**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

 

**Washington, D.C. 20549**

 

**FORM 10-Q**

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

 

**Commission File No. 000-30207**

 

**SEEBEYOND TECHNOLOGY CORPORATION**

(Exactname of Registrant as Specified in Its Charter)

 
| **Delaware**                                                                                                                                    | ** ** | **95-4249153**                            |
|-------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|
| (State  or Other Jurisdiction of  Incorporation or Organization)                                                                                |       | (I.R.S.  Employer  Identification Number) |
|                                                                                                                                            |       |                                      |
| **800 E. Royal Oaks Drive  Monrovia, California 91016  (626) 471-6000**                                                                    |
| ** **                                                                                                                                      |
| (Address,  including Zip Code, of Registrant’s Principal  Executive Offices  and Registrant’s Telephone Number, including Area  Code) |

 

Indicate by check markwhether the registrant: (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports) and (2) has been subject to such filingrequirements for the past 90 days. Yes  ý No  o

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2 underthe Act). Yes  ý No  o

 

The number of sharesoutstanding of the registrant’s Common Stock, $0.0001 par value, as ofAugust 6, 2004 was 85,361,059.

 

 

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**SeeBeyond Technology Corporation and Subsidiaries**

 

**INDEX**

 
| **Part I - Financial  Information**               |                                                                                                                                |
|---------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------|
| Item 1.                                           | Financial  Statements:                                                                                                              |   |
|                                              | Condensed Consolidated Balance Sheets as  of June 30, 2004 (unaudited) and December 31, 2003                              |   |
|                                              | Condensed Consolidated  Statements of Operations (unaudited) for the three months and six months ended  June 30, 2004 and 2003 |   |
|                                              | Condensed Consolidated Statements of Cash  Flows (unaudited) for the six months ended June 30, 2004 and 2003                   |   |
|                                              | Notes to Condensed Consolidated  Financial Statements (unaudited)                                                                   |   |
| Item 2.                                           | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                         |   |
| Item 3.                                           | Quantitative  and Qualitative Disclosure About Market Risk                                                                          |   |
| Item 4.                                           | Controls  and Procedures                                                                                                            |   |
| **Part II -  Other Information**                  |                                                                                                                                |
| Item 1.                                           | Legal  Proceedings                                                                                                                  |   |
| Item 2.                                           | Changes in  Securities and Use of Proceeds                                                                                          |   |
| Item 4.                                           | Submission  of Matters to a Vote of Security Holders                                                                                |   |
| Item 6.                                           | Exhibits and Reports  on Form 8-K                                                                                                   |   |
| **Signatures**                                    |                                                                                                                                |
| **Certification  of the Chief Executive Officer** | ** **                                                                                                                          |
| **Certification  of the Chief Financial Officer** | ** **                                                                                                                          |

 

2

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**PART I****—FINANCIAL INFORMATION**

 

**Item 1****. Financial Statements**

 

**SeeBeyond Technology Corporation and Subsidiaries**

 

**Condensed Consolidated BalanceSheets**

(inthousands, except share and per share amounts)

 
| ** **                                                                                                                                                                                                                                                | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                                | ** ** | **2004**          | ** ** | **2003**              | ** ** |
| ** **                                                                                                                                                                                                                                                | ** ** | **(unaudited)**   | ** ** | ** **            | ** ** |
| Assets:                                                                                                                                                                                                                                                   |       |              |       |                  |       |
| Current assets:                                                                                                                                                                                                                                           |       |              |       |                  |       |
| Cash and cash equivalents                                                                                                                                                                                                                                 |       | $                 | 64,888     |                  | $          | 70,135 |   |
| Accounts receivable, net of allowances of  $2,101 and $2,373 at June 30, 2004 and December 31, 2003,  respectively                                                                                                                              |       | 34,091            |       | 34,333                |       |
| Prepaid expenses and other current assets                                                                                                                                                                                                                 |       | 3,531             |       | 4,596                 |       |
| Total current assets                                                                                                                                                                                                                                      |       | 102,510           |       | 109,064               |       |
| Property and equipment, net                                                                                                                                                                                                                               |       | 13,838            |       | 15,224                |       |
| Goodwill                                                                                                                                                                                                                                                  |       | 1,391             |       | 1,391                 |       |
| Other assets                                                                                                                                                                                                                                              |       | 1,750             |       | 2,068                 |       |
| Total assets                                                                                                                                                                                                                                              |       | $                 | 119,489    |                  | $          | 127,747 |   |
| Liabilities and stockholders’ equity:                                                                                                                                                                                                                |       |              |       |                  |       |
| Current liabilities:                                                                                                                                                                                                                                      |       |              |       |                  |       |
| Accounts payable                                                                                                                                                                                                                                          |       | $                 | 5,905      |                  | $          | 5,120 |   |
| Accrued employee compensation and related  expenses                                                                                                                                                                                                       |       | 6,950             |       | 12,675                |       |
| Accrued expenses                                                                                                                                                                                                                                          |       | 11,271            |       | 9,263                 |       |
| Deferred revenues                                                                                                                                                                                                                                         |       | 30,069            |       | 31,221                |       |
| Equipment line and advance payable                                                                                                                                                                                                                        |       | 1,521             |       | 3,097                 |       |
| Capital lease payable - current portion                                                                                                                                                                                                                   |       | 320               |       | 310                   |       |
| Total current liabilities                                                                                                                                                                                                                                 |       | 56,036            |       | 61,686                |       |
| Capital lease payable                                                                                                                                                                                                                                     |       | 375               |       | 515                   |       |
| Total liabilities                                                                                                                                                                                                                                         |       | 56,411            |       | 62,201                |       |
| Commitments and contingencies                                                                                                                                                                                                                             |       |              |       |                  |       |
| Stockholders’ equity:                                                                                                                                                                                                                                |       |              |       |                  |       |
| Common stock, $.0001 par value -  200,000,000 shares authorized;  87,203,944 shares issued and 85,334,606   shares outstanding as of June 30, 2004 and 85,548,522 shares  issued and 83,826,520 shares outstanding as of December 31, 2003 |       | 8                 |       | 8                     |       |
| Additional paid-in capital                                                                                                                                                                                                                                |       | 225,647           |       | 222,539               |       |
| Treasury stock                                                                                                                                                                                                                                            |       | (4,276            | )          | (3,632                | )          |
| Deferred stock compensation                                                                                                                                                                                                                               |       | —            |       | (47                   | )          |
| Accumulated other comprehensive loss                                                                                                                                                                                                                      |       | 551               |       | 616                   |       |
| Accumulated deficit                                                                                                                                                                                                                                       |       | (158,852          | )          | (153,938              | )          |
| Total stockholders’ equity                                                                                                                                                                                                                           |       | 63,078            |       | 65,546                |       |
| Total liabilities and stockholders’ equity                                                                                                                                                                                                           |       | $                 | 119,489    |                  | $          | 127,747 |   |

 

*The accompanying notes are an integral part of thesefinancial statements.*

 

3

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**SeeBeyond Technology Corporation and Subsidiaries**

 

**Condensed Consolidated Statementsof Operations**

 

**(Unaudited)**

(in thousands, except per share data)

 
| ** **                                     | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                     | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **                                     | ** ** | **2004**               | ** ** | **2003**             | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenues:                                      |       |                   |       |                 |       |   |   |   |   |
| License                                        |       | $                      | 19,778     |                 | $          | 7,137 |   | $ | 30,658 |   | $ | 20,127 |   |
| Services                                       |       | 9,110                  |       | 9,823                |       | 19,620 |   | 21,055 |   |
| Maintenance                                    |       | 12,981                 |       | 11,897               |       | 26,028 |   | 23,497 |   |
| Total revenues                                 |       | 41,869                 |       | 28,857               |       | 76,306 |   | 64,679 |   |
| Cost of revenues:                              |       |                   |       |                 |       |   |   |   |   |
| License                                        |       | 381                    |       | 276                  |       | 658 |   | 821 |   |
| Services and maintenance                       |       | 10,615                 |       | 10,572               |       | 20,794 |   | 22,120 |   |
| Total cost of revenues                         |       | 10,996                 |       | 10,848               |       | 21,452 |   | 22,941 |   |
| Gross profit                                   |       | 30,873                 |       | 18,009               |       | 54,854 |   | 41,738 |   |
| Operating expenses:                            |       |                   |       |                 |       |   |   |   |   |
| Research and development                       |       | 9,636                  |       | 10,449               |       | 19,376 |   | 21,076 |   |
| Sales and marketing                            |       | 16,066                 |       | 13,959               |       | 31,070 |   | 28,440 |   |
| General and administrative                     |       | 4,249                  |       | 4,599                |       | 8,858 |   | 9,225 |   |
| Restructuring and impairment charges           |       | —                 |       | 6,386                |       | — |   | 6,386 |   |
| Amortization of sales and marketing  warrants  |       | —                 |       | 13                   |       | (14 | ) | 124 |   |
| Amortization of stock-based compensation       |       | —                 |       | 71                   |       | 97 |   | 172 |   |
| Total operating expenses                       |       | 29,951                 |       | 35,477               |       | 59,387 |   | 65,423 |   |
| Income (loss) from operations                  |       | 922                    |       | (17,468              | )          | (4,533 | ) | (23,685 | ) |
| Interest and other income (expense), net       |       | 143                    |       | 308                  |       | (70 | ) | 619 |   |
| Interest expense                               |       | (61                    | )          | (115                 | )          | (133_ | ) | (256 | ) |
| Income (loss) before provision for income  tax |       | 1,004                  |       | (17,275              | )          | (4,736 | ) | (23,322 | ) |
| Provision for income tax                       |       | 135                    |       | 8                    |       | 178 |   | 86 |   |
| Net income (loss)                              |       | $                      | 869        |                 | $          | (17,283 | ) | $ | (4,914 | ) | $ | (23,408 | ) |
|                                           |       |                   |       |                 |       |   |   |   |   |
| Basic and diluted net income (loss) per  share |       | $                      | 0.01       |                 | $          | (0.21 | ) | $ | (0.06 | ) | $ | (0.28 | ) |
| Number of shares used in calculating:          |       |                   |       |                 |       |   |   |   |   |
| •  basic net income (loss) per share      |       | 84,607                 |       | 82,808               |       | 84,430 |   | 82,718 |   |
| •  diluted net income (loss) per share    |       | 88,819                 |       | 82,808               |       | 84,430 |   | 82,718 |   |

 

*The accompanying notes are an integral part of thesefinancial statements.*

 

4

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**SeeBeyond Technology Corporation and Subsidiaries**

 

**Condensed Consolidated Statements of Cash Flows**

 

**(Unaudited)**

(inthousands)

 
| ** **                                                                       | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                       | ** ** | **June 30,**    | ** ** |
| ** **                                                                       | ** ** | **2004**             | ** ** | **2003** | ** ** |
| Cash flows from operating activities:                                            |       |                 |       |   |   |
| Net loss                                                                         |       | $                    | (4,914     | ) | $ | (23,408 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities:     |       |                 |       |   |   |
| Gain on disposal of fixed assets                                                 |       | (34                  | )          | (21 | ) |
| Depreciation and amortization                                                    |       | 2,443                |       | 3,005 |   |
| Provision for doubtful accounts receivable                                       |       | 93                   |       | 433 |   |
| Amortization of sales and marketing  warrants                                    |       | (14                  | )          | 124 |   |
| Amortization of stock-based compensation                                         |       | 97                   |       | 172 |   |
| Non-cash restructuring and impairment  charges                                   |       | —               |       | 4,274 |   |
| Changes in assets and liabilities:                                               |       |                 |       |   |   |
| Accounts receivable                                                              |       | 149                  |       | 12,767 |   |
| Prepaid expenses and other current assets                                        |       | 1,065                |       | (379 | ) |
| Accounts payable                                                                 |       | 785                  |       | (2,763 | ) |
| Accrued compensation and related expenses                                        |       | (3,717               | )          | (1,297 | ) |
| Deferred revenues                                                                |       | (1,152               | )          | (1,009 | ) |
| Net cash used in operating activities:                                           |       | (5,199               | )          | (8,102 | ) |
|                                                                             |       |                 |       |   |   |
| Cash flows from investing activities:                                            |       |                 |       |   |   |
| Purchases of property and equipment                                              |       | (1,023               | )          | (3,888 | ) |
| Other                                                                            |       | 318                  |       | (860 | ) |
| Net cash used in investing activities                                            |       | (705                 | )          | (4,748 | ) |
|                                                                             |       |                 |       |   |   |
| Cash flows from financing activities:                                            |       |                 |       |   |   |
| Net repayments on bank lines of credit                                           |       | (1,576               | )          | (1,575 | ) |
| Repayments of capital lease obligation                                           |       | (130                 | )          | (115 | ) |
| Proceeds from issuance of common stock  pursuant to employee stock option plan   |       | 2,744                |       | 264 |   |
| Proceeds from issuance of common stock  pursuant to employee stock purchase plan |       | 328                  |       | 345 |   |
| Payments for purchase of common stock                                            |       | (644                 | )          | — |   |
| Net cash provided by (used in) financing  activities                             |       | 722                  |       | (1,081 | ) |
|                                                                             |       |                 |       |   |   |
| Effect of exchange rate changes on cash and  cash equivalents                    |       | (65                  | )          | (92 | ) |
| Net decrease in cash and cash equivalents                                        |       | (5,247               | )          | (14,023 | ) |
| Cash and cash equivalents at beginning of  the period                            |       | 70,135               |       | 94,114 |   |
| Cash and cash equivalents at end of the  period                                  |       | $                    | 64,888     |   | $ | 80,091 |   |

 

*The accompanying notes are an integral part of thesefinancial statements.*

 

5

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**SeeBeyond Technology Corporation and Subsidiaries**

 

**Notes to Condensed Consolidated Financial Statements**

 

**(Unaudited)**

 

**Note 1.    *Basis of Presentation***

 

The accompanying unauditedcondensed consolidated financial statements have been prepared by SeeBeyondTechnology Corporation (the “Company” or “SeeBeyond”) in accordance with therules and regulations of the Securities and Exchange Commission. Certaininformation and footnote disclosures normally included in consolidatedfinancial statements prepared in accordance with accounting principlesgenerally accepted in the United States have been condensed or omitted inaccordance with such rules and regulations. In the opinion of management, theaccompanying unaudited condensed consolidated financial statements reflect alladjustments, consisting only of normal recurring adjustments, necessary topresent fairly the financial position of the Company, and its results ofoperations and cash flows. These condensed consolidated financial statementsshould be read in conjunction with the annual audited consolidated financialstatements and notes as of and for the year ended December 31, 2003included in the Company’s Form 10-K filed with the Securities and ExchangeCommission on March 11, 2004.

 

The results of operationsfor the three months and six months ended June 30, 2004 are notnecessarily indicative of the results that may be expected for the year endingDecember 31, 2004 or any other interim period, and the Company makes norepresentations related thereto.

 

The consolidated financialstatements include the accounts of the Company and its subsidiaries. Allmaterial intercompany accounts and transactions have been eliminated inconsolidation.

 

Certain reclassificationshave been made to prior year information to conform to the current period’spresentation.

 

**Note 2.    *Revenue Recognition***

 

The Company recognizesrevenue when an agreement has been signed by both parties or other persuasiveevidence of an arrangement exists, the software has been shipped orelectronically delivered, the fees are fixed or determinable, collection of theresulting receivable is probable and no other significant obligations remain.For multiple element arrangements where vendor-specific objective evidence offair value exists for all undelivered elements, we account for the deliveredelements in accordance with the “residual method” prescribed by Statement ofPosition 98-9. Vendor-specific objective evidence of fair value is based on theprice a customer is required to pay when the element is sold separately. TheCompany enters into arrangements with end users, which may include the sale oflicenses of software, maintenance and services under the arrangement or variouscombinations of each element, including the sale of such elements separately.

 

For multiple elementarrangements, each element of the arrangement is analyzed and the Companyallocates a portion of the total fee under the arrangement to the undeliveredelements, primarily services and maintenance, using vendor-specific objectiveevidence of fair value of the element and the remaining portion of the fee isallocated to the delivered elements (i.e. generally the software license),regardless of any separate prices stated within the contract for each element,under the residual method prescribed by SOP 98-9. Vendor-specific objectiveevidence of fair value is based on the price the customer is required to paywhen the element is sold separately (i.e. hourly rates charged for consultingservices when sold separately from a software license and the renewal rate formaintenance arrangements). Each license agreement offers additional maintenancerenewal periods at a stated price. If vendor-specific objective evidence offair value does not exist for the undelivered elements, all revenue is deferredand recognized ratably over the service period if the undelivered element isservices, or over the period the maintenance is provided if the undeliveredelement is maintenance, or until sufficient objective evidence exists or allelements have been delivered.

 

6

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*LicenseRevenues:* Amountsallocated to license revenues under the residual method are recognized at thetime of delivery of the software when vendor specific objective evidence offair value exists for the undelivered elements, if any, and all the otherrevenue recognition criteria discussed above have been met.

 

*ServicesRevenues:* Revenuesfrom services are comprised of consulting and implementation services and, to alimited extent, training. Services are generally sold on a time-and-materialsor fixed fee basis and include a range of services including installation ofoff-the-shelf software, data conversion and building non-complex interfaces toallow the software to operate in customized environments. Services aregenerally separable from the other elements under the arrangement since theperformance of the services are not essential to the functionality (i.e. do notinvolve significant production, modification or customization of the softwareor building complex interfaces) of any other element of the transaction and aredescribed in the contract such that the total price of the arrangement would beexpected to vary as the result of the inclusion or exclusion of the services.Revenues for services are recognized as the services are performed. Trainingservices are sold either on a per student basis or per class and are recognizedas classes are attended.

 

*MaintenanceRevenues:* Maintenancerevenues consist primarily of fees for providing unspecified software upgradeson a when-and-if-available basis and technical support over a specified term,which is typically twelve months. Maintenance revenues are typically paid inadvance and are recognized on a straight-line basis over the term of thecontract.

 

Revenues on sales made byalliance partners are generally recognized upon shipment of the software to theend user, if all other revenue recognition criteria noted above are met. Underlimited arrangements with certain distributors, when all the revenuerecognition criteria have been met upon delivery of the product to thedistributor, revenues are recognized at that time. The Company does not offer aright of return on its products.

 

**Note 3.    *Operations by Reportable Segments and Geographic Area***

 

SeeBeyond has developed acomprehensive solution for business integration, enabling the seamless flow ofinformation across systems applications and enterprises in real-time, on aglobal basis. The Company operates in one industry segment, which is thedevelopment and marketing of a comprehensive solution for business integrationwhere all key integration technologies, including application-to-application,business-to-business and business process management, are seamlesslyintegrated.  Revenues and long-livedassets by geographic area were as follows (in thousands):

 
| ** **     | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **     | ** ** | **2004**                              | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenues:      |       |                                  |       |                                |       |   |   |   |   |
| North America  |       | $                                     | 20,596     |                                | $          | 17,194 |   | $ | 37,450 |   | $ | 39,877 |   |
| Europe         |       | 18,367                                |       | 8,572                               |       | 33,592 |   | 18,225 |   |
| Pacific Rim    |       | 2,906                                 |       | 3,091                               |       | 5,264 |   | 6,577 |   |
| Total revenues |       | $                                     | 41,869     |                                | $          | 28,857 |   | $ | 76,306 |   | $ | 64,679 |   |

 
| ** **              | ** ** | ** ** | ** ** | ** ** | ** ** | **June 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|-------------------------|------------|------------|------------|------------|------------|-------------------------|------------|-----------------------------|------------|
| Long-lived assets:      |       |       |       |       |       |                    |       |                        |       |
| North America           |       |       |       |       |       | $                       | 13,897     |                        | $          | 15,341 |   |
| Europe                  |       |       |       |       |       | 1,826                   |       | 1,894                       |       |
| Pacific Rim             |       |       |       |       |       | 1,256                   |       | 1,448                       |       |
| Total long-lived assets |       |       |       |       |       | $                       | 16,979     |                        | $          | 18,683 |   |

 

One customer accounted for 11%of the Company’s net revenues during the three months and six months endedJune 30, 2004 and no single customer accounted for more than 10% of netrevenues during 

 

7

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the three months and sixmonths ended June 30, 2003.

 

**Note 4.    *Computation of Net Income (Loss) Per Share***

 

Basic net income (loss) pershare is computed on the basis of the weighted average number of common sharesoutstanding. Diluted net loss per share is computed on the basis of theweighted average number of common shares outstanding plus the effect ofoutstanding stock warrants and outstanding employee stock options using the“treasury stock” method.

 

The following table setsforth the components of basic and diluted net income (loss) per share for theperiods indicated (in thousands, except per share amounts):

 
| ** **                                                                                             | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                             | ** ** | **2004**                              | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net income (loss)                                                                                      |       | $                                     | 869        |                                | $          | (17,283 | ) | $ | (4,914 | ) | $ | (23,408 | ) |
| Weighted average outstanding shares of  common stock used to compute basic net income (loss) per share |       | 84,607                                |       | 82,808                              |       | 84,430 |   | 82,718 |   |
| Dilutive effect of employee stock options                                                              |       | 4,212                                 |       | —                              |       | — |   | — |   |
| Common stock and common stock equivalents                                                              |       | 88,819                                |       | 82,808                              |       | 84,430 |   | 82,718 |   |
| Basic and diluted net income (loss) per  share                                                         |       | $                                     | 0.01       |                                | $          | (0.21 | ) | $ | (0.06 | ) | $ | (0.28 | ) |

 

Options to purchase 18,386,656 shares of common stock for the sixmonths ended June 30, 2004, and options to purchase 18,697,816 shares ofcommon stock for the three months and six months ended June 30, 2003 werenot included in the calculations of diluted net income (loss) per share becausetheir effect would be antidilutive. For the three months ended June 30,2004, options to purchase 4,212,000 shares of common stock were included in thecalculations of diluted net income (loss) per share. Common stock warrants topurchase 625,000 and 650,000 shares were not included in the calculations ofdiluted net loss per share because their effect would be antidilutive for thethree months and six months ended June 30, 2004 and the three months andsix months ended June 30, 2003, respectively.

 

**Note 5.    *Stock-Based Compensation***

 

As permitted under SFASNo. 123 “Accounting for Stock-based Compensation”, the Company continuesto apply the provisions of APB No. 25, “Accounting for Stock Issued toEmployees,” for its recording of stock-based compensation arrangements.Accordingly, the Company accounts for its stock-based compensation using theintrinsic value method, which requires recognition of expense when the optionexercise price is less than the fair value of the stock at the date of grant.The Company provides the required pro forma net income (loss) and pro formaearnings (loss) per share disclosures for employee stock option grants made in1995 and future years as if the fair value based method defined in SFASNo. 123 had been applied. Under the fair value method stock options arevalued and expensed based on the fair value of the options determined under anoption-pricing model.

 

8

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The following table setsforth pro forma net loss and pro forma loss per share (in thousands, except pershare amounts):

 
| ** **                                                                           | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                           | ** ** | **2004**                              | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net income (loss), as reported                                                       |       | $                                     | 869        |                                | $          | (17,283 | ) | $ | (4,914 | ) | $ | (23,408 | ) |
| Stock-based employee compensation costs,  included in net income (loss), as reported |       | —                                |       | 71                                  |       | 97 |   | 172 |   |
| Stock-based employee compensation costs if  fair value based method had been applied |       | (2,666                                | )          | (3,322                              | )          | (4,951 | ) | (6,677 | ) |
| Pro forma net income (loss)                                                          |       | (1,797                                | )          | (20,534                             | )          | (9,768 | ) | (29,913 | ) |
| Earnings (loss) per share:                                                           |       |                                  |       |                                |       |   |   |   |   |
| Basic and diluted - as reported                                                      |       | $                                     | 0.01       |                                | $          | (0.21 | ) | $ | (0.06 | ) | $ | (0.28 | ) |
| Basic and diluted - pro forma                                                        |       | $                                     | (0.02      | )                                   | $          | (0.25 | ) | $ | (0.12 | ) | $ | (0.36 | ) |

 

**Note 6.    *Commitments, Contingencies and Debt***

 

**Bank Linesof Credit and Equipment Line Payable**

 

In November 2000, theCompany established a $15.0 million line of credit facility (the “Line”)with a lending institution that bears interest at an annual rate of eitherprime plus 0.5% or the London InterBank Offered Rate (“LIBOR”) rate plus 2.50%(payable monthly).  The expiration date of the Line has been extendedthrough May 31, 2005.  As ofJune 30, 2004, $9.7 million was available under the Line and therewere no borrowings outstanding. The Company may use up to $5.0 million ofthe Line to issue letters of credit. As of June 30, 2004, approximately$386,000 was available for the issuance of letters of credit. The Line issecured by intellectual property rights, accounts receivable and certain otherassets and is subject to certain borrowing base restrictions. The Line requiresmaintenance of certain financial covenants pertaining to key financial ratiosand the Company is in compliance with those covenants as of June 30, 2004.

 

In October 2001, theCompany’s $3.0 million equipment line (the “Equipment Line”) with the samelending institution providing the Line was amended, reducing the maximum amountavailable for borrowing under the Equipment Line to $2.0 million. TheEquipment Line bears interest at an annual rate of prime plus 0.75%, or theLIBOR rate plus 2.75% (payable monthly) and expires on November 30, 2004.The rate at June 30, 2004 was 4.75%. The Company could draw against theEquipment Line through November 30, 2001. Interest is payable monthly andprincipal is payable in 36 monthly installments commencing in December 2001.As of June 30, 2004, there was approximately $271,000 outstanding underthe Equipment Line. The Equipment Line is secured by certain assets of theCompany.

 

In December 2002, theCompany’s credit facility was amended to include an equipment advance (the“Equipment Advance”) in the amount of $5.0 million from the same lendinginstitution. Interest on the Equipment Advance is payable monthly and principalis payable in 24 equal monthly installments, beginning January 31, 2003.The Equipment Advance bears interest at an annual rate of prime plus 0.75% orthe LIBOR rate plus 3.0%. The rate at June 30, 2004 was 4.75%. As ofJune 30, 2004, the balance outstanding under this Equipment Advance wasapproximately $1.25 million.

 

Future principal payments onthe Equipment Line and the Equipment Advance will aggregate approximately $1.5million in 2004, based on the total outstanding balance.

 

**Note 7.****    *****Restructuring***

 

In 2002, the Company recorded restructuring and impairment chargestotaling $6.6 million, consisting of $1.7 million for employeetermination benefits and related costs associated with headcount reductions,$2.7 million related to future rent obligations for properties abandonedin connection with facilities 

 

9

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consolidation and $2.3 million related to the write-down ofleasehold improvements, furniture, computer equipment and software and otherassets in connection with facilities consolidation and headcount reductions.The headcount reduction of 57 employees was made up of 58% sales and marketingstaff, 19% professional services staff, 14% research and development staff and9% general and administrative staff. The restructuring and impairment chargesrecorded in 2002 and 2001 were recorded under EITF No. 94-3, “LiabilityRecognition for Certain Employee Termination Benefits and Other Costs to Exitan Activity.” Under EITF No. 94-3, the accrual for future rent obligationswas recorded when the commitment to abandon the facilities was reached.

 

In 2003, the Company recorded restructuring and impairment chargestotaling $7.4 million, consisting of $1.9 million for employeetermination benefits and related costs associated with headcount reductions,$1.2 million related to future rent obligations for properties abandonedin connection with facilities consolidation and $4.3 million related tothe write-down of leasehold improvements, furniture, computer equipment andsoftware in connection with the facilities consolidation and headcount reductions.The 2003 headcount reduction of 56 employees was comprised of approximately 48%sales and marketing staff, 41% professional services staff and 11% general andadministrative staff. The Company also recovered approximately $944,000 inrestructuring expenses that had previously been reserved for. The restructuringand impairment charges recorded during 2003 were recorded under SFASNo. 146, “Accounting for Costs Associated with Exit or DisposalActivities.” Under SFAS No. 146, the accrual for future rent obligationswere recorded when the facilities were abandoned.

 

These restructuring and impairment charges were recorded to betteralign the Company’s cost structure with changing market conditions. Thefollowing table sets forth the Company’s accrued restructuring costs as ofJune 30, 2004 (in thousands).

 
| ** **                        | ** ** | **Facilities  Consolidation** | ** ** | **Termination  Benefits** | ** ** | **Total** | ** ** |
|-----------------------------------|------------|-------------------------------|------------|---------------------------|------------|-----------|------------|
|                              |       |                          |       |                      |       |      |       |
| Balance at December 31, 2003 |       | $                             | 1,913      |                      | $          | 214       |       | $ | 2,127 |   |
| Cash utilized                     |       | (424                          | )          | (214                      | )          | (638      | )          |
| Balance at March 31, 2004    |       | 1,489                         |       | —                    |       | 1,489     |       |
| Cash utilized                     |       | (425                          | )          | —                    |       | (425      | )          |
| Balance at June 30, 2004     |       | $                             | 1,064      |                      | $          | —    |       | $ | 1,064 |   |

 

Accruedfacilities consolidation costs represent future payment obligations onabandoned excess facilities, net of sublease income and is expected to be paidover the next sixteen months.

 

**Note8.    Legal Proceedings**

 

Beginning on July 3, 2002, severalpurported class action shareholder complaints were filed in the United StatesDistrict Court for the Central District of California against the Company andseveral of our officers and directors. The actions were subsequentlyconsolidated and a consolidated amended complaint was filed purportedly broughton behalf of purchasers of common stock of SeeBeyond Technology Corporationbetween December 10, 2001 and May 7, 2002.  The complaint generallyalleged that defendants made false statements about SeeBeyond’s operatingresults and business, while concealing material information. The plaintiffsseek unspecified monetary damages.   Wehave entered into an agreement in principle, subject to final documentation andcourt approval, to settle this litigation. The total amount of the settlement is $13.1 million which is to be paidby our insurers.  The settlement providesfor a complete dismissal of all claims against SeeBeyond and the individualdefendants.

 

Beginning on September 5, 2002, severalderivative lawsuits were filed by purported Company shareholders in theSuperior Court of California for the County of Los Angeles.  Thecomplaints name certain of the Company’s present and former officers anddirectors as defendants and name the Company as a nominal defendant. Thecomplaints generally allege that the defendants breached their fiduciary dutiesto the Company through the dissemination of allegedly misleading and inaccurateinformation and other 

 

10

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allegations. The parties have entered into a settlement in principle of thislitigation, subject to final documentation and court approval, involving theimplementation of certain policies and procedures by the company and thepayment of attorneys’ fees to plaintiffs’ counsel.  These attorney’s fees are to be paid by ourinsurers and the settlement is not expected to have a material adverse effecton the Company’s financial position or its results of operations and cashflows.

 

The Company is also party toclaims and suits brought against it in the ordinary course of business. In theopinion of management, such claims should not have any material adverse effectupon the results of operation, cash flows or the financial position of theCompany.

 

**Note 9.    *Comprehensive Income (Loss)***

 

SFAS No. 130 “ReportingComprehensive Income,” establishes standards for reporting comprehensive income(loss) and its components in financial statements. Comprehensive income (loss),as defined, refers to revenues, expenses, gains and losses that are notincluded in net income (loss) but rather are recorded directly in stockholders’equity.

 

Total comprehensive income(loss) was as follows (in thousands):

 
| ** **                         | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                         | ** ** | **2004**                             | ** ** | **2003**                           | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net income (loss)                  |       | $                                    | 869        |                               | $          | (17,283 | ) | $ | (4,914 | ) | $ | (23,408 | ) |
| Other comprehensive income (loss): |       |                                 |       |                               |       |   |   |   |   |
| Foreign translation adjustment     |       | (565                                 | )          | 72                                 |       | (65 | ) | (92 | ) |
| Comprehensive income (loss)        |       | $                                    | 304        |                               | $          | (17,211 | ) | $ | (4,979 | ) | $ | (23,500 | ) |

 

**Note 10.    *Stockholders’ Equity***

 

**Treasury Stock**

 

During the sixmonths ended June 30, 2004, the Company repurchased 147,336 shares of itscommon stock at an average price of $4.31 per share.  As of June 30, 2004, the Company held1,869,338 shares of its common stock in treasury.

 

**Note 11.    *Subsequent Events***

 

During theperiod from July 29, 2004 – August 6, 2004, the Company repurchased265,200 shares of its common stock at an average price of approximately $3.02per share.

 

11

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**Item 2****..    Management’s Discussion and Analysis of FinancialCondition and Results of Operations**

 

You should read thefollowing discussion in conjunction with the consolidated financial statementsand related notes of SeeBeyond Technology Corporation appearing elsewhere inthis Form 10-Q. The following discussion contains forward-lookingstatements that involve risks and uncertainties, including statements regardinganticipated costs and expenses, mix of revenues and plans for introducing newproducts and services. Our actual results could differ materially from theresults contemplated by these forward-looking statements as a result of anumber of factors, including those discussed below, under “Risk Factors” andelsewhere in this Form 10-Q.

 

**GeneralOverview**

 

InOctober 2003 we announced the general availability of our new suite ofproducts, the SeeBeyond Integrated Composite Application Network version 5.0(“ICAN 5”).   ICAN 5 offers theintegration industry’s first fully integrated platform for the development anddeployment of composite applications. ICAN 5 helps organizations to rapidly assemble and deployenterprise-scale end-user composite applications built on existing systems andinfrastructure.

 

We sell our products and services on a global basis through our directsales force, and through alliances with leading systems integrators, and inother instances, through value-added software resellers and technology vendors.Our products are typically licensed directly to customers for a perpetual term,with pricing based on the number of systems or applications the customer isintegrating or connecting with our products.

 

Totalrevenue for the three months and six months ended June 30, 2004 was $41.9million and $76.3 million compared to $28.9 million and $64.7 million in thesame periods of the prior year.  For thethree months ending June 30, 2004 total revenue was $41.9 million up 45%from the same period in the prior year as well as up 22% from the three monthsended March 31, 2004.

 

Licenserevenue for the three months ended June 30, 2004 was $19.8 million whichis a 177% increase over the prior year’s second quarter and an 82% increasefrom the three months ended March 31, 2004.

 

Netincome (loss) for the three months and six months ended June 30, 2004 was$869,000, or $0.01 per share, and $(4.9) million, or $(0.06) per share,respectively compared to $(17.3) million, or $(0.21) per share and $(23.4)million, or $(0.28) per share, respectively in the same periods of the prioryear.

 

We currently have operations in nineteen countries outside of theUnited States. Revenues derived from international sales were 51% and 41% oflicense revenue for the three months ended June 30, 2004 and 2003,respectively, and 51% and 39% for the six months ended June 30, 2004 and2003, respectively. We believe international revenues will continue to besignificant in future periods.

 

SeeBeyond closedsixty-six customer transactions in the three months ended June 30, 2004,up from fifty-four customer transactions from the first quarter of 2004. Withlicense revenue generated across key verticals including financial services andinsurance, healthcare and manufacturing, the following customers represent newand existing business in the quarter: Bank Vontobel AG, Capita BusinessServices, Tenet Health Care, Puerto Rico Electric Power Authority, BBC, BMWGroup, united Kingdom MHS, Carrefour, the District of Columbia, DirecTV, FloridaPower and Light, The Gap, General Motors, HP Shopping, Lanier Worldwide andRyder Systems.

 

**CriticalAccounting Policies**

 

The discussion and analysisof our financial condition and results of operations are based upon ourconsolidated financial statements, which have been prepared in accordance withaccounting principles generally accepted in the United States. The preparationof these financial statements requires us to make estimates and judgments thataffect the reported amounts of assets and liabilities, revenues and expenses,and related disclosure of contingent assets and liabilities at the date of ourfinancial statements. Actual results may differ from these estimates underdifferent assumptions or conditions.

 

12

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Our significant accountingpolicies are described in Note 1 to the annual consolidated financialstatements as of and for the year ended December 31, 2003 in Item 8:Financial Statements and Supplementary Data. We believe our most criticalaccounting policies include the following:

 

•                                          revenue recognition,

 

•                                          estimating allowance for doubtful accounts,

 

•                                          accounting for income taxes

 

*Revenuerecognition.* Werecognize revenue when an agreement has been signed by both parties or other persuasiveevidence of an arrangement exists, the software has been shipped orelectronically delivered, the fees are fixed or determinable, collection of theresulting receivable is probable, and no other significant obligations remain.For multiple element arrangements where vendor specific objective evidence offair value exists for all undelivered elements, we account for the deliveredelements in accordance with the “residual method” prescribed by Statement ofPosition 98-9. Vendor-specific objective evidence of fair value is based on theprice a customer is required to pay when the element is sold separately.

 

We assess whether the fee isfixed and determinable and collection is probable at the time of thetransaction. In assessing whether the fee is fixed and determinable we analyzethe payment terms of the transaction and other factors, including the natureand class of customer, our historical experience of collecting under ourpayment terms without granting a concession, the possibility of the productbecoming technologically obsolete before the payments become due and thelikelihood of the customer asking for a refund. If we determine the fee is notfixed or determinable, we defer the revenue until the payments under thearrangement become due. We assess whether collection is probable based on anumber of factors, including the customer’s past transaction history and creditworthiness. If we determine that collection of a fee is not probable, we deferthe fee and recognize revenue at the time collection become probable, which isgenerally upon the receipt of cash.

 

Maintenance revenues consistprimarily of fees for providing unspecified software upgrades on awhen-and-if-available basis and technical support over a specified term, whichis typically twelve months. Maintenance revenues are typically paid in advanceand are recognized on a straight-line basis over the specified term.

 

Revenues on sales made byalliance partners are generally recognized upon shipment of the software to theend user, if all other revenue recognition criteria noted above are met. Underlimited arrangements with certain distributors when all the revenue recognitioncriteria have been met upon delivery of the product to the distributor,revenues are recognized at that time. We do not offer a right of return on itsproducts.

 

The fair value of servicessuch as consulting or training is based upon separate sales of these services.Consulting and training services are generally sold on a time-and-materials orfixed fee basis and are generally recognized as the services are performed.Consulting services primarily consist of implementation services related to theinstallation of our products and generally do not involve significantproduction, modification or customization to or development of the software.

 

Significant managementjudgments and estimates must be made in connection with determination of therevenue to be recognized in any accounting period. If we made differentjudgments or estimates for any period, material differences in the amount andtiming of revenue could result.

 

*Allowancefor doubtful accounts.* Wemaintain allowances for doubtful accounts based on our analyses of thelikelihood that our customers will not pay us all the money they owe. Incircumstances where there is knowledge of a specific customer’s inability tomeet its financial obligations, a specific reserve is recorded against amountsdue to reduce the net recognized receivable to the amount that is reasonablybelieved to be collected. For all our customers we perform analyses, whichinclude a review of their credit profiles, the terms and conditions of thecontracts with our customers, and the current economic trends and paymenthistory. We reassess these allowances each accounting period. If actual paymentexperience with our

 

13

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customers is different thanour estimates, adjustments to these allowances may be necessary resulting inadditional charges to our income statement.

 

*Accountingfor income taxes.* Werecord a valuation allowance to reduce our deferred tax assets by an estimatedamount of tax benefits, which is not expected to be realized. Tax benefits willnot be realized if we do not generate sufficient taxable income in the futureto apply against the deferred tax balance. As of June 30, 2004, avaluation allowance equal to the value of the deferred tax assets wasmaintained.  In the event we were to determine that we would be able torealize our deferred tax assets in the future in excess of its net recordedamount, an adjustment to the deferred tax asset would increase income in theperiod such a determination was made.

 

Significant managementjudgment is required in determining our provision for income tax assets andliabilities and our future taxable income for purposes of assessing our abilityto realize any future benefit from our deferred tax assets. In the event actualresults differ from these estimates or we adjust these estimates in futureperiods, our operating results and financial position could be materiallyaffected.

 

**Results ofOperations**

 

The following table setsforth our results of operations for the three months and six months endedJune 30, 2004 and 2003, respectively, expressed as a percentage of totalrevenues:

 
| ** **                                     | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                     | ** ** | **2004**                              | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenues:                                      |       |                                  |       |                                |       |   |   |   |   |
| License                                        |       | 47                                    | %          | 25                                  | %          | 40 | % | 31 | % |
| Services                                       |       | 22                                    |       | 34                                  |       | 26 |   | 33 |   |
| Maintenance                                    |       | 31                                    |       | 41                                  |       | 34 |   | 36 |   |
| Total revenues                                 |       | 100                                   |       | 100                                 |       | 100 |   | 100 |   |
| Cost of revenues:                              |       |                                  |       |                                |       |   |   |   |   |
| License                                        |       | 1                                     |       | 1                                   |       | 1 |   | 1 |   |
| Services and maintenance                       |       | 25                                    |       | 37                                  |       | 27 |   | 34 |   |
| Total cost of revenues                         |       | 26                                    |       | 38                                  |       | 28 |   | 35 |   |
| Gross profit                                   |       | 74                                    |       | 62                                  |       | 72 |   | 65 |   |
| Operating expenses:                            |       |                                  |       |                                |       |   |   |   |   |
| Research and development                       |       | 23                                    |       | 36                                  |       | 25 |   | 33 |   |
| Sales and marketing                            |       | 38                                    |       | 48                                  |       | 41 |   | 44 |   |
| General and administrative                     |       | 10                                    |       | 16                                  |       | 12 |   | 14 |   |
| Restructuring and impairment charges           |       | —                                |       | 22                                  |       | — |   | 10 |   |
| Amortization of sales and marketing  warrants  |       | —                                |       | —                              |       | — |   | — |   |
| Amortization of stock-based compensation       |       | —                                |       | —                              |       | — |   | — |   |
| Total operating expenses                       |       | 72                                    |       | 122                                 |       | 78 |   | 101 |   |
| Income (loss) from operations                  |       | 2                                     |       | (60                                 | )          | (6 | ) | (36 | ) |
| Interest and other income (expense), net       |       | —                                |       | —                              |       | — |   | — |   |
| Interest expense                               |       | —                                |       | —                              |       | — |   | — |   |
| Income (loss) before provision for income  tax |       | 2                                     |       | (60                                 | )          | (6 | ) | (36 | ) |
| Provision for income tax                       |       | —                                |       | —                              |       | — |   | — |   |
| Net income (loss)                              |       | 2                                     | %          | (60                                 | )%         | (6 | )% | (36 | )% |

 

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**Revenues**

 

***Total revenues***(in thousandsexcept percentages):

 
| ** **    | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **    | ** ** | **2004**                              | ** ** | **2003**                            | ** ** | **Change** | ** ** | **2004** | ** ** | **2003** | ** ** | **Change** | ** ** |
| Total revenue |       | $                                     | 41,869     |                                | $          | 28,857 |   | $ | 13,012 |   | 45 | % | $ | 76,306 |   | $ | 64,679 |   | $ | 11,627 |   | 18 | % |
|               |            |                                       |            |                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Total revenues increased forthe three months and six months ended June 30, 2004 as compared to thesame periods of the prior year primarily due to increases in license andmaintenance revenues, partially offset by decreases in services revenues.

*** ***

***License revenue(in thousands except percentages):***

 
| ** **      | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **      | ** ** | **2004**                              | ** ** | **2003**                            | ** ** | **Change** | ** ** | **2004** | ** ** | **2003** | ** ** | **Change** | ** ** |
| License revenue |       | $                                     | 19,778     |                                | $          | 7,137 |   | $ | 12,641 |   | 177 | % | $ | 30,658 |   | $ | 20,127 |   | $ | 10,531 |   | 52 | % |
|                 |            |                                       |            |                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Licenserevenues increased for the three months and six months ended June 30, 2004as compared to the same periods in the prior year primarily due to an increasein license revenue in Europe as a result of increased sales of ICAN 5 which wasmade generally available in October 2003. 

 

 

***Services revenue***(in thousandsexcept percentages):

 

Revenues from services include consulting and implementation services,training and reimbursable out-of-pocket expenses. A majority of our customersuse third-party systems integrators to implement our products. Customers alsotypically purchase additional consulting services from us to support theirimplementation activities. These consulting services are generally sold on atime and materials or fixed fee basis, and services revenues are recognized asthe services are performed. We also offer training services, which are sold ona per student basis and for which revenues are recognized as the classes areattended.

 
| ** **       | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------|------------|------------------------|------------|----------------------|------------|
| ** **       | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **       | ** ** | **2004**               | ** ** | **2003**             | ** ** | **Change** | ** ** | **2004** | ** ** | **2003** | ** ** | **Change** | ** ** |
| Services revenue |       | $                      | 9,110      |                 | $          | 9,823 |   | $ | (713 | ) | (7 | )% | $ | 19,620 |   | $ | 21,055 |   | $ | (1,435 | ) | (7 | )% |
|                  |            |                        |            |                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Services revenues decreasedfor the three months and six months ended June 30, 2004 as compared to thesame periods of the prior year primarily due to a decrease in North Americanservices revenues.  This decreaseprimarily resulted from a lower demand for our consulting services from ourcustomers in North America due to lower license revenues during the precedingquarterly periods.

 

***Maintenance revenue***(in thousandsexcept percentages):

 

Customers who license our products normally purchase maintenancecontracts. These contracts provide unspecified software upgrades and technicalsupport over a fixed term, which is typically 12 months. Maintenancecontracts are usually paid in advance, and revenues from these contracts arerecognized ratably over the term of the contract.

 
| ** **          | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------|------------|------------------------|------------|----------------------|------------|
| ** **          | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **          | ** ** | **2004**               | ** ** | **2003**             | ** ** | **Change** | ** ** | **2004** | ** ** | **2003** | ** ** | **Change** | ** ** |
| Maintenance revenue |       | $                      | 12,981     |                 | $          | 11,897 |   | $ | 1,084 |   | 9 | % | $ | 26,028 |   | $ | 23,497 |   | $ | 2,531 |   | 11 | % |
|                     |            |                        |            |                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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Maintenance revenues for thethree months and six months ended June 30, 2004 increased as compared tothe same periods of the prior year primarily due to renewals of prior periodmaintenance contracts associated with the increase in our cumulative licenserevenues.

 

**Cost ofrevenues**(in thousands except percentages):

 

Costof revenues consists primarily of royalties for third-party products embeddedor bundled with our products and compensation and related overhead costs forpersonnel engaged in implementation services and maintenance supportactivities, training and out-of-pocket expenses. Such costs include salaries,employee benefits, incentive compensation, bonuses, travel, rent and allocatedfacilities and professional fees.

 
| ** **            | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **            | ** ** | **2004**                              | ** ** | **2003**                            | ** ** | **Change** | ** ** | **2004** | ** ** | **2003** | ** ** | **Change** | ** ** |
| Total cost of revenue |       | $                                     | 10,996     |                                | $          | 10,848 |   | $ | 148 |   | 1 | % | $ | 21,452 |   | $ | 22,941 |   | $ | (1,489 | ) | (6 | )% |
|                       |            |                                       |            |                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Total cost of revenues forthe three months ended June 30, 2004 remained virtually unchanged ascompared to the same period of the prior year with no significant year overyear changes in any particular cost of revenue line item.  Total cost of revenues decreased for the sixmonths ended June 30, 2004 as compared to the same period of the prioryear primarily due to a decrease in professional services related headcount aspart of cost-cutting exercises that were performed during the third and fourthquarters of 2003.

 

**Operatingexpenses**

 

***Research and developmentexpenses*******(in thousands except percentages):

 

Research anddevelopment expenses consist primarily of personnel, third party contractorsand related costs associated with the development and enhancement of ourproducts.

 
| ** **               | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **               | ** ** | **2004**                              | ** ** | **2003**                            | ** ** | **Change** | ** ** | **2004** | ** ** | **2003** | ** ** | **Change** | ** ** |
| Research and development |       | $                                     | 9,636      |                                | $          | 10,449 |   | $ | (813 | ) | (8 | )% | $ | 19,376 |   | $ | 21,076 |   | $ | (1,700 | ) | (8 | )% |
|                          |            |                                       |            |                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Research and developmentexpenses decreased for the three months and six months ended June 30, 2004as compared to the same periods of the prior year primarily due to a slightdecrease in development expenses during the post-release development period ofICAN 5.  We anticipate research anddevelopment expenses to increase slightly in absolute dollars in theforeseeable future.

 

***Sales and marketingexpenses***(in thousands except percentages):

 

Salesand marketing expenses consist primarily of personnel and related costs of ourdirect sales force and marketing staff and the cost of expenditures specific tothe marketing group, such as public relations and advertising, trade shows andmarketing collateral materials and expenditures.

 
| ** **                   | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                   | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **                   | ** ** | **2004**               | ** ** | **2003**             | ** ** | **Change** | ** ** | **2004** | ** ** | **2003** | ** ** | **Change** | ** ** |
| Sales and marketing expenses |       | $                      | 16,066     |                 | $          | 13,959 |   | $ | 2,107 |   | 15 | % | $ | 31,070 |   | $ | 28,440 |   | $ | 2,630 |   | 9 | % |
|                              |            |                        |            |                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Sales andmarketing expenses increased for the three months and six months endedJune 30, 2004 as compared to the same periods of the prior year primarilydue to an increase in sales commissions, promotional and public relationsactivities related to the marketing of ICAN 5, and an increase in salesheadcount.  We anticipate sales andmarketing expenses to remain flat in absolute dollars for the foreseeablefuture.

 

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***General and administrativeexpenses*** (in thousands except percentages):

 

Generaland administrative expenses consist primarily of personnel and related costsfor corporate, executive, human resources, legal, IT, finance and accountingfunctions.

 
| ** **                 | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                 | ** ** | **2004**                              | ** ** | **2003**                            | ** ** | **Change** | ** ** | **2004** | ** ** | **2003** | ** ** | **Change** | ** ** |
| General and administrative |       | $                                     | 4,249      |                                | $          | 4,599 |   | $ | (350 | ) | (8 | )% | $ | 8,858 |   | $ | 9,225 |   | $ | (367 | ) | (4 | )% |
|                            |            |                                       |            |                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

General andadministrative expenses for the three months and six months endedJune 30, 2004 decreased slightly as compared to the same periods of theprior year due to the recovery of certain previously written off baddebts.  There was no other significantperiod over period changes in any particular general and administrative expenseitem.  We anticipate general andadministrative expenses to increase slightly for the foreseeable future.

 

***Interest and other income (expense), net***(in thousandsexcept percentages):

 

Interestand other income (expense), net consists of interest earned on cash balances,foreign currency gains and losses, gains and losses on the disposal of fixedassets and other miscellaneous income and expense items.

 
| ** **                               | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                               | ** ** | **2004**                              | ** ** | **2003**                            | ** ** | **Change** | ** ** | **2004** | ** ** | **2003** | ** ** | **Change** | ** ** |
| Interest and other income (expense), net |       | $                                     | 143        |                                | $          | 308 |   | $ | (165 | ) | (54 | )% | $ | (70 | ) | $ | 619 |   | $ | (689 | ) | (111 | )% |
|                                          |            |                                       |            |                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Interestand other income (expense), net for the three months and six months endedJune 30, 2004 decreased as compared to the same periods of the prior yearprimarily due to increases in foreign exchange losses in several of ourinternational subsidiaries, and a decrease in interest income as a result oflower average cash balances.

 

**Liquidityand capital resources**

 

As of June 30, 2004, wehad cash and cash equivalents of $64.9 million, a decrease of$5.2 million from $70.1 million held as of December 31, 2003.

 

*Operating activities:*

 
| ** **                            | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------|------------|----------------------|------------|
| ** **                            | ** ** | **June 30,**    | ** ** |
| ** **                            | ** ** | **2004**             | ** ** | **2003** | ** ** | **Change** | ** ** |
| Net cash used in operating activities |       | $                    | (5,199     | ) | $ | (8,102 | ) | $ | 2,903 |   | 36 | % |
|                                       |            |                      |            |  |  |  |  |  |  |  |  |  |

 

Net cash used in operatingactivities for the six months ended June 30, 2004 decreased as compared tothe same period of the prior year primarily due to a $4.9 million net loss andreceivable balances remaining virtually unchanged for the current year period,as compared to a $23.4 million net loss which was partially offset by a $12.8million decrease in accounts receivable during the same period in the prioryear.

 

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*Investing activities:*

 
| ** **                            | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------|------------|----------------------|------------|
| ** **                            | ** ** | **June 30,**    | ** ** |
| ** **                            | ** ** | **2004**             | ** ** | **2003** | ** ** | **Change** | ** ** |
| Net cash used in investing activities |       | $                    | (705       | ) | $ | (4,748 | ) | $ | 4,043 |   | 85 | % |
|                                       |            |                      |            |  |  |  |  |  |  |  |  |  |

 

Net cash used in investingactivities for the six months ended June 30, 2004 decreased as compared tothe same period of the prior year primarily due to a decrease in capitalexpenditures. We expect capital expenditures in the next three months to remainflat compared to the previous three months.

 

*Financing activities:*

 
| ** **                                           | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------|------------|----------------------|------------|
| ** **                                           | ** ** | **June 30,**    | ** ** |
| ** **                                           | ** ** | **2004**             | ** ** | **2003** | ** ** | **Change** | ** ** |
| Net cash provided by (used in) financing  activities |       | $                    | 722        |   | $ | (1,081 | ) | $ | 1,803 |   | 167 | % |
|                                                      |            |                      |            |  |  |  |  |  |  |  |  |  |

 

Net cash provided by (usedin) financing activities for the six months ended June 30, 2004 increasedas compared to the same period of the prior year primarily due to an increasein proceeds from stock options exercises, partially offset by payments for thepurchase of common stock.

 

In November 2000, theCompany established a $15.0 million line of credit facility (the “Line”)with a lending institution that bears interest at an annual rate of eitherprime plus 0.5% or the London InterBank Offered Rate (“LIBOR”) rate plus 2.50%(payable monthly).  The expiration date of the Line has been extendedthrough May 31, 2005.  As ofJune 30, 2004, $9.7 million was available under the Line and therewere no borrowings outstanding. The Company may use up to $5.0 million ofthe Line to issue letters of credit. As of June 30, 2004, approximately$386,000 was available for the issuance of letters of credit. The Line issecured by intellectual property rights, accounts receivable and certain otherassets and is subject to certain borrowing base restrictions. The Line requiresmaintenance of certain financial covenants pertaining to key financial ratiosand the Company is in compliance with those covenants as of June 30, 2004.

 

In October 2001, theCompany’s $3.0 million equipment line (the “Equipment Line”) with the samelending institution providing the Line was amended, reducing the maximum amountavailable for borrowing under the Equipment Line to $2.0 million. TheEquipment Line bears interest at an annual rate of prime plus 0.75%, or theLIBOR rate plus 2.75% (payable monthly) and expires on November 30, 2004.The rate at June 30, 2004 was 4.75%. The Company could draw against theEquipment Line through November 30, 2001. Interest is payable monthly andprincipal is payable in 36 monthly installments commencing inDecember 2001. As of June 30, 2004, there was approximately $271,000outstanding under the Equipment Line. The Equipment Line is secured by certainassets of the Company.

 

In December 2002, theCompany’s credit facility was amended to include an equipment advance (the“Equipment Advance”) in the amount of $5.0 million from the same lendinginstitution. Interest on the Equipment Advance is payable monthly and principalis payable in 24 equal monthly installments, beginning January 31, 2003.The Equipment Advance bears interest at an annual rate of prime plus 0.75% orthe LIBOR rate plus 3.0%. The rate at June 30, 2004 was 4.75%. As ofJune 30, 2004 the balance outstanding under this Equipment Advance wasapproximately $1.25 million.

 

Future principal payments onthe Equipment Line and the Equipment Advance will aggregate approximately $1.5million in 2004, based on the total outstanding balance.

 

We believe that our currentcash and cash equivalents balance will be sufficient to meet our workingcapital and capital expenditure requirements for at least the next twelvemonths. However, we may need to raise additional funds, and we may not be ableto obtain additional debt or equity financing on favorable terms, if at all. Inaddition, we may also utilize cash resources to fund acquisitions or investmentsin complementary 

 

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businesses, technologies orproduct lines.

 

**Risks Related to SeeBeyond**

 

You should carefully consider the risks described below in evaluatingthe other statements made herein. The risks described below are not the onlyones facing our company. Additional risks not presently known to us, or wecurrently deem immaterial, may also impair our business operations.

 

Our business, financial condition or results of operations could be adverselyaffected by any of these risks. The trading price of our common stock coulddecline due to any of these risks.

 

***Acontinued downturn in the general economy or a continuation of the industrytrend toward reducing or delaying additional information technology spendingdue to cost-cutting pressures could reduce demand for our products andservices.***

 

We rely significantly upon customers making large informationtechnology purchasing decisions as a source of revenue. During the past severalyears including the first three months of 2004, we experienced a generalslow-down in the level of capital spending by some of our customers due to thegeneral economic downturn, which has adversely affected our revenues. Thisslow-down in capital spending, if sustained in future periods, could result inreduced sales or the postponement of sales to our customers. There can be noassurance the level of spending on information technology in general or onbusiness integration software by our customers and potential customers inparticular, will increase or remain at current levels in future periods. Lowerspending on information technology could result in reduced license sales to ourcustomers, reduced overall revenues, diminished margin levels, and could impairour operating results in future periods.

 

***Wehave a large accumulated deficit, we may incur future losses and we may notachieve or maintain profitability.***

 

We have incurred substantial losses since 1998 as we increased fundingof the development of our products and technologies and expanded our sales andmarketing organization. As of June 30, 2004, we had an accumulated deficitof approximately $158.9 million. We may continue to incur losses in futureperiods and we may not achieve or maintain profitability on a quarterly orannual basis.

 

***Ouroperating results fluctuate significantly, and an unanticipated decline inrevenues or gross margin may disappoint securities analysts or investors andresult in a decline in our stock price.***

 

Our operating results have fluctuated significantly in the past and mayvary significantly in the future. We believe period-to-period comparisons ofour historical results of operations are not a good predictor of our futureperformance.

 

Our revenues and operating results depend upon the volume and timing ofcustomer orders and payments and the date of product delivery. Historically, asubstantial portion of our revenues in a given quarter has been recorded in thefinal month of that quarter, with a concentration of these revenues in the lasttwo weeks of the final month. We expect this trend to continue and, therefore,any failure or delay in the closing of orders would have a material adverseeffect on our quarterly operating results. Since our operating expenses arebased on anticipated revenues and because a high percentage of these expensesare relatively fixed, a delay in the recognition of revenues from one or morelicense transactions could cause significant variations in operating resultsfrom quarter to quarter and cause a decline in our stock price. We realizesubstantially higher gross margins on our license revenues compared to ourservices and maintenance revenues. Thus, our margins for any particular quarterwill be highly dependent on our revenue mix in that quarter. In our internationalmarkets, we have experienced some seasonality of revenues, with lower revenuesin the summer months. Although this seasonality has not had a material impacton our operating results in the past, we cannot assure you our operatingresults will not fluctuate in the future as a result of these and otherinternational trends.

 

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We record as deferred revenue, payments from customers that do not meetour revenue recognition policy requirements. Since only a small portion of ourrevenues each quarter is recognized from deferred revenue, our quarterlyresults depend primarily upon entering into new contracts to generate revenuesfor that quarter. New contracts may not result in revenues in the quarter inwhich the contract was signed, and we may not be able to predict accuratelywhen revenues from these contracts will be recognized. If our operating resultsare below the expectations of securities analysts or investors for these orother reasons, our stock price would likely decline, perhaps substantially.

 

***Weexperience long and variable sales cycles, which could have a negative impacton our results of operations for any given quarter.***

 

Our products are often used by our customers throughout their organizationsto address critical business problems. Customers generally consider a widerange of issues before committing to purchase our products, including productbenefits, the ability to operate with existing and future computer systems, theability to accommodate increased transaction volumes and product reliability.Many customers are addressing these issues for the first time when theyconsider whether to buy our products and services. As a result, we or otherparties, including systems integrators, must educate potential customers on theuse and benefits of our products and services. In addition, the purchase of ourproducts generally involves a significant commitment of capital and otherresources by a customer. This commitment often requires significant technicalreview, assessment of competitive products and approval at a number ofmanagement levels within a customer’s organization. Our sales cycle may varybased on the industry in which the potential customer operates and is difficultto predict for any particular license transaction. The length and variabilityof our sales cycle makes it difficult to predict whether particular sales willbe concluded in any given quarter. If one or more of our license transactionsare not consummated in a given quarter, our results of operations for thatquarter may be below our expectations and the expectations of analysts andinvestors.

 

***Ouroperating results are highly dependent on license revenues from one softwaresuite, and our business could be materially harmed by factors that adverselyaffect the pricing and demand for this software suite.***

 

Substantially all of our license revenues have been, and are expectedto continue to be, derived from the license of our Business Integration Suite.Accordingly, our future operating results will depend on the demand for ourBusiness Integration Suite by future customers, including new and enhancedreleases that are subsequently introduced. Our latest version of the BusinessIntegration Suite, ICAN 5, was announced in March 2003 and made generallyavailable to customers in October of 2003. If our competitors release newproducts that are superior to our Business Integration Suite in performance orprice, or if we fail to enhance our Business Integration Suite and introduce newproducts in a timely manner, demand for our products may decline, and we mayhave to reduce the pricing of our products. A decline in demand or pricing forour Business Integration Suite as a result of these or other factors wouldsignificantly reduce our revenues.

 

In the past, we have experienced delays in the commencement ofcommercial releases of our Business Integration Suite. In the future, we mayfail to introduce or deliver new products on a timely basis. If new releases orproducts are delayed or do not achieve market acceptance, we could experiencecustomer dissatisfaction or a delay or loss of revenues. For example, theintroduction of new enterprise and business applications requires us tointroduce new e*Way adapters to support the integration of these applications.Our failure to introduce these or other modules in a timely manner could causeour revenues and market share to decline. In addition, customers may delaypurchases of our products in anticipation of future releases. If customers defermaterial orders in anticipation of new releases or new product introductions,our revenues may decline.

 

Moreover, as we release enhanced versions of our products, we may notbe successful in upgrading our customers who purchased previous versions of ourBusiness Integration Suite to the current version. We also may not besuccessful in selling add-on modules for our products to existing customers.Any failure to continue to upgrade existing customers’ products or sell newmodules, if and when they are introduced, could negatively impact customersatisfaction and our revenues.

 

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**The loss of any significantcustomer could harm our business and cause our stock price to decline.**

 

Wedo not have long-term sales contracts with any of our customers. There can beno assurance that any of our customers will continue to purchase our productsin the future. As a result, a customer that generates substantial revenue forus in one period may not be a source of revenue in subsequent periods. Forexample, a single customer accounted for approximately 11% of total revenueduring the first quarter of fiscal 2004 and 11% of total revenue during thesecond quarter of fiscal 2004.  The lossof this customer, or any other significant customer, could cause our revenuesto decline, harm our business and cause our stock price to decline.

 

***Ourrevenues will likely decline if we do not develop and maintain successfulrelationships with our systems integration partners and other partners, whoalso have relationships with our competitors.***

 

We have entered into agreements with a number of systems integratorsfor them to install and deploy our products and perform custom integration ofsystems and applications. These systems integrators also engage in jointmarketing and sales efforts with us. If these relationships fail, we will haveto devote substantially more resources to the sales and marketing andimplementation and support of our products than we would otherwise, and ourefforts may not be as effective as those of the systems integrators. In manycases, these parties have extensive relationships with our existing andpotential customers and influence the decisions of these customers. We relyupon these firms to recommend our products during the evaluation stage of thepurchasing process, as well as for implementation and customer supportservices.

 

These systems integrators are not contractually required to implementour products, and competition for these resources may preclude us fromobtaining sufficient resources to provide the necessary implementation servicesto support our needs. If the number of installations of our products exceedsour access to the resources provided by these systems integrators, we will berequired to provide these services internally, which would increase ourexpenses and significantly limit our ability to meet our customers’implementation needs. A number of our competitors have stronger relationshipswith some of these systems integrators and, as a result, these systemsintegrators might be more likely to recommend competitors’ products andservices instead of ours. In addition, a number of our competitors haverelationships with a greater number of these systems integrators or havestronger systems integrator relationships based on specific vertical marketsand, therefore, have access to a broader base of customers.

 

Our failure to establish or maintain systems integrator relationshipswould significantly harm our ability to license and successfully implement oursoftware products. In addition, we rely on the industry expertise and customercontacts of these firms in order to market our products more effectively.Therefore, any failure of these relationships would also harm our ability toincrease revenues in key commercial markets. We are currently investing, andplan to continue to invest, significant resources to develop theserelationships. Our operating results could be adversely affected if theseefforts do not generate license and service revenues necessary to offset thisinvestment.

 

***Ourmarkets are highly competitive and, if we do not compete effectively, we maysuffer price reductions, reduced gross margins and loss of market share.***

 

The market for our products is intensely competitive, evolving andsubject to rapid technological change. We expect the intensity of competitionto increase in the future. As a result of increased competition, we may have toreduce the price of our products and services, and we may experience reducedgross margins and loss of market share, any one of which could significantlyreduce our future revenues and operating results. Our current competitorsinclude vendors offering e-Business application integration and traditionalelectronic data interchange, or EDI, software products, as well as “in house”information technology departments of potential customers that have developedor may develop systems that provide some or all of the functionality of ourBusiness Integration Suite. We may also encounter competition from majorenterprise software developers in the future.

 

Many of our existing and potential competitors have more resources,broader customer relationships and better-established brands than we do. Inaddition, many of these competitors have extensive knowledge of our industry.Some of our competitors have established or may establish cooperativerelationships among themselves or with third parties to offer a single solutionand increase the ability of their products to address customer needs.

 

***Oursubstantial and expanding international operations are subject touncertainties, which could adversely affect our operating results.***

 

Revenues from the sale of products and services outside the UnitedStates accounted for 51% and 41% for the three months ended June 30, 2004and 2003, respectively and 51% and 39% for the six months ended June 30,2004 and 2003, respectively.  Revenuesfrom the sale of products and services in the United 

 

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Kingdom as a percent of our total revenues were 32% and 13% for thethree months ended June 30, 2004 and 2003, respectively and 30% and 14%for the six months ended June 30, 2004 and 2003, respectively. We believerevenues from sales outside the United States will continue to account for amaterial portion of our total revenues for the foreseeable future. We areexposed to several risks inherent in conducting business internationally, suchas:

 

•                                          fluctuationsin currency exchange rates, which could result in increased expenses;

 

•                                          unexpectedchanges in regulatory requirements, including imposition of currency exchangecontrols, applicable to our business or to the Internet, which could result inincreased costs of doing business overseas;

 

•                                          difficultiesand costs of staffing and managing international operations;

 

•                                          politicaland economic instability, which could result in increasing governmentalownership or regulation of businesses or other instrumentalities of commerce,wage and price controls, higher interest rates and spiraling inflation; and

 

•                                          reducedprotection for intellectual property rights in some countries.

 

Any of these factors could adversely affect our internationaloperations and, consequently, our operating results.

 

***Wecould suffer losses and negative publicity if new versions or releases of ourproducts contain errors or defects.***

 

Our products and their interactions with customers’ softwareapplications and IT systems are complex and, accordingly, there may beundetected errors or failures when our products are introduced or as newversions are released. In the past we have discovered software errors in ournew releases and new products after their introduction, which have resulted inadditional product development expenses. To date, these additional expenseshave not been material. These errors have resulted in product release delays,delayed revenues and customer dissatisfaction. In the future we may discovererrors, including performance limitations, in new releases or new productsafter the commencement of commercial shipments. Since many customers are usingour products for mission-critical business operations, any of these occurrencescould seriously harm our business and generate negative publicity, which couldhave a negative impact on future sales. Although we maintain product liabilityand errors and omissions insurance, we cannot assure you these policies will besufficient to compensate for losses caused by any of these occurrences.

 

***Ifour products do not operate with the many hardware and software platforms usedby our customers and keep pace with technological change, our business mayfail.***

 

We currently serve a customer base with a wide variety of constantlychanging hardware, software applications and platforms. If our products fail togain broad market acceptance due to an inability to support a variety of theseplatforms, our operating results may suffer. Our business depends on a numberof factors, including the following:

 

•                                          ourability to integrate our products with multiple platforms and existing, orlegacy, systems and to modify our products as new versions of softwareapplications are introduced;

 

•                                          theportability of our products, particularly the number of operating systems anddatabases our products can source or target;

 

•                                          ourability to anticipate and support new standards, especially Internet standards;

 

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•                                          theintegration of additional software modules under development with our existingproducts; and

 

•                                          ourmanagement of software being developed by third parties for our customers foruse with our products.

 

Our industry is characterized by very rapid technological change,frequent new product introductions and enhancements, changes in customerdemands and evolving industry standards. We have also found the technologicallife cycles of our products are difficult to estimate. We believe we mustcontinue to enhance our current products and concurrently develop and introducenew products that anticipate emerging technology standards and keep pace with competitiveand technological developments. Failure to do so will harm our ability tocompete. As a result, we are required to continue to make substantial productdevelopment investments.

 

***Themarket for business integration software may not grow as quickly as weanticipate, which would cause our revenues to fall below expectations.***

 

The market for business integration software is rapidly evolving. Weearn substantially all of our license revenues from sales of our BusinessIntegration Suite. We expect to earn substantially all of our revenues in theforeseeable future from sales of our Business Integration Suite and relatedproducts and services. Our future financial performance will depend oncontinued growth in the number of organizations demanding software and servicesfor application integration and business integration solutions and seekingoutside vendors to develop, manage and maintain this software for theircritical applications. Many of our potential customers have made significantinvestments in internally developed systems and would incur significant costsin switching to third-party products, which may substantially inhibit thegrowth of the market for business integration software. If this market fails togrow, or grows more slowly than we expect, our revenues will be adverselyaffected.

 

***Pendingor future litigation could have a material adverse impact on our results ofoperation and financial condition.***

 

From time to time, we have been subject to litigation. Several putativesecurities class action lawsuits are currently pending against us, ourdirectors and officers. The plaintiffs in these suits allege we and the otherdefendants made false statements about our operating results and business,while concealing material information. We have reached an agreement inprinciple, subject to court, approval to settle these suits.  There is no assurance that the court willapprove the settlement.  Should the courtnot approve the settlement, the ultimate outcome of the litigation could harmour business, financial condition and reputation or cause our stock price todecline. In addition to the related cost and use of cash, pending or futurelitigation could cause the diversion of management’s attention and resources.Although we have begun to accrue amounts relating to legal costs and expenses,we have not accrued any amounts relating to potential damages associated withthe putative class action lawsuits. However, because of uncertainties relatingto litigation, our decision as to whether to accrue and the amount of ourestimates could be wrong.

 

***Ifwe fail to adequately protect our proprietary rights, we may lose these rightsand our business may be seriously harmed.***

 

We depend upon our ability to develop and protect our proprietarytechnology and intellectual property rights to distinguish our product from ourcompetitors’ products. The unauthorized use by others of our proprietary rightscould materially harm our business. We rely on a combination of copyright,trademark and trade secret laws, as well as confidentiality agreements andlicensing arrangements, to establish and protect our proprietary rights. Wecurrently have no issued patents. Despite our efforts to protect ourproprietary rights, existing laws afford only limited protection. Attempts may bemade to copy or reverse engineer aspects of our products or to obtain and useinformation we regard as proprietary. Accordingly, we cannot be certain we willbe able to protect our proprietary rights against unauthorized third partycopying or use. Furthermore, policing the unauthorized use of our products isdifficult, and expensive litigation may be necessary in the future to enforceour intellectual property rights.

 

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***Ourproducts could infringe the intellectual property rights of others, causingcostly litigation and the loss of significant rights.***

 

Third parties may claim we have infringed their current or futureintellectual property rights. We expect software developers in our market willincreasingly be subject to infringement claims as the number of products indifferent software industry segments overlap. Any claims, with or withoutmerit, could be time-consuming, result in costly litigation, prevent productshipment or cause delays, or require us to enter into royalty or licensingagreements, any of which could harm our business. Patent litigation inparticular has complex technical issues and inherent uncertainties. In theevent an infringement claim against us is successful and we cannot obtain alicense on acceptable terms, license a substitute technology or redesign ourproducts to avoid infringement, our business would be harmed. Furthermore,former employers of our current and future employees may assert our employeeshave improperly disclosed to us or are using their confidential or proprietaryinformation.

 

***Failureto raise additional capital or generate the significant capital necessary toexpand our operations and invest in new products could reduce our ability tocompete and result in lower revenues.***

 

We currently expect our current cash resources will be sufficient tomeet our working capital and capital expenditure needs for at least the nexttwelve months. After that, we may need to raise additional funds, and we cannotbe certain we will be able to obtain additional debt or equity financing onfavorable terms, or at all. If we raise additional equity financing, ourstockholders may experience significant dilution of their ownership interestsand the per share value of our common stock could decline. If we engage in debtfinancing, we may be required to accept terms that restrict our ability toincur additional indebtedness and force us to maintain specified liquidity orother ratios, any of which could harm our business. If we need additionalcapital and cannot raise it on acceptable terms, we may not be able to, amongother things:

 

•                                          developor enhance our products and services;

 

•                                          maintainor expand our sales and marketing organizations;

 

•                                          acquirecomplementary technologies, products or businesses;

 

•                                          expandoperations, in the United States or internationally;

 

•                                          hire,train and retain employees; or

 

•                                          respondto competitive pressures or unanticipated working capital requirements.

 

Our failure to do any of these things could result in lower revenuesand could seriously harm our business.

 

***Ifwe fail to attract, retain and integrate qualified personnel, our ability tocompete will be harmed.***

 

We depend on the continued service of our key technical, sales andsenior management personnel, including our founder and Chief Executive Officer,James T. Demetriades. Most of these persons are not bound by an employmentagreement, and we do not maintain key person life insurance on any of thesepersons, other than Mr. Demetriades. The loss of any of our seniormanagement or other key product development or sales and marketing personnelcould adversely affect our future operating results. Additionally, werecently experienced significant turnover in our North American sales force,including new staff and management.  Ourability to effectively train and integrate this new North American sales forcecould pose continuing challenges to our business.  If we fail to do so, our operating results,particularly in the short term, could be negatively impacted.  In addition, we must attract, retainand motivate highly skilled employees, including sales personnel and softwareengineers. We face significant competition for individuals with the skillsrequired to develop, market and support our products and services. We may notbe able to recruit and retain sufficient numbers of these highly skilledemployees. If we fail to do so, our ability to compete will be significantlyharmed.

 

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***Ourgrowth continues to place a significant strain on our management systems andresources. If we fail to manage our growth, our ability to market and sell ourproducts and develop new products may be harmed.***

 

We must plan and manage our growth effectively in order to offer ourproducts and services and achieve revenue growth and profitability in a rapidlyevolving market. Our growth has and will continue to place a significant strainon our management systems and resources, and we may not be able to effectivelymanage our growth in the future.

 

Furthermore, if our relationships with systems integrators succeed andwe are able to penetrate additional commercial markets, we may need additionalsales and marketing and professional services resources to support thesecustomers. The growth of our customer base will require us to investsignificant resources in the training and development of our employees and oursystems integration partners. If these organizations fail to keep pace with thenumber and demands of the customers that license our products, our ability tomarket and sell our products and services and our ability to develop newproducts and services will be harmed. To manage our business, we must continueto:

 

•                                          effectivelymanage our direct sales force;

 

•                                          effectivelymanage our professional services organization;

 

•                                          hireand retain qualified software engineers;

 

•                                          improveour operational, financial and management controls;

 

•                                          improveour reporting systems and procedures;

 

•                                          enhanceour management and information control systems; and

 

•                                          effectivelymanage, train and motivate our workforce.

 

In addition, if we acquire or invest in other companies, we mayexperience further strain on our resources and face risks inherent inintegrating two corporate cultures, product lines, operations and businesses.

 

***Wehave implemented anti-takeover provisions that could discourage or prevent atakeover, even if an acquisition would be beneficial to our stockholders.***

 

Some provisions of Delaware law and our certificate of incorporationand bylaws could have the effect of delaying or preventing a third party fromacquiring us, even if a change in control would be beneficial to ourstockholders. For example, our certificate of incorporation provides for aclassified board of directors whose members serve staggered three-year termsand does not provide for cumulative voting in the election of directors. Ourboard of directors has the authority, without further action by ourstockholders, to fix the rights and preferences of and issue shares of preferredstock. In addition, our stockholders are unable to act by written consent.These and other provisions could make it more difficult for a third party toacquire us, even if doing so would benefit our stockholders.

 

***Concentrationof ownership among our existing executive officers and directors may preventnew investors from influencing significant corporate decisions.***

 

Our Chief Executive Officer, James T. Demetriades beneficially ownsapproximately 32% of our outstanding common stock. Our executive officers anddirectors beneficially own, in the aggregate, approximately 41% of ouroutstanding common stock. As a result, these stockholders will be able toexercise a significant level of control over all matters requiring stockholderapproval, including the election of directors and approval of significantcorporate transactions. This could have the effect of delaying or 

 

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preventing a change of control of SeeBeyond and will make sometransactions difficult or impossible without the support of these stockholders.

 

***Externalfactors such as potential terrorist attacks could have a material adverseaffect on the U.S. and global economics.***

 

The possibility of potential terrorist attacks could have an adverseeffect upon an already weakened world economy and could cause U.S. and foreignbusinesses to slow spending on products and services and delay sales cycles.The economic uncertainty resulting from any such future attacks and otherresponses associated with such attacks may continue to negatively impactshort-term consumer and business confidence.

 

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**Item 3****:    Quantitative and Qualitative Disclosure About MarketRisk**

 

We are exposed to a varietyof risks, including changes in interest rates affecting the return on ourinvestments and foreign currency fluctuations. We have established policies andprocedures to manage our exposure to fluctuations in interest rates and foreigncurrency exchange rates.

 

*Interestrate risk.* Wemaintain our funds in money market and certificate of deposit accounts atfinancial institutions. Our exposure to market risk due to fluctuations ininterest rates relates primarily to our interest earnings on our cash deposits.These securities are subject to interest rate risk in as much as their fairvalue may fall if market interest rates increase. If market interest rates wereto increase immediately and uniformly by 10% from the levels prevailing as ofJune 30, 2004, the fair value of the portfolio would not decline by amaterial amount. We do not use derivative financial instruments to mitigaterisks. However, we do have an investment policy that would allow us to investin short-term and long-term investments such as money market instruments andcorporate debt securities. Our policy attempts to reduce such risks bytypically limiting the maturity date of such securities, placing ourinvestments with high credit quality issuers and limiting the amount of creditexposure with any one issuer.

 

*Foreigncurrency exchange rate risk.* Our exposure to market risk due to fluctuations in foreigncurrency exchange rates relates primarily to the intercompany balances with oursubsidiaries located in Australia, Belgium, France, Germany, Italy, Japan, Korea,The Netherlands, New Zealand, Singapore, Spain, Sweden, Switzerland and theUnited Kingdom. Transaction gains or losses have not been significant in thepast and we do not participate in any hedging activity on foreign currencies.We would not experience a material foreign exchange loss based on ahypothetical 10% adverse change in the price of any of the local currencies ofthese countries. Consequently, we do not expect that a reduction in the valueof such accounts denominated in foreign currencies resulting from a sudden orsignificant fluctuation in foreign exchange rates would have a direct materialimpact on our financial position, results of operations or cash flows.

 

**Item 4****..    Controls and Procedures**

 

Our management evaluated,with the participation of our chief executive officer and chief financialofficer, the effectiveness of our disclosure controls and procedures (asdefined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the“Exchange Act”)) as of the end of the period covered by this Quarterly Reporton Form 10-Q.  Based upon this evaluation, our chief executive officer andchief financial officer have concluded that our disclosure controls andprocedures are effective to ensure that information we are required to disclosein reports that we file or submit under the Exchange Act is recorded,processed, summarized and reported within the time periods specified inSecurities and Exchange Commission rules and forms. There was no change in ourinternal control over financial reporting (as defined in Rule 13a–15(f) underthe Exchange Act) during the period covered by this Quarterly Report on Form10-Q that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

 

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**PART II****—OTHER INFORMATION**

 

**Item1.    Legal Proceedings**

 

The Company is party toroutine claims and suits brought against it in the ordinary course of businessincluding disputes arising over the ownership of intellectual property rightsand collection matters. In the opinion of management, the outcome of suchroutine claims will not have a material adverse effect on the Company’sbusiness, financial condition or results of operation.

 

Information with respect tothis item is incorporated by reference to Note 8 (“—Legal Proceedings”) ofthe Notes to the Condensed Consolidated Financial Statements included in thisReport on Form 10-Q.

 
| **Item 2.**     | **Changes  in Secu****rities and Use of Proceeds**                      |
|-----------------|-------------------------------------------------------------------------|
|            |                                                                    |
| **(a)**         | Modification  of Constituent Instruments                                |
| Not  applicable |
| **(b)**         | Change  in Rights                                                       |
| Not  applicable |
| **(c)**         | Changes  in Securities                                                  |
| Not  applicable |
| **(d)**         |                                                                    |
| Not  applicable |
| **(e)**         | Purchases  of Equity Securities by the Issuer and Affiliated Purchasers |
|                 |                                                                         |  |

 
| **Period**     | ** ** | **(a) Total  Number of  Shares  Purchased** | ** ** | **(b) Average Price  Paid per Share** | ** ** | **(c) Total Number of  Shares Purchased as  Part of Publicly  Announced Plan** | ** ** | **(d) Maximum Dollar  Amount of Shares that  May Yet Be Purchased  Under the Plan** | ** ** |
|----------------|------------|---------------------------------------------|------------|---------------------------------------|------------|--------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|
| 1/1/04-1/31/04 |       | —                                      |       |                                  |       |                                                                           |       |                                                                                |       |
| 2/1/04-2/29/04 |       | 97,336                                      |       | $                                     | 4.36       |                                                                           | 97,336     |                                                                                | 8,334,000  |   |
| 3/1/04-3/31/04 |       | 50,000                                      |       | $                                     | 4.40       |                                                                           | 50,000     |                                                                                | 8,114,000  |   |
| 4/1/04-4/30/04 |       | —                                      |       |                                  |       |                                                                           |       |                                                                                |       |
| 5/1/04-5/31/04 |       | —                                      |       |                                  |       |                                                                           |       |                                                                                |       |
| 6/1/04-6/30/04 |       | —                                      |       |                                  |       |                                                                           |       |                                                                                |       |
| Total          |       | 147,336                                     |       | $                                     | 4.37       |                                                                           | 147,336    |                                                                                | 8,114,000  |   |

 

The repurchase plan was announced on February 25,2003 for up to $10,000,000 of shares repurchased and will terminate intwenty-four months on February 24, 2005.

 

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

 

ProposalOne:  To elect two Class I directors tothe Board of Directors to serve for a term of three years or until the annualmeeting of shareholders in 2007.

 
| **Directors**    | ** ** | **For**    | ** ** | **Withhold  Authority** | ** ** |
|------------------|------------|------------|------------|-------------------------|------------|
| John W. Buckley  |       | 79,107,847 |       | 2,377,536               |       |
| Steven A. Ledger |       | 78,125,353 |       | 3,360,030               |       |

 

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ProposalTwo:  To ratify the appointment of Ernst& Young LLP as independent auditors for the 2004 fiscal year.

 
| For:     |   | 80,136,761 |   |
|----------|--------|------------|--------|
| Against: |   | 1,322,491  |   |
| Abstain: |   | 26,130     |   |

 

Proposal Three:  To approve theamended and restated 1998 stock plan.

 
| For:      |   | 41,039,497 |   |
|-----------|--------|------------|--------|
| Against:  |   | 13,151,543 |   |
| Abstain:  |   | 34,620     |   |
| Non-vote: |   | 27,259,723 |   |

 

**Item6.    Exhibits and reports onForm 8-K**

 

(a)                                                                                                              Exhibits.

 
| **Exhibit  No.** | ** ** | **Description**                                                                                                                                                                                                    |
|------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1(f)           |       | Restated  Certificate of Incorporation of the Registrant                                                                                                                                                           |
| 3.2(f)           |       | Bylaws  of the Registrant                                                                                                                                                                                          |
| 4.1(a)           |       | Specimen  common stock certificates                                                                                                                                                                                |
| 10.1(f)          |       | Form  of Indemnification Agreement between the Registrant and each of its directors  and officers                                                                                                                  |
| 10.2(n)(c)       |       | Amended  and Restated 1998 Stock Plan                                                                                                                                                                              |
| 10.3(a)(c)       |       | 2000  Employee Stock Purchase Plan and form of agreements there under                                                                                                                                              |
| 10.5(a)          |       | Registration  Rights Agreement dated May 8, 1998, as amended                                                                                                                                                       |
| 10.6(a)          |       | Lease  Agreement dated June 6, 1997 between the Registrant and  Boone/Fetter/Occidental I for premises in Monrovia, California                                                                                |
| 10.7(a)          |       | Lease  Agreement dated June 10, 1999 between the Registrant and Franklin Select  Realty Trust for premises in Redwood Shores, California                                                                      |
| 10.8(a)          |       | Lease  Agreement dated December 30, 1991 between the Registrant and the  Demetriades Family Trust (dated December 20, 1983) for premises in  Arcadia, California                                         |
| 10.9(b)          |       | Lease  Agreement between The Employees Retirement System of The State of Hawaii and  the Registrant dated July 21, 2000 for premises in Monrovia, California                                                  |
| 10.10(b)         |       | Lease  Agreement between Grant Regent, LLC and the Registrant dated August 2,  2000 for premises in New York, New York                                                                                        |
| 10.11(e)         |       | Lease  Agreement dated October 9, 2000 between S & F Huntington Millennium  LLC and the Registrant for premises in Monrovia, California                                                                   |
| 10.12(e)         |       | Loan  and Security Agreement, dated December 4, 2000, between the Registrant  and Comerica Bank—California                                                                                               |
| 10.13(d)         |       | Warrant  Purchase Agreement and Warrant dated March 16, 2001 issued to General  Motors Corporation                                                                                                            |
| 10.14(f)         |       | Amendment  to the Loan and Security Agreement dated as of June 25, 2001, between  the Registrant and Comerica Bank-California                                                                                 |
| 10.15(f)         |       | Second  amendment to the Loan and Security Agreement dated October 31, 2001,  between the Registrant and Comerica Bank-California                                                                             |
| 10.16(f)         |       | Lease  Agreement dated as of February 24, 2001 between MWB Business Eschange  Limited and the Registrant for premises in Berkshire, United Kingdom                                                            |
| 10.17(f)         |       | Lease  Agreement as of July 1, 2001 between Trust Company of Australia Limited  and the Registrant for premises in Melbourne, Australia                                                                       |
| 10.18(g)         |       | Lease  Agreement between Monrovia Technology Campus LLC and the Registrant dated  November 28, 2000 for premises in Monrovia, California                                                                      |
| 10.19(g)         |       | Sublease  Agreement between the Registrant (Tenant) and The Employees Retirement System  of The State Of Hawaii (Landlord) and Loopnet (Subtenant) dated  April 23, 2002 for premises in Monrovia, California |
| 10.20(g)         |       | Third  Amendment to the Loan and Security Agreement dated as of June 30, 2002  between the Registrant and Comerica Bank-California                                                                            |
| 10.21(h)         |       | Sublease  Agreement between the Registrant (Sublessor) and Fidelity National  Information                                                                                                                          |

 

29

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|        |   | Services  (Sublessee) and The Employees Retirement System of the State of Hawaii  (Lessor) dated December 17, 2002 for premises in Monrovia, California             |
|-------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.22(h)    |   | First  Amendment to the Lease Agreement between Monrovia Technology Campus LLC and  the Registrant dated January 23, 2002                                           |
| 10.23(h)    |   | Second  Amendment to the Lease Agreement between Foothill Technology Center LLC,  (Boone/Fetter/Occidental I) and the Registrant dated October 25, 2002             |
| 10.24(h)    |   | Fourth  Amendment to the Loan and Security Agreement dated December 24, 2002  between the Registrant and Comerica Bank-California                                   |
| 10.25(c)(h) |   | Change  of Control Letter Agreement between Alex Demetriades and the Registrant dated  March 19, 2001                                                               |
| 10.26(c)(k) |   | Form  of Change of Control Letter Agreement between the Registrant and certain of  its executive officers.                                                               |
| 10.27(c)(l) |   | Employment  Letter Agreement between the Registrant and H. Carvel Moore dated  July 21, 2003.                                                                       |
| 10.28(l)    |   | Fifth  Amendment to the Loan and Security Agreement dated December 24, 2002  between the Registrant and Comerica Bank-California dated March 26, 2003          |
| 10.29(l)    |   | Sixth  Amendment to the Loan and Security Agreement dated December 24, 2002  between the Registrant and Comerica Bank-California dated May 30, 2003                 |
| 10.30(c)(m) |   | Employment  Letter Agreement between the Registrant and Thor Culverhouse dated  September 8, 2003.                                                                  |
| 10.31       |   | Lease  Agreement between Mr. T. Devendar Reddy and STC Systems Private Limited dated  April 22, 2004 for premises in Hyderabad, India                               |
| 10.32       |   | Equipment  Lease Agreement between Mrs. T. Jhansi Reddy and STC Systems Private Limited  dated April 22, 2004 for equipment at leased premises in Hyderabad,  India |
| 10.33       |   | Seventh  Amendment to the Loan and Security Agreement dated December 24, 2002  between the Registrant and Comerica Bank-California dated July 29, 2004         |
| 31.1        |   | Certification  of Chief Executive Officer and Chief Financial Officer pursuant to  Section 302 of the Sarbanes-Oxley Act.                                           |
| 32.1        |   | Certification  of Chief Executive Officer and Chief Financial Officer pursuant to  Section 906 of the Sarbanes-Oxley Act.                                           |
|        |   |                                                                                                                                                                     |
|        | (a)    | Incorporated  by reference to an exhibit in the Registrant’s Registration Statement on Form  S-1 File No. 333-330648.                                               |
|        | (b)    | Incorporated  by reference to an exhibit in the Registrant’s Quarterly Report on Form 10-Q  filed with the Commission on November 14, 2000.                    |
|        | (c)    | Denotes  a management contract or compensatory plan arrangement.                                                                                                         |
|        | (d)    | Incorporated  by reference to an exhibit in the Registrant’s Quarterly Report on Form 10-Q  filed with the Commission on May 15, 2001.                              |
|        | (e)    | Incorporated  by reference to an exhibit in the Registrant’s Annual Report on Form 10-K  filed with the Commission on March 30, 2001.                          |
|        | (f)    | Incorporated  by reference to an exhibit in the Registrant’s Annual Report on Form 10-K  filed with the Commission on February 8, 2002.                        |
|        | (g)    | Incorporated  by reference to an exhibit in the Registrant’s Quarterly Report on Form 10-Q  filed with the Commission on August 14, 2002.                      |
|        | (h)    | Incorporated  by reference to an exhibit in the Registrant’s Annual Report on  Form 10-K filed with the Commission on March 28, 2003.                     |
|        |   |                                                                                                                                                                     |
|        | (k)    | Incorporated  by reference to an exhibit in the Registrant’s Annual Report on Form 10-K/A  filed with the Commission on May 30, 2003.                               |
|        | (l)    | Incorporated  by reference to an exhibit in the Registrant’s Quarterly Report on Form 10-Q  filed with the Commission on August 14, 2003.                      |
|        | (m)    | Incorporated  by reference to an exhibit in the Registrant’s Quarterly Report on Form 10-Q  filed with the Commission on November 14, 2003.                    |
|        | (n)    | Incorporated  by reference to an exhibit in the Registrant’s Proxy Statement on  Schedule 14A filed with the Commission on April 29, 2004                 |
|             |        |                                                                                                                                                                          |  |

 

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(b)       Reports on Form 8-K.

 

On April 5, 2004,SeeBeyond filed a report on Form 8-K furnishing the press release thatannounced its preliminary first fiscal quarter 2004 financial results.

 

On April 20, 2004,SeeBeyond filed a report on Form 8-K furnishing the press release thatannounced its first fiscal quarter 2004 financial results.

 

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**Signature**

 

Pursuant to the requirementsof Section 13 or 15(d) of the Securities Exchange Act of 1934, theRegistrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized, on August 9, 2004.

 
| **SeeBeyond  Technology Corporation**                   |
|---------------------------------------------------------|
| /s/  BARRY J.  PLAGA                          |   |
| Barry J. Plaga                                          |
| *Executive  Vice President and Chief Financial Officer* |
| *(Principal  Financial and Accounting Officer)*         |

 

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