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

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FORM 10-K

|ý                                           | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|------------------------------------------- | ----------------------------------------------------------------------------------------
|For the fiscal year ended December 31, 2003
|or                                         
|o                                           | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 000-30207

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

|Delaware(State or other jurisdiction of incorporation or organization)                                         |  | 95-4249153(IRS Employer Identification No.)
|-------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------
|800 E. Royal Oaks Drive
Monrovia, California 91016(Address, including zip code, of Principal Executive Office)
|(626) 471-6000                                                                                                

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K ý

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

As of March 9, 2004 there were 84,402,757 shares of the Registrant's Common Stock outstanding. The aggregate market value of the Registrant's common stock
held by non-affiliates of the Registrant (based upon the closing sale price of such shares on the NASDAQ National Market as of June 30, 2003) was approximately 91,361,972 Shares of
common stock held by each executive officer and director and by each entity that owns 5% or more of the outstanding common stock have been excluded as such persons may be deemed to be affiliates. This
determination of affiliates status is not necessarily a conclusive determination for other purposes.

DOCUMENT INCORPORATED BY REFERENCE

Certain sections of the Registrant's definitive Proxy Statement for the 2004 Annual Meeting of Stockholders to be held on June 3, 2004 are incorporated by
reference in Part III of this Form 10-K to the extent stated herein.



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SEEBEYOND TECHNOLOGY CORPORATION
For the Fiscal Year Ended December 31, 2003

Table of Contents

|         |         |                                               |                                                                                       | Page
No.
|-------- | ------- | --------------------------------------------- | ------------------------------------------------------------------------------------- | --------
|Part I   |         |                                              
|         | Item 1  |                                               | Business                                                                              |         
|         | Item 2  |                                               | Properties                                                                            |         
|         | Item 3  |                                               | Legal Proceedings                                                                     |         
|         | Item 4  |                                               | Submission of Matters to a Vote of Security Holders                                   |         
|Part II  |         |                                               |                                                                                       |         
|         | Item 5  |                                               | Market for the Company's Common Stock and Related Stockholder Matters                 |         
|         | Item 6  |                                               | Selected Consolidated Financial Data                                                  |         
|         | Item 7  |                                               | Management's Discussion and Analysis of Financial Condition and Results of Operations |         
|         | Item 7A |                                               | Quantitative and Qualitative Disclosure about Market Risk                             |         
|         | Item 8  |                                               | Financial Statements and Supplementary Data                                           |         
|         | Item 9  |                                               | Changes in and Disagreements with Accountants on Accounting Financial Disclosure      |         
|         | Item 9A |                                               | Controls and Procedures                                                               |         
|Part III |         |                                               |                                                                                       |         
|         | Item 10 |                                               | Directors and Executive Officers of the Registrant                                    |         
|         | Item 11 |                                               | Executive Compensation of the Registrant                                              |         
|         | Item 12 |                                               | Security Ownership of Certain Beneficial Owners and Management                        |         
|         | Item 13 |                                               | Certain Relationships and Related Transactions                                        |         
|         | Item 14 |                                               | Principal Accounting Fees and Services                                                |         
|Part IV  |         |                                               |                                                                                       |         
|         | Item 15 |                                               | Exhibits, Financial Statement Schedule and Reports on Form 8-K                        |         
|         |         | SIGNATURES                                    |                                                                                       | 62      
|         |         | SCHEDULE IIValuation and Qualifying Accounts |                                                                                       | 63      
|         |         | CERTIFICATION OF CHIEF EXECUTIVE OFFICER      |                                                                                       |         
|         |         | CERTIFICATION OF CHIEF FINANCIAL OFFICER      |                                                                                       |         

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FORWARD LOOKING STATEMENTS

This report on Form 10-K contains forward-looking statements. These statements relate to future events or our future financial performance. In
some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expect," "plan," "intend," "anticipate," "believe," "estimate," "predict," "potential" or
"continue," the negative of these terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially. In evaluating these statements, you
should specifically consider various factors, including the risks outlined in the Risk Factors section below. These factors may cause our actual results to differ materially from any forward-looking
statement.

Although
we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.
Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. We are under no duty to update any of the forward-looking
statements after the date of this report to conform these statements to actual results or to changes in our expectations.

Trademarks

SeeBeyond, the SeeBeyond logo, SeeBeyond Technology Corporation, e*Gate, e*Way, AppSolut, DataDental, STC, PROVEN RETURN ON INTEGRATION, DataLoad, STC and Design,
DataGate, SeeBeyond E*Xchange, and E*Xchange are registered trademarks of SeeBeyond Technology Corporation in the United States and/or select foreign countries; and eInsight, eXchange, SeeBeyond
eIndex Global Identifier, SeeBeyond eVision Studio, SeeBeyond eView Studio, SeeBeyond eBAM Studio, SeeBeyond ePortal Composer, SeeBeyond eGate Integrator, SeeBeyond eWay Intelligent Adapters,
SeeBeyond eTL Integrator, SeeBeyond eInsight Orchestrator, SeeBeyond eXchange Integrator, and SeeBeyond eXpressway Integrator, SeeBeyond Integrated Composite Application Network (ICAN) are all
trademarks of SeeBeyond Technology Corporation. The absence of a trademark from this list does not constitute a waiver of SeeBeyond Technology Corporation's intellectual property rights concerning
that trademark. This document may contain references to other companies, brand and product names. These companies, brand and product names are used herein for identification purposes only and may be
the trademarks of their respective owners.

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PART I

Item 1: Business

Overview

SeeBeyond Technology Corporation (the "Company" or "SeeBeyond") is a leading provider of business integration software that enables the real-time flow
of information within the enterprise and among customers, suppliers and partners. We believe we offer the only comprehensive business integration solution in our industry, architected from a single,
internally developed software code base, encompassing application-to-application integration, business-to-business integration, business process
management along with integrated human work flow, portal, ETL and business activity monitoring capabilities. The SeeBeyond® Integrated Composite Application Network ("ICAN") Suite 5.0
builds upon more than thirteen years of continuous development of business integration solutions within and among enterprises. As of December 31, 2003, we had licensed our products to over
1,880 customers worldwide.

Today's
business and economic environment presents organizations with a wide range of challenges. Competitive pressures, macroeconomic volatility, corporate mergers and acquisitions, the
ubiquity of the Internet, shortened development and production cycles, shifting supplier relationships and diverse customer demands are forcing organizations to adapt in numerous ways to lower costs
and increase revenue. In response, most organizations have implemented aggressive e-Business initiatives, whereby business transactions and relationships are conducted electronically among
enterprises. These e-Business initiatives have been adopted in an attempt to operate more efficiently and communicate better with suppliers, customers and partners. To this end,
organizations have made significant investments in a range of custom and packaged software applications such as Enterprise Resource Planning ("ERP"), Supply Chain Management ("SCM"), Customer
Relationship Management ("CRM"), decision support and e-Commerce
technologies. However, these applications generally were not designed to interact with each other, and the proliferation of these diverse technologies has resulted in highly disconnected and disparate
information technology infrastructures. These diverse systems and applications often reside on different hardware platforms with varying and incompatible data formats and communication methods. As a
result, information remains trapped within isolated systems. To enable truly automated business processes, these isolated systems must be seamlessly integrated. As organizations seek enhanced
profitability, integration solutions that enable dynamic and real-time connections across systems, applications and enterprises, and allow for the automation and active management of
business processes, known as business process management, have become critical.

Organizations
have historically tried to bridge disparate systems and applications through in-house or third-party custom development of
point-to-point interfaces. This approach is no longer viable for many organizations given the large and growing number of applications and the cost, time and resources required
to create and maintain integration in a rapidly changing environment. Additionally, when large numbers of applications and systems are linked through point-to-point interfaces,
organizations can find it difficult to respond quickly to business changes. Integrating with external systemsincluding those of its suppliers, customers and partnerspresents
an additional challenge that requires expertise in Internet technologies and a solution that is reliable, secure, centrally managed and scalable to a very large number of disparate users.

The
integration demands of e-Business present major technical challenges. In an attempt to address these challenges, organizations have implemented various ERP,
e-Business Application Integration ("eAI"), and Electronic Data Interchange ("EDI"), technologies. However, these solutions each have their own limitations in terms of
time-to-market, cost, performance or flexibility, and no one approach fully addresses the entire e-Business integration challenge.

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We
have developed a comprehensive solution for business integration, enabling the seamless flow of information across systems, applications and enterprises in real-time on a
global basis. The SeeBeyond ICAN Suite 5.0 provides organizations with a flexible and easily configurable software platform to connect applications and systems within an organization and among
geographically dispersed enterprises, allowing for continuous and reliable information exchange to meet today's fast-paced business demands. In contrast to other eAI approaches, we are the
only provider in our industry of a comprehensive solution for business integration where all key integration technologies, including application-to-application,
business-to-business, business process management, human work flow, portal, ETL, and business activity monitoring are seamlessly integrated. Because we have architected all of
our products from a single, internally-developed code base, our solutions are fully integrated to deliver faster time-to-market, improved performance and higher reliability for
our customers.

Our
application-to-application integration capability provides extensive pre-built application interfaces and facilitates rapid connectivity to
packaged applications, legacy applications, web and object technologies and industry standard relational databases. Our business-to-business integration capability supports
various trading partner business models, including direct partner-to-partner integration, trading exchange or marketplace integration, as well as more traditional EDI
integration. Our business process management capability enables our customers to model, monitor and manage business process flows of business activities in real-time.

Our
solution provides business benefits in such areas as: single customer or single patient view; multi-channel/multi-product application integration; real-time stock
management and vendor-managed inventory. In addition our products allow organizations to unite their IT infrastructure (rather than continually adding to it) in a gradual, controlled way that is not
disruptive to an organization's core business processes. To help our customers achieve this end, our products are designed for rapid deployment, enterprise scalability, operational efficiency and are
designed to be open, standards-based and portable.

Our
objective is to provide the leading business integration solution to manage the real-time, seamless flow of information across an enterprise and among customers,
suppliers and partners. Our strategy for achieving this objective includes providing a comprehensive integrated suite of products and services which has been organically developed on one code base,
capitalizing on our integrated solutions and technology leadership, enhancing our presence in targeted vertical markets such as financial services/insurance, manufacturing, healthcare,
telecommunications/energy/utilities, government and retail, becoming the preferred integration standard for large global entities and continuing to enhance our existing product lines, as well as
develop new product offerings.

Products

We have been an innovator in enterprise integration solutions since 1989, introducing our first commercial product in 1991. We believe our SeeBeyond
(ICAN) Suite 5.0, released in October 2003, is the most usable, scalable and open platform for developing, executing and managing end-to-end integrated
business processes as composite applications. The SeeBeyond ICAN Suite 5.0 provides a process-driven integration platform that is completely unified, extremely scalable and fully open with support for
leading industry standards, technologies, architectures and programming languages to connect applications, systems and processes. Additionally, the SeeBeyond ICAN Suite 5.0 represents the next
generation of open integration bringing Application-to-Application ("A2A") integration, Business-to-Business ("B2B") integration, and Business Process
Management ("BPM") together with Web services, System-Oriented Architecture ("SOA"), Java 2 Enterprise Edition ("J2EE") Application Servers, Extract, Transform and Load ("ETL")
capabilities, Business Activity Monitoring ("BAM") capabilities, Data Quality Management, Composite View Generation, Indexing, Workflow and Portals.

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The
SeeBeyond ICAN Suite 5.0 is comprised of the following components:

eGate
Integrator 5.0 provides a J2EE compliant and Web services-based distributed integration platform for application connectivity, data transformation, and guaranteed
transactions and messaging.

eInsight
Business Process Manager 5.0 automates and orchestrates complex business processes and workflows that span Web services, systems, people, and companies.

eInsight
Enterprise Service Bus is a rapidly implemented, limited edition version of eInsight BPM natively utilizing BPEL4WS (a.k.a. WS-BPEL) and UDDI to
coordinate enterprise Web services.

eVision
Studio 5.0 creates composite Web applications to provide end users with rapid access to business processes and backend systems.

ePortal
Composer 5.0 aggregates, personalizes and manages access to composite applications for end users.

eTL
Integrator 5.0 provides extraction, transformation and loading services for bulk data between files and databases.

eXchange
Integrator 5.0 automates B2B interactions through Web-based trading partner and protocol management, message handling, message tracking and security.

eView
Studio 5.0 generates tailored single-view applications that cleanse, match and index data to enable a single view of data entities such as businesses,
persons and products across the enterprise.

eIndex
Global Identifier 5.0 is an Enterprise Master Patient Index ("EMPI") solution. eIndex creates a cross-reference of patient information kept current by rules that
healthcare organizations define to identify, match and update patient data originating from multiple source applications.

eBAM
Studio 5.0 generates tailored Business Activity Monitoring applications with executive dashboards that track key performance indicators and provide exception alerting
and management for proactive business actions.

eWay
Intelligent Adapters 5.0 accelerate Integration with Web services enabled, JCA-based connectivity. We provide over 80 packaged eWay intelligent
adapters that expose JCA and Web services compliant interfaces for the purpose of application / business integration.

Professional Services

Our customers typically purchase consulting services from us to support their implementation activities. We offer professional services with the initial
deployment of our product, as well as on an ongoing basis to address continuing customer needs. Our consulting services range from architectural planning to complete development and deployment of our
products. In each case, these services are tailored to meet each customer's needs. Our professional services organization also provides comprehensive education at our new,
state-of-the-art training facility, as well as on-site courses for both customers and partners. Many of our professional services employees have
advanced degrees and/or substantial industry experience in systems architecture
and design. We expect the number of service professionals and the scope of the services we offer will increase as we continue to address the expanding enterprise infrastructure needs of large
organizations.

Sales, Alliances and Marketing



We license our products and sell our services primarily through our direct sales organization, complemented by the selling and support efforts of systems
integrators and our relationships with independent software vendors. In the United States, we maintain sales offices in the greater

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metropolitan
areas of San Francisco, Los Angeles, New York, Chicago, Dallas, Atlanta, Boston, and Washington DC. In Europe, we maintain sales offices in Belgium, Denmark, France, Germany, Italy, The
Netherlands, Spain, Sweden, Switzerland and the United Kingdom. In the Asia Pacific region we have sales offices in Australia, Japan, Korea, New Zealand and Singapore. Our direct sales force works
closely with our professional services organization, which provides pre-sales support to potential customers on product information and deployment capabilities. Sales to customers outside
North America totaled $57.1 million for the year ended December 31, 2003. For a geographic breakdown of our revenue and long-lived assets, see Note 3 to our
consolidated financial statement included elsewhere in this report.

Our
sales process requires our sales professionals work closely with targeted customers to identify both the business as well as the technical value derived from a real-time
information network. Our sales team, which includes both sales and technical professionals, then works with the customer to develop a proposal to address the customer's specific needs and highlight
the potential business and financial benefits. The length of our sales cycle generally ranges from 90 to 180 days, depending on the customer's industry and the size of the project.



To promote additional market penetration of our products, we have established strategic alliances with several of the largest independent systems integrators,
including Accenture, Cap Gemini Ernst & Young, Computer Sciences Corporation, Braxton (formerly Deloitte Consulting), Electronic Data Systems Corporation and First Consulting Group. In addition
to these strategic alliances, we also have relationships with other systems integrators, including Booz-Allen & Hamilton and BearingPoint (formerly KPMG Consulting). We also
maintain close relationships with several leading independent software vendors and technology providers, including Hewlett Packard, Retek and Siebel Systems. Our alliances with system integrators and
technology vendors position us as a preferred business integration software provider. We believe these alliances have enabled us to increase market awareness of our products and increase sales.

Through
our global software partner program, we license our technology to leading independent software vendors, so we can embed components of the SeeBeyond ICAN Suite 5.0 into their
products on a limited basis for seamless integration with specific applications. These relationships allow these companies to resell our products to their customers worldwide and provide our sales
force opportunities to cross-sell additional SeeBeyond products and services to these same customers. We have OEM and reseller agreements with a number of software vendors, including
Siebel Systems and Retek.



Our marketing efforts are focused on creating awareness of our products and their applications, and identifying and educating partners as well as potential
customers on both the business value as well as the technical value to be gained from a real-time information network, thereby generating new sales opportunities. We will continue to
invest to increase awareness of the SeeBeyond ICAN Suite 5.0 as a comprehensive solution for business integration. Our marketing activities include advertising, direct mail, seminars, customer
marketing, tradeshows and industry conferences. We also have a public relations program focused on the trade, financial and business press as well as industry analysts.

Product Development

We began developing our products in 1989, introducing our first commercial product in 1991. Our entire product suite has been developed internally, or
organically, without acquisitions of companies or externally developed technologies. We expect most of our enhancements to existing products and the

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development
of new products will be developed internally. However, we will continue to evaluate on an on-going basis the potential acquisition of externally developed products or
technologies and their integration into our existing product offerings.

Customer Service and Support

We provide "Follow the Sun" support for all of our products on a global basis 24 hours a day, seven days a week. Our support centers are located in
California and the United Kingdom. Each of these support centers tracks support incidents on one global IT system, providing a consistent level of service worldwide. Customers have the option to log,
track and update their service and support inquiries electronically, via the web, telephone, or a combination of both. Our customer service group handles incoming calls, shipping requests, call
logging, maintaining customer information and responding to basic product questions. Our technical support/engineering group is responsible for all technical incidents until resolution and is
responsible for meeting targeted response times and providing regular updates. We provide customers Escalation Management with a dedicated resource to assure continuity through any escalation. We have
developed several new programs for Go-live, Major Accounts, and Vertical Support. Our Technical Assistance Group ("TAG") provides emergency on site support within the United States. Our
technical support/engineering group coordinates with our product development group for product maintenance.

Competition

The market for our products is intensely competitive, evolving, and subject to rapid technological change. The intensity of competition is expected to increase in
the future. Increased competition is likely to result in price reductions, reduced gross margins and loss of market share, any one of which could significantly reduce our future revenues and increase
operating losses.

We
face competition from other vendors offering integration and eAI software products. These vendors include IBM, Microsoft, Tibco Software Inc., Vitria Technology Inc. and
webMethods Inc. We believe
none of these companies has a suite of integration products as complete as ours, but BEA, IBM and Microsoft offer products outside our segment and routinely bundle such products with EAI components.
In the future, some of these companies may expand their products to enhance their functionality to provide a solution more similar to ours. "In house" information technology departments of potential
customers have developed or may develop systems that provide for some of the functionality of the SeeBeyond ICAN Suite 5.0. In particular, it can be difficult to sell our products to a potential
customer whose internal development group has already made large investments in and progress towards completion of systems our product is intended to replace. We also face competition from major
enterprise software developers including Oracle, PeopleSoft, SAP and Siebel, whose software applications perform some limited functionality similar to our solution.

Many
of our existing and potential competitors have more resources, broader customer relationships and more established brands than ours. Additionally, many of these competitors have
extensive knowledge of the integration industry. Some of our competitors have established or may establish cooperative relationships among themselves or with third parties to offer a single solution
and increase the ability of their products to address customer needs.

We
believe the principal competitive factors affecting the market for its products and services include product functionality and features, product price and performance, ease of
implementation, market awareness, quality of professional services offerings, acceptance of product or vendor by leading system integrators, quality of customer support services, quality of training
and documentation and vendor and product reputation. Although we believe our solutions generally compete favorably with respect to these factors, the market is evolving rapidly. We may not be able to
maintain our competitive position against current and potential competitors, especially those with significantly greater resources.

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Intellectual Property and Proprietary Rights

Our success is dependent upon the technological and creative skills of our personnel in developing and enhancing our software products, as well as our ability to
protect the related proprietary technology and intellectual proprietary rights. We rely primarily on a combination of contractual provisions, confidentiality procedures, trade secrets, copyright and
trademark laws to accomplish these goals. We do not currently hold any issued or registered patents. We have filed ten patent applications that are pending in the United States. We cannot be certain a
patent will be issued from any patent application submitted. Moreover, we may not be able to develop proprietary products or technologies that are patentable, that any patent issued to us will provide
us with any competitive advantages, or that the patents of others will not seriously harm our ability to do business.

We
license our products pursuant to license agreements that prohibit reverse engineering or de-compilation of our software, impose restrictions on the licensee's ability to
utilize the software and provide for specific remedies in the event of a breach of these restrictions. In addition, we take measures to avoid disclosure of our trade secrets, including but not limited
to requiring employees, customers and others with access to our proprietary information to execute confidentiality agreements with us which define the unauthorized uses and disclosures of our trade
secrets and other proprietary materials and information. Additionally, we restrict access to our source code.

We
assert copyrights in software, documentation and other works of authorship and periodically file for and are granted copyrights from the U.S. Copyright Office in and to qualifying
works of authorship. We assert trademark rights in and to our name, product names, logos and other markings that are designed to permit consumers to identify our goods and services. We routinely file
for and have been granted trademark protection from the U.S. Patent and Trademark Office for qualifying marks.

Despite
our efforts to protect our proprietary rights, existing laws, contractual provisions and remedies afford only limited protection. In addition, effective copyright and trade
secret protection may be unavailable or limited in some foreign countries. Attempts may be made to copy or reverse engineer aspects of our product or to obtain and use information we regard as
proprietary. Accordingly we cannot be certain we will be able to protect our proprietary rights against unauthorized third-party copying or use. Use by others of our proprietary rights could
materially harm our business. Furthermore, policing the unauthorized use of our product is difficult and expensive litigation may be necessary in the future to enforce and defend our intellectual
property rights.

Although
we do not believe our products infringe the proprietary rights of third parties and are not aware of any currently pending claims our products infringe upon the proprietary
rights of third parties, it is possible third parties will claim we have infringed on their current or future products. Any claims, with or without merit, could be time-consuming, result
in costly litigation, prevent product shipment, cause delays or require us to enter into royalty or licensing agreements, any of which could harm our business. Patent litigation in particular has
complex technical issues and inherent uncertainties. Parties making claims against us could secure substantial damages, as well as injunctive or other equitable relief, which could effectively block
our ability to license our products in the United States or abroad. Such a judgment could seriously harm our business. In the event a product infringement claim against us were successful and we could
not obtain a license on acceptable terms or license a substitute technology or redesign to avoid infringement, our business would be harmed.

Employees

As of December 31, 2003, we had a total of 673 employees, including 233 in product development, 174 in sales and marketing, 50 in customer support, 130 in
professional services and training, and 86 in operations, administration and finance. None of our employees are represented by a collective

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bargaining
agreement, nor have we experienced any work stoppage. We consider our relations with our employees to be good.

Available Information

You may request a copy of our quarterly and annual report filings and our other regular filings with the U.S. Securities Exchange Commission ("SEC"), free of
charge, by writing or telephoning us at 800 E. Royal Oaks Drive, Monrovia, CA, 91016, our principal executive office. Our telephone number at this address is (626) 471-6000. Our
principal Internet address ishttp://www.seebeyond.comand our SEC filings are available on our website as soon as reasonably practicable after we
electronically file such material with the SEC. Our public filings are also available from the SEC's web site athttp://www.sec.gov. The information on
our website is not incorporated by reference into this report.

Item 2: Properties

Our principal executive and corporate offices are located in Monrovia, California, where we lease a total of approximately 200,000 square feet under leases that
expire from 2005 to 2014. We lease approximately 17,000 square feet in Redwood Shores, California under a lease that expires in September 2004. In the United States, we have sales offices in
the greater metropolitan areas of San Francisco, Los Angeles, New York, Chicago, Dallas, Atlanta, Boston, and Washington DC. In Europe we have sales offices in Belgium, Denmark, France, Germany,
Italy, the Netherlands, Spain, Sweden, Switzerland and the United Kingdom. In the Asia Pacific region, we have sales offices in Australia, Japan, Korea, New Zealand and Singapore under leases that
cover from 200 to 9,600 square feet and expire from January 2005 to October 2013. We believe these facilities are adequate for our current operations and additional space can be obtained
on commercially reasonable terms if needed.

Item 3: Legal Proceedings

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

Information
with respect to this item is incorporated by reference to Note 6 of the Notes to the Consolidated Financial Statements included in this Report on
Form 10-K.

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

No matters were submitted to a vote of security holders during the fourth quarter of the year ended December 31, 2003.

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PART II

Item 5: Market for the Company's Common Stock and Related Stockholders Matters

Our common stock is traded on the Nasdaq National Market under the symbol "SBYN." The following table shows, for the periods indicated, the high and low per share
closing prices of our common stock, as reported by the Nasdaq National Market:

Year ended December 31, 2003:

High

LowMarch 31, 2003

$
2.93

$
2.02June 30, 2003


3.10


2.08September 30, 2003


3.10


1.94December 31, 2003


4.29


2.56Year ended December 31, 2002:March 31, 2002


13.45


6.58June 30, 2002


8.64


2.45September 30, 2002


3.11


1.09December 31, 2002


2.98


1.10


We
had 388 stockholders of record as of December 31, 2003. Because many of our shares of common stock are held in street name by brokers and other institutions on behalf of
stockholders, we are unable to estimate the total number of stockholders represented by these record holders.

We
have never declared or paid any cash dividends on our common stock. The Company currently intends to invest cash generated from operations, if any, to support the development of its
business and does not anticipate paying cash dividends for the foreseeable future. Payment of future dividends, if any, will be at the discretion of the Company's Board of Directors after taking into
account various factors, including the Company's financial condition, operating results and current and anticipated cash needs.

Item 6: Selected Consolidated Financial Data

The following selected consolidated financial data should be read in conjunction with the Company's Consolidated Financial Statements and Notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere herein. The Consolidated Statements of Operations Data for the years ended
December 31, 2003, 2002 and 2001, and the Consolidated Balance Sheet Data as of December 31, 2003 and 2002, are derived from the audited consolidated financial statements included
elsewhere in this Form 10-K. The Consolidated Statements of Operations Data for the years ended December 31, 2000 and 1999, and the Consolidated Balance Sheet Data as of
December 31, 2001, 2000 and 1999, are derived from the audited

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Consolidated
Financial Statements not included elsewhere in this Form 10-K. The historical results are not necessarily indicative of results to be expected for future periods.

Year Ended December 31,2003

2002

2001

2000

1999(in thousands, except per share data)Consolidated Statements of Operations Data:Revenues:License

$
51,815

$
67,243

$
109,628

$
65,403

$
24,051Services


38,662


43,562


51,669


36,650


20,268Maintenance


47,364


39,945


29,302


16,205


9,055Other














1,797Total revenues


137,841


150,750


190,599


118,258


55,171Cost of revenues:License


1,375


2,322


2,004


569


690Services and maintenance


41,028


45,425


48,609


35,865


23,272Other














1,219Total cost of revenues


42,403


47,747


50,613


36,434


25,181Gross profit


95,438


103,003


139,986


81,824


29,990Operating expenses:Research and development


41,012


34,443


29,224


19,175


11,990Sales and marketing


57,044


66,520


95,507


76,689


28,652General and administrative


17,913


18,609


21,208


17,231


12,176Restructuring and impairment charges


6,433


6,625


3,426





Amortization of goodwill








319





Amortization of sales and marketing warrants


190


380


5,892


6,798


814Amortization of stock-based compensation


277


775


1,815


3,878


1,708Total operating expenses


122,869


127,352


157,391


123,771


55,340Loss from operations


(27,431
)

(24,349
)

(17,405
)

(41,947
)

(25,350
)Interest and other income (expense), net


624


1,102


435


(23
)

(515
)Loss before provision for taxes


(26,807
)

(23,247
)

(16,970
)

(41,970
)

(25,865
)Provision for income taxes


691


697


463





Net loss


(27,498
)

(23,944
)

(17,433
)

(41,970
)

(25,865
)Accretion on preferred stock











769


2,410Net loss available to common stockholders

$
(27,498
)
$
(23,944
)
$
(17,433
)
$
(42,739
)
$
(28,275
)Basic and diluted net loss per share

$
(0.33
)
$
(0.29
)
$
(0.24
)
$
(0.69
)
$
(0.62
)Number of shares used in computing basic and diluted net loss per share


83,002


82,145


71,346


61,909


45,954


12

---

As of December 31,2003

2002

2001

2000

1999(in thousands)Consolidated Balance Sheet Data:Cash and cash equivalents

$
70,135

$
94,114

$
47,039

$
29,428

$
1,572Working capital (deficit)


47,378


68,449


37,890


24,133


(1,917
)Total assets


127,747


157,043


105,764


84,958


29,852Deferred revenue


31,221


28,141


23,858


19,657


10,354Long-term liabilities


515


4,010


1,412


400


10,000Redeemable convertible preferred stock














24,681Total stockholders' equity (deficit)


65,546


89,638


50,646


36,039


(28,421
)


Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations

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

Overview

We were founded in 1989 and sold our first products and services in 1991 under the name "Software Technologies Corporation." From 1991 to 1998 our sales and
marketing efforts were primarily focused on customers in the healthcare industry. In 1998, we began to significantly increase our sales and marketing expenses to target customers in other vertical
markets, such as financial services/insurance, manufacturing, retail/e-Commerce/services, telecommunications, energy services and government.

In
November 1999 we launched the fourth generation of our product e*Gate 4.0, which introduced a fully distributed, fault tolerant architecture. Through the end of September, 2003
we were shipping an enhanced version of our eBusiness Integration Suite, version 4.5.3 to our customers, and in October 2003 we announced the general availability of our new suite of products,
the SeeBeyond Integrated Composite Application Network ("ICAN") version 5.0. We incurred significant losses in fiscal years 2001, 2002 and 2003. As of December 31, 2003, we had an accumulated
deficit of approximately $153.9 million.

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

We
currently have operations in sixteen countries outside of the United States. Revenues derived from international sales were 41% in 2003, 35% in 2002 and 34% in 2001. We believe
international revenues will continue to be significant in future periods. To date, we have not experienced significant

13

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seasonality
of revenues. However, we expect our future results will fluctuate in response to the fiscal or quarterly budget cycles of our customers.

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

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

Our
cost of revenues includes cost of license revenues and cost of services and maintenance revenues. Each category, except cost of license revenues, includes related expenses for
salaries, employee benefits, incentive compensation, bonuses, travel, telephone, communications, rent and allocated facilities and professional fees.

Cost
of license revenues includes the cost of third-party licensed software embedded or bundled with our products. Cost of services and maintenance revenues consists of compensation and
related overhead costs for personnel engaged in implementation consulting and services and maintenance and support activities, training and out-of-pocket expenses. Our gross
margin was 97.3%, 96.6% and 98.2% for the years ended December 31, 2003, 2002 and 2001, respectively on our license revenues and 52.3%, 45.6% and 40.0%, respectively on our services and
maintenance revenues. We expect in the future to continue to earn substantially higher gross margins on our license
revenues as compared to our services and maintenance revenues. As a result, our overall gross margin depends significantly on our revenue mix.

Our
sales and marketing expenses include additional expenditures specific to the marketing group, such as public relations and advertising, trade shows, and marketing collateral
materials and expenditures specific to the sales group, such as commissions.

To
date, all software product development costs have been expensed as incurred. Also included in our total costs and expenses are restructuring and impairment charges, sales and
marketing warrants and stock compensation.

In
March 2001, we entered into a four-year co-marketing agreement with General Motors Corporation ("GMC") and issued GMC a warrant to purchase 625,000
shares of common stock at an exercise price of $11.34 per share. As a result of the December 2001 private placement of 2,574,298 shares of our common stock, the exercise price of this warrant
was adjusted to $5.83 per share. The warrant expires in March 2006 and 175,000 shares under the warrant were exercisable immediately. The remaining 450,000 shares subject to the warrant are
performance based and vest and become exercisable over the thirty-six month period following the issuance of the warrant provided the warrant holder has achieved various milestones related
to providing certain sales and marketing support. The unvested portion of the warrant was valued as of the date of issuance and is being amortized as a charge to marketing expense over the term of the
co-marketing agreement. As of December 31, 2003, a total of 587,500 shares subject to the warrant were vested and exercisable. We recognized amortization on this warrant of
approximately $190,000, $380,000 and $1.8 million, for the years ended December 31, 2003, 2002 and 2001, respectively. The value of the unvested portion of the warrant will be adjusted
in each reporting period based on changes in the fair value of the warrants until such date

14

---

as
the warrants are fully vested. There is no obligation for GMC to make future product purchases from us.

In
connection with stock option grants to our employees and non-employee directors, we have recorded deferred stock compensation totaling $8.5 million, of which
approximately $44,000 remains to be amortized as of December 31, 2003. This amount represents the difference between the exercise price and the deemed fair value of our common stock on the date
the options were granted multiplied by the number of option shares granted. This amount is included as a component of stockholders' equity and is being amortized by charges to operations over the
vesting period of the options, consistent with the method described in Financial Accounting Standards Board Interpretation No. 28. We recognized amortization of deferred compensation expense of
approximately $277,000, $775,000 and $1.8 million for the years ended December 31, 2003, 2002 and 2001, respectively. The amortization of stock compensation is classified as a separate
component of operating expenses in our consolidated statement of operations.

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported
amounts of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these
estimates under different assumptions or conditions.

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



Revenue recognition.We recognize revenue when an agreement has been signed by both parties or other persuasive evidence of
an arrangement exists, the software has been shipped or electronically delivered, the fees are fixed or determinable, collection of the resulting receivable is probable, and no other significant
obligations remain. For multiple element arrangements where vendor-specific 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 of fair value is based on the price a customer is required to pay when the element
is sold separately.

We
assess whether the fee is fixed or determinable and collection is probable at the time of the transaction. In assessing whether the fee is fixed or determinable we analyze the payment
terms of the transaction and other factors, including the nature and class of customer, our historical experience of collecting under our payment terms without granting a concession, the possibility
of the product becoming technologically obsolete before the payments become due and the likelihood of the customer asking for a refund. If we determine the fee is not fixed or determinable we defer
the revenue until the payments under the arrangement become due. We assess whether collection is probable based on a number of factors, including the customer's past transaction history and credit
worthiness. If we determine that collection of a fee is not probable, we defer the fee and recognize revenue at the time collection becomes probable, which is generally upon the receipt of cash.

15

---

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

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

The
fair value of services such as consulting or training is based upon separate sales of these services. Consulting and training are generally sold on a
time-and-materials or fixed fee basis and are generally recognized as the services are performed. Consulting services primarily consist of implementation services related to
the installation of the Company's products and generally do not involve significant production, modification or customization to or development of the software.

Significant
management judgments and estimates must be made in connection with determination of the revenue to be recognized in any accounting period. If we made different judgments or
estimates for any period, material differences in the amount and timing of revenue could result.

Allowance for doubtful accounts.We maintain allowances for doubtful accounts, as a reduction of accounts receivable, based
on our analyses of the likelihood our customers will not pay us all the amounts due us. In circumstances where there is knowledge of a specific customer's inability to meet its financial obligations,
a specific reserve is recorded against amounts due to reduce the net recognized receivable to the amount that is reasonably believed to be collectable. For all our customers we perform analyses, which
include a review of their credit profiles, the terms and conditions of the contracts with our customers, and the current economic trends and payment history. We reassess these
allowances each accounting period. Historically, our actual losses and credits have been consistent with these provisions. If actual payment experience with our customers is different than our
estimates, adjustments to these allowances may be necessary resulting in additional charges to our income statement.

Accounting for income taxes.We record a valuation allowance to reduce our deferred tax assets by the amount of tax benefits
we estimate are not expected to be realized. Tax benefits will not be realized if we do not generate sufficient taxable income in the future to apply the deferred tax balance. As of
December 31, 2003, a valuation allowance equal to the value of the deferred tax assets was maintained. In the event we were to determine we would be able to realize our deferred tax assets in
the future in excess of its net recorded amount, an adjustment to the deferred tax asset would increase income in the period such a determination was made.

Significant
management judgment is required in determining our provision for income tax assets and liabilities and our future taxable income for purposes of assessing our ability to
realize any future benefit from our deferred tax assets. In the event actual results differ from these estimates or we adjust these estimates in future periods, our operating results and financial
position could be materially affected.

16

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Results of Operations

The following table sets forth our results of operations expressed as a percentage of total revenues:

Year Ended December 31,2003

2002

2001Revenues:License

38
%
45
%
58
%Services

28

29

27Maintenance

34

26

15Total revenues

100

100

100Cost of revenues:License

1

2

1Services and maintenance

30

30

26Total cost of revenues

31

32

27Gross profit

69

68

73Operating expenses:Research and development

30

23

15Sales and marketing

41

44

50General and administrative

13

12

11Restructuring and impairment charge

5

4

2Amortization of goodwill





Amortization of sales and marketing warrants





3Amortization of stock-based compensation



1

1Total operating expenses

89

84

82Loss from operations

(20
)
(16
)
(9
)Other income (expense), net





Loss before income tax provision

(20
)
(16
)
(9
)Provision for income taxes





Net loss

(20
)%
(16
)%
(9
)%


Comparison of Years Ended December 31, 2003, 2002 and 2001



Total revenues were $137.8 million for 2003, $150.8 million for 2002 and $190.6 million for 2001, representing a decrease of
$13.0 million, or 9%, from 2002 to 2003 and $39.8 million, or 21%, from 2001 to 2002. No customer accounted for more than 10% of our total revenues in 2001, 2002 or 2003.

License Revenues.License revenues were $51.8 million for 2003, $67.2 million for 2002,
$109.6 million for 2001, representing a decrease of $15.4 million, or 23% from 2002 to 2003 and a decrease of $42.4 million, or 39%, from 2001 to 2002. License revenues as a
percentage of total revenues were 38% in 2003, 45% in 2002 and 58% in 2001. The decrease in our license revenues from 2002 to 2003 was due primarily to the global economic slowdown and a reduction in
information technology spending in general and in part from our customers delaying the decision to purchase from us because of the release of our new SeeBeyond ICAN 5.0 suite of products which we made
generally available in October 2003. The decrease in our license revenues from 2001 to 2002 was primarily due to the global economic slowdown and a reduction in information technology spending
in general.

17

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Services Revenues.Services revenues were $38.7 million for 2003, $43.6 million for
2002 and $51.7 million for 2001, representing a decrease of $4.9 million, or 11% from 2002 to 2003 and $8.1 million, or 16%, from 2001 to 2002. Services revenues as a percentage
of total revenues were 28% in 2003, 29% in 2002 and 27% in 2001. The decrease in the absolute dollar amount of services revenues from 2002 to 2003
was due to the decrease in license revenue as well as the lower demand for our consulting services from our customers, in part resulting from our customers delaying the decision to purchase consulting
services from us because of the upcoming release of our new SeeBeyond ICAN 5.0 suite of products which we made generally available in October 2003. The decrease in the absolute dollar amount of
services revenues from 2001 to 2002 was due primarily to the decline in consulting revenues that resulted from the corresponding decrease in license revenues.

Maintenance Revenues.Maintenance revenues were $47.4 million for 2003, $40.0 million
for 2002 and $29.3 million for 2001, representing increases of $7.4 million, or 19%, from 2002 to 2003 and $10.7 million, or 37%, from 2001 to 2002. Maintenance revenues as a
percentage of total revenues were 34% in 2003, 26% in 2002 and 15% in 2001. The increases in the absolute dollar amount of maintenance revenues from 2002 to 2003 and 2001 to 2002 were primarily due to
increased cumulative license sales of our products and the renewals of prior period maintenance contracts, which had increased consistent with the increase in our cumulative license revenues.



Cost of License Revenues.Cost of license revenues were $1.4 million for 2003,
$2.3 million for 2002 and $2.0 million for 2001. Cost of license revenues, as a percentage of total revenues, was 1% in 2003, 2% in 2002 and 1% in 2001. Cost of license revenues consists
primarily of the cost of third-party licensed software embedded or bundled with our products. The decrease in the cost of license revenues from 2002 to 2003 was in part due to a decrease in
professional services staff and in part due to a decrease in the proportion of products we sold that contain third-party software embedded or bundles with our software product offerings. The increase
in the cost of license revenues from 2001 to 2002 was primarily due to an increase in the proportion of products we sold that contain third-party software embedded or bundled with our software product
offerings.

Cost of Services and Maintenance Revenues.Cost of services and maintenance revenues were
$41.0 million for 2003, $45.4 million for 2002 and $48.6 million for 2001, representing a decrease of $4.4 million, or 10%, from 2002 to 2003 and a decrease of
$3.2 million, or 7%, from 2001 to 2002. Cost of services and maintenance revenues as a percentage of total revenues was 30% in 2003, 30% in 2002 and 26% in 2001. The decrease in the absolute
dollar amount of cost of services and maintenance revenues from 2002 to 2003 was primarily due to a decrease in professional services staff and a decrease in the use of third-party contractors during
the year, as compared to the same period in the previous year. The decrease in the absolute dollar amount of cost of services and maintenance revenues from 2001 to 2002 was primarily due to the
decrease in professional services staff and the related costs associated with decreased services revenues.



Research and Development Expenses.Research and development expenses were $41.0 million for
2003, $34.4 million for 2002 and $29.2 million for 2001, representing an increase of $6.6 million, or 19%, from 2002 to 2003 and an increase of $5.2 million, or 18%, from
2001 to 2002. Research and development expenses as a percentage of total revenues were 30% in 2003, 23% in 2002 and 15% in 2001. The increases in the absolute dollar amount of research and development
expenses from 2002 to 2003 and from 2001 to 2002 were primarily due to the increase in the number of software development personnel and quality assurance personnel to support our product development,
documentation and testing activities related to the development of the SeeBeyond ICAN version 5.0 products. We anticipate research and development expenses will increase slightly in absolute dollars
in the

18

---

foreseeable
future as we transition our product development efforts to new products due to the completion of SeeBeyond ICAN 5.0 product suite and continue to enhance and extend our product suites.

Sales and Marketing Expenses.Sales and marketing expenses were $57.0 million for 2003,
$66.5 million for 2002 and $95.5 million for 2001, representing a decrease of $9.5 million, or 14%, from 2002 to 2003 and a decrease of $29.0 million, or 30%, from 2001 to
2002. Sales and marketing expenses as a percentage of total revenues were 41% in 2003, 44% in 2002 and 50% in 2001. The decreases in the absolute dollar amount in sales and marketing expenses from
2002 to 2003, and from 2001 to 2002 were due primarily to lower headcount and a decrease in promotional and public relations activities, as well as a decrease in sales commissions that resulted from
lower license revenue during 2002 and 2003. We anticipate our sales and marketing expenses to increase slightly in absolute dollars in fiscal 2004 due to the addition of new sales person headcount.

General and Administrative Expenses.General and administrative expenses were $17.9 million
for 2003, $18.6 million for 2002 and $21.2 million for 2001, representing a decrease of approximately $700,000, or 4%, from 2002 to 2003 and a decrease of $2.6 million, or 12%,
from 2001 to 2002. General and administrative expenses as a percentage of total revenues were 13% in 2003, 12% in 2002 and 11% in 2001. The decreases in the absolute dollar amounts from 2002 to 2003
and 2001 to 2002 were primarily due to lower headcount during the years as compared to the previous years. We anticipate general and administrative expenses to remain flat for the foreseeable future.

Restructuring and Impairment Charge.In 2001, the company recorded restructuring charges of
$3.4 million for employee termination benefits and related costs. The restructuring resulted in headcount reductions of approximately 228 employees, which was made up of 56% sales and marketing
staff, 15%
professional services staff, 19% general and administrative staff and 10% research and development staff.

In
2002, the Company recorded restructuring and impairment charges totaling $6.6 million, consisting of $1.7 million for employee termination benefits and related costs
associated with headcount reductions, $2.7 million related to future rent obligations for properties abandoned in connection with facilities consolidation and $2.3 million related to the
write-down of leasehold improvements, furniture, computer equipment and software and other assets in connection with facilities consolidation and headcount reductions. The headcount
reduction of 57 employees was made up of 58% sales and marketing staff, 19% professional services staff, 14% research and development staff and 9% general and administrative staff. The restructuring
and impairment charges recorded in 2002 and 2001 were recorded under EITF No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity." Under EITF No. 94-3 the accrual for future rent obligations was recorded when the commitment to abandon the facilities was reached.

In
2003, the Company recorded restructuring and impairment charges totaling $7.4 million, consisting of $1.9 million for employee termination benefits and related costs
associated with headcount reductions, $1.2 million related to future rent obligations for properties abandoned in connection with facilities consolidation and $4.3 million related to the
write-down of leasehold improvements, furniture, computer equipment and software in connection with the facilities consolidation and headcount reductions. The 2003 headcount reduction of
56 employees was comprised of approximately 48% sales and marketing staff, 41% professional services staff and 11% general and administrative staff. The Company recovered approximately $944,000 in
restructuring expenses that had previously been reserved for. The restructuring and impairment charges recorded during 2003 were recorded under SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." Under SFAS No. 146 the accrual for future rent obligations were recorded when the facilities were abandoned.

19

---

These
restructuring and impairment charges were recorded to better align the company's cost structure with changing market conditions. The following table sets forth the Company's
accrued restructuring costs as of December 31, 2003 (in thousands).

Facilities
Consolidation

Asset
Impairment

Termination
benefits

Total2001 charges

$


$


$
3,426

$
3,426Cash utilized








(2,976
)

(2,976
)Balance at December 31, 2001








450


4502002 charges


2,666


2,279


1,680


6,625Non-cash write down of fixed assets





(2,279
)




(2,279
)Cash utilized


(183
)




(664
)

(847
)Balance at December 31, 2002


2,483





1,466


3,949Adjustment of prior estimates


(7
)

(421
)

(516
)

(944
)2003 charges


1,214


4,274


1,889


7,377Non-cash write down of fixed assets





(3,853
)




(3,853
)Cash utilized


(1,777
)




(2,625
)

(4,402
)Balance at December 31, 2003

$
1,913

$


$
214

$
2,127


Accrued
future rent obligations represent the estimated future rent expense on abandoned excess facilities, net of sublease income and is expected to be paid over the next
twenty-five months.

Amortization of Goodwill.Amortization of goodwill was $0 in 2003 and 2002 and $319,000 in 2001. In
June 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141
requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. Under SFAS No. 142, goodwill and intangible assets with indefinite lives
are no longer amortized but reviewed annually or more frequently if impairment indicators arise, for impairment. We adopted SFAS No. 142 effective January 1, 2002 with respect to
goodwill and intangible assets.

Amortization of Sales and Marketing Warrants.Amortization of sales and marketing warrants was
approximately $190,000 in 2003, $380,000 in 2002 and $5.9 million in 2001. The decrease in the amortization of sales and marketing warrants from 2002 to 2003 was primarily due to a decrease in
the value of the unvested portion of a warrant issued to a strategic marketing partner. The amortization of sales and marketing warrant expense for the year ended 2003, and the remaining warrant
expense to be recognized going forward, relate to this warrant issued under a four-year co-marketing agreement with a strategic partner. The value of the unvested portion of
the warrant is adjusted in each reporting period based on changes in the fair value of the warrant until such date as the warrant is fully vested and therefore the amount of amortization for such
warrant will be subject to fluctuation based on the value of our stock. The decrease in amortization of sales and marketing warrants from 2001 to 2002 was a result of warrants issued to strategic
alliance partners being fully amortized or cancelled during 2002, as well as a decrease in the value of the unvested portion of a warrant issued to a strategic marketing partner.

Amortization of Stock-Based Compensation.In connection with the grant of certain stock options to
employees and non-employee directors during 2003, 2000 and 1999, we recorded total deferred compensation of $8.5 million, of which approximately $277,000, $775,000 and
$1.8 million was expensed in 2003, 2002 and 2001, respectively as amortization of stock-based compensation.

20

---



Interest and other income (expense), net primarily consists of interest income earned on cash balances. Interest and other income (expense), net, was
approximately $1.0 million in 2003, $1.4 million in 2002 and $608,000 in 2001. The decrease in interest and other income (expense), net from 2002 to 2003 was primarily due to a decrease
in interest income as a result of lower interest rates and lower average cash balances during the year ended 2003.. The increase in interest and other income (expense), net from 2001 to 2002 were
primarily due to increases in interest income due to larger average cash balances during 2002 as compared to 2001, which was attributable to our public offering in February 2002.



Interest expense primarily consists of interest expense on our equipment lines of credit. Interest expense was approximately $382,000, $263,000 and $173,000 in
2003, 2002 and 2001, respectively. The increase in interest expense from 2002 to 2003 was primarily due to interest expense incurred as a result of a $5.0 million equipment advance that was
added to our line of credit in December 2002. The increase in interest expense from 2001 to 2002 was primarily due to interest expense incurred as a result of higher balances on our equipment
line in 2002 as compared to 2001.



In 2003, a provision of $691,000 was recorded for state and foreign taxes compared to a provision of approximately $697,000 in 2002 and $463,000 in 2001. As of
December 31, 2003, we had net operating loss carryforwards of approximately $124 million for federal and $95 million for state, which expire through 2023 for federal and 2013 for
state taxes. We had domestic research and development credit carryforwards of approximately $5.6 million, which expire through 2023. We had California research and
development credit carryforwards of approximately $6.0 million which can be carried over indefinitely. The United States tax laws contain provisions that limit the use in any future period of
net operating loss and credit carryforwards upon the occurrence of certain events, including a significant change in ownership interests. We had deferred tax assets, including our net operating loss
carryforwards and tax credits of approximately $75.2 million as of December 31, 2003. The realization of benefits of the net operating loses and tax credits are dependent on sufficient
taxable income in future years. Possible lack of future earnings or a change in the ownership of the Company could adversely affect our ability to utilize its tax attributes. A valuation allowance has
been recorded for the entire net deferred tax asset as a result of uncertainties regarding the realization of this asset. See Note 5 of Notes to Consolidated Financial Statements.

Liquidity and Capital Resources

As of December 31, 2003, we had cash and cash equivalents of $70.1 million, a decrease of $24.0 million from $94.1 million held as of
December 31, 2002.

Net
cash used in operating activities was $17.8 million in 2003, $3.7 million in 2002 and $275,000 in 2001. The increase in cash used in operating activities from 2002 to
2003 reflects primarily increases in net loss and accounts receivable and a decrease in accounts payable, partially offset by an increase in accrued compensation and related expenses and
non-cash restructuring and impairment charges. The increase in cash used in operating activities for 2001 to 2002 reflects primarily increases in net loss, accrued expenses, deferred
revenues and accounts payable offset by a decrease in accounts receivable.

Accounts
receivable, net of allowances, increased approximately $700,000 to $34.3 million at December 31, 2003 from $33.6 million at December 31, 2002. The
timing of receivable collections and revenue recorded within a given quarter will affect our accounts receivable balances going forward.

21

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Net
cash used in investing activities was $5.8 million in 2003, $15.2 million in 2002 and $6.1 million in 2001. The decrease from 2002 to 2003 related primarily to a
decrease in capital investments. The increase from 2001 to 2002 related primarily to an increase in purchases of property and equipment related to new office facilities and information systems. We
expect capital expenditures in fiscal 2004 to remain flat.

Net
cash used in financing activities was $1.1 million in 2003 and net cash provided by financing activities was $65.0 million for 2002 and $24.8 million in 2001.
The increase in net cash used in financing
activities from 2002 to 2003 related primarily to the completion of our secondary public offering in February 2002 in addition to paying down on our bank lines of credit. The increase in net
cash provided by financing activities from 2001 to 2002 related primarily to the completion of our public offering in February 2002, partially offset by the repurchase of shares of our common
stock during the fourth quarter of 2002.

In
November 2000, the Company established a $15.0 million line of credit facility (the "Line") with a lending institution that bears interest at an annual rate of either
prime plus 0.5% or the London InterBank Offered Rate ("LIBOR") rate plus 2.50% (payable monthly) and it expires May 31, 2004. As of December 31, 2003, $10.1 million was available
under the Line and there were no borrowings outstanding. The Company may use up to $5.0 million of the Line to issue letters of credit. As of December 31, 2003, approximately $386,000
was available for the issuance of letters of credit. The Line is secured by intellectual property rights, accounts receivable and certain other assets and is subject to certain borrowing base
restrictions. The Line requires maintenance of certain financial covenants pertaining to key financial ratios. The Company was in compliance with all covenants at December 31, 2003.

In
October 2001, the Company's $3.0 million equipment line (the "Equipment Line") with the same lending institution providing the Line was amended, reducing the maximum
amount available for borrowing under the Equipment Line to $2.0 million. The Equipment Line bears interest at an annual rate of prime plus 0.75%, or the LIBOR rate plus 2.75% (payable monthly)
and expires on November 30, 2004. The interest rate at December 31, 2003 was 4.75%. The Company could draw against the Equipment Line through November 30, 2001. Interest is
payable monthly and principal is payable in 36 monthly installments commencing in December 2001. As of December 31, 2003, there was approximately $597,000 outstanding under the
Equipment Line. The Equipment Line is secured by certain assets of the Company.

In
December 2002, the Company's credit facility was amended to include an equipment advance (the "Equipment Advance") in the amount of $5.0 million from the same lending
institution. Interest on the Equipment Advance is payable monthly and principal is payable in 24 equal monthly installments, beginning January 31, 2003. The Equipment Advance bears interest at
an annual rate of prime plus 0.75% or the LIBOR rate plus 3.0%. The interest rate at December 31, 2003 was 4.75%. As of December 31, 2003 the balance outstanding under this Equipment
Advance was approximately $2.5 million.

Future
principal payments on the Equipment Line and the Equipment Advance will aggregate $3.1 million in 2004, based on the total outstanding balance of approximately
$3.1 million.

In
December 2001, we completed the sale of 2,574,298 shares of common stock to purchasers in a private placement at a price of $5.83 per share and realized proceeds, net of
commissions and issuance costs, of approximately $14.9 million.

In
February 2002, we completed a secondary public offering of 6,572,623 shares of common stock at $9.57 per share and realized proceeds, net of underwriting discounts, commissions
and issuance costs of approximately $59.0 million.

22

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In
November 2002, we completed the repurchase of 1,200,000 shares of our common stock at $2.30 per share.

In
July 2003, we completed the repurchase of 522,002 shares of our common stock at $2.38 per share from a former officer of the Company. Approximately $370,000 of the
re-purchase amount was charged to compensation expense.

We
anticipate continued growth in our operating expenses for the foreseeable future, particularly in research and development expenses and, to a lesser extent, sales and marketing and
general and administrative expenses. As a result, we expect our operating expenses and capital expenditures to constitute the primary uses of our cash resources. In addition, we may require cash
resources to fund acquisitions or investments in complementary businesses, technologies or product lines. We believe our current cash and cash equivalents and expected cash from operations, will be
sufficient to meet our anticipated cash requirements for working capital and capital expenditures for at least the next 24 months. However, in the event there is reduced demand for our products
and services in the future, our cash from operations could be negatively impacted. Thereafter, we may need to raise additional funds, and cannot be certain we will be able to obtain additional debt or
equity financing on favorable terms, if at all.

Future
minimum payments required under capital leases, together with the net present value of such payments, and future minimum lease payments required under operating leases, by year
and in the aggregate, with initial terms of one year or more, consisted of the following at December 31, 2003 (in thousands):

Operating Leases

Capital LeasesRelated Party Lease
Expense

Lease Expense

Sublease Income

Net

Lease ExpenseYear ended December 31,2004

$
51

$
10,664

$
355

$
10,360

$
3072005





8,389


123


8,266


5122006





5,688





5,688


112007





5,088





5,088


102008





4,365





4,365


Thereafter





22,501





22,501


$
51

$
56,695

$
478

$
56,268


840Less: amount representing interest














(15
)Net present value














825Less: current portion














(310
)Long-term portion













$
515


23

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Recently Issued Accounting Pronouncements

In May 2003, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 150, "Accounting for
Certain Financial Instruments with Characteristics of Both Liabilities and Equity." SFAS 150 requires certain instruments with certain characteristics be classified as liabilities as opposed to
equity. This statement is effective for financial instruments entered into or modified after May 31, 2003. We adopted SFAS No. 150 on June 1, 2003. The adoption did not have a
material impact on our results of operations or financial condition.

In
January 2003, the FASB issued FASB Interpretation No. 46, ("FIN 46") "Consolidation of Variable Interest Entities". FIN 46 requires certain variable interest entities to
be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at
risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning
after December 15, 2003. We do not have any ownership in any variable interest entities as of December 31, 2003. We will apply the consolidation requirement of FIN 46 in future periods
should an interest in a variable interest entity be acquired.

Risks Related to SeeBeyond

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

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

A continued downturn in the general economy or a continuation of the industry trend toward reducing or delaying additional information technology
spending due to cost-cutting pressures could reduce demand for our products and services.

We rely significantly upon customers making large information technology purchasing decisions as a source of revenue. During 2001, 2002, and the first nine months
of 2003, we experienced a general slow-down in the level of capital spending by some of our customers due to the general economic downturn, which has adversely affected our revenues. This
slow-down in capital spending, if sustained in future periods, could result in reduced sales or the postponement of sales to our customers. There can be no assurance the level of spending
on information technology in general or on business integration software by our customers and potential customers in particular, will increase or remain at current levels in future periods. Lower
spending on information technology could result in reduced license sales to our customers, reduced overall revenues, diminished margin levels, and could impair our operating results in future periods.

We have a large accumulated deficit, we may incur future losses and we may not achieve or maintain profitability.

We have incurred substantial losses since 1998 as we increased funding of the development of our products and technologies and expanded our sales and marketing
organization. As of December 31, 2003, we had an accumulated deficit of approximately $153.9 million. We may continue to incur losses in future periods and we may not achieve or maintain
profitability on a quarterly or annual basis.

24

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Our operating results fluctuate significantly, and an unanticipated decline in revenues or gross margin may disappoint securities analysts or investors
and result in a decline in our stock price.

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

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

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

We experience long and variable sales cycles, which could have a negative impact on our results of operations for any given quarter.

Our products are often used by our customers throughout their organizations to address critical business problems. Customers generally consider a wide range of
issues before committing to purchase our products, including product benefits, the ability to operate with existing and future computer systems, the ability to accommodate increased transaction
volumes and product reliability. Many customers are addressing these issues for the first time when they consider whether to buy our products and services. As a result, we or other parties, including
systems integrators, must educate potential customers on the use and benefits of our products and services. In addition, the purchase of our products generally involves a significant commitment of
capital and other resources by a customer. This commitment often requires significant technical review, assessment of competitive products and approval at a number of management levels within a
customer's organization. Our sales cycle may vary based on the industry in which the potential customer operates and is difficult to predict for any particular license transaction. The length and
variability of our sales cycle makes it difficult to predict whether particular sales will be concluded in any given quarter. If one or more of our license transactions are not consummated in a given
quarter, our results of operations for that quarter may be below our expectations and the expectations of analysts and investors.

25

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Our operating results are highly dependent on license revenues from one software suite, and our business could be materially harmed by factors that
adversely affect the pricing and demand for this software suite.

Substantially all of our license revenues have been, and are expected to continue to be, derived from the license of our Business Integration Suite. Accordingly,
our future operating results will depend on the demand for our Business Integration Suite by future customers, including new and enhanced releases that are subsequently introduced. Our latest version
of the Business Integration Suite, called our SeeBeyond Integrated Composite Application Network (ICAN) Suite version 5.0, was announced in March 2003 and made generally available to customers
in October of 2003. If our competitors release new products that are superior to our Business Integration Suite in performance or price, or if we fail to enhance our Business Integration Suite and
introduce new products in a timely manner, demand for our products may decline, and we may have to reduce the pricing of our products. A decline in demand or pricing for our Business Integration Suite
as a result of these or other factors would significantly reduce our revenues.

In
the past, we have experienced delays in the commencement of commercial releases of our Business Integration Suite. In the future, we may fail to introduce or deliver new products on a
timely basis. If new releases or products are delayed or do not achieve market acceptance, we could experience customer dissatisfaction or a delay or loss of revenues. For example, the introduction of
new enterprise and business applications requires us to introduce new e*Way adapters to support the integration of these applications. Our failure to introduce these or other modules in a timely
manner could cause our revenues and market share to decline. In addition, customers may delay purchases of our products in anticipation of future releases. If customers defer material orders in
anticipation of new releases or new product introductions, our revenues may decline.

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

Our revenues will likely decline if we do not develop and maintain successful relationships with our systems integration partners and other partners,
who also have relationships with our competitors.

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

These
systems integrators are not contractually required to implement our products, and competition for these resources may preclude us from obtaining sufficient resources to provide the
necessary implementation services to support our needs. If the number of installations of our products exceeds our access to the resources provided by these systems integrators, we will be required to
provide these services internally, which would increase our expenses and significantly limit our ability to meet our customers' implementation needs. A number of our competitors have stronger
relationships with some of these systems integrators and, as a result, these systems integrators might be more likely to recommend competitors' products and services instead of ours. In addition, a
number of our competitors have relationships with a greater number of these systems integrators or have stronger

26

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systems
integrator relationships based on specific vertical markets and, therefore, have access to a broader base of customers.

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

Our markets are highly competitive and, if we do not compete effectively, we may suffer price reductions, reduced gross margins and loss of market
share.

The market for our products is intensely competitive, evolving and subject to rapid technological change. We expect the intensity of competition to increase in
the future. As a result of increased competition, we may have to reduce the price of our products and services, and we may experience reduced gross margins and loss of market share, any one of which
could significantly reduce our future revenues and operating results. Our current competitors include vendors offering e-Business application integration and traditional electronic data
interchange, or EDI, software products, as well as "in house" information technology departments of potential customers that have developed or may develop systems that provide some or all of the
functionality of our Business Integration Suite. We may also encounter competition from major enterprise software developers in the future.

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

Our substantial and expanding international operations are subject to uncertainties, which could adversely affect our operating results.

Revenues from the sale of products and services outside the United States accounted for 41%, 35% and 34% for the years ended 2003, 2002 and 2001, respectively.
Revenues from the sale of products and services in the United Kingdom as a percent of our total revenues were 16%, 13% and 17% for the years ended 2003, 2002 and 2001, respectively. We believe
revenues from sales outside the United States will continue to account for a material portion of our total revenues for the foreseeable future. We are exposed to several risks inherent in conducting
business internationally, such as:



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

27

---

We could suffer losses and negative publicity if new versions or releases of our products contain errors or defects.

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

If our products do not operate with the many hardware and software platforms used by our customers and keep pace with technological change, our business
may fail.

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



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

The market for business integration software may not grow as quickly as we anticipate, which would cause our revenues to fall below expectations.

The market for business integration software is rapidly evolving. We earn substantially all of our license revenues from sales of our Business Integration Suite.
We expect to earn substantially all of our revenues in the foreseeable future from sales of our Business Integration Suite and related products and services. Our future financial performance will
depend on continued growth in the number of organizations demanding software and services for application integration and business integration solutions and seeking outside vendors to develop, manage
and maintain this software for their critical

28

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applications.
Many of our potential customers have made significant investments in internally developed systems and would incur significant costs in switching to third-party products, which may
substantially inhibit the growth of the market for business integration software. If this market fails to grow, or grows more slowly than we expect, our revenues will be adversely affected.

Pending or future litigation could have a material adverse impact on our results of operation and financial condition.

From time to time, we have been subject to litigation. Several putative securities class action lawsuits are currently pending against us, our directors and
officers. The plaintiffs in these suits allege we and the other defendants made false statements about our operating results and business, while concealing material information. We believe these
lawsuits are without merit and we intend to defend against them vigorously. The complaint does not specify the amount of damages the plaintiffs seek, and as a result, we are unable to estimate the
possible range of damages that might be incurred as a result of the lawsuit. The uncertainty associated with these unresolved lawsuits could harm our business, financial condition and reputation.
Negative developments with respect to the lawsuits could cause our stock price to decline. In addition to the related cost and use of cash, pending or future litigation could cause the diversion of
management's attention and resources. Although we have begun to accrue amounts relating to legal costs and expenses, we have not accrued any amounts relating to potential damages associated with the
putative class action lawsuits. However, because of uncertainties relating to litigation, our decision as to whether to accrue and the amount of our estimates could be wrong. In addition, although we
are unable to determine the amount, if any, we may be required to pay in connection with the resolution of the lawsuits by settlement or otherwise, such a payment could seriously harm our results of
operation, financial condition and liquidity.

If we fail to adequately protect our proprietary rights, we may lose these rights and our business may be seriously harmed.

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

Our products could infringe the intellectual property rights of others, causing costly litigation and the loss of significant rights.

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

29

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Furthermore,
former employers of our current and future employees may assert our employees have improperly disclosed to us or are using their confidential or proprietary information.

Failure to raise additional capital or generate the significant capital necessary to expand our operations and invest in new products could reduce our
ability to compete and result in lower revenues.

We currently expect our current cash resources will be sufficient to meet our working capital and capital expenditure needs for at least the next
twenty-four months. After that, we may need to raise additional funds, and we cannot be certain we will be able to obtain additional debt or equity financing on favorable terms, or at all.
If we raise additional equity financing, our stockholders may experience significant dilution of their ownership interests and the per share value of our common stock could decline. If we engage in
debt financing, we may be required to accept terms that restrict our ability to incur additional indebtedness and force us to maintain specified liquidity or other ratios, any of which could harm our
business. If we need additional capital and cannot raise it on acceptable terms, we may not be able to, among other things:



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

If we fail to attract and retain qualified personnel, our ability to compete will be harmed.

We depend on the continued service of our key technical, sales and senior management personnel, including our founder and Chief Executive Officer, James T.
Demetriades. Most of these persons are not bound by an employment agreement, and we do not maintain key person life insurance on any of these persons, other than Mr. Demetriades. The loss of
any of our senior management or other key product development or sales and marketing personnel could adversely affect our future operating results. In addition, we must attract, retain and motivate
highly skilled employees, including sales personnel and software engineers. We face significant competition for individuals with the skills required to develop, market and support our products and
services. We may not be able to recruit and retain sufficient numbers of these highly skilled employees. If we fail to do so, our ability to compete will be significantly harmed.

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

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

Furthermore,
if our relationships with systems integrators succeed and we are able to penetrate additional commercial markets, we may need additional sales and marketing and professional
services resources to support these customers. The growth of our customer base will require us to invest significant resources in the training and development of our employees and our systems
integration

30

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partners.
If these organizations fail to keep pace with the number and demands of the customers that license our products, our ability to market and sell our products and services and our ability to
develop new products and services will be harmed. To manage our business, we must continue to:



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

We have implemented anti-takeover provisions that could discourage or prevent a takeover, even if an acquisition would be beneficial to our
stockholders.

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

Concentration of ownership among our existing executive officers and directors may prevent new investors from influencing significant corporate
decisions.

Our Chief Executive Officer, James T. Demetriades beneficially owns approximately 32% of our outstanding common stock. Our executive officers and directors
beneficially own, in the aggregate, approximately 41% of our outstanding common stock. As a result, these stockholders will be able to exercise a significant level of control over all matters
requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This could have the effect of delaying or preventing a change of control of
SeeBeyond and will make some transactions difficult or impossible without the support of these stockholders.

External factors such as potential terrorist attacks could have a material adverse affect on the U.S. and global economics.

The possibility of potential terrorist attacks could have an adverse effect upon an already weakened world economy and could cause U.S. and foreign businesses to
slow spending on products and services and delay sales cycles. The economic uncertainty resulting from any such future attacks and other responses associated with such attacks may continue to
negatively impact short-term consumer and business confidence.

31

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Item 7A: Quantitative and Qualitative Disclosure about Market Risk

We are exposed to a variety of risks, including changes in interest rates affecting the return on our investments and foreign currency fluctuations. We have
established policies and procedures to manage our exposure to fluctuations in interest rates and foreign currency exchange rates.

Interest rate risk.We maintain our funds in money market and certificate of deposit accounts at financial institutions. Our
exposure to market risk due to fluctuations in interest rates relates primarily to our interest earnings on our cash deposits. These securities are subject to interest rate risk in as much as their
fair value may fall if market interest rates increase. If market interest rates were to increase immediately and uniformly by 10% from the levels prevailing as of December 31, 2003, the fair
value of the portfolio would not decline by a material amount. We do not use derivative financial instruments to mitigate risks. However, we do have an investment policy that would allow us to invest
in short-term and long-term investments such as money market instruments and corporate debt securities. Our policy attempts to reduce such risks by typically limiting the
maturity date of such securities, placing our investments with high credit quality issuers and limiting the amount of credit exposure with any one issuer.

Foreign currency exchange rate risk.Our exposure to market risk due to fluctuations in foreign currency exchange rates
relates primarily to the intercompany balances with our subsidiaries located in Australia, France, Germany, Japan, and the United Kingdom. Transaction gains or losses have not been significant in the
past and we do not participate in any hedging activity on foreign currencies. We would not experience a material foreign exchange loss based on a hypothetical 10% adverse change in the price of any of
the local currencies of these countries. Consequently, we do not expect a reduction in the value of such accounts denominated in foreign currencies resulting from a sudden or significant fluctuation
in foreign exchange rates would have a direct material impact on our financial position, results of operations or cash flows.

32

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Item 8: Financial Statements and Supplementary Data

SEEBEYOND TECHNOLOGY CORPORATION

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

|                                                  |  | Page
|------------------------------------------------- |  | ----
|Report of Ernst & Young LLP, Independent Auditors |  | 34  
|Consolidated Balance Sheets                       |  | 35  
|Consolidated Statements of Operations             |  | 36  
|Consolidated Statements of Stockholders' Equity   |  | 37  
|Consolidated Statements of Cash Flows             |  | 39  
|Notes to Consolidated Financial Statements        |  | 40  

33

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REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The
Board of Directors and Stockholders of
SeeBeyond Technology Corporation

We
have audited the accompanying consolidated balance sheets of SeeBeyond Technology Corporation as of December 31, 2003 and 2002, and the related consolidated statements of
operations, stockholders' equity (deficit), and cash flows for each of the three years in the period ended December 31, 2003. Our audits also included the financial statement schedule listed in
the Index at Item 15(a). These financial statements and schedule are the responsibility of SeeBeyond Technology Corporation's management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.

We
conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.

In
our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of SeeBeyond Technology Corporation as of
December 31, 2003 and 2002, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2003, in conformity with
accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a
whole, presents fairly in all material respects, the information set forth therein.

As
discussed in Note 1 to the consolidated financial statements, SeeBeyond Technology Corporation changed its method of accounting for goodwill in 2002, in accordance with
Statement of Financial Accounting Standards No. 142.

|                                            |  | /s/ Ernst & Young LLP
|------------------------------------------- |  | ---------------------
|Woodland Hills, California
January 27, 2004 |  |                      

34

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SEEBEYOND TECHNOLOGY CORPORATION

CONSOLIDATED BALANCE SHEETS

|                                      |                                                                                                                                                                                                                                         | 2003                                                                                                    |                                            | 2002     |       
|------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------- | ------------------------------------------ | -------- | ------
|
|Assets:                               |                                                                                                                                                                                                                                         |                                                                                                         |                                            |          |       
|                                      | Current assets:                                                                                                                                                                                                                         |                                                                                                         |                                            |          |       
|                                      |                                                                                                                                                                                                                                         | Cash and cash equivalents                                                                               |                                            | $        | 70,135
|                                      |                                                                                                                                                                                                                                         | Accounts receivable, net of allowances of $2,373 and $2,539 at December 31, 2003 and 2002, respectively |                                            |          | 34,333
|                                      |                                                                                                                                                                                                                                         | Prepaid expenses and other current assets                                                               |                                            |          | 4,596 
|                                      |                                                                                                                                                                                                                                         |                                                                                                         |                                            |          |       
|                                      |                                                                                                                                                                                                                                         |                                                                                                         | Total current assets                       |          |       
|                                      |                                                                                                                                                                                                                                         | Property and equipment, net                                                                             |                                            |          | 15,224
|                                      |                                                                                                                                                                                                                                         | Other assets                                                                                            |                                            |          | 2,068 
|                                      |                                                                                                                                                                                                                                         | Goodwill                                                                                                |                                            |          | 1,391 
|                                      |                                                                                                                                                                                                                                         |                                                                                                         |                                            |          |       
|                                      |                                                                                                                                                                                                                                         |                                                                                                         | Total assets                               |          | $     
|                                      |                                                                                                                                                                                                                                         |                                                                                                         |                                            |          |       
|Liabilities and stockholders' equity: |                                                                                                                                                                                                                                         |                                                                                                         |                                            |          |       
|                                      | Current liabilities:                                                                                                                                                                                                                    |                                                                                                         |                                            |          |       
|                                      |                                                                                                                                                                                                                                         | Accounts payable                                                                                        |                                            | $        | 5,120 
|                                      |                                                                                                                                                                                                                                         | Accrued compensation and related expenses                                                               |                                            |          | 12,675
|                                      |                                                                                                                                                                                                                                         | Accrued expenses                                                                                        |                                            |          | 9,263 
|                                      |                                                                                                                                                                                                                                         | Deferred revenues                                                                                       |                                            |          | 31,221
|                                      |                                                                                                                                                                                                                                         | Equipment line and advance payablecurrent portion                                                      |                                            |          | 3,097 
|                                      |                                                                                                                                                                                                                                         | Capital lease payablecurrent portion                                                                   |                                            |          | 310   
|                                      |                                                                                                                                                                                                                                         |                                                                                                         |                                            |          |       
|                                      |                                                                                                                                                                                                                                         |                                                                                                         | Total current liabilities                  |          |       
|Equipment line and advance payable    |                                                                                                                                                                                                                                         |                                                                                                         |                                           |          |       
|Capital lease payable                 |                                                                                                                                                                                                                                         |                                                                                                         | 515                                        |          |       
|                                      |                                                                                                                                                                                                                                         |                                                                                                         |                                            |          |       
|                                      |                                                                                                                                                                                                                                         |                                                                                                         | Total liabilities                          |          |       
|Commitments and contingencies         |                                                                                                                                                                                                                                         |                                                                                                         |                                            |          |       
|Stockholders' equity:                 |                                                                                                                                                                                                                                         |                                                                                                         |                                            |          |       
|                                      | Common stock, $.0001 par value200,000,000 shares authorized; 85,548,522 shares issued and 83,826,520 shares outstanding as of December 31, 2003 and 83,738,243 shares issued and 82,538,243 shares outstanding as of
December 31, 2002 |                                                                                                         |                                            | 8        |       
|                                      | Additional paid-in capital                                                                                                                                                                                                              |                                                                                                         |                                            | 222,539  |       
|                                      | Treasury stock                                                                                                                                                                                                                          |                                                                                                         |                                            | (3,632   | )     
|                                      | Deferred stock compensation                                                                                                                                                                                                             |                                                                                                         |                                            | (47      | )     
|                                      | Accumulated other comprehensive income (loss)                                                                                                                                                                                           |                                                                                                         |                                            | 616      |       
|                                      | Accumulated deficit                                                                                                                                                                                                                     |                                                                                                         |                                            | (153,938 | )     
|                                      |                                                                                                                                                                                                                                         |                                                                                                         |                                            |          |       
|                                      |                                                                                                                                                                                                                                         |                                                                                                         | Total stockholders' equity                 |          |       
|                                      |                                                                                                                                                                                                                                         |                                                                                                         |                                            |          |       
|                                      |                                                                                                                                                                                                                                         |                                                                                                         | Total liabilities and stockholders' equity |          | $     
|                                      |                                                                                                                                                                                                                                         |                                                                                                         |                                            |          |       

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

35

---

SEEBEYOND TECHNOLOGY CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                                        |                                                                                                                 | Years Ended December 31, |        
|----------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------- | ------------------------ | -------
|
|
|Revenues:                                                               |                                                                                                                 |                          |        
|                                                                        | License (net of warrant amortization of $1,116 in 2001)                                                         |                          | $      
|                                                                        | Services                                                                                                        |                          |        
|                                                                        | Maintenance                                                                                                     |                          |        
|                                                                        |                                                                                                                 |                          |        
|                                                                        |                                                                                                                 | Total revenues           |        
|Cost of revenues:                                                       |                                                                                                                 |                          |        
|                                                                        | License                                                                                                         |                          |        
|                                                                        | Services and maintenance (exclusive of stock-based compensation of $37 in 2003, $124 in 2002 and $284 in 2001)  |                          |        
|                                                                        |                                                                                                                 |                          |        
|                                                                        |                                                                                                                 | Total cost of revenues   |        
|                                                                        |                                                                                                                 |                          |        
|                                                                        |                                                                                                                 | Gross profit             |        
|                                                                        |                                                                                                                 |                          |        
|Operating expenses:                                                     |                                                                                                                 |                          |        
|                                                                        | Research and development (exclusive of stock-based compensation of $54 in 2003, $141 in 2002 and $319 in 2001)  |                          |        
|                                                                        | Sales and marketing (exclusive of stock-based compensation of $125 in 2003, $450 in 2002 and $1,076 in 2001)    |                          |        
|                                                                        | General and administrative (exclusive of stock-based compensation of $61 in 2003, $60 in 2002 and $136 in 2001) |                          |        
|                                                                        | Restructuring and impairment charges                                                                            |                          |        
|                                                                        | Amortization of goodwill                                                                                        |                          |        
|                                                                        | Amortization of sales and marketing warrants                                                                    |                          |        
|                                                                        | Amortization of stock-based compensation                                                                        |                          |        
|                                                                        |                                                                                                                 |                          |        
|                                                                        |                                                                                                                 | Total operating expenses |        
|                                                                        |                                                                                                                 |                          |        
|Loss from operations                                                    |                                                                                                                 |                          | (27,431
|Interest and other income                                               |                                                                                                                 |                          | 1,006  
|Interest expense                                                        |                                                                                                                 |                          | (382   
|                                                                        |                                                                                                                 |                          |        
|Loss before income tax provision                                        |                                                                                                                 |                          | (26,807
|Provision for income taxes                                              |                                                                                                                 |                          | 691    
|                                                                        |                                                                                                                 |                          |        
|Net loss                                                                |                                                                                                                 | $                        | (27,498
|                                                                        |                                                                                                                 |                          |        
|Basic and diluted net loss per share                                    |                                                                                                                 | $                        | (0.33  
|                                                                        |                                                                                                                 |                          |        
|Number of shares used in computing basic and diluted net loss per share |                                                                                                                 |                          | 83,002 
|                                                                        |                                                                                                                 |                          |        

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

36

---

SEEBEYOND TECHNOLOGY CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(In thousands)

|                                |                                                                     | Common Stock                            |        |   |   |   |         |        |   | Accumulated
Other
Comprehensive
Income (Loss) |        |   |        |        |  
|------------------------------- | ------------------------------------------------------------------- | --------------------------------------- | ------ | - | - | - | ------- | ------ | - | --------------------------------------------- | ------ | - | ------ | ------ | -
|
|
|Balance as of January 1, 2001   |                                                                     | 69,678                                  |        | 6 |   |   | 130,135 |        |   |                                              |        |   | (8,623 | )      |  
|                                | Components of comprehensive loss                                    |                                         |        |   |   |   |         |        |   |                                               |        |   |        |        |  
|                                |                                                                     | Net loss                                |        |  |   |  |         |        |  |                                               |        |  |        |        | 
|                                |                                                                     | Foreign currency translation adjustment |        |  |   |  |         |        |  |                                               |        |  |        |        | 
|                                |                                                                     |                                         |        |   |   |   |         |        |   |                                               |        |   |        |        |  
|                                |                                                                     | Total comprehensive loss                |        |   |   |   |         |        |   |                                               |        |   |        |        |  
|                                | Issuance of common stock pursuant to acquisition of subsidiary      |                                         | 35     |   |  |   |         | 735    |   |                                               |       |   |        |       |  
|                                | Issuance of common stock, net of issuance costs                     |                                         | 2,574  |   | 1 |   |         | 14,853 |   |                                               |       |   |        |       |  
|                                | Issuance of common stock pursuant to employee stock option plan     |                                         | 1,807  |   |  |   |         | 4,724  |   |                                               |       |   |        |       |  
|                                | Issuance of common stock pursuant to employee stock purchase plan   |                                         | 430    |   |  |   |         | 3,614  |   |                                               |       |   |        |       |  
|                                | Issuance of common stock warrants                                   |                                         |       |   |  |   |         | 3,689  |   |                                               |       |   |        | (3,689 | )
|                                | Issuance of common stock pursuant to warrant exercises              |                                         | 226    |   |  |   |         |       |   |                                               |       |   |        |       |  
|                                | Amortization of common stock warrants                               |                                         |       |   |  |   |         |       |   |                                               |       |   |        | 7,065  |  
|                                | Amortization of deferred stock compensation                         |                                         |       |   |  |   |         |       |   |                                               |       |   |        | 1,815  |  
|                                |                                                                     |                                         |        |   |   |   |         |        |   |                                               |        |   |        |        |  
|Balance as of December 31, 2001 |                                                                     | 74,750                                  |        | 7 |   |   | 157,750 |        |   |                                              |        |   | (3,432 | )      |  
|                                | Components of comprehensive loss                                    |                                         |        |   |   |   |         |        |   |                                               |        |   |        |        |  
|                                |                                                                     | Net loss                                |        |  |   |  |         |        |  |                                               |        |  |        |        | 
|                                |                                                                     | Foreign currency translation adjustment |        |  |   |  |         |        |  |                                               |        |  |        |        | 
|                                |                                                                     |                                         |        |   |   |   |         |        |   |                                               |        |   |        |        |  
|                                |                                                                     | Total comprehensive loss                |        |   |   |   |         |        |   |                                               |        |   |        |        |  
|                                | Issuance of common stock pursuant to secondary public offering, net |                                         | 6,573  |   | 1 |   |         | 59,011 |   |                                               |       |   |        |       |  
|                                | Issuance of common stock pursuant to employee stock option plan     |                                         | 1,336  |   |  |   |         | 3,509  |   |                                               |       |   |        |       |  
|                                | Issuance of common stock pursuant to employee stock purchase plan   |                                         | 412    |   |  |   |         | 936    |   |                                               |       |   |        |       |  
|                                | Issuance of common stock pursuant to warrant exercises              |                                         | 667    |   |  |   |         |       |   |                                               |       |   |        |       |  
|                                | Amortization of common stock warrants                               |                                         |       |   |  |   |         |       |   |                                               |       |   |        | 380    |  
|                                | Amortization of deferred stock compensation                         |                                         |       |   |  |   |         |       |   |                                               |       |   |        | 775    |  
|                                | Payments for the purchase of common stock                           |                                         | (1,200 | ) |  |   |         |       |   |                                               | (2,760 | ) |        |       |  
|                                | Revaluation of warrant                                              |                                         |       |   |  |   |         | (1,500 | ) |                                               |       |   |        | 1,500  |  
|                                | Cancellation of common stock warrant                                |                                         |       |   |  |   |         | (460   | ) |                                               |       |   |        | 460    |  
|                                |                                                                     |                                         |        |   |   |   |         |        |   |                                               |        |   |        |        |  
|Balance as of December 31, 2002 |                                                                     | 82,538                                  |        | 8 |   |   | 219,246 |        |   | (2,760                                        | )      |   | (317   | )      |  
|                                |                                                                     |                                         |        |   |   |   |         |        |   |                                               |        |   |        |        |  

37

---

|                                | Components of comprehensive loss                                  |                                         |       |   |   |   |         |       |   |        |      |   |     |      |   |     |   |     |          |   |         |        |       |        
|------------------------------- | ----------------------------------------------------------------- | --------------------------------------- | ----- | - | - | - | ------- | ----- | - | ------ | ---- | - | --- | ---- | - | --- | - | --- | -------- | - | ------- | ------ | ----- | -------
|                                |                                                                   | Net loss                                |       |  |   |  |         |       |  |        |      |  |     |      |  |     |   |    |          |   | (27,498 | )      |       | (27,498
|                                |                                                                   | Foreign currency translation adjustment |       |  |   |  |         |       |  |        |      |  |     |      |  |     |   | 715 |          |   |        |        |       | 715    
|                                |                                                                   |                                         |       |   |   |   |         |       |   |        |      |   |     |      |   |     |   |     |          |   |         |       
|                                |                                                                   | Total comprehensive loss                |       |   |   |   |         |       |   |        |      |   |     |      |   |     |   |     |          |   |         |        |       | (26,783
|                                | Issuance of common stock pursuant to employee stock option plan   |                                         | 1,427 |   |  |   |         | 2,422 |   |        |     |   |     |     |   |     |  |     |          |  |         |        | 2,422 |        
|                                | Issuance of common stock pursuant to employee stock purchase plan |                                         | 383   |   |  |   |         | 674   |   |        |     |   |     |     |   |     |  |     |          |  |         |        | 
674 |        
|                                | Payments for the purchase of common stock                         |                                         | (522  | ) |  |   |         |      |   |        | (872 | ) |     |     |   |     |  |     |          |  |         |        | (872  | )      
|                                | Deferred stock compensation related to stock options              |                                         |      |   |  |   |         | 39    |   |        |     |   |     | (39  | ) |     |  |     |          |  |         |        |      |        
|                                | Amortization of common stock warrants                             |                                         |      |   |  |   |         |      |   |        |     |   |     | 190  |   |     |  |     |          |  |         |        | 190   |        
|                                | Amortization of deferred stock compensation                       |                                         |      |   |  |   |         |      |   |        |     |   |     | 277  |   |     |  |     |          |  |         |        | 
277 |        
|                                | Revaluation of warrant                                            |                                         |      |   |  |   |         | 158   |   |        |     |   |     | (158 | ) |     |  |     |          |  |         |        |      |        
|                                |                                                                   |                                         |       |   |   |   |         |       |   |        |      |   |     |      |   |     |  
|Balance as of December 31, 2003 |                                                                   | 83,826                                  |       | 8 |   | $ | 222,539 |       | $ | (3,632 | )    | $ | (47 | )    | $ | 616 |   | $   | (153,938 | ) | $       | 65,546 |      
|                                |                                                                   |                                         |       |   |   |   |         |       |   |        |      |   |     |      |   |     |  

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

38

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SEEBEYOND TECHNOLOGY CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                             |                                                                                   | For the Years Ended December 31,              |        
|------------------------------------------------------------ | --------------------------------------------------------------------------------- | --------------------------------------------- | -------
|
|
|Cash flows from operating activities:                        |                                                                                   |                                               |        
|                                                             | Net loss                                                                          |                                               | $      
|                                                             | Adjustments to reconcile net loss to net cash used in operating activities:       |                                               |        
|                                                             |                                                                                   | (Gain) loss on disposal of fixed assets       |        
|                                                             |                                                                                   | Depreciation and amortization                 |        
|                                                             |                                                                                   | Provision for doubtful accounts receivable    |        
|                                                             |                                                                                   | Amortization of goodwill                      |        
|                                                             |                                                                                   | Amortization of sales and marketing warrants  |        
|                                                             |                                                                                   | Amortization of other warrants                |        
|                                                             |                                                                                   | Amortization of bank warrant                  |        
|                                                             |                                                                                   | Amortization of stock-based compensation      |        
|                                                             |                                                                                   | Non-cash restructuring and impairment charges |        
|                                                             | Changes in assets and liabilities:                                                |                                               |        
|                                                             |                                                                                   | Accounts receivable                           |        
|                                                             |                                                                                   | Prepaid expenses and other current assets     |        
|                                                             |                                                                                   | Accounts payable                              |        
|                                                             |                                                                                   | Accrued compensation and related expenses     |        
|                                                             |                                                                                   | Deferred revenues                             |        
|                                                             |                                                                                   |                                               |        
|                                                             |                                                                                   | Net cash used in operating activities:        |        
|Cash flows from investing activities:                        |                                                                                   |                                               |        
|                                                             | Purchases of property and equipment                                               |                                               |        
|                                                             | Payments to acquire companies, net of cash acquired                               |                                               |        
|                                                             | Related party receivable                                                          |                                               |        
|                                                             | Other                                                                             |                                               |        
|                                                             |                                                                                   |                                               |        
|                                                             | Net cash used in investing activities                                             |                                               |        
|Cash flows from financing activities:                        |                                                                                   |                                               |        
|                                                             | Net (repayments) borrowings on bank lines of credit                               |                                               |        
|                                                             | Proceeds from issuance of common stock, net                                       |                                               |        
|                                                             | Proceeds from issuance of common stock pursuant to secondary public offering, net |                                               |        
|                                                             | Proceeds from issuance of common stock pursuant to employee stock option plan     |                                               |        
|                                                             | Proceeds from issuance of common stock pursuant to employee stock purchase plan   |                                               |        
|                                                             | Payments for the purchase of common stock                                         |                                               |        
|                                                             | Repayments of capital lease obligation                                            |                                               |        
|                                                             |                                                                                   |                                               |        
|                                                             | Net cash (used in) provided by financing activities                               |                                               |        
|Effect of exchange rate changes on cash and cash equivalents |                                                                                   |                                               | 715    
|                                                             |                                                                                   |                                               |        
|Net (decrease) increase in cash and cash equivalents         |                                                                                   |                                               | (23,979
|                                                             |                                                                                   |                                               |        
|Cash and cash equivalents at beginning of the period         |                                                                                   |                                               | 94,114 
|Cash and cash equivalents at end of the period               |                                                                                   | $                                             | 70,135 
|                                                             |                                                                                   |                                               |        
|Supplemental cash flow disclosure:                           |                                                                                   |                                               |        
|                                                             | Income taxes paid                                                                 |                                               | $      
|                                                             |                                                                                   |                                               |        
|                                                             | Interest paid                                                                     |                                               | $      
|                                                             |                                                                                   |                                               |        
|Non-cash investing activities:                               |                                                                                   |                                               |        
|                                                             | Common stock issued in connection with acquisitions                               |                                               | $      
|                                                             |                                                                                   |                                               |        
|                                                             | Fair value of assets assumed in acquisition                                       |                                               | $      
|                                                             |                                                                                   |                                               |        
|                                                             | Fair value of liabilities assumed in acquisition                                  |                                               | $      
|                                                             |                                                                                   |                                               |        
|                                                             | Capital lease obligation incurred                                                 |                                               | $      
|                                                             |                                                                                   |                                               |        

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

39

---

SEEBEYOND TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. The Company and Summary of Significant Accounting Policies

The Company

SeeBeyond Technology Corporation (the "Company") is a leading provider of business integration software that enables the real-time flow of information
within the enterprise and among customers, suppliers and partners. The Company believes it offers the only comprehensive business integration solution architected from a single, internally developed
software code base, encompassing application-to-application integration, business-to-business integration and business process management. The Company's
Business Integration Suite builds upon more than twelve years of continuous development of business integration solutions within and among enterprises.

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

Basis of Presentation

The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany transactions have been
eliminated in consolidation. Certain reclassifications have been made to prior year balances in order to conform to the current period presentation. These reclassifications have no impact on
previously reported net loss or cash flows.

Use of Estimates

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

Cash and Cash Equivalents

The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.

Concentration of Credit Risk and Allowance for Doubtful Accounts

Financial instruments that potentially expose the Company to concentration of credit risk consist primarily of temporary cash investments and accounts receivable.
The Company places its temporary cash investments with financial institutions. The Company's accounts receivable are derived from revenues earned from customers located primarily in the United States,
Europe, Australia and Japan. The risk with respect to trade receivables is mitigated by credit evaluations we perform on our customers and by the diversification of our customer base. The Company
generally does not require collateral or other security from its customers.

The
Company performs ongoing credit evaluations of its customers' financial condition and maintains allowances for potential credit losses based upon the expected collectibility of the
receivable. The expectation of collectibility is based on the review of credit profiles of each customer, contractual

40

---

terms
and conditions, current economic trends and payment history. Credit losses have historically been within management's expectations.

Fair Value of Financial Instruments

The Company's financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities are carried at cost, which
approximates their fair value, due to the relatively short maturity of these instruments. As of December 31, 2003 and 2002, the Company's short-term line of credit and equipment
line payable had variable interest rates and, accordingly, the Company believes the carrying value of the short-term line of credit and equipment line approximates their fair values.

Software Development Costs

Costs related to the research and development of new software products and enhancements to existing software products are expensed as incurred until technological
feasibility of the product has been established, at which time such costs are capitalized, subject to expected recoverability. To date, the Company has not capitalized any development costs related to
its software products since the time period between technological feasibility and general release of a product is not significant and related costs incurred during that time period have not been
material.

For
software developed for internal use, certain qualifying costs incurred in the application development stage are capitalized and amortized over a period of three years.

Revenue Recognition

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

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

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

Services Revenues:Revenues from services are comprised of consulting and implementation services
and, to a limited extent, training. Consulting services are generally sold on a time-and-materials

41

---

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

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

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

Net Loss Per Share

Basic and diluted net loss per share has been computed using the weighted-average number of shares of common stock outstanding during the period. The Company has
excluded all warrants and outstanding stock options from the calculation of diluted net loss per share because all such securities are antidilutive for all periods presented.

Income Taxes

The Company uses the liability method of accounting for income taxes. Deferred tax assets and liabilities are recognized for the future tax consequences
attributable to financial statements carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. The measurement of deferred tax
assets and liabilities is based on provisions of applicable tax law. The measurement of deferred tax assets is reduced, if necessary, by a valuation allowance based on the amount of tax benefits that,
based on available evidence, is not expected to be realized.

Advertising Expense

The cost of advertising is expensed as incurred. The Company incurred approximately $667,000, $350,000 and $800,000 in advertising costs during 2003, 2002 and
2001, respectively.

Long-lived Assets

The Company reviews for impairment long-lived assets whenever events or changes in circumstances indicate the carrying amount of an asset may not be
recoverable. The recoverability test
is performed at the lowest level at which undiscounted net cash flows can be attributable to long-lived assets.

Goodwill

Goodwill acquired in purchase transactions prior to July 1, 2001 was amortized on a straight-line method over the estimated useful life of the
assets over three years until January 1, 2002. Amortization

42

---

expense
was $319,000 for the year ended December 31, 2001. Pursuant to SFAS No. 142 effective January 1, 2002, goodwill will no longer be amortized and will be subject to annual
impairment reviews.

Comprehensive Income (Loss)

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

Foreign Currency Translation

The functional currency for the Company's foreign operations is the local currency. Foreign currency financial statements are converted into United States dollars
by translating asset and liability accounts at the current exchange rate at year-end and statement of operations accounts at the average exchange rate for the period, with the resulting
translation adjustment reflected in accumulated other comprehensive income (loss) in stockholders' equity (deficit). Realized and unrealized transaction gains and losses, other than intercompany debt
deemed to be of a long-term nature, are included in operations in the period they occur.

Stock-Based Compensation

As permitted under SFAS No. 123 "Accounting for Stock-based Compensation" and SFAS No. 148, "Accounting for Stock-based
CompensationTransition and Disclosureand amendment to FAS 123", the Company continues to apply the provisions of APB No. 25, "Accounting for Stock Issued to
Employees," for its recording of stock-based compensation arrangements. Accordingly, the Company accounts for its stock based compensation using the intrinsic value method, which requires recognition
of expense when the option exercise price is less than the fair value of the stock at the date of grant. The Company provides the required pro forma net income (loss) and pro forma earnings (loss) per
share disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in SFAS No. 123 had been applied. Under the fair value
method stock options are valued and expensed based on the fair value of the options determined under an option-pricing model.

Recently Issued Accounting Pronouncements

In May 2003, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 150, "Accounting for
Certain Financial Instruments with Characteristics of Both Liabilities and Equity." SFAS 150 requires certain instruments with certain characteristics be classified as liabilities as opposed to
equity. This statement is effective for financial instruments entered into or modified after May 31, 2003. We adopted SFAS No. 150 on June 1, 2003. The adoption did not have a
material impact on our results of operations or financial condition.

In
January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"). FIN 46 requires certain variable interest entities to
be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at
risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning
after December 15, 2003. We do not have any ownership in

43

---

any
variable interest entities as of December 31, 2003. We will apply the consolidation requirement of FIN 46 in future periods should an interest in a variable interest entity be acquired.

Note 2. Property and Equipment

Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over the shorter of the estimated useful lives or
the lease term of the assets: computer equipment, three years; office furniture and equipment, five years; leasehold improvements, through the lesser of useful life or life of the lease. Property and
equipment, stated at cost, was as follows (in thousands):

As of December 31,2003

2002Computer equipment (hardware and software)

$
20,101

$
24,465Office furniture and equipment


9,092


6,927Leasehold improvements


6,797


6,497Total cost of property and equipment


35,990


37,889Less accumulated depreciation and amortization


(20,766
)

(15,460
)Property and equipment, net

$
15,224

$
22,429


Depreciation
and amortization expense for the years ended December 31, 2003, 2002 and 2001 was approximately $5.8 million, $5.6 million and $5.2 million,
respectively.

Note 3. Operations by Reportable Segments and Geographic Area

The Company operates in one industry segment. In the United States, we have sales offices in the greater metropolitan areas of San Francisco, Los Angeles, New
York, Chicago, Dallas, Atlanta, Boston, and Washington DC. In Europe we have sales offices in Belgium, Denmark, France, Germany, Italy, the Netherlands, Spain, Sweden, Switzerland and the United
Kingdom. In the Asia Pacific region, we have sales offices in Australia, Japan, Korea, New Zealand and Singapore. Revenues and long-lived assets by geographic area were as follows (in
thousands):

Years Ended December 31,2003

2002

2001Revenues:North America

$
80,702

$
98,360

$
126,515Europe


44,585


39,802


48,920Pacific Rim


12,554


12,588


15,164Total revenues

$
137,841

$
150,750

$
190,599


December 31,2003

2002Long-lived assets:North America

$
15,342

$
22,143Europe


1,893


2,047Pacific Rim


1,448


1,009Total long-lived assets

$
18,683

$
25,199


No
single customer accounted for more than 10% of the Company's revenues during the years ended December 31, 2003, 2002 and 2001. Included in revenues from operations in Europe
are

44

---

approximately
$22.0 million, $19.5 million and $31.6 million of revenues from the Company's operations in the United Kingdom and approximately $8.6 million,
$5.8 million and $7.0 million of revenues from the Company's operations in Germany, for the years ended December 31, 2003, 2002 and 2001, respectively.

Note 4. Computation of Net Loss Per Share

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

Years Ended December 31,2003

2002

2001Net loss

$
(27,498
)
$
(23,944
)
$
(17,433
)Weighted average outstanding shares of common stock used to compute basic net loss per share


83,002


82,145


71,346Dilutive effect of:Stock warrants








Employee stock options








Common stock and common stock equivalents


83,002


82,145


71,346Basic and diluted net loss per share

$
(0.33
)
$
(0.29
)
$
(0.24
)


Options
to purchase 19,731,055, 19,610,621 and 17,623,971 shares of common stock were outstanding as of December 31, 2003, 2002 and 2001, respectively, but were not included in
the calculations of diluted net loss per share because their effect would be antidilutive. Warrants to purchase shares of common stock were not included in the calculations of diluted net loss per
share because their effect would be antidilutive.

Note 5. Income Taxes

The components of the provision for income taxes are as follows (in thousands):

Years ended December 31,2003

2002

2001Federal:Current

$


$


$
Deferred








Total federal








State:Current


183


214


116Deferred








Total state


183


214


116Foreign:Current


508


483


347Deferred








Total foreign


508


483


347Income tax provision

$
691

$
697

$
463


45

---

Federal
and state income taxes have not been provided on accumulated but undistributed earnings of certain foreign subsidiaries as such earnings have been and will continue to be
reinvested in the business indefinitely. Undistributed earnings of certain consolidated foreign subsidiaries at December 31, 2003, amounted to approximately $1.1 million.

The
provision for income taxes differs from the amount obtained by applying the federal statutory income tax rate for the following reasons:

2003

2002

2001Tax benefit computed at the statutory federal rate

(34
)%
(34
)%
(34
)%Change in valuation allowance

31

33

32Utilization of foreign net operating losses



(1
)
(3
)State taxes, net of federal benefit

(4
)
(4
)
(3
)Non-deductible expense

1

1

2Foreign taxes

2

2

2Foreign losses not benefited

7

6

7Income tax provision

3
%
3
%
3
%


The
components of the Company's deferred tax assets/liabilities as of December 31, 2003 and 2002 are as follows (in thousands):

2003

2002Deferred tax liabilities:Tax in excess of book depreciation

$
(214
)
$
(261
)Total deferred Tax liabilities


(214
)

(261
)Deferred tax assets:Net operating loss carryforwards


58,317


44,676Accrued liabilities and deferred revenue


1,398


1,763Allowance for doubtful accounts


429


578Restructuring reserve


2,557


2,030Tax credit carryforwards


11,816


5,930Other


697


754Total deferred tax assets


75,214


55,731Valuation allowance


(75,000
)

(55,470
)Net deferred taxes

$


$



The
valuation allowance increased by approximately $19.5 million and $6.3 million in 2003 and 2002, respectively. Approximately $13.3 million of the
valuation allowance relates to stock option compensation deductions incurred in our net operating loss carryforwards. If and when the Company reduces any portion of the valuation allowance related to
stock option compensation deduction, the benefit will be added to stockholders' equity, rather than being shown as a reduction of future income tax expense.

Loss
before the provision for income taxes of the Company's foreign operations amounted to approximately $5.6 million, $3.8 million and $3.3 million, respectively,
for the years ended December 31, 2003, 2002 and 2001.

As
of December 31, 2003, the Company had Net Operating Loss ("NOL") carryforwards in foreign subsidiaries of approximately $22.6 million. These NOL
carryforwards in foreign subsidiaries expire at various dates beginning in 2007. The Company has recorded a valuation allowance for the assets because realizability is uncertain.

46

---

As
of December 31, 2003, the Company had NOL carryforwards for the United States and state purposes of approximately $124.0 million and $94.7 million, respectively,
expiring through 2023 for the United States and 2013 for state. The Company had domestic research and development credit carryforwards of approximately $5.6 million which expire through 2023.
The Company also had California research and development credit carryforwards of approximately $6.0 million which can be carried over indefinitely. The realization of the benefits of the
NOL's and tax credits is dependent on sufficient taxable income in future years. The United States tax laws contain provisions that limit the use in any future period of net operating
loss and credit carryforwards upon the occurrence of certain
events including a significant change in ownership interest. The Company has recorded a valuation allowance against its otherwise recognizable deferred tax assets.

Note 6. Commitments, Contingencies and Debt

Bank Lines of Credit and Equipment Line Payable

In November 2000, the Company established a $15.0 million line of credit facility (the "Line") with a lending institution that bears interest at an
annual rate of either prime plus 0.5% or the London InterBank Offered Rate ("LIBOR") rate plus 2.50% (payable monthly) and it expires May 31, 2004. As of December 31, 2003,
$10.1 million was available under the Line and there were no borrowings outstanding. The Company may use up to $5.0 million of the Line to issue letters of credit. As of
December 31, 2003, approximately $386,000 was available for the issuance of letters of credit. The Line is secured by intellectual property rights, accounts receivable and certain other assets
and is subject to certain borrowing base restrictions. The Line requires maintenance of certain financial covenants pertaining to key financial ratios. The Company was in compliance with all covenants
at December 31, 2003.

In
October 2001, the Company's $3.0 million equipment line (the "Equipment Line") with the same lending institution providing the Line was amended, reducing the maximum
amount available for borrowing under the Equipment Line to $2.0 million. The Equipment Line bears interest at an annual rate of prime plus 0.75%, or the LIBOR rate plus 2.75% (payable monthly)
and expires on November 30, 2004. The interest rate at December 31, 2003 was 4.75%. The Company could draw against the Equipment Line through November 30, 2001. Interest is
payable monthly and principal is payable in 36 monthly installments commencing in December 2001. As of December 31, 2003, there was approximately $597,000 outstanding under the
Equipment Line. The Equipment Line is secured by certain assets of the Company.

In
December 2002, the Company's credit facility was amended to include an equipment advance (the "Equipment Advance") in the amount of $5.0 million from the same lending
institution. Interest on the Equipment Advance is payable monthly and principal is payable in 24 equal monthly installments, beginning January 31, 2003. The Equipment Advance bears interest at
an annual rate of prime plus 0.75% or the LIBOR rate plus 3.0%. The interest rate at December 31, 2003 was 4.75%. As of December 31, 2003 the balance outstanding under this Equipment
Advance was approximately $2.5 million.

Future
principal payments on the Equipment Line and the Equipment Advance will aggregate approximately $3.1 million in 2004, based on the total outstanding balance of
approximately $3.1 million.

Lease Obligations

The Company leases office facilities and computers equipment under non-cancelable operating lease agreements with third parties expiring through 2014.
Certain of the office facilities leases contain escalation clauses and certain of the computer equipment leases contain purchase options to purchase at various dates. The Company leases, from a
related party, a 4,000-square-foot office facility under a non-cancelable operating lease agreement expiring in December 2004. The Company leases certain
storage space and computer and office equipment under month-to-month leases.

47

---



The Company also leases office furniture and equipment under both capital and non-cancelable operating lease agreements with third parties expiring through 2008. Office
furniture and equipment capitalized under capital leases totaled $1.0 million at December 31, 2003 and 2002, and is included in the appropriate category under property and equipment.
Related accumulated amortization of equipment under capital leases amounted to approximately $217,000 and $33,000 at December 31, 2003 and 2002, respectively, and is included in accumulated
depreciation. Amortization of office furniture and equipment under capital leases is included in depreciation and amortization expense.

Future
minimum payments required under capital leases, together with the net present value of such payments, and future minimum lease payments required under operating leases, by year
and in the aggregate, with initial terms of one year or more, consisted of the following at December 31, 2003 (in thousands):

|                                   |                       | Operating Leases  |    | Capital
Leases |  
|---------------------------------- | --------------------- | ----------------- | -- | -------------- | -
|
|Year ended December 31,            |                       |                   |    |                |  
|2004                               |                       | $                 | 51 |                | $
|2005                               |                       |                   |   |                |  
|2006                               |                       |                   |   |                |  
|2007                               |                       |                   |   |                |  
|2008                               |                       |                   |   |                |  
|Thereafter                         |                       |                   |   |                |  
|                                   |                       |                   |    |                |  
|                                   |                       | $                 | 51 |                | $
|                                   |                       |                   |    |                |  
|Less: amount representing interest |                       |                   |    |                |  
|                                   |                       |                   |    |                |  
|                                   | Net present value     |                   |    |                |  
|                                   | Less: current portion |                   |    |                |  
|                                   |                       |                   |    |                |  
|                                   |                       | Long-term portion |    |                |  
|                                   |                       |                   |    |                |  

As
of December 31, 2003, future minimum lease payments under non-cancelable operating leases included $1.9 million of future rent payments, related to abandoned
facilities, expensed in 2002 and 2003 as restructuring expenses.

Total
rent expense was approximately $5.1 million in 2003, $11.6 million in 2002 and $8.5 million in 2001 of which approximately $51,000, $51,000 and $56,000 was
paid to related parties in 2003, 2002 and 2001, respectively.

Business Combinations

In July 2001, the Company acquired SeeBeyond Nordic ApS ("Nordic"), an independent distributor of the Company's software. The Company purchased all of the
outstanding capital stock of Nordic for approximately $116,000. The transaction was accounted for under the purchase method of accounting and the excess of the purchase price over the fair value of
the net assets acquired was recorded as goodwill. Results of operations of the acquisition have been included in the consolidated operating results since the date of acquisition. Proforma financial
information is not presented as such amounts are not material.

In
January 2001, the Company acquired STC Software Technologies Corporation (Schweiz) AG, Zurich ("Distributor"), an independent distributor of the Company's software. The Company
purchased all of the outstanding capital stock of the Distributor for approximately $885,000, excluding

48

---

approximately
$1.2 million of contingent consideration to be paid upon the achievement of certain operating results through June 2002. During 2002, the Company recorded an additional
$268,000 upon the achievement of certain operating results as final consideration. The purchase price included $150,000 in cash and 35,000 shares of the Company's common stock. The transaction was
accounted for under the purchase method of accounting and the excess of the purchase price over the fair value of the net assets acquired was being amortized as goodwill on a straight-line
basis over a three-year period through December 31, 2001. Results of operations of the acquisition have been included in the consolidated operating results since the date of
acquisition. Effective January 1, 2002, pursuant to SFAS 141, amortization will no longer be recorded and the goodwill amount will be subject to periodic impairment reviews. Proforma
financial information is not presented as such amounts are not material.

Legal Proceedings

Beginning on July 3, 2002, several purported class action shareholder complaints were filed in the United States District Court for the Central District of
California against the Company and several of our officers and directors. The actions were subsequently consolidated and a consolidated amended complaint was filed purportedly brought on behalf of
purchasers of common stock of SeeBeyond Technology Corporation between December 10, 2001 and May 7, 2002. The complaint generally alleges that defendants made false statements about
SeeBeyond's operating results and business, while concealing material information. The plaintiffs seek unspecified monetary damages. The Company believes the suit to be without merit and intends to
defend against it vigorously.

Beginning
on September 5, 2002, several derivative lawsuits were filed by purported Company shareholders in the Superior Court of California for the County of Los Angeles. The
complaints name certain of the Company's present and former officers and directors as defendants and name the Company as a nominal defendant. The complaints generally allege the defendants breached
their fiduciary duties to the Company through the dissemination of allegedly misleading and inaccurate information and other allegations.

Although
we have begun to incur amounts relating to legal costs and expenses, we have not accrued any amounts relating to potential damages associated with the putative class action
lawsuits. However, because of uncertainties relating to litigation, our decision as to whether to accrue and the amount of our estimates could be wrong. In addition, although we are unable to
determine the amount, if any, we may be required to pay in connection with the resolution of the lawsuits by settlement or otherwise, such a payment could seriously harm our results of operation,
financial condition and liquidity.

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

Note 7. Stockholders' Equity

Preferred Stock

In February 2000, the Company authorized 10,000,000 shares of undesignated preferred stock, none of which was outstanding as of December 31, 2003.

Private Placement

In December 2001, the Company completed the sale of 2,574,298 shares of common stock to purchasers in a private placement at a price of $5.83 per share and
realized proceeds, net of commissions and issuance costs, of approximately $14.9 million.

49

---

Secondary Public Offering

In February 2002, the Company completed a public offering of 6,572,623 shares of common stock at $9.57 per share and realized proceeds, net of underwriting
discounts, commissions and issuance costs, of approximately $59.0 million.

Common Stock Warrants

In January 2002, a strategic alliance partner of the Company exercised its warrant and converted its right to purchase 1,200,000 shares of common stock at
$5.33 per share into 666,337 shares of common stock of the Company.

In
March 2002, a warrant agreement between another strategic alliance partner and the Company was cancelled and all rights under the warrant agreement, including all fully vested
shares were forfeited.

Treasury Stock

In November 2002, the Company repurchased 1,200,000 shares of its common stock at $2.30 per share.

In
July 2003, the Company repurchased 522,002 shares of its common stock at $2.38 per share from a former officer of the Company. Approximately $370,000 of the
re-purchase amount was charged to compensation expense.

Warrant Grants

In October 1999, the Company issued a warrant to a lending institution (the "Lender Warrant") to purchase 262,500 shares of common stock at $1.89 per
share. The Lender Warrant vested immediately on the date of the grant. The fair market value of the Lender Warrant was determined using the Black-Scholes pricing model, assuming a risk free interest
rate of 5.3% and a volatility factor of 0.6, resulting in an estimated fair value at the time of the grant of $4.00 per common share. In January 2001, the lending institution holding the Lender
Warrant exercised the entire warrant and converted its right to purchase 262,500 shares of common stock at $1.89 per share into 225,579 shares of common stock.

In
November 1999, the Company issued a warrant to a strategic alliance partner (the "1999 Alliance Warrant") to purchase up to 1,200,000 shares of common stock at $5.33 per share.
The 1999 Alliance Warrant vested contingently upon the achievement of various milestones, which included the creation of certain product marketing offerings and new customer introductions. The fair
value of the 1999 Alliance Warrant was determine using the Black-Scholes pricing model, assuming a risk free interest rate of 5.3% and a volatility factor of 0.6, resulting in a fair value at the time
of the grant of $5.33 per share. The warrant was fully vested as of December 31, 2001 and was exercised and converted into 666,537 shares of common stock of the Company in January 2002.

In
January 2000, the Company issued a warrant (the "January 2000 Alliance Warrant") to a strategic alliance partner to purchase up to 1,200,000 shares of common stock at
$6.67 per share. The January 2000 Alliance Warrant vested contingently upon the achievement of certain milestones, primarily the generation of license revenue for the Company. The fair value of
the January 2000 Alliance Warrant was determined using the Black-Scholes pricing model, assuming a risk free interest rate of 5.3%, a volatility factor of 0.6 and an estimated fair value at the
time of grant of $9.25 per common share. In December 2001, the Company extended the duration of the January 2000 Alliance Warrant agreement. As a result, the Company remeasured the value
of the warrant and related expense, which is reflected in the results of operations for 2001. The warrant expired on July 31, 2002 without being exercised.

50

---

In
March 2000, the Company issued a warrant (the "March 2000 Alliance Warrant") to another strategic alliance partner to purchase up to 1,200,000 shares of common stock at
$14.00 per share. The March 2000 Alliance Warrant vested contingently upon the achievement of certain milestones, primarily the creation of e*Gate software market offerings and the generation
of license revenue for the
Company through the sale of licenses of our software products to third parties. The fair value of the March 2000 Alliance Warrant was determined using the Black-Scholes pricing model, assuming
a risk free interest rate of 5.3%, a volatility factor of 0.6 and an estimated fair value at the time of grant of $11.08 per common share. In March 2002 the warrant agreement was cancelled and
all rights under the warrant agreement, including all fully vested shares, were forfeited resulting in a decrease in additional paid-in capital and deferred stock compensation of $460,000,
with no net impact on total stockholders' equity.

In
March 2001, the Company entered into a four-year co-marketing agreement with a strategic marketing partner and issued a warrant to purchase 625,000
shares of common stock at an exercise price of $11.34 per share. The warrant expires in March 2006 and 175,000 shares under the warrant were exercisable immediately. The remaining 450,000
shares subject to the warrant are performance based and shall vest and become exercisable over the 36-month period following the issuance of the warrant provided the warrant holder has
achieved various milestones related to providing certain sales and marketing support. The immediately exercisable portion of the warrant was valued as of the date of issuance and was charged against
revenues generated from a concurrent license sale to this strategic marketing partner. The vesting of the remaining shares subject to the warrant is not contingent upon future sales of licenses of our
products to the marketing partner. The unvested portion of the warrant was valued as of the date of issuance and is being amortized as a charge to operating expense over the term of the
co-marketing agreement. The value of the unvested portion of the warrant will be adjusted in each reporting period based on changes in the fair value of the warrants until such date as the
warrants are fully vested. In connection with the December 2001 private placement of 2,574,298 shares of the Company's common stock, the exercise price of this warrant was adjusted to $5.83 per
share, pursuant to the original agreement. Accordingly, the fair value of the warrant and related warrant expense was remeasured using the new exercise price. For the year ending December 31,
2003, adjustments in the fair value of the warrants resulted in a net increase in additional paid-in capital and deferred compensation of $158,000, with no impact on total stockholders'
equity. As of December 31, 2003, 587,500 shares subject to the warrant were fully vested and exercisable.

In
October 2001, the Company issued a warrant (the "Bank Warrant") to a bank to purchase up to 25,000 shares of common stock at an exercise price of $4.39 per share and vested
immediately. The fair value of the warrant was recorded as a financing cost and is being amortized to interest expense over the term of the bank agreement. The warrant expires in October 2004
and is fully vested and exercisable as of December 31, 2003. In January 2004, the lending institution holding the Bank Warrant exercised the entire warrant and converted its right to
purchase 25,000 shares of common stock at $4.39 per share into 3,751 shares of common stock.

Employee Stock Purchase Plan

In February 2000, the Board of Directors approved the Company's 2000 Employee Stock Purchase Plan (the "ESPP"). The ESPP became effective on
April 28, 2000. A total of 2,250,000 shares of common stock were initially available for issuance under the ESPP. Pursuant to the terms of the ESPP, the
number of shares of common stock available for issuance under the ESPP will be increased on the first day of each calendar year during the term of the ESPP to 2,250,000 shares of common stock.

The
ESPP, which is intended to qualify under Section 423 of the IRS Code, will be implemented by a series of overlapping offering periods of 24 months duration, with new
offering periods, other than the first offering period, commencing on or about May 16 and November 16 of each year. Each offering period will consist of four consecutive purchase periods
of approximately six months duration,

51

---

and
at the end of each offering period, an automatic purchase will be made for participants. Participants generally may not purchase more than 1,500 shares in any calendar year or stock having a value
measured at the beginning of the offering period greater than $25,000 in any calendar year.

The
purchase price per share will be 85% of the lower of (1) the fair market value of our common stock on the purchase date and (2) the fair market value of a share of our
common stock on the last trading day before the offering date. Under the ESPP, approximately 383,000, 412,000 and 430,000 shares were issued during 2003, 2002 and 2001, respectively.

Option Plan

In July 1998, the Board of Directors of the Company adopted the 1998 Stock Option Plan (the "Plan"), which replaced the 1997 Stock Option Plan (the "1997
Plan") as to future grants. Under the Plan, stock options may be granted to employees, directors and consultants of the Company. At December 31, 2003, there were options to purchase 5,252,333
shares of common stock that were available for grant under the Plan. Options previously granted that are forfeited will be added to options available for grant under the Plan. The Stock Plan currently
provides for automatic annual increases on January 1st of each year beginning January 1, 2001 equal to the lesser of:



The
exercise price of options granted under the Plan may not be less than fair market value of the common stock at the time of grant with respect to incentive stock options and not less
than 85% of the fair market value with respect to nonstatutory options. Options granted under the Plan carry a maximum term of 10 years from the date of grant and typically vest and become
exercisable at the rate of at least 25% per year from the date of grant.

Activity
under the Plan for the last three years was as follows:

Options OutstandingNumber
of shares

Weighted Average
Exercise PriceBalance as of December 31, 2000

14,872,876

$
5.94Granted

7,969,909

$
6.49Cancelled

(3,411,387
)
$
8.31Exercised

(1,807,427
)
$
2.60Balance as of December 31, 2001

17,623,971

$
6.08Granted

5,905,300

$
2.65Cancelled

(2,582,510
)
$
8.06Exercised

(1,336,140
)
$
2.58Balance as of December 31, 2002

19,610,621

$
5.11Granted

5,552,556

$
2.24Cancelled

(4,004,941
)
$
4.64Exercised

(1,427,181
)
$
1.70Balance as of December 31, 2003

19,731,055

$
4.64


52

---

The
following table summarizes information regarding stock options outstanding as of December 31, 2003:

Options Outstanding

Options ExercisablePrice Range

Number
of shares

Weighted
Average
Remaining
Contractual
Life

Weighted
Average
Exercise
Price

Number
of shares

Weighted
Average
Exercise
Price(in thousands)





(in thousands)$1.09 to $1.35

2,179

6.31

$
1.27

1,382

$
1.24$1.36 to $1.67

2,562

6.37

$
1.48

1,914

$
1.51$1.70 to $2.00

2,369

9.56

$
2.00

10

$
1.77$2.01 to $2.41

2,025

9.37

$
2.21

148

$
2.09$2.42 to $3.34

3,223

8.39

$
3.02

1,396

$
3.21$3.40 to $5.70

2,176

7.33

$
4.81

1,369

$
4.75$6.03 to $7.50

2,211

6.87

$
7.29

1,239

$
7.24$7.51 to $12.00

2,078

6.59

$
11.24

1,426

$
11.44$12.04 to $31.69

908

6.91

$
17.79

590

$
18.39Total

19,731

7.59

$
4.64

9,474

$
5.49


Options
exercisable under the Plan were approximately 9,474,000, 7,636,000 and 5,042,000, as of December 31, 2003, 2002 and 2001, respectively.

Fair Value Disclosure

The weighted average exercise prices and fair market value of stock options granted using the Black-Scholes option pricing model were as follows:

2003

2002

2001Fair
Value

Exercise
Price

Fair
Value

Exercise
Price

Fair
Value

Exercise
PriceExercise price equals market value of stock at date of grant

$
1.42

$
2.24

$
2.11

$
2.65

$
3.72

$
6.49


The
Company accounts for its stock-based compensation using the intrinsic-value method prescribed by APB No. 25 and provides the required pro forma net loss disclosure as if the
fair-value-based method defined in SFAS No. 123 and SFAS No.148 had been applied.

Had
compensation expense for the years ended December 31, 2003, 2002 and 2001 been determined based on the fair value at the grant dates, the Company's net loss available to
common

53

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stockholders
and net loss per share would have increased to the pro forma amounts indicated below (in thousands, except for net loss per share).

Years Ended December 31,2003

2002

2001Net loss, as reported

$
(27,498
)
$
(23,944
)
$
(17,433
)Stock-based employee compensation costs, included in net loss, as reported


277


775


1,815Stock-based employee compensation costs if fair value based method had been applied


(11,986
)

(13,634
)

(11,027
)Pro forma net loss available to common stockholders

$
(39,207
)
$
(36,803
)
$
(26,645
)Basic and diluted net loss per share, as reported

$
(0.33
)
$
(0.29
)
$
(0.24
)Pro forma basic and diluted net loss per share

$
(0.47
)
$
(0.45
)
$
(0.37
)


The
Company estimated the fair value of options granted in the years ended December 31, 2003, 2002 and 2001 using the Black-Scholes option-pricing model with the following
assumptions:

Stock Option Plans

ESPP Plan 20032003

2002

2001

2003

2002

2001Expected lives (in years)

5

5

5

0.5

0.5

0.5Risk-free interest rate

3.125
%
3.0
%
3.5
%
3.125
%
3.0
%
3.5
%Dividend yield

0

0

0

0

0

0Expected volatility

75.6
%
110
%
65
%
75.6
%
110
%
65
%


These
pro forma amounts may not be representative of the effects on pro forma disclosures in future years as options vest over several years and additional grants are generally made
every year. Prior to the Company's initial public offering, the Company used the minimum value method (it assumed a zero volatility) as allowed under SFAS No. 123.

Reserved for Future Issuance

As of December 31, 2003, the Company had reserved the following shares of authorized but unissued common stock for future issuance:

Stock option plans:

24,983,388ESPP:

1,866,902Common stock warrants:

650,00027,500,290


On
January 1, 2004, an additional 4,191,326 and 383,098 shares were made available for issuance under the Company's stock option plan and ESPP, respectively, as a result of
automatic annual increases in the stock option plan and ESPP.

Stock Option Exchange Program

In November 2002, the Company's Board of Directors approved a voluntary stock option exchange program for some of the Company's employees. Under the
program, employees had the opportunity to cancel certain outstanding stock options granted to them under the Plan through November 17, 2002 in exchange for a new option grant at a future date
for a number of shares ranging from one new option for every one exchanged option to one new option for every five exchanged options, depending on the exercise price of the option being exchanged. The
new option grants will vest 50% of the shares on

54

---

June 19,
2004 with an additional 4.166% of the shares subject to the new option vesting on each 19th day of each month following June 19, 2004. The program terminated on
December 17, 2002. A total of 891,600 options were cancelled in connection with the exchange and approximately 409,000 new options were issued on June 19, 2003. The exercise price of the
new options was based on the closing price of the Company's stock on June 19, 2003.

Deferred Stock-based Compensation

When the exercise price of an employee stock option is less than the estimated fair value of the underlying stock on the date of grant, deferred compensation is
recognized and amortized to expense in accordance with the aggregation methodology prescribed by the Financial Accounting Standards Board Interpretation No. 28 over the vesting period of the
individual option grants which is generally four years.

Through
December 31, 2003, in connection with the grant of certain stock options to employees and non-employee directors, the Company has recorded total deferred
stock-based compensation of approximately $8.5 million, representing the difference between the exercise price of the option and the estimated fair value of the Company's common stock on the
date of grant. Amortization of deferred stock compensation was approximately $277,000, $775,000 and $1.8 million for the years ended December 31, 2003, 2002 and 2001, respectively.

Note 8. 401(K) Plan

The Company has a 401(K) plan covering substantially all of its eligible employees. Under this plan, employees may defer up to 15% of their pre-tax
salary, subject to statutory limits. The Company contributes an amount equal to 50% of each participant's elective contribution, up to 4% of
compensation. On January 1, 2000, the Company modified the Plan to provide for company matching contributions equal to 50% of each participant's elective contribution, up to 8% of compensation.
The Company's matching contributions to the plan were approximately $1.3 million, $1.3 million and $1.5 million during the years ended December 2003, 2002 and 2001,
respectively.

Note 9. Restructuring Charge

In 2001, the company recorded restructuring charges of $3.4 million for employee termination benefits and related costs. The restructuring resulted in
headcount reductions of approximately 228 employees, which was made up of 56% sales and marketing staff, 15% professional services staff, 19% general and administrative staff and 10% research and
development staff.

In
2002, the Company recorded restructuring and impairment charges totaling $6.6 million, consisting of $1.7 million for employee termination benefits and related costs
associated with headcount reductions, $2.7 million related to future rent obligations for properties abandoned in connection with facilities consolidation and $2.3 million related to the
write-down of leasehold improvements, furniture, computer equipment and software and other assets in connection with facilities consolidation and headcount reductions. The headcount
reduction of 57 employees was made up of 58% sales and marketing staff, 19% professional services staff, 14% research and development staff and 9% general and administrative staff. The restructuring
and impairment charges recorded in 2002 and 2001 were recorded under EITF No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity." Under EITF No. 94-3 the accrual for future rent obligations was recorded when the commitment to abandon the facilities was reached.

In
2003, the Company recorded restructuring and impairment charges totaling $7.4 million, consisting of $1.9 million for employee termination benefits and related costs
associated with headcount reductions, $1.2 million related to future rent obligations for properties abandoned in connection with facilities consolidation and $4.3 million related to the
write-down of leasehold improvements, furniture,

55

---

computer
equipment and software in connection with the facilities consolidation and headcount reductions. The 2003 headcount reduction of 56 employees was comprised of approximately 48% sales and
marketing staff, 41% professional services staff and 11% general and administrative staff. The Company recovered approximately $944,000 in restructuring expenses that had previously been reserved for.
The restructuring and impairment charges recorded during 2003 were recorded under SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." Under SFAS No. 146 the
accrual for future rent obligations were recorded when the facilities were abandoned.

These
restructuring and impairment charges were recorded to better align the company's cost structure with changing market conditions. The following table sets forth the Company's
accrued restructuring costs as of December 31, 2003 (in thousands).

Facilities
Consolidation

Asset
Impairment

Termination
benefits

Total2001 charges

$


$


$
3,426

$
3,426Cash utilized








(2,976
)

(2,976
)Balance at December 31, 2001








450


4502002 charges


2,666


2,279


1,680


6,625Non-cash write down of fixed assets





(2,279
)




(2,279
)Cash utilized


(183
)




(664
)

(847
)Balance at December 31, 2002


2,483





1,466


3,949Adjustment of prior estimates


(7
)

(421
)

(516
)

(944
)2003 charges


1,214


4,274


1,889


7,377Non-cash write down of fixed assets





(3,853
)




(3,853
)Cash utilized


(1,777
)




(2,625
)

(4,402
)Balance at December 31, 2003

$
1,913

$


$
214

$
2,127


Accrued
future rent obligations represent the estimated future rent expense on abandoned excess facilities, net of sublease income and is expected to be paid over the next
twenty-five months.

Note 10. Related Party Transactions

The Company leases, from a related party, a 4,000-square-foot office facility under a non-cancelable operating lease agreement
expiring in December 2004 under which approximately $51,000, $51,000 and $56,000 was paid by the Company to related parties in 2003, 2002 and 2001, respectively.

On
August 15, 2001 the Company provided one of its executive officers with a loan of $500,000 pursuant to a promissory note with an annual interest rate of 8.5% repayable to the
Company on February 15, 2002. The promissory note was subsequently amended in February 2002 to reflect a June 16, 2002 repayment date. As of December 31, 2003, partial
payments in the amount of $196,000 have been applied against the loan balance outstanding. The loan balance, including accumulated interest, was paid in full in January 2004.

At
December 31, 2001, the Company had a receivable of $366,000 representing an amount due from one of its executive officers, who is also a significant stockholder, related to
certain life insurance premiums paid on behalf of the officer / stockholder. The amount due to the Company was paid in full in March 2002.

On
January 2, 2002, the Company provided one of its executive officers, who is also a significant stockholder, with a loan of $2.0 million pursuant to a promissory note
with an annual interest rate of 8.5%. This loan was repaid in full on February 28, 2002.

56

---

During
the year ended December 31, 2002, the Company recorded approximately $209,000, in consulting and referral fees to EDS. An affiliate of EDS was a member of the Company's
Board of Directors through September 9, 2002. EDS, which formerly was a stockholder of the Company, in May 2000 purchased 1,200,000 shares in a private placement concurrent with the
Company's initial public offering at $12.00 per share, the same price paid by investors in the public offering. The Company also issued a warrant to EDS in January 2000 to purchase 1,200,000
shares of its common stock at $6.67 per share. The warrant, which was fully vested and exercisable as to 1,200,000 shares and expired on July 31, 2002 without being exercised.

Note 11. Subsequent Events (unaudited)

In January 2004, the lending institution holding the Bank Warrant exercised the entire warrant and converted its right to purchase 25,000 shares of common
stock at $4.39 per share into 3,751 shares of common stock.

Note 12. Interim Financial Results (unaudited)

The following table sets forth certain unaudited consolidated financial information for each of the four quarters for the years ended December 31, 2003 and
2002.

Quarter ended 2003

Quarter ended 200231-Dec

30-Sep

30-Jun

31-Mar

31-Dec

30-Sep

30-Jun

31-Mar(in thousands, except per share data)Net revenues

$
40,806

$
32,356

$
28,857

$
35,822

$
40,496

$
35,702

$
33,670

$
40,882Gross profit


31,684


22,016


18,009


23,729


27,395


22,941


22,811


29,856Net income (loss)


759


(4,849
)

(17,283
)

(6,125
)

(11,617
)

(8,156
)

(7,066
)

2,895Basic net earnings (loss) per share

$
0.01

$
(0.06
)
$
(0.21
)
$
(0.07
)
$
(0.14
)
$
(0.10
)
$
(0.08
)
$
0.04Diluted net earnings (loss) per share

$
0.01

$
(0.06
)
$
(0.21
)
$
(0.07
)
$
(0.14
)
$
(0.10
)
$
(0.08
)
$
0.03


Quarterly data may not sum to the full year data reported in the Company's consolidated financial statements due to rounding.

Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Not applicable.

Item 9A: Controls and Procedures

Our management evaluated, with the participation of our chief executive officer and chief financial officer, the effectiveness of our disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")) as of the end of the period covered by this annual report on
Form 10-K. Based upon this evaluation, our chief executive officer and chief financial officer have concluded our disclosure controls and procedures are effective to ensure
information we are required to disclose in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange
Commission rules and forms.

There
was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the period covered by this annual
report on Form 10-K that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

57

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PART III

Certain information required by Part III is omitted from this report on Form 10-K in that the registrant will file its definitive Proxy
Statement for its Annual Meeting of Stockholders to be held on June 3, 2004, pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended (the "Proxy Statement"), not
later than 120 days after the end of the fiscal year covered by this report, and certain information contained in the Proxy Statement is incorporated herein by reference.

Item 10: Directors and Executive Officers of the Registrant



Item 11: Executive Compensation of the Registrant

The information required by this item regarding executive compensation is incorporated by reference to the sections entitled "Compensation of Executive Officers"
and "Compensation of Directors" in the Proxy Statement.

Item 12: Security Ownership of Certain Beneficial Owners and Management

The information required by this item regarding security ownership of certain beneficial owners and management is incorporated by reference to the section
entitled "Stock Ownership" in the Proxy Statement.

Item 13: Certain Relationships and Related Transactions

The information required by this item regarding certain relationships and related transactions is incorporated by reference to the sections entitled "Certain
Relationships and Related Transactions" in the Proxy Statement.

Item 14: Principal Accounting Fees and Services

The information required by this item regarding principal accounting fees and services is incorporated by reference to the sections entitled "Principal Accounting
Fees and Services" in the Proxy Statement.

PART IV

Item 15: Exhibits, Financial Statement Schedule and Reports on Form 8-K



58

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

59

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|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.                                                                                                                                             
|21.1(h)     |  | List of Subsidiaries                                                                                                                                                                                                                         
|23.1        |  | Consent of Ernst & Young LLP, Independent Auditors                                                                                                                                                                                           
|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.                                                                                                                      

---

60

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We
filed a Current Report on Form 8-K on October 23, 2003 to furnish the press release we issued on October 23, 2003 entitled "SeeBeyond Announces Third
Quarter 2003 Financial Results."

We
filed a Current Report on Form 8-K on October 7, 2003 to furnish the press release we issued on October 7, 2003 entitled "SeeBeyond Announces
Preliminary Third Quarter 2003 Results."



61

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on March 10, 2004.

|Signature                                   |  | Title                                                                                        
|------------------------------------------- |  | ---------------------------------------------------------------------------------------------
|                                            |  |                                                                                              
|/s/JAMES T. DEMETRIADESJames T. Demetriades |  | Chief Executive Officer and Director (Principal Executive Officer)                           
|/s/BARRY J. PLAGABarry J. Plaga             |  | Executive Vice President, Chief Financial Officer(Principal Financial and Accounting Officer)
|/s/RAYMOND J. LANERaymond J. Lane           |  | Chairman of the Board of Directors                                                           
|/s/JOHN W. BUCKLEYJohn W. Buckley           |  | Director                                                                                     
|/s/SALAH M. HASSANEINSalah M. Hassanein     |  | Director                                                                                     
|/s/STEVEN A. LEDGERSteven A. Ledger         |  | Director                                                                                     

62

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SEEBEYOND TECHNOLOGY CORPORATION

SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS

Year Ended December 31, 2003, 2002 and 2001

(In thousands)

|                             |                                 | Balance at
Beginning of Period |   | Additions |  | Deductions(A) |     | Balance at
End of Period
|---------------------------- | ------------------------------- | ------------------------------ | - | --------- |  | ------------- | --- | ------------------------
|Year ended December 31, 2003 |                                 |                                |   |           |  |               |     |                         
|                             | Allowance for doubtful accounts |                                | $ | 2,539     |  | $             | 727 |                         
|Year ended December 31, 2002 |                                 |                                |   |           |  |               |     |                         
|                             | Allowance for doubtful accounts |                                |   | 1,837     |  |               | 933 |                         
|Year ended December 31, 2001 |                                 |                                |   |           |  |               |     |                         
|                             | Allowance for doubtful accounts |                                |   | 1,127     |  |               | 721 |                         

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