---

---

UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

---

FORM 10-Q

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(Mark One)

|/x/ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|--- | ---------------------------------------------------------------------------------------

For the quarterly period ended September 30, 2001

OR

|/ / | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|--- | ----------------------------------------------------------------------------------------

For the transition period from  to
.

Commission file number 000-30207

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SEEBEYOND TECHNOLOGY CORPORATION(Exact name of Registrant as Specified in Its Charter)

Delaware

95-4249153(State or Other Jurisdiction of
Incorporation or Organization)

(I.R.S. Employer
Identification Number)


404 E Huntington Drive
Monrovia, California 91016
(Address of Principal Executive Office)
(626) 471-6000(Address, including Zip Code, of Registrant's Principal Executive Offices
and Registrant's Telephone Number, including Area Code)

---

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

The
number of shares outstanding of the registrant's Common Stock, $0.0001 par value, as of November 13, 2001 was 71,831,962. The Company's state of incorporation changed
effective July 9, 2001 from California to Delaware by means of a merger of the Company with and into a wholly owned Delaware subsidiary of the Company.

---

---

---



SeeBeyond Technology Corporation and Subsidiaries

INDEX

PART IFINANCIAL INFORMATION

|Item 1.                   |  | Financial Statements:                                                                                                              |  |   
|------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------- |  | --
|                          |  | Condensed Consolidated Balance Sheets as of September 30, 2001 (unaudited) and and December 31, 2000                               |  | 3 
|                          |  | Condensed Consolidated Statements of Operations (unaudited) for the three months and nine months ended September 30, 2001 and 2000 |  | 4 
|                          |  | Condensed Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2001 and 2000                  |  | 5 
|                          |  | Notes to Condensed Consolidated Financial Statements (unaudited)                                                                   |  | 6 
|Item 2.                   |  | Management's Discussion and Analysis of Financial Condition and Results of Operations                                              |  | 12
|Item 3.                   |  | Quantitative and Qualitative Disclosure About Market Risk                                                                          |  | 27
|PART IIOTHER INFORMATION
|Item 1.                   |  | Legal Proceedings                                                                                                                  |  | 28
|Item 2.                   |  | Changes in Securities and Use of Proceeds                                                                                          |  | 28
|Item 4.                   |  | Submission of Matters to a Vote of Security Holders                                                                                |  | 28
|Item 6.                   |  | Exhibits and Reports on Form 8-K                                                                                                   |  | 28
|SIGNATURES                |  | 29                                                                                                                                

2

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PART IFINANCIAL INFORMATION  Item 1.  Financial Statements    SeeBeyond Technology Corporation and Subsidiaries    Condensed Consolidated Balance Sheets

|In thousands, except share and per share data |                                      | September 30,
2001                                                                                                                                                                |                                            | December 31,
2000 |       
|--------------------------------------------- | ------------------------------------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ----------------- | ------
|
|Assets:                                       |                                      |                                                                                                                                                                                   |                                            |                   |       
|                                              | Current assets:                      |                                                                                                                                                                                   |                                            |                   |       
|                                              |                                      | Cash and cash equivalents                                                                                                                                                         |                                            | $                 | 26,898
|                                              |                                      | Accounts receivable, net of allowances of $1,595 and $1,127 at September 30, 2001 and December 31, 2000, respectively                                                             |                                            |                   | 44,711
|                                              |                                      | Prepaid expenses and other current assets                                                                                                                                         |                                            |                   | 3,809 
|                                              |                                      |                                                                                                                                                                                   |                                            |                   |       
|                                              |                                      |                                                                                                                                                                                   | Total current assets                       |                   |       
|                                              |                                      | Property and equipment, net                                                                                                                                                       |                                            |                   | 13,800
|                                              |                                      | Related party receivable                                                                                                                                                          |                                            |                   | 972   
|                                              |                                      | Goodwill                                                                                                                                                                          |                                            |                   | 1,025 
|                                              |                                      | Other assets                                                                                                                                                                      |                                            |                   | 793   
|                                              |                                      |                                                                                                                                                                                   |                                            |                   |       
|                                              |                                      |                                                                                                                                                                                   | Total assets                               |                   | $     
|                                              |                                      |                                                                                                                                                                                   |                                            |                   |       
|Liabilities and stockholders' equity:         |                                      |                                                                                                                                                                                   |                                            |                   |       
|                                              | Current liabilities:                 |                                                                                                                                                                                   |                                            |                   |       
|                                              |                                      | Bank line of credit                                                                                                                                                               |                                            | $                 | 4,000 
|                                              |                                      | Accounts payable                                                                                                                                                                  |                                            |                   | 9,591 
|                                              |                                      | Accrued compensation and related expenses                                                                                                                                         |                                            |                   | 9,703 
|                                              |                                      | Accrued expenses                                                                                                                                                                  |                                            |                   | 14,354
|                                              |                                      | Deferred revenues                                                                                                                                                                 |                                            |                   | 22,315
|                                              |                                      |                                                                                                                                                                                   |                                            |                   |       
|                                              |                                      |                                                                                                                                                                                   | Total current liabilities                  |                   |       
|                                              | Note payable and other obligation    |                                                                                                                                                                                   |                                            | 1,954             |       
|                                              |                                      |                                                                                                                                                                                   |                                            |                   |       
|                                              |                                      |                                                                                                                                                                                   | Total liabilities                          |                   |       
|                                              | Stockholders' equity:                |                                                                                                                                                                                   |                                            |                   |       
|                                              |                                      | Preferred stock, $.0001 par value10,000,000 shares authorized; no shares issued and outstanding as of September 30, 2001 and December 31, 2000                                   |                                            |                   |      
|                                              |                                      | Common stock, $.0001 par value200,000,000 shares authorized; 71,765,614 and 69,678,315 share issued and outstanding as of September 30, 2001 and December 31, 2000, respectively |                                            |                   | 7     
|                                              | Additional paid-in capital           |                                                                                                                                                                                   |                                            | 138,962           |       
|                                              | Deferred stock compensation          |                                                                                                                                                                                   |                                            | (3,396            | )     
|                                              | Accumulated other comprehensive loss |                                                                                                                                                                                   |                                            | (1,405            | )     
|                                              | Accumulated deficit                  |                                                                                                                                                                                   |                                            | (104,077          | )     
|                                              |                                      |                                                                                                                                                                                   |                                            |                   |       
|                                              |                                      |                                                                                                                                                                                   | Total stockholders' equity                 |                   |       
|                                              |                                      |                                                                                                                                                                                   |                                            |                   |       
|                                              |                                      |                                                                                                                                                                                   | Total liabilities and stockholders' equity |                   | $     
|                                              |                                      |                                                                                                                                                                                   |                                            |                   |       

The accompanying notes are an integral part of these financial statements.

3

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SeeBeyond Technology Corporation and Subsidiaries        Condensed Consolidated Statements of Operations        (Unaudited)

|                                                                          |                                                                                                                                                                          | Three Months Ended
September 30, |        | Nine Months Ended
September 30, |       
|------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -------------------------------- | ------ | ------------------------------- | ------
|
|
|Revenues:                                                                 |                                                                                                                                                                          |                                  |        |                                 |       
|                                                                          | License (net of amortization of marketing warrants of $0 and $0 and $1,116 and $0 for the three months and nine months ended September 30, 2001 and 2000, respectively.) |                                  | $      | 21,497                          |       
|                                                                          | Services                                                                                                                                                                 |                                  |        | 12,456                          |       
|                                                                          | Maintenance                                                                                                                                                              |                                  |        | 8,142                           |       
|                                                                          |                                                                                                                                                                          |                                  |        |                                 |       
|                                                                          |                                                                                                                                                                          | Total revenues                   |        |                                 | 42,095
|Costs and expenses:                                                       |                                                                                                                                                                          |                                  |        |                                 |       
|                                                                          | Cost of license revenues                                                                                                                                                 |                                  |        | 370                             |       
|                                                                          | Cost of services revenues                                                                                                                                                |                                  |        | 9,527                           |       
|                                                                          | Cost of maintenance revenues                                                                                                                                             |                                  |        | 1,365                           |       
|                                                                          | Research and development                                                                                                                                                 |                                  |        | 7,520                           |       
|                                                                          | Sales and marketing                                                                                                                                                      |                                  |        | 21,435                          |       
|                                                                          | General and administrative                                                                                                                                               |                                  |        | 4,967                           |       
|                                                                          | Restructuring charge                                                                                                                                                     |                                  |        | 3,426                           |       
|                                                                          | Amortization of goodwill                                                                                                                                                 |                                  |        | 95                              |       
|                                                                          | Amortization of warrants                                                                                                                                                 |                                  |        | 980                             |       
|                                                                          | Amortization of stock-compensation                                                                                                                                       |                                  |        | 409                             |       
|                                                                          |                                                                                                                                                                          |                                  |        |                                 |       
|                                                                          |                                                                                                                                                                          | Total costs and expenses         |        |                                 | 50,094
|                                                                          |                                                                                                                                                                          |                                  |        |                                 |       
|Loss from operations                                                      |                                                                                                                                                                          |                                  | (7,999 | )                               |       
|Other income (expense)                                                    |                                                                                                                                                                          |                                  |        |                                 |       
|                                                                          | Interest, net                                                                                                                                                            |                                  |        | 223                             |       
|                                                                          |                                                                                                                                                                          |                                  |        |                                 |       
|                                                                          | Loss before income tax provision                                                                                                                                         |                                  |        | (7,776                          | )     
|                                                                          | Provision for income tax                                                                                                                                                 |                                  |        | 11                              |       
|                                                                          |                                                                                                                                                                          |                                  |        |                                 |       
|                                                                          | Net loss                                                                                                                                                                 |                                  |        | (7,787                          | )     
|Accretion on preferred stock                                              |                                                                                                                                                                          |                                  |       |                                 |       
|                                                                          |                                                                                                                                                                          |                                  |        |                                 |       
|Net loss available to common shareholders                                 |                                                                                                                                                                          | $                                | (7,787 | )                               | $     
|                                                                          |                                                                                                                                                                          |                                  |        |                                 |       
|Basic and diluted net loss per share                                      |                                                                                                                                                                          | $                                | (0.11  | )                               | $     
|                                                                          |                                                                                                                                                                          |                                  |        |                                 |       
|Number of shares used in calculating basic and diluted net loss per share |                                                                                                                                                                          |                                  | 71,650 |                                 |       
|                                                                          |                                                                                                                                                                          |                                  |        |                                 |       

The accompanying notes are an integral part of these financial statements.

4

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SeeBeyond Technology Corporation and Subsidiaries        Condensed Consolidated Statements of Cash Flows        (Unaudited)

|                                                             |                                                                                 | Nine Months Ended
September 30,            |                                          
|------------------------------------------------------------ | ------------------------------------------------------------------------------- | ------------------------------------------ | -----------------------------------------
|
|
|Cash flows from operating activities:                        |                                                                                 |                                            |                                          
|                                                             | Net loss                                                                        |                                            | $                                        
|                                                             | Adjustments to reconcile net loss to net cash used in operating activities:     |                                            |                                          
|                                                             |                                                                                 | Loss on disposal of fixed assets           |                                          
|                                                             |                                                                                 | Depreciation and amortization              |                                          
|                                                             |                                                                                 | Provision for doubtful accounts receivable |                                          
|                                                             |                                                                                 | Amortization of goodwill                   |                                          
|                                                             |                                                                                 | Amortization of marketing warrants         |                                          
|                                                             |                                                                                 | Amortization of alliance warrants          |                                          
|                                                             |                                                                                 | Amortization of stock based compensation   |                                          
|                                                             | Changes in assets and liabilities:                                              |                                            |                                          
|                                                             |                                                                                 | Accounts receivable                        |                                          
|                                                             |                                                                                 | Prepaid expenses and other current assets  |                                          
|                                                             |                                                                                 | Accounts payable                           |                                          
|                                                             |                                                                                 | Other accrued expenses                     |                                          
|                                                             |                                                                                 | Deferred revenue                           |                                          
|                                                             |                                                                                 |                                            |                                          
|                                                             |                                                                                 |                                            | Net cash used in operating activities:   
|                                                             |                                                                                 |                                            |                                          
|Cash flows from investing activities:                        |                                                                                 |                                            |                                          
|                                                             | Purchases of property and equipment                                             |                                            |                                          
|                                                             | Payments to acquire companies, net of cash acquired                             |                                            |                                          
|                                                             | Related party receivable                                                        |                                            |                                          
|                                                             | Other                                                                           |                                            |                                          
|                                                             |                                                                                 |                                            |                                          
|                                                             |                                                                                 |                                            | Net cash used in investing activities    
|                                                             |                                                                                 |                                            |                                          
|Cash flows from financing activities:                        |                                                                                 |                                            |                                          
|                                                             | Net borrowings (repayments) on bank lines of credit                             |                                            |                                          
|                                                             | Proceeds from issuance of common stock pursuant to initial public offering, net |                                            |                                          
|                                                             | Proceeds from issuance of common stock pursuant to concurrent offering, net     |                                            |                                          
|                                                             | Payments on notes payable, net                                                  |                                            |                                          
|                                                             | Proceeds from issuance of common stock pursuant to employee stock option plan   |                                            |                                          
|                                                             | Proceeds from issuance of common stock pursuant to employee stock purchase plan |                                            |                                          
|                                                             |                                                                                 |                                            |                                          
|                                                             |                                                                                 |                                            | Net cash provided by financing activities
|                                                             |                                                                                 |                                            |                                          
|Effect of exchange rate changes on cash and cash equivalents |                                                                                 |                                            | (989                                     
|                                                             |                                                                                 |                                            |                                          
|Net (decrease) increase in cash and cash equivalents         |                                                                                 |                                            | (2,530                                   
|Cash and cash equivalents at beginning of the period         |                                                                                 |                                            | 29,428                                   
|                                                             |                                                                                 |                                            |                                          
|Cash and cash equivalents at end of the period               |                                                                                 | $                                          | 26,898                                   
|                                                             |                                                                                 |                                            |                                          

The accompanying notes are an integral part of these financial statements.

5

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SeeBeyond Technology Corporation and Subsidiaries    Notes to Condensed Consolidated Financial Statements

Note 1.The Company and Summary of Significant Accounting Policies

The Company

SeeBeyond Technology Corporation (the "Company"), formerly known as Software Technologies Corporation, provides a comprehensive solution for
e-Business application integration, enabling the seamless flow of information within and among all systems, applications and enterprises on a global basis in real time. The Company
provides this solution to its customers primarily by license of its software and also by offering software implementation and consulting services. The Company was founded in 1989 and sold its first
product and services in 1991. Following the launch in November 1999 of the fourth generation of its primary product with the introduction of e*Gate 4.0, the Company launched the next version of
its eBusiness Integration Suite ("eBI Suite") version 4.5, in June 2001.

The
Company's operations are subject to certain risks and uncertainties, including rapid technological changes, success of the Company's product marketing and product distribution
strategies, the need to manage growth, the need to retain key personnel and protect intellectual property, and the availability of additional capital financing on terms acceptable to the Company.

Basis of Presentation

The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All material intercompany
transactions have been eliminated in consolidation. The information furnished is unaudited and reflects all adjustments that, in the opinion of management, are necessary to provide a fair statement of
the results for the interim periods presented. The financial statements should be read in conjunction with the Company's financial statements for the year ended December 31, 2000 as filed with
the Securities and Exchange Commission ("SEC").

Use of Estimates

The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates. Significant estimates made in preparing the consolidated financial statements include the allowance for doubtful
accounts, certain accrued liabilities and estimates of future cash flows developed to determine whether conditions of impairment are present.

Reclassifications

Certain amounts in the December 31, 2000 condensed consolidated financial statements have been reclassified to conform to the September 30, 2001
presentation.

Revenue Recognition

The Company enters into arrangements with end users, which may include the sale of licenses of software, maintenance and services under the arrangement or
various combinations of each element, including the sale of such elements separately. For each arrangement, revenues are recognized when an agreement has been signed by both parties, the fees are
fixed or determinable, collection of the fees is probable and delivery of the product has occurred and no other significant obligations remain.

6

---

For multi-element arrangements, each element of the arrangement is analyzed and the Company allocates a portion of the total fee under the arrangement to the undelivered elements,
primarily services and maintenance, using vendor specific objective evidence of fair value of the element and the remaining portion of the fee is allocated 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 objective evidence
of fair value is based on the price the customer is required to pay when the element is sold separately (i.e. hourly rates charged for consulting services when sold separately from a software license
and the renewal rate for maintenance arrangements). Each license agreement offers additional maintenance renewal periods at a stated price. If vendor specific objective evidence of fair value does not
exist for the undelivered elements, all revenue is deferred and recognized ratably over the service period if the undelivered element is
services, or over the period the maintenance is provided if the undelivered element is maintenance, or until sufficient objective evidence exists or all elements have been delivered.

License Revenues:Amounts allocated to license revenues under the residual method are recognized at the time of
delivery of the software when vendor specific objective evidence of fair value exists for the undelivered elements, if any, and all the other revenue recognition criteria discussed above have been
met.

Services Revenues:Revenues from services are comprised of consulting and implementation services and, to a limited
extent, training. Services are generally sold on a time-and-materials or fixed fee basis and include a range of services including installation of
off-the-shelf software, data conversion and building non-complex interfaces to allow the software to operate in customized environments. Services are generally
separable from the other elements under the arrangement since the performance of the services are not essential to the functionality (i.e. do not involve significant production, modification or
customization of the software or building complex interfaces) of any other element of the transaction and are described in the contract such that the total price of the arrangement would be expected
to vary as the result of the inclusion or exclusion of the services. Revenues for services are recognized as the services are performed. Training services are sold either on a per student basis or per
class and are recognized as classes are attended.

Maintenance Revenues:Maintenance revenues consist primarily of fees for providing unspecified software upgrades on a
when-and-if-available basis and technical support over a specified term, which is typically twelve months. Maintenance revenues are typically paid in advance and
are recognized on a straight-line basis over the term of the contract.

Revenues
on sales made by our resellers are generally recognized upon shipment of our software to the end user, if all other revenue recognition criteria noted above are met. Under
limited arrangements with certain distributors, all the revenue recognition criteria have been met upon delivery of the product to the distributor and, accordingly, revenues are recognized at that
time. The Company does not offer a right of return on its products.

Income Taxes

The Company uses the liability method of accounting for income taxes. Deferred tax assets and liabilities are recognized for the future tax consequences
attributable to financial statements carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit carry forwards. The measurement of deferred
tax assets and liabilities is based on provisions of the enacted tax law. The measurement of deferred tax assets is reduced, if necessary, by a valuation

7

---

allowance based on the amount of tax benefits that, based on available evidence, is not expected to be realized.

Comprehensive Income (Loss)

The Company accounts for comprehensive loss using SFAS No. 130, "Reporting Comprehensive Income". SFAS No. 130 establishes standards for
reporting comprehensive income and its components in financial statements. Comprehensive income, as defined, refers to revenues, expenses, gains and losses that are not included in net income but
rather are recorded directly in shareholders' equity.

Total
comprehensive loss was as follows (in thousands):

|                          |                                | Three Months Ended
September 30, |        | Nine Months Ended
September 30, |       
|------------------------- | ------------------------------ | -------------------------------- | ------ | ------------------------------- | ------
|
|Net loss                  |                                | $                                | (7,787 | )                               | $     
|Other comprehensive loss: |                                |                                  |        |                                 |       
|                          | Foreign translation adjustment |                                  |        | (419                            | )     
|                          |                                |                                  |        |                                 |       
|                          |                                | Comprehensive loss               |        | $                               | (8,206
|                          |                                |                                  |        |                                 |       

Recently Issued Accounting Pronouncements

In June 2001, SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets" was issued and the Company
expects to adopt these new standards January 1, 2002. SFAS No. 141 eliminates the pooling-of-interests method of accounting for business combinations and changes
the criteria to recognize intangible assets apart from goodwill. Under SFAS No. 142 goodwill and indefinite lived intangible assets are no longer amortized but reviewed annually, or more
frequently if impairment indicators arise, for impairment. The Company is in the process of evaluating the effect of these new pronouncements.

Note 2.Operations by Reportable Segments and Geographic Area

The
Company has adopted the provisions of SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." The Company's Chief Executive Officer ("CEO") is
considered to be the Company's chief operating decision maker. The CEO reviews financial information presented on a consolidated basis similar to the consolidated financial statements. The Company has
concluded that it operates primarily in one industry segment and accordingly, has provided enterprise-wide disclosures.

8

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The Company maintains operations in North America and sixteen countries in Europe and the Pacific Rim including: United Kingdom, Germany, France, Belgium, Italy, Australia and Japan.
Information about the Company's operations in North America and international territories is presented below.

Revenues
and long-lived assets by geographic area were as follows (in thousands):

Three Months Ended
September 30,

Nine Months Ended
September 30,2001

2000

2001

2000Revenues:North America

$
28,128

$
22,027

$
95,265

$
53,864Europe


10,284


7,001


35,446


13,479Pacific Rim


3,683


2,264


11,164


4,717Total net revenues

$
42,095

$
31,292

$
141,875

$
72,060


September 30,
2001

December 30,
2000Long-lived assets:North America

$
13,495

$
9,468Europe


2,818


2,605Pacific Rim


277


233Total long-lived assets

$
16,590

$
12,306


No
single customer accounted for more than 10% of the Company's net revenues during the three months or nine months ended September 30, 2001.

Note 3.Computation of Net Loss Per Share

The
following table sets forth the computations of basic and diluted net loss per share for the periods indicated (in thousands, except per share data):

Three Months Ended
September 30,

Nine Months Ended
September 30,2001

2000

2001

2000Numerator:Net loss

$
(7,787
)
$
(9,905
)
$
(19,014
)
$
(35,741
)Accretion of preferred stock











(769
)Net loss available to common shareholders

$
(7,787
)
$
(9,905
)
$
(19,014
)
$
(36,510
)Denominator:Denominator for basic and diluted net loss per share weighted average shares outstanding


71,650


69,035


70,937


59,397Basic and diluted net loss per share

$
(0.11
)
$
(0.14
)
$
(0.27
)
$
(0.61
)


Options
to purchase 16,321,863 and 14,532,765 shares of common stock were outstanding as of September 30, 2001 and 2000, respectively, but were not included in the calculations
of diluted net loss per share because their effect would be antidilutive. Common stock warrants were not included in the calculations of diluted net loss per share because their effect would be
antidilutive.

9

---

Note 4.Commitments, Contingencies and Debt

Bank Line of Credit and Notes Payable

In November 2000, the Company established a $15.0 million line of credit facility (the "Line") with a lending institution that bears interest at
an annual rate of either prime plus 0.5% or the London InterBank Offered Rate ("LIBOR") rate plus 2.50% (payable monthly) and expires May 31, 2002. In October 2001 the Line was amended
to expire on May 31, 2003. The interest rate at September 30, 2001 was 6.5% and at December 31, 2000 was 10.25%. As of September 30, 2001 $8.8 million was available
under the Line, and as of December 31, 2000, $15.0 million was available. The Company may use up to $5.0 million of the Line to issue letters of credit. The Line is secured by
intellectual property rights, accounts receivable and certain other assets and is subject to certain borrowing base restrictions. The Line requires maintenance of certain financial covenants
pertaining to key financial ratios. As of September 30, 2001, the company was in compliance with such covenants.

As
of September 30, 2001 and December 31, 2001, the Company established a $3.0 million equipment line (the "Equipment Line") with the same lending institution as
the Line that bears interest at an annual rate of either prime plus 0.75%, or the LIBOR rate plus 2.75% (payable monthly) and expires on November 30, 2004. The interest rate at
September 30, 2001 was 6.75% and at December 31, 2000 was 10.25%. The Company may draw against the Equipment Line through November 30, 2001. In October 2001 the Equipment
Line was amended to a $2.0 million credit facility. Interest is payable monthly and principal is payable in 36 monthly installments commencing in December 2001. As of
September 30, 2001 and December 31, 2000, there was $2.0 million and $400,000, respectively outstanding under the Equipment Line, which is secured by certain assets of the
Company.

Business Combination

In July 2001 the Company acquired SeeBeyond Nordic ApS ("Nordic"), an independent distributor of the Company's software. The Company purchased all of
the outstanding capital stock of Nordic for approximately $116,000. The transaction was accounted for under the purchase method of accounting and the excess purchase price was recorded as goodwill.
Proforma financial information is not presented as such amounts are not material.

In
January 2001, the Company acquired STC Software Technologies Corporation (Schweiz) AG, Zurich ("Distributor"), an independent distributor of the Company's software. The
Company purchased all of the outstanding capital stock of the Distributor for approximately $885,000, excluding approximately $1.2 million of contingent consideration to be paid upon the
achievement of certain operating results. The purchase price included $150,000 in cash and 35,000 shares of the Company's common stock. The transaction was accounted for under the purchase method of
accounting and the excess purchase price is being amortized as goodwill on a straight-line basis over a three-year period. Proforma financial information is not presented as
such amounts are not material.

Legal Proceedings

The Company is party to claims and suits brought against it in the ordinary course of business. In the opinion of management, such claims should not have any
material adverse effect upon the results of operation, cash flows or the financial position of the Company.

Note 5.Amortization of Stock-Based Compensation

Various
expense line items on the statement of operations relates to the amortization of stock-based compensation. These expense line items are presented exclusive of the amortization
and the total amortization of stock-based compensation is presented as a separate line item. The following table

10

---

itemizes the line items affected and the corresponding amortization of stock-based compensation expense:

Three Months
Ended
September 30,

Nine Months
Ended
September 30,2001

2000

2001

2000Stock-based compensation related to:Cost of services revenues

$
64

$
132

$
231

$
496Research and development


72


149


259


545Sales and marketing


242


496


873


1,853General and administrative


31


63


110


293Total amortized stock-based compensation

$
409

$
840

$
1,473

$
3,187


Note 6.Stockholders' Equity

Warrant Grants

In March 2001, the Company entered into a four-year co-marketing agreement with a strategic marketing partner and issued a
warrant to purchase 625,000 shares of common stock at an exercise price of $11.34 per share. The warrant expires in March 2006 and 175,000 shares under the warrant was exercisable
immediately. The remaining 450,000 shares subject to the warrant are performance based and shall vest and become exercisable over the thirty-six month period following the issuance of the
warrant provided the warrant holder has achieved various milestones related to providing certain sales and marketing support. The immediately exercisable portion of the warrant was valued as of the
date of issuance and was charged against revenues generated from a concurrent license sale to this strategic marketing partner. The unvested portion of the warrant was valued as of the date of
issuance and is being amortized as a charge to marketing expense over the term of the co-marketing agreement. The value of the unvested portion of the warrant will be adjusted in each
reporting period based on changes in the fair value of the warrants until such date as the warrants are fully vested. As of September 30, 2001 262,500 shares subject to the warrant were fully
vested.

Note 7.Restructuring Charge

During
the three months ended September 30, 2001, the Company recorded a restructuring charge of $3.4 million for employee termination benefits and related costs. At
September 30, 2001 approximately $700,000 remain in accrued expenses, the majority of which are expected to be paid in the fourth quarter. These restructuring charges were taken to align the
Company's cost structure with changing market conditions. The restructuring resulted in headcount reductions of approximately 228 employees, which was made up of 56% sales and marketing staff, 15%
professional services staff, 19% general and administrative staff and 10% research and development staff.

Note 8.Subsequent Events

In
October 2001, the company amended the $15.0 million Line to extend the expiration date through May 31, 2003. Previously the Line was set to expire on
May 31, 2002. In October 2001, the Company also amended the Equipment Line by reducing the maximum amount available for borrowing to $2.0 million from $3.0 million.

11

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion in conjunction with the consolidated financial statements and related notes of SeeBeyond Technology Corporation
appearing elsewhere in this Form 10-Q. The following discussion contains forward-looking statements that involve risks and uncertainties, including statements regarding anticipated
costs and expenses, mix of revenues and plans for introducing new products and services. Our actual results could differ materially from the results contemplated by these forward-looking statements as
a result of a number of factors, including those discussed below, under "Risk Factors" and elsewhere in this Form 10-Q.

Overview

We were founded in 1989 and sold our first products and services in 1991 under the name "Software Technologies Corporation." From 1991 to 1998 our sales and
marketing efforts were primarily focused on customers in the healthcare industry. In 1998, we began to significantly increase our sales and marketing expenses to target customers in other vertical
markets, such as financial services/insurance, manufacturing, retail/e-Commerce/services, telecommunications, energy services and government. Following the launch in November 1999
of the fourth generation of its primary product with the introduction of e*Gate 4.0, we launched the next version of its eBusiness Integration Suite ("eBI Suite") version 4.5, in June 2001. In
anticipation of these releases, we accelerated the growth of our product development, services and sales and marketing organizations. We incurred significant losses in 1999 and 2000, and as of
September 30, 2001, we had an accumulated deficit of approximately $104 million.

We
derive revenues primarily from three sources: licenses, services and maintenance. We market our products and services on a global basis through our direct sales force, and augment
our marketing efforts through relationships with systems integrators, and in other instances, through value-added 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 is integrating or connecting with our products. We record license revenues when a license
agreement has been signed by both parties, the fee is fixed or determinable, collection of the fee is probable, delivery of our products has occurred and no other significant obligations remain.
Payments for licenses, services and maintenance received in advance of revenue recognition are recorded as deferred revenue.

We
currently have operations in sixteen countries outside of the United States. Revenues derived from international sales have grown to 33% of total revenues for the nine months ended
September 30, 2001 from 25% of total revenues for the same period in the previous year. We believe that international
revenues will continue to be significant in future periods. To date, we have not experienced significant seasonality of revenues. However, we expect that our future results will fluctuate in response
to the fiscal or quarterly budget cycles of our customers.

Revenues
from services include consulting and implementation services and training. A majority of our customers use third-party systems integrators to implement our products.
Customers also typically purchase additional consulting services from us to support their implementation activities. These consulting services are generally sold on a time and materials or fixed fee
basis, and services revenues are recognized as the services are performed. We also offer training services, which are sold on a per student basis and for which revenues are recognized as the classes
are attended.

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

12

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Our costs and expenses are classified as cost of license revenues, cost of service revenues, cost of maintenance revenues, research and development, sales and marketing and general
and administrative. Each category, except cost of license revenues includes related expenses for salaries, employee benefits, incentive compensation, bonuses, travel, telephone, communications, rent
and allocated facilities and professional fees. Cost of license revenues includes the cost of third-party licensed software embedded or bundled with our products. Cost of services revenues consists of
compensation and related overhead costs for personnel engaged in implementation consulting and services and training. Cost of maintenance revenues includes compensation and related overhead costs for
personnel engaged in maintenance and support activities. For the nine months ended September 30, 2001, our gross margin was 98.3% on our license revenues, 16.4% on our services revenues and
83.4% on our maintenance revenues. We expect in the future to continue to earn substantially higher gross margins on our license and maintenance revenues compared to our services revenues. As a
result, our overall gross margin depends significantly on our revenues mix.

Our
sales and marketing expenses include additional expenditures specific to the marketing group, such as public relations and advertising, trade shows, and marketing collateral
materials and expenditures specific to the sales group, such as commissions. To date, all software product development costs have been expensed as incurred. Also included in our operating expenses are
the restructuring charge, amortizations of goodwill, alliance warrants, marketing warrants and stock compensation.

In
order to increase both our company's and our products' market presence, we entered into strategic alliances with Computer Sciences Corporation ("CSC") in March 2000,
Electronic Data Systems Corporation ("EDS") in January 2000 and Accenture, formerly Andersen Consulting, in November 1999.
We granted each of these strategic partners a warrant to purchase up to 1,200,000 shares of our common stock which becomes exercisable upon the achievement of various milestones, which include the
creation of e*Gate software market offerings in the case of Accenture and CSC and the generation of SeeBeyond license revenues by selling our products to third parties in the case of EDS and CSC.
These warrants expire from July 2002 to November 2003, and have a per share exercise price of $5.33 for Accenture, $6.67 for EDS and $14.00 for CSC. These warrants contain a significant
economic disincentive for non-performance, and accordingly, the fair value of these warrants was measured at the date of grant in accordance with Emerging Issues Task Force
No. 96-18. Using the Black-Scholes option-pricing model, we valued the warrants granted to Accenture in 1999 at $3.3 million and the warrants granted to EDS and CSC at
$10.1 million. These amounts are included in common stock and are being amortized by charges to operations over the vesting periods of the warrants. We recognized amortization of
$1.3 million and $3.8 million for the three months and nine months ended September 30, 2001, respectively, and $1.3 million and $5.5 million for the three months and
nine months ended September 30, 2000, respectively, and we will recognize additional amortization of $1.3 million in 2001 and the remainder of $0.7 million in 2002.

In
March 2001, we entered into a four-year co-marketing agreement with a strategic marketing partner and issued a warrant to purchase 625,000 shares of
common stock at an exercise price of $11.34 per share. The warrant expires in March 2006 and 175,000 shares under the warrant was exercisable immediately. The remaining 450,000 shares subject
to the warrant are performance based and shall vest and become exercisable over the thirty-six month period following the issuance of the warrant provided the warrant holder has achieved
various milestones related to providing certain sales an marketing support. As of September 30, 2001, a total of 262,500 shares subject to the warrant were vested. The unvested portion of the
warrant was valued as of the date of issuance and is being amortized as a charge to marketing expense over the term of the co-marketing agreement. The value of the unvested portion of the
warrant will be adjusted in each reporting period based on changes in the fair value of the warrants until such date as the warrants are fully vested. There is no obligation for this strategic partner
to make future product purchases from us.

13

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In connection with stock option grants to our employees, we have recorded deferred stock compensation totaling $8.5 million through September 30, 2001, of which
approximately $1.4 million remains to be amortized. This amount represents the difference between the exercise price and the deemed fair value of our common stock on the date the options were
granted multiplied by the number of option shares granted. This amount is included as a component of shareholders' equity and is being amortized by charges to operations over the vesting period of the
options, consistent with the method described in Financial Accounting Standards Board Interpretation No. 28. We recognized amortization of deferred compensation expense of approximately
$400,000 and $1.5 million for the three months and none months ended September 30, 2001, respectively. The amortization of the remaining deferred stock compensation will result in
additional charges to operations through 2004. The amortization of stock compensation is classified as a separate component of operating expenses in our consolidated statement of operations.



The following table sets forth our results of operations for the three months ended and nine months ended September 30, 2001 and 2000 respectively,
expressed as a percentage of total revenues:

Three Months
Ended
September 30,

Nine Months
Ended
September 30,2001

2000

2001

2000Revenues:License

51
%
56
%
60
%
53
%Services

30

30

25

32Maintenance

19

14

15

15Total revenues

100

100

100

100Costs and expenses:Cost of license revenues

1

1

1

1Cost of services revenues

23

25

21

28Cost of maintenance revenues

3

3

2

3Research and development

18

17

15

19Sales and marketing

51

66

56

69General and administrative

12

15

12

17Restructuring charge

8



2

Amortization of goodwill







Amortization of warrants

2

4

3

8Amortization of stock based compensation

1

3

1

4Total costs and expenses

119

134

113

149Loss from operations

(19
)
(34
)
(13
)
(49
)Other income (expense), net







Loss before provision for income taxes

(19
)
(34
)
(13
)
(49
)Provision for income taxes







Net loss

(19
)%
(34
)%
(13
)%
(49
)%


Results of operations for the three months ended September 30, 2001 and September 30, 2000:

Revenues

Total revenues.Total revenues for the three months ended September 30, 2001 increased 35% from the same period
last year, from $31.3 million to $42.1 million. Total revenues for the three

14

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months ended September 30, 2001 increased primarily due to an increase in sales of our products and services to both new and existing customers.

License revenues.License revenues for the three months ended September 30, 2001, increased 22% from the same
period last year, from $17.6 million to $21.5 million. License revenues for the three months ended September 30, 2001, as a percentage of total revenues were 51%, as compared to
56% for the same period in the previous year. The increase in the absolute dollar amount of license revenues was due primarily to continued sales of the eBI Suite and our B2B Business Process
Management product offerings, the increasing acceptance of our product in key vertical markets and the expansion of our relationships with leading systems integrators. The decrease in license revenue
as a percentage of total revenues for the three months ended September 30, 2001 was due to an economic slowdown and a decline in information technology spending in general.

Services revenues.Services revenues for the three months ended September 30, 2001, increased 34% from the same
period in the previous year, from $9.3 million to $12.5 million. Services revenues for the three months ended September 30, 2001, as a percentage of total revenues remained
constant at 30% from the same period in the previous year. The increase in the absolute dollar amount in services revenues was due primarily to the growth of consulting revenues associated with
increased licensing revenues.

Maintenance revenues.Maintenance revenues for the three months ended September 30, 2001, increased 84% from the
same period in the previous year, from $4.4 million to $8.1 million. Maintenance revenues for the three months ended September 30, 2001, as a percentage of total revenues were
19%, as compared to 14% for the same period in the previous year. The increase in maintenance revenues was due primarily the renewals of prior period maintenance contacts associated with the increase
in our cumulative license revenue.

Costs and expenses

Cost of license revenues.Cost of license revenues for the three months ended September 30, 2001, was
approximately $370,000, compared to $183,000 in the same period in the previous year. Cost of license revenues consist primarily of the cost of third party licensed software embedded or bundled with
our products. This increase was due to the corresponding absolute dollar increase in revenues.

Cost of services revenues.Cost of services revenues for the three months ended September 30, 2001, increased
22% from the same period in the previous year, from $7.8 million to $9.5 million. This increase was due primarily to an increase in professional services staff and the related increase
in services revenues. Cost of services revenues as a percentage of total revenues was 23% for the three months ended September 30, 2001, as compared to 25% for the same period in the previous
year. This decrease was due primarily to the decrease in cost of services revenues as a percentage of services revenues. We expect that cost of services revenues will increase slightly in absolute
dollars for the remainder of 2001.

Cost of maintenance revenues.Cost of maintenance revenues for the three months ended September 30, 2001,
increased 59% from the same period in the previous year, from approximately $879,000 to $1.4 million. Cost of maintenance revenues as a percentage of total revenues was 3% for the three months
ended September 30, 2001, as compared to 3% for the same period in the previous year.

Research and development expenses.Research and development expenses for the three months ended September 30,
2001, increased 42% from the same period in the previous year, from $5.3 million to $7.5 million. Research and development expenses as a percentage of total revenues were 18% for the
three months ended September 30, 2001 as compared to 17% for the same period in the prior year.

15

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The increases in research and development expenses were due primarily to the increase in the number of software developers and quality assurance personnel to support our product development,
documentation and testing activities related to the development and release of the latest versions of our products. We anticipate that research and development expenses will continue to increase in
absolute dollars for the foreseeable future as we continue to invest in the further development of our products.

Sales and marketing expenses.Sales and marketing expenses for the three months ended September 30, 2001,
increased 3% from the same period in the previous year, from $20.8 million to $21.4 million. Sales and marketing expenses as a percentage of total revenues were 51% for the quarter ended
September 30, 2001 as compared to 66% for the same period in the prior year. Sales and marketing
expenses for the three months ended September 30, 2001 however, decreased 28% from the three months ended June 2001, from $29.8 million to $21.4 million. This decrease in
sales and marketing expense was due primarily to a decrease in marketing staff and promotional and public relations activities during the three months ended September 30, 2001, as well as the
completion of a reduction in our workforce in July 2001. We anticipate that our sales and marketing expense will decrease in absolute dollars and as a percentage of total revenues for the
remainder of 2001, primarily as a result of the completion of reductions in our workforce during the quarter.

General and administrative expenses.General and administrative expenses for the three months ended
September 30, 2001, increased 9% from the same period in the previous year, from $4.6 million to $5.0 million. General and administrative expenses as a percentage of total
revenues were 12% for the quarter ended September 30, 2001 as compared to 15% for the same period in the prior year. General and administrative expenses for the three months ended
September 30, 2001, however, decreased 12% from the three months ended June 30, 2001, from $5.7 million to $5.0 million. This decrease in general and administrative
expenses was due primarily to the completion of the reduction in workforce in July 2001. We anticipate general and administrative expenses to decrease in absolute dollars for the remainder of
2001, primarily as a result of the completion of a reduction in workforce during the quarter.

Amortization of goodwill.Amortization of goodwill for the three months ended September 30, 2001, was $95,000,
compared to $0 for the same period in the prior year. The increase in amortization of goodwill was a result of the acquisition of the Swiss distributorship in the first quarter of 2001.

Amortization of warrants.Amortization of warrants for the three months ended September 30, 2001, was $980,000,
compared to $1.3 million for the same period in the prior year. The decrease in amortization of warrants was a result of warrants issued to a strategic alliance partner in January 2000
being fully amortized during 2000.

Amortization of stock-based compensation.In connection with the stock options grants to employees and
non-employee directors during 2000 and 1999, we recorded total deferred compensation of $8.5 million. Amortization of stock-based compensation for the three months ended
September 30, 2001, was approximately $409,000, compared to $840,000 for the same period in the previous year.

Other Income (Expense), Net

Other income (expense), net consists primarily of interest income (expense). Other income, net for the three months ended September 30, 2001, was
approximately $223,000 compared to other income of $379,000 for the same period last year. The decrease in income was primarily due to an decrease in interest income due to lower average cash balances
during the three months ended September 30, 2001 as compared to the same period in the prior year.

16

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Results of operations for the nine months ended September 30, 2001 and September 30, 2000:

Revenues

Total revenues.Total revenues for the nine months ended September 30, 2001 increased 97% from the same period
last year, from $72.1 million to $141.9 million during the three months ended September 30, 2001, as compared to the same period in the prior year. Total revenues for the nine
months ended September 30, 2001 increased primarily due to an increase in sales of our products and services to both new and existing customers.

License revenues.License revenues for the nine months ended September 30, 2001, increased 124% from the same
period last year, from $38.1 million to $85.2 million. License revenues for the nine months ended September 30, 2001, as a percentage of total revenues were 60%, as compared to
53% for the same period in the previous year. These increases in license revenues were due primarily to continued sales of the eBI Suite and our B2B Business Process Management product offering, the
increasing acceptance of our product in key vertical markets and the expansion of our relationships with leading systems integrators.

Services revenues.Services revenues for the nine months ended September 30, 2001, increased 57% from the same
period in the previous year, from $23.0 million to $36.0 million. Services revenues for the nine months ended September 30, 2001, as a percentage of total revenues decreased to
25%, as compared to 32% for the same period in the previous year. The increase in the absolute dollar amount in services revenues was due primarily to the growth of consulting revenues associated with
increased licensing revenues.

Maintenance revenues.Maintenance revenues for the nine months ended September 30, 2001, increased 88% from the
same period in the previous year, from $11.0 million to $20.7 million. Maintenance revenues for the nine months ended September 30, 2001, as a percentage of total revenues were
15%, as compared to 15% for the same period in the previous year. The increase in the absolute dollar amount of maintenance revenues was due primarily to increased licensed sales of our products and
the
renewals of prior period maintenance contacts associated with the increase in our cumulative license revenues.

Costs and expenses

Cost of license revenues.Cost of license revenues for the nine months ended September 30, 2001, was
approximately $1.5 million compared to $414,000 in the same period in the previous year. Cost of license revenues consist primarily of the cost of third party licensed software embedded or
bundled with our products.

Cost of services revenues.Cost of services revenues for the nine months ended September 30, 2001, increased 47%
from the same period in the previous year, from $20.5 million to $30.1 million. This increase was due primarily to an increase in professional services staff and the related increase in
services revenues. Cost of services revenues as a percentage of total revenues was 21% for the nine months ended September 30, 2001, as compared to 28% for the same period in the previous year.
This decrease was due primarily to the decrease in cost of services revenues as a percentage of services revenues.

Cost of maintenance revenues.Cost of maintenance revenues for the nine months ended September 30, 2001,
increased 36% from the same period in the previous year, from approximately $2.5 million to $3.4 million. Cost of maintenance revenues as a percentage of total revenues was 2% for the
nine months ended September 30, 2001, as compared to 3% for the same period in the previous year. The increase in the absolute dollar amount of the cost of maintenance revenues is due to an
increase in maintenance revenues from the same period in the previous year.

17

---

Research and development expenses.Research and development expenses for the nine months ended September 30,
2001, increased 60% from the same period in the previous year, from $13.5 million to $21.6 million. The increase in the absolute dollar amount in research and development expenses was
due primarily to the increase in the number of software developers and quality assurance personnel to support our product development, documentation and testing activities related to the development
and release of the latest versions of our products. Research and development expenses as a percentage of total revenues were 15% for the nine months ended September 30, 2001, as compared to 19%
for the same period in the previous year. This decrease was due primarily to the increase in total revenues for the nine months ended September 30, 2001, as compared to the same period in the
previous year.

Sales and marketing expenses.Sales and marketing expenses for the nine months ended September 30, 2001,
increased 58% from the same period in the previous year, from $49.8 million to $78.8 million. Sales and marketing expenses as a percentage of total revenues for the nine months ended
September 30, 2001, was 56%, as compared to 69% for the same period in the previous year. The increase in the absolute dollar amount of sales and marketing expense was due primarily to the
expansion of our domestic and international direct sales forces, and the increase in marketing staff, promotional and public relations activities and product and corporate communications through
June 30, 2001. Sales and marketing expenses for the three months ended September 30, 2001 decreased 28% from the three months ended June 30, 2001, from $29.8 million to
$21.6 million. This decrease was due primarily to a decrease in marketing staff and promotional and public relationship activities during the three months ended September 30, 2001, as
well as the completion of a reduction in workforce in July 2001.

General and administrative expenses.General and administrative expenses for the nine months ended September 30,
2001, increased 39% from the same period in the previous year, from $12.0 million to $16.7 million. General and administrative expenses as a percentage of total revenues for the nine
months ended September 30, 2001, was 12%, as compared to 17% for the same period in the previous year. The increase in the absolute dollar amount of general and administrative expenses was due
primarily to hiring additional executive, finance, information technologies and administrative personnel to support the growth of our business and worldwide infrastructure through June 30,
2001. General and administrative expenses for the three months ended September 30, 2001 decreased 12% from the three months ended June 30, 2001, from $5.7 million to
$5.0 million. This decrease in general and administrative expenses was due primarily to the completion of a reduction in workforce in July 2001.

Amortization of goodwill.Amortization of goodwill for the nine months ended September 30, 2001, was $223,000,
compared to $0 for the same period in the prior year. The increase in amortization of goodwill was a result of the acquisition of the Swiss distributorship in the first quarter of 2001.

Amortization of warrants.Amortization of warrants for the nine months ended September 30, 2001, was
$3.9 million, compared to $5.5 million for the same period in the prior year. The decrease in amortization of warrants was a result of warrants issued to a strategic alliance partner in
January 2000 being fully amortized during 2000.

Amortization of stock-based compensation.In connection with the stock options grants to employees and
non-employee directors during 2000 and 1999, we recorded total deferred compensation of $8.5 million. Amortization of stock-based compensation for the nine months ended
September 30, 2001, was approximately $1.5 million compared to $3.2 million for the same period in the previous year.

18

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Other Income (Expense), Net

Other income (expense), net consists primarily of interest income (expense). Other income (expense), net for the nine months ended September 30, 2001,
was approximately $339,000 compared to $(392,000) for the same period last year. The decrease in expense was primarily due to an increase in interest income due to larger average cash balances during
the nine month period ending September 30, 2001, as compared to the same period last year.

Liquidity and Capital Resources

As of September 30, 2001, we had cash and cash equivalents of $26.9 million, a decrease of $2.5 million from $29.4 million held as
of December 31, 2000.

Net
cash used in operating activities was $6.9 million during the nine months ended September 30, 2001, as compared with $18.3 million in the same period in the
previous year. This period over period decrease in cash used in operating activities reflects a decrease in net loss and increases in other accrued expenses and deferred revenue offset by increases in
accounts receivable, prepaid expenses and other current assets.

Net
cash used in investing activities was $7.1 million during the nine months ended September 30, 2001, as compared with $4.7 million in the same period in the
previous year. The increase primarily was due to an increase in capital expenditures as a result of the expansion of our office facilities.

Net
cash provided by financing activities was $12.4 million during the nine months ended September 30, 2001, as compared with $54.4 million in the same period in
the previous year. This decrease was due primarily to the completion of our initial public offering and concurrent private offering in May 2000, offset by the repayment of the bank line of
credit and notes payable.

In
May 2000, we completed our IPO of 4,600,000 shares of common stock at $12 per share and realized proceeds, net of underwriting discounts, commissions and issuance costs, of
approximately $49.6 million. Concurrent with the IPO, we completed the sale of 1,200,000 shares of common stock to a purchaser in a private placement at a price of $12 per share and realized
proceeds, net of underwriting discounts, commissions and issuance costs, of approximately $14.1 million.

In
October 2001, we extended the $15.0 million senior line of credit facility to May 31, 2003. The line of credit bears interest at a rate of prime plus .5%,
payable monthly, and expires on May 31, 2003. As of September 30, 2001, we had $4.0 million in borrowings outstanding against the line of credit.

19

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We believe that our current cash and cash equivalents balance and cash flow from operations will be sufficient to meet our working capital and capital expenditure requirements for at
least the next twelve months. However, we may need to raise additional funds, and we cannot be certain that weit will be able to obtain additional debt or equity financing on favorable terms, if at
all. In addition, we may also utilize cash resources to fund acquisitions or investments in complementary businesses, technologies or product lines.

Euro Currency Conversion

The Euro currency ("Euro") was introduced on January 1, 1999, and the eleven participating European Monetary Union member countries established
irrevocable fixed conversion rates between their local currencies and the Euro. However, the local currencies in those countries will continue to be used as legal tender through January 1,
2002. Thereafter, the local currencies will be canceled and Euro bills and coins will be used for cash transactions in the participating countries. From January 1, 1999 to December 31,
2001, companies will be allowed to transact noncash transactions in either Euro or the local currency.

The
Company and certain of its European subsidiaries are currently evaluating the Euro conversion and the potential impact on their operations. At the present time, the Company
believes the necessary changes and costs incurred thus far, and expected to be incurred in the future, are not significant.

Risks Related to SeeBeyond

You should carefully consider the risks described below in evaluating the other statements made herein. The risks described below are not the only ones facing
our company. Additional risks not presently known to us, or that we currently deem immaterial, may also impair our business operations.

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



We have incurred substantial losses since 1998 as we increased funding of the development of our products and technologies and expanded our sales and marketing
organization. As of September 30, 2001, we had an accumulated deficit of $104.1 million. We may incur future losses in future periods and we may not achieve or maintain profitability on
a quarterly or annual basis.



Our products are often used by our customers throughout their organizations to address critical business problems. Customers generally consider a wide range of
issues before committing to purchase our products, including product benefits, the ability to operate with existing and future computer systems, the ability to accommodate increased transaction
volumes and product reliability. Many customers are addressing these issues for the first time when they consider whether to buy our products and services. As a result, we or other parties, including
systems integrators, must educate potential customers on the use and benefits of our products and services. In addition, the purchase of our products generally involves a significant commitment of
capital and other resources by a customer. This commitment often requires significant technical review, assessment of competitive products and approval at a number of management levels within a
customer's organization. Our sales cycle may vary based on the industry in which the potential customer operates and is difficult to predict for any particular license transaction. The length and
variability of our sales cycle makes it difficult to predict

20

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whether particular sales will be concluded in any given quarter. If one or more of our license transactions are not consummated in a given quarter, our results of operations for that quarter may be
below our expectations and the expectations of analysts and investors.



Substantially all of our license revenues have been, and are expected to continue to be, derived from the license of our eBusiness Integration Suite.
Accordingly, our future operating results will depend on the demand for eBusiness Integration Suite by future customers, including new and enhanced releases that are subsequently introduced. Our core
technology engine, e*Gate version 4.0, was completed in September 1999 and commercially launched in November 1999 followed by version 4.5 in
September 2001. If our competitors release new products that are superior to our eBI Suite in performance or price, or if we fail to enhance our eBI Suite and introduce new products in a timely
manner, demand for our products may decline, and we may have to reduce the pricing of our products. A decline in demand or pricing for our eBI Suite as a result of these or other factors would
significantly reduce our revenues.

In
the past, we have experienced delays in the commencement of commercial releases of our eBI Suite. To date, these delays have not had a material impact on our revenues. In the
future, we may fail to introduce or deliver new products on a timely basis. If new releases or products are delayed or do not achieve market acceptance, we could experience customer dissatisfaction or
a delay or loss of revenues. For example, the introduction of new enterprise and business applications requires us to introduce new e*Ways adapters to support the integration of these applications.
Our failure to introduce these or other modules in a timely manner could cause our revenues and market share to decline. In addition, customers may delay purchases of our products in anticipation of
future releases. If customers defer material 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 not be successful in upgrading our customers who purchased previous versions of our eBI Suite to the current version.
We also may not be successful in selling add-on modules for our products to existing customers. Any failure to continue to upgrade existing customers' products or sell new modules, if and
when they are introduced, could negatively impact customer satisfaction and our revenues.



In 2000, we entered into agreements with EDS and CSC for them to install and deploy our products and perform custom integration of systems and applications.
These systems integrators also engage in joint marketing and sales efforts with us. If these relationships fail, we will have to devote substantially more resources to the sales and marketing, and
implementation and support of our products than we would otherwise, and our efforts may not be as effective as those of the systems integrators. In many cases, these parties have extensive
relationships with our existing and potential customers and influence the decisions of these customers. We rely upon these firms to recommend our products during the evaluation stage of the purchasing
process, as well as for implementation and customer support services.

These
systems integrators are not contractually required to implement our products, and competition for these resources may preclude us from obtaining sufficient resources to provide
the necessary implementation services to support our needs. If the number of installations of our products exceeds our access to the resources provided by these systems integrators, we will be
required to

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provide these services internally, which would increase our expenses and significantly limit our ability to meet our customers' implementation needs. A number of our competitors have stronger
relationships with some of these systems integrators and, as a result, these systems integrators might be more likely to recommend competitors' products and services instead of ours. In addition, a
number of our competitors have relationships with a greater number of these systems integrators or have stronger systems integrator relationships based on specific vertical markets and, therefore,
have access to a broader base of customers.

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

In
March 2001, we entered into a strategic marketing agreement and established a relationship with General Motors Corporation ("GMC"). Under this agreement, GMC will assist us
in our sales and marketing efforts to affiliates within the GMC family of companies and their suppliers. If this relationship with GMC fails to develop as we anticipate, we will have to devote more
resources to the sales and marketing of our products than we would otherwise, and our efforts may not be as effective as those of GMC in marketing our products to these divisions and companies
affiliated with GMC. Our failure to maintain this relationship with GMC could harm our ability to increase our revenues from the license and successful implementation of our software products in this
key commercial market.



The market for our products is intensely competitive, evolving and subject to rapid technological change. We expect the intensity of competition to increase in
the future. As a result of increased competition, we may have to reduce the price of our products and services, and we may experience reduced gross margins and loss of market share, any one of which
could significantly reduce our future revenues and operating results. Our current competitors include vendors offering enterprise application integration, or EAI, and traditional electronic data
interchange, or EDI, software products, as well as "in house" information technology departments of potential customers that have developed or may develop systems that provide some or all of the
functionality of our e*Xchange product suite. We may also encounter competition from major enterprise 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. In addition, many of these competitors
have extensive
knowledge of our industry. Some of our competitors have established or may establish cooperative relationships among themselves or with third parties to offer a single solution and increase the
ability of their products to address customer needs.



We must plan and manage our growth effectively in order to offer our products and services and achieve revenue growth and profitability in a rapidly evolving
market. We continue to increase the scope of our operations domestically and internationally and have in recent years added a number of employees. Our growth has and will continue to place a
significant strain on our management systems and resources, and we may not be able to effectively manage our growth in the future.

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Furthermore, if our relationships with systems integrators succeed and we are able to penetrate additional commercial markets, we will need additional sales and marketing and
professional services resources to support these customers. The growth of our customer base will require us to invest significant resources in the training and development of our employees and our
systems integration partners. If these organizations fail to keep pace with the number and demands of the customers that license our products, our ability to market and sell our products and services
and our ability to develop new products and services will be harmed. To manage our business, we must continue to:



Our quarterly operating results have fluctuated significantly in the past and may vary significantly in the future. We believe that
period-to-period comparisons of our historical results of operations are not a good predictor of our future performance.

Our
revenues and operating results depend upon the volume and timing of customer orders and payments and the date of product delivery. Historically, a substantial portion of our
revenues in a given quarter has been recorded in the final month of that quarter, with a concentration of these revenues in the last two 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 adverse effect on our quarterly operating results. Since our operating expenses are based on anticipated revenues and
because a high percentage of these expenses are relatively fixed, a delay in the recognition of revenues from one or more license transactions could cause significant variations in operating results
from quarter to quarter and cause a decline in our stock price. We realize substantially higher gross margins on our license revenues compared to our services and maintenance revenues. Thus, our
margins for any particular quarter will be highly dependent on our revenue mix in that quarter. In our international markets, we have experienced some seasonality of revenues, with lower revenues in
the summer months. Although this seasonality has not had a material impact on our operating results in the past, we cannot assure you that our operating results will not fluctuate in the future as a
result of these and other international trends.

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

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We rely significantly upon customers making large information technology purchasing decisions a source of revenue. In 2001, we have experienced a general
slow-down in the level of capital spending by some of our customers due to the general economic downturn. This slow-down in capital spending, if sustained in future periods,
could result in reduced sales or the postponement of sales to our customers. There can be no assurance that the level of spending on information technology in general, or on e-Business
integration software by our customers and potential customers in particular, will increase or remain at current levels in future periods. Lower spending on information technology could result in
reduced sales to our customers and could impair our operating results in future periods.



We depend on the continued service of our key technical, sales and senior management personnel, including our founder and Chief Executive Officer, James T.
Demetriades. None of these persons is bound by an employment agreement, and we do not maintain key person life insurance on any of these persons, other than Mr. Demetriades. The loss of any of
our senior management or other key research and development or sales and marketing personnel could adversely affect our future operating results. In addition, we must attract, retain and motivate
highly skilled employees, including sales personnel and software engineers. We face significant competition for individuals with the skills required to develop, market and support our products and
services. We cannot assure you that we will be able to recruit and retain sufficient numbers of these highly skilled employees. If we fail to do so, our ability to compete will be significantly
harmed.



Revenues from the sale of products and services outside the United States accounted for 33% and 22% of our total revenues for the nine months ended
September 30, 2001 and 2000, respectively. Revenues from the sale of products and services in the United Kingdom as a percent of our total revenues were 18% and 9% for the nine months ended
September 30, 2001 and 2000, respectively, while revenues from the sale of our products and services in Germany as a percent of total revenues remained unchanged at 4% for the nine months ended
September 30, 2001 and 2000. We believe that revenues from sales outside the United States will continue to account for a material portion of our total revenues for the foreseeable future. We
are exposed to several risks inherent in conducting business internationally, such as:



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

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Our products and their interactions with customers' software applications and IT systems are complex and, accordingly, there may be undetected errors or
failures when our products are introduced or as new versions are released. In the past we have discovered software errors in our new releases and new products after their introduction, which has
resulted in additional research and development expenses. To date, these additional expenses have not been material. These errors have resulted in product release delays, delayed revenues and customer
dissatisfaction. In the future we may discover errors, including performance limitations, in new releases or new products after the commencement of commercial shipments. Since many customers are using
our products for mission-critical business operations, any of these occurrences could seriously harm our business and generate negative publicity, which could have a negative impact on future sales.
Although we maintain product liability and errors and omissions insurance, we cannot assure you that these policies will be sufficient to compensate for losses caused by any of these occurrences.



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



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



The market for e-Business integration software is rapidly evolving. We earn substantially all of our license revenues from sales of our eBI Suite
software suite. We expect to earn substantially all of our revenues in the foreseeable future from sales of our eBI Suite and related products and services. Our future financial performance will
depend on continued growth in the number of organizations demanding software and services for application integration and e-Business solutions and seeking outside vendors to develop,
manage and maintain this software for their critical applications. Many of our potential customers have made significant investments in internally developed systems and would incur significant costs
in switching to third-party products, which may substantially inhibit the growth of the market for e-Business integration software. If this market fails to grow, or grows more slowly than
we expect, our revenues will be adversely affected.



We depend upon our ability to develop and protect our proprietary technology and intellectual property rights to distinguish our product from our competitors'
products. The unauthorized use by others of our proprietary rights could materially harm our business. We rely on a combination of copyright, trademark and trade secret laws, as well as
confidentiality agreements and licensing arrangements, to establish and protect our proprietary rights. We have no issued patents. Despite our efforts to protect our proprietary rights, existing laws
afford only limited protection. Attempts may be made to copy or reverse engineer aspects of our products or to obtain and use information that we regard as proprietary. Accordingly, we cannot be
certain that we will be able to protect our proprietary rights against unauthorized third party copying or use. Furthermore, policing the unauthorized use of our products is difficult, and expensive
litigation may be necessary in the future to enforce our intellectual property rights.



Third parties may claim that we have infringed their current or future intellectual property rights. We expect that software developers in our market will
increasingly be subject to infringement claims as the number of products in different software industry segments overlap. Any claims, with or without merit, could be time-consuming, result
in costly litigation, prevent product shipment or cause delays, or require us to enter into royalty or licensing agreements, any of which could harm our business. Patent litigation in particular has
complex technical issues and inherent uncertainties. In the event an infringement claim against us is successful and we cannot obtain a license on acceptable terms, license a substitute technology or
redesign our products to avoid infringement, our business would be harmed. Furthermore, former employers of our current and future employees may assert that our employees have improperly disclosed to
us or are using their confidential or proprietary information.

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Item 3: Quantitative and Qualitative Disclosure About Market Risk

The Company develops products in the United States and sells them in North America, Europe, Africa and the Pacific Rim. As a result, our financial results
could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. If any of these events were to occur, our revenues could be seriously
impacted, since a significant portion of our revenues are derived from international customers. For the three months ended September 30, 2001 we incurred losses of approximately $(49,000) due
to the effect of foreign currency fluctuations as compared to no significant gains or losses for the same period in the prior year. For the nine months ended September 30, 2001 we incurred
losses of approximately ($206,000) as compared to no significant gains or losses for the nine months ending September 30, 2000. Revenues from international customers represented 33% and 30% for
the three months ended September 31, 2001 and 2000, respectively, and 33% and 25% for the nine months ended September 30, 2001 and 2000, respectively.

Our
line of credit and equipment line of credit carry a floating interest rate based on prime plus 0.5% and 0.75%, respectively. Accordingly, we are subject to the risk of incurring
additional interest expense should the prime interest rate increase in the future. The interest rates on our line of credit and equipment line of credit as of September 30, 2001 was 6.5% and
6.75%, respectively.

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PART IIOTHER INFORMATION

Item 1. Legal Proceedings

The Company is party to routine claims and suits brought against it in the ordinary course of business including disputes arising over the ownership of
intellectual property rights and collection matters. In the opinion of management, the outcome of such routine claims will not have a material adverse effect on the Company's business, financial
condition or results of operation.

Item 2. Changes in Securities and Use of Proceeds

Not
applicable

Not
applicable

Not
applicable

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

None.

Item 6. Exhibits and reports of Form 8-K

None.

None.

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Signatures

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized, on November 14, 2001.

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

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