarters, in
amounts between $150,000 and $300,000. The Company issued a
promissory note payable in the principal amount of
$5.0 million, representing the present value of the
Companys minimum payment obligations under the purchase
agreement for the acquired technology, which are payable
quarterly commencing in the first quarter of 2003 and ending in
the fourth quarter of 2012. The contingent payments in excess of
the quarterly minimum obligations will be paid as they may
become due. The outstanding balance of the note payable was
$4.8 million as of June 30, 2003 and $5.0 million
as of December 31, 2002 and is included in non-current
accrued acquisition and restructuring costs.



| |                  
| | -----------------
| | Legal Proceedings

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

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

On January 10, 2003, Raytheon Company sued
the Company along with Brocade Communications Systems, Oracle
Corporation, Overland Storage Inc., Qualstar Corp., QLogic
Corporation, Ricoh Corporation and Spectra Logic Corporation in
the United States District Court for the Eastern District of
Texas. Raytheon is alleging infringement of US Patent
No. 5,412,791, or 791 patent, entitled Mass Data
Storage Library, and is seeking damages and an injunction
against all defendants. The Company believes that it has
numerous defenses and counterclaims to the claims of
infringement asserted against it and it intends to defend itself
vigorously. The Company filed an answer to Raytheons
complaint on March 7, 2003, denying all material

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VERITAS SOFTWARE CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

allegations in the complaint and asserting
counterclaims seeking to have Raytheons 791 patent
declared invalid and not infringed by the Company. A trial date
is currently scheduled for June 2004.

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

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

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

16.     Subsequent
Events

In August 2003, the Company issued
$500.0 million of 0.25% convertible subordinated notes due
August 1, 2013 (the 0.25% Notes), for which the
Company received net proceeds of approximately
$488.0 million, to several initial purchasers in a private
offering. The Company has also granted to the initial purchasers
of the 0.25% Notes an option to purchase up to an additional
$100.0 million principal amount of 0.25% Notes solely to
cover over-allotments. This over-allotment option may be
exercised by the initial purchasers at any time on or prior to
August 28, 2003.

The 0.25% Notes were issued at their face value
and provide for semi-annual interest payments of
$0.6 million each February 1 and August 1, beginning
February 1, 2004. The 0.25% Notes are convertible, under
the specified circumstances discussed below, into shares of the
Companys common stock at a conversion rate of
21.6802 shares per $1,000 principal amount of notes, which
is equivalent to a conversion price of approximately $46.13 per
share. The conversion rate is subject to adjustment upon the
occurrence of specified events. The specified circumstances
under which the 0.25% Notes are convertible prior to maturity
are: (1) during any quarterly conversion period (which
periods begin on the eleventh trading day of each fiscal quarter
and end on the eleventh trading day of the following fiscal
quarter) prior to August 1, 2010, if the closing sale price
of the Companys common stock for at least 20 trading
days in the 30 trading day period ending on the first day
of such conversion period exceeds 120% of the conversion price
of the notes on that first day, (2) during the period
beginning August 1, 2010 through the maturity date of the
notes, if the closing sale price of the Companys common
stock is more than 120% of the then current conversion price,
(3) during the five consecutive business day period
following any five consecutive trading day period in which the
average of the trading prices for the 0.25% Notes was less than
95% of the average of the sale price of the Companys
common stock multiplied by the then current conversion rate of
the notes, (4) the Companys corporate credit rating
assigned by Standard & Poors falls below B- (and if
Moodys has assigned a corporate credit rating to the
Company and such rating is lower than B3) or if both such
ratings are withdrawn, (5) the Company calls

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VERITAS SOFTWARE CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

the notes for redemption or (6) upon the
occurrence of corporate transactions specified in the indenture
governing the notes. Upon any conversion of notes by a holder,
the Company shall have the option to satisfy its conversion
obligation in shares of its common stock, in cash or a
combination thereof. It is the intention of the Company to
satisfy the principal portion of the obligation in cash and the
remainder, if any, in shares of its common stock. On or after
August 5, 2006, the Company has the option to redeem all or
a portion of the 0.25% Notes at a redemption price equal to 100%
of the principal amount, plus accrued and unpaid interest. On
August 1, 2006 and August 1, 2008, or upon the
occurrence of a fundamental change involving the Company,
holders of the 0.25% Notes may require the Company to repurchase
their notes at a repurchase price equal to 100% of the principal
amount, plus accrued and unpaid interest. Upon a fundamental
change, the Company will have the option to pay the repurchase
price in cash, shares of common stock or a combination thereof.

In July 2003, the Companys board of
directors authorized a program to repurchase the Companys
common stock in an amount of up to $300.0 million plus the
market value at the time of repurchase of any shares issued upon
conversion of the 1.856% convertible subordinated notes due 2006
(1.856% Notes), which the Company has called for
redemption. If all holders of the 1.856% Notes elect to convert
their notes into common stock, they would receive in the
aggregate approximately 13.0 million shares of the
Companys common stock. On August 1, 2003, the Company
repurchased 4.2 million shares of its common stock for an
aggregate purchase price of approximately $129.0 million.
The Company expects to purchase additional shares of common
stock under the program from time to time on the open market or
in privately negotiated transactions.

In July 2003, the Company announced that it will
be redeeming on August 18, 2003 all of its outstanding
5.25% convertible subordinated notes due 2004 (5.25%
Notes), and all of its outstanding 1.856% Notes. On
August 18, 2003, the aggregate redemption price of the
5.25% Notes will be approximately $64.0 million and the
aggregate redemption price of the 1.856% Notes will be
approximately $407.0 million. The conversion price of the
5.25% Notes is $9.56 per share. The effective conversion price
of the 1.856% Notes on August 18, 2003 will be
approximately $31.35 per share. If the market price of the
Companys common stock is higher than the conversion prices
of the 5.25% Notes or the 1.856% Notes on the redemption date,
some or all holders of the 5.25% Notes and 1.856% Notes may
elect to convert their notes into common stock in lieu of
redeeming for cash. If the 1.856% Notes are redeemed for cash,
the Company will record a loss on extinguishment of debt of
approximately $4.9 million in the third quarter of 2003
related to the unamortized portion of debt issuance costs. This
charge would be classified as a non-operating expense in the
Companys statement of operations.

22



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VERITAS SOFTWARE CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








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

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

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

Overview

VERITAS is a leading independent supplier of
storage software products and services. Storage software
includes storage management, data protection and high
availability software. With our recent acquisition of Precise
Software Solutions Ltd., we also offer application performance
management software. We develop and sell products for most
popular operating systems, including various versions of
Windows, UNIX and Linux. We also develop and sell products that
support a wide variety of servers, storage devices, databases,
applications and network solutions. Our customers include many
leading global corporations and small and medium enterprises
around the world operating in a wide variety of industries. We
also provide a full range of services to assist our customers in
assessing, architecting and implementing their storage software
solutions.

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

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

International Sales and Operations

Our international sales are generated primarily
through our international sales subsidiaries. International
revenue, a majority of which is collectible in foreign
currencies, accounted for approximately 35% of our total revenue
for the three months ended June 30, 2003 and 30% of our
total revenue for the three months ended June 30, 2002. Our
international revenue accounted for approximately 34% of our
total revenue for the six months ended June 30, 2003 and
31% of our total revenue for the six months ended June 30,
2002. Our international revenue increased 33% to
$145.1 million for the three months ended June 30,
2003 from

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$109.0 million for the three months ended
June 30, 2002. Our international revenue increased 23% to
$276.4 million for the six months ended June 30, 2003
from $224.3 million for the six months ended June 30,
2002. For the three months ending September 30, 2003, we
expect to experience a seasonal reduction in business activity
in Europe which is typical during the summer months. Over the
long-term, we expect that our international revenue will
increase relative to total revenue as a result of the lower
penetration of our products existing in these markets and our
increasing focus on developing international revenue
opportunities.


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

Business Combinations



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

On June 30, 2003, we acquired all of the
outstanding common stock of Precise Software Solutions Ltd., or
Precise, a provider of application performance management
products. We acquired Precise in order to expand our product and
service offerings across storage, databases and application
management. The Precise acquisition was accounted for using the
purchase method of accounting for total purchase consideration
of $701.0 million, which included 7.3 million shares
of common stock valued at $210.6 million,
$397.8 million of cash of which $333.3 was paid on
June 30, 2003 and $64.5 million was paid in July 2003
and has been recorded as merger consideration payable in the
balance sheet, $79.5 million relating to the assumption of
Precise options exercisable for 4.4 million shares of our
common stock and $13.1 million of acquisition-related
costs. The fair value of stock options assumed is net of
$14.5 million which represents the portion of the intrinsic
value of Precises unvested options applicable to the
remaining vesting period. Upon the assumption of the outstanding
Precise options, each Precise option became exercisable for
0.6741 shares of our common stock. Our balance sheet as of
June 30, 2003 includes balances as a result of our
acquisition of Precise. The results of operations of Precise
will be included in our consolidated statements of operations
beginning July 1, 2003.

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

|                                                  |       |   |         |         | 
|------------------------------------------------- | ----- | - | ------- | ------- | 
|Cash, cash equivalents and short-term investments |       | $ | 149,627 |        
|Other current assets                              |       |   | 11,527  |        
|Long-term assets                                  |       |   | 8,629   |        
|Current liabilities                               |       |   | (29,103 | )      
|Goodwill                                          |       |   | 493,220 |        
|Developed technology                              |       |   | 26,600  |        
|Customer contracts                                |       |   | 15,200  |        
|Patented technology                               |       |   | 11,600  |        
|Other intangible assets                           |       |   | 7,500   |        
|Unearned stock-based compensation                 |       |   | 14,475  |        
|In-process research and development               |       |   | 15,300  |        
|Net deferred and other income taxes payable       |       |   | (23,592 | )      
|                                                  |       |   |         |        
|                                                  | Total |   | $       | 700,983 | 
|                                                  |       |   |         |        

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

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

Acquisition-related costs of $13.1 million
consist of $9.2 million associated with legal and other
professional fees, $3.3 million for terminating and
satisfying existing lease commitments and $0.6 million for
severance-related costs. Total cash outlays for
acquisition-related costs were approximately $2.0 million
for legal and other professional fees and no amounts for leases
or severance through June 30, 2003.



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

On January 27, 2003, we acquired all of the
outstanding capital stock of Jareva Technologies, Inc., or
Jareva, a privately held provider of automated server
provisioning products that enable businesses to automatically
deploy additional servers without manual intervention. We
acquired Jareva to integrate its technology into our software
products to enable our customers to optimize their investments
in server hardware by deploying new server resources on demand.
The Jareva acquisition was accounted for using the purchase
accounting method for total purchase consideration of
$63.3 million, which included $58.7 million of cash,
$1.4 million relating to the assumption of options
exercisable for 426,766 shares of our common stock and
$3.2 million of acquisition-related costs. The purchase
price was allocated, based on an independent valuation, to
goodwill of $43.3 million, developed technology of
$9.1 million, other intangibles of $1.9 million,
in-process research and development of $4.1 million, net
deferred tax liabilities of $4.3 million, deferred
stock-based compensation of $5.4 million and net tangible
assets of $3.8 million. For the three and six months ended
June 30, 2003, we recorded amortization of developed
technology of $0.5 million and $0.8 million,
respectively, amortization of other intangibles of
$0.3 million and $0.5 million, respectively, and,
included in research and development expense, stock-based
compensation expense of $0.7 million and $1.1 million,
respectively. The acquired in-process research and development
of $4.1 million was written off and the related charge is
included in income from operations for the six months ended
June 30, 2003. Acquisition-related costs consist of
$2.7 million associated with terminating and satisfying
remaining lease commitments, partially offset by sublease income
net of related sublease costs and direct transaction costs of
$0.5 million for legal and other professional fees. Total
cash outlays for acquisition-related costs were
$0.7 million through June 30, 2003.



| |     
| | ----
| | NSMG

On May 28, 1999, we acquired the Network
Storage Management Group business of Seagate Software, Inc., or
NSMG. We incurred acquisition-related costs of
$43.4 million. In addition, as a result of the NSMG
acquisition, we recorded a restructure charge of
$11.0 million in 1999 related to exit costs associated with
duplicative facilities that we planned to vacate. In the fourth
quarter of 2002, we recorded an additional reserve of
$4.2 million due to a decline in real estate market
conditions that resulted in higher actual exit costs than
estimated associated with these duplicative facilities. As of
December 31, 2002, we had a remaining accrual of
$10.5 million for duplicative facility related costs and
for the three and six months ended June 30, 2003, cash
outlays for these costs were $0.9 million and
$1.8 million, respectively and the impact of exchange rates
was $(0.5) million and $(0.3) million, respectively.
The impact of exchange rates for the first half of 2003 is the
result of transferring the acquisition and acquisition-related
restructuring charge accrual to a foreign subsidiary. The
remaining acquisition and acquisition-related restructuring
charge accrual as of June 30, 2003 of $9.0 million is
anticipated to be utilized for servicing operating lease
payments or negotiated

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buyouts of operating lease commitments, the lease
terms of which will expire at various times through the year
2013.


Seagate Technology Transaction

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

We issued approximately 109.4 million shares
of our common stock to the Seagate stockholders in exchange for
approximately 128.1 million shares of our common stock and
certain non-operating assets and liabilities held by Seagate.
The transaction resulted in a decrease of approximately
18.7 million shares of our outstanding common stock. At the
closing of the transaction we recorded the non-operating assets
and liabilities assumed from Seagate at their fair values. In
addition, we accrued $40.0 million of direct transaction
costs, of which less than $0.1 million remain in accrued
acquisition and restructuring costs as of June 30, 2003. We
anticipate that the remaining acquisition-related costs will be
utilized in the third quarter of 2003.

For the three and six months ended June 30,
2003 and 2002, the Seagate transaction had no significant impact
on our net income.

As a result of the decrease of approximately
18.7 million shares of our common stock outstanding on the
number of shares used in computing our net income per share, the
transaction resulted in incremental net income per diluted share
of $0.01 for the six months ended June 30, 2003. The
transaction did not affect net income per diluted share for the
three months ended June 30, 2003 and 2002 and the six
months ended June 30, 2002.

As of June 30, 2003 and December 31,
2002, the transaction affected our consolidated balance sheet,
as follows:



| |   |                                                                                            
| | - | -------------------------------------------------------------------------------------------
| |  | other current assets included $21.3 million
    of indemnification receivable from SAC;    
|
| |  | other non-current assets included
    $18.0 million of indemnification receivable from SAC;
|
| |  | income taxes payable included an additional
    $21.3 million; and                         
|
| |  | deferred and other income taxes included an
    additional $113.1 million.                 

As of June 30, 2003 and December 31,
2002, deferred and other income taxes payable recorded in
connection with the Seagate transaction totaled
$134.4 million and related to certain tax liabilities that
we expect to pay. Certain of Seagates federal and state
tax returns for various fiscal years are under examination by
tax authorities. We believe that adequate amounts for tax
liabilities have been provided for any final assessments that
may result from these examinations. The timing of the settlement
of these examinations is uncertain. To the extent the
settlements of these audits and the amounts reimbursed by SAC
are different from the amounts recorded, the difference will be
recorded as a component of income tax expense or benefit and may
significantly affect our effective tax rate for the period in
which the settlements take place.

Facility Restructure Reserve

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

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to operating expenses of $98.2 million in
the fourth quarter of 2002. This restructuring charge is
comprised of $86.9 million associated with terminating and
satisfying remaining lease commitments, partially offset by
sublease income net of related sublease costs, and
$11.3 million for asset write-offs. Total net cash outlays
under this restructuring plan are expected to be approximately
$86.9 million.


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

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

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

|                         |                              |             |      |            |  |       |      |      |  |   |      |      | 
|------------------------ | ---------------------------- | ----------- | ---- | ---------- |  | ----- | ---- | ---- |  | - | ---- | ---- | 
|                         |                              | Net Rent    |      | Asset      |  |      
|                         |                              | Commitments |      | Write-Offs |  | Total
|                         |                              |             |      |            |  |      
|Provision accrued        |                              | $           | 86.9 |            |  | $     | 11.3 |      |  | $ | 98.2 |     
|Cash payments            |                              |             | (0.2 | )          |  |       |     |      |  |   | (0.2 | )   
|Impact of exchange rates |                              |             | 0.6  |            |  |       | 0.1  |      |  |   | 0.7  |     
|                         |                              |             |      |            |  |       |      |      |  |   |      |     
|                         | Balance at December 31, 2002 |             |      | 87.3       |  |       |      | 11.4 |  |   |      | 98.7 | 
|Cash payments            |                              |             | (2.7 | )          |  |       |     |      |  |   | (2.7 | )   
|Adjustment               |                              |             | 0.8  |            |  |       | (0.8 | )    |  |   |     |     
|Impact of exchange rates |                              |             | (0.4 | )          |  |       | (0.1 | )    |  |   | (0.5 | )   
|                         |                              |             |      |            |  |       |      |      |  |   |      |     
|                         | Balance at March 31, 2003    |             |      | 85.0       |  |       |      | 10.5 |  |   |      | 95.5 | 
|Cash payments            |                              |             | (2.3 | )          |  |       |     |      |  |   | (2.3 | )   
|Asset write-offs         |                              |             |     |            |  |       | (3.6 | )    |  |   | (3.6 | )   
|Impact of exchange rates |                              |             | 1.5  |            |  |       | 0.3  |      |  |   | 1.8  |     
|                         |                              |             |      |            |  |       |      |      |  |   |      |     
|                         | Balance at June 30, 2003     |             | $    | 84.2       |  |       | $    | 7.2  |  |   | $    | 91.4 | 
|                         |                              |             |      |            |  |       |      |      |  |   |      |     

Critical Accounting Policies

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



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

These policies and our procedures related to
these policies are described in detail below and under specific
areas within the discussion and analysis of our financial
condition and results of operations. In addition, please

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




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

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

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

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

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

Maintenance and technical support includes
updates (unspecified product upgrades and enhancements) on a
when-and-if-available basis, telephone support, and bug fixes or
patches. Maintenance and technical support revenue is recognized
ratably over the maintenance term. Training consists of courses
taught by our instructors at our facility or at the
customers site. Various courses are offered specific to
the license products. Training fees are based on a per course
basis or on an annual value-pass, which allows for unlimited
courses to be taken by one individual over a one-year term.
Revenue is recognized when the customer has completed the
course. For value-passes, the revenue is recognized ratably over
the one-year term. Consulting consists primarily of product
installation services, which does not involve customization of
the software. Installation services provided by us are not
mandatory and can be performed by the customer, a third party,
or us. Consulting fees are based on a computed daily rate.

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

We define revenue recognition criteria as follows:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Persuasive Evidence of an Arrangement Exists.It is our customary practice to have a
    written contract, which is signed by both the customer and us,
    or a purchase order prior to recognizing revenue on an
    arrangement.                                                                                                                                                                                                                                                                                                                               
|
| | Delivery Has Occurred.Our software is usually physically
    delivered to our customers with standard transfer terms as FOB
    shipping point. It is occasionally delivered electronically,
    through an FTP download or a load and leave, where a
    VERITAS employee physically loads the software and does not
    leave any tangible property with the customer. If undelivered
    products or services exist that are essential to the
    functionality of the delivered product in an arrangement,
    delivery is not considered to have occurred.
|
| | The Vendors Fee is Fixed or
    Determinable.The fee our customers
    pay for the products is negotiated at the outset of an
    arrangement, and is generally based on the specific volume of
    product to be delivered. Therefore, except in cases where we
    grant extended payment terms to a specific customer, the                                                                                                                                                                                                                                   

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | fees are considered to be fixed or determinable
    at the inception of the arrangement. Arrangements with payment
    terms extending beyond 90 days from the invoice date are
    not considered to be fixed or determinable. Revenue from such
    arrangements is recognized as the fees become due and payable.                                                                                                                                                                                                             
|
| | Collection is
    Probable.Probability of collection is
    assessed on a customer-by-customer basis. We typically sell to
    customers where we have a history of successful collection. New
    customers are subjected to a credit review process that
    evaluates the customers financial position and ultimately
    their ability to pay. If it is determined from the outset of an
    arrangement that collection is not probable based upon our
    review process, revenue is recognized on a cash-collected basis.

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

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

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



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

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



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

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

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

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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 that we use an asset or changes in the
    manner that we use it; and       
|
| |  | significant changes to the asset since we
    acquired it.                             

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



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

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

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

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

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

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

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Accounting
for Income Taxes

We are required to estimate our income taxes in
each federal, state and international jurisdiction in which we
operate. This process requires that we estimate the current tax
exposure as well as assess temporary differences between the
accounting and tax treatment of assets and liabilities,
including items such as accruals and allowances not currently
deductible for tax purposes. The income tax effects of the
differences we identify are classified as current or long-term
deferred tax assets and liabilities in our consolidated balance
sheets. We must also assess the likelihood that deferred tax
assets will be realized from future taxable income and, based on
this assessment, establish a valuation allowance if required. As
of June 30, 2003, we determined the valuation allowance to
be $103.1 million, which includes $22.9 million
related to the acquisition of Precise, based upon uncertainties
related to our ability to recover certain deferred tax assets.
The valuation allowance related to Precise deferred tax assets
will be credited to goodwill when realized. These deferred tax
assets are in specific geographical or jurisdictional locations
or are related to losses on strategic investments that will only
be realized with the generation of future capital gains within a
limited time period.

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

Results of Operations



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

|                                  |                   |                    |       |       |  |                  |       |       |  |      |    |          |   |   |       |       |  |   |       |       |  |  |    |    |  
|--------------------------------- | ----------------- | ------------------ | ----- | ----- |  | ---------------- | ----- | ----- |  | ---- | -- | -------- | - | - | ----- | ----- |  | - | ----- | ----- |  |  | -- | -- | -
|                                  |                   |                    |       |       |  |                  |       |      
|                                  |                   | Three Months Ended |       |       |  | Six Months Ended |       |      
|                                  |                   | June 30,           |       |       |  | June 30,         |       |      
|                                  |                   |                    |       |       |  |                  |       |      
|(In millions, except percentages) |                   | 2003               |       | 2002  |  | % Change         |       | 2003  |  | 2002 |    | % Change
|                                  |                   |                    |       |       |  |                  |       |       |  |      |    |         
|User license fees                 |                   | $                  | 261.0 |       |  | $                | 241.9 |       |  |      | 8  | %        |   | $ | 515.5 |       |  | $ | 501.6 |       |  |  | 3  | % 
|Services                          |                   |                    | 151.9 |       |  |                  | 122.8 |       |  |      | 24 | %        |   |   | 291.7 |       |  |   | 233.5 |       |  |  | 25 | % 
|                                  |                   |                    |       |       |  |                  |       |       |  |      |    |          |   |   |       |       |  |   |       |       |  |  |    |   
|                                  | Total net revenue |                    | $     | 412.9 |  |                  | $     | 364.7 |  |      |    | 13       | % |   | $     | 807.2 |  |   | $     | 735.1 |  |  |    | 10 | %
|                                  |                   |                    |       |       |  |                  |       |       |  |      |    |          |   |   |       |       |  |   |       |       |  |  |    |   

Total net revenue increased 13% for the three
months ended June 30, 2003 over the same period in 2002 and
10% for the six months ended June 30, 2003 over the same
period in 2002. The benefit from currency rate changes accounted
for approximately 3% of the change in net revenue for the three
and six months ended June 30, 2003 over the same periods in
2002. The remainder of the increase is primarily due to the
continued growth of our services revenue, increased penetration
of international markets and the benefit of new product
offerings. We believe that total net revenue will increase in
the second half of 2003 due to these factors and due to our
recent acquisition of Precise.



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

|                                  |  |                    |       |      |  |                  |       |      |  |      |   |          |  |   |       |   |  |   |       |   |  |  |   |  
|--------------------------------- |  | ------------------ | ----- | ---- |  | ---------------- | ----- | ---- |  | ---- | - | -------- |  | - | ----- | - |  | - | ----- | - |  |  | - | -
|                                  |  |                    |       |      |  |                  |       |     
|                                  |  | Three Months Ended |       |      |  | Six Months Ended |       |     
|                                  |  | June 30,           |       |      |  | June 30,         |       |     
|                                  |  |                    |       |      |  |                  |       |     
|(In millions, except percentages) |  | 2003               |       | 2002 |  | % Change         |       | 2003 |  | 2002 |   | % Change
|                                  |  |                    |       |      |  |                  |       |      |  |      |   |         
|User license fees                 |  | $                  | 261.0 |      |  | $                | 241.9 |      |  |      | 8 | %        |  | $ | 515.5 |   |  | $ | 501.6 |   |  |  | 3 | %
|As a percentage of net revenue    |  |                    | 63    | %    |  |                  | 66    | %    |  |      |   |          |  |   | 64    | % |  |   | 68    | % |  |  |   |  

We derive user license fees from the sale of our
core technology products, including data protection and file
system and volume management products, and from our emerging
technology products, including cluster and replication, storage
area networking and network attached storage products. Revenue
from core technology products comprises the majority of user
license fees and was 88% of total user license fees for the
three months ended June 30, 2003 and 2002 and 85% and 87%
for the six months ended June 30, 2003 and 2002.

The increase in user license fees in the second
quarter of 2003 over the same period in 2002 reflects increases
in revenue from both core and emerging technology products. The
increase in user license fees in the first half of 2003 over the
same period in 2002 primarily reflects an increase in revenue
from emerging technologies, which was the result of increased
market penetration of our emerging technology products,
particularly our clustering and replication products.

31



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##### Table of Contents



|                                      |                       |                                       |   |       |       |                  |   |       |       |      |  |          |   |   |   |       |       |   |   |       |       |   |  |    |   |  
|------------------------------------- | --------------------- | ------------------------------------- | - | ----- | ----- | ---------------- | - | ----- | ----- | ---- |  | -------- | - | - | - | ----- | ----- | - | - | ----- | ----- | - |  | -- | - | -
|                                      |                       |                                       |   |       |       |                  |   |      
|                                      |                       | Three Months Ended                    |   |       |       | Six Months Ended |   |      
|                                      |                       | June 30,                              |   |       |       | June 30,         |   |      
|                                      |                       |                                       |   |       |       |                  |   |      
|(In millions, except percentages)     |                       | 2003                                  |   | 2002  |       | % Change         |   | 2003  |       | 2002 |  | % Change
|                                      |                       |                                       |   |       |       |                  |   |       |       |      |  |         
|User license fees:                    |                       |                                       |   |       |       |                  |   |       |       |      |  |          |   |   |   |       |       |   |   |       |       |   |  |   
|                                      | Core technologies     |                                       | $ | 228.4 |       |                  | $ | 212.6 |       |      |  | 7        | % |   | $ | 437.2 |       |   | $ | 438.5 |       |   |  |   |  
|                                      | Emerging technologies |                                       |   | 32.6  |       |                  |   | 29.3  |       |      |  | 11       | % |   |   | 78.3  |       |   |   | 63.1  |       |   |  | 24 | %
|                                      |                       |                                       |   |       |       |                  |   |       |       |      |  |          |   |   |   |       |       |   |   |       |       |   |  |   
|                                      |                       | Total user license fees               |   | $     | 261.0 |                  |   | $     | 241.9 |      |  |          | 8 | % |   | $     | 515.5 |   |   | $     | 501.6 |   |  |    | 3 | %
|                                      |                       |                                       |   |       |       |                  |   |       |       |      |  |          |   |   |   |       |       |   |   |       |       |   |  |   
|As a percentage of user license fees: |                       |                                       |   |       |       |                  |   |       |       |      |  |          |   |   |   |       |       |   |   |       |       |   |  |   
|                                      | Core technologies     |                                       |   | 88    | %     |                  |   | 88    | %     |      |  |          |   |   |   | 85    | %     |   |   | 87    | %     |   |  |    |  
|                                      | Emerging technologies |                                       |   | 12    | %     |                  |   | 12    | %     |      |  |          |   |   |   | 15    | %     |   |   | 13    | %     |   |  |    |  
|                                      |                       |                                       |   |       |       |                  |   |       |       |      |  |          |   |   |   |       |       |   |   |       |       |   |  |   
|                                      |                       | Total percentage of user license fees |   |       | 100   | %                |   |       | 100   | %    |  |          |   |   |   |       | 100   | % |   |       | 100   | % |  |    |   |  
|                                      |                       |                                       |   |       |       |                  |   |       |       |      |  |          |   |   |   |       |       |   |   |       |       |   |  |   

The increase in user license fees from core
technologies in the second quarter of 2003 over the same period
in 2002 is due to the increased revenue from both our data
protection products and file system and volume management
products. Revenue from core technologies in the first half of
2003 was relatively consistent with the same period in 2002.

Our user license fees from original equipment
manufacturers decreased 9% in the second quarter of 2003 to
$33.9 million from $37.4 million during the second
quarter of 2002 and decreased 13% to $68.9 million for the
six months ended June 30, 2003 from $79.3 million for
the six months ended June 30, 2002. The user license fees
from original equipment manufacturers accounted for 13% of user
license fees in the second quarter of 2003 and 16% of user
license fees in the second quarter of 2002 and accounted for 13%
for the six months ended June 30, 2003 and 16% for the six
months ended June 30, 2002. The decrease in 2003 compared
to 2002 reflects reduced hardware sales by original equipment
manufacturers as their customers reduced technology spending in
the weaker economic environment. We expect revenue from original
equipment manufacturers to continue decreasing as a percentage
of our total revenue as a result of increased offerings of
competitive software products by original equipment
manufacturers as well as the trend toward less bundling of
storage software with storage hardware.

Service
Revenue

|                                  |  |                    |       |      |  |                  |       |      |  |      |    |          |  |   |       |   |  |   |       |   |  |  |    |  
|--------------------------------- |  | ------------------ | ----- | ---- |  | ---------------- | ----- | ---- |  | ---- | -- | -------- |  | - | ----- | - |  | - | ----- | - |  |  | -- | -
|                                  |  |                    |       |      |  |                  |       |     
|                                  |  | Three Months Ended |       |      |  | Six Months Ended |       |     
|                                  |  | June 30,           |       |      |  | June 30,         |       |     
|                                  |  |                    |       |      |  |                  |       |     
|(In millions, except percentages) |  | 2003               |       | 2002 |  | % Change         |       | 2003 |  | 2002 |    | % Change
|                                  |  |                    |       |      |  |                  |       |      |  |      |    |         
|Service revenue                   |  | $                  | 151.9 |      |  | $                | 122.8 |      |  |      | 24 | %        |  | $ | 291.7 |   |  | $ | 233.5 |   |  |  | 25 | %
|As a percentage of net revenue    |  |                    | 37    | %    |  |                  | 34    | %    |  |      |    |          |  |   | 36    | % |  |   | 32    | % |  |  |    |  

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



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

|                                  |  |                    |      |      |  |                  |      |      |  |      |   |          |  |   |       |   |  |   |       |   |  |  |   |  
|--------------------------------- |  | ------------------ | ---- | ---- |  | ---------------- | ---- | ---- |  | ---- | - | -------- |  | - | ----- | - |  | - | ----- | - |  |  | - | -
|                                  |  |                    |      |      |  |                  |      |     
|                                  |  | Three Months Ended |      |      |  | Six Months Ended |      |     
|                                  |  | June 30,           |      |      |  | June 30,         |      |     
|                                  |  |                    |      |      |  |                  |      |     
|(In millions, except percentages) |  | 2003               |      | 2002 |  | % Change         |      | 2003 |  | 2002 |   | % Change
|                                  |  |                    |      |      |  |                  |      |      |  |      |   |         
|Cost of revenue                   |  | $                  | 72.6 |      |  | $                | 70.5 |      |  |      | 3 | %        |  | $ | 146.6 |   |  | $ | 137.8 |   |  |  | 6 | %
|As a percentage of net revenue    |  |                    | 18   | %    |  |                  | 19   | %    |  |      |   |          |  |   | 18    | % |  |   | 19    | % |  |  |   |  

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Gross margin on user license fees, excluding
amortization of developed technology, is substantially higher
than gross margin on service revenue, reflecting the low
materials, packaging and other costs of software products
compared with the relatively high personnel costs associated
with providing maintenance and technical support, consulting and
training services. Cost of service revenue varies depending upon
the mix of maintenance and technical support, consulting and
training services. We expect gross margin to fluctuate in the
future, reflecting changes in royalty rates on licensed
technologies, the mix of license and service revenue and the
timing differences between increasing our organizational
investments and the recognition of revenue that we expect as a
result of these investments. In the near term, we expect service
revenue to grow faster than user license fee revenue, which
could result in slight declines in gross margin percentages.



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

|                                  |                                                                      |                                 |   |      |      |                  |   |      |      |      |  |          |     |    |   |      |      |  |   |      |      |  |  |     |    |   
|--------------------------------- | -------------------------------------------------------------------- | ------------------------------- | - | ---- | ---- | ---------------- | - | ---- | ---- | ---- |  | -------- | --- | -- | - | ---- | ---- |  | - | ---- | ---- |  |  | --- | -- | --
|                                  |                                                                      |                                 |   |      |      |                  |   |     
|                                  |                                                                      | Three Months Ended              |   |      |      | Six Months Ended |   |     
|                                  |                                                                      | June 30,                        |   |      |      | June 30,         |   |     
|                                  |                                                                      |                                 |   |      |      |                  |   |     
|(In millions, except percentages) |                                                                      | 2003                            |   | 2002 |      | % Change         |   | 2003 |      | 2002 |  | % Change
|                                  |                                                                      |                                 |   |      |      |                  |   |      |      |      |  |         
|Cost of user license fees:        |                                                                      |                                 |   |      |      |                  |   |      |      |      |  |          |     |    |   |      |      |  |   |      |      |  |  |    
|                                  | User license fees                                                    |                                 | $ | 11.7 |      |                  | $ | 8.8  |      |      |  | 33       | %   |    | $ | 23.1 |      |  | $ | 18.0 |      |  |  | 28  | % 
|                                  | Amortization of developed technology                                 |                                 |   | 10.6 |      |                  |   | 16.9 |      |      |  | (37      | )%  |    |   | 25.3 |      |  |   | 33.8 |      |  |  | (25 | )%
|                                  |                                                                      |                                 |   |      |      |                  |   |      |      |      |  |          |     |    |   |      |      |  |   |      |      |  |  |    
|                                  |                                                                      | Total cost of user license fees |   | $    | 22.3 |                  |   | $    | 25.7 |      |  |          | (13 | )% |   | $    | 48.4 |  |   | $    | 51.8 |  |  |     | (7 | )%
|                                  |                                                                      |                                 |   |      |      |                  |   |      |      |      |  |          |     |    |   |      |      |  |   |      |      |  |  |    
|Gross margin:                     |                                                                      |                                 |   |      |      |                  |   |      |      |      |  |          |     |    |   |      |      |  |   |      |      |  |  |    
|                                  | User license fees including amortization of
    developed technology |                                 |   | 91   | %    |                  |   | 89   | %    |      |  |          |     |    |   | 91   | %    |  |   | 90   | %    |  |  |     |   

Cost of user license fees consists primarily of
amortization of developed technology, royalties, media, manuals
and distribution costs. Amortization of developed technology is
related primarily to the acquisition of NSMG and other
acquisitions completed during 1999 and the first quarter of
2003. Amortization of developed technology decreased in the
second quarter and first half of 2003 over the same periods in
2002 primarily due to the fact that all intangibles related to
the NSMG acquisition were fully amortized in May 2003. In
addition, during the fourth quarter of 2002, we sold some of our
technology and wrote-off the related net book value of developed
technology which impacted the decrease in the first half of 2003
over 2002. If we excluded the amortization of developed
technology from the cost of user license fees, the gross margin
on user license fees would have been 96% for each of the three
and six months ended June 30, 2003 and 2002. The gross
margin on user license fees may vary from period to period based
on the license revenue mix because some of our products carry
higher royalty rates than others. Excluding the amortization of
developed technology, we expect gross margins on user license
fees to remain relatively constant in the second half of 2003.



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

|                                  |  |                    |      |      |  |                  |      |      |  |      |    |          |  |   |      |   |  |   |      |   |  |  |    |  
|--------------------------------- |  | ------------------ | ---- | ---- |  | ---------------- | ---- | ---- |  | ---- | -- | -------- |  | - | ---- | - |  | - | ---- | - |  |  | -- | -
|                                  |  |                    |      |      |  |                  |      |     
|                                  |  | Three Months Ended |      |      |  | Six Months Ended |      |     
|                                  |  | June 30,           |      |      |  | June 30,         |      |     
|                                  |  |                    |      |      |  |                  |      |     
|(In millions, except percentages) |  | 2003               |      | 2002 |  | % Change         |      | 2003 |  | 2002 |    | % Change
|                                  |  |                    |      |      |  |                  |      |      |  |      |    |         
|Cost of service revenue           |  | $                  | 50.3 |      |  | $                | 44.9 |      |  |      | 12 | %        |  | $ | 98.1 |   |  | $ | 86.0 |   |  |  | 14 | %
|Gross margin                      |  |                    | 67   | %    |  |                  | 63   | %    |  |      |    |          |  |   | 66   | % |  |   | 63   | % |  |  |    |  

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

33



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##### Table of Contents





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

|                                     |  |                    |      |      |  |                  |      |      |  |      |     |          |  |   |      |   |  |   |      |   |  |  |     |   
|------------------------------------ |  | ------------------ | ---- | ---- |  | ---------------- | ---- | ---- |  | ---- | --- | -------- |  | - | ---- | - |  | - | ---- | - |  |  | --- | --
|                                     |  |                    |      |      |  |                  |      |     
|                                     |  | Three Months Ended |      |      |  | Six Months Ended |      |     
|                                     |  | June 30,           |      |      |  | June 30,         |      |     
|                                     |  |                    |      |      |  |                  |      |     
|(In millions, except percentages)    |  | 2003               |      | 2002 |  | % Change         |      | 2003 |  | 2002 |     | % Change
|                                     |  |                    |      |      |  |                  |      |      |  |      |     |         
|Amortization of developed technology |  | $                  | 10.6 |      |  | $                | 16.9 |      |  |      | (37 | )%       |  | $ | 25.3 |   |  | $ | 33.8 |   |  |  | (25 | )%
|As a percentage of net revenue       |  |                    | 3    | %    |  |                  | 5    | %    |  |      |     |          |  |   | 3    | % |  |   | 5    | % |  |  |     |   

Amortization of developed technology is related
primarily to the acquisition of NSMG and other acquisitions
completed during 1999 and the first quarter of 2003.
Amortization of developed technology decreased in the second
quarter and first half of 2003 over the same periods in 2002
primarily due to the fact that all intangibles related to the
NSMG acquisition were fully amortized in May 2003. In addition,
during the fourth quarter of 2002, we sold some of our
technology and wrote-off the related net book value of developed
technology which impacted the decrease in the first half of 2003
over 2002. We expect amortization of developed technology to
decline in the third quarter of 2003 to approximately
$4.3 million per quarter, including the amortization
related to the January 2003 acquisition of Jareva and the June
2003 acquisition of Precise.



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

|                                  |  |                    |       |      |  |                  |       |      |  |      |   |          |  |   |       |   |  |   |       |   |  |  |   |  
|--------------------------------- |  | ------------------ | ----- | ---- |  | ---------------- | ----- | ---- |  | ---- | - | -------- |  | - | ----- | - |  | - | ----- | - |  |  | - | -
|                                  |  |                    |       |      |  |                  |       |     
|                                  |  | Three Months Ended |       |      |  | Six Months Ended |       |     
|                                  |  | June 30,           |       |      |  | June 30,         |       |     
|                                  |  |                    |       |      |  |                  |       |     
|(In millions, except percentages) |  | 2003               |       | 2002 |  | % Change         |       | 2003 |  | 2002 |   | % Change
|                                  |  |                    |       |      |  |                  |       |      |  |      |   |         
|Operating expenses                |  | $                  | 262.1 |      |  | $                | 247.1 |      |  |      | 6 | %        |  | $ | 516.0 |   |  | $ | 490.3 |   |  |  | 5 | %
|As a percentage of net revenue    |  |                    | 63    | %    |  |                  | 68    | %    |  |      |   |          |  |   | 64    | % |  |   | 67    | % |  |  |   |  

The increase in total operating expenses in the
second quarter and first half of 2003 over the same periods in
2002 is due in part to currency rate changes which accounted for
approximately 3% of the change. The remainder of the increase
was primarily the result of increases in research and
development and general and administrative expenses and the
write-off of in-process research and development related to the
acquisitions of Precise and Jareva in the second quarter and
first quarter of 2003, respectively, partially offset by a
decrease in selling and marketing expenses and amortization of
other intangibles. During the third quarter of 2003, we expect
our operating margin to increase compared to the second quarter
of 2003 due to the expected increase in net revenue, the absence
in the third quarter of the charge to write off in-process
research and development of Precise, the expected decrease in
amortization of developed technology and other intangibles as a
result of fully amortized intangibles and our continued effort
to contain costs while investing for future growth, partially
offset by an increase in operating expenses as a result of our
acquisition of Precise. Our operating expenses include selling
and marketing expenses, research and development expenses,
general and administrative expenses, amortization of other
intangibles and in-process research and development expense.



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

|                                  |  |                    |       |      |  |                  |       |      |  |      |    |          |  |   |       |   |  |   |       |   |  |  |    |   
|--------------------------------- |  | ------------------ | ----- | ---- |  | ---------------- | ----- | ---- |  | ---- | -- | -------- |  | - | ----- | - |  | - | ----- | - |  |  | -- | --
|                                  |  |                    |       |      |  |                  |       |     
|                                  |  | Three Months Ended |       |      |  | Six Months Ended |       |     
|                                  |  | June 30,           |       |      |  | June 30,         |       |     
|                                  |  |                    |       |      |  |                  |       |     
|(In millions, except percentages) |  | 2003               |       | 2002 |  | % Change         |       | 2003 |  | 2002 |    | % Change
|                                  |  |                    |       |      |  |                  |       |      |  |      |    |         
|Selling and marketing             |  | $                  | 123.1 |      |  | $                | 126.7 |      |  |      | (3 | )%       |  | $ | 245.2 |   |  | $ | 253.7 |   |  |  | (3 | )%
|As a percentage of net revenue    |  |                    | 30    | %    |  |                  | 35    | %    |  |      |    |          |  |   | 30    | % |  |   | 35    | % |  |  |    |   

Selling and marketing expenses consist primarily
of salaries, related benefits, commissions, consultant fees and
other costs associated with our sales and marketing efforts. The
decrease in selling and marketing expense in the second quarter
and first half of 2003 over the same periods in 2002 is
primarily the result of a decrease in staffing levels, leading
to a reduction in other employee costs, primarily outside
recruiting and employee events, and travel and entertainment
expenses. The decrease in 2003 also reflects our efforts to
contain costs and control discretionary spending. For the second
half of 2003, we expect selling and marketing expenses to
increase in absolute dollars as a result of our recent
acquisition of Precise and investments in

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##### Table of Contents



international sales and marketing efforts,
partially offset by recent reductions in staffing levels in the
United States.




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

|                                  |  |                    |      |      |  |                  |      |      |  |      |   |          |  |   |       |   |  |   |       |   |  |  |   |  
|--------------------------------- |  | ------------------ | ---- | ---- |  | ---------------- | ---- | ---- |  | ---- | - | -------- |  | - | ----- | - |  | - | ----- | - |  |  | - | -
|                                  |  |                    |      |      |  |                  |      |     
|                                  |  | Three Months Ended |      |      |  | Six Months Ended |      |     
|                                  |  | June 30,           |      |      |  | June 30,         |      |     
|                                  |  |                    |      |      |  |                  |      |     
|(In millions, except percentages) |  | 2003               |      | 2002 |  | % Change         |      | 2003 |  | 2002 |   | % Change
|                                  |  |                    |      |      |  |                  |      |      |  |      |   |         
|Research and development          |  | $                  | 72.6 |      |  | $                | 67.7 |      |  |      | 7 | %        |  | $ | 144.0 |   |  | $ | 132.9 |   |  |  | 8 | %
|As a percentage of net revenue    |  |                    | 18   | %    |  |                  | 19   | %    |  |      |   |          |  |   | 18    | % |  |   | 18    | % |  |  |   |  

Research and development expenses consist
primarily of salaries, related benefits, third-party consultant
fees, stock-based compensation expense and other engineering
related costs. The increase in research and development expense
in the second quarter and first half of 2003 over the same
periods in 2002 is primarily the result of an increase in
compensation and benefits and, to a lesser extent, costs
associated with outside services, primarily for intellectual
property protection. The increase in compensation and benefits
for the three and six months ended June 30, 2003 also
reflects additional headcount from the acquisition of Jareva in
January 2003, stock-based compensation expense of
$0.7 million and $1.1 million, respectively, resulting
from the acquisition of Jareva and a general increase in
compensation levels for research and development personnel. We
believe that a significant level of research and development
investment is required to remain competitive and expect research
and development expenses to increase in absolute dollars as a
result of our recent acquisition of Precise, partially offset by
an increased use of research and development personnel in India,
where labor costs are lower.



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

|                                  |  |                    |      |      |  |                  |      |      |  |      |    |          |  |   |      |   |  |   |      |   |  |  |    |  
|--------------------------------- |  | ------------------ | ---- | ---- |  | ---------------- | ---- | ---- |  | ---- | -- | -------- |  | - | ---- | - |  | - | ---- | - |  |  | -- | -
|                                  |  |                    |      |      |  |                  |      |     
|                                  |  | Three Months Ended |      |      |  | Six Months Ended |      |     
|                                  |  | June 30,           |      |      |  | June 30,         |      |     
|                                  |  |                    |      |      |  |                  |      |     
|(In millions, except percentages) |  | 2003               |      | 2002 |  | % Change         |      | 2003 |  | 2002 |    | % Change
|                                  |  |                    |      |      |  |                  |      |      |  |      |    |         
|General and administrative        |  | $                  | 38.9 |      |  | $                | 34.6 |      |  |      | 12 | %        |  | $ | 77.1 |   |  | $ | 67.7 |   |  |  | 14 | %
|As a percentage of net revenue    |  |                    | 9    | %    |  |                  | 9    | %    |  |      |    |          |  |   | 10   | % |  |   | 9    | % |  |  |    |  

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



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

|                                  |  |                    |      |      |  |                  |      |      |  |      |     |          |  |   |      |   |  |   |      |   |  |  |     |   
|--------------------------------- |  | ------------------ | ---- | ---- |  | ---------------- | ---- | ---- |  | ---- | --- | -------- |  | - | ---- | - |  | - | ---- | - |  |  | --- | --
|                                  |  |                    |      |      |  |                  |      |     
|                                  |  | Three Months Ended |      |      |  | Six Months Ended |      |     
|                                  |  | June 30,           |      |      |  | June 30,         |      |     
|                                  |  |                    |      |      |  |                  |      |     
|(In millions, except percentages) |  | 2003               |      | 2002 |  | % Change         |      | 2003 |  | 2002 |     | % Change
|                                  |  |                    |      |      |  |                  |      |      |  |      |     |         
|Amortization of other intangibles |  | $                  | 12.3 |      |  | $                | 18.0 |      |  |      | (32 | )%       |  | $ | 30.4 |   |  | $ | 36.0 |   |  |  | (16 | )%
|As a percentage of net revenue    |  |                    | 3    | %    |  |                  | 5    | %    |  |      |     |          |  |   | 4    | % |  |   | 5    | % |  |  |     |   

Amortization of other intangibles principally
represents amortization of distribution channels, trademarks and
other intangibles recorded upon the acquisitions completed
during 1999 and the first quarter of 2003. The estimated useful
life of our other intangibles is six months to five years, with
the majority of intangibles being amortized over two to four
years. Other intangibles related to the 1999 acquisitions were
fully amortized in May 2003. We expect amortization of other
intangibles to decline in the third quarter of 2003 to
approximately $2.5 million per quarter because we will
realize the full impact of fully amortized intangibles,
partially offset by the impact of the January 2003 acquisition
of Jareva and June 2003 acquisition of Precise.

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

|                                                 |  |                    |      |      |  |                  |   |      |  |      |     |          |  |   |      |   |  |   |   |  |  |  |     |  
|------------------------------------------------ |  | ------------------ | ---- | ---- |  | ---------------- | - | ---- |  | ---- | --- | -------- |  | - | ---- | - |  | - | - |  |  |  | --- | -
|                                                 |  |                    |      |      |  |                  |   |     
|                                                 |  | Three Months Ended |      |      |  | Six Months Ended |   |     
|                                                 |  | June 30,           |      |      |  | June 30,         |   |     
|                                                 |  |                    |      |      |  |                  |   |     
|(In millions, except percentages)                |  | 2003               |      | 2002 |  | % Change         |   | 2003 |  | 2002 |     | % Change
|                                                 |  |                    |      |      |  |                  |   |      |  |      |     |         
|Write-off of in-process research and development |  | $                  | 15.3 |      |  | $                |  |      |  |      | 100 | %        |  | $ | 19.4 |   |  | $ |  |  |  |  | 100 | %
|As a percentage of net revenue                   |  |                    | 4    | %    |  |                  |  |      |  |      |     |          |  |   | 2    | % |  |   |  |  |  |  |     |  

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

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

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

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

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

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

Upon the acquisition of Jareva in January 2003,
we recorded a charge to IPR&D of $4.1 million. We
obtained an outside valuation for this acquisition, and values
were assigned to developed technology, IPR&D and other
intangibles. The fair value of the IPR&D for the acquisition
of Jareva was determined using the income approach, which
discounts expected future cash flows from projects under
development to their net present value. Each project was
analyzed to determine the characteristics and applications of
the technology; the complexity, cost and time to complete the
remaining development efforts; any alternative future use or
current technological feasibility; and the stage of completion.
Two IPR&D projects were identified and valued at the time of
our acquisition of Jareva. The projected future cash flows from
the projects under development were based on our estimates of
revenues and operating profits related to the projects. Revenues
on the projects related to IPR&D were estimated to begin in
2003 through 2007, with the majority of the revenues occurring
in 2006 and 2007. Costs to complete these two research and
development projects were estimated at $1.3 million. At the
date of acquisition, the development of the related products was
estimated at 52%

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complete, with an expected completion date of
June 2003 for both projects. Both IPR&D projects were
completed as of June 30, 2003. The risk-adjusted discount
rate applied to after-tax cash flows was 38%, compared to an
estimated weighted average cost of capital of 18%. We believe
the amounts determined for IPR&D are representative of the
fair value and do not exceed the amounts an independent third
party would pay for the projects assumed.


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



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

|                                  |  |                    |      |      |  |                  |      |      |  |      |     |          |  |   |      |   |  |   |      |   |  |  |     |   
|--------------------------------- |  | ------------------ | ---- | ---- |  | ---------------- | ---- | ---- |  | ---- | --- | -------- |  | - | ---- | - |  | - | ---- | - |  |  | --- | --
|                                  |  |                    |      |      |  |                  |      |     
|                                  |  | Three Months Ended |      |      |  | Six Months Ended |      |     
|                                  |  | June 30,           |      |      |  | June 30,         |      |     
|                                  |  |                    |      |      |  |                  |      |     
|(In millions, except percentages) |  | 2003               |      | 2002 |  | % Change         |      | 2003 |  | 2002 |     | % Change
|                                  |  |                    |      |      |  |                  |      |      |  |      |     |         
|Interest and other income, net    |  | $                  | 11.3 |      |  | $                | 13.7 |      |  |      | (18 | )%       |  | $ | 19.7 |   |  | $ | 26.9 |   |  |  | (27 | )%
|As a percentage of net revenue    |  |                    | 3    | %    |  |                  | 4    | %    |  |      |     |          |  |   | 2    | % |  |   | 4    | % |  |  |     |   

The decrease in interest and other income in the
second quarter and first half of 2003 compared to 2002 is
primarily due to lower interest rates and the appreciation of
the Euro against the U.S. Dollar experienced since the
second quarter and first half of 2002, partially offset by the
higher level of funds available for investment in 2003, which
were generated primarily from the net cash provided by operating
activities, and a $2.2 million gain on sale on one of our
investments.



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

|                                  |  |                    |     |      |  |                  |     |      |  |      |   |          |  |   |      |   |  |   |      |   |  |  |   |  
|--------------------------------- |  | ------------------ | --- | ---- |  | ---------------- | --- | ---- |  | ---- | - | -------- |  | - | ---- | - |  | - | ---- | - |  |  | - | -
|                                  |  |                    |     |      |  |                  |     |     
|                                  |  | Three Months Ended |     |      |  | Six Months Ended |     |     
|                                  |  | June 30,           |     |      |  | June 30,         |     |     
|                                  |  |                    |     |      |  |                  |     |     
|(In millions, except percentages) |  | 2003               |     | 2002 |  | % Change         |     | 2003 |  | 2002 |   | % Change
|                                  |  |                    |     |      |  |                  |     |      |  |      |   |         
|Interest expense                  |  | $                  | 7.8 |      |  | $                | 7.5 |      |  |      | 4 | %        |  | $ | 15.5 |   |  | $ | 15.4 |   |  |  | 1 | %
|As a percentage of net revenue    |  |                    | 2   | %    |  |                  | 2   | %    |  |      |   |          |  |   | 2    | % |  |   | 2    | % |  |  |   |  

Interest expense consisted primarily of interest
recorded under the 1.856% convertible subordinated notes due
2006 issued in August 1999 and the 5.25% convertible
subordinated notes due 2004 issued in October 1997. We expect
interest expense to increase by approximately $4.1 million
per quarter in future periods as a result of the adoption of
FASB Interpretation No. 46 on July 1, 2003 which
requires us to consolidate the properties from the build-to-suit
lease agreements and related debt in our financial statements.
As a result, the payments on the debt will be recorded as
interest expense. Previously, these payments were recorded as
operating expenses. In addition, future interest expense will be
impacted by the August 1, 2003 issuance of
$500.0 million of 0.25% convertible subordinated notes due
August 1, 2013 and the expected redemption or conversion of
all of our outstanding 1.856% and 5.25% convertible subordinated
notes on August 18, 2003. If the 1.856% notes are redeemed
for cash, we will record a loss on extinguishment of debt of
approximately $4.9 million in the third quarter of 2003
related to the unamortized portion of debt issuance costs. This
charge would be classified as a non-operating expense in our
statement of operations.



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

|                                  |  |                    |   |      |  |                  |      |      |  |      |      |          |  |   |     |  |  |   |      |  |  |  |     |   
|--------------------------------- |  | ------------------ | - | ---- |  | ---------------- | ---- | ---- |  | ---- | ---- | -------- |  | - | --- |  |  | - | ---- |  |  |  | --- | --
|                                  |  |                    |   |      |  |                  |      |     
|                                  |  | Three Months Ended |   |      |  | Six Months Ended |      |     
|                                  |  | June 30,           |   |      |  | June 30,         |      |     
|                                  |  |                    |   |      |  |                  |      |     
|(In millions, except percentages) |  | 2003               |   | 2002 |  | % Change         |      | 2003 |  | 2002 |      | % Change
|                                  |  |                    |   |      |  |                  |      |      |  |      |      |         
|Loss on strategic investments     |  | $                  |  |      |  | $                | 14.8 |      |  |      | (100 | )%       |  | $ | 3.5 |  |  | $ | 14.8 |  |  |  | (76 | )%
|As a percentage of net revenue    |  |                    |  |      |  |                  | 4    | %    |  |      |      |          |  |   |    |  |  |   | 2%   |  |  |  |     |   

With the decline in general economic conditions
beginning in 2001, some of the companies in which we have
invested have experienced extreme volatility and instability in
their business and operating results. During the first quarter
of 2003, we recognized impairment losses on our strategic
investments when we determined that there had been a decline in
the fair value of these investments that was other than
temporary. These losses represented write-downs of the carrying
amount of our investments. For the three months ended

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June 30, 2003, we determined that there was
no further impairment, other than temporary, on our strategic
investments.




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

|                                  |  |                    |      |      |  |                  |      |      |  |      |     |          |  |   |      |   |  |   |      |   |  |  |    |  
|--------------------------------- |  | ------------------ | ---- | ---- |  | ---------------- | ---- | ---- |  | ---- | --- | -------- |  | - | ---- | - |  | - | ---- | - |  |  | -- | -
|                                  |  |                    |      |      |  |                  |      |     
|                                  |  | Three Months Ended |      |      |  | Six Months Ended |      |     
|                                  |  | June 30,           |      |      |  | June 30,         |      |     
|                                  |  |                    |      |      |  |                  |      |     
|(In millions, except percentages) |  | 2003               |      | 2002 |  | % Change         |      | 2003 |  | 2002 |     | % Change
|                                  |  |                    |      |      |  |                  |      |      |  |      |     |         
|Income taxes                      |  | $                  | 32.8 |      |  | $                | 12.5 |      |  |      | 162 | %        |  | $ | 54.0 |   |  | $ | 33.2 |   |  |  | 63 | %
|As a percentage of net revenue    |  |                    | 8    | %    |  |                  | 3    | %    |  |      |     |          |  |   | 7    | % |  |   | 5    | % |  |  |    |  

Our effective tax rates for the three months
ended June 30, 2003 and 2002 were 40% and 32%,
respectively, and 37% and 32%, respectively, for the six months
ended June 30, 2003 and 2002. Our second quarter and first
half effective tax rates for 2003 and 2002 differed from the
federal statutory rate due primarily to differences attributable
to acquisition-related charges, including in-process research
and development, that were non-deductible for tax purposes and
to foreign earnings which are taxed at rates different from the
federal statutory rate.

New Accounting Pronouncements

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

In April 2003, the FASB issued SFAS No. 149,
Amendment of Statement 133 on Derivative Instruments and
Hedging Activities, which amends and clarifies financial
accounting and reporting for derivative instruments, including
certain derivative instruments embedded in other contracts and
for hedging activities under SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities. In
particular, SFAS No. 149 (1) clarifies under what
circumstances a contract with an initial net investment meets
the characteristic of a derivative, (2) clarifies when a
derivative contains a financing component, (3) amends the
definition of an underlying to conform it to language used in
FASB Interpretation No., or FIN, 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, and
(4) amends certain other existing pronouncements. SFAS
No. 149 is effective for contracts entered into or modified
after June 30, 2003 and for hedging relationships
designated after June 30, 2003, except for those paragraphs
related to guidance in SFAS No. 133 implementation issues
that have been cleared by the FASB and have been effective for
fiscal quarters that began prior to June 15, 2003. Those
paragraphs should continue to be applied in accordance with
their respective effective dates. We do not expect the adoption
of SFAS No. 149 to have a material effect on our financial
position, results of operations or cash flows.

In January 2003, the FASB issued FIN 46,
Consolidation of Variable Interest Entities, which
addresses the consolidation of variable interest entities.
FIN 46 provides guidance for determining when an entity
that is the primary beneficiary of a variable interest entity or
equivalent structure should consolidate the variable interest
entity into the entitys financial statements. The
provisions of FIN 46 are to be applied as of the beginning of
the first interim or annual reporting period beginning after
June 15, 2003 for variable interest entities created before
February 1, 2003 and still existing on June 15, 2003.
We currently have three build-to-suit operating leases, commonly
referred to as synthetic leases, which were entered into prior
to February 1, 2003. Each synthetic lease is owned by a
trust that has no voting rights, no employees, no financing
activity other than the lease with us, no ability to absorb
losses and no right to participate in gains realized on the sale
of the related property. We have determined that the trusts
under the leasing structures qualify as variable interest
entities for purposes of FIN 46. Consequently, we are
considered the primary beneficiary and will consolidate the
trusts into our financial statements beginning July 1,
2003. As a result of consolidating these

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entities in the third quarter of 2003, we expect
to report a cumulative effect of change in accounting principle
in accordance with Accounting Principles Board Opinion, or
APB, 20, Accounting Changes, with a charge of
$6.2 million which equals the amount of depreciation
expense that would have been recorded had these trusts been
consolidated from the date the properties were available for
occupancy, net of tax. In addition, on July 1, 2003, we
will record property and equipment, net of accumulated
depreciation, equal to $369.1 million, long-term debt in
the amount of $369.2 million and noncontrolling interest of
$11.4 million on the balance sheet. Future depreciation
expense related to these properties will be approximately
$1.6 million per quarter and $4.1 million per quarter
of rent expense previously classified as operating expense will
be classified as interest expense in the statements of
operations beginning July 1, 2003.


In November 2002, the FASB issued FIN 45,
Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others. FIN 45 requires that we recognize the fair
value for guarantee and indemnification arrangements issued or
modified by us after December 31, 2002, if these
arrangements are within the scope of the Interpretation. In
addition, we must continue to monitor the conditions that are
subject to the guarantees and indemnifications, as required
under previously existing generally accepted accounting
principles, in order to identify if a loss has occurred. If we
determine it is probable that a loss has occurred then any such
estimable loss would be recognized under those guarantees and
indemnifications. Some of the software licenses granted by us
contain provisions that indemnify licensees of our software from
damages and costs resulting from claims alleging that our
software infringes the intellectual property rights of a third
party. We have historically received only a limited number of
requests for indemnification under these provisions and have not
been required to make material payments pursuant to these
provisions. Accordingly, we have not recorded a liability
related to these indemnification provisions. We do not have any
guarantees or indemnification arrangements other than the
indemnification clause in some of our software licenses, the
guarantee on a credit facility discussed in Note 14 to our
condensed consolidated financial statements and the guarantee on
our three build-to-suit lease agreements for buildings in
Mountain View, Roseville and Milpitas discussed in Note 15
to our condensed consolidated financial statements. We adopted
FIN 45 effective January 1, 2003. The adoption of
FIN 45 did not have a material impact on our financial
position, results of operations or cash flows.

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

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

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Liquidity and Capital Resources



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

Our cash, cash equivalents and short-term
investments totaled $2,371.0 million at June 30, 2003
and represented 79% of our net tangible assets. Our cash, cash
equivalents and short-term investments totaled
$2,241.3 million at December 31, 2002 and represented
77% of our net tangible assets. Cash and cash equivalents are
highly liquid with original maturities of 90 days or less.
Short-term investments consist mainly of commercial paper,
medium-term notes, corporate notes, government agency securities
(taxable and non-taxable), asset-backed securities and market
auction preferreds.

Operating activities, excluding the effects of
business acquisitions, provided cash of $324.9 million for
the six months ended June 30, 2003, primarily due to net
income of $91.3 million, adjusted for depreciation and
amortization of $50.0 million, amortization of developed
technology and other intangibles of $55.8 million,
in-process research and development expense of
$19.4 million, tax benefits from stock plans of
$11.1 million, a decrease in accounts receivable of
$44.9 million, an increase in income taxes payable of
$50.4 million and an increase in deferred revenue of
$26.1 million which were partially offset by deferred
income taxes of $22.1 million and a decrease in accrued
compensation and benefits of $11.0 million. Accounts
receivable increased at June 30, 2003 compared to
March 31, 2003 primarily because a greater portion of our
sales for the three months ended March 31, 2003 occurred in
the first two months. In contrast, sales occurred more evenly
during the three months ended June 30, 2003 which is
consistent with our historical, seasonal patterns for the second
quarter. As a result, a higher amount of our transactions during
the second quarter of 2003 was invoiced and unpaid in the third
month of the quarter ended June 30, 2003 than the third
month of the quarter ended March 31, 2003. Operating
activities provided cash of $339.6 million for the six months
ended June 30, 2002, primarily due to net income of
$70.5 million, adjusted for depreciation and amortization
of $52.0 million, amortization of developed technology and
other intangibles of $69.8 million, tax benefits from stock
plans of $19.6 million, loss on strategic investments of
$14.8 million, a decrease in accounts receivable of
$37.2 million, an increase in accounts payable of
$14.2 million, an increase in income taxes payable of
$34.6 million and an increase in deferred revenue of
$36.6 million partially offset by deferred income taxes of
$26.3 million and a decrease in accrued compensation and
benefits of $7.7 million. We expect cash flows from
operating activities to increase in the third quarter of 2003.

Investing activities used cash of
$145.1 million for the six months ended June 30, 2003,
primarily due to the acquisitions of Precise and Jareva, net of
cash acquired, for $333.8 million and purchases of property
and equipment of $36.0 million, partially offset by net
sales of short-term investments of $228.9 million.
Investing activities used cash of $195.5 million for the
six months ended June 30, 2002, primarily due to the net
purchases of short-term investments of $135.1 million,
purchases of property and equipment of $53.1 million and
payment made for purchases of businesses and technologies of
$7.3 million.

Financing activities provided cash of
$59.0 million and $63.6 million for the six months
ended June 30, 2003 and 2002, respectively, as a result of
the issuance of common stock under our employee stock plans.

In August 2003, we received net proceeds of
approximately $488.0 million from the issuance of 0.25%
convertible subordinated notes due August 1, 2013, or 0.25%
notes.

In July 2003, we paid an additional cash amount
of $64.5 million as part of the total purchase
consideration for Precise.

In July 2003, our board of directors authorized a
program to repurchase our common stock in an amount of up to
$300.0 million plus the market value at the time of
repurchase of any shares we issue upon conversion of our 1.856%
convertible subordinated notes due 2006, or 1.856% notes, which
we have called for redemption. If all holders of the 1.856%
notes elect to convert their notes into common stock, they would
receive in the aggregate approximately 13.0 million shares
of our common stock. On August 1, 2003, we repurchased
4.2 million shares of our common stock for an aggregate
purchase price of approximately $129.0 million. We expect
to purchase additional shares of common stock under the program
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

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program is intended to reduce the dilution
resulting from our acquisition of Precise, our employee stock
plans and the potential conversion of our 1.856% notes.


In July 2003, we announced that we will be
redeeming on August 18, 2003 all of our outstanding 5.25%
convertible subordinated notes due 2004, or 5.25% notes,
and all of our outstanding 1.856% notes. On August 18,
2003, the aggregate redemption price of the 5.25% notes
will be approximately $64.0 million and the aggregate
redemption price of the 1.856% notes will be approximately
$407.0 million. The conversion price of our
5.25% notes is $9.56 per share. The effective
conversion price of our 1.856% notes on August 18,
2003 will be approximately $31.35 per share. Should the
market price of our common stock be higher than the conversion
prices of the 5.25% notes or the 1.856% notes on the
redemption date, then some or all holders of the
5.25% notes and 1.856% notes may elect to convert
their notes into common stock in lieu of redeeming for cash.

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 October 1997, we issued $100.0 million of
5.25% notes, for which we received net proceeds of
$97.5 million. We and our wholly-owned subsidiary, VERITAS
Operating Corporation, are co-obligors on the 5.25% notes
and are unconditionally, jointly and severally liable for all
payments under the 5.25% notes. As of June 30, 2003, a
total principal amount of $36.0 million had been converted
into approximately 3.8 million shares of our common stock.
Based on the aggregate principal amount of $64.0 million
outstanding as of June 30, 2003, the 5.25% notes provide
for semi-annual interest payments of $1.7 million each
May 1 and November 1. The 5.25% notes are
convertible into shares of our common stock at any time prior to
the close of business on the maturity date, unless previously
redeemed or repurchased, at a conversion price of $9.56 per
share, subject to adjustment in certain events, equivalent to a
conversion rate of 104.65 shares of common stock per $1,000
principal amount at maturity. The 5.25% notes are
redeemable over a period of time until maturity at our option at
declining premiums to par. The debt issuance costs are being
amortized over the term of the 5.25% notes using the
interest method. We called the 5.25% notes for redemption
on August 18, 2003 on which date the aggregate redemption
price of the 5.25% notes will be $64.0 million. If the
holders elect to convert their notes into common stock, they
would receive in the aggregate approximately 6.7 million
shares of our common stock. Because our stock price as of
August 12, 2003 is significantly higher than the conversion
price of the 5.25% notes, we expect that the
5.25% notes will be converted into our common stock,
although there can be no guarantee that this will happen.

In August 1999, we and our wholly-owned
subsidiary, VERITAS Operating Corporation, issued
$465.8 million, aggregate principal amount at maturity, of
1.856% notes, for which we received net proceeds of
approximately $334.1 million. The interest rate of 1.856%,
together with the accrual of original issue discount, represent
a yield to maturity of 6.5%. We, and VERITAS Operating
Corporation are co-obligors on the 1.856% notes and are
unconditionally, jointly and severally liable for all payments
under the notes. As of June 30, 2003, a total principal
amount of $1.1 million had been converted into
approximately 29,400 shares of our common stock. Based on the
aggregate principal amount at maturity of $464.7 million,
the 1.856% notes provide for semi-annual interest payments
of $4.3 million each February 13 and August 13.
The 1.856% notes are convertible into shares of our common
stock at any time prior to the close of business on the maturity
date, unless previously redeemed or repurchased. The
1.856% notes are redeemable over a period of time until
maturity at our option at the issuance price plus accrued
original issue discount and any accrued interest. The debt
issuance costs are being amortized over the term of the
1.856% notes using the interest method. We called the
1.856% notes for redemption on August 18, 2003 on which
date the aggregate redemption price of the 1.856% notes will be
$407.0 million and the effective conversion price will be
approximately $31.35 per share. If the holders elect to convert
their notes into common stock, they would receive in the
aggregate approximately 13.0 million shares of our common
stock.

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In August 2003, we issued $500.0 million of
0.25% notes, for which we received net proceeds of
approximately $488.0 million, to several initial purchasers
in a private offering. We also granted to the initial purchasers
of the 0.25% notes an option to purchase up to an
additional $100.0 million principal amount of
0.25% notes solely to cover over-allotments. This
over-allotment option may be exercised by the initial purchasers
at any time on or prior to August 28, 2003.

The 0.25% notes were issued at their face
value and provide for semi-annual interest payments of
$0.6 million each February 1 and August 1,
beginning February 1, 2004. The 0.25% notes are
convertible, under the specified circumstances discussed below,
into shares of our common stock at a conversion rate of
21.6802 shares per $1,000 principal amount of notes, which
is equivalent to a conversion price of approximately
$46.13 per share. The conversion rate is subject to
adjustment upon the occurrence of specified events. The
specified circumstances under which the 0.25% notes are
convertible prior to maturity are: (1) during any quarterly
conversion period (which periods begin on the eleventh trading
day of each fiscal quarter and end on the eleventh trading day
of the following fiscal quarter) prior to August 1, 2010,
if the closing sale price of our common stock for at least
20 trading days in the 30 trading day period ending on
the first day of such conversion period exceeds 120% of the
conversion price of the notes on that first day, (2) during
the period beginning August 1, 2010 through the maturity
date of the notes, if the closing sale price of our common stock
is more than 120% of the then current conversion price,
(3) during the five consecutive business day period
following any five consecutive trading day period in which the
average of the trading prices for the 0.25% notes was less
than 95% of the average of the sale price of our common stock
multiplied by the then current conversion rate of the notes,
(4) our corporate credit rating assigned by
Standard & Poors falls below B-(and if
Moodys has assigned VERITAS a corporate credit rating and
such rating is lower than B3) or if both such ratings are
withdrawn, (5) we call the notes for redemption or
(6) upon the occurrence of corporate transactions specified
in the indenture governing the notes. Upon any conversion of
notes by a holder, we shall have the option to satisfy our
conversion obligation in shares of our common stock, in cash or
a combination thereof. It is our intention to satisfy the
principal portion of the obligation in cash and the remainder,
if any, in shares of our common stock. On or after
August 5, 2006, we have the option to redeem all or a
portion of the 0.25% notes at a redemption price equal to
100% of the principal amount, plus accrued and unpaid interest.
On August 1, 2006 and August 1, 2008, or upon the
occurrence of a fundamental change involving VERITAS, holders of
the 0.25% notes may require us to repurchase their notes at
a repurchase price equal to 100% of the principal amount, plus
accrued and unpaid interest. Upon a fundamental change, we have
the option to pay the repurchase price in cash, shares of common
stock or a combination thereof.

At June 30 2003, we had a ratio of long-term
debt to total capitalization of approximately 12%. The degree to
which we will be leveraged could materially and adversely affect
our ability to obtain financing for working capital,
acquisitions or other purposes and could make us more vulnerable
to industry downturns and competitive pressures. We will require
substantial amounts of cash to fund scheduled payments of
principal and interest on our indebtedness, future capital
expenditures and any increased working capital requirements. If
we are unable to meet our cash requirements out of cash flow
from operations, we cannot assure you that we will be able to
obtain alternative financing.



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



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

During 2002, our Japanese subsidiary entered into
a short-term credit facility with a multinational Japanese bank
in the amount of 1.0 billion Japanese yen
($8.4 million USD). At June 30, 2003, no amount was
outstanding. The short-term credit facility was renewed in March
2003 and is due to expire in March 2004. Borrowings under the
short-term credit facility bear interest at Tokyo Inter Bank
Offered Rate, or TIBOR, plus 0.5%. There are no covenants on the
short-term credit facility and the loan has been guaranteed by
VERITAS Software Global LLC, one of our wholly-owned
subsidiaries.



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

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

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Mountain View facilities in May and June 2001
respectively, and began occupying the Milpitas facility in April
2003. The development and acquisition of the properties have
been financed by a third party through a syndicate of financial
institutions. We have accounted for these agreements as
operating leases in accordance with SFAS No. 13,
Accounting for Leases, as amended. Commencing
July 1, 2003, we will account for these agreements in
accordance with FIN 46 which will require us to consolidate
these entities into the consolidated financial statements.
Please see New Accounting Pronouncements.


During 2001 and 2002, we amended our existing
lease agreement, originally signed in 1999, for our corporate
headquarters in Mountain View, California. The facilities of
425,000 square feet provide space for sales, marketing,
administration and research and development functions. The lease
term for these facilities is five years beginning in March 2000,
with an option to extend the lease term for two successive
periods of one year each, if agreed to by the financial
institutions. We have the option to purchase the property (land
and facilities) for the termination value of $145.2 million
or, at the end of the lease, to arrange for the sale of the
property to a third party while we retain an obligation to the
owner for the difference between the sales price and the
guaranteed residual value up to $129.0 million if the sales
price is less than this amount, subject to the terms of the
lease. In addition, we are entitled to any proceeds from a sale
of the property in excess of the termination value. We occupy
these facilities and began making lease payments in the second
quarter of 2001.

During 2001 and 2002, we amended our existing
lease agreement, originally signed in 2000, for our facilities
in Roseville, Minnesota. We improved and expanded our existing
facilities of 62,000 square feet and developed adjacent
property adding 142,000 square feet completed in 2001. The
facilities provide space for technical support and research and
development functions. The lease term for these facilities is
five years beginning in March 2000, with an option to extend the
lease term for two successive periods of one year each, if
agreed to by the financial institutions. We have the option to
purchase the property (land and facilities) for the termination
value of $41.3 million or, at the end of the lease, to
arrange for the sale of the property to a third party while we
retain an obligation to the owner for the difference between the
sales price and the guaranteed residual value up to
$35.1 million if the sales price is less than this amount,
subject to the terms of the lease. In addition, we are entitled
to any proceeds from a sale of the property in excess of the
termination value. We occupy these facilities and began making
lease payments in 2001.

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

Lease payments under our three build-to-suit
lease agreements are generally paid quarterly and are equal to
the termination value of the outstanding lease obligations
multiplied by our cost of funds, which is based on LIBOR using
30-day to 180-day LIBOR contracts and adjusted for our credit
spread. In January 2002, we entered into two three-year pay
fixed, receive floating, interest rate swaps for the purpose of
hedging the cash payments related to the Roseville, Minnesota
and Mountain View, California lease agreements. Under the terms
of these interest rate swaps, we make payments based on the
fixed rate and will receive interest payments based on the
3-month LIBOR rate. For the three and six months ended
June 30, 2003, our aggregate lease payments, including the
payments on the interest rate swaps, were $4.1 million and
$8.3 million, respectively. For the three and six months
ended June 30, 2002, our aggregate lease payments,

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including payments on the interest rate swaps,
were $4.2 million and $8.3 million, respectively. Our
aggregate payment obligations under the three build-to-suit
lease agreements for the third quarter of 2003 will be
$4.1 million.


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

If we choose to exercise the purchase option for
the properties subject to the three build-to-suit lease
agreements, the aggregate purchase price would be approximately
$380.8 million. Payment of the purchase price for these
properties would significantly reduce the amount of cash, cash
equivalents and short-term investments available for funding our
research and development efforts, geographic expansion and
strategic acquisitions in the future.

The agreements for the facilities described above
require that we maintain specified financial covenants, all of
which we were in compliance with as of June 30, 2003. The
specified financial covenants as of June 30, 2003 require
us to maintain a minimum rolling four quarter EBITDA of
$400.0 million, a minimum ratio of cash and cash
equivalents to current liabilities of 1.2 to 1, and a leverage
ratio of total funded indebtedness to rolling four quarter
EBITDA of not more than 3.0 to 1. For purposes of these
financial covenants, EBITDA represents our net income for the
applicable period, plus interest expense, taxes, depreciation
and amortization and all non-cash restructuring charges for
acquisitions occurring within a four year period, less software
development expenses classified as capital expenditures. In
order to secure the obligations under each agreement, each of
the facilities is subject to a deed of trust in favor of the
financial institutions which 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.

We currently have operating leases for our
facilities and rental equipment through 2023. In addition to our
basic rent, we are responsible for all taxes, insurance and
utilities related to the facilities. The table below shows our
commitments related to our approximate minimum lease payments
for our facilities and rental equipment as of June 30, 2003
(in millions):

|                                    |                   |             |       |       | 
|----------------------------------- | ----------------- | ----------- | ----- | ----- | 
|                                    |                   | Operating  
|                                    |                   | Lease      
|                                    |                   | Commitments
|                                    |                   |            
|Six months ending December 31, 2003 |                   | $           | 41.3  |      
|2004                                |                   |             | 71.7  |      
|2005                                |                   |             | 47.8  |      
|2006                                |                   |             | 34.3  |      
|2007                                |                   |             | 32.4  |      
|2008 and thereafter                 |                   |             | 169.9 |      
|                                    |                   |             |       |      
|                                    | Total commitments |             | $     | 397.4 | 
|                                    |                   |             |       |      

The table above includes payments on our three
build-to-suit lease agreements that are currently classified as
operating expenses in our statements of operations. Upon
adoption of FIN 46 on July 1, 2003, we are required to
record the properties as property and equipment on our balance
sheet with corresponding long-term debt and noncontrolling
interest, and consequently rent expense in the amount of
approximately $4.1 million per quarter previously recorded
as operating expense will be recorded as interest expense in our
statements of operations beginning July 1, 2003.

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

On October 1, 2002, we acquired volume
replicator software technology for $6.0 million and
contingent payments of up to another $6.0 million based on
future revenues generated by the acquired technology. The
payments will be paid quarterly over 40 quarters, in
amounts between $150,000 and $300,000. We issued a promissory
note payable in the principal amount of $5.0 million,
representing the present value of our minimum payment
obligations under the purchase agreement for the acquired
technology, which are payable quarterly commencing in the first
quarter of 2003 and ending in the fourth quarter of 2012. The
contingent payments in excess of the quarterly minimum
obligations will be paid as they may become due. The balance
outstanding of the note payable was $4.8 million as of
June 30, 2003 and $5.0 million as of December 31,
2002 and is included in non-current accrued acquisition and
restructuring costs.

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

Factors That May Affect Future
Results

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

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

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



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

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

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

We derive a substantial majority of our revenue
from a small number of software products, including data
protection, file system and volume management products. For the
three and six months ended June 30, 2003, we derived
approximately 88% and 85%, respectively, of our user license
fees from these core products, and a similar percentage of our
service revenue from associated maintenance and technical
support. As a result, we are particularly vulnerable to
fluctuations in demand for these products, whether as a result
of competition, product obsolescence, technological change,
budget constraints or other factors. If our revenue derived from
these software products were to decline significantly, our
business and operating results would be adversely affected. In
addition, because our software products are concentrated within
the market for data storage, a decline in the demand for storage
devices, storage software applications or storage capacity could
result in a significant reduction in our revenue and adversely
affect our business and operating results.

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

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

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



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

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



| |   |                                                                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our lack of control over the shipping dates or
    volume of systems shipped;                                                                                                                                                                
|
| |  | the original equipment manufacturers are not
    subject to minimum sales requirements or any obligation to offer
    our products to their customers;                                                                                       
|
| |  | the original equipment manufacturers may
    terminate their arrangements with us at any time;                                                                                                                                               
|
| |  | the development work that we must generally
    undertake under our agreements with original equipment
    manufacturers may require us to invest significant resources and
    incur significant costs with little or no associated revenue;

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| |   |                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the time and expense required for the sales and
    marketing organizations of our original equipment manufacturer
    customers to become familiar with our products make it more
    difficult to introduce those products to the market; and
|
| |  | our original equipment manufacturer customers are
    able to develop, market and distribute their own storage
    products and market and distribute storage products of our
    competitors, which could reduce our sales.                   

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



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

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

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

Many of our original equipment manufacturer
customers offer software products that compete with our products
or have announced their intention to focus on developing or
acquiring their own storage software products. These original
equipment manufacturers may choose to offer their own products
rather than offer our products to their customers or limit our
access to their hardware platforms. End-user customers may
prefer to purchase software and hardware that is manufactured by
the same company because of perceived advantages in price,
technical support, compatibility or other issues. In addition,
software vendors may choose to bundle their software, such as an
operating system, with their own or other vendors storage
software. They may also limit our access to standard product
interfaces for their software and inhibit our ability to develop
products for their platform.

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

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

Our future success depends on our ability to
address the rapidly changing needs of our customers by
developing and introducing new products, product updates and
services on a timely basis. We must also extend the operation of
our products to new platforms and keep pace with technological
developments and emerging industry standards. We intend to
commit substantial resources to developing new software products
and services, including software products and services for the
storage area networking market and the storage resource
management market. Each of these markets is new and unproven,
and industry standards for these

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markets are evolving and changing. They also may
require development of new channels. If these markets do not
develop as anticipated, or demand for our products and services
in these markets does not materialize or occurs more slowly than
we expect, we will have expended substantial resources and
capital without realizing sufficient revenue, and our business
and operating results could be adversely affected.


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

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

We derive a substantial portion of our revenue
from customers located outside of the U.S. We have significant
operations outside of the U.S., including engineering, sales,
customer support and production operations, and we plan to
expand our international operations. Our international
operations are subject to risks, including:



| |   |                                                                                                                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | potential loss of proprietary information due to
    piracy, misappropriation or weaker laws regarding intellectual
    property protection;                                                                                                                                         
|
| |  | imposition of foreign laws and other governmental
    controls, including trade and employment restrictions;                                                                                                                                                                         
|
| |  | fluctuations in currency exchange rates and
    economic instability such as higher interest rates and
    inflation, which could reduce our customers ability to
    obtain financing for software products or which could make our
    products more expensive in those countries;
|
| |  | limitations on future growth or inability to
    maintain current levels of revenue from international sales if
    we do not invest sufficiently in our international operations;                                                                                                   
|
| |  | difficulties in hedging foreign currency
    transaction exposures;                                                                                                                                                                                                                  
|
| |  | longer payment cycles for sales in foreign
    countries and difficulties in collecting accounts receivable;                                                                                                                                                                         
|
| |  | difficulties in staffing and managing our
    international operations, including difficulties related to
    administering our stock option plan in some foreign countries;                                                                                                         
|
| |  | difficulties in coordinating the activities of
    our geographically dispersed and culturally diverse operations;                                                                                                                                                                   
|
| |  | seasonal reductions in business activity in the
    summer months in Europe and in other periods in other countries;                                                                                                                                                                 
|
| |  | competition from local suppliers;                                                                                                                                                                                                                                                    
|
| |  | costs and delays associated with developing
    software in multiple languages;                                                                                                                                                                                                      
|
| |  | the possible reduced level of general business
    activity, particularly in the Asia-Pacific region, as a result
    of the SARS illness; 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.

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

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

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

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

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

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

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

Our success depends on our ability to hire and
retain qualified employees and to manage our employee base
effectively. If we are unable to hire and retain qualified
employees, our business and operating results could be adversely
affected. Conversely, if we fail to manage employee performance
or reduce staffing levels when required by market conditions,
our costs would be excessive and our business and operating
results could be adversely affected. We may need to hire
additional sales, technical and senior management personnel to
support our business and to meet customer demand for our
products and services. Competition for people with the skills
that we require is intense, particularly in the San Francisco
Bay area where our headquarters are located, and the high cost
of living in this area makes our recruiting and compensation
costs higher. In addition, stock-based compensation, such as
stock options, has historically been an important incentive for
employees in the software industry. If we are unable to get
stockholder approval for future increases in the number of
shares of common stock authorized under our stock plans or if
changes in accounting rules cause us to reduce the amount of
stock-based compensation awarded to employees, then it may
become more difficult for us to attract and retain employees. We
cannot assure you that we will be successful in hiring or
retaining

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qualified personnel, and if we are unable to do
so, our ability to manage and operate our business could be
adversely affected.


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

Many of our products operate primarily on the
UNIX and Windows computer operating systems. We have also
redesigned, or ported, these products to operate on the Linux
operating systems for both server-based and embedded solutions.
We continue to develop new products for UNIX, Windows Server and
Linux. 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 efforts. If they do not grant us a
license or if they do not renew our license, we may not be able
to expand our product line into other areas.

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

We derive significant revenue from Ingram Micro,
Inc., a distributor that sells our products and services through
resellers. For the three and six months ended June 30,
2003, Ingram Micro accounted for 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
substantially increase sales through other distributors or
direct sales to customers. Our contract with Ingram Micro does
not require them to purchase any specified number of software
licenses from us. Accordingly, we cannot be sure that Ingram
Micro will continue to market and sell our products at current
levels.

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

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

Following the announcement of our financial
restatement, we were named as a party to several class action
and derivative action lawsuits, and we may be named in
additional litigation, all of which could require significant
management attention and result in significant legal expenses.
An unfavorable outcome in one

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or more of these lawsuits could have a
material adverse effect on our business, financial condition,
results of operations and cash flows.


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

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

As part of our business strategy, we have in the
past acquired and expect in the future to acquire other
businesses, business units and technologies. We recently
acquired Precise Software Solutions Ltd. and Jareva
Technologies, Inc. Our acquisitions involve a number of special
risks and challenges, including:



| |   |                                                                                                                                                                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | diversion of managements attention from our
    business;                                                                                                                                                                                                                       
|
| |  | integration of acquired business operations and
    employees into our existing business, including coordination of
    geographically dispersed operations, which in the past has taken
    longer and was more complex than initially expected for some
    acquired companies;
|
| |  | incorporation of acquired products and business
    technology into our existing product lines, including
    consolidating technology with duplicative functionality or
    designed on different technological architecture;                                                   
|
| |  | loss or termination of employees, including
    costly litigation resulting from the termination of those
    employees;                                                                                                                                                         
|
| |  | dilution of our then-current stockholders
    percentage ownership;                                                                                                                                                                                                             
|
| |  | assumption of liabilities of the acquired
    business, including costly litigation related to alleged
    liabilities of the acquired business;                                                                                                                                 
|
| |  | presentation of a unified corporate image to our
    customers and our employees; and                                                                                                                                                                                            
|
| |  | risk of impairment charges related to potential
    write-down of acquired assets in future acquisitions.                                                                                                                                                                        

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

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

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

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Technologys operations prior to the
transaction. However, governmental organizations or other third
parties may seek recourse against our subsidiary or us for these
liabilities. As a result, our subsidiary could receive claims
related to a wide range of possible liabilities. The main area
of potential liability for our Seagate Technology subsidiary
relates to tax liabilities. Any such claim, with or without
merit, could be time consuming to defend, result in costly
litigation and divert management attention. Moreover, if SAC is
unable or unwilling to indemnify us as agreed, we could incur
unexpected costs. For example, the Internal Revenue Service is
currently auditing past tax returns of Seagate Technology. We
can predict neither the outcome of these audits, nor the amount
of any liability we might incur arising from these audits.


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

Our effective tax rate could be adversely
affected by several factors, many of which are outside of our
control. Our effective tax rate is directly affected by the
relative proportions of revenue and income before taxes in the
various domestic and international jurisdictions in which we
operate. We are also subject to changing tax laws, regulations
and interpretations in multiple jurisdictions in which we
operate as well as the requirements of certain tax rulings. In
particular, we are subject to a number of tax rulings from the
country of Israel related to the activities of Precise. Failure
to comply with the terms and conditions of such rulings could
significantly impact our effective tax rate. We do not have a
history of audit activity from various taxing authorities and
while we believe we are in compliance with all federal, state
and international tax laws, there are various interpretations of
their application that could result in additional tax
assessments. Our effective tax rate is also influenced by the
tax effects of purchase accounting for acquisitions and
non-recurring charges, which may cause fluctuations between
reporting periods. In addition, in November 2000, we acquired
Seagate Technology, which has certain federal and state tax
returns for various fiscal years under examination by tax
authorities. We believe that adequate amounts for tax
liabilities have been provided for any final assessments that
may result from these examinations. The timing of the settlement
of these examinations is uncertain. To the extent the
settlements of these audits and the amounts reimbursed by SAC,
as required by the Seagate acquisition agreement, are different
from the amounts recorded, the difference will be recorded as a
component of income tax expense or benefit and may significantly
affect our effective tax rate for the period in which the
settlements take place.

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

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



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Amortization of Developed Technology and Other
    Intangibles.We incur significant
    charges related to the amortization of developed technology and
    other intangibles. For the quarter ended June 30, 2003, we
    incurred a charge of approximately $22.8 million relating
    to amortization of developed technology and other intangibles
    and expect this charge to be approximately $6.8 million for
    the quarter ending September 30, 2003, including the impact
    of our recent acquisition of Precise. The quarterly amortization
    charge could increase as a result of future business
    combinations or impairment of our other intangibles. While we do
    not expect to record other intangibles impairment charges, we
    cannot be sure that we will not have to record impairment in the
    future. As of June 30, 2003, the total net carrying amount
    of our other intangible assets was $88.8 million;
|
| |  | Impairment of
    Goodwill.We do not amortize goodwill
    related to business combinations, but instead we test it for
    impairment at least annually. While we do not expect to record
    goodwill impairment charges, we cannot be sure that we will not
    have to record impairment in the future. As of June 30,
    2003, the total net carrying amount of our goodwill was
    $1,733.1 million;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | Loss on Strategic
    Investments.In the third quarter of
    2001, the second quarter of 2002 and the first quarter of 2003,
    we recorded losses on strategic investments. Future losses will
    depend on the results of our quarterly reviews to determine if
    there has been a decline in the fair value of our strategic                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | investments that is other than temporary. As of
    June 30, 2003, the total carrying amount of our strategic
    investments was $5.4 million;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | Stock-based
    Compensation.Because the exercise
    price of options granted under our stock plans are generally
    equal to the market value of our common stock on the date of
    grant, we generally recognize no compensation cost for grants
    under our stock option plans. The FASB has voted to require
    companies to record a charge to earnings for employee stock
    option grants, but the methodology for valuing stock options and
    the timing for issuance of final rules have not been finalized.
    Any change in practice regarding accounting for stock options
    could result in significant accounting charges; and                                                                                                                                                                                                                             
|
| |  | Restructuring
    Charges.We regularly perform
    evaluations of our operations and activities. Any decision to
    restructure our operations, to exit any activity or to eliminate
    any excess capacity could result in significant accounting
    charges. Restructuring charges could also result from future
    business combinations. As a result of an evaluation of our
    facilities requirements, our board of directors approved in the
    fourth quarter of 2002 a restructuring plan to exit and
    consolidate certain of our facilities located in
    17 metropolitan areas worldwide. In connection with this
    restructuring plan, we recorded a restructuring charge of
    approximately $98.2 million during the fourth quarter of
    2002. As of June 30, 2003, the total carrying amount of our
    facility restructure reserve was $91.4 million.

If our assumptions about our ability to
terminate or sublet our facilities prove to be unrealistic, the
total costs of our facilities restructuring may be larger than
we anticipated.

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

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

We have called for redemption on August 18,
2003 all of our outstanding 5.25% convertible subordinated notes
due 2004 and 1.856% convertible subordinated notes due 2006. The
aggregate redemption price of the 5.25% notes will be
approximately $64.0 million and the aggregate redemption
price of the 1.856% notes will be approximately
$407.0 million. In addition, in August 2003, we issued
$500.0 million of 0.25% convertible subordinated notes
due August 1, 2013. The 0.25% notes were issued at
face value and bear interest at the rate of 0.25% per annum
which is payable on February 1 and August 1 of each
year, beginning February 1, 2004. The 0.25% notes will
mature on August 1, 2013, and on August 1, 2006 and
August 1, 2008, holders of the 0.25% notes may require
us to repurchase all or a portion of their notes at 100% of
their principal amount plus accrued and unpaid interest to, but
not including, the repurchase date. We will need to generate
substantial amounts of cash from our operations to fund interest
payments and to repay the principal amount of debt when

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it matures or is redeemed, while at the same time
funding capital expenditures and our other working capital
needs. If we do not have sufficient cash to pay interest or
principal on our debts as they come due, we could be in default
of those debts. For example, if we do not make timely payments,
the notes could be declared immediately due and payable, in
which event we would be required to immediately repay the notes
in their entirety. A default under the notes could result in a
reduction of our credit rating and make it more difficult for us
to raise capital and adversely affect the trading price of our
common stock. In addition, repayment of the notes upon a default
would significantly reduce the amount of cash, cash equivalents
and short-term investments available for funding our research
and development efforts, geographic expansion and strategic
acquisitions in the future. Our outstanding debt could also
increase our vulnerability to adverse economic and industry
conditions by making it more difficult for us to raise capital
if needed.


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

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

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

From time to time, we receive claims that we have
infringed the intellectual property rights of others. As the
number of products in the software industry increases and the
functionality of these products further overlap, we believe that
we may become increasingly subject to infringement claims,
including patent and copyright infringement claims. We have
received several trademark claims in the past and may receive
more claims in the future based on the name VERITAS, which is a
word commonly used in trade names throughout Europe and the
western hemisphere. We have also received patent infringement
claims in the past and may receive more claims in the future
based on allegations that our products infringe upon patents
held by third parties. In addition, former employers of our
former, current or future employees may assert claims that such
employees have improperly disclosed to us the confidential or
proprietary information of these former employers. Any such
claim, with or without merit, could:



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

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

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If we discontinue reporting financial
results using non-GAAP financial measures, investors may be
confused about our operating results and our stock price could
decline.

We have announced our intention to discontinue
reporting non-GAAP financial measures (sometimes called
pro forma reporting) beginning with our earnings
announcement for the quarter ending September 30, 2003.
Historically, we reported our financial results using both GAAP
financial measures and non-GAAP financial measures, which
typically excluded the impact of purchase accounting adjustments
and the impact of other special items on our operating results.
It is possible that, as we transition away from pro forma
reporting, investors may be confused about our operating
results, particularly with regard to comparisons to our
operating results for prior periods. If this occurs, the market
price of our common stock could decline.

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

We must protect our business and our network
infrastructure against damage from earthquake, flood, hurricane
and similar events. Many of our operations are subject to these
risks, particularly our operations located in California. A
natural disaster or other unanticipated problem could adversely
affect our business, including both our primary data center and
other internal operations and our ability to communicate with
our customers or sell our products over the Internet.

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

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



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

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

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

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

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



| |   |                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------
| |  | announcements of our quarterly operating results
    or those of our competitors or our original equipment
    manufacturer customers;      
|
| |  | rumors, announcements or press articles regarding
    changes in our management, organization, operations or prior
    financial statements;

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| |   |                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------
| |  | inquiries by the SEC, NASDAQ or regulatory bodies;                                                                                  
|
| |  | changes in earnings estimates by securities
    analysts;                                                                           
|
| |  | announcements of planned acquisitions by us or by
    our competitors;                                                              
|
| |  | gain or loss of a significant customer;                                                                                             
|
| |  | announcements of new products by us, our
    competitors or our original equipment manufacturer customers;                          
|
| |  | the potential impact of the SARS illness upon our
    ability to generate revenues, particularly in the Asia-Pacific
    region; and
|
| |  | acts of terrorism, the threat of war and economic
    slowdowns in general.                                                         

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




Item 3.     Quantitative
and Qualitative Disclosures About Market Risk

Foreign Currency Risk

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

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

|                             |                    |                 |  |                 |  |               |  |             |   |  |  |        |  
|---------------------------- | ------------------ | --------------- |  | --------------- |  | ------------- |  | ----------- | - |  |  | ------ | -
|                             |                    |                 |  |                 |  | Fair Market  
|                             |                    |                 |  |                 |  | Value at     
|                             |                    | Local Currency  |  |                 |  | June 30, 2003
|                             |                    | Contract Amount |  | Contract Amount |  | (US$)        
|                             |                    |                 |  |                 |  |              
|Contracts to Buy US $        |                    |                 |  |                 |  |               |  |             |   |  |  |       
|                             | British pound      |                 |  | 2,602.0 GBP     |  |               |  | 4,320.3 US  | D |  |  | 7.1    |  
|                             | Euro               |                 |  | 26,200.0 EUR    |  |               |  | 29,919.0 US | D |  |  | (196.0 | )
|                             | Indian rupee       |                 |  | 352,730.0 INR   |  |               |  | 7,593.8 US  | D |  |  | 16.4   |  
|                             | Mexican peso       |                 |  | 4,900.0 MXN     |  |               |  | 467.3 US    | D |  |  | 1.8    |  
|Contracts to Sell US $       |                    |                 |  |                 |  |               |  |             |   |  |  |       
|                             | Brazilian real     |                 |  | 6,645.0 BRL     |  |               |  | 2,229.9 US  | D |  |  | (94.1  | )
|                             | Canadian dollar    |                 |  | 9,000.0 CAD     |  |               |  | 6,662.1 US  | D |  |  | 21.5   |  
|Contracts to Buy Euro
      |                    |                 |  |                 |  |               |  |             |   |  |  |       
|                             | Australian dollar  |                 |  | 4,586.0 AUD     |  |               |  | 2,661.8 EU  | R |  |  | 17.3   |  
|                             | Malaysian ringgit  |                 |  | 2,112.0 MYR     |  |               |  | 507.1 EU    | R |  |  | (28.0  | )
|                             | South African rand |                 |  | 1,915.0 ZAR     |  |               |  | 218.2 EU    | R |  |  | 4.2    |  
|                             | South Korean won   |                 |  | 365,515.0 KRW   |  |               |  | 270.4 EU    | R |  |  | (5.1   | )
|                             | Swedish krona      |                 |  | 5,915.0 SEK     |  |               |  | 643.9 EU    | R |  |  | (1.0   | )
|Contracts to Sell Euro
     |                    |                 |  |                 |  |               |  |             |   |  |  |       
|                             | British pound      |                 |  | 43,200.0 GBP    |  |               |  | 62,807.2 EU | R |  |  | 858.3  |  
|                             | Hong Kong dollar   |                 |  | 3,320.0 HKD     |  |               |  | 372.9 EU    | R |  |  | 3.2    |  
|                             | Indian rupee       |                 |  | 145,100.0 INR   |  |               |  | 2,688.5 EU  | R |  |  | (38.7  | )
|                             | Japanese yen       |                 |  | 2,162,000.0 JPY |  |               |  | 15,874.5 EU | R |  |  | 227.9  |  
|                             | UAE dirham         |                 |  | 13,774.0 AED    |  |               |  | 3,278.2 EU  | R |  |  | 42.7   |  

In September 2000, we entered into a three-year
cross currency interest rate swap transaction, or swap, for the
purpose of hedging fixed interest rate, foreign currency
denominated cash flows under an inter-company loan receivable.
Under the terms of this derivative financial instrument, Euro
denominated fixed principal and interest payments to be received
under the inter-company loan will be swapped for
U.S. dollar-fixed principal and interest payments. As of
June 30, 2003, three monthly payments of
4.3 million
remained to be swapped at a forward exchange rate of 0.89070
U.S. dollar per Euro. The fair market value of the swap at
June 30, 2003 was $(10.0) million. As a result of
entering into the swap, we have mitigated our exposure to
foreign currency exchange rate fluctuations. The gains or losses
on the foreign currency loan receivable will be offset by the
gains or losses on the swap. Because we are receiving fixed
interest payments under the swap, we are still subject to
fluctuations in value due to changes in U.S. dollar
interest rates. As of June 30, 2003, the impact of these
fluctuations was not significant. This hedge was deemed to be
highly effective as of June 30, 2003.

In January 2002, we entered into two three-year
pay fixed, receive floating, interest rate swaps for the purpose
of hedging cash flows on variable interest rate debt of our
build-to-suit lease agreements. Under the terms of these
interest rate swaps, we make payments based on the fixed rate
and will receive interest payments based on the 3-month London
Inter Bank Offered Rate, or LIBOR. The payments on our
build-to-suit lease agreements are based upon a 3-month LIBOR
plus a credit spread. If our credit spread remains consistent
and other critical terms of the interest rate swap or the hedged
item do not change, the interest rate swap will be considered to
be highly effective with all changes in the fair value included
in other comprehensive income. If our credit spread changes or
other critical terms of the interest rate swap or the hedged
item change, the hedge may become partially or fully
ineffective, which could result in all or a portion of the
changes in fair value of 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, 2003, the fair value of the interest rate
swaps was $(10.8) 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

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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, 2003.


Interest Rate Risk

We are exposed to interest rate risk primarily on
our investment portfolio and long-term debt obligations. Our
primary investment objective is to preserve principal while at
the same time maximizing yields without significantly increasing
risk. Our portfolio primarily includes money market funds,
commercial paper, corporate notes, government securities
(taxable and non-taxable), asset-backed securities and market
auction preferred. The diversity of our portfolio helps us to
achieve our investment objective.

Long-term debt of $468.7 million consists of
$64.0 million from our 5.25% convertible subordinated notes
due 2004 and $404.7 million from our
1.856% convertible subordinated notes due 2006. The
interest rate of 1.856% on the 1.856% notes together with
the accrual of original issue discount represent a yield to
maturity of 6.5%. The nominal interest rate on these notes is
fixed and the notes provide for semi-annual interest payments of
approximately $1.7 million each May 1 and
November 1 for the 5.25% notes and approximately
$4.3 million each February 13 and August 13 for
the 1.856% notes. The notes are convertible into our common
stock at any time prior to the close of business on the maturity
date, unless previously redeemed or repurchased, and subject to
adjustment under the terms of the notes. In July 2003, we
announced that we will be redeeming on August 18, 2003 all
of our outstanding 5.25% notes and 1.856% notes.

On August 1, 2003, we issued
$500.0 million of 0.25% convertible subordinated notes
due 2013 for which we received net proceeds of approximately
$488.0 million. The nominal interest rate on these notes is
fixed and the notes provide for semi-annual interest payments of
$0.6 million each February 1 and August 1,
beginning February 1, 2004. The notes are convertible,
under specified conditions, into shares of our common stock
unless previously redeemed or repurchased and are subject to
adjustment under the terms of the notes.

The following table presents the amounts of our
cash equivalents, investments and long-term debt, according to
maturity date, that may be subject to interest rate risk and the
average interest rates as of June 30, 2003 by year of
maturity (in thousands, except percentages):

|                                                  |                       |                |         |            |   |       |         |           |   |           |           |           |   |   |           |           |   |   |           |           |  
|------------------------------------------------- | --------------------- | -------------- | ------- | ---------- | - | ----- | ------- | --------- | - | --------- | --------- | --------- | - | - | --------- | --------- | - | - | --------- | --------- | -
|                                                  |                       |                |         |            |   |      
|                                                  |                       | Amortized Cost |         |            |   |      
|                                                  |                       |                |         |            |   |      
|                                                  |                       |                |         | Due in     |   |       |         |           |   | 2002     
|                                                  |                       |                |         | 2004 and   |   |       |         | 2003 Fair |   | Amortized
|                                                  |                       | Due in 2003    |         | Thereafter |   | Total |         | Value     |   | Cost     
|                                                  |                       |                |         |            |   |       |         |           |   |          
|Cash equivalents and short-term investments:      |                       |                |         |            |   |       |         |           |   |           |           |           |   |   |           |           |   |   |           |          
|                                                  | Fixed rate            |                | $       | 573,378    |   |       | $       | 636,035   |   |           | $         | 1,209,413 |   |   | $         | 1,215,282 |   |   | $         | 1,778,702 |  
|                                                  | Average fixed rate    |                |         | 1.35       | % |       |         | 2.38      | % |           |           | 1.90      | % |   |           | 1.89      | % |   |           | 2.26      | %
|                                                  | Variable rate         |                | $       | 413,673    |   |       | $       | 75,258    |   |           | $         | 488,931   |   |   | $         | 488,668   |   |   | $         | 288,575   |  
|                                                  | Average variable rate |                |         | 1.27       | % |       |         | 3.51      | % |           |           | 1.61      | % |   |           | 1.61      | % |   |           | 1.73      | %
|Total cash equivalents and short-term investments |                       | $              | 987,051 |            |   | $     | 711,293 |           |   | $         | 1,698,344 |           |   | $ | 1,703,950 |           |   | $ | 2,067,277 |          
|                                                  | Average rate          |                |         | 1.32       | % |       |         | 2.50      | % |           |           | 1.81      | % |   |           | 1.81      | % |   |           | 2.18      | %
|Long-term debt:                                   |                       |                |         |            |   |       |         |           |   |           |           |           |   |   |           |           |   |   |           |          
|                                                  | Fixed rate            |                | $       |           |   |       | $       | 468,740   |   |           | $         | 468,740   |   |   | $         | 601,575   |   |   | $         | 460,252   |  
|                                                  | Average fixed rate    |                |         |           |   |       |         | 6.33      | % |           |           | 6.33      | % |   |           | 6.10      | % |   |           | 6.33      | %

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

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that was other than temporary. During the first
half of 2003, we recognized impairment losses of
$3.5 million on our strategic investments when we
determined that there had been a decline in the fair value of
the investments that were other than temporary. The losses
represented write-downs of the carrying amount of our
investments and were determined by using, among other factors,
an investees significant decline in stock value, its
inability to obtain additional private financing and the
uncertainty of its financial conditions. As of June 30,
2003, we determined that there was no further impairment in
these investments. We cannot assure you that our investments
will have the above mentioned results, or even that we will not
lose all or any part of these investments.





Item 4.     Controls
and Procedures

Disclosure Controls and Procedures

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

Internal Control over Financial
Reporting

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




PART II:     OTHER
INFORMATION




Item 1.     Legal
Proceedings

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

After we announced in January 2003 that we would
restate financial results as a result of transactions entered
into with AOL in September 2000, numerous separate complaints
purporting to be class actions were filed in the United States
District Court for the Northern District of California alleging
that VERITAS and some of our officers and directors violated
provisions of the Securities Exchange Act of 1934. The
complaints contain varying allegations, including that we made
materially false and misleading statements with respect to our
2000, 2001 and 2002 financial results included in our filings
with the SEC, press releases and other public disclosures. On
May 2, 2003, a lead plaintiff and lead counsel were
appointed. A consolidated complaint was filed by the lead
plaintiff on July 18, 2003. In addition, several complaints
purporting to be derivative actions have been filed in
California state court against some of our directors and
officers. These complaints are based on the same facts and
circumstances as the class actions and generally allege that the
named directors and officers breached their fiduciary duties by
failing to oversee adequately our financial reporting. The state
court complaints have also been consolidated. All of the
complaints generally seek an unspecified amount of

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


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

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

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




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

The results of our annual meeting of stockholders
held on May 13, 2003 are disclosed in Item 4 of
Part II of our Quarterly Report on Form 10-Q for the
quarter ended March 31, 2003, which was filed with the
Securities and Exchange Commission on May 15, 2003. Such
information is incorporated by reference in this quarterly
report on Form 10-Q.




Item 5.     Other
Information

On August 11, 2003, Gary Bloom, our
Chairman, President and Chief Executive Officer, established a
stock-trading plan under Rule 10b5-1 of the Securities
Exchange Act of 1934, pursuant to which Goldman,
Sachs & Co. will undertake to sell up to
250,000 shares of our common stock subject to options
currently owned by Mr. Bloom at specified intervals from
November 2003 through August 2004.

On August 11, 2003, Edwin Gillis, our
Executive Vice President, Finance and Chief Financial Officer,
established a stock-trading plan under Rule 10b5-1 of the
Securities Exchange Act of 1934, pursuant to which G.W. &
Wade Asset Management Company will undertake to sell up to
200,000 shares of our common stock subject to options
currently owned by Mr. Gillis at specified intervals from
November 2003 through August 2004.

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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
|        |       |                     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  |       |  |        |  |         
|        | 4.01  |                     |  | Indenture dated as of August 1, 2003 by and
    between VERITAS and U.S. Bank National Association                                                                                                                                                                                                                                                                                                                                                                                                                                                |  |       |  |        |  |          |  |  |  |  |  |  | X | 
|        | 4.02  |                     |  | Registration Rights Agreement dated as of
    August 1, 2003 by and among VERITAS, Goldman
    Sachs & Co., ABN AMRO Rothschild LLC and McDonald
    Investments Inc.                                                                                                                                                                                                                                                                                                                                                                             |  |       |  |        |  |          |  |  |  |  |  |  | X | 
|        | 10.01 |                     |  | Consent and Sixth Amendment Agreement dated as of
    June 6, 2003 by and among VERITAS Software Global
    Corporation, the various parties designated as Guarantors, Wells
    Fargo Bank Northwest, National Association as Owner Trustee, the
    various banks and other lending institutions designated as
    Holders, the various banks and other lending institutions
    designated as Lenders and Bank of America, N.A. as Agent and
    relating to the Participation Agreement dated as of
    March 9, 2000                         |  |       |  |        |  |          |  |  |  |  |  |  | X | 
|        | 10.02 |                     |  | Consent and Seventh Amendment Agreement dated as
    of June 6, 2003 by and among VERITAS Software Global
    Corporation, the various parties designated as Guarantors, Wells
    Fargo Bank Northwest, National Association as Owner Trustee, the
    various banks and other lending institutions designated as
    Holders, the various banks and other lending institutions
    designated as Lenders and Bank of America, N.A. as Agent and
    relating to the Participation Agreement dated as of
    April 23, 1999                      |  |       |  |        |  |          |  |  |  |  |  |  | X | 
|        | 10.03 |                     |  | Consent and Sixth Amendment Agreement to
    Participation Agreement dated as of June 6, 2003 by and
    among VERITAS Software Global Corporation, the various parties
    designated as Guarantors, Wells Fargo Bank Northwest, National
    Association as Owner Trustee, the various banks and other
    lending institutions designated as Holders, the various banks
    and other lending institutions designated as Lenders and ABN
    Amro Bank N.V. as Agent and relating to the Participation
    Agreement dated as of July 28, 2000 |  |       |  |        |  |          |  |  |  |  |  |  | X | 
|        | 31.01 |                     |  | Certification of Chief Executive Officer pursuant
    to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                                                                                                                            |  |       |  |        |  |          |  |  |  |  |  |  | X | 
|        | 31.02 |                     |  | Certification of Chief Financial Officer pursuant
    to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                                                                                                                            |  |       |  |        |  |          |  |  |  |  |  |  | X | 
|        | 32.01 |                     |  | Certifications of Chief Executive Officer and
    Chief Financial Officer pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                                                                                           |  |       |  |        |  |          |  |  |  |  |  |  | X | 
|        | 99.01 |                     |  | Consent of Standard & Poors Corporate
    Value Consulting                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  |       |  |        |  |          |  |  |  |  |  |  | X | 

(b) Reports on Form 8-K

|               |         |         |  |             |          |  |  |                                                                                   
|-------------- | ------- | ------- |  | ----------- | -------- |  |  | ----------------------------------------------------------------------------------
|Date of Report |         | Item(s) |  | Description
|               |         |         |  |            
|               | 4/23/03 |         |  |             | 7, 9, 12 |  |  | VERITAS announced financial results for the three
    months ended March 31, 2003.

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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 13, 2003.



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

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EXHIBIT INDEX

|        |       |                     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  |       |  |        |  |          |  |  |  |  |  |  |   | 
|------- | ----- | ------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----- |  | ------ |  | -------- |  |  |  |  |  |  | - | 
|        |       |                     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  |      
|        |       |                     |  | Incorporated by Reference                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |      
|Exhibit |       |                     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  | Filed
|Number  |       | Exhibit Description |  | Form                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |  | Date  |  | Number |  | Herewith
|        |       |                     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  |       |  |        |  |         
|        | 4.01  |                     |  | Indenture dated as of August 1, 2003 by and
    between VERITAS and U.S. Bank National Association                                                                                                                                                                                                                                                                                                                                                                                                                                                |  |       |  |        |  |          |  |  |  |  |  |  | X | 
|        | 4.02  |                     |  | Registration Rights Agreement dated as of
    August 1, 2003 by and among VERITAS, Goldman Sachs &
    Co., ABN AMRO Rothschild LLC and McDonald Investments Inc.                                                                                                                                                                                                                                                                                                                                                                                 |  |       |  |        |  |          |  |  |  |  |  |  | X | 
|        | 10.01 |                     |  | Consent and Sixth Amendment Agreement dated as of
    June 6, 2003 by and among VERITAS Software Global Corporation,
    the various parties designated as Guarantors, Wells Fargo Bank
    Northwest, National Association as Owner Trustee, the various
    banks and other lending institutions designated as Holders, the
    various banks and other lending institutions designated as
    Lenders and Bank of America, N.A. as Agent and relating to the
    Participation Agreement dated as of March 9, 2000                             |  |       |  |        |  |          |  |  |  |  |  |  | X | 
|        | 10.02 |                     |  | Consent and Seventh Amendment Agreement dated as
    of June 6, 2003 by and among VERITAS Software Global
    Corporation, the various parties designated as Guarantors, Wells
    Fargo Bank Northwest, National Association as Owner Trustee, the
    various banks and other lending institutions designated as
    Holders, the various banks and other lending institutions
    designated as Lenders and Bank of America, N.A. as Agent and
    relating to the Participation Agreement dated as of
    April 23, 1999                      |  |       |  |        |  |          |  |  |  |  |  |  | X | 
|        | 10.03 |                     |  | Consent and Sixth Amendment Agreement to
    Participation Agreement dated as of June 6, 2003 by and
    among VERITAS Software Global Corporation, the various parties
    designated as Guarantors, Wells Fargo Bank Northwest, National
    Association as Owner Trustee, the various banks and other
    lending institutions designated as Holders, the various banks
    and other lending institutions designated as Lenders and ABN
    Amro Bank N.V. as Agent and relating to the Participation
    Agreement dated as of July 28, 2000 |  |       |  |        |  |          |  |  |  |  |  |  | X | 
|        | 31.01 |                     |  | Certification of Chief Executive Officer pursuant
    to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                                                                                                                            |  |       |  |        |  |          |  |  |  |  |  |  | X | 
|        | 31.02 |                     |  | Certification of Chief Financial Officer pursuant
    to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                                                                                                                            |  |       |  |        |  |          |  |  |  |  |  |  | X | 
|        | 32.01 |                     |  | Certifications of Chief Executive Officer and
    Chief Financial Officer pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                                                                                           |  |       |  |        |  |          |  |  |  |  |  |  | X | 
|        | 99.01 |                     |  | Consent of Standard & Poors Corporate
    Value Consulting                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  |       |  |        |  |          |  |  |  |  |  |  | X |