**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

 

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

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

 

**Commission File No. 000-30207**

 

**SEEBEYONDTECHNOLOGY CORPORATION**

(Exactname of Registrant as Specified in Its Charter)

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

 

Indicate by check markwhether the registrant: (1) has filed all reports required to be filed by Section 13or 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 suchreports) and (2) has been subject to such filing requirements for the past90 days. Yes  ý No  o

 

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

 

The number of sharesoutstanding of the registrant’s Common Stock, $0.0001 par value, as of November 7,2004 was 84,771,947.

 

 

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**SeeBeyond Technology Corporation and Subsidiaries**

 

**INDEX**

 
| **Part I - Financial  Information**               |                                                                                                                                      |
|---------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------|
| Item 1.                                           | Financial Statements:                                                                                                                     |   |
|                                              | Condensed  Consolidated Balance Sheets as of September 30, 2004 (unaudited) and December 31,  2003                              |   |
|                                              | Condensed  Consolidated Statements of Operations (unaudited) for the three months and  nine months ended September 30, 2004 and 2003 |   |
|                                              | Condensed  Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30,  2004 and 2003                  |   |
|                                              | Notes  to Condensed Consolidated Financial Statements (unaudited)                                                                         |   |
| Item  2.                                          | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                               |   |
| Item  3.                                          | Quantitative  and Qualitative Disclosure About Market Risk                                                                                |   |
| Item 4.                                           | Controls and  Procedures                                                                                                                  |   |
| **Part II - Other Information**                   | ** **                                                                                                                                |
| Item  1.                                          | Legal  Proceedings                                                                                                                        |   |
| Item 2.                                           | Changes in Securities and Use of  Proceeds                                                                                                |   |
| Item 3.                                           | Defaults Upon Senior Securities                                                                                                           |   |
| Item 4.                                           | Submission of Matters to a Vote  of Security Holders                                                                                      |   |
| Item 5.                                           | Other Information                                                                                                                         |   |
| Item 6.                                           | Exhibits                                                                                                                                  |   |
| **Signatures**                                    | ** **                                                                                                                                |
| **Certification  of the Chief Executive Officer** | ** **                                                                                                                                |
| **Certification  of the Chief Financial Officer** | ** **                                                                                                                                |

 

2

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**PART I—FINANCIAL INFORMATION**

 

**Item 1 .Financial Statements**

 

**SeeBeyond Technology Corporation and Subsidiaries**

 

**CondensedConsolidated Balance Sheets**

(inthousands, except share and per share amounts)

 
| ** **                                                                                                                                                                                                                                              | ** ** | **September 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                                                                              | ** ** | **(unaudited)**              | ** ** | ** **                  | ** ** |
| Assets:                                                                                                                                                                                                                                                 |       |                         |       |                        |       |
| Current assets:                                                                                                                                                                                                                                         |       |                         |       |                        |       |
| Cash and cash equivalents                                                                                                                                                                                                                               |       | $                            | 68,106     |                        | $          | 70,135 |   |
| Accounts receivable, net of allowances of  $1,531 and $2,373 at September 30, 2004 and December 31, 2003,  respectively                                                                                                                       |       | 34,450                       |       | 34,333                      |       |
| Prepaid expenses and other current assets                                                                                                                                                                                                               |       | 3,210                        |       | 4,596                       |       |
| Total current assets                                                                                                                                                                                                                                    |       | 105,766                      |       | 109,064                     |       |
| Property and equipment, net                                                                                                                                                                                                                             |       | 13,113                       |       | 15,224                      |       |
| Goodwill                                                                                                                                                                                                                                                |       | 1,391                        |       | 1,391                       |       |
| Other assets                                                                                                                                                                                                                                            |       | 1,709                        |       | 2,068                       |       |
| Total assets                                                                                                                                                                                                                                            |       | $                            | 121,979    |                        | $          | 127,747 |   |
| Liabilities and stockholders’ equity:                                                                                                                                                                                                              |       |                         |       |                        |       |
| Current liabilities:                                                                                                                                                                                                                                    |       |                         |       |                        |       |
| Accounts payable                                                                                                                                                                                                                                        |       | $                            | 5,487      |                        | $          | 5,120 |   |
| Accrued employee compensation and related  expenses                                                                                                                                                                                                     |       | 12,538                       |       | 12,675                      |       |
| Accrued expenses                                                                                                                                                                                                                                        |       | 8,050                        |       | 9,263                       |       |
| Deferred revenues                                                                                                                                                                                                                                       |       | 31,985                       |       | 31,221                      |       |
| Equipment line and advance payable                                                                                                                                                                                                                      |       | 734                          |       | 3,097                       |       |
| Capital lease payable - current portion                                                                                                                                                                                                                 |       | 324                          |       | 310                         |       |
| Total current liabilities                                                                                                                                                                                                                               |       | 59,118                       |       | 61,686                      |       |
| Capital lease payable                                                                                                                                                                                                                                   |       | 303                          |       | 515                         |       |
| Total liabilities                                                                                                                                                                                                                                       |       | 59,421                       |       | 62,201                      |       |
| Commitments and contingencies                                                                                                                                                                                                                           |       |                         |       |                        |       |
| Stockholders’ equity:                                                                                                                                                                                                                              |       |                         |       |                        |       |
| Common stock, $.0001 par value -  200,000,000 shares authorized; 87,269,395 shares issued and 84,716,243 shares  outstanding as of September 30, 2004 and 85,548,522 shares issued and  83,826,520 shares outstanding as of December 31, 2003 |       | 8                            |       | 8                           |       |
| Additional paid-in capital                                                                                                                                                                                                                              |       | 225,773                      |       | 222,539                     |       |
| Treasury stock                                                                                                                                                                                                                                          |       | (6,286                       | )          | (3,632                      | )          |
| Deferred stock compensation                                                                                                                                                                                                                             |       | —                       |       | (47                         | )          |
| Accumulated other comprehensive loss                                                                                                                                                                                                                    |       | 605                          |       | 616                         |       |
| Accumulated deficit                                                                                                                                                                                                                                     |       | (157,542                     | )          | (153,938                    | )          |
| Total stockholders’ equity                                                                                                                                                                                                                         |       | 62,558                       |       | 65,546                      |       |
| Total liabilities and stockholders’ equity                                                                                                                                                                                                         |       | $                            | 121,979    |                        | $          | 127,747 |   |

 

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

 

3

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**SeeBeyond Technology Corporation and Subsidiaries**

 

**CondensedConsolidated Statements of Operations**

 

**(Unaudited)**

(in thousands, except per share data)

 
| ** **                                     | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                     | ** ** | **2004**                                   | ** ** | **2003**                                  | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenues:                                      |       |                                       |       |                                      |       |   |   |   |   |
| License                                        |       | $                                          | 17,944     |                                      | $          | 11,249 |   | $ | 48,602 |   | $ | 31,376 |   |
| Services                                       |       | 10,090                                     |       | 9,440                                     |       | 29,710 |   | 30,495 |   |
| Maintenance                                    |       | 13,698                                     |       | 11,667                                    |       | 39,726 |   | 35,164 |   |
| Total revenues                                 |       | 41,732                                     |       | 32,356                                    |       | 118,038 |   | 97,035 |   |
| Cost of revenues:                              |       |                                       |       |                                      |       |   |   |   |   |
| License                                        |       | 331                                        |       | 299                                       |       | 989 |   | 1,120 |   |
| Services and maintenance                       |       | 10,645                                     |       | 10,041                                    |       | 31,439 |   | 32,161 |   |
| Total cost of revenues                         |       | 10,976                                     |       | 10,340                                    |       | 32,428 |   | 33,281 |   |
| Gross profit                                   |       | 30,756                                     |       | 22,016                                    |       | 85,610 |   | 63,754 |   |
| Operating expenses:                            |       |                                       |       |                                      |       |   |   |   |   |
| Research and development                       |       | 9,657                                      |       | 10,142                                    |       | 29,033 |   | 31,218 |   |
| Sales and marketing                            |       | 14,623                                     |       | 12,443                                    |       | 45,693 |   | 40,883 |   |
| General and administrative                     |       | 4,869                                      |       | 3,846                                     |       | 13,727 |   | 13,071 |   |
| Restructuring and impairment charges           |       | —                                     |       | —                                    |       | — |   | 6,386 |   |
| Amortization of sales and marketing  warrants  |       | —                                     |       | 48                                        |       | (14 | ) | 172 |   |
| Amortization of stock-based compensation       |       | —                                     |       | 41                                        |       | 97 |   | 213 |   |
| Total operating expenses                       |       | 29,149                                     |       | 26,520                                    |       | 88,536 |   | 91,943 |   |
| Income (loss) from operations                  |       | 1,607                                      |       | (4,504                                    | )          | (2,926 | ) | (28,189 | ) |
| Interest and other income, net                 |       | 187                                        |       | 123                                       |       | 117 |   | 741 |   |
| Interest expense                               |       | (68                                        | )          | (112                                      | )          | (201 | ) | (367 | ) |
| Income (loss) before provision for income  tax |       | 1,726                                      |       | (4,493                                    | )          | (3,010 | ) | (27,815 | ) |
| Provision for income tax                       |       | 416                                        |       | 356                                       |       | 594 |   | 442 |   |
| Net income (loss)                              |       | $                                          | 1,310      |                                      | $          | (4,849 | ) | $ | (3,604 | ) | $ | (28,257 | ) |
|                                           |       |                                       |       |                                      |       |   |   |   |   |
| Basic net income (loss) per share              |       | $                                          | 0.02       |                                      | $          | (0.06 | ) | $ | (0.04 | ) | $ | (0.34 | ) |
| Diluted net income (loss) per share            |       | $                                          | 0.01       |                                      | $          | (0.06 | ) | $ | (0.04 | ) | $ | (0.34 | ) |
| Number of shares used in calculating:          |       |                                       |       |                                      |       |   |   |   |   |
| - basic net income (loss) per share            |       | 85,025                                     |       | 83,065                                    |       | 84,628 |   | 82,841 |   |
| - diluted net income (loss) per share          |       | 87,830                                     |       | 83,065                                    |       | 84,628 |   | 82,841 |   |

 

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

 

4

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**SeeBeyond Technology Corporation and Subsidiaries**

 

**CondensedConsolidated Statements of Cash Flows**

 

**(Unaudited)**

(inthousands)

 
| ** **                                                                            | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                            | ** ** | **2004**                                  | ** ** | **2003** | ** ** |
| Cash flows from operating activities:                                                 |       |                                      |       |   |   |
| Net loss                                                                              |       | $                                         | (3,604     | ) | $ | (28,257 | ) |
| Adjustments to reconcile net loss to net  provided by (used in) operating activities: |       |                                      |       |   |   |
| Gain on disposal of fixed assets                                                      |       | (34                                       | )          | (16 | ) |
| Depreciation and amortization                                                         |       | 3,572                                     |       | 4,406 |   |
| Provision for doubtful accounts receivable                                            |       | (24                                       | )          | 82 |   |
| Amortization of sales and marketing  warrants                                         |       | (14                                       | )          | 172 |   |
| Amortization of stock-based compensation                                              |       | 97                                        |       | 213 |   |
| Non-cash restructuring and impairment  charges                                        |       | —                                    |       | 4,274 |   |
| Changes in assets and liabilities:                                                    |       |                                      |       |   |   |
| Accounts receivable                                                                   |       | (93                                       | )          | 5,389 |   |
| Prepaid expenses and other current assets                                             |       | 1,386                                     |       | (580 | ) |
| Accounts payable                                                                      |       | 367                                       |       | (3,044 | ) |
| Accrued expenses                                                                      |       | (1,350                                    | )          | (1,297 | ) |
| Deferred revenues                                                                     |       | 764                                       |       | 1,100 |   |
| Net cash provided by (used in) operating  activities:                                 |       | 1,067                                     |       | (17,558 | ) |
|                                                                                  |       |                                      |       |   |   |
| Cash flows from investing activities:                                                 |       |                                      |       |   |   |
| Purchases of property and equipment                                                   |       | (1,427                                    | )          | (4,416 | ) |
| Other                                                                                 |       | 359                                       |       | (1,294 | ) |
| Net cash used in investing activities                                                 |       | (1,068                                    | )          | (5,710 | ) |
|                                                                                  |       |                                      |       |   |   |
| Cash flows from financing activities:                                                 |       |                                      |       |   |   |
| Repayments on bank lines of credit                                                    |       | (2,363                                    | )          | (2,363 | ) |
| Repayments of capital lease obligation                                                |       | (198                                      | )          | (173 | ) |
| Proceeds from issuance of common stock  pursuant to employee stock option plan        |       | 2,870                                     |       | 1,600 |   |
| Proceeds from issuance of common stock  pursuant to employee stock purchase plan      |       | 328                                       |       | 347 |   |
| Payments for purchase of common stock                                                 |       | (2,654                                    | )          | (872 | ) |
| Net cash used in financing activities                                                 |       | (2,017                                    | )          | (1,461 | ) |
|                                                                                  |       |                                      |       |   |   |
| Effect of exchange rate changes on cash and  cash equivalents                         |       | (11                                       | )          | 345 |   |
| Net decrease in cash and cash equivalents                                             |       | (2,029                                    | )          | (24,384 | ) |
| Cash and cash equivalents at beginning of the  period                                 |       | 70,135                                    |       | 94,114 |   |
| Cash and cash equivalents at end of the  period                                       |       | $                                         | 68,106     |   | $ | 69,730 |   |

 

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

 

5

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**SeeBeyond Technology Corporation and Subsidiaries**

 

**Notes toCondensed Consolidated Financial Statements**

 

**(Unaudited)**

 

**Note 1.****                                 *****Basis ofPresentation***

 

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

 

The results of operationsfor the three months and nine months ended September 30, 2004 are notnecessarily indicative of the results that may be expected for the year ending December 31,2004 or any other interim period, and the Company makes no representationsrelated thereto.

 

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

 

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

 

**Note 2.****                                 *****RevenueRecognition***

 

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

 

For multiple element arrangements,each element of the arrangement is analyzed and the Company allocates a portionof the total fee under the arrangement to the undelivered elements, primarilyservices and maintenance, using vendor-specific objective evidence of fairvalue of the element and the remaining portion of the fee is allocated to thedelivered elements (i.e. generally the software license), regardless of anyseparate prices stated within the contract for each element, under the residualmethod prescribed by SOP 98-9. Vendor-specific objective evidence of fair valueis based on the price the customer is required to pay when the element is soldseparately (i.e. hourly rates charged for consulting services when soldseparately from a software license and the renewal rate for maintenancearrangements). Each license agreement offers additional maintenance renewalperiods at a stated price. If vendor-specific objective evidence of fair valuedoes not exist for the undelivered elements, all revenue is deferred andrecognized ratably over the service period if the undelivered element isservices, or over the period the maintenance is provided if the undeliveredelement is maintenance, or until sufficient objective evidence exists or allelements have been delivered.

 

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

 

*ServicesRevenues:* Revenuesfrom services are comprised of consulting and implementation services and, to alimited extent, training. Services are generally sold on a time-and-materialsor fixed fee basis and include a range of services including installation ofoff-the-shelf software, data conversion and building non-complex interfaces toallow the software to operate in customized environments. Services aregenerally separable from the other elements under the arrangement since theperformance of the services is not essential to the functionality (i.e. do notinvolve significant production, modification or customization of the softwareor building 

 

6

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complex interfaces) of anyother element of the transaction and are described in the contract such thatthe total price of the arrangement would be expected to vary as the result ofthe inclusion or exclusion of the services. Revenues for services arerecognized as the services are performed. Training services are sold either ona per student basis or per class and are recognized as classes are attended.

 

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

 

Revenues on sales made byalliance partners are generally recognized upon shipment of the software to theend user, if all other revenue recognition criteria noted above are met. Underarrangements with distributors revenue is recognized upon delivery of theproduct to the distributor. The Company does not offer a right of return on itsproducts.

 

**Note 3.****                                 *****Operationsby Reportable Segments and Geographic Area***

 

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

 
| ** **     | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **     | ** ** | **2004**                                   | ** ** | **2003**                                  | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenues:      |       |                                       |       |                                      |       |   |   |   |   |
| North America  |       | $                                          | 23,690     |                                      | $          | 18,305 |   | $ | 61,140 |   | $ | 58,182 |   |
| Europe         |       | 15,698                                     |       | 10,898                                    |       | 49,290 |   | 29,123 |   |
| Pacific Rim    |       | 2,344                                      |       | 3,153                                     |       | 7,608 |   | 9,730 |   |
| Total revenues |       | $                                          | 41,732     |                                      | $          | 32,356 |   | $ | 118,038 |   | $ | 97,035 |   |
|                |            |                                            |            |                                           |            |  |  |  |  |  |  |  |  |  |

 
| ** **              | ** ** | **September 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|-------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Long-lived assets:      |       |                         |       |                        |       |
| North America           |       | $                            | 13,311     |                        | $          | 15,341 |   |
| Europe                  |       | 1,686                        |       | 1,894                       |       |
| Pacific Rim             |       | 1,216                        |       | 1,448                       |       |
| Total long-lived assets |       | $                            | 16,213     |                        | $          | 18,683 |   |

 

No single customer accountedfor more than 10% of the Company’s net revenues during the three months andnine months ended September 30, 2004 and 2003.

 

**Note 4.****                                 *****Computationof Net Income (Loss) Per Share***

 

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

 

7

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

 
| ** **                                                                                             | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                             | ** ** | **2004**                                   | ** ** | **2003**                                  | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net income (loss)                                                                                      |       | $                                          | 1,310      |                                      | $          | (4,849 | ) | $ | (3,604 | ) | $ | (28,257 | ) |
| Weighted average outstanding shares of  common stock used to compute basic net income (loss) per share |       | 85,025                                     |       | 83,065                                    |       | 84,628 |   | 82,841 |   |
| Dilutive effect of employee stock options                                                              |       | 2,805                                      |       | —                                    |       | — |   | — |   |
| Common stock and common stock equivalents                                                              |       | 87,830                                     |       | 83,065                                    |       | 84,628 |   | 82,841 |   |
| Basic net income (loss) per share                                                                      |       | $                                          | 0.02       |                                      | $          | (0.06 | ) | $ | (0.04 | ) | $ | (0.34 | ) |
| Diluted net income (loss) per share                                                                    |       | $                                          | 0.01       |                                      | $          | (0.06 | ) | $ | (0.04 | ) | $ | (0.34 | ) |

 

Options to purchase approximately 18,088,000 shares of common stock forthe nine months ended September 30, 2004, and options to purchase approximately20,680,000 shares of common stock for the three months and nine months ended September 30,2003 were not included in the calculations of diluted net income (loss) pershare because their effect would be antidilutive. For the three months ended September 30,2004, options to purchase approximately 2,805,000 shares of common stock wereincluded in the calculations of diluted net income per share. Common stockwarrants to purchase 625,000 and 650,000 shares were not included in thecalculations of diluted net loss per share because their effect would beantidilutive for the nine months ended September 30, 2004 and the threemonths and nine months ended September 30, 2003, respectively.

 

**Note 5.****                                 *****Stock-BasedCompensation***

 

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

 

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

 
| ** **                                                                           | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                           | ** ** | **2004**                                   | ** ** | **2003**                                  | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net income (loss), as reported                                                       |       | $                                          | 1,310      |                                      | $          | (4,849 | ) | $ | (3,604 | ) | $ | (28,257 | ) |
| Stock-based employee compensation costs,  included in net income (loss), as reported |       | —                                     |       | 41                                        |       | 97 |   | 213 |   |
| Stock-based employee compensation costs if  fair value based method had been applied |       | (3,098                                     | )          | (2,845                                    | )          | (8,049 | ) | (9,522 | ) |
| Pro forma net loss                                                                   |       | $                                          | (1,788     | )                                         | $          | (7,653 | ) | $ | (11,556 | ) | $ | (37,566 | ) |
| Earnings (loss) per share:                                                           |       |                                       |       |                                      |       |   |   |   |   |
| Basic - as reported                                                                  |       | $                                          | 0.02       |                                      | $          | (0.06 | ) | $ | (0.04 | ) | $ | (0.34 | ) |
| Diluted - as reported                                                                |       | $                                          | 0.01       |                                      | $          | (0.06 | ) | $ | (0.04 | ) | $ | (0.34 | ) |
| Basic and diluted - pro forma                                                        |       | $                                          | (0.02      | )                                         | $          | (0.09 | ) | $ | (0.14 | ) | $ | (0.45 | ) |

 

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

 

**Bank Linesof Credit and Equipment Line Payable**

 

In November 2000, theCompany established a $15.0 million line of credit facility (the “Line”)with a lending institution that bears interest at an annual rate of eitherprime plus 0.5% or the London InterBank Offered Rate (“LIBOR”) rate plus 2.50%(payable 

 

8

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monthly).  Theexpiration date of the Line has been extended through May 31, 2005.  As of September 30, 2004, $11.5 millionwas available under the Line and there were no borrowings outstanding. TheCompany may use up to $5.0 million of the Line to issue letters of credit.As of September 30, 2004, approximately $386,000 was available for theissuance of letters of credit. The Line is secured by intellectual propertyrights, accounts receivable and certain other assets and is subject to certainborrowing base restrictions. The Line requires maintenance of certain financialcovenants pertaining to key financial ratios and the Company is in compliancewith those covenants as of September 30, 2004.

 

In October 2001, theCompany’s $3.0 million equipment line (the “Equipment Line”) with the samelending institution providing the Line was amended, reducing the maximum amountavailable for borrowing under the Equipment Line to $2.0 million. TheEquipment Line bears interest at an annual rate of prime plus 0.75%, or theLIBOR rate plus 2.75% (payable monthly) and expires on November 30, 2004.The rate at September 30, 2004 was 5.5%. The Company could draw againstthe Equipment Line through November 30, 2001. Interest is payable monthlyand principal is payable in 36 monthly installments commencing in December 2001.As of September 30, 2004, there was approximately $109,000 outstandingunder the Equipment Line. The Equipment Line is secured by certain assets ofthe Company.

 

In December 2002, theCompany’s credit facility was amended to include an equipment advance (the “EquipmentAdvance”) in the amount of $5.0 million from the same lending institution.Interest on the Equipment Advance is payable monthly and principal is payablein 24 equal monthly installments, beginning January 31, 2003. TheEquipment Advance bears interest at an annual rate of prime plus 0.75% or theLIBOR rate plus 3.0%. The rate at September 30, 2004 was 5.5%.  As of September 30, 2004, the balance outstandingunder this Equipment Advance was approximately $625,000.

 

Future principal payments onthe Equipment Line and the Equipment Advance will aggregate approximately $734,000in 2004.

 

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

 

In 2002, the Company recorded restructuring and impairment chargestotaling $6.6 million, consisting of $1.7 million for employeetermination benefits and related costs associated with headcount reductions,$2.7 million related to future rent obligations for properties abandonedin connection with facilities consolidation and $2.2 million related tothe write-down of leasehold improvements, furniture, computer equipment andsoftware and other assets in connection with facilities consolidation andheadcount reductions. The headcount reduction of 57 employees was made up of58% sales and marketing staff, 19% professional services staff, 14% researchand development staff and 9% general and administrative staff. Therestructuring and impairment charges recorded in 2002 were recorded under EITFNo. 94-3, “Liability Recognition for Certain Employee Termination Benefitsand Other Costs to Exit an Activity.” Under EITF No. 94-3, the accrual forfuture rent obligations was recorded when the commitment to abandon thefacilities was approved.

 

In 2003, the Company recorded restructuring and impairment chargestotaling $7.4 million, consisting of $1.9 million for employeetermination benefits and related costs associated with headcount reductions,$1.2 million related to future rent obligations for properties abandonedin connection with facilities consolidation and $4.3 million related tothe write-down of leasehold improvements, furniture, computer equipment andsoftware in connection with the facilities consolidation and headcountreductions. The 2003 headcount reduction of 56 employees was comprised of approximately48% sales and marketing staff, 41% professional services staff and 11% generaland administrative staff. The Company also recovered approximately $944,000 inrestructuring expenses that had previously been reserved for. The restructuringand impairment charges recorded during 2003 were recorded under SFASNo. 146, “Accounting for Costs Associated with Exit or DisposalActivities.” Under SFAS No. 146, the accrual for future rent obligationswere recorded when the facilities were abandoned.

 

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

 
| ** **                         | ** ** | **Facilities  Consolidation** | ** ** | **Termination  Benefits** | ** ** | **Total** | ** ** |
|------------------------------------|------------|-------------------------------|------------|---------------------------|------------|-----------|------------|
|                               |       |                          |       |                      |       |      |       |
| Balance at December 31, 2003  |       | $                             | 1,913      |                      | $          | 214       |       | $ | 2,127 |   |
| Cash utilized                      |       | (424                          | )          | (214                      | )          | (638      | )          |
| Balance at March 31, 2004     |       | 1,489                         |       | —                    |       | 1,489     |       |
| Cash utilized                      |       | (425                          | )          | —                    |       | (425      | )          |
| Balance at June 30, 2004      |       | 1,064                         |       | —                    |       | 1,064     |       |
| Cash utilized                      |       | (385                          | )          | —                    |       | (385      | )          |
| Balance at September 30, 2004 |       | $                             | 679        |                      | $          | —    |       | $ | 679 |   |

 

9

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Accruedfacilities consolidation costs represent future payment obligations onabandoned excess facilities, net of sublease income, and are expected to bepaid over the next thirteen months.

 

**Note 8.****                                 *****LegalProceedings***

 

Beginning on July 3, 2002, several purported class actionshareholder complaints were filed in the United States District Court for theCentral District of California against the Company and several of our officersand directors. The actions were subsequently consolidated and a consolidatedamended complaint was filed purportedly brought on behalf of purchasers ofcommon stock of SeeBeyond Technology Corporation between December 10, 2001and May 7, 2002.  The complaint generally alleged that defendantsmade false statements about SeeBeyond’s operating results and business, whileconcealing material information. The plaintiffs seek unspecified monetarydamages.   We have entered into anagreement, subject to court approval, to settle this litigation.  The total amount of the settlement is $13.1million which is to be paid by our insurers. The settlement provides for a complete dismissal of all claims againstSeeBeyond and the individual defendants.

 

Beginningon September 5, 2002, several derivative lawsuits were filed by purportedCompany shareholders in the Superior Court of California for the County of LosAngeles.  The complaints name certain of the Company’s present and formerofficers and directors as defendants and name the Company as a nominaldefendant. The complaints generally allege that the defendants breached theirfiduciary duties to the Company through the dissemination of allegedlymisleading and inaccurate information and other allegations.  The parties entered into a settlement of thislitigation, which has been approved by the court, involving the implementationof certain policies and procedures by the Company and the payment of attorneys’fees to plaintiffs’ counsel paid by our insurers.

 

The Company is also party to claims and suits brought against it in theordinary course of business. In the opinion of management, such claims shouldnot have any material adverse effect upon the results of operation, cash flowsor the financial position of the Company.

 

**Note 9.****                                 *****ComprehensiveIncome (Loss)***

 

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

 

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

 
| ** **                         | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                         | ** ** | **2004**                                   | ** ** | **2003**                                  | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net income (loss)                  |       | $                                          | 1,310      |                                      | $          | (4,849 | ) | $ | (3,604 | ) | $ | (28,257 | ) |
| Other comprehensive income (loss): |       |                                       |       |                                      |       |   |   |   |   |
| Foreign translation adjustment     |       | 54                                         |       | 437                                       |       | (11 | ) | 345 |   |
| Comprehensive income (loss)        |       | $                                          | 1,364      |                                      | $          | (4,412 | ) | $ | (3,615 | ) | $ | (27,912 | ) |

 

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

 

**Treasury Stock**

 

During the threemonths ended September 30, 2004, the Company repurchased 683,814 shares ofits common stock at an average price of $2.91 per share.  As of September 30, 2004, the Companyheld 2,553,152 shares of its common stock in treasury.

 

**Note 11.****                          *****RecentAccounting Pronouncements***

 

In October 2004, theFinancial Accounting Standards Board (“FASB”) concluded that the ProposedStatement of Financial Accounting Standards, *Share-BasedPayment*, which would require all companies to measure compensationcost for all share-based payments (including employee stock options) at fairvalue, would be effective for public companies for interim or annual periodsbeginning after June 15, 2005.  TheCompany is currently evaluating the effect the adoption of this proposed standardwill have on its financial position and results of operations.

 

10

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**Item 2 .****                               ****Management’s Discussion andAnalysis of Financial Condition and Results of Operatio****ns**

 

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

 

**GeneralOverview**

 

InOctober 2003, we announced the general availability of our new suite ofproducts, the SeeBeyond Integrated Composite Application Network version 5.0 (“ICAN5”).   ICAN 5 offers the integrationindustry’s first fully integrated platform for the development and deploymentof composite applications.  ICAN 5 helpsorganizations to rapidly assemble and deploy enterprise-scale end-usercomposite applications built on existing systems and infrastructure.

 

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

 

Totalrevenue for the three months and nine months ended September 30, 2004 was$41.7 million and $118.0 million, respectively, as compared to $32.4 millionand $97.0 million in the same periods of the prior year.  For the three months ending September 30,2004, respectively, total revenue was up 29% from the same period in the prioryear.

 

Licenserevenue for the three months ended September 30, 2004 was $17.9 million, a60% increase over the same period of the prior year.  For the three months ended September 30,2004, license revenues represented 43% of total revenue with services revenuesrepresenting 24% and maintenance revenues representing 33%.  International revenues represented 43% oftotal revenues for the three months ending September 30, 2004, with Europerevenues representing 38% and Asia Pacific revenues representing 5%.

 

We closed 75 customer license transactions for the three months ended September 30,2004, up from 66 customer license transactions for the three months ended June 30,2004.  For the three months ended September 30,2004 we closed customer license transactions in key verticals such as financialservices, healthcare, manufacturing and retail. The following customers represent new and repeat business during thequarter:  BMW Group, BNP Paribas, BordersGroup, Inc., Dun and Bradstreet, EDS, Emerson, Haworth, Hertz Corporation,Nestle, United Kingdom’s National Health Service (NHS), ORIX Australia, PegasusSolutions, Phoenix Wealth Management, Societe Generale, St. Paul Travelers,State of South Dakota, Sutter Health and US Oncology, Inc.  We are continuing to drive progress in keyareas such as North American sales execution, a renewed focus on strategicalliances development, customer adoption of ICAN 5, which debuted a year agoand composite application development with our existing customer base.

 

**CriticalAccounting Policies**

 

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

 

Our significant accountingpolicies are described in Note 1 to the annual consolidated financialstatements as of and for the year ended December 31, 2003 in Item 8:Financial Statements and Supplementary Data of our annual report on Form 10-Kfor the year ended December 31, 2003. We believe our most criticalaccounting policies include the following:

 

•                                          revenue recognition,

 

•                                          estimating allowance for doubtful accounts,

 

•                                          accounting for income taxes

 

*Revenuerecognition.* Werecognize revenue when an agreement has been signed by both parties or otherpersuasive evidence of an 

 

11

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arrangement exists, thesoftware has been shipped or electronically delivered, the fees are fixed ordeterminable, collection of the resulting receivable is probable, and no othersignificant obligations remain. For multiple element arrangements where vendorspecific objective evidence of fair value exists for all undelivered elements,we account for the delivered elements in accordance with the “residual method”prescribed by Statement of Position 98-9. Vendor-specific objective evidence offair value is based on the price a customer is required to pay when the elementis sold separately.

 

We assess whether the fee isfixed and determinable and collection is probable at the time of thetransaction. In assessing whether the fee is fixed and determinable, we analyzethe payment terms of the transaction and other factors, including the natureand class of customer, our historical experience of collecting under ourpayment terms without granting a concession, the possibility of the productbecoming technologically obsolete before the payments become due and thelikelihood of the customer asking for a refund. We do not offer a right ofreturn on our products.

 

If we determine the fee isnot fixed or determinable, we defer the revenue until the payments under thearrangement become due. We assess whether collection is probable based on anumber of factors, including the customer’s past transaction history and creditworthiness. If we determine that collection of a fee is not probable, we deferthe fee and recognize revenue at the time collection becomes probable, which isgenerally upon the receipt of cash.

 

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

 

Revenues on sales made byalliance partners are generally recognized upon shipment of the software to theend user, if all other revenue recognition criteria noted above are met. Underarrangements with distributors revenue is recognized upon delivery of theproduct to the distributor.

 

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

 

Significant managementjudgments and estimates must be made when applying our revenue recognitionpolicy.  In the event the application ofour revenue recognition policy is incorrect material differences in the amountand timing of revenue could result.

 

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

 

*Accountingfor income taxes.* Werecord a valuation allowance to reduce our deferred tax assets to the amountexpected to be realized. As of September 30, 2004, a valuation allowanceequal to the value of the net deferred tax assets was maintained.  In theevent we were to determine that we would be able to realize our deferred taxassets in the future in excess of its net recorded amount, an adjustment to thevaluation allowance would increase income in the period such determination wasmade.

 

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

 

12

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**Results ofOperations**

 

The following table setsforth our results of operations for the three months and nine months ended September 30,2004 and 2003, respectively, expressed as a percentage of total revenues:

 
| ** **                                    | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                    | ** ** | **2004**                                   | ** ** | **2003**                                  | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenues:                                     |       |                                       |       |                                      |       |   |   |   |   |
| License                                       |       | 43                                         | %          | 35                                        | %          | 41 | % | 33 | % |
| Services                                      |       | 24                                         |       | 29                                        |       | 25 |   | 31 |   |
| Maintenance                                   |       | 33                                         |       | 36                                        |       | 34 |   | 36 |   |
| Total revenues                                |       | 100                                        |       | 100                                       |       | 100 |   | 100 |   |
| Cost of revenues:                             |       |                                       |       |                                      |       |   |   |   |   |
| License                                       |       | 1                                          |       | 1                                         |       | 1 |   | 1 |   |
| Services and maintenance                      |       | 25                                         |       | 31                                        |       | 26 |   | 33 |   |
| Total cost of revenues                        |       | 26                                         |       | 32                                        |       | 27 |   | 34 |   |
| Gross profit                                  |       | 74                                         |       | 68                                        |       | 73 |   | 66 |   |
| Operating expenses:                           |       |                                       |       |                                      |       |   |   |   |   |
| Research and development                      |       | 23                                         |       | 31                                        |       | 25 |   | 32 |   |
| Sales and marketing                           |       | 35                                         |       | 39                                        |       | 39 |   | 42 |   |
| General and administrative                    |       | 12                                         |       | 12                                        |       | 12 |   | 14 |   |
| Restructuring and impairment charges          |       | —                                     |       | —                                    |       | — |   | 7 |   |
| Amortization of sales and marketing  warrants |       | —                                     |       | —                                    |       | — |   | — |   |
| Amortization of stock-based compensation      |       | —                                     |       | —                                    |       | — |   | — |   |
| Total operating expenses                      |       | 70                                         |       | 82                                        |       | 76 |   | 95 |   |
| Income (loss) from operations                 |       | 4                                          |       | (14                                       | )          | (3 | ) | (29 | ) |
| Interest and other income, net                |       | —                                     |       | —                                    |       | — |   | — |   |
| Interest expense                              |       | —                                     |       | —                                    |       | — |   | — |   |
| Income (loss) before income tax provision     |       | 4                                          |       | (14                                       | )          | (3 | ) | (29 | ) |
| Provision for income tax                      |       | —                                     |       | 1                                         |       | — |   | — |   |
| Net income (loss)                             |       | 4                                          | %          | (15                                       | )%         | (3 | )% | (29 | )% |

 

**Revenues**

 

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

 
| ** **     | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **     | ** ** | **2004**                                   | ** ** | **2003**                                  | ** ** | **Change** | ** ** | **2004** | ** ** | **2003** | ** ** | **Change** | ** ** |
| Total revenues |       | $                                          | 41,732     |                                      | $          | 32,356 |   | $ | 9,376 |   | 29 | % | $ | 118,038 |   | $ | 97,035 |   | $ | 21,003 |   | 22 | % |
|                |            |                                            |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Total revenues increased forthe three months and nine months ended September 30, 2004 as compared tothe same periods of the prior year primarily due to increases in license andmaintenance revenues.

 

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

 
| ** **       | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **       | ** ** | **2004**                                   | ** ** | **2003**                                  | ** ** | **Change** | ** ** | **2004** | ** ** | **2003** | ** ** | **Change** | ** ** |
| License revenues |       | $                                          | 17,944     |                                      | $          | 11,249 |   | $ | 6,695 |   | 60 | % | $ | 48,602 |   | $ | 31,376 |   | $ | 17,226 |   | 55 | % |
|                  |            |                                            |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

13

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Licenserevenues increased for the three months and nine months ended September 30,2004 as compared to the same periods in the prior year primarily due to anincrease in license revenue in Europe as a result of increased sales of ICAN 5which was made generally available in October 2003.

 

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

 

Revenues from services include consulting and implementation services,training and reimbursable out-of-pocket expenses. A majority of our customersuse third-party systems integrators to implement our products. Customers alsotypically purchase additional consulting services from us to support theirimplementation activities.  From time totime, we use third-party systems integrators in a sub-contractor capacity tosupplement our own internal services employees. Our consulting services aregenerally sold on a time and materials or fixed fee basis, and servicesrevenues are recognized as the services are performed. We also offer trainingservices, which are sold on a per student basis and for which revenues arerecognized as the classes are attended.

 
| ** **        | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **        | ** ** | **2004**                                   | ** ** | **2003**                                  | ** ** | **Change** | ** ** | **2004** | ** ** | **2003** | ** ** | **Change** | ** ** |
| Services revenues |       | $                                          | 10,090     |                                      | $          | 9,440 |   | $ | 650 |   | 7 | % | $ | 29,710 |   | $ | 30,495 |   | $ | (785 | ) | (3 | )% |
|                   |            |                                            |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Services revenues increasedfor the three months ended September 30, 2004 as compared to the sameperiod of the prior year primarily due to a higher demand for our consultingservices in EMEA (Europe, Middle East and Africa) due to higher licenserevenues in the preceding quarterly periods. Services revenues decreased slightly for the nine months ended September 30,2004 as compared to the same period of the prior year primarily due to adecrease in North American services revenues. This decrease primarily resulted from lower average rates earned for ourconsulting services due to increased competition from other service providersin the industry.

 

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

 

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

 
| ** **           | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **           | ** ** | **2004**                                   | ** ** | **2003**                                  | ** ** | **Change** | ** ** | **2004** | ** ** | **2003** | ** ** | **Change** | ** ** |
| Maintenance revenues |       | $                                          | 13,698     |                                      | $          | 11,667 |   | $ | 2,031 |   | 17 | % | $ | 39,726 |   | $ | 35,164 |   | $ | 4,562 |   | 13 | % |
|                      |            |                                            |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Maintenance revenues for thethree months and nine months ended September 30, 2004 increased ascompared to the same periods of the prior year primarily due to renewals ofprior period maintenance contracts associated with the increase in ourcumulative license revenues.

 

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

 

Costof revenues consists primarily of compensation and related overhead costs forpersonnel and sub-contractors engaged in implementation services, maintenancesupport activities, training and out-of-pocket expenses as well as royaltiesfor third-party products embedded or bundled with our products. Such costsinclude salaries, employee benefits, incentive compensation, bonuses, travel,rent and allocated facilities and professional fees.

 
| ** **             | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **             | ** ** | **2004**                                   | ** ** | **2003**                                  | ** ** | **Change** | ** ** | **2004** | ** ** | **2003** | ** ** | **Change** | ** ** |
| Total cost of revenues |       | $                                          | 10,976     |                                      | $          | 10,340 |   | $ | 636 |   | 6 | % | $ | 32,428 |   | $ | 33,281 |   | $ | (853 | ) | (3 | )% |
|                        |            |                                            |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Total cost of revenues forthe three months ended September 30, 2004 increased slightly as comparedto the same period of the prior year with no significant year over year changesin any particular cost of revenue line item. Total cost of revenues decreased slightly for the nine months ended September 30,2004 as compared to the same period of the prior year primarily due to adecrease in professional services related headcount as part of cost-cuttingexercises that were performed during the third and fourth quarters of 2003, aswell as the use of sub-contractors to supplement our own consultants.

 

14

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**Operatingexpenses**

 

***Research anddevelopment expenses*******(in thousands except percentages):

 

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

 
| ** **                        | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                        | ** ** | **2004**                                   | ** ** | **2003**                                  | ** ** | **Change** | ** ** | **2004** | ** ** | **2003** | ** ** | **Change** | ** ** |
| Research and development expenses |       | $                                          | 9,657      |                                      | $          | 10,142 |   | $ | (485 | ) | (5 | )% | $ | 29,033 |   | $ | 31,218 |   | $ | (2,185 | ) | (7 | )% |
|                                   |            |                                            |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Research and developmentexpenses decreased for the three months and nine months ended September 30,2004 as compared to the same periods of the prior year primarily due to aslight decrease in development expenses during the post-release developmentperiod of ICAN 5.  We anticipate researchand development expenses to increase slightly in absolute dollars for theforeseeable future.

 

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

 

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

 
| ** **                   | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                   | ** ** | **2004**                                   | ** ** | **2003**                                  | ** ** | **Change** | ** ** | **2004** | ** ** | **2003** | ** ** | **Change** | ** ** |
| Sales and marketing expenses |       | $                                          | 14,623     |                                      | $          | 12,443 |   | $ | 2,180 |   | 18 | % | $ | 45,693 |   | $ | 40,883 |   | $ | 4,810 |   | 12 | % |
|                              |            |                                            |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Sales andmarketing expenses increased for the three months and nine months ended September 30,2004 as compared to the same periods of the prior year primarily due to anincrease in sales commissions as a result of increases in license revenues,promotional and public relations activities related to the marketing of ICAN 5,and an increase in sales headcount.  Weanticipate sales and marketing expenses to increase slightly in absolutedollars for the foreseeable future.

 

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

 

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

 
| ** **                          | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                          | ** ** | **2004**                                   | ** ** | **2003**                                  | ** ** | **Change** | ** ** | **2004** | ** ** | **2003** | ** ** | **Change** | ** ** |
| General and administrative expenses |       | $                                          | 4,869      |                                      | $          | 3,846 |   | $ | 1,023 |   | 27 | % | $ | 13,727 |   | $ | 13,071 |   | $ | 656 |   | 5 | % |
|                                     |            |                                            |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

General andadministrative expenses for the three months and nine months ended September 30,2004 increased as compared to the same periods of the prior year primarily dueto consulting and related expenses incurred on compliance and review projectsrelated to the requirements imposed by the Sarbanes-Oxley Act of 2002.  There was no other significant period overperiod changes in any particular general and administrative expense item.  We anticipate general and administrativeexpenses to increase slightly in absolute dollars for the foreseeable future.

 

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

 

Interestand other income, net consists of interest earned on cash balances, foreigncurrency gains and losses, gains and losses on the disposal of fixed assets andother miscellaneous income and expense items.

 
| ** **                     | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                     | ** ** | **2004**                                   | ** ** | **2003**                                  | ** ** | **Change** | ** ** | **2004** | ** ** | **2003** | ** ** | **Change** | ** ** |
| Interest and other income, net |       | $                                          | 187        |                                      | $          | 123 |   | $ | 64 |   | 52 | % | $ | 117 |   | $ | 741 |   | $ | (624 | ) | (84 | )% |
|                                |            |                                            |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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Interestand other income, net for the three months ended September 30, 2004 increasedas compared to the same period of the prior year primarily due to decreases inforeign exchange losses in several of our international subsidiaries.  Interest and other income, net for the ninemonths ended September 30, 2004 decreased as compared to the same periodof the prior year primarily due to increases in foreign exchange losses inseveral of our international subsidiaries.

 

***Interest expense***(in thousands except percentages):

 
| ** **       | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **       | ** ** | **2004**                                   | ** ** | **2003**                                  | ** ** | **Change** | ** ** | **2004** | ** ** | **2003** | ** ** | **Change** | ** ** |
| Interest expense |       | $                                          | (68)       |                                      | $          | (112 | ) | $ | 44 |   | (39 | )% | $ | (201 | ) | $ | (367 | ) | $ | 166 |   | (45 | )% |
|                  |            |                                            |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Interestexpense for the three months and nine months ended September 30, 2004decreased as compared to the same period of the prior year primarily due to thelower equipment line and equipment advance balances.

 

**Liquidityand capital resources**

 

As of September 30,2004, we had cash and cash equivalents of $68.1 million, a decrease of $2.0 millionfrom $70.1 million held as of December 31, 2003.

 

*Operating activities:*

 
| ** **                                           | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                           | ** ** | **2004**                                  | ** ** | **2003** | ** ** | **Change** | ** ** |
| Net cash provided by (used in) operating  activities |       | $                                         | 1,067      |   | $ | (17,558 | ) | $ | 18,625 |   | (106 | )% |
|                                                      |            |                                           |            |  |  |  |  |  |  |  |  |  |

 

Net cash provided byoperating activities for the nine months ended September 30, 2004 was $1.1million, as compared to cash used in operating activities of $17.6 million for thesame period of the prior year.  The cashprovided by operating activities in the 2004 period was principally related tochanges in operating assets and liabilities; whereas the cash used in operatingactivities in the comparable period in 2003 was comprised of the $28.3 millionnet loss which was partially offset by $9.1 million of non-cash charges(principally depreciation and amortization of $4.4 million and restructuringand impairment charges of $4.3 million) and $1.6 million related to changes in operatingassets and liabilities.

 

*Investing activities:*

 
| ** **                            | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------|------------|-------------------------------------------|------------|
| ** **                            | ** ** | **2004**                                  | ** ** | **2003** | ** ** | **Change** | ** ** |
| Net cash used in investing activities |       | $                                         | (1,068     | ) | $ | (5,710 | ) | $ | 4,642 |   | (81 | )% |
|                                       |            |                                           |            |  |  |  |  |  |  |  |  |  |

 

Net cash used in investingactivities for the nine months ended September 30, 2004 decreased ascompared to the same period of the prior year primarily due to a decrease incapital expenditures. We expect capital expenditures in the next three monthsto remain flat compared to the previous three months.

 

*Financing activities:*

 
| ** **                            | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------|------------|-------------------------------------------|------------|
| ** **                            | ** ** | **2004**                                  | ** ** | **2003** | ** ** | **Change** | ** ** |
| Net cash used in financing activities |       | $                                         | (2,017     | ) | $ | (1,461 | ) | $ | (556 | ) | 38 | % |
|                                       |            |                                           |            |  |  |  |  |  |  |  |  |  |

 

Net cash used in financingactivities for the nine months ended September 30, 2004 increased ascompared to the same period of the prior year primarily due to an increase in treasurystock purchases, partially offset by an increase in proceeds from stock options

 

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exercises.

 

In November 2000, theCompany established a $15.0 million line of credit facility (the “Line”)with a lending institution that bears interest at an annual rate of eitherprime plus 0.5% or the London InterBank Offered Rate (“LIBOR”) rate plus 2.50%(payable monthly).  The expiration date of the Line has been extendedthrough May 31, 2005.  As of September 30,2004, $11.5 million was available under the Line and there were noborrowings outstanding. The Company may use up to $5.0 million of the Lineto issue letters of credit. As of September 30, 2004, approximately$386,000 was available for the issuance of letters of credit. The Line issecured by intellectual property rights, accounts receivable and certain otherassets and is subject to certain borrowing base restrictions. The Line requiresmaintenance of certain financial covenants pertaining to key financial ratiosand the Company is in compliance with those covenants as of September 30,2004.

 

In October 2001, theCompany’s $3.0 million equipment line (the “Equipment Line”) with the samelending institution providing the Line was amended, reducing the maximum amountavailable for borrowing under the Equipment Line to $2.0 million. TheEquipment Line bears interest at an annual rate of prime plus 0.75%, or theLIBOR rate plus 2.75% (payable monthly) and expires on November 30, 2004.The rate at September 30, 2004 was 5.5%. The Company could draw againstthe Equipment Line through November 30, 2001. Interest is payable monthlyand principal is payable in 36 monthly installments commencing in December 2001.As of September 30, 2004, there was approximately $109,000 outstandingunder the Equipment Line. The Equipment Line is secured by certain assets ofthe Company.

 

In December 2002, theCompany’s credit facility was amended to include an equipment advance (the “EquipmentAdvance”) in the amount of $5.0 million from the same lending institution.Interest on the Equipment Advance is payable monthly and principal is payablein 24 equal monthly installments, beginning January 31, 2003. The EquipmentAdvance bears interest at an annual rate of prime plus 0.75% or the LIBOR rateplus 3.0%. The rate at September 30, 2004 was 5.5%.  As of September 30, 2004, the balanceoutstanding under this Equipment Advance was approximately $625,000.

 

Future principal payments onthe Equipment Line and the Equipment Advance will aggregate approximately $734,000in 2004.

 

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

 

**Risks Related to SeeBeyond**

 

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

 

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

 

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

 

We rely significantly upon customers making large informationtechnology purchasing decisions as a source of revenue. The general slow-downin capital spending by our customers that we experienced in recent years, ifsustained again in future periods, could result in reduced sales or thepostponement of sales to our customers. There can be no assurance the level ofspending on information technology in general or on business integrationsoftware by our customers and potential customers in particular, will increaseor remain at current levels in future periods. Lower spending on informationtechnology could result in reduced license sales to our customers, reducedoverall revenues, diminished margin levels, and could impair our operatingresults in future periods.

 

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

 

We have incurred substantial losses since 1998 as we increased fundingof the development of our products and technologies and expanded our sales andmarketing organization. As of September 30, 2004, we had an accumulateddeficit of approximately $157.5 million. We may continue to incur lossesin future periods and we may not maintain profitability on a quarterly basis,or achieve and sustain profitability on an annual basis.

 

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

 

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

 

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

 

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

 

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

 

Our products are often used by our customers throughout theirorganizations to address critical business problems. Customers generallyconsider a wide range of issues before committing to purchase our products,including product benefits, the ability to operate with existing and futurecomputer systems, the ability to accommodate increased transaction volumes andproduct reliability. Many customers are addressing these issues for the firsttime when they consider whether to buy our products and services. As a result,we or other parties, including systems integrators, must educate potentialcustomers on the use and benefits of our products and services. In addition,the purchase of our products generally involves a significant commitment ofcapital and other resources by a customer. This commitment often requiressignificant technical review, assessment of competitive products and approvalat a number of management levels within a customer’s organization. Our salescycle may vary based on the industry in which the potential customer operatesand is difficult to predict for any particular license transaction. The lengthand variability of our sales cycle makes it difficult to predict whetherparticular sales will be concluded in any given quarter. If one or more of ourlicense transactions are not consummated in a given quarter, our results ofoperations for that quarter may be below our expectations and the expectationsof analysts and investors.

 

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

 

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

 

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

 

18

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

 

***The loss of anysignificant customer could harm our business and cause our stock price todecline.***

 

Wedo not have long-term sales contracts with any of our customers. There can beno assurance that any of our customers will continue to purchase our productsin the future. As a result, a customer that generates substantial revenue forus in one period may not be a source of revenue in subsequent periods.  The loss of any significant customer couldcause our revenues to decline, harm our business and cause our stock price todecline.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Revenues from the sale of products and services outside the UnitedStates accounted for 43% for the three months ended September 30, 2004 and2003 and 48% and 40% for the nine months ended September 30, 2004 and2003, respectively.  Revenues from thesale of products and services in the United Kingdom as a percent of our totalrevenues were 21% and 10% for the three months ended September 30, 2004and 2003, respectively, and 27% and 13% for the nine months ended September 30,2004 and 2003, respectively. We believe revenues from sales outside the UnitedStates will continue to account for a material portion of our total revenuesfor the foreseeable future. We are exposed to several risks inherent inconducting business internationally, such as:

 

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

 

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

 

•                                          difficultiesand costs of staffing and managing international operations;

 

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

 

•                                          reducedprotection for intellectual property rights in some countries.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Our industry is characterized by very rapid technological change,frequent new product introductions and enhancements, changes in customerdemands and evolving industry standards. We have also found the technologicallife cycles of our products are difficult to estimate. We believe we mustcontinue to enhance our current products and concurrently develop and introducenew products that anticipate emerging technology standards and keep pace withcompetitive and technological developments. Failure to do 

 

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so will harm our ability to compete. As a result, we are required tocontinue to make substantial product development investments.

 

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

 

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

 

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

 

From time to time, we have been subject to litigation. Several putativesecurities class action lawsuits are currently pending against us, ourdirectors and officers. The plaintiffs in these suits allege we and the otherdefendants made false statements about our operating results and business,while concealing material information. We have reached an agreement, subject tocourt approval, to settle these suits. There is no assurance that the court will approve the settlement.  Should the court not approve the settlement,the ultimate outcome of the litigation could harm our business, financialcondition and reputation or cause our stock price to decline. In addition tothe related cost and use of cash, pending or future litigation could cause thediversion of management’s attention and resources. Although we have begun toaccrue amounts relating to legal costs and expenses, we have not accrued anyamounts relating to potential damages associated with the putative class actionlawsuits. However, because of uncertainties relating to litigation, ourdecision as to whether to accrue and the amount of our estimates could bewrong.

 

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

 

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

 

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

 

Third parties may claim we have infringed their current or futureintellectual property rights. We expect software developers in our market willincreasingly be subject to infringement claims as the number of products indifferent software industry segments overlap. Any claims, with or withoutmerit, could be time-consuming, result in costly litigation, prevent product shipmentor cause delays, or require us to enter into royalty or licensing agreements,any of which could harm our business. Patent litigation in particular hascomplex technical issues and inherent uncertainties. In the event aninfringement claim against us is successful and we cannot obtain a license onacceptable terms, license a substitute technology or redesign our products toavoid infringement, our business would be harmed. Furthermore, former employersof our current and future employees may assert our employees have improperlydisclosed to us or are using their confidential or proprietary information.

 

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

 

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

 

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•                                          developor enhance our products and services;

 

•                                          maintainor expand our sales and marketing organizations;

 

•                                          acquirecomplementary technologies, products or businesses;

 

•                                          expandoperations, in the United States or internationally;

 

•                                          hire,train and retain employees; or

 

•                                          respondto competitive pressures or unanticipated working capital requirements.

 

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

 

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

 

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

 

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

 

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

 

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

 

•                                          effectivelymanage our direct sales force;

 

•                                          effectivelymanage our professional services organization;

 

•                                          hireand retain qualified software engineers;

 

•                                          improveour operational, financial and management controls;

 

•                                          improveour reporting systems and procedures;

 

•                                          enhanceour management and information control systems; and

 

•                                          effectivelymanage, train and motivate our workforce.

 

In addition, if we acquire or invest in other companies, we mayexperience further strain on our resources and face risks

 

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inherent in integrating two corporate cultures, product lines,operations and businesses.

 

***Failure to comply with all of the requirements imposed by Section 404of the Sarbanes-Oxley Act of 2002 could severely harm our credibility and leadto a reduction in our stock price.***

 

As required bySection 404 of the Sarbanes-Oxley Act of 2002, the Securities and ExchangeCommission adopted rules requiring public companies to include a report ofmanagement on our internal control over financial reporting in our annualreports on Form 10-K beginning with the annual report we file in 2005.  This report is required to contain anassessment by management of the effectiveness of our internal controls overfinancial reporting.  In addition, thepublic accounting firm auditing a public company’s financial statements mustattest to and report on management’s assessment of the effectiveness of ourinternal controls over financial reporting. While we are expending significantresources in developing the necessary documentation and testing proceduresrequired by Section 404, there is a significant risk that we will not beable to fully comply with all of the requirements imposed by Section 404.  Further, if we fail to implement required newor improved controls, we may be unable to comply with the requirements of Section 404in a timely manner.  This could result inan adverse reaction in the financial markets due to a loss of confidence in thereliability of our financial statements and could cause the market price of ourcommon stock to decline.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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**Item 3 .****                               ****Quantitative and QualitativeDisclosure About Market Risk**

 

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

 

*Interestrate risk.* Wemaintain our funds in money market and certificate of deposit accounts atfinancial institutions. Our exposure to market risk due to fluctuations ininterest rates relates primarily to our interest earnings on our cash deposits.These securities are subject to interest rate risk in as much as their fairvalue may fall if market interest rates increase. If market interest rates wereto increase immediately and uniformly by 10% from the levels prevailing as of September 30,2004, the fair value of the portfolio would not decline by a material amount.We do not use derivative financial instruments to mitigate risks. However, wedo have an investment policy that would allow us to invest in short-term andlong-term investments such as money market instruments and corporate debtsecurities. Our policy attempts to reduce such risks by typically limiting thematurity date of such securities, placing  our investments with high credit qualityissuers and limiting the amount of credit exposure with any one issuer.

 

*Foreigncurrency exchange rate risk.* Our exposure to market risk due to fluctuations in foreigncurrency exchange rates relates primarily to the intercompany balances with oursubsidiaries located in Australia, Belgium, France, Germany, India, Italy,Japan, Korea, The Netherlands, New Zealand, Singapore, Spain, Sweden,Switzerland and the United Kingdom. Transaction gains or losses have not beensignificant in the past and we do not participate in any hedging activity onforeign currencies. We would not experience a material foreign exchange lossbased on a hypothetical 10% adverse change in the price of any of the localcurrencies of these countries. Consequently, we do not expect that a reductionin the value of such accounts denominated in foreign currencies resulting froma sudden or significant fluctuation in foreign exchange rates would have adirect material impact on our financial position, results of operations or cashflows.

 

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

 

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

 

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**PART II —OTHER INFORMATION**

 

**Item 1.****                                  ****Legal Proceedings**

 

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

 

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

 

**Item 2.****                                  ****Changes in Securities andUse of Proceeds**

 
| **(a)** | Not  applicable                                                         |
|---------|-------------------------------------------------------------------------|
| **(b)** | Not  applicable                                                         |
| **(c)** | Purchases  of Equity Securities by the Issuer and Affiliated Purchasers |

 

Issuer Purchases of Equity Securities

 
| **Period**     | ** ** | **(a) Total  Number of  Shares  Purchased** | ** ** | **(b) Average  Price Paid per  Share** | ** ** | **(c) Total Number of Shares  Purchased as Part of  Publicly Announced Plan** | ** ** | **(d) Maximum Dollar  Amount of Shares that May  Yet Be Purchased Under the  Plan** | ** ** |
|----------------|------------|---------------------------------------------|------------|----------------------------------------|------------|-------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|
| 7/1/04-7/31/04 |       | 70,100                                      |       | $                                      | 2.97       |                                                                          | 217,436    |                                                                                | $          | 7,905,803 |   |
| 8/1/04-8/31/04 |       | 509,714                                     |       | $                                      | 2.89       |                                                                          | 727,150    |                                                                                | $          | 6,432,730 |   |
| 9/1/04-9/30/04 |       | 104,000                                     |       | $                                      | 2.87       |                                                                          | 831,150    |                                                                                | $          | 6,134,250 |   |
| Total          |       | 683,814                                     |       | $                                      | 2.91       |                                                                          | 831,150    |                                                                                | $          | 6,134,250 |   |

 

The repurchase plan was announced on February 25, 2003 torepurchase up to $10,000,000 worth of shares and will terminate on February 24,2005.

 

**Item 3.****                                   DefaultsUpon Senior Securities**

 

Not applicable

 

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

 

None

 

**Item 5.****                                   OtherInformation**

 

None

 

**Item 6.****                                  ****Exhibits**

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                            |
|-----------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1(f)          |       | Restated  Certificate of Incorporation of the Registrant                                                                                                                   |
| 3.2(f)          |       | Bylaws  of the Registrant                                                                                                                                                  |
| 4.1(a)          |       | Specimen  common stock certificates                                                                                                                                        |
| 10.1(f)         |       | Form  of Indemnification Agreement between the Registrant and each of its directors  and officers                                                                          |
| 10.2(n)(c)      |       | Amended  and Restated 1998 Stock Plan                                                                                                                                      |
| 10.3(a)(c)      |       | 2000  Employee Stock Purchase Plan and form of agreements there under                                                                                                      |
| 10.5(a)         |       | Registration  Rights Agreement dated May 8, 1998, as amended                                                                                                               |
| 10.6(a)         |       | Lease  Agreement dated June 6, 1997 between the Registrant and  Boone/Fetter/Occidental I for premises in Monrovia, California                                        |
| 10.7(a)         |       | Lease  Agreement dated June 10, 1999 between the Registrant and Franklin Select  Realty Trust for premises in Redwood Shores, California                              |
| 10.8(a)         |       | Lease  Agreement dated December 30, 1991 between the Registrant and the  Demetriades Family Trust (dated December 20, 1983) for premises in  Arcadia, California |
| 10.9(b)         |       | Lease  Agreement between The Employees Retirement System of The State of Hawaii and  the Registrant dated July 21, 2000 for premises in Monrovia, California          |
| 10.10(b)        |       | Lease  Agreement between Grant Regent, LLC and the Registrant dated August 2,  2000 for premises in New York,                                                         |

 

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|        |   | New  York                                                                                                                                                                                                                                              |
|-------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.11(e)    |   | Lease  Agreement dated October 9, 2000 between S & F Huntington Millennium  LLC and the Registrant for premises in Monrovia, California                                                                                                       |
| 10.12(e)    |   | Loan  and Security Agreement, dated December 4, 2000, between the Registrant  and Comerica Bank-California                                                                                                                                        |
| 10.13(d)    |   | Warrant  Purchase Agreement and Warrant dated March 16, 2001 issued to General  Motors Corporation                                                                                                                                                |
| 10.14(f)    |   | Amendment  to the Loan and Security Agreement dated as of June 25, 2001, between  the Registrant and Comerica Bank-California                                                                                                                     |
| 10.15(f)    |   | Second  amendment to the Loan and Security Agreement dated October 31, 2001,  between the Registrant and Comerica Bank-California                                                                                                                 |
| 10.16(f)    |   | Lease  Agreement dated as of February 24, 2001 between MWB Business Exchange  Limited and the Registrant for premises in Berkshire, United Kingdom                                                                                                |
| 10.17(f)    |   | Lease  Agreement as of July 1, 2001 between Trust Company of Australia Limited  and the Registrant for premises in Melbourne, Australia                                                                                                           |
| 10.18(g)    |   | Lease  Agreement between Monrovia Technology Campus LLC and the Registrant dated November 28,  2000 for premises in Monrovia, California                                                                                                          |
| 10.19(g)    |   | Sublease  Agreement between the Registrant (Tenant) and The Employees Retirement System  of The State Of Hawaii (Landlord) and Loopnet (Subtenant) dated April 23,  2002 for premises in Monrovia, California                                     |
| 10.20(g)    |   | Third  Amendment to the Loan and Security Agreement dated as of June 30, 2002  between the Registrant and Comerica Bank-California                                                                                                                |
| 10.21(h)    |   | Sublease  Agreement between the Registrant (Sublessor) and Fidelity National  Information Services (Sublessee) and The Employees Retirement System of the  State of Hawaii (Lessor) dated December 17, 2002 for premises in  Monrovia, California |
| 10.22(h)    |   | First  Amendment to the Lease Agreement between Monrovia Technology Campus LLC and  the Registrant dated January 23, 2002                                                                                                                         |
| 10.23(h)    |   | Second  Amendment to the Lease Agreement between Foothill Technology Center LLC,  (Boone/Fetter/Occidental I) and the Registrant dated October 25, 2002                                                                                           |
| 10.24(h)    |   | Fourth  Amendment to the Loan and Security Agreement dated December 24, 2002  between the Registrant and Comerica Bank-California                                                                                                                 |
| 10.25(c)(h) |   | Change  of Control Letter Agreement between Alex Demetriades and the Registrant dated  March 19, 2001                                                                                                                                             |
| 10.26(c)(k) |   | Form  of Change of Control Letter Agreement between the Registrant and certain of  its executive officers.                                                                                                                                             |
| 10.27(c)(l) |   | Employment  Letter Agreement between the Registrant and H. Carvel Moore dated July 21,  2003.                                                                                                                                                     |
| 10.28(l)    |   | Fifth  Amendment to the Loan and Security Agreement dated December 24, 2002  between the Registrant and Comerica Bank-California dated March 26, 2003                                                                                        |
| 10.29(l)    |   | Sixth  Amendment to the Loan and Security Agreement dated December 24, 2002  between the Registrant and Comerica Bank-California dated May 30, 2003                                                                                               |
| 10.30(c)(m) |   | Employment  Letter Agreement between the Registrant and Thor Culverhouse dated September 8,  2003.                                                                                                                                                |
| 10.31(o)    |   | Lease  Agreement between Mr. T. Devendar Reddy and STC Systems Private Limited dated  April 22, 2004 for premises in Hyderabad, India                                                                                                             |
| 10.32(o)    |   | Equipment  Lease Agreement between Mrs. T. Jhansi Reddy and STC Systems Private Limited  dated April 22, 2004 for equipment at leased premises in Hyderabad,  India                                                                               |
| 10.33(o)    |   | Seventh  Amendment to the Loan and Security Agreement dated December 24, 2002  between the Registrant and Comerica Bank-California dated July 29, 2004                                                                                       |
| 31.1        |   | Certification  of Chief Executive Officer and Chief Financial Officer pursuant to Section 302  of the Sarbanes-Oxley Act.                                                                                                                         |
| 32.1        |   | Certification  of Chief Executive Officer and Chief Financial Officer pursuant to Section 906  of the Sarbanes-Oxley Act.                                                                                                                         |

 

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| (a) |   | Incorporated  by reference to an exhibit in the Registrant’s Registration Statement on Form  S-1 File No. 333-330648.                            |
|-----|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------|
| (b) |   | Incorporated  by reference to an exhibit in the Registrant’s Quarterly Report on Form 10-Q  filed with the Commission on November 14, 2000. |
| (c) |   | Denotes  a management contract or compensatory plan arrangement.                                                                                      |
| (d) |   | Incorporated  by reference to an exhibit in the Registrant’s Quarterly Report on Form 10-Q  filed with the Commission on May 15, 2001.           |
| (e) |   | Incorporated  by reference to an exhibit in the Registrant’s Annual Report on Form 10-K  filed with the Commission on March 30, 2001.       |
| (f) |   | Incorporated  by reference to an exhibit in the Registrant’s Annual Report on Form 10-K  filed with the Commission on February 8, 2002.     |
| (g) |   | Incorporated  by reference to an exhibit in the Registrant’s Quarterly Report on Form 10-Q  filed with the Commission on August 14, 2002.   |

 

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| (h) |   | Incorporated  by reference to an exhibit in the Registrant’s Annual Report on  Form 10-K filed with the Commission on March 28, 2003.     |
|-----|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------|
| (k) |   | Incorporated  by reference to an exhibit in the Registrant’s Annual Report on Form 10-K/A  filed with the Commission on May 30, 2003.               |
| (l) |   | Incorporated  by reference to an exhibit in the Registrant’s Quarterly Report on Form 10-Q  filed with the Commission on August 14, 2003.      |
| (m) |   | Incorporated  by reference to an exhibit in the Registrant’s Quarterly Report on Form 10-Q  filed with the Commission on November 14, 2003.    |
| (n) |   | Incorporated  by reference to an exhibit in the Registrant’s Proxy Statement on Schedule 14A  filed with the Commission on April 29, 2004 |
| (o) |   | Incorporated  by reference to an exhibit in the Registrant’s Quarterly Report on Form 10-Q  filed with the Commission on August 9, 2004.       |

 

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**Signature**

 

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

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

 

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