**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

----

FORM 10-K

**x**                              ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934

**Forthe fiscal year ended December 31, 2004**

**Or**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934

**CommissionFile No. 000-30207**

----

SEEBEYOND TECHNOLOGYCORPORATION(Exact name ofRegistrant as Specified in Its Charter)
| Delaware                                                        | ** ** | **95-4249153**                         |
|-----------------------------------------------------------------|------------|----------------------------------------|
| (State or other jurisdiction of incorporation or  organization) | ** ** | (IRS Employer Identification No.) |
| **800  E. Royal Oaks Drive**                                    |
| **Monrovia, California  91016**                                 |
| (Address, including zip code, of Principal Executive  Office)   |
| **(626) 471-6000**                                         |

----

Indicate by check mark whetherthe Registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the Registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days.  Yes  x No  o

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, andwill not be contained, to the best of Registrant’s knowledge, in definitiveproxy or information statements incorporated by reference in Part III ofthis Form 10-K or any amendment to this Form 10-K.  o

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

As of March 8, 2005, there were 85,725,002 shares of theRegistrant’s Common Stock outstanding. The aggregate market value of theRegistrant’s common stock held by non-affiliates of the Registrant (based uponthe closing sale price of such shares on the NASDAQ National Market as of June 30,2004) was approximately $184,450,549. Shares ofcommon stock held by each executive officer and director and by each entitythat owns 5% or more of the outstanding common stock have been excluded as suchpersons may be deemed to be affiliates. This determination of affiliate’sstatus is not necessarily a conclusive determination for other purposes.

**DOCUMENT INCORPORATED BY REFERENCE**

Certainsections of the Registrant’s definitive Proxy Statement for the 2005 AnnualMeeting of Stockholders to be held June 17, 2005 are incorporated byreference in Part III of this Form 10-K to the extent statedherein.

 

----

 

**SEEBEYOND TECHNOLOGY CORPORATIONFor the Fiscal Year Ended December 31, 2004Table of Contents**
|                   | ** ** | ** **                                                                                                                      | **Page  No.** |
|-------------------|------------|---------------------------------------------------------------------------------------------------------------------------------|---------------|
| **Part I**   |       |                                                                                                                            |          |   |
|              | Item 1     | Business                                                                                                                        |          |   | 4 |   |
|              | Item 2     | Properties                                                                                                                      |          |   | 10 |   |
|              | Item 3     | Legal  Proceedings                                                                                                              |          |   | 10 |   |
|              | Item  4    | Submission  of Matters to a Vote of Security Holders                                                                            |          |   | 10 |   |
| **Part II**  |       |                                                                                                                            |          |   |
|              | Item  5    | Market  for the Company’s Common Stock and Related Stockholder Matters and Issuer  Purchases of Equity Securities          |          |   | 11 |   |
|              | Item  6    | Selected  Consolidated Financial Data                                                                                           |          |   | 12 |   |
|              | Item  7    | Management’s  Discussion and Analysis of Financial Condition and Results of Operations       |          |   | 13 |   |
|              | Item  7A   | Quantitative  and Qualitative Disclosure about Market Risk                                                                      |          |   | 32 |   |
|              | Item  8    | Financial  Statements and Supplementary Data                                                                                    |          |   | 34 |   |
|              | Item  9    | Changes  in and Disagreements with Accountants on Accounting and Financial Disclosure                  |          |   | 56 |   |
|              | Item  9A   | Controls  and Procedures                                                                                                        |          |   | 56 |   |
| **Part III** |       |                                                                                                                            |          |   |
|              | Item  10   | Directors  and Executive Officers of the Registrant                                                                             |          |   | 58 |   |
|              | Item  11   | Executive  Compensation of the Registrant                                                                                       |          |   | 58 |   |
|              | Item  12   | Security  Ownership of Certain Beneficial Owners and Management                                                                 |          |   | 58 |   |
|              | Item  13   | Certain  Relationships and Related Transactions                                                                                 |          |   | 58 |   |
|              | Item  14   | Principal  Accounting Fees and Services                                                                                         |          |   | 58 |   |
| **Part IV**  |       |                                                                                                                            |          |   |
|              | Item  15   | Exhibits  and Financial Statement Schedule                                                                                      |          |   | 59 |   |

 

2

----

 

**FORWARD LOOKING STATEMENTS**

This report on Form 10-K contains forward-lookingstatements. These statements relate to future events or our future financialperformance. In some cases, you can identify forward-looking statementsby terminology such as “may,” “will,” “should,” “expect,” “plan,” “intend,” “anticipate,”“believe,” “estimate,” “predict,” “potential” or “continue,” the negative ofthese terms or other comparable terminology. These statements are onlypredictions. Actual events or results may differ materially. In evaluatingthese statements, you should specifically consider various factors, includingthe risks outlined in the Risk Factors section below. These factors may causeour actual results to differ materially from any forward-looking statement.

Although we believe theexpectations reflected in the forward-looking statements are reasonable,we cannot guarantee future results, levels of activity, performance orachievements. Moreover, neither we nor any other person assumes responsibilityfor the accuracy and completeness of the forward-looking statements. Weare under no duty to update any of the forward-looking statements afterthe date of this report to conform these statements to actual results or tochanges in our expectations.

**Trademarks**

SeeBeyond, the SeeBeyond logo, SeeBeyond TechnologyCorporation, e*Gate, e*Way, AppSolut, DataDental, STC, PROVEN RETURN ONINTEGRATION, DataLoad, STC and Design, DataGate, SeeBeyond E*Xchange, andE*Xchange are registered trademarks of SeeBeyond Technology Corporation in theUnited States and /or select foreign countries; and eInsight, eXchange,SeeBeyond eIndex Global Identifier, SeeBeyond eVision Studio, SeeBeyond eViewStudio, SeeBeyond eBAM Studio, SeeBeyond ePortal Composer, SeeBeyond eGateIntegrator, SeeBeyond eWay Intelligent Adapters, SeeBeyond eTL Integrator,SeeBeyond eInsight Orchestrator, SeeBeyond eXchange Integrator, and SeeBeyondeXpressway Integrator, SeeBeyond Integrated Composite Application Network (“ICAN”)are all trademarks of SeeBeyond Technology Corporation. The absence of atrademark from this list does not constitute a waiver of SeeBeyond TechnologyCorporation’s intellectual property rights concerning that trademark. Thisdocument may contain references to other companies, brand and product names.These companies, brand and product names are used herein for identificationpurposes only and may be the trademarks of their respective owners.

3

----

**PART I**

**Item 1:   Business**

**Overview**

SeeBeyond Technology Corporation (the “Company” or “SeeBeyond”)is a leading provider of business integration software that enables thereal-time flow of information within the enterprise and among customers,suppliers and partners. We believe we offer the world’s first fully integrated composite application network suitefor advanced integration and composite application solutions architectedfrom a single, internally developed software code base, encompassingapplication-to-application integration, business-to-business integration,business process management along with integrated human work flow, portal,Extract Transfer and Load (“ETL”), business activity monitoring and compositeapplication development capabilities. The SeeBeyond® Integrated CompositeApplication Network Suite 5.0 (“ICAN 5”) builds upon more thanfourteen years of continuous development of business integration solutionswithin and among enterprises. As of December 31, 2004, we had licensed ourproducts to over 2,000 customers worldwide.

Today’s business and economic environment presentsorganizations with a wide range of challenges. Competitive pressures,macroeconomic volatility, corporate mergers and acquisitions, the ubiquity ofthe Internet, shortened development and production cycles, shifting supplierrelationships and diverse customer demands are forcing organizations to adaptin numerous ways to lower costs and increase revenue. The need to keepInformation Technology (“IT”) aligned with the business is an ongoing problem,continually challenged by the increasing rate of change that businesses face.It is simply not viable to embark on substantial reinvestment in IT systemseach time the business model demands it. The need for consistency and efficiencyacross IT systems has, in the past, resulted in rigid architectures that do notrespond well to changing requirements. Organizations have made significantinvestments in a range of custom and packaged software applications such asEnterprise Resource Planning (“ERP”), Supply Chain Management (“SCM”), CustomerRelationship Management (“CRM”), decision support and internet technologies.However, these applications generally were not designed to interact with eachother, and the proliferation of these diverse technologies has resulted inhighly disconnected and disparate information technology infrastructures. Thesediverse systems and applications often reside on different hardware platformswith varying and incompatible data formats and communication methods. As aresult, information remains trapped within isolated systems. The proliferationof these systems, an application backlog and shrinking IT budgets are forcingCIOs to look closely at their IT architectures in an effort to implement crossapplication rationalization and business process improvement to achievesignificant cost savings and greater business visibility.

It is now widely recognized that no organization cansurvive without an infrastructure that integrates and supports their businessprocesses and enables their transformation and quick adaptation to a constantlychanging and fast moving environment. This means integration; betweenapplications, business partners, customers, and thus between business processesgiving the ability to develop composite applications across applications andbusiness processes.

Organizations have historically tried to bridgedisparate systems and applications through in-house or third-party customdevelopment of point-to-point interfaces. This approach is no longer viable formany organizations given the large and growing number of applications and thecost, time and resources required to create and maintain integration in arapidly changing environment. Additionally, when large numbers of applicationsand systems are linked through point-to-point interfaces, organizations canfind it difficult to respond quickly to business changes. Integrating withexternal systems—including those of its suppliers, customers andpartners—presents an additional challenge that requires expertise in Internettechnologies and a solution that is reliable, secure, centrally managed andscalable to a very large number of disparate users.

4

----

We have developed a comprehensive solution forbusiness integration, enabling the seamless flow of information across systems,applications and enterprises in real-time on a global basis. The SeeBeyond ICAN 5suite provides organizations with a flexible and easily configurable softwareplatform to connect applications and systems within an organization and amonggeographically dispersed enterprises, allowing for continuous and reliableinformation exchange to meet today’s fast-paced business demands. In contrastto other EAI approaches, we are the only provider in our industry offering acomprehensive solution for business integration where all key integrationtechnologies, including application-to-application, business-to-business,business process management, human work flow, portal, ETL, business activitymonitoring and composite application development are seamlessly integrated.Because we have architected all of our products from a single, internally-developedcode 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 capabilityprovides extensive pre-built application interfaces and facilitates rapidconnectivity to packaged applications, legacy applications, web and objecttechnologies and industry standard relational databases. Ourbusiness-to-business integration capability supports various trading partnerbusiness models, including direct partner-to-partner integration, tradingexchange or marketplace integration, as well as more traditional EDIintegration. Our business process management capability enables our customersto model, monitor and manage business process flows of business activities inreal-time.

Our solution provides business benefits in such areasas: single customer or single patient view; multi-channel/multi-productapplication integration; real-time stock management and vendor-managedinventory. Lack of visibility across the supply chain means that too muchcapital is locked up in inventory but at the same time sales are lost due toitems being frequently out of stock. SeeBeyond recently introduced the *RFID Composite Application Network*, enabling customers toleverage a comprehensive solution framework to rapidly deploy next generation,composite-based RFID applications. Poweredby ICAN 5, the solution enables not only real-time access to RFIDevents, but also a development environment from which to build and deployprocess-centric applications that maximize the return on investment from thevast amount of information made available from RFID readers.

In addition our products allow organizations to unitetheir IT infrastructure (rather than continually adding to it) in a gradual,controlled way that is not disruptive to an organization’s core businessprocesses. To help our customers achieve this end, our products are designedfor rapid deployment, enterprise scalability, operational efficiency and aredesigned to be open, standards-based and portable.

Our objective is toprovide 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 includesproviding a comprehensive integrated suite of products and services which hasbeen organically developed on one code base, capitalizing on our integratedsolutions and technology leadership, enhancing our presence in targetedvertical markets such as financial services/insurance, manufacturing,healthcare, telecommunications/energy/utilities, government and retail, becomingthe preferred integration standard for large global entities and continuing toenhance our existing product lines, as well as develop new product offerings.

**Products**

We have been an innovator in enterprise integrationsolutions since 1989, introducing our first commercial product in 1991. Webelieve our ICAN 5 suite released in October 2003 is the most usable,scalable and open platform for developing, executing and managing end-to-endintegrated business processes as composite applications. The ICAN 5 suiteprovides a process-driven integration platform that is completelyunified, extremely scalable and fully open with support for leading industrystandards, technologies, architectures and programming languages to connectapplications, systems and processes. 

5

----

Additionally, the ICAN 5suite represents the next generation of open integration bringing Application-to-Application(“A2A”) integration, Business-to-Business (“B2B”) integration, and BusinessProcess Management (“BPM”) together with Web services, System-OrientedArchitecture (“SOA”), Java 2 Enterprise Edition (“J2EE”) Application Servers,ETL capabilities, Business Activity Monitoring (“BAM”) capabilities, DataQuality Management, Composite View Generation, Indexing, Workflow and Portals.

The ICAN 5 suite is comprised of the followingcomponents:

eGateTM Integrator 5.0 provides a J2EE compliant andWeb services-based distributed integration platform for applicationconnectivity, data transformation, and guaranteed transactions and messaging.

eInsightTM Business Process Manager 5.0 automates andorchestrates complex business processes and workflows that span Web services,systems, people, and companies.

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

eVisionTM Studio 5.0 creates composite Web applicationsto provide end users with rapid access to business processes and backendsystems.

ePortalTM Composer 5.0 aggregates, personalizes andmanages access to composite applications for end users.

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

eXchangeTM Integrator 5.0 automates B2B interactionsthrough Web-based trading partner and protocol management, message handling,message tracking and security.

eViewTM Studio 5.0 generates tailored single-viewapplications that cleanse, match and index data to enable a single view of dataentities such as businesses, persons and products across the enterprise.

eIndexTM Global Identifier 5.0 is an Enterprise MasterPatient Index (“EMPI”) solution. eIndex creates a cross-reference ofpatient information kept current by rules that healthcare organizationsdefine to identify, match and update patient data originating from multiplesource applications.

eBAMTM Studio 5.0 generates tailored Business ActivityMonitoring applications with executive dashboards that track key performanceindicators and provide exception alerting and management for proactive businessactions.

eWayTM Intelligent Adapters5.0 accelerate Integration with Web services enabled, JCA-based connectivity.We provide over 80 packaged eWayTM intelligent adapters that expose JCA and Webservices compliant interfaces for the purpose of application / business integration.

**Professional Services**

Our customers typicallypurchase consulting services from us to support their implementationactivities. We offer professional services with the initial deployment of ourproduct, as well as on an ongoing basis to address continuing customer needs.Our consulting services range from architectural planning to completedevelopment and deployment of our products. In each case, these services aretailored to meet each customer’s needs. Our professional services organizationalso provides comprehensive education at our new, state-of-the-art trainingfacility, as well as on-site courses for both customers and partners. Many ofour professional services employees have advanced degrees and/or substantialindustry experience in systems architecture and design. We expect the number ofservice 

6

----

professionalsand the scope of the services we offer will increase as we continue to addressthe expanding enterprise infrastructure needs of large organizations.

**Sales, Alliances and Marketing**

***Sales***

We license our products and sell our servicesprimarily through our direct sales organization, complemented by the sellingand support efforts of systems integrators and our relationships withindependent software vendors. In the United States, we maintain sales officesin the greater metropolitan areas of Atlanta, Boston, Chicago, Dallas, LosAngeles, New York, San Francisco and Washington DC. In Europe, we maintainsales offices in Belgium, Denmark, France, Germany, Italy, The Netherlands,Spain, Sweden, Switzerland and the United Kingdom. In the Asia Pacific regionwe have sales offices in Australia, Japan, Korea, New Zealand and Singapore.Our direct sales force works closely with our professional servicesorganization, which provides pre-sales support to potential customers onproduct information and deployment capabilities. Sales to customers outsideNorth America totaled $78.3 million for the year ended December 31,2004. For a geographic breakdown of our revenue and long-lived assets, seeNote 3 to our consolidated financial statements included elsewhere in thisreport.

Our sales process requiresour sales professionals to work closely with targeted customers to identifyboth the business as well as the technical value derived from a real-time informationnetwork. Our sales team, which includes both sales and technical professionals,then works with the customer to develop a proposal to address the customer’sspecific needs and highlight the potential business and financial benefits. Thelength of our sales cycle generally ranges from 90 to 180 days, dependingon the customer’s industry and the size of the project.

***Alliances***

To promote additional market penetration of ourproducts, we have established strategic alliances with several of the largestindependent systems integrators, including Accenture, Cap Gemini, ComputerSciences Corporation, Braxton (formerly Deloitte Consulting), Electronic DataSystems Corporation and First Consulting Group. In addition to these strategicalliances, we also have relationships with other systems integrators, includingBooz-Allen & Hamilton and BearingPoint (formerly KPMG Consulting). Wealso maintain close relationships with several leading independent softwarevendors and technology providers, including Hewlett Packard, Retek, SiebelSystems and Sun Microsystems. Our alliances with system integrators andtechnology vendors position us as a preferred business integration softwareprovider. We believe these alliances have enabled us to increase marketawareness of our products and increase sales.

Through our globalsoftware partner program, we license our technology to leading independentsoftware vendors, so we can embed components of the ICAN 5 suite into theirproducts on a limited basis for seamless integration with specificapplications. These relationships allow these companies to resell our productsto their customers worldwide and provide our sales force opportunities tocross-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.

***Marketing***

A key focus of ourmarketing efforts is around creating awareness of our products and services,and identifying and educating partners as well as potential customers on thebusiness and technical value of the SeeBeyond ICAN Suite 5; an integratedcomposite application network suite for advanced integration and compositeapplication solutions. Our solution built on an open standards-based platformdelivers a framework to develop composite applications across the business—andSeeBeyond is the only company 

7

----

thatprovides the architecture to build these applications. The challenge for themarketing function is to make people see the benefits of this new approach.This is only possible if they can stop thinking about the different categoriesof products that have been available until now, and instead step back and takea more holistic view. Our marketing activities include advertising, directmail, seminars, customer marketing, tradeshows and industry conferences. Wealso have a public relations program focused on the trade, financial andbusiness press as well as industry analysts.

**Product Development**

We began developing ourproducts in 1989, introducing our first commercial product in 1991. Our entireproduct suite has been developed internally, or organically, withoutacquisitions of companies or externally developed technologies. We expect mostof our enhancements to existing products and the development of new productswill be developed internally. However, we will continue to evaluate on an on-goingbasis the potential acquisition of externally developed products ortechnologies 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, sevendays a week. Our support centers are located in California, the United Kingdomand Australia. Each of these support centers tracks support incidents on oneglobal IT system, providing a consistent level of service worldwide. Customershave the option to log, track and update their service and support inquirieselectronically, via the web, telephone, or a combination of both. Our customerservice group handles incoming calls, shipping requests, call logging,maintaining customer information and responding to basic product questions. Ourtechnical support/engineering group is responsible for all technical incidentsuntil resolution and is responsible for meeting targeted response times andproviding regular updates. We provide customers Escalation Management with adedicated resource to assure continuity through any escalation. We havedeveloped several new programs for Go-live, Major Accounts, and Vertical Support.Our Technical Assistance Group (“TAG”) provides emergency on site supportwithin the United States. Our technical support/engineering group coordinateswith 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 ofcompetition is expected to increase in the future. Increased competition islikely to result in price reductions, reduced gross margins and loss of market share,any one of which could significantly reduce our future revenues and increaseoperating losses.

We face competition from other vendors offeringintegration 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 ascomplete as ours, but BEA, IBM and Microsoft offer products outside our segmentand routinely bundle such products with EAI components. In the future, some ofthese companies may expand their products to enhance their functionality toprovide a solution more similar to ours. “In house” information technologydepartments of potential customers have developed or may develop systems thatprovide for some of the functionality of the SeeBeyond ICAN Suite 5. Inparticular, it can be difficult to sell our products to a potential customerwhose internal development group has already made large investments in andprogress towards completion of systems our product is intended to replace. Wealso face competition from major enterprise software developers includingOracle, PeopleSoft, SAP and Siebel, whose software applications perform somelimited functionality similar to our solution.

8

----

Many of our existing and potential competitors havemore resources, broader customer relationships and more established brands thanours. Additionally, many of these competitors have extensive knowledge of theintegration industry. Some of our competitors have established or may establishcooperative relationships among themselves or with third parties to offer asingle solution and increase the ability of their products to address customerneeds.

We believe the principalcompetitive factors affecting the market for our products and services includeproduct functionality and features, product price and performance, ease ofimplementation, market awareness, quality of professional services offerings,acceptance of product or vendor by leading system integrators, quality ofcustomer support services, quality of training and documentation and vendor andproduct reputation. Although we believe our solutions generally competefavorably with respect to these factors, the market is evolving rapidly. We maynot be able to maintain our competitive position against current and potentialcompetitors, especially those with significantly greater resources.

**IntellectualProperty and Proprietary Rights**

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

We license our products pursuant to license agreementsthat prohibit reverse engineering or de-compilation of our software, imposerestrictions on the licensee’s ability to utilize the software and provide forspecific remedies in the event of a breach of these restrictions. In addition,we take measures to avoid disclosure of our trade secrets, including but notlimited to requiring employees, customers and others with access to ourproprietary information to execute confidentiality agreements with us whichdefine the unauthorized uses and disclosures of our trade secrets and otherproprietary materials and information. Additionally, we restrict access to oursource code.

We assert copyrights in software, documentation andother works of authorship and periodically file for and are granted copyrightsfrom the U.S. Copyright Office in and to qualifying works of authorship. Weassert trademark rights in and to our name, product names, logos and othermarkings that are designed to permit consumers to identify our goods andservices. We routinely file for and have been granted trademark protection fromthe 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 limitedprotection. In addition, effective copyright and trade secret protection may beunavailable or limited in some foreign countries. Attempts may be made to copyor reverse engineer aspects of our product or to obtain and use information weregard as proprietary. Accordingly we cannot be certain we will be able toprotect our proprietary rights against unauthorized third-party copyingor use. Use by others of our proprietary rights could materially harm ourbusiness. Furthermore, policing the unauthorized use of our product isdifficult and expensive litigation may be necessary in the future to enforceand defend our intellectual property rights.

Although we do not believeour products infringe the proprietary rights of third parties and are not awareof any currently pending claims our products infringe upon the proprietaryrights of third parties, it is possible third parties will claim we haveinfringed on their current or future products. Any claims, with or withoutmerit, could be time-consuming, result in costly litigation, prevent productshipment, cause 

9

----

delaysor require us to enter into royalty or licensing agreements, any of which couldharm our business. Patent litigation in particular has complex technical issuesand inherent uncertainties. Parties making claims against us could securesubstantial damages, as well as injunctive or other equitable relief, whichcould effectively block our ability to license our products in the UnitedStates or abroad. Such a judgment could seriously harm our business. In theevent a product infringement claim against us were successful and we could notobtain a license on acceptable terms or license a substitute technology orredesign to avoid infringement, our business would be harmed.

**Employees**

As of December 31,2004, we had a total of 814 employees, including 340 in product development,183 in sales and marketing, 64 in customer support, 140 in professionalservices and training, and 87 in operations, administration and finance. Noneof our employees are represented by a collective bargaining agreement, nor havewe experienced any work stoppage. We consider relations with our employees tobe good.

**Available Information**

You may request a copy ofour quarterly and annual report filings and our other regular filings with theU.S. Securities Exchange Commission (“SEC”), free of charge, by writing ortelephoning us at 800 E. Royal Oaks Drive, Monrovia, CA, 91016, our principalexecutive office. Our telephone number at this address is (626) 471-6000.Our principal Internet address is *http://www.seebeyond.com*and our SEC filings are available on our website as soon as reasonablypracticable after we electronically file such material with the SEC. Our publicfilings are also available from the SEC’s web site at *http://www.sec.gov*. The information on ourwebsite is not incorporated by reference into this report.

**Item 2:   Properties**

Our principal executiveand corporate offices are located in Monrovia, California, where we lease atotal of approximately 200,000 square feet under leases that expire from 2005to 2014. In the United States, we have sales offices in the greatermetropolitan areas of Atlanta, Boston, Chicago, Dallas, Los Angeles, New York,San Francisco and Washington DC. In Europe, we have sales offices in Belgium,Denmark, France, Germany, Italy, The Netherlands, Spain, Sweden, Switzerlandand the United Kingdom. In the Asia Pacific region, we have sales offices inAustralia, Japan, Korea, New Zealand and Singapore under leases that cover from200 to 9,600 square feet and expire from May 2005 to October 2013. Webelieve these facilities are adequate for our current operations and additionalspace can be obtained on commercially reasonable terms if needed.

**Item 3:   Legal Proceedings**

We are party to routine claims and suits broughtagainst us in the ordinary course of business including disputes arising overthe ownership of intellectual property rights and collection matters. In theopinion of management, the outcome of such routine claims will not have amaterial adverse effect on our business, financial condition or results ofoperation.

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

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

No matters were submitted to a vote of securityholders during the fourth quarter of the year ended December 31, 2004.

10

----

**PART II**

**Item5:   Market for the Company’s Common Stock, Related Stockholders Mattersand Issuer Purchases of Equity Securities**

**Market Information**

Ourcommon stock is traded on the Nasdaq National Market under the symbol “SBYN.”The following table shows, for the quarters indicated, the high and low pershare closing prices of our common stock, as reported by the Nasdaq NationalMarket:
| ** **                                | ** ** | **High**   | ** ** | **Low**    | ** ** |
|-------------------------------------------|------------|------------|------------|------------|------------|
| ***Year  ended December 31, 2004:*** | ** ** | ** ** | ** ** | ** ** | ** ** |
| March 31,  2004                      |       | $          | 3.76       |       | $          | 2.83 |   |
| June 30,  2004                       |       | 3.60       |       | 2.64       |       |
| September 30,  2004                  |       | 4.74       |       | 3.00       |       |
| December 31,  2004                   |       | 5.60       |       | 3.79       |       |
| ***Year  ended December 31, 2003:*** |       |       |       |       |       |
| March 31,  2003                      |       | $          | 2.93       |       | $          | 2.02 |   |
| June 30,  2003                       |       | 3.10       |       | 2.08       |       |
| September 30,  2003                  |       | 3.10       |       | 1.94       |       |
| December 31, 2003                    |       | 4.29       |       | 2.56       |       |

 

**Holders of Record**

We had 341 stockholders ofrecord as of December 31, 2004. Because many of our shares of common stockare held in street name by brokers and other institutions on behalf ofstockholders, we are unable to estimate the total number of stockholdersrepresented by these record holders.

**Dividends**

We have never declared orpaid any cash dividends on our common stock. The Company currently intends toinvest cash generated from operations, if any, to support the development ofits business and does not anticipate paying cash dividends for the foreseeablefuture. Payment of future dividends, if any, will be at the discretion of theCompany’s Board of Directors after taking into account various factors,including the Company’s financial condition, operating results and current andanticipated cash needs.

**IssuerPurchases of Equity Securities**
| **Period**         | ** ** | ** ** | ** ** | **(a)  Total Number of  Shares Purchased** | ** ** | **(b)  Average Price  Paid per Share** | ** ** | **(c)  Total Number of  Shares Purchased as  Part of Publicly  Announced Plan** | ** ** | **(d)  Maximum Dollar  Amount of Shares that  May Yet Be Purchased  Under the Plan** | ** ** |
|--------------------|------------|------------|------------|-----------------------------------------------------------|------------|-------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------|------------|
| October 2004  |       |       | —     |                                                      |       |                                                  | —     |                                                                                                               |       |                                                                                                                              | —     |   |   |   | — |   |   |
| November 2004 |       |       | —     |                                                      |       |                                                  | —     |                                                                                                               |       |                                                                                                                              | —     |   |   |   | — |   |   |
| December 2004 |       |       | 75,800     |                                                      |       |                                                  | $          | 2.92                                                                                                               |       |                                                                                                                              |       | 906,950 |   |   |   | $ | 5,912,914 |   |   |
| Total              |       |       | 75,800     |                                                      |       |                                                  | $          | 2.92                                                                                                               |       |                                                                                                                              |       | 906,950 |   |   |   | $ | 5,912,914 |   |   |

 

A two year Stock Repurchase Plan (“Repurchase Plan”)was announced on February 25, 2003 for up to $10,000,000 of sharesrepurchased and expired on February 24, 2005

11

----

**Item6:   Selected Consolidated Financial Data**

Thefollowing selected consolidated financial data should be read in conjunctionwith the Company’s Consolidated Financial Statements and Notes thereto and “Management’sDiscussion and Analysis of Financial Condition and Results of Operations”included elsewhere herein. The Consolidated Statements of Operations Data forthe years ended December 31, 2004, 2003 and 2002, and the ConsolidatedBalance Sheet Data as of December 31, 2004 and 2003, are derived from theaudited consolidated financial statements included elsewhere in this Form 10-K.The Consolidated Statements of Operations Data for the years ended December 31,2001 and 2000, and the Consolidated Balance Sheet Data as of December 31,2002, 2001 and 2000, are derived from the audited Consolidated FinancialStatements not included elsewhere in this Form 10-K. The historicalresults are not necessarily indicative of results to be expected for futureperiods.
| ** **                                                 | ** ** | **Years Ended December 31,**                        | ** ** |
|------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                 | ** ** | **2004**                                                           | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| ** **                                                 | ** ** | **(in thousands, except per share data)** | ** ** |
| Consolidated Statements of Operations Data:                |       |                                                               |       |   |   |   |   |   |   |   |   |
| Revenues:                                                  |       |                                                               |       |   |   |   |   |   |   |   |   |
| License                                                    |       | $                                                                  | 70,271     |   | $ | 51,815 |   | $ | 67,243 |   | $ | 109,628 |   | $ | 65,403 |   |
| Services                                                   |       | 39,514                                                             |       | 38,662 |   | 43,562 |   | 51,669 |   | 36,650 |   |
| Maintenance                                                |       | 54,013                                                             |       | 47,364 |   | 39,945 |   | 29,302 |   | 16,205 |   |
| Total revenues                                             |       | 163,798                                                            |       | 137,841 |   | 150,750 |   | 190,599 |   | 118,258 |   |
| Cost of revenues:                                          |       |                                                               |       |   |   |   |   |   |   |   |   |
| License                                                    |       | 1,030                                                              |       | 1,375 |   | 2,322 |   | 2,004 |   | 569 |   |
| Services and maintenance                                   |       | 42,606                                                             |       | 41,028 |   | 45,425 |   | 48,609 |   | 35,865 |   |
| Total cost of revenues                                     |       | 43,636                                                             |       | 42,403 |   | 47,747 |   | 50,613 |   | 36,434 |   |
| Gross profit                                               |       | 120,162                                                            |       | 95,438 |   | 103,003 |   | 139,986 |   | 81,824 |   |
| Operating expenses:                                        |       |                                                               |       |   |   |   |   |   |   |   |   |
| Research and development                                   |       | 39,117                                                             |       | 41,012 |   | 34,443 |   | 29,224 |   | 19,175 |   |
| Sales and marketing                                        |       | 61,905                                                             |       | 57,044 |   | 66,520 |   | 95,507 |   | 76,689 |   |
| General and  administrative                                |       | 19,132                                                             |       | 17,913 |   | 18,609 |   | 21,208 |   | 17,231 |   |
| Restructuring and  impairment charges                      |       | —                                                             |       | 6,433 |   | 6,625 |   | 3,426 |   | — |   |
| Amortization of goodwill                                   |       | —                                                             |       | — |   | — |   | 319 |   | — |   |
| Amortization of sales  and marketing warrants              |       | (14                                                                | )          | 190 |   | 380 |   | 5,892 |   | 6,798 |   |
| Amortization of  stock-based compensation                  |       | 97                                                                 |       | 277 |   | 775 |   | 1,815 |   | 3,878 |   |
| Total operating expenses                                   |       | 120,237                                                            |       | 122,869 |   | 127,352 |   | 157,391 |   | 123,771 |   |
| Loss from operations                                       |       | (75                                                                | )          | (27,431 | ) | (24,349 | ) | (17,405 | ) | (41,947 | ) |
| Interest income and other  income and expense              |       | 575                                                                |       | 1,006 |   | 1,365 |   | 608 |   | 1,657 |   |
| Interest expense                                           |       | (238                                                               | )          | (382 | ) | (263 | ) | (173 | ) | (1,680 | ) |
| Income (loss) before  income tax (benefit) provision  |       | 262                                                                |       | (26,807 | ) | (23,247 | ) | (16,970 | ) | (41,970 | ) |
| Income tax (benefit) provision                             |       | (80                                                                | )          | 691 |   | 697 |   | 463 |   | — |   |
| Net income (loss)                                          |       | 342                                                                |       | (27,498 | ) | (23,944 | ) | (17,433 | ) | (41,970 | ) |
| Accretion on preferred  stock                              |       | —                                                             |       | — |   | — |   | — |   | 769 |   |
| Net income (loss)  available to common stockholders        |       | $                                                                  | 342        |   | $ | (27,498 | ) | $ | (23,944 | ) | $ | (17,433 | ) | $ | (42,739 | ) |
| Basic net income (loss)  per share                         |       | $                                                                  | 0.00       |   | $ | (0.33 | ) | $ | (0.29 | ) | $ | (0.24 | ) | $ | (0.69 | ) |
| Diluted net income  (loss) per share                       |       | $                                                                  | 0.00       |   | $ | (0.33 | ) | $ | (0.29 | ) | $ | (0.24 | ) | $ | (0.69 | ) |
| Number of shares used in computing:                        |       |                                                               |       |   |   |   |   |   |   |   |   |
| —basic net income (loss)  per share                   |       | 84,644                                                             |       | 83,002 |   | 82,145 |   | 71,346 |   | 61,909 |   |
| —diluted net income  (loss) per share                 |       | 88,736                                                             |       | 83,002 |   | 82,145 |   | 71,346 |   | 61,909 |   |

 

12

----

 
| ** **                            | ** ** | **As of December 31,** | ** ** |
|---------------------------------------|------------|---------------------------------------|------------|
| ** **                            | ** ** | **2004**                              | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| ** **                            | ** ** | **(in thousands)**               | ** ** |
| **Consolidated  Balance Sheet Data:** |       |                                  |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents             |       | $                                     | 73,148     |   | $ | 70,135 |   | $ | 94,114 |   | $ | 47,039 |   | $ | 29,428 |   |
| Working capital                       |       | 51,130                                |       | 47,378 |   | 68,449 |   | 37,890 |   | 24,133 |   |
| Total assets                          |       | 131,094                               |       | 127,747 |   | 157,043 |   | 105,764 |   | 84,958 |   |
| Deferred revenue                      |       | 36,537                                |       | 31,221 |   | 28,141 |   | 23,858 |   | 19,657 |   |
| Long-term liabilities                 |       | 28                                    |       | 515 |   | 4,010 |   | 1,412 |   | 400 |   |
| Total stockholders’  equity      |       | 67,373                                |       | 65,546 |   | 89,638 |   | 50,646 |   | 36,039 |   |
|                                       |            |                                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Item7:   Management’s Discussion and Analysis of Financial Condition andResults of Operations**

You should read thefollowing discussion in conjunction with the consolidated financial statementsand related notes of SeeBeyond Technology Corporation appearing elsewhere inthis Form 10-K. The following discussion contains forward-lookingstatements that involve risks and uncertainties, including statements regardinganticipated costs and expenses, anticipated gross margins, mix of revenues andplans for introducing new products and services. Our actual results coulddiffer materially from the results contemplated by these forward-lookingstatements 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 productsand services in 1991 under the name “Software Technologies Corporation.” From1991 to 1998 our sales and marketing efforts were primarily focused oncustomers in the healthcare industry. In 1998, we began to significantlyincrease our sales and marketing expenses to target customers in other verticalmarkets, such as financial services/insurance, manufacturing,retail/eCommerce/services, telecommunications, energy services and government.

In October 2003, we announced the generalavailability of our new suite of products, the SeeBeyond Integrated CompositeApplication Network Version 5.0 (“ICAN 5”). ICAN 5 offers the integrationindustry’s first fully integrated platform for the development and deploymentof composite applications. ICAN 5 helps organizations to rapidly assemble anddeploy enterprise-scale end-user composite applications built on existingsystems and infrastructure.

We derive revenues primarily from three sources:licenses, services and maintenance. We sell our products and services on aglobal basis through our direct sales force, and through alliances with leadingsystems integrators, and in other instances, through value-addedresellers and technology vendors. Our products are typically licensed directlyto customers for a perpetual term, with pricing based on the number of systemsor applications the customer is integrating or connecting with our products. Werecord license revenues when a license agreement has been signed by bothparties, the fee is fixed or determinable, collection of the fee is probable,delivery of our products has occurred and no other significant obligationsremain. Payments for licenses, services and maintenance received in advance ofrevenue recognition are recorded as deferred revenue.

Total revenue for the year ended December 31,2004 was $163.8 million compared to $137.8 million for the year ended December 31,2003, an increase of 19% from the prior year. License revenue for the 2004fiscal year was $70.3 million compared to $51.8 million for the 2003 fiscalyear, an increase of 36% from the prior year. Net income for the 2004 fiscalyear was $342,000 compared to a net loss of $27.5 million for the prior year.

International revenuesrepresented approximately 48% of total revenues for 2004 fiscal year, withEuropean revenues representing approximately 43% and Asia Pacific revenuesrepresenting approximately 5%.

13

----

**Critical Accounting Policies**

The discussion and analysis of our financial conditionand results of operations are based upon our consolidated financial statements,which have been prepared in accordance with U.S. generally accepted accountingprinciples. The preparation of these financial statements requires us to makeestimates and judgments that affect the reported amounts of assets andliabilities, revenues and expenses, and related disclosure of contingent assetsand liabilities at the date of our financial statements. Actual results maydiffer from these estimates under different assumptions or conditions.

Our significantaccounting policies are described in Note 1 to the consolidated financialstatements as of and for the year ended December 31, 2004 includedelsewhere in this report. We believe our most critical accounting policiesinclude the following:

·       revenuerecognition,

·       estimatingallowance for doubtful accounts,

·       accountingfor income taxes

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

We assess whether the fee is fixed and determinableand collection is probable at the time of the transaction. In assessing whetherthe fee is fixed and determinable, we analyze the payment terms of thetransaction and other factors, including the nature and class of customer, ourhistorical experience of collecting under our payment terms without granting aconcession, the possibility of the product becoming technologically obsoletebefore the payments become due and the likelihood of the customer asking for arefund. We do not offer a right of return on our products.

If we determine the fee is not fixed or determinable,we defer the revenue until the payments under the arrangement become due. Weassess whether collection is probable based on a number of factors, includingthe customer’s past transaction history and credit worthiness. If we determinethat collection of a fee is not probable, we defer the fee and recognizerevenue at the time collection becomes probable, which is generally upon thereceipt of cash.

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

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

The fair value of services such as consulting ortraining is based upon separate sales of these services. Consulting andtraining services are generally sold on a time-and-materials or fixed fee basisand are generally recognized as the services are performed. Consulting servicesprimarily consist of 

14

----

implementation servicesrelated to the installation of our products and generally do not involvesignificant production, modification or customization to or development of thesoftware.

Significant management judgments and estimates must bemade when applying our revenue recognition policy. In the event the applicationof our revenue recognition policy is incorrect material differences in theamount and timing of revenue could result.

*Allowancefor doubtful accounts.**  *We maintain allowances for doubtful accounts based onour analyses of the likelihood that our customers will not pay us all theamounts due us. In circumstances where there is knowledge of a specificcustomer’s inability to meet its financial obligations, a specific reserve isrecorded against amounts due to reduce the net recognized receivable to theamount that is reasonably believed to be collected. For all our customers weperform analyses, which include a review of their credit profiles, the terms andconditions of the contracts with our customers, and the current economic trendsand payment history. We reassess these allowances each accounting period. Ifactual payment experience with our customers is different than our estimates,adjustments to these allowances may be necessary resulting in additionalcharges to our statement of operations.

*Accountingfor income taxes.**  *Theincome tax benefit recorded for the year ended December 31, 2004 reflectsthe expected realization of a portion of the future deductible temporarydifferences and net operating losses primarily related to our foreignsubsidiaries. We record a valuation allowance to reduce our deferred tax assetsby the estimated amount of tax benefits which are not expected to be realized. Taxbenefits will not be realized if we do not generate sufficient taxable incomein the future to utilize those deferred tax assets. Our accounting for deferredtaxes under Statement of Financial Accounting Standards No. 109, *Accounting for Income Taxes*(“Statement109”), involves the evaluation of a number of factors concerning the ability torealize our deferred tax assets. In concluding that a valuation allowance wasrequired on the remaining net deferred tax assets, we primarily considered suchfactors as our history of operating losses and expected future income or lossesand the nature of our deferred tax assets in specific jurisdictions. In theevent that we determine we are able to realize our deferred tax assets in thefuture in excess of their net recorded amount, an adjustment to the valuationallowance would increase income in the period such a determination was made.

Significant management judgment is required forpurposes of assessing our ability to realize any future benefit from our netdeferred tax assets. In the event actual results differ from these estimates orwe adjust these estimates in future periods, our operating results andfinancial position could be materially affected.

In addition, Federal andstate income taxes have not been provided for accumulated undistributedearnings of our foreign subsidiaries. We intend to permanently reinvest suchearnings in those foreign subsidiaries. The amount of earnings designated asindefinitely reinvested offshore is based upon the Company’s expectations ofthe future cash needs of its entities. Income tax considerations are also afactor in determining the amount of foreign earnings to be repatriated. In theevent actual cash needs of the Company’s U.S. entity exceeds its currentexpectations or the actual cash needs of its foreign entities are less thanexpected, the Company may need to repatriate foreign earnings which have beendesignated as indefinitely reinvested offshore. This would result in additionalincome tax expense being recorded.

15

----

**Results of Operations**

Thefollowing table sets forth our results of operations expressed as a percentageof total revenues:
| ** **                                           | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                           | ** ** | **2004**                          | ** ** | **2003** | ** ** | **2002** | ** ** |
| Revenues:                                            |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| License                                              |       |                              | 43         | % |   |   | 38 | % |   |   | 45 | % |   |
| Services                                             |       |                              | 24         |   |   |   | 28 |   |   |   | 29 |   |   |
| Maintenance                                          |       |                              | 33         |   |   |   | 34 |   |   |   | 26 |   |   |
| Total revenues                                       |       |                              | 100        |   |   |   | 100 |   |   |   | 100 |   |   |
| Cost of revenues:                                    |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| License                                              |       |                              | 1          |   |   |   | 1 |   |   |   | 2 |   |   |
| Services and maintenance                             |       |                              | 26         |   |   |   | 30 |   |   |   | 30 |   |   |
| Total cost of revenues                               |       |                              | 27         |   |   |   | 31 |   |   |   | 32 |   |   |
| Gross profit                                         |       |                              | 73         |   |   |   | 69 |   |   |   | 68 |   |   |
| Operating expenses:                                  |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Research and development                             |       |                              | 23         |   |   |   | 30 |   |   |   | 23 |   |   |
| Sales and marketing                                  |       |                              | 38         |   |   |   | 41 |   |   |   | 44 |   |   |
| General and administrative                           |       |                              | 12         |   |   |   | 13 |   |   |   | 12 |   |   |
| Restructuring and impairment charges                 |       |                              | —     |   |   |   | 5 |   |   |   | 4 |   |   |
| Amortization of sales and marketing warrants         |       |                              | —     |   |   |   | — |   |   |   | — |   |   |
| Amortization of stock-based compensation             |       |                              | —     |   |   |   | — |   |   |   | 1 |   |   |
| Total operating expenses                             |       |                              | 73         |   |   |   | 89 |   |   |   | 84 |   |   |
| Income (loss)  from operations                       |       |                              | —     |   |   |   | (20 | ) |   |   | (16 | ) |   |
| Interest income  and other income and expense        |       |                              | —     |   |   |   | — |   |   |   | — |   |   |
| Interest expense                                     |       |                              | —     |   |   |   | — |   |   |   | — |   |   |
| Income (loss)  before income tax (benefit) provision |       |                              | —     |   |   |   | (20 | ) |   |   | (16 | ) |   |
| (Benefit)  provision for income tax                  |       |                              | —     |   |   |   | — |   |   |   | — |   |   |
| Net income (loss)                                    |       |                              | 0          | % |   |   | (20 | )% |   |   | (16 | )% |   |

 

**Comparisonof Years Ended December 31, 2004, 2003 and 2002**

**Revenues**

***Total revenues***(inthousands except percentages):
| ** **     | ** ** | **Years Ended December 31,** | ** ** | **Change** | ** ** |
|----------------|------------|---------------------------------------------|------------|------------|------------|
| ** **     | ** ** | **2004**                                    | ** ** | **2003**   | ** ** | **2002** | ** ** | **2004 vs. 2003** | ** ** | **2003 vs. 2002** | ** ** |
| Total revenues |       | $                                           | 163,798    |       | $          | 137,841 |   | $ | 150,750 |   | $ | 25,957 |   | 19 | % | $ | (12,909 | ) | (9 | )% |
|                |            |                                             |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Total revenues increased from 2003 to 2004 primarilydue to increases in license and maintenance revenues. Total revenues decreasedfrom 2002 to 2003 primarily due to a global economic slowdown and a reductionin information technology spending in general and in part from our customersdelaying the decision to purchase from us because of the release of our newICAN 5 suite of products which were made generally available in October 2003.

***License******revenues******(***inthousands except percentages):
| ** **       | ** ** | **Years Ended December 31,** | ** ** | **Change** | ** ** |
|------------------|------------|---------------------------------------------|------------|------------|------------|
| ** **       | ** ** | **2004**                                    | ** ** | **2003**   | ** ** | **2002** | ** ** | **2004 vs. 2003** | ** ** | **2003 vs. 2002** | ** ** |
| License revenues |       | $                                           | 70,271     |       | $          | 51,815 |   | $ | 67,243 |   | $ | 18,456 |   | 36 | % | $ | (15,428 | ) | (23 | )% |
|                  |            |                                             |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

16

----

License revenues increased from 2003 to 2004 primarilyas a result of increased sales of ICAN 5 which was made generally available in October 2003.The decrease in our license revenues from 2002 to 2003 was due primarily to theglobal economic slowdown and a reduction in information technology spending ingeneral and in part from our customers delaying the decision to purchase fromus pending the release of our new ICAN 5 suite of products.

***Services revenues***(inthousands except percentages):

Revenuesfrom services include consulting and implementation services, training andreimbursable out-of-pocket expenses. A majority of our customers usethird-party systems integrators to implement our products. Customers alsotypically purchase additional consulting services from us to support theirimplementation activities. From time to time, we use third-party systemsintegrators in a sub-contractor capacity to supplement our own internalservices employees. Our consulting services are generally sold on a time andmaterials or fixed fee basis, and services revenues are recognized as theservices are performed. We also offer training services, which are sold on aper student basis and for which revenues are recognized as the classes areattended.
| ** **        | ** ** | **Years Ended December 31,** | ** ** | **Change** | ** ** |
|-------------------|------------|---------------------------------------------|------------|------------|------------|
| ** **        | ** ** | **2004**                                    | ** ** | **2003**   | ** ** | **2002** | ** ** | **2004 vs. 2003** | ** ** | **2003 vs. 2002** | ** ** |
| Services revenues |       | $                                           | 39,514     |       | $          | 38,662 |   | $ | 43,562 |   | $ | 852 |   | 2 | % | $ | (4,900 | ) | (11 | )% |
|                   |            |                                             |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Services revenues increased from 2003 to 2004primarily due to a higher demand for our consulting services due to higherlicense revenue during the year. The decrease in the absolute dollar amount ofservices revenues from 2002 to 2003 was primarily due to a decline inconsulting services that resulted from the decrease in license revenue in thecorresponding period.

***Maintenancerevenues***(in thousands except percentages):

Customerswho license our products normally purchase maintenance contracts. Thesecontracts provide unspecified software upgrades and technical support over afixed term, which is typically 12 months. Maintenance contracts areusually paid in advance, and revenues from these contracts are recognizedratably over the term of the contract.
| ** **            | ** ** | **Years Ended December 31,** | ** ** | **Change** | ** ** |
|-----------------------|------------|---------------------------------------------|------------|------------|------------|
| ** **            | ** ** | **2004**                                    | ** ** | **2003**   | ** ** | **2002** | ** ** | **2004 vs. 2003** | ** ** | **2003 vs. 2002** | ** ** |
| Maintenance  revenues |       | $                                           | 54,013     |       | $          | 47,364 |   | $ | 39,945 |   | $ | 6,649 |   | 14 | % | $ | 7,419 |   | 19 | % |
|                       |            |                                             |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The increases in theabsolute dollar amount of maintenance revenues from 2003 to 2004 and 2002 to2003 were primarily due to increased cumulative license sales of our productsand the renewals of prior period maintenance contracts, which had increasedconsistent with the increase in our cumulative license revenues.

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

Costof revenues consists of compensation and related overhead costs for personneland sub-contractors engaged in implementation services, maintenance supportactivities, training and out-of-pocket expenses as well as royalties forthird-party products embedded or bundled with our products. Such costs includesalaries, employee benefits, incentive compensation, bonuses, travel, rent andallocated facilities and professional fees.
| ** **              | ** ** | **Years Ended December 31,** | ** ** | **Change** | ** ** |
|-------------------------|------------|---------------------------------------------|------------|------------|------------|
| ** **              | ** ** | **2004**                                    | ** ** | **2003**   | ** ** | **2002** | ** ** | **2004 vs. 2003** | ** ** | **2003 vs. 2002** | ** ** |
| Total cost of  revenues |       | $                                           | 43,636     |       | $          | 42,403 |   | $ | 47,747 |   | $ | 1,233 |   | 3 | % | $ | (5,344 | ) | (11 | )% |
|                         |            |                                             |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

17

----

Total cost of revenuesfrom 2003 to 2004 increased slightly with no significant year over year changesin any particular cost of revenue line item. The decrease in the cost oflicense revenues from 2002 to 2003 was in part due to a decrease inprofessional services staff and in part due to a decrease in the proportion ofproducts we sold that contains third-party software embedded or bundles withour software product offerings. The decrease in the absolute dollar amount ofcost of services and maintenance revenues from 2002 to 2003 was primarily dueto a decrease in professional services staff and a decrease in the use ofthird-party contractors during the year, as compared to the same period in theprevious year.

**Operating expenses**

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

Researchand development expenses consist of personnel, third party contractors andrelated costs associated with the development and enhancement of our products.
| ** **                         | ** ** | **Years Ended December 31,** | ** ** | **Change** | ** ** |
|------------------------------------|------------|---------------------------------------------|------------|------------|------------|
| ** **                         | ** ** | **2004**                                    | ** ** | **2003**   | ** ** | **2002** | ** ** | **2004 vs. 2003** | ** ** | **2003 vs. 2002** | ** ** |
| Research and  development expenses |       | $                                           | 39,117     |       | $          | 41,012 |   | $ | 34,443 |   | $ | (1,895 | ) | (5 | )% | $ | 6,569 |   | 19 | % |
|                                    |            |                                             |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Research and development expenses decreased from 2003to 2004 primarily due to a slight decrease in development expenses during thepost-release development period of our ICAN 5 suite. The increase in theabsolute dollar amount of research and development expenses from 2002 to 2003were primarily due to the increase in the number of software developmentpersonnel and quality assurance personnel to support our product development,documentation and testing activities related to the development of the ICAN 5products. We anticipate research and development expenses will increaseslightly in absolute dollars in the foreseeable future as we transition ourproduct development efforts to new products due to the completion of ICAN 5product suite and continue to enhance and extend our product suites.

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

Salesand marketing expenses consist of personnel and related costs of our directsales force and marketing staff and the cost of expenditures specific to themarketing group, such as public relations and advertising, trade shows andmarketing collateral materials and expenditures.
| ** **                    | ** ** | **Years Ended December 31,** | ** ** | **Change** | ** ** |
|-------------------------------|------------|---------------------------------------------|------------|------------|------------|
| ** **                    | ** ** | **2004**                                    | ** ** | **2003**   | ** ** | **2002** | ** ** | **2004 vs. 2003** | ** ** | **2003 vs. 2002** | ** ** |
| Sales and marketing  expenses |       | $                                           | 61,905     |       | $          | 57,044 |   | $ | 66,520 |   | $ | 4,861 |   | 9 | % | $ | (9,476 | ) | (14 | )% |
|                               |            |                                             |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Sales and marketing expenses increased from 2003 to2004 primarily due to an increase in sales commissions as a result of anincrease in license revenues, an increase in promotional and marketingactivities related to the ICAN 5 product suite, and an increase in salesheadcount. The decrease in the absolute dollar amount in sales and marketingexpenses from 2002 to 2003 was due primarily to lower headcount and a decreasein promotional and public relations activities, as well as a decrease in salescommissions that resulted from lower license revenue during 2003. We anticipatesales and marketing expenses to increase slightly in absolute dollars for theforeseeable future.

18

----

***General andadministrative expenses*** (in thousands exceptpercentages):

General and administrativeexpenses consist of personnel and related costs for corporate, executive, humanresources, legal, IT, finance and accounting functions.
| ** **                           | ** ** | **Years Ended December 31,** | ** ** | **Change** | ** ** |
|--------------------------------------|------------|---------------------------------------------|------------|------------|------------|
| ** **                           | ** ** | **2004**                                    | ** ** | **2003**   | ** ** | **2002** | ** ** | **2004 vs. 2003** | ** ** | **2003 vs. 2002** | ** ** |
| General and  administrative expenses |       | $                                           | 19,132     |       | $          | 17,913 |   | $ | 18,609 |   | $ | 1,219 |   | 7 | % | $ | (696 | ) | (4 | )% |
|                                      |            |                                             |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

General and administrativeexpenses increased from 2003 to 2004 primarily due to consulting and relatedexpenses incurred on compliance and review projects related to the requirementsimposed by the Sarbanes-Oxley Act of 2002. The decrease in the absolute dollaramounts from 2002 to 2003 was primarily due to lower headcount as compared tothe previous years. We anticipate general and administrative expenses to remainflat for the foreseeable future.

***Restructuring and impairment charges*** (inthousands except percentages):
| ** **                            | ** ** | **Years Ended December 31,** | ** ** | **Change** | ** ** |
|---------------------------------------|------------|---------------------------------------------|------------|------------|------------|
| ** **                            | ** ** | **2004**                                    | ** ** | **2003**   | ** ** | **2002** | ** ** | **2004 vs. 2003** | ** ** | **2003 vs. 2002** | ** ** |
| Restructuring and  impairment charges |       | $                                           | —     |       | $          | 6,433 |   | $ | 6,625 |   | $ | (6,433 | ) | (100 | )% | $ | (192 | ) | (3 | )% |
|                                       |            |                                             |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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

In 2002, the Company recorded restructuring andimpairment charges totaling $6.6 million, consisting of $1.7 millionfor employee termination benefits and related costs associated with headcountreductions, $2.7 million related to future rent obligations for propertiesabandoned in connection with facilities consolidation and $2.3 millionrelated to the write-down of leasehold improvements, furniture, computerequipment and software and other assets in connection with facilitiesconsolidation and headcount reductions. The headcount reduction of 57 employeeswas made up of 58% sales and marketing staff, 19% professional services staff,14% research and development staff and 9% general and administrative staff. Therestructuring and impairment charges recorded in 2002 and 2001 were recordedunder EITF No. 94-3, “Liability Recognition for Certain EmployeeTermination Benefits and Other Costs to Exit an Activity.” Under EITF No. 94-3,the accrual for future rent obligations was recorded when the commitment toabandon the facilities was reached.

In 2003, the Company recorded restructuring andimpairment charges totaling $7.4 million, consisting of $1.9 millionfor employee termination benefits and related costs associated with headcountreductions, $1.2 million related to future rent obligations for propertiesabandoned in connection with facilities consolidation and $4.3 millionrelated to the write-down of leasehold improvements, furniture, computerequipment and software in connection with the facilities consolidation andheadcount reductions. The 2003 headcount reduction of 56 employees wascomprised of approximately 48% sales and marketing staff, 41% professionalservices staff and 11% general and administrative staff. The Company recoveredapproximately $944,000 in restructuring expenses that had previously beenreserved for. The restructuring and impairment charges recorded during 2003were recorded under SFAS No. 146, “Accounting for Costs Associated withExit or Disposal Activities.” Under SFAS No. 146, the accrual for futurerent obligations were recorded when the facilities were abandoned.

19

----

Theserestructuring and impairment charges were recorded to better align the Company’scost structure with changing market conditions. The following table sets forththe Company’s accrued restructuring costs as of December 31, 2004 (inthousands).
| ** **                           | ** ** | **Facilities  Consolidation** | ** ** | **Asset  Impairment** | ** ** | **Termination  Benefits** | ** ** | **Total** | ** ** |
|--------------------------------------|------------|-------------------------------|------------|-----------------------|------------|---------------------------|------------|-----------|------------|
| 2001 charges                         |       |                          | $          | —                |       |                      |       | $         | —     |   |   |   | $ | 3,426 |   |   | $ | 3,426 |   |
| Cash utilized                        |       |                          | —     |                  |       |                      | —     |      |       |   | (2,976 | ) |   | (2,976 | ) |
| Balance at December 31, 2001    |       |                          | —     |                  |       |                      | —     |      |       |   | 450 |   |   | 450 |   |
| 2002 charges                         |       |                          | 2,666      |                  |       |                      | 2,279      |      |       |   | 1,680 |   |   | 6,625 |   |
| Non-cash write  down of fixed assets |       |                          | —     |                  |       |                      | (2,279     | )         |       |   | — |   |   | (2,279 | ) |
| Cash utilized                        |       |                          | (183       | )                     |       |                      | —     |      |       |   | (664 | ) |   | (847 | ) |
| Balance at December 31, 2002    |       |                          | 2,483      |                  |       |                      | —     |      |       |   | 1,466 |   |   | 3,949 |   |
| Adjustment of  prior estimates       |       |                          | (7         | )                     |       |                      | (421       | )         |       |   | (516 | ) |   | (944 | ) |
| 2003 charges                         |       |                          | 1,214      |                  |       |                      | 4,274      |      |       |   | 1,889 |   |   | 7,377 |   |
| Non-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 |   |
| Cash utilized                        |       |                          | (1,397     | )                     |       |                      | —     |      |       |   | (214 | ) |   | (1,611 | ) |
| Balance at  December 31, 2004   |       |                          | $          | 516                   |       |                      |       | $         | —     |   |   |   | $ | — |   |   | $ | 516 |   |

 

Accrued future rent obligations represent theestimated future rent expense on abandoned excess facilities, net of sublease income,which we expect to pay over the next thirteen months.

***Amortization of sales and marketing warrants*** (inthousands except percentages):
| ** **                                    | ** ** | **Years Ended December 31,** | ** ** | **Change** | ** ** |
|-----------------------------------------------|------------|---------------------------------------------|------------|------------|------------|
| ** **                                    | ** ** | **2004**                                    | ** ** | **2003**   | ** ** | **2002** | ** ** | **2004 vs. 2003** | ** ** | **2003 vs. 2002** | ** ** |
| Amortization of  sales and marketing warrants |       | $                                           | (14        | )          |       | $ | 190 |   |   | $ | 380 |   | $ | (204 | ) | (107 | )% | $ | (190 | ) | (50 | )% |
|                                               |            |                                             |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Amortization of sales and marketing warrants decreasedfrom 2003 to 2004 primarily due to a warrant issued to a strategic marketingpartner being fully vested and amortized during 2004. Amortization of sales andmarketing warrants decreased from 2002 to 2003 primarily due to a decrease inthe value of the unvested portion of the warrant.

***Amortization of stock-based compensation*** (inthousands except percentages):
| ** **                                | ** ** | **Years Ended December 31,** | ** ** | **Change** | ** ** |
|-------------------------------------------|------------|---------------------------------------------|------------|------------|------------|
| ** **                                | ** ** | **2004**                                    | ** ** | **2003**   | ** ** | **2002** | ** ** | **2004 vs. 2003** | ** ** | **2003 vs. 2002** | ** ** |
| Amortization of  stock-based compensation |       | $                                           | 97         |       |       | $ | 277 |   |   | $ | 775 |   | $ | (180 | ) | (65 | )% | $ | (498 | ) | (64 | )% |
|                                           |            |                                             |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

In connection with the grant of certain stock optionsto employees and non-employee directors during 2004, 2003, 2000 and 1999, werecorded total deferred compensation of $8.5 million, of whichapproximately $97,000, $277,000 and $775,000 was expensed in 2004, 2003 and2002, respectively as amortization of stock-based compensation.

20

----

***Interestincome and other income and expense*** (in thousands exceptpercentages):

Interestincome and other income and expense consists of interest earned on cashbalances, foreign currency gains and losses, gains and losses on the disposalof fixed assets and other miscellaneous income and expense items.
| ** **                                    | ** ** | **Years Ended December 31,** | ** ** | **Change** | ** ** |
|-----------------------------------------------|------------|---------------------------------------------|------------|------------|------------|
| ** **                                    | ** ** | **2004**                                    | ** ** | **2003**   | ** ** | **2002** | ** ** | **2004 vs. 2003** | ** ** | **2003 vs. 2002** | ** ** |
| Interest income  and other income and expense |       | $                                           | 575        |       | $          | 1,006 |   | $ | 1,365 |   | $ | (431 | ) | (43 | )% | $ | (359 | ) | (26 | )% |
|                                               |            |                                             |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Interest income and other income and expense decreasedfrom 2003 to 2004 primarily due to increases in foreign exchange losses inseveral of our international subsidiaries. The decrease in interest income andother income and expense from 2002 to 2003 was primarily due to a decrease ininterest income as a result of lower interest rates and lower average cashbalances during 2003.

***Interest expense*** (inthousands except percentages):
| ** **       | ** ** | **Years Ended December 31,** | ** ** | **Change** | ** ** |
|------------------|------------|---------------------------------------------|------------|------------|------------|
| ** **       | ** ** | **2004**                                    | ** ** | **2003**   | ** ** | **2002** | ** ** | **2004 vs. 2003** | ** ** | **2003 vs. 2002** | ** ** |
| Interest expense |       | $                                           | (238       | )          | $          | (382 | ) | $ | (263 | ) | $ | 144 |   | (38 | )% | $ | (119 | ) | 45 | % |
|                  |            |                                             |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Interest expense primarily consists of interestexpense on our equipment lines of credit. Interest expense decreased from 2003to 2004 due to lower equipment line and equipment advance balances. Theincrease in interest expense from 2002 to 2003 was due to interest expenseincurred as a result of a $5.0 million equipment advance that was added toour line of credit in December 2002.

***Income tax (benefit) provision*****(in thousands except percentages):
| ** **                      | ** ** | **Years Ended December 31,** | ** ** | **Change** | ** ** |
|---------------------------------|------------|---------------------------------------------|------------|------------|------------|
| ** **                      | ** ** | **2004**                                    | ** ** | **2003**   | ** ** | **2002** | ** ** | **2004 vs. 2003** | ** ** | **2003 vs. 2002** | ** ** |
| Income tax  (benefit) provision |       | $                                           | (80        | )          | $          | 691 |   | $ | 697 |   | $ | (771 | ) | (112 | )% | $ | (6 | ) | (1 | )% |
|                                 |            |                                             |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Income tax benefit in 2004consists primarily of foreign withholding taxes and income taxes due in certainforeign jurisdictions, offset by a decrease in the valuation allowance of$736,000 as a result of a reversal of a portion of the valuation allowancepreviously recorded against the net operating losses and other deferred taxassets of certain foreign jurisdictions. Income tax expense in 2003 and 2002consists primarily of foreign withholding taxes and income taxes due in certainforeign jurisdictions. As of December 31, 2004, we had net U.S. operatingloss carryforwards of approximately $120.0 million for federal and$90.0 million for state, which expire through 2024 for federal and 2014for state taxes. We also had available tax credit carryforwards ofapproximately $7.0 million and $7.5 million for federal and California, respectivelywhich expire through 2024. The United States tax laws contain provisions thatlimit the use in any future period of net operating loss and creditcarryforwards upon the occurrence of certain events, including a significantchange in ownership interests. We had net deferred tax assets, including ournet operating loss carryforwards and tax credits of approximately$77.7 million as of December 31, 2004. The realization of thebenefits of deferred tax assets including net operating losses and tax creditsare dependent on sufficient taxable income in future years. Possible lack offuture earnings or a change in the ownership of the Company could adverselyaffect our ability to utilize these tax attributes. A valuation allowance ofapproximately $77.0 million has been recorded for the portion of net deferredtax assets which management believes uncertainties exist regarding the futurerealization of these assets. See Note 5 of Notes to Consolidated FinancialStatements.

21

----

**Liquidity and Capital Resources**

As of December 31, 2004, we had cash and cashequivalents of $73.1 million, an increase of $3.0 million from$70.1 million held as of December 31, 2003.

Accounts receivable, net of allowances, increasedapproximately $3.7 million to $38.0 million at December 31, 2004 from$34.3 million at December 31, 2003. The timing of receivablecollections and revenue recorded within a given quarter will affect ouraccounts receivable balances going forward.

***Operating activities*** (in thousands exceptpercentages):
| ** **                                           | ** ** | **Years Ended December 31,** | ** ** | **Change** | ** ** |
|------------------------------------------------------|------------|---------------------------------------------|------------|------------|------------|
| ** **                                           | ** ** | **2004**                                    | ** ** | **2003**   | ** ** | **2002** | ** ** | **2004 vs. 2003** | ** ** | **2003 vs. 2002** | ** ** |
| Net cash provided  by (used in) operating activities |       | $                                           | 7,105      |       | $          | (17,797 | ) | $ | (3,736 | ) | $ | 24,902 |   | (140 | )% | $ | (14,061 | ) | 376 | % |
|                                                      |            |                                             |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The increase in cash provided by operating activitiesfrom 2003 to 2004 reflects primarily the change from a net loss in 2003 to netincome in 2004, increases in accounts payable and deferred revenues, offset bydecreases in non-cash restructuring and impairment charges and an increase inaccounts receivable. The increase in cash used in operating activities from2002 to 2003 reflects primarily increases in net loss and accounts receivableand a decrease in accounts payable, partially offset by an increase in accruedcompensation and related expenses and non-cash restructuring and impairmentcharges.

***Investing activities*** (in thousands exceptpercentages):
| ** **                             | ** ** | **Years Ended December 31,** | ** ** | **Change** | ** ** |
|----------------------------------------|------------|---------------------------------------------|------------|------------|------------|
| ** **                             | ** ** | **2004**                                    | ** ** | **2003**   | ** ** | **2002** | ** ** | **2004 vs. 2003** | ** ** | **2003 vs. 2002** | ** ** |
| Net cash used in  investing activities |       | $                                           | (2,058     | )          | $          | (5,792 | ) | $ | (15,227 | ) | $ | 3,734 |   | (64 | )% | $ | 9,435 |   | (62 | )% |
|                                        |            |                                             |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The decreases from 2003 to 2004 and from 2002 to 2003are related primarily to a decrease in capital expenditures. We expect capitalexpenditures in fiscal 2005 to remain consistent with 2004.

***Financing activities*** (in thousands exceptpercentages):
| ** **                             | ** ** | **Years Ended December 31,** | ** ** | **Change** | ** ** |
|----------------------------------------|------------|---------------------------------------------|------------|------------|------------|
| ** **                             | ** ** | **2004**                                    | ** ** | **2003**   | ** ** | **2002** | ** ** | **2004 vs. 2003** | ** ** | **2003 vs. 2002** | ** ** |
| Net cash used in  financing activities |       | $                                           | (2,408     | )          | $          | (1,105 | ) | $ | 64,954 |   | $ | (1,303 | ) | 118 | % | $ | (66,059 | ) | (102 | )% |
|                                        |            |                                             |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The increase in net cash used in financing activitiesfrom 2003 to 2004 is primarily due to an increase in payments for the purchaseof common stock partially offset by an increase in proceeds from stock optionexercises. The increase in net cash used in financing activities from 2002 to2003 related primarily to the completion of our secondary public offering in February 2002in addition to a net borrowing on our bank lines of credit during 2002.

In November 2000, the Company established a$15.0 million line of credit facility (the “Line”) with a lendinginstitution that bears interest at an annual rate of either prime plus 0.5% orthe London InterBank Offered Rate (“LIBOR”) rate plus 2.50% (payable monthly). Theexpiration date of the Line has been extended through May 31, 2005. As of December 31,2004, $11.1 million was available under the Line and there were noborrowings outstanding. The Company may use up to $5.0 million of the Lineto issue letters of credit. As of December 31, 2004, approximately$386,000 was available for the issuance of letters of credit. The Line issecured by intellectual property rights, accounts receivable and certain otherassets and is subject to certain borrowing base restrictions. The Line requiresmaintenance of certain financial 

22

----

covenants pertaining tokey financial ratios and the Company is in compliance with those covenants asof December 31, 2004.

In October 2001, the Company’s $3.0 millionequipment line (the “Equipment Line”) with the same lending institution providingthe Line was amended, reducing the maximum amount available for borrowing underthe Equipment Line to $2.0 million. The Equipment Line bore interest at anannual rate of prime plus 0.75%, or the LIBOR rate plus 2.75% (payable monthly)and expired on November 30, 2004. All amounts outstanding under theEquipment Line had been repaid by December 31, 2004.

In December 2002, the Company’s credit facilitywas amended to include an equipment advance (the “Equipment Advance”) in theamount of $5.0 million from the same lending institution. Interest on theEquipment Advance was payable monthly and principal was payable in 24 equalmonthly installments, beginning January 31, 2003. The Equipment Advancebore interest at an annual rate of prime plus 0.75% or the LIBOR rate plus 3.0%.All amounts outstanding under the Equipment Advance had been repaid by December 31,2004.

In February 2002, we completed a secondary publicoffering of 6,572,623 shares of common stock at $9.57 per share and realizedproceeds, net of underwriting discounts, commissions and issuance costs ofapproximately $59.0 million.

In November 2002, we completed the repurchase of1,200,000 shares of our common stock at $2.30 per share.

In July 2003, we repurchased 522,002 shares ofour 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 compensationexpense.

During the year ended December 31, 2004, werepurchased 906,950 shares of our common stock at an average price ofapproximately $3.14 per share.

We believe that our current cash and cash equivalentsbalance will be sufficient to meet our working capital and capital expenditurerequirements for at least the next twelve months. However, we may need to raiseadditional funds, and we may not be able to obtain additional debt or equityfinancing on favorable terms, if at all. In addition, we may also utilize cashresources to fund acquisitions or investments in complementary businesses,technologies or product lines.

23

----

Futureminimum payments required under capital leases, together with the net presentvalue of such payments, and future minimum lease payments required underoperating leases, by year and in the aggregate, with initial terms of one yearor more, consisted of the following at December 31, 2004 (in thousands):
| ** **                          | ** ** | **Operating Leases** | ** ** | **Capital Leases** | ** ** |
|-------------------------------------|------------|---------------------------|------------|-------------------------|------------|
| ** **                          | ** ** | **Lease  Expense**        | ** ** | **Sublease  Income**    | ** ** | **Net** | ** ** | **Lease  Payments** | ** ** |
| Years ended  December 31,      |       |                      |       |                    |       |   |   |   |   |   |   |   |   |
| 2005                                |       | $                         | 9,211      |                    |       | 154 |   |   | $ | 9,057 |   |   | $ | 778 |   |   |
| 2006                                |       | 5,830                     |       |                    | —     |   |   | 5,830 |   |   | 12 |   |   |
| 2007                                |       | 4,997                     |       |                    | —     |   |   | 4,997 |   |   | 11 |   |   |
| 2008                                |       | 4,472                     |       |                    | —     |   |   | 4,472 |   |   | — |   |   |
| 2009                                |       | 4,305                     |       |                    | —     |   |   | 4,305 |   |   | — |   |   |
| Thereafter                          |       | 17,830                    |       |                    | —     |   |   | 17,830 |   |   | — |   |   |
|                                |       | $                         | 46,645     |                    |       | $ | 154 |   |   | $ | 46,491 |   |   | 801 |   |   |
| Less: amount  representing interest |       |                      |       |                    |       |   |   |   |   |   | (25 | ) |   |
| Net present value                   |       |                      |       |                    |       |   |   |   |   |   | 776 |   |   |
| Less: current portion               |       |                      |       |                    |       |   |   |   |   |   | (748 | ) |   |
| Long-term portion                   |       |                      |       |                    |       |   |   |   |   |   | $ | 28 |   |   |
|                                     |            |                           |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

**RecentlyIssued Accounting Pronouncements**

In December 2004, the Financial AccountingStandards Board issued Statements of Financial Accounting Standards Statement No. 123(revised 2004), “Share-Based Payment” (“SFAS 123R”). This Statement is arevision of SFAS No. 123, “Accountingfor Stock-Based Compensation” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”.SFAS 123(R) requires a companyto measure the grant-date fair value of equity awards given to employees inexchange for services and recognize that cost over the period that suchservices are performed. SFAS 123R is effective for the first interim or annualperiod that begins after June 15, 2005.

The Company is currentlyevaluating the two methods of adoption allowed by SFAS 123R: themodified-prospective transition method and the modified-retrospectivetransition method. Adoption of SFAS 123R is expected to materially increasestock compensation expense and decrease net income, however the impact cannotbe determined at this time. In addition, SFAS 123R requires the excess taxbenefits related to stock compensation be reported as a cash inflow fromfinancing activities rather than as a reduction of taxes paid in cash fromoperating activities.

**Risks Related to SeeBeyond**

You should carefully consider the risks describedbelow in evaluating the other statements made herein. The risks described beloware not the only ones facing our Company. Additional risks not presently knownto us, or we currently deem immaterial, may also impair our businessoperations.

Our business, financialcondition or results of operations could be adversely affected by any of theserisks. The trading price of our common stock could decline due to any of theserisks.

***A downturn in the general economy or a continuation ofthe industry trend toward reducing or delaying additional informationtechnology spending due to cost-cutting pressures could reduce demand for ourproducts and services.***

We rely significantly uponcustomers making large information technology purchasing decisions as a sourceof revenue. The general slow-down in capital spending by our customers that weexperienced in 

24

----

recentyears, if sustained again in future periods, could result in reduced sales orthe postponement of sales to our customers. There can be no assurance the levelof spending on information technology in general or on business integrationsoftware by our customers and potential customers in particular, will increaseor remain at current levels in future periods. Lower spending on informationtechnology could result in reduced license sales to our customers, reducedoverall revenues, diminished margin levels, and could impair our operatingresults in future periods.

***We have a large accumulated deficit, we may incurfuture losses and we may not maintain profitability.***

We have incurredsubstantial losses since 1998 as we increased funding of the development of ourproducts and technologies and expanded our sales and marketing organization. Asof December 31, 2004, we had an accumulated deficit of approximately$153.6 million. We may continue to incur losses in future periods and wemay not maintain profitability on a quarterly basis, or achieve and sustainprofitability on an annual basis.

***Our operating results fluctuate significantly, and anunanticipated decline in revenues or gross margin may disappoint securitiesanalysts or investors and result in a decline in our stock price.***

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

Our revenues and operating results depend upon thevolume and timing of customer orders and payments and the date of productdelivery. Historically, a substantial portion of our revenues in a givenquarter has been recorded in the final month of that quarter, with aconcentration of these revenues in the last two weeks of the final month. Weexpect this trend to continue and, therefore, any failure or delay in theclosing of orders would have a material adverse effect on our quarterlyoperating results. Since our operating expenses are based on anticipatedrevenues and because a high percentage of these expenses are relatively fixed,a delay in the recognition of revenues from one or more license transactionscould cause significant variations in operating results from quarter to quarterand cause a decline in our stock price. We realize substantially higher grossmargins on our license revenues compared to our services and maintenancerevenues. Thus, our margins for any particular quarter will be highly dependenton our revenue mix in that quarter. In our international markets, we haveexperienced some seasonality of revenues, with lower revenues in the summermonths. Although this seasonality has not had a material impact on ouroperating results in the past, we cannot assure you our operating results willnot fluctuate in the future as a result of these and other internationaltrends.

We record as deferredrevenue, payments from customers that do not meet our revenue recognitionpolicy requirements. Since only a small portion of our revenues each quarter isrecognized from deferred revenue, our quarterly results depend primarily uponentering into new contracts to generate revenues for that quarter. Newcontracts 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 contractswill be recognized. If our operating results are below the expectations ofsecurities analysts or investors for these or other reasons, our stock pricewould likely decline, perhaps substantially.

***We experience long and variable sales cycles, whichcould have a negative impact on our results of operations for any givenquarter.***

Our products are oftenused by our customers throughout their organizations to address critical businessproblems. Customers generally consider a wide range of issues before committingto purchase our products, including product benefits, the ability to operatewith existing and future computer systems, the ability to accommodate increasedtransaction volumes and product reliability. Many customers are 

25

----

addressingthese issues for the first time when they consider whether to buy our productsand services. As a result, we or other parties, including systems integrators,must educate potential customers on the use and benefits of our products andservices. In addition, the purchase of our products generally involves asignificant commitment of capital and other resources by a customer. Thiscommitment often requires significant technical review, assessment ofcompetitive products and approval at a number of management levels within acustomer’s organization. Our sales cycle may vary based on the industry inwhich the potential customer operates and is difficult to predict for anyparticular license transaction. The length and variability of our sales cyclemakes it difficult to predict whether particular sales will be concluded in anygiven quarter. If one or more of our license transactions are not consummatedin a given quarter, our results of operations for that quarter may be below ourexpectations and the expectations of analysts and investors.

***Our operating results are highly dependent on licenserevenues from one software suite, and our business could be materially harmedby factors that adversely affect the pricing and demand for this softwaresuite.***

Substantially all of our license revenues have been,and are expected to continue to be, derived from the license of our BusinessIntegration Suite. Accordingly, our future operating results will depend on thedemand for our Business Integration Suite by future customers, includingnew and enhanced releases that are subsequently introduced. Our latest versionof the Business Integration Suite, ICAN 5, was made generally available tocustomers in October 2003. If our competitors release new products thatare superior to our Business Integration Suite in functionality,performance or price, or if we fail to enhance our Business Integration Suite andintroduce 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 orpricing for our Business Integration Suite as a result of these or otherfactors would significantly reduce our revenues.

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

Moreover, as we releaseenhanced versions of our products, we may not be successful in upgrading ourcustomers who purchased previous versions of our Business Integration Suite tothe current version. We also may not be successful in selling add-on modulesfor our products to existing customers. Any failure to continue to upgradeexisting customers’ products or sell new modules, if and when they areintroduced, could negatively impact customer satisfaction and our revenues.

***The loss of any significant customer could harm ourbusiness and cause our stock price to decline.***

We do not have long-term sales contracts with any ofour customers. There can be no assurance that any of our customers willcontinue to purchase our products in the future. As a result, a customer thatgenerates substantial revenue for us in one period may not be a source ofrevenue in subsequent periods. Because a significant portion of our revenuesare derived from repeat customer business, the loss of any significant customeror the failure of such a customer to license additional products and servicesfrom us, could cause our revenues to decline, harm our business and cause ourstock price to decline.

26

----

***Our revenues will likely decline if we do not developand maintain successful relationships with our systems integration partners andother partners, who also have relationships with our competitors.***

We have entered into agreements with a number ofsystems integrators for them to install and deploy our products and performcustom integration of systems and applications. These systems integrators alsoengage in joint marketing and sales efforts with us. If these relationshipsfail, we will have to devote substantially more resources to the sales andmarketing and implementation and support of our products than we wouldotherwise, and our efforts may not be as effective as those of the systemsintegrators. In many cases, these parties have extensive relationships with ourexisting and potential customers and influence the decisions of thesecustomers. We rely upon these firms to recommend our products during theevaluation stage of the purchasing process, as well as for implementation andcustomer support services.

These systems integrators are not contractuallyrequired to implement our products, and competition for these resources maypreclude us from obtaining sufficient resources to provide the necessaryimplementation services to support our needs. If the number of installations ofour products exceeds our access to the resources provided by these systemsintegrators, we will be required to provide these services internally, whichwould increase our expenses and significantly limit our ability to meet ourcustomers’ implementation needs. A number of our competitors have strongerrelationships with some of these systems integrators and, as a result, thesesystems integrators might be more likely to recommend competitors’ products andservices instead of ours. In addition, a number of our competitors haverelationships with a greater number of these systems integrators or havestronger systems integrator relationships based on specific vertical marketsand, therefore, have access to a broader base of customers.

Our failure to establishor maintain systems integrator relationships would significantly harm ourability to license and successfully implement our software products. Inaddition, we rely on the industry expertise and customer contacts of thesefirms in order to market our products more effectively. Therefore, any failureof these relationships would also harm our ability to increase revenues in keycommercial markets. We are currently investing, and plan to continue to invest,significant resources to develop these relationships. Our operating resultscould be adversely affected if these efforts do not generate license andservice revenues necessary to offset this investment.

***Our markets are highly competitive and, if we do notcompete effectively, we may suffer price reductions, reduced gross margins andloss of market share.***

The market for our products is intensely competitive,evolving and subject to rapid technological change. We expect the intensity ofcompetition to increase in the future. As a result of increased competition, wemay have to reduce the price of our products and services, and we mayexperience reduced gross margins and loss of market share, any one of whichcould significantly reduce our future revenues and operating results. Ourcurrent competitors include vendors offering business application integrationand traditional electronic data interchange, or EDI, software products, as wellas “in house” information technology departments of potential customers thathave developed or may develop systems that provide some or all of thefunctionality of our Business Integration Suite. We may also encountercompetition from major enterprise software developers in the future.

Many of our existing andpotential competitors have more resources, broader customer relationships and better-establishedbrands than we do. In addition, many of these competitors have extensiveknowledge of our industry. Some of our competitors have established or mayestablish cooperative relationships among themselves or with third parties tooffer a single solution and increase the ability of their products to addresscustomer needs.

27

----

***Our substantial and expanding international operationsare subject to uncertainties, which could adversely affect our operatingresults.***

Revenues from thesale of products and services outside the United States accounted for 48%, 41%and 35% during 2004, 2003 and 2002, respectively. Revenues from the sale ofproducts and services in the United Kingdom as a percent of our total revenueswere 27%, 16% and 13% for 2004, 2003 and 2002, respectively. We believerevenues from sales outside the United States will continue to account for amaterial portion of our total revenues for the foreseeable future. We areexposed to several risks inherent in conducting business internationally, suchas:

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

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

·       difficultiesand costs of staffing and managing international operations;

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

·       reducedprotection for intellectual property rights in some countries.

Any of these factors couldadversely affect our international operations and, consequently, our operatingresults.

***New regulations related to equity compensation willadversely affect our operating results and may affect our ability to attractand retain key personnel.***

Since our inception, wehave used stock options as an important component of our employee compensationpackages. We believe that our stock option plan is an essential tool to linkthe long-term interests of our stockholders and employees, and serve tomotivate management to make decisions that will, in the long run, give the bestreturns to stockholders. The Financial Accounting Standards Board(FASB) has implemented changes to United States generally acceptedaccounting principles requiring us to record a charge to earnings for employeestock option grants, as well as other equity-based awards. The changesimplemented by FASB relating to the accounting for equity compensation plansare scheduled to go into effect in mid-2005. This accountingpronouncement will negatively impact our operating results and could affect ourability to raise capital on acceptable terms. For an illustrative example ofthe adverse impact this accounting change may have had on our recent operatingresults, please see Note 7—“Stockholders’ Equity; Fair Value Disclosure” to theconsolidated financial statements included elsewhere in this report. To theextent that new regulations make it more difficult or expensive to grantoptions to employees, we may incur increased compensation costs, change ourequity compensation strategy or find it difficult to attract, retain andmotivate employees, each of which could materially and adversely affect ourbusiness.

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

Our products and their interactionswith customers’ software applications and IT systems are complex and,accordingly, there may be undetected errors or failures when our products areintroduced or as new versions are released. In the past we have discoveredsoftware errors in our new releases and new products after their introduction,which have resulted in additional product development expenses. To date, theseadditional expenses have not been material. These errors have resulted inproduct release delays, delayed revenues and customer dissatisfaction. In thefuture we may discover errors, including performance 

28

----

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 generatenegative publicity, which could have a negative impact on future sales.Although we maintain product liability and errors and omissions insurance, wecannot assure you these policies will be sufficient to compensate for lossescaused by any of these occurrences.

***If our products do not operate with the many hardwareand software platforms used by our customers and keep pace with technologicalchange, our business may fail.***

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

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

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

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

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

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

Our industry ischaracterized by very rapid technological change, frequent new productintroductions and enhancements, changes in customer demands and evolvingindustry standards. We have also found the technological life cycles of ourproducts are difficult to estimate. We believe we must continue to enhance ourcurrent products and concurrently develop and introduce new products thatanticipate emerging technology standards and keep pace with competitive andtechnological developments. Failure to do so will harm our ability to compete.As a result, we are required to continue to make substantial productdevelopment investments.

***The market for business integration software may notgrow as quickly as we anticipate which would cause our revenues to fall belowexpectations.***

The market for businessintegration software is rapidly evolving. We earn substantially all of ourlicense revenues from sales of our Business Integration Suite. We expect toearn substantially all of our revenues in the foreseeable future from sales ofour Business Integration Suite and related products and services. Our futurefinancial performance will depend on continued growth in the number oforganizations demanding software and services for application integration andbusiness integration solutions and seeking outside vendors to develop, manageand maintain this software for their critical applications. Many of ourpotential customers have made significant investments in internally developedsystems and would incur significant costs in switching to third-party products,which may substantially inhibit the growth of the market for businessintegration software. If this market fails to grow, or grows more slowly thanwe expect, our revenues will be adversely affected.

29

----

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

From time to time, we havebeen subject to litigation. In addition to the related cost and use of cash,pending or future litigation could cause the diversion of management’sattention and resources, and ultimately could have a material adverse impact onour results of operation and financial condition.

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

We depend upon our abilityto develop and protect our proprietary technology and intellectual propertyrights to distinguish our product from our competitors’ products. Theunauthorized use by others of our proprietary rights could materially harm ourbusiness. We rely on a combination of copyright, trademark and trade secretlaws, as well as confidentiality agreements and licensing arrangements, toestablish and protect our proprietary rights. We currently have no issuedpatents. Despite our efforts to protect our proprietary rights, existing lawsafford only limited protection. Attempts may be made to copy or reverseengineer aspects of our products or to obtain and use information we regard asproprietary. Accordingly, we cannot be certain we will be able to protect ourproprietary rights against unauthorized third party copying or use.Furthermore, policing the unauthorized use of our products is difficult, andexpensive litigation may be necessary in the future to enforce our intellectualproperty rights.

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

Third parties may claim wehave infringed their current or future intellectual property rights. We expectsoftware developers in our market will increasingly be subject to infringementclaims as the number of products in different software industry segmentsoverlap. Any claims, with or without merit, could be time-consuming, result incostly litigation, prevent product shipment or cause delays, or require us toenter into royalty or licensing agreements, any of which could harm ourbusiness. Patent litigation in particular has complex technical issues andinherent uncertainties. In the event an infringement claim against us issuccessful and we cannot obtain a license on acceptable terms, license asubstitute technology or redesign our products to avoid infringement, ourbusiness would be harmed. Furthermore, former employers of our current andfuture employees may assert our employees have improperly disclosed to us orare using their confidential or proprietary information.

***Failure to raise additional capital or generate thesignificant capital necessary to expand our operations and invest in newproducts could reduce our ability to compete and result in lower revenues.***

We currently expectour current cash resources will be sufficient to meet our working capital andcapital expenditure needs for at least the next twelve months. After that, wemay need to raise additional funds, and we cannot be certain we will be able toobtain additional debt or equity financing on favorable terms, or at all. If weraise additional equity financing, our stockholders may experience significantdilution of their ownership interests and the per share value of our commonstock could decline. If we engage in debt financing, we may be required toaccept terms that restrict our ability to incur additional indebtedness andforce us to maintain specified liquidity or other ratios, any of which couldharm our business. If we need additional capital and cannot raise it on acceptableterms, we may not be able to, among other things:

·       developor enhance our products and services;

·       maintainor expand our sales and marketing organizations;

·       acquirecomplementary technologies, products or businesses;

30

----

·       expandoperations, in the United States or internationally;

·       hire,train and retain employees; or

·       respondto competitive pressures or unanticipated working capital requirements.

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

***If we fail to attract, retain and integrate qualifiedpersonnel, our ability to compete will be harmed.***

We depend on the continuedservice of our key technical, sales and senior management personnel, includingour founder and Chief Executive Officer, James T. Demetriades. Most of thesepersons are not bound by an employment agreement, and we do not maintain keyperson life insurance on any of these persons, other than Mr. Demetriades.The loss of any of our senior management or other key product development orsales and marketing personnel could adversely affect our future operatingresults. Additionally, we recently experienced significant turnover in ourNorth American sales force, including new staff and management. Our ability toeffectively train and integrate this new North American sales force could posecontinuing challenges to our business. If we fail to do so, our operatingresults, particularly in the short term, could be negatively impacted. Inaddition, we must attract, retain and motivate highly skilled employees,including sales personnel and software engineers. We face significantcompetition for individuals with the skills required to develop, market andsupport our products and services. We may not be able to recruit and retain sufficientnumbers of these highly skilled employees. If we fail to do so, our ability tocompete will be significantly harmed.

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

We must plan and manage our growth effectively inorder to offer our products and services and achieve revenue growth andprofitability in a rapidly evolving market. Our growth has and will continue toplace a significant strain on our management systems and resources, and we maynot be able to effectively manage our growth in the future.

Furthermore, if ourrelationships with systems integrators succeed and we are able to penetrateadditional commercial markets, we may need additional sales and marketing andprofessional services resources to support these customers. The growth of ourcustomer base will require us to invest significant resources in the trainingand development of our employees and our systems integration partners. If theseorganizations fail to keep pace with the number and demands of the customersthat license our products, our ability to market and sell our products andservices and our ability to develop new products and services will be harmed.To manage our business, we must continue to:

·       effectivelymanage our direct sales force;

·       effectivelymanage our professional services organization;

·       hireand retain qualified software engineers;

·       improveour operational, financial and management controls;

·       improveour reporting systems and procedures;

·       enhanceour management and information control systems; and

·       effectivelymanage, train and motivate our workforce.

31

----

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

***We have implemented anti-takeover provisions thatcould discourage or prevent a takeover, even if an acquisition would bebeneficial to our stockholders.***

Some provisions ofDelaware law and our certificate of incorporation and bylaws could have theeffect of delaying or preventing a third party from acquiring us, even if achange in control would be beneficial to our stockholders. For example, ourcertificate of incorporation provides for a classified board of directors whosemembers serve staggered three-year terms and does not provide for cumulativevoting in the election of directors. Our board of directors has the authority,without further action by our stockholders, to fix the rights and preferencesof and issue shares of preferred stock. In addition, our stockholders areunable to act by written consent. These and other provisions could make it moredifficult for a third party to acquire us, even if doing so would benefit ourstockholders.

***Concentration of ownership among our existingexecutive officers and directors may prevent new investors from influencingsignificant corporate decisions.***

Our Chief ExecutiveOfficer, James T. Demetriades beneficially owns approximately 30% of ouroutstanding common stock. Our executive officers and directors beneficiallyown, in the aggregate, approximately 38% of our outstanding common stock. As aresult, these stockholders will be able to exercise a significant level ofcontrol over all matters requiring stockholder approval, including the electionof directors and approval of significant corporate transactions. This couldhave the effect of delaying or preventing a change of control of SeeBeyond andwill make some transactions difficult or impossible without the support ofthese stockholders.

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

The possibility ofpotential terrorist attacks could have an adverse effect upon an alreadyweakened world economy and could cause U.S. and foreign businesses to slowspending on products and services and delay sales cycles. The economicuncertainty resulting from any such future attacks and other responsesassociated with such attacks may continue to negatively impact short-termconsumer and business confidence.

**Item7A:   Quantitative and Qualitative Disclosure about Market Risk**

We are exposed to a variety of risks, includingchanges in interest rates affecting the return on our investments and foreigncurrency fluctuations. We have established policies and procedures to manageour exposure to fluctuations in interest rates and foreign currency exchangerates.

*Interestrate risk.**  *Wemaintain our funds in money market and certificate of deposit accounts atfinancial institutions. Our exposure to market risk due to fluctuations ininterest rates relates primarily to our interest earnings on our cash deposits.These securities are subject to interest rate risk in as much as their fairvalue may fall if market interest rates increase. If market interest rates wereto increase immediately and uniformly by 10% from the levels prevailing as of December 31,2004, the fair value of the portfolio would not decline by a material amount.We do not use derivative financial instruments to mitigate risks. However, wedo have an investment policy that would allow us to invest in short-term andlong-term investments such as money market instruments and corporate debtsecurities. Our policy attempts to reduce such risks by typically limiting thematurity date of such securities, placing our investments with high creditquality issuers and limiting the amount of credit exposure with any one issuer.

32

----

*Foreigncurrency exchange rate risk.**  *Our exposure to market risk due tofluctuations in foreign currency exchange rates relates primarily to theintercompany balances with our subsidiaries located in Australia, France,Germany, Japan, and the United Kingdom. Transaction gains or losses have notbeen significant in the past and we do not participate in any hedging activityon foreign currencies. We would not experience a material foreign exchange lossbased on a hypothetical 10% adverse change in the price of any of the localcurrencies of these countries. Consequently, we do not expect a reduction inthe value of such accounts denominated in foreign currencies resulting from asudden or significant fluctuation in foreign exchange rates would have a directmaterial impact on our financial position, results of operations or cash flows.

33

----

 

**Item8:**   Financial Statements and SupplementaryData

**SEEBEYOND TECHNOLOGY CORPORATION**

**INDEXTO CONSOLIDATED FINANCIAL STATEMENTS**
|                                                                                       | ** ** | **Page** |
|---------------------------------------------------------------------------------------|------------|----------|
| Report of Independent  Registered Public Accounting Firm                              |       |     | 35 |   |
| Consolidated Balance Sheets                                                           |       |     | 36 |   |
| Consolidated Statements of  Operations                                                |       |     | 37 |   |
| Consolidated Statements of  Stockholders’ Equity and Comprehensive Income (Loss) |       |     | 38 |   |
| Consolidated Statements of  Cash Flows                                                |       |     | 39 |   |
| Notes  to Consolidated Financial Statements                                           |       |     | 40 |   |

 

34

----

 

**Report of Independent Registered Public AccountingFirm**

The Board of Directors and Stockholders of SeeBeyondTechnology Corporation

We have audited the accompanying consolidated balancesheets of SeeBeyond Technology Corporation as of December 31, 2004 and2003, and the related consolidated statements of operations, stockholders’equity and comprehensive income (loss), and cash flows for each of the threeyears in the period ended December 31, 2004. Our audits also included thefinancial statement schedule listed in the Index at Item 15(a). These financialstatements and schedule are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements andschedule based on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of material misstatement.An audit includes examining, on a test basis, evidence supporting the amountsand disclosures in the financial statements. An audit also includes assessingthe accounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred toabove present fairly, in all material respects, the consolidated financial positionof SeeBeyond Technology Corporation as of December 31, 2004 and 2003, andthe consolidated results of its operations and its cash flows for each of thethree years in the period ended December 31, 2004, in conformity with U.S.generally accepted accounting principles. Also, in our opinion, the relatedfinancial statement schedule, when considered in relation to the basicfinancial statements taken as a whole, presents fairly in all materialrespects, the information set forth therein.

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the effectiveness of SeeBeyondTechnology Corporation’s internal control over financial reporting as of December 31,2004, based on criteria established in *InternalControl-Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission and our report dated March 3,2005 expressed an unqualified opinion thereon.
|                            | /s/ Ernst & Young LLP |
|----------------------------|--------------------------------|
| Orange County,  California |
| March 3, 2005         |

 

35

----

**SEEBEYOND TECHNOLOGY CORPORATIONCONSOLIDATED BALANCE SHEETS**
| ** **                                                                                                                                                                                                                                                | ** ** | **As of December 31,**                                                | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------|------------|
| ** **                                                                                                                                                                                                                                                | ** ** | **2004**                                                                             | ** ** | **2003** | ** ** |
| ** **                                                                                                                                                                                                                                                | ** ** | **In thousands, except share and per share data** | ** ** |
| Assets:                                                                                                                                                                                                                                                   |       |                                                                                 |       |   |   |   |   |   |   |
| Current assets:                                                                                                                                                                                                                                           |       |                                                                                 |       |   |   |   |   |   |   |
| Cash and cash equivalents                                                                                                                                                                                                                                 |       |                                                                                 | $          | 73,148 |   |   |   | $ | 70,135 |   |   |
| Accounts receivable, net of allowances of $1,606 and  $2,373 at December 31, 2004 and 2003, respectively                                                                                                                                             |       |                                                                                 | 37,995     |   |   |   | 34,333 |   |   |
| Prepaid expenses and other current assets                                                                                                                                                                                                                 |       |                                                                                 | 3,680      |   |   |   | 4,596 |   |   |
| Total current assets                                                                                                                                                                                                                                      |       |                                                                                 | 114,823    |   |   |   | 109,064 |   |   |
| Property and equipment, net                                                                                                                                                                                                                               |       |                                                                                 | 12,728     |   |   |   | 15,224 |   |   |
| Goodwill                                                                                                                                                                                                                                                  |       |                                                                                 | 1,391      |   |   |   | 1,391 |   |   |
| Other assets                                                                                                                                                                                                                                              |       |                                                                                 | 2,152      |   |   |   | 2,068 |   |   |
| Total assets                                                                                                                                                                                                                                              |       |                                                                                 | $          | 131,094 |   |   |   | $ | 127,747 |   |   |
| Liabilities and  stockholders’ equity:                                                                                                                                                                                                               |       |                                                                                 |       |   |   |   |   |   |   |
| Current  liabilities:                                                                                                                                                                                                                                     |       |                                                                                 |       |   |   |   |   |   |   |
| Accounts payable                                                                                                                                                                                                                                          |       |                                                                                 | $          | 6,739 |   |   |   | $ | 5,120 |   |   |
| Accrued employee compensation and related expenses                                                                                                                                                                                                        |       |                                                                                 | 13,861     |   |   |   | 12,675 |   |   |
| Accrued expenses                                                                                                                                                                                                                                          |       |                                                                                 | 5,808      |   |   |   | 9,263 |   |   |
| Deferred revenues                                                                                                                                                                                                                                         |       |                                                                                 | 36,537     |   |   |   | 31,221 |   |   |
| Equipment line and advance payable                                                                                                                                                                                                                        |       |                                                                                 | —     |   |   |   | 3,097 |   |   |
| Capital lease payable—current portion                                                                                                                                                                                                                |       |                                                                                 | 748        |   |   |   | 310 |   |   |
| Total current liabilities                                                                                                                                                                                                                                 |       |                                                                                 | 63,693     |   |   |   | 61,686 |   |   |
| Capital lease payable                                                                                                                                                                                                                                     |       |                                                                                 | 28         |   |   |   | 515 |   |   |
| Total liabilities                                                                                                                                                                                                                                         |       |                                                                                 | 63,721     |   |   |   | 62,201 |   |   |
| Commitments and  contingencies                                                                                                                                                                                                                            |       |                                                                                 |       |   |   |   |   |   |   |
| Stockholders’  equity:                                                                                                                                                                                                                               |       |                                                                                 |       |   |   |   |   |   |   |
| Common stock, $.0001 par value—200,000,000 shares  authorized; 87,559,663 shares issued and 84,930,711 shares outstanding as of  December 31, 2004 and 85,548,522 shares issued and 83,826,520 shares  outstanding as of December 31, 2003 |       |                                                                                 | 8          |   |   |   | 8 |   |   |
| Additional paid-in capital                                                                                                                                                                                                                                |       |                                                                                 | 226,481    |   |   |   | 222,539 |   |   |
| Treasury stock                                                                                                                                                                                                                                            |       |                                                                                 | (6,510     | ) |   |   | (3,632 | ) |   |
| Deferred stock compensation                                                                                                                                                                                                                               |       |                                                                                 | —     |   |   |   | (47 | ) |   |
| Accumulated other comprehensive income                                                                                                                                                                                                                    |       |                                                                                 | 990        |   |   |   | 616 |   |   |
| Accumulated deficit                                                                                                                                                                                                                                       |       |                                                                                 | (153,596   | ) |   |   | (153,938 | ) |   |
| Total stockholders’ equity                                                                                                                                                                                                                           |       |                                                                                 | 67,373     |   |   |   | 65,546 |   |   |
| Total liabilities  and stockholders’ equity                                                                                                                                                                                                          |       |                                                                                 | $          | 131,094 |   |   |   | $ | 127,747 |   |   |

 

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

36

----

**SEEBEYOND TECHNOLOGY CORPORATIONCONSOLIDATED STATEMENTS OFOPERATIONS**
| ** **                                                                                                          | ** ** | **Years Ended December 31,**                      | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|
| ** **                                                                                                          | ** ** | **2004**                                                         | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                                                          | ** ** | **In thousands, except per share data** | ** ** |
| Revenues:                                                                                                           |       |                                                             |       |   |   |   |   |
| License                                                                                                             |       | $                                                                | 70,271     |   | $ | 51,815 |   | $ | 67,243 |   |
| Services                                                                                                            |       | 39,514                                                           |       | 38,662 |   | 43,562 |   |
| Maintenance                                                                                                         |       | 54,013                                                           |       | 47,364 |   | 39,945 |   |
| Total revenues                                                                                                      |       | 163,798                                                          |       | 137,841 |   | 150,750 |   |
| Cost of revenues:                                                                                                   |       |                                                             |       |   |   |   |   |
| License                                                                                                             |       | 1,030                                                            |       | 1,375 |   | 2,322 |   |
| Services and maintenance (exclusive of stock-based compensation  of $8 in 2004, $37 in 2003 and $124 in 2002)  |       | 42,606                                                           |       | 41,028 |   | 45,425 |   |
| Total cost of revenues                                                                                              |       | 43,636                                                           |       | 42,403 |   | 47,747 |   |
| Gross profit                                                                                                        |       | 120,162                                                          |       | 95,438 |   | 103,003 |   |
| Operating expenses:                                                                                                 |       |                                                             |       |   |   |   |   |
| Research and development (exclusive of stock-based compensation  of $10 in 2004, $54 in 2003 and $141 in 2002) |       | 39,117                                                           |       | 41,012 |   | 34,443 |   |
| Sales and marketing (exclusive of stock-based compensation  of $75 in 2004, $125 in 2003 and $450 in 2002)     |       | 61,905                                                           |       | 57,044 |   | 66,520 |   |
| General and administrative (exclusive of stock-based  compensation of $4 in 2004, $61 in 2003 and $60 in 2002) |       | 19,132                                                           |       | 17,913 |   | 18,609 |   |
| Restructuring and impairment charges                                                                                |       | —                                                           |       | 6,433 |   | 6,625 |   |
| Amortization of sales and marketing warrants                                                                        |       | (14                                                              | )          | 190 |   | 380 |   |
| Amortization of stock-based compensation                                                                            |       | 97                                                               |       | 277 |   | 775 |   |
| Total operating expenses                                                                                            |       | 120,237                                                          |       | 122,869 |   | 127,352 |   |
| Loss from  operations                                                                                               |       | (75                                                              | )          | (27,431 | ) | (24,349 | ) |
| Interest income  and other income and expense                                                                       |       | 575                                                              |       | 1,006 |   | 1,365 |   |
| Interest expense                                                                                                    |       | (238                                                             | )          | (382 | ) | (263 | ) |
| Income (loss)  before income tax (benefit) provision                                                                |       | 262                                                              |       | (26,807 | ) | (23,247 | ) |
| Income tax  (benefit) provision                                                                                     |       | (80                                                              | )          | 691 |   | 697 |   |
| Net income (loss)                                                                                                   |       | $                                                                | 342        |   | $ | (27,498 | ) | $ | (23,944 | ) |
| Basic net income (loss) per share                                                                                   |       | $                                                                | 0.00       |   | $ | (0.33 | ) | $ | (0.29 | ) |
| Diluted net  income (loss) per share                                                                                |       | $                                                                | 0.00       |   | $ | (0.33 | ) | $ | (0.29 | ) |
| Number of shares used in  calculating:                                                                              |       |                                                             |       |   |   |   |   |
| —basic net income (loss) per share                                                                             |       | 84,644                                                           |       | 83,002 |   | 82,145 |   |
| —diluted net  income (loss) per share                                                                          |       | 88,736                                                           |       | 83,002 |   | 82,145 |   |

 

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

37

----

**SEEBEYOND TECHNOLOGY CORPORATIONCONSOLIDATED STATEMENTS OFSTOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)(In thousands)**
| ** **                                                           | ** ** | ** **            | ** ** | ** **  | ** ** | ** **     | ** ** | ** ** | ** ** | ** **        | ** ** | **Accumulated**        | ** ** | ** **             | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------|------------|-----------------------|------------|-------------|------------|----------------|------------|------------|------------|-------------------|------------|------------------------|------------|------------------------|------------|------------|------------|
| ** **                                                           | ** ** | ** **            | ** ** | ** **  | ** ** | **Additional** | ** ** | ** ** | ** ** | **Deferred**      | ** ** | **Other**              | ** ** | ** **             | ** ** | **Total**  | ** ** |
| ** **                                                           | ** ** | **Common Stock** | ** ** | **Paid-in** | ** ** | **Treasury**   | ** ** | **Stock**  | ** ** | **Comprehensive** | ** ** | **Accumulated**        | ** ** | **Stockholders’** | ** ** |
| ** **                                                           | ** ** | **Shares**            | ** ** | **Amount**  | ** ** | **Capital**    | ** ** | **Stock**  | ** ** | **Compensation**  | ** ** | **Income (Loss)** | ** ** | **Deficit**            | ** ** | **Equity** | ** ** |
| Balance as of  December 31, 2001                                |       | 74,750                |       |        | $          | 7              |       |       |       | $                 | 157,750    |                   |       |                   | $          | —     |       |   |   | $ | (3,432 | ) |   |   | $ | (1,183 | ) |   |   | $ | (102,496 | ) |   |   | $ | 50,646 |   |   |
| Components of comprehensive  loss:                                   |       |                  |       |        |       |           |       |       |       |              |       |                   |       |                   |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net loss                                                             |       | —                |       |        | —     |           |       |       | —     |              |       |                   | —     |                   |       |       | —     |   |   |   | — |   |   |   | (23,944 | ) |   |   | (23,944 | ) |   |
| Foreign currency  translation adjustment                             |       | —                |       |        | —     |           |       |       | —     |              |       |                   | —     |                   |       |       | —     |   |   |   | 1,084 |   |   |   | — |   |   |   | 1,084 |   |   |
| Total  comprehensive loss                                            |       |                  |       |        |       |           |       |       |       |              |       |                   |       |                   |       |       |       |   |   |   |   |   |   |   |   |   |   |   | (22,860 | ) |   |
| Issuance of common  stock pursuant to secondary public offering, net |       | 6,573                 |       |        | 1          |           |       |       | 59,012     |              |       |                   | —     |                   |       |       | —     |   |   |   | — |   |   |   | — |   |   |   | 59,013 |   |   |
| Issuance of common  stock pursuant to employee stock option plan     |       | 1,336                 |       |        | —     |           |       |       | 3,508      |              |       |                   | —     |                   |       |       | —     |   |   |   | — |   |   |   | — |   |   |   | 3,508 |   |   |
| Issuance of common  stock pursuant to employee stock purchase plan   |       | 412                   |       |        | —     |           |       |       | 936        |              |       |                   | —     |                   |       |       | —     |   |   |   | — |   |   |   | — |   |   |   | 936 |   |   |
| Issuance of common  stock pursuant to warrant exercises              |       | 667                   |       |        | —     |           |       |       | —     |              |       |                   | —     |                   |       |       | —     |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Amortization of  common stock warrants                               |       | —                |       |        | —     |           |       |       | —     |              |       |                   | —     |                   |       |       | 380        |   |   |   | — |   |   |   | — |   |   |   | 380 |   |   |
| Amortization of  deferred stock compensation                         |       | —                |       |        | —     |           |       |       | —     |              |       |                   | —     |                   |       |       | 775        |   |   |   | — |   |   |   | — |   |   |   | 775 |   |   |
| Payments for the  purchase of common stock                           |       | (1,200                | )          |        | —     |           |       |       | —     |              |       |                   | (2,760     | )                      |       |       | —     |   |   |   | — |   |   |   | — |   |   |   | (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       | ) |   |   | (99 | ) |   |   | (126,440 | ) |   |   | 89,638 |   |   |
| 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 |   |   |
| Components of  comprehensive income:                                 |       |                  |       |        |       |           |       |       |       |              |       |                   |       |                   |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                                           |       | —                |       |        | —     |           |       |       | —     |              |       |                   | —     |                   |       |       | —     |   |   |   | — |   |   |   | 342 |   |   |   | 342 |   |   |
| Foreign currency  translation adjustment                             |       | —                |       |        | —     |           |       |       | —     |              |       |                   | —     |                   |       |       | —     |   |   |   | 374 |   |   |   | — |   |   |   | 374 |   |   |
| Total  comprehensive income                                          |       |                  |       |        |       |           |       |       |       |              |       |                   |       |                   |       |       |       |   |   |   |   |   |   |   |   |   |   |   | 716 |   |   |
| Issuance of common  stock pursuant to employee stock option plan     |       | 1,653                 |       |        | —     |           |       |       | 3,262      |              |       |                   | —     |                   |       |       | —     |   |   |   | — |   |   |   | — |   |   |   | 3,262 |   |   |
| Issuance of common  stock pursuant to employee stock purchase plan   |       | 355                   |       |        | —     |           |       |       | 644        |              |       |                   | —     |                   |       |       | —     |   |   |   | — |   |   |   | — |   |   |   | 644 |   |   |
| Issuance of common  stock pursuant to warrant exercise               |       | 4                     |       |        | —     |           |       |       | —     |              |       |                   | —     |                   |       |       | —     |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Payments for the  purchase of common stock                           |       | (907                  | )          |        | —     |           |       |       | —     |              |       |                   | (2,878     | )                      |       |       | —     |   |   |   | — |   |   |   | — |   |   |   | (2,878 | ) |   |
| Deferred stock  compensation related to stock options                |       | —                |       |        | —     |           |       |       | 54         |              |       |                   | —     |                   |       |       | (54        | ) |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Amortization of  deferred stock compensation                         |       | —                |       |        | —     |           |       |       | —     |              |       |                   | —     |                   |       |       | 97         |   |   |   | — |   |   |   |   |   |   |   | 97 |   |   |
| Revaluation of  warrant                                              |       | —                |       |        | —     |           |       |       | (18        | )                 |       |                   | —     |                   |       |       | 18         |   |   |   | — |   |   |   |   |   |   |   | — |   |   |
| Amortization of  warrant                                             |       | —                |       |        | —     |           |       |       | —     |              |       |                   | —     |                   |       |       | (14        | ) |   |   | — |   |   |   | — |   |   |   | (14 | ) |   |
| Balance as of  December 31, 2004                                |       | 84,931                |       |        | $          | 8              |       |       |       | $                 | 226,481    |                   |       |                   | $          | (6,510     | )          |   |   | $ | — |   |   |   | $ | 990 |   |   |   | $ | (153,596 | ) |   |   | $ | 67,373 |   |   |

 

The accompanying notes are an integral part of these financialstatements.

38

 

----

**SEEBEYOND TECHNOLOGY CORPORATIONCONSOLIDATED STATEMENTS OFCASH FLOWS**
| ** **                                                                                          | ** ** | **For the Years Ended** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                          | ** ** | **2004**                               | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                                          | ** ** | **In thousands**                  | ** ** |
| Cash flows from operating activities:                                                               |       |                                   |       |   |   |   |   |
| Net income (loss)                                                                                   |       | $                                      | 342        |   | $ | (27,498 | ) | $ | (23,944 | ) |
| Adjustments to reconcile net income (loss) to net cash  provided by (used in) operating activities: |       |                                   |       |   |   |   |   |
| Loss (gain) on disposal  of fixed assets                                                            |       | 2                                      |       | (16 | ) | 43 |   |
| Depreciation and  amortization                                                                      |       | 4,758                                  |       | 5,814 |   | 5,585 |   |
| Provision for doubtful  accounts receivable                                                         |       | 67                                     |       | 727 |   | 933 |   |
| Amortization of sales  and marketing warrants                                                       |       | (14                                    | )          | 190 |   | 380 |   |
| Amortization of  stock-based compensation                                                           |       | 97                                     |       | 277 |   | 775 |   |
| Non-cash restructuring  and impairment charges                                                      |       | —                                 |       | 3,853 |   | 2,279 |   |
| Changes in assets and liabilities:                                                                  |       |                                   |       |   |   |   |   |
| Accounts receivable                                                                                 |       | (3,729                                 | )          | (1,510 | ) | 6,628 |   |
| Prepaid expenses and  other current assets                                                          |       | 916                                    |       | 5 |   | (1,169 | ) |
| Accounts payable                                                                                    |       | 1,619                                  |       | (3,948 | ) | 672 |   |
| Accrued compensation and  related expenses                                                          |       | (2,269                                 | )          | 1,229 |   | (201 | ) |
| Deferred revenues                                                                                   |       | 5,316                                  |       | 3,080 |   | 4,283 |   |
| Net cash provided by (used in) operating activities:                                                |       | 7,105                                  |       | (17,797 | ) | (3,736 | ) |
| Cash flows from investing activities:                                                               |       |                                   |       |   |   |   |   |
| Purchases of property  and equipment                                                                |       | (1,974                                 | )          | (5,103 | ) | (14,226 | ) |
| Payments to acquire  companies, net of cash acquired                                                |       | —                                 |       | — |   | (268 | ) |
| Related party receivable                                                                            |       | —                                 |       | — |   | 366 |   |
| Other                                                                                               |       | (84                                    | )          | (689 | ) | (1,099 | ) |
| Net cash used in  investing activities                                                              |       | (2,058                                 | )          | (5,792 | ) | (15,227 | ) |
| Cash flows from financing activities:                                                               |       |                                   |       |   |   |   |   |
| Net (repayments)  borrowings on bank lines of credit                                                |       | (3,097                                 | )          | (3,151 | ) | 4,294 |   |
| Repayments of capital  lease obligation                                                             |       | (339                                   | )          | (178 | ) | (37 | ) |
| Proceeds from issuance  of common stock pursuant to secondary public offering, net                  |       | —                                 |       | — |   | 59,012 |   |
| Proceeds from issuance  of common stock pursuant to employee stock option plan                 |       | 3,263                                  |       | 2,422 |   | 3,509 |   |
| Proceeds from issuance  of common stock pursuant to employee stock purchase plan                    |       | 644                                    |       | 674 |   | 936 |   |
| Payments for purchase of  common stock                                                              |       | (2,879                                 | )          | (872 | ) | (2,760 | ) |
| Net cash (used in)  provided by financing activities                                                |       | (2,408                                 | )          | (1,105 | ) | 64,954 |   |
| Effect of exchange rate  changes on cash and cash equivalents                                       |       | 374                                    |       | 715 |   | 1,084 |   |
| Net increase (decrease)  in cash and cash equivalents                                               |       | 3,013                                  |       | (23,979 | ) | 47,075 |   |
| Cash and cash  equivalents at beginning of the period                                               |       | 70,135                                 |       | 94,114 |   | 47,039 |   |
| Cash and cash  equivalents at end of the period                                                     |       | $                                      | 73,148     |   | $ | 70,135 |   | $ | 94,114 |   |
| Supplemental cash flow disclosure:                                                                  |       |                                   |       |   |   |   |   |
| Income taxes paid                                                                                   |       | $                                      | 859        |   | $ | 594 |   | $ | 536 |   |
| Interest paid                                                                                       |       | $                                      | 236        |   | $ | 382 |   | $ | 263 |   |
| Non-cash investing activities:                                                                      |       |                                   |       |   |   |   |   |
| Capital lease obligation incurred                                                                   |       | $                                      | 290        |   | $ | — |   | $ | 1,001 |   |

 

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

39

----

**SEEBEYOND TECHNOLOGY CORPORATIONNOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

**Note 1.   TheCompany and Summary of Significant Accounting Policies**

***The Company***

SeeBeyond Technology Corporation (the “Company”) is aprovider of business integration software that enables the real-time flow ofinformation within the enterprise and among customers, suppliers and partners.The Company believes it offers the only comprehensive business integrationsolution architected from a single, internally developed software code base,encompassing application-to-application integration, business-to-businessintegration and business process management. The Company’s Business IntegrationSuite builds upon more than thirteen years of continuous development ofbusiness integration solutions within and among enterprises.

The Company’s operationsare subject to certain risks and uncertainties, including rapid technologicalchanges, success of the Company’s product marketing and product distributionstrategies, the need to manage growth, the need to retain key personnel andprotect intellectual property, and the availability of additional capitalfinancing on terms acceptable to the Company.

***Basis of Presentation***

The accompanyingconsolidated financial statements include the accounts of the Company and itswholly owned subsidiaries. All intercompany transactions have been eliminatedin consolidation. Certain reclassifications have been made to prior yearbalances in order to conform to the current period presentation. Thesereclassifications have no impact on previously reported net loss or cash flows.

***Use of Estimates***

The preparation offinancial statements in conformity with U.S. generally accepted accountingprinciples requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting periods. Actual resultscould differ from those estimates. Significant estimates made in preparing theconsolidated financial statements include the allowance for doubtful accounts,certain accrued liabilities and estimates of future cash flows developed todetermine whether conditions of impairment are present.

***Cash and Cash Equivalents***

The Company considers allhighly liquid investments with a maturity of three months or less whenpurchased to be cash equivalents.

***Concentration of Credit Risk and Allowance forDoubtful Accounts***

Financial instruments that potentially expose theCompany to concentration of credit risk consist primarily of temporary cashinvestments and accounts receivable. The Company places its temporary cashinvestments with financial institutions. The Company’s accounts receivable arederived from revenues earned from customers located primarily in the UnitedStates, Europe, Australia and Japan. The risk with respect to trade receivablesis mitigated by credit evaluations we perform on our customers and by thediversification of our customer base. The Company generally does not requirecollateral or other security from its customers.

40

----

The Company performsongoing credit evaluations of its customers’ financial condition and maintainsallowances for potential credit losses based upon the expected collectibilityof the receivable. The expectation of collectibility is based on the review ofcredit profiles of each customer, contractual terms and conditions, currenteconomic trends and payment history. Credit losses have historically beenwithin management’s expectations.

***Fair Value of Financial Instruments***

The Company’s financialinstruments, including cash and cash equivalents, accounts receivable, accountspayable and accrued liabilities are carried at cost, which approximates theirfair value, due to the relatively short maturity of these instruments. As of December 31,2003, the Company’s short-term line of credit and equipment line payable hadvariable interest rates and, accordingly, the Company believed the carryingvalue of the short-term line of credit and equipment line approximated theirfair values.

***Software Development Costs***

Costs related to the research and development of newsoftware products and enhancements to existing software products are expensedas incurred until technological feasibility of the product has beenestablished, at which time such costs are capitalized, subject to expectedrecoverability. To date, the Company has not capitalized any development costsrelated to its software products since the time period between technologicalfeasibility and general release of a product is not significant and relatedcosts incurred during that time period have not been material.

For software developed forinternal use, certain qualifying costs incurred in the application developmentstage are capitalized and amortized over a period of three years.

***Revenue Recognition***

The Company recognizes revenue when an agreement hasbeen signed by both parties or other persuasive evidence of an arrangementexists, the software has been shipped or electronically delivered, the fees arefixed or determinable, collection of the resulting receivable is probable andno other significant obligations remain. For multiple element arrangementswhere vendor-specific objective evidence of fair value exists for allundelivered elements, we account for the delivered elements in accordance withthe “residual method” prescribed by Statement of Position 98-9. Vendor-specificobjective evidence of fair value is based on the price a customer is requiredto pay when the element is sold separately. The Company enters intoarrangements with end users, which may include the sale of licenses ofsoftware, maintenance and services under the arrangement or variouscombinations of each element, including the sale of such elements separately.

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

41

----

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

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

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

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

***Net Income (Loss) Per Share***

Basic and diluted netincome (loss) per share has been computed using the weighted-averagenumber of shares of common stock outstanding during the period. The Companyexcludes outstanding warrants and outstanding stock options from thecalculation of diluted net income (loss) per share when such securities areantidilutive.

***Income Taxes***

The Company uses theliability method of accounting for income taxes. Deferred tax assets andliabilities are recognized for the future tax consequences attributable tofinancial statements carrying amounts of existing assets and liabilities andtheir respective tax bases and operating loss and tax credit carryforwards. Themeasurement of deferred tax assets and liabilities is based on provisions ofapplicable tax law. The measurement of deferred tax assets is reduced, ifnecessary, 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 isexpensed as incurred. The Company incurred approximately $614,000, $667,000 and$350,000 in advertising costs during 2004, 2003 and 2002, respectively.

***Long-lived Assets***

The Company reviews forimpairment of long-lived assets whenever events or changes in circumstancesindicate if the carrying amount of an asset may not be recoverable. Therecoverability test is performed at the lowest level at which undiscounted netcash flows can be attributable to long-lived assets.

42

----

***Goodwill***

The Company tests goodwillfor impairment at the reporting unit level on an annual basis in the fourthquarter or more frequently if the Company believes that indicators ofimpairment exist.

***Comprehensive Income (Loss)***

The Company accounts forcomprehensive income (loss) using Statement of Financial Accounting Standards (“SFAS”)No. 130, “Reporting Comprehensive Income.” SFAS No. 130 establishesstandards for reporting comprehensive income (loss) and its components infinancial statements. Comprehensive income (loss), as defined therein, refersto revenues, expenses, gains and losses that are not included in net income(loss) but rather are recorded directly in stockholders’ equity.

***Foreign Currency Translation***

The functional currencyfor the Company’s foreign operations is the local currency. Foreign currencyfinancial statements are converted into United States dollars by translatingasset and liability accounts at the current exchange rate at year-end andstatement of operations accounts at the average exchange rate for the period,with the resulting translation adjustment reflected in accumulated othercomprehensive income (loss) in stockholders’ equity. Realized and unrealizedtransaction gains and losses, other than intercompany debt deemed to be of along-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, “Accountingfor Stock-based Compensation—Transition and Disclosure—and amendment toFAS 123”, the Company continues to apply the provisions of APB No. 25,“Accounting for Stock Issued to Employees,” for its recording of stock-basedcompensation arrangements. Accordingly, the Company accounts for its stockbased compensation using the intrinsic value method, which requires recognitionof expense when the option exercise price is less than the fair value of thestock at the date of grant. The Company provides the required pro forma netincome (loss) and pro forma earnings (loss) per share disclosures for employeestock option grants made in 1995 and future years as if the fair-value-basedmethod defined in SFAS No. 123 had been applied. Under the fair valuemethod stock options are valued and expensed based on the fair value of theoptions determined under an option-pricing model.

***Recently Issued Accounting Pronouncements***

In December 2004, the Financial AccountingStandards Board issued Statements of Financial Accounting Standards Statement No. 123(revised 2004), “Share-Based Payment” (“SFAS 123R”). This Statement is arevision of SFAS No. 123, “Accountingfor Stock-Based Compensation” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”.SFAS 123(R) requires acompany to measure the grant-date fair value of equity awards given toemployees in exchange for services and recognize that cost over the period thatsuch services are performed. SFAS 123R is effective for the first interim orannual period that begins after June 15, 2005.

The Company is currentlyevaluating the two methods of adoption allowed by SFAS 123R: themodified-prospective transition method and the modified-retrospectivetransition method. Adoption of SFAS 123R is expected to materially increasestock compensation expense and decrease net income, however the impact cannotbe determined at this time. In addition, SFAS 123R requires the excess taxbenefits related to stock compensation be reported as a cash inflow fromfinancing activities rather than as a reduction of taxes paid in cash fromoperating activities.

43

----

**Note 2.   Property and Equipment**

Propertyand equipment are recorded at cost. Depreciation is computed using thestraight-line method over the shorter of the estimated useful lives or thelease term of the assets: computer equipment, three years; office furniture andequipment and vehicles, five years; leasehold improvements, through the lesserof useful life or life of the lease. Property and equipment, stated at cost,was as follows (in thousands):
| ** **                                     | ** ** | **As of December 31,** | ** ** |
|------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                     | ** ** | **2004**                              | ** ** | **2003** | ** ** |
| Computer  equipment (hardware and software)    |       | $                                     | 19,562     |   | $ | 20,101 |   |
| Office furniture  and equipment                |       | 8,770                                 |       | 9,092 |   |
| Leasehold  improvements                        |       | 6,891                                 |       | 6,797 |   |
| Vehicles                                       |       | 71                                    |       | — |   |
| Total cost of property and equipment           |       | 35,294                                |       | 35,990 |   |
| Less accumulated depreciation and amortization |       | (22,566                               | )          | (20,766 | ) |
| Property and  equipment, net                   |       | $                                     | 12,728     |   | $ | 15,224 |   |

 

Depreciation andamortization expense for the years ended December 31, 2004, 2003 and 2002was approximately $4.8 million, $5.8 million and $5.6 million,respectively.

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

TheCompany operates in one industry segment. In the United States, we have salesoffices in the greater metropolitan areas of Atlanta, Boston, Chicago, Dallas,Los Angeles, New York, San Francisco and Washington DC. In Europe we have salesoffices in Belgium, Denmark, France, Germany, Italy, the Netherlands, Spain,Sweden, Switzerland and the United Kingdom. In the Asia Pacific region, we havesales offices in Australia, Japan, Korea, New Zealand and Singapore. Revenuesand long-lived assets by geographic area were as follows (in thousands):
| ** **     | ** ** | **For the Years Ended** | ** ** |
|----------------|------------|----------------------------------------|------------|
| ** **     | ** ** | **2004**                               | ** ** | **2003** | ** ** | **2002** | ** ** |
| Revenues:      |       |                                   |       |   |   |   |   |
| North America  |       | $                                      | 85,453     |   | $ | 80,702 |   | $ | 98,360 |   |
| Europe         |       | 69,407                                 |       | 44,585 |   | 39,802 |   |
| Pacific Rim    |       | 8,938                                  |       | 12,554 |   | 12,588 |   |
| Total revenues |       | $                                      | 163,798    |   | $ | 137,841 |   | $ | 150,750 |   |

 
| ** **              | ** ** | **December 31,** | ** ** |
|-------------------------|------------|------------------|------------|
| ** **              | ** ** | **2004**         | ** ** | **2003** | ** ** |
| Long-lived assets:      |       |             |       |   |   |
| North America           |       | $                | 13,392     |   | $ | 15,342 |   |
| Europe                  |       | 1,617            |       | 1,893 |   |
| Pacific Rim             |       | 1,262            |       | 1,448 |   |
| Total long-lived assets |       | $                | 16,271     |   | $ | 18,683 |   |

 

No single customeraccounted for more than 10% of the Company’s revenues during the years ended2004, 2003 and 2002. Included in revenues from operations in Europe areapproximately $44.1 million, $22.0 million and $19.5 million ofrevenues from the Company’s operations in the United Kingdom and approximately$9.4 million, $8.6 million and $5.8 million of revenues from theCompany’s operations in Germany, for the years ended December 31, 2004,2003 and 2002, respectively.

44

----

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

Thefollowing table sets forth the computations of basic and diluted net income(loss) per share for the years indicated (in thousands, except per share data):
| ** **                                                                                             | ** ** | **For the Years Ended** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                             | ** ** | **2004**                               | ** ** | **2003** | ** ** | **2002** | ** ** |
| Net income (loss)                                                                                      |       | $                                      | 342        |   | $ | (27,498 | ) | $ | (23,944 | ) |
| Weighted average outstanding shares of common stock used  to compute basic net income (loss) per share |       | 84,644                                 |       | 83,002 |   | 82,145 |   |
| Dilutive effect of employee stock options                                                              |       | 4,092                                  |       | — | * * | *—* | * * |
| Common stock and common stock equivalents                                                              |       | 88,736                                 |       | 83,002 |   | 82,145 |   |
| Basic net income (loss) per share                                                                      |       | $                                      | 0.00       |   | $ | (0.33 | ) | $ | (0.29 | ) |
| Diluted net  income (loss) per share                                                                   |       | $                                      | 0.00       |   | $ | (0.33 | ) | $ | (0.29 | ) |

 

Options to purchase14,066,628, 19,731,055 and 19,610,621 shares of common stock were not includedin the calculations of diluted net income (loss) per share for the years ended December 31,2004, 2003 and 2002, respectively, because their effect would be antidilutive.Warrants to purchase shares of common stock were not included in thecalculations of diluted net income (loss) per share because their effect wouldbe antidilutive.

**Note 5.   Income Taxes**

Thecomponents of the (benefit) provision for income taxes are as follows (inthousands):
| ** **                      | ** ** | **Years ended December 31,** | ** ** |
|---------------------------------|------------|---------------------------------------------|------------|
| ** **                      | ** ** | **2004**                                    | ** ** | **2003** | ** ** | **2002** | ** ** |
| Federal:                        |       |                                        |       |   |   |   |   |
| Current                         |       | $                                           | 25         |   | $ | — |   | $ | — |   |
| Deferred                        |       | —                                      |       | — |   | — |   |
| Total federal                   |       | 25                                          |       | — |   | — |   |
| State:                          |       |                                        |       |   |   |   |   |
| Current                         |       | 50                                          |       | 183 |   | 214 |   |
| Deferred                        |       | —                                      |       | — |   | — |   |
| Total state                     |       | 50                                          |       | 183 |   | 214 |   |
| Foreign:                        |       |                                        |       |   |   |   |   |
| Current                         |       | 581                                         |       | 508 |   | 483 |   |
| Deferred                        |       | (736                                        | )          | — |   | — |   |
| Total foreign                   |       | (155                                        | )          | 508 |   | 483 |   |
| Income tax  (benefit) provision |       | $                                           | (80        | ) | $ | 691 |   | $ | 697 |   |

 

Federal and state income taxes have not been providedon accumulated but undistributed earnings of certain foreign subsidiaries assuch earnings have been and will continue to be reinvested in the businessindefinitely, thus reducing the Company’s overall tax expense. At December 31,2004, the Company had approximately $170,000 of accumulated but undistributedearnings of certain consolidated foreign subsidiaries.

45

----

The(benefit) provision for income taxes differs from the amount obtained byapplying the federal statutory income tax rate for the following reasons (inthousands):
| ** **                                                      | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|-----------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Tax (benefit)  provision computed at the statutory federal rate |       | $        | 103        |     | $          | (9,114   | )          | $ | (7,904 | ) |
| Change in  valuation allowance                                  |       | (736     | )          | 8,193    |       | 7,856    |       |
| Utilization of  net operating losses                            |       | (2,106   | )          | (123     | )          | (313     | )          |
| State taxes, net  of federal benefit                            |       | 168      |       | (1,222   | )          | (1,108   | )          |
| Non-deductible  expense                                         |       | 75       |       | 345      |       | 190      |       |
| Minimum taxes                                                   |       | 75       |       | 183      |       | 214      |       |
| Foreign taxes                                                   |       | 581      |       | 507      |       | 483      |       |
| Foreign losses  not benefited                                   |       | 1,760    |       | 1,922    |       | 1,279    |       |
| Income tax  (benefit) provision                                 |       | $        | (80        | )        | $          | 691      |       | $ | 697 |   |

 

In fiscal 2004, the tax rate benefited from afavorable adjustment to previously estimated foreign tax liabilities ofapproximately $250,000, which decreased the provision for foreign income taxes.The favorable adjustment related to the resolution of a transfer pricinginquiry related to the Company’s United Kingdom subsidiary.

Thecomponents of the Company’s deferred tax assets and liabilities as of December 31,2004 and 2003 are as follows (in thousands): 
| ** **                                             | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------------------------------------|------------|----------|------------|----------|------------|
| Current deferred tax  assets (liabilities):            |       |     |       |     |       |
| Accrued liabilities and deferred revenue               |       | $        | 1,314      |     | $          | 1,398 |   |
| Allowance for doubtful accounts                        |       | 297      |       | 429      |       |
| Other                                                  |       | 438      |       | —   |       |
| Valuation allowance                                    |       | (1,681   | )          | (1,827   | )          |
| Net current deferred tax assets                        |       | 368      |       | —   |       |
| Non-current  deferred tax assets (liabilities):        |       |     |       |     |       |
| Net operating loss carryforwards                       |       | 58,029   |       | 58,317   |       |
| Restructuring reserve                                  |       | 1,839    |       | 2,557    |       |
| Book depreciation in excess of tax                     |       | —   |       | (214     | )          |
| Tax credit carryforwards                               |       | 14,700   |       | 11,816   |       |
| Fixed assets capitalizable for tax                     |       | 785      |       | 603      |       |
| Other                                                  |       | 284      |       | 94       |       |
| Valuation allowance                                    |       | (75,269  | )          | (73,173  | )          |
| Net non-current deferred tax assets                    |       | 368      |       | —   |       |
| Total current and  non-current net deferred tax assets |       | $        | 736        |     | $          | — |   |

 

The Company records valuation allowances against itsdeferred tax assets, when necessary, in accordance with SFAS No. 109, “Accountingfor Income Taxes”. Realization of deferred tax assets (such as net operatingloss carryforwards and income tax credits) is dependent on future taxableearnings and is therefore uncertain. To the extent management believes thatrecovery is unlikely, the Company establishes a valuation allowance against itsdeferred tax asset. The valuation allowance increased by approximately$2.0 million and $19.5 million in 2004 and 2003, respectively. Theincrease in valuation allowance during 2004 is net of  a decrease to the valuation allowance of$736,000 as a result of the reversal of a portion of the valuation allowancepreviously recorded against the net operating losses and other deferred taxassets of certain foreign jurisdictions. The reversal was based on management’sassessment during the fourth 

46

----

quarter of 2004, that arecent history of taxable income and the future estimated taxable earnings ofthose foreign jurisdictions indicated that a portion of the deferred tax assetwould be realized. Management believes that it is more likely than not the netdeferred tax assets in those foreign jurisdictions will be realized, althoughrealization is not assured. Approximately $14.2 million of the valuationallowance relates to stock option compensation deductions incurred in our netoperating loss carryforwards. If and when the Company reduces any portion ofthe valuation allowance related to stock option compensation deduction, thebenefit will be added to stockholders’ equity, rather than being shown as areduction of future income tax expense.

Loss before the (benefit) provision for income taxesof the Company’s foreign operations amounted to approximately$5.1 million, $5.6 million and $3.8 million, respectively, forthe years ended December 31, 2004, 2003 and 2002.

As of December 31, 2004, the Company had Net OperatingLoss (“NOL”) carryforwards in foreign subsidiaries of approximately $32.7million. These NOL carryforwards in foreign subsidiaries expire at variousdates beginning in 2007.

The Company had NOLcarryforwards for the United States and state purposes of approximately$120.0 million and $90.0 million, respectively, expiring through 2024for the U.S. and 2014 for state. The Company also had federal and stateresearch and development credit carryforwards of approximately$7.0 million and $7.5 million, respectively, which expire through 2024.The realization of the benefits of the NOL’s and tax credits is dependent onthe Company generating sufficient taxable income in future years. The UnitedStates tax laws contain provisions that limit the use in any future period ofnet operating loss and credit carryforwards upon the occurrence of certainevents including a significant change in ownership interest.

**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 lendinginstitution that bears interest at an annual rate of either prime plus 0.5% orthe London InterBank Offered Rate (“LIBOR”) rate plus 2.50% (payable monthly). Theexpiration date of the Line has been extended through May 31, 2005. As of December 31,2004, $11.1 million was available under the Line and there were noborrowings outstanding. The Company may use up to $5.0 million of the Lineto issue letters of credit. As of December 31, 2004, approximately$386,000 was available for the issuance of letters of credit. The Line issecured by intellectual property rights, accounts receivable and certain otherassets and is subject to certain borrowing base restrictions. The Line requiresmaintenance of certain financial covenants pertaining to key financial ratiosand the Company is in compliance with those covenants as of December 31,2004.

In October 2001, the Company’s $3.0 millionequipment line (the “Equipment Line”) with the same lending institutionproviding the Line was amended, reducing the maximum amount available forborrowing under the Equipment Line to $2.0 million. The Equipment Linebore interest at an annual rate of prime plus 0.75%, or the LIBOR rate plus2.75% (payable monthly) and expired on November 30, 2004. All amountsoutstanding under the Equipment Line had been repaid by December 31, 2004.

In December 2002, theCompany’s credit facility was amended to include an equipment advance (the “EquipmentAdvance”) in the amount of $5.0 million from the same lending institution.Interest on the Equipment Advance was payable monthly and principal was payablein 24 equal monthly installments, beginning January 31, 2003. TheEquipment Advance bore interest at an annual rate of prime plus 0.75% or theLIBOR rate plus 3.0%. All amounts outstanding under the Equipment Advance hadbeen repaid by December 31, 2004.

47

----

***Lease Obligations***

The Company leases office facilities and computerequipment under non-cancelable operating lease agreements with third partiesexpiring through 2014. Certain of the office facility leases contain escalationclauses and certain of the computer equipment leases contain purchase optionsto purchase at various dates. The Company leases certain storage space andcomputer and office equipment under month-to-month leases.  The Company also leases office furniture andequipment under both capital and non-cancelable operating lease agreements withthird parties expiring through 2008. Office furniture and equipment capitalizedunder capital leases totaled $1.1 million at December 31, 2004 and2003, and is included in the appropriate category under property and equipment.Related accumulated amortization of equipment under capital leases amounted to approximately$222,000 and $217,000 at December 31, 2004 and 2003, respectively, and isincluded in accumulated depreciation. Amortization of office furniture andequipment under capital leases is included in depreciation and amortizationexpense.

Futureminimum payments required under capital leases, together with the net presentvalue of such payments, and future minimum lease payments required underoperating leases, by year and in the aggregate, with initial terms of one yearor more, consisted of the following at December 31, 2004 (in thousands):
| ** **                         | ** ** | **Operating Leases** | ** ** | **Capital Leases** | ** ** |
|------------------------------------|------------|---------------------------|------------|-------------------------|------------|
| ** **                         | ** ** | **Lease  Expense**        | ** ** | **Sublease  Income**    | ** ** | **Net** | ** ** | **Lease  Payments** | ** ** |
| Year ended  December 31,      |       |                      |       |                    |       |   |   |   |   |   |   |   |   |
| 2005                               |       | $                         | 9,211      |                    |       | 154 |   |   | $ | 9,057 |   |   | $ | 778 |   |   |
| 2006                               |       | 5,830                     |       |                    | —     |   |   | 5,830 |   |   | 12 |   |   |
| 2007                               |       | 4,997                     |       |                    | —     |   |   | 4,997 |   |   | 11 |   |   |
| 2008                               |       | 4,472                     |       |                    | —     |   |   | 4,472 |   |   | — |   |   |
| 2009                               |       | 4,305                     |       |                    | —     |   |   | 4,305 |   |   | — |   |   |
| Thereafter                         |       | 17,830                    |       |                    | —     |   |   | 17,830 |   |   | — |   |   |
|                               |       | $                         | 46,645     |                    |       | $ | 154 |   |   | $ | 46,491 |   |   | 801 |   |   |
| Less: amount representing interest |       |                      |       |                    |       |   |   |   |   |   | (25 | ) |   |
| Net present value                  |       |                      |       |                    |       |   |   |   |   |   | 776 |   |   |
| Less: current portion              |       |                      |       |                    |       |   |   |   |   |   | (748 | ) |   |
| Long-term portion                  |       |                      |       |                    |       |   |   |   |   |   | $ | 28 |   |   |
|                                    |            |                           |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

As of December 31, 2004, future minimum leasepayments under non-cancelable operating leases included approximately $516,000of future rent payments, related to abandoned facilities, expensed in 2002 and2003 as restructuring expenses.

Total rent expense wasapproximately $5.0 million in 2004, $5.1 million in 2003 and$11.6 million in 2002 of which approximately $51,000 was paid to relatedparties in each of 2004, 2003 and 2002.

***Legal Proceedings***

Beginning on July 3, 2002, several purportedclass action shareholder complaints were filed in the United States DistrictCourt for the Central District of California against the Company and several ofits officers and directors. The actions were subsequently consolidated and aconsolidated amended complaint was filed purportedly brought on behalf ofpurchasers of common stock of SeeBeyond between December 10, 2001 and May 7,2002. The complaint generally alleged that defendants made falsestatements about SeeBeyond’s operating results and business, while concealingmaterial information. The 

48

----

litigation was settled for$13.1 million, which was paid by the Company’s insurers. The settlementprovided for a complete dismissal of all claims against SeeBeyond and theindividual defendants.

Beginning on September 5, 2002, severalderivative lawsuits were filed by purported Company shareholders in theSuperior Court of California for the County of Los Angeles. The complaints namecertain of the Company’s present and former officers and directors asdefendants and name the Company as a nominal defendant. The complaintsgenerally allege that the defendants breached their fiduciary duties to theCompany through the dissemination of allegedly misleading and inaccurateinformation and other allegations. The parties entered into a settlement ofthis litigation, which has been approved by the court, involving theimplementation of certain policies and procedures by the Company and thepayment of attorneys’ fees to plaintiffs’ counsel paid by the Company insurers.

The Company is also aparty to claims and suits brought against it in the ordinary course ofbusiness. In the opinion of management, such claims should not have anymaterial adverse effect upon the results of operation, cash flows or thefinancial position of the Company.

**Note 7.   Stockholders’ Equity**

***Preferred Stock***

In February 2000, theCompany authorized 10,000,000 shares of undesignated preferred stock, none ofwhich was outstanding as of December 31, 2004.

***Treasury Stock***

In November 2002, the Company repurchased1,200,000 shares of its common stock at $2.30 per share.

In July 2003, the Company repurchased 522,002shares 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 compensationexpense.

During the year ended December 31,2004, the Company repurchased 906,950 shares of its common stock at an averageprice of approximately $3.14 per share.

***Warrant Grants***

In March 2000, the Company issued a warrant (the “March 2000Alliance Warrant”) to another strategic alliance partner to purchase up to1,200,000 shares of common stock at $14.00 per share. The March 2000Alliance Warrant vested contingently upon the achievement of certainmilestones, primarily the creation of e*Gate software market offerings and thegeneration of license revenue for the Company through the sale of licenses ofour software products to third parties. The fair value of the March 2000Alliance 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 anestimated fair value at the time of grant of $11.08 per common share. In March 2002the warrant agreement was cancelled and all rights under the warrant agreement,including all fully vested shares, were forfeited resulting in a decrease inadditional paid-in capital and deferred stock compensation of $460,000, with nonet impact on total stockholders’ equity.

In March 2001, theCompany entered into a four-year co-marketing agreement with a strategicmarketing partner and issued a warrant to purchase 625,000 shares of commonstock at an exercise price of $11.34 per share. The warrant expires in March 2006and 175,000 shares under the warrant were exercisable immediately. Theremaining 450,000 shares subject to the warrant are performance based andvested and became exercisable over the 36-month period following the issuanceof the warrant provided the warrant holder achieved various milestones relatedto providing certain sales and marketing support. 

49

----

Theimmediately exercisable portion of the warrant was valued as of the date ofissuance and was charged against revenues generated from a concurrent licensesale to this strategic marketing partner. The vesting of the remaining sharessubject to the warrant was not contingent upon future sales of licenses of ourproducts to the marketing partner. The unvested portion of the warrant wasvalued as of the date of issuance and was amortized as a charge to operatingexpense over the term of the co-marketing agreement. In connection with the December 2001private placement of 2,574,298 shares of the Company’s common stock, theexercise price of this warrant was adjusted to $5.83 per share, pursuant to theoriginal agreement. Accordingly, the fair value of the warrant and relatedwarrant expense was remeasured using the new exercise price. For the year endedDecember 31, 2003, adjustments in the fair value of the warrants resultedin a net increase in additional paid-in capital and deferred compensation of$158,000, with no impact on total stockholders’ equity. As of December 31,2004, 625,000 shares subject to the warrant were fully vested and exercisable.

***Employee Stock Purchase Plan***

In February 2000, the Board of Directors approvedthe Company’s 2000 Employee Stock Purchase Plan (the “ESPP”). The ESPP becameeffective on April 28, 2000. A total of 2,250,000 shares of common stockwere initially available for issuance under the ESPP. Pursuant to the terms ofthe ESPP, the number of shares of common stock available for issuance under theESPP will be increased on the first day of each calendar year during the termof the ESPP to 2,250,000 shares of common stock.

The ESPP, which is intended to qualify under Section 423of the IRS Code, will be implemented by a series of overlapping offeringperiods of 24 months duration, with new offering periods, other than thefirst offering period, commencing on or about May 16 and November 16of each year. Each offering period will consist of four consecutive purchaseperiods of approximately six months duration, and at the end of each offeringperiod, an automatic purchase will be made for participants. Participantsgenerally may not purchase more than 1,500 shares in any calendar year or stockhaving a value measured at the beginning of the offering period greater than$25,000 in any calendar year.

The purchase price pershare will be 85% of the lower of (1) the fair market value of our commonstock on the purchase date and (2) the fair market value of a share of ourcommon stock on the last trading day before the offering date. Under the ESPP,approximately 354,000, 383,000 and 412,000 shares were issued during 2004, 2003and 2002, 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 futuregrants. Under the Plan, stock options may be granted to employees, directorsand consultants of the Company. At December 31, 2004, there were optionsto purchase 9,362,676 shares of common stock that were available for grantunder the Plan. Options previously granted that are forfeited will be added tooptions available for grant under the Plan. The Stock Plan currently providesfor automatic annual increases on January 1st of each yearbeginning January 1, 2001 equal to the lesser of:

·       6,000,000shares;

·       5.0%of the outstanding shares on such date; or

·       anamount determined by our board of directors.

The exercise price of options granted under the Planmay not be less than fair market value of the common stock at the time of grantwith respect to incentive stock options and not less than 85% of the fairmarket value with respect to nonstatutory options. Options granted under thePlan carry a maximum term 

50

----

of 10 years from thedate of grant and typically vest and become exercisable at the rate of at least25% per year from the date of grant.

Activityunder the Plan for the last three years was as follows:
| ** **                            | ** ** | **Options Outstanding**   | ** ** |
|---------------------------------------|------------|--------------------------------|------------|
| ** **                            | ** ** | **Number of shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| Balance as of  December 31, 2001 |       |                           | 17,623,971 |   |   |   | $ | 6.08 |   |   |
| Granted                               |       |                           | 5,905,300  |   |   |   | $ | 2.65 |   |   |
| Cancelled                             |       |                           | (2,582,510 | ) |   |   | $ | 8.06 |   |   |
| Exercised                             |       |                           | (1,336,140 | ) |   |   | $ | 2.58 |   |   |
| Balance as of December 31, 2002  |       |                           | 19,610,621 |   |   |   | $ | 5.11 |   |   |
| Granted                               |       |                           | 5,552,556  |   |   |   | $ | 2.24 |   |   |
| Cancelled                             |       |                           | (4,004,941 | ) |   |   | $ | 4.64 |   |   |
| Exercised                             |       |                           | (1,427,181 | ) |   |   | $ | 1.70 |   |   |
| Balance as of December 31, 2003  |       |                           | 19,731,055 |   |   |   | $ | 4.64 |   |   |
| Granted                               |       |                           | 1,968,400  |   |   |   | $ | 3.53 |   |   |
| Cancelled                             |       |                           | (1,887,417 | ) |   |   | $ | 4.08 |   |   |
| Exercised                             |       |                           | (1,653,112 | ) |   |   | $ | 1.97 |   |   |
| Balance as of December 31, 2004  |       |                           | 18,158,926 |   |   |   | $ | 4.82 |   |   |

 

Thefollowing table summarizes information regarding stock options outstanding asof December 31, 2004:
| **Options Outstanding**                 | ** ** | **Options Exercisable** | ** ** |
|-----------------------------------------|------------|-------------------------|------------|
| **Price Range**                    | ** ** | ** **              | ** ** | **Number  of shares** | ** ** | **Weighted  Average  Remaining  Contractual  Life** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number  of shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| ** **                              | ** ** | **(in thousands)** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **(in thousands)** | ** ** | ** ** | ** ** | ** ** | ** ** |
| $  0.00  to $  1.37 |       |                    | 2,405      |   |   |   | 4.92 |   |   |   | $ | 1.29 |   |   |   | 1,987 |   |   |   | $ | 1.29 |   |   |
| $  1.39  to $  1.70 |       |                    | 879        |   |   |   | 6.66 |   |   |   | $ | 1.46 |   |   |   | 582 |   |   |   | $ | 1.49 |   |   |
| $  1.81  to $  2.00 |       |                    | 1,890      |   |   |   | 8.57 |   |   |   | $ | 2.00 |   |   |   | 450 |   |   |   | $ | 2.00 |   |   |
| $  2.01  to $  2.46 |       |                    | 2,303      |   |   |   | 8.42 |   |   |   | $ | 2.25 |   |   |   | 822 |   |   |   | $ | 2.30 |   |   |
| $  2.47  to $  3.34 |       |                    | 2,939      |   |   |   | 7.86 |   |   |   | $ | 3.10 |   |   |   | 1,549 |   |   |   | $ | 3.22 |   |   |
| $  3.35  to $  5.33 |       |                    | 2,119      |   |   |   | 7.37 |   |   |   | $ | 4.16 |   |   |   | 1,017 |   |   |   | $ | 4.30 |   |   |
| $  5.47  to $  7.50 |       |                    | 2,889      |   |   |   | 6.00 |   |   |   | $ | 6.83 |   |   |   | 2,292 |   |   |   | $ | 6.83 |   |   |
| $  7.51  to $12.00            |       |                    | 1,882      |   |   |   | 5.53 |   |   |   | $ | 11.39 |   |   |   | 1,786 |   |   |   | $ | 11.50 |   |   |
| $12.04 to $31.69                        |       |                    | 853        |   |   |   | 5.91 |   |   |   | $ | 17.67 |   |   |   | 765 |   |   |   | $ | 18.08 |   |   |
| Total                                   |       |                    | 18,159     |   |   |   | 6.87 |   |   |   | $ | 4.82 |   |   |   | 11,250 |   |   |   | $ | 5.83 |   |   |

 

Options exercisable underthe Plan were approximately 11,250,000, 9,474,000 and 7,636,000, as of December 31,2004, 2003 and 2002, respectively.

51

----

***Fair Value Disclosure***

Theweighted average exercise prices and fair market value of stock options grantedusing the Black-Scholes option pricing model were as follows:
| ** **                                                    | ** ** | **2004**        | ** ** | **2003**            | ** ** | **2002**        | ** ** |
|---------------------------------------------------------------|------------|-----------------|------------|---------------------|------------|-----------------|------------|
| ** **                                                    | ** ** | **Fair  Value** | ** ** | **Exercise  Price** | ** ** | **Fair  Value** | ** ** | **Exercise  Price** | ** ** | **Fair  Value** | ** ** | **Exercise  Price** | ** ** |
| Exercise price  equals market value of stock at date of grant |       | $               | 1.92       |                |       | $               | 3.53       |   |   | $ | 1.42 |   |   | $ | 2.24 |   |   | $ | 2.11 |   |   | $ | 2.65 |   |   |
|                                                               |            |                 |            |                     |            |                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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

Hadcompensation expense for the years ended December 31, 2004, 2003 and 2002been determined based on the fair value at the grant dates, the Company’s netloss available to common stockholders and net loss per share would haveincreased to the pro forma amounts indicated below (in thousands, except fornet loss per share).
| ** **                                                                                | ** ** | **For the Years Ended** | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                | ** ** | **2004**                               | ** ** | **2003** | ** ** | **2002** | ** ** |
| Net income  (loss), as reported                                                           |       | $                                      | 342        |   | $ | (27,498 | ) | $ | (23,944 | ) |
| Stock-based  employee compensation costs, included in net loss, as reported               |       | 97                                     |       | 277 |   | 775 |   |
| Stock-based  employee compensation costs if fair value based method had been applied |       | (10,065                                | )          | (11,986 | ) | (13,634 | ) |
| Pro forma net loss available to common stockholders                                       |       | $                                      | (9,626     | ) | $ | (39,207 | ) | $ | (36,803 | ) |
| Basic and diluted  net income (loss) per share, as reported                               |       | $                                      | 0.00       |   | $ | (0.33 | ) | $ | (0.29 | ) |
| Pro forma basic and  diluted net loss per share                                           |       | $                                      | (0.11      | ) | $ | (0.47 | ) | $ | (0.45 | ) |

 

TheCompany estimated the fair value of options granted in the years ended December 31,2004, 2003 and 2002 using the Black-Scholes option-pricing modelwith the following assumptions:
| ** **                 | ** ** | **Stock Option Plans** | ** ** | **ESPP Plan 2003** | ** ** |
|----------------------------|------------|----------------------------------|------------|------------------------------|------------|
| ** **                 | ** ** | **2004**                         | ** ** | **2003**                     | ** ** | **2002** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| Expected lives  (in years) |       | 5                                |       | 5                            |       | 5 |   | 0.5 |   | 0.5 |   | 0.5 |   |
| Risk-free  interest rate   |       | 3.5                              | %          | 3.125                        | %          | 3.0 | % | 3.5 | % | 3.125 | % | 3.0 | % |
| Dividend yield             |       | 0                                |       | 0                            |       | 0 |   | 0 |   | 0 |   | 0 |   |
| Expected volatility        |       | 60.5                             | %          | 75.6                         | %          | 110 | % | 60.5 | % | 75.6 | % | 110 | % |

 

These pro forma amountsmay not be representative of the effects on pro forma disclosures in futureyears as options vest over several years and additional grants are generallymade every year.

***Reserved for Future Issuance***

As of December 31,2004, the Company had reserved the following shares of authorized but unissuedcommon stock for future issuance:
| Stock option plans    |   | 27,521,602 |   |
|-----------------------|--------|------------|--------|
| Stock purchase plan   |   | 1,895,722  |   |
| Common stock warrants |   | 625,000    |   |
|                  |   | 30,042,324 |   |

 

52

----

On January 1, 2005,an additional 4,246,348 and 354,278 shares were made available for issuanceunder the Company’s stock option plan and ESPP, respectively, as a result ofautomatic annual increases in the stock option plan and ESPP.

***Stock Option Exchange Program***

In November 2002, theCompany’s Board of Directors approved a voluntary stock option exchange programfor some of the Company’s employees. Under the program, employees had theopportunity to cancel certain outstanding stock options granted to them underthe Plan through November 17, 2002 in exchange for a new option grant at afuture date for a number of shares ranging from one new option for every oneexchanged option to one new option for every five exchanged options, dependingon the exercise price of the option being exchanged. The new option grants willvest 50% of the shares on June 19, 2004 with an additional 4.166% of theshares subject to the new option vesting on each 19th day of eachmonth following June 19, 2004. The program terminated on December 17,2002. A total of 891,600 options were cancelled in connection with the exchangeand approximately 409,000 new options were issued on June 19, 2003. Theexercise price of the new options was based on the closing price of the Company’sstock on June 19, 2003.

***Deferred Stock-based Compensation***

When the exercise price of an employee stock option isless than the estimated fair value of the underlying stock on the date ofgrant, deferred compensation is recognized and amortized to expense in accordancewith the aggregation methodology prescribed by the Financial AccountingStandards Board Interpretation No. 28 over the vesting period of theindividual option grants which is generally four years.

Through December 31,2004, in connection with the grant of certain stock options to employees andnon-employee directors, the Company has recorded total deferred stock-basedcompensation of approximately $8.5 million, representing the differencebetween the exercise price of the option and the estimated fair value of theCompany’s common stock on the date of grant. Amortization of deferred stockcompensation was approximately $97,000, $277,000 and $775,000 for the yearsended December 31, 2004, 2003 and 2002, respectively.

**Note 8.   401(K) Plan**

The Company has a 401(K) plancovering substantially all of its eligible employees. Under this plan,employees may defer up to 15% of their pre-tax salary, subject to statutorylimits. The Company contributes an amount equal to 50% of each participant’selective contribution, up to 4% of compensation. On January 1, 2000, theCompany modified the Plan to provide for company matching contributions equalto 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 during each of the years ended December 2004, 2003 and2002.

**Note 9.   Restructuring Charge**

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

53

----

In 2002, the Company recorded restructuring andimpairment charges totaling $6.6 million, consisting of $1.7 millionfor employee termination benefits and related costs associated with headcountreductions, $2.7 million related to future rent obligations for propertiesabandoned in connection with facilities consolidation and $2.3 millionrelated to the write-down of leasehold improvements, furniture, computerequipment and software and other assets in connection with facilitiesconsolidation and headcount reductions. The headcount reduction of 57 employeeswas made up of 58% sales and marketing staff, 19% professional services staff,14% research and development staff and 9% general and administrative staff. Therestructuring and impairment charges recorded in 2002 and 2001 were recordedunder EITF No. 94-3, “Liability Recognition for Certain EmployeeTermination 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 abandonthe facilities was reached.

In 2003, the Company recorded restructuring andimpairment charges totaling $7.4 million, consisting of $1.9 millionfor employee termination benefits and related costs associated with headcountreductions, $1.2 million related to future rent obligations for propertiesabandoned in connection with facilities consolidation and $4.3 millionrelated to the write-down of leasehold improvements, furniture, computerequipment and software in connection with the facilities consolidation andheadcount reductions. The 2003 headcount reduction of 56 employees wascomprised of approximately 48% sales and marketing staff, 41% professionalservices staff and 11% general and administrative staff. The Company recoveredapproximately $944,000 in restructuring expenses that had previously beenreserved for. The restructuring and impairment charges recorded during 2003were recorded under SFAS No. 146, “Accounting for Costs Associated withExit or Disposal Activities.” Under SFAS No. 146, the accrual for futurerent obligations were recorded when the facilities were abandoned.

Theserestructuring and impairment charges were recorded to better align the Company’scost structure with changing market conditions. The following table sets forththe Company’s accrued restructuring costs as of December 31, 2004 (inthousands).
| ** **                           | ** ** | **Facilities  Consolidation** | ** ** | **Asset  Impairment** | ** ** | **Termination  Benefits** | ** ** | **Total** | ** ** |
|--------------------------------------|------------|-------------------------------|------------|-----------------------|------------|---------------------------|------------|-----------|------------|
| 2001 charges                         |       |                          | $          | —                |       |                      |       | $         | —     |   |   |   | $ | 3,426 |   |   | $ | 3,426 |   |
| Cash utilized                        |       |                          | —     |                  |       |                      | —     |      |       |   | (2,976 | ) |   | (2,976 | ) |
| Balance at December 31, 2001    |       |                          | —     |                  |       |                      | —     |      |       |   | 450 |   |   | 450 |   |
| 2002 charges                         |       |                          | 2,666      |                  |       |                      | 2,279      |      |       |   | 1,680 |   |   | 6,625 |   |
| Non-cash write  down of fixed assets |       |                          | —     |                  |       |                      | (2,279     | )         |       |   | — |   |   | (2,279 | ) |
| Cash utilized                        |       |                          | (183       | )                     |       |                      | —     |      |       |   | (664 | ) |   | (847 | ) |
| Balance at December 31, 2002    |       |                          | 2,483      |                  |       |                      | —     |      |       |   | 1,466 |   |   | 3,949 |   |
| Adjustment of  prior estimates       |       |                          | (7         | )                     |       |                      | (421       | )         |       |   | (516 | ) |   | (944 | ) |
| 2003 charges                         |       |                          | 1,214      |                  |       |                      | 4,274      |      |       |   | 1,889 |   |   | 7,377 |   |
| Non-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 |   |
| Cash utilized                        |       |                          | (1,397     | )                     |       |                      | —     |      |       |   | (214 | ) |   | (1,611 | ) |
| Balance at  December 31, 2004   |       |                          | $          | 516                   |       |                      |       | $         | —     |   |   |   | $ | — |   |   | $ | 516 |   |

 

Accrued future rentobligations represent the estimated future rent expense on abandoned excessfacilities, net of sublease income; we expect to pay over the next thirteenmonths.

54

----

**Note 10.   Related Party Transactions**

The Company leases, from a related party, a4,000-square-foot office facility under a non-cancelable operating leaseagreement expiring in December 2004 under which approximately $51,000 waspaid by the Company to related parties in each of 2004, 2003 and 2002.

On August 15, 2001, the Company provided one ofits executive officers with a loan of $500,000 pursuant to a promissory notewith an annual interest rate of 8.5% repayable to the Company on February 15,2002. The promissory note was subsequently amended in February 2002 toreflect a June 16, 2002 repayment date. The loan balance, includingaccumulated interest, was paid in full in January 2004.

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

On January 2, 2002, the Company provided one ofits 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 of8.5%. This loan was repaid in full on February 28, 2002.

During the year ended December 31,2002, the Company recorded approximately $209,000, in consulting and referralfees to EDS. An affiliate of EDS was a member of the Company’s Board ofDirectors through September 9, 2002. EDS, which formerly was a stockholderof the Company, in May 2000 purchased 1,200,000 shares in a privateplacement concurrent with the Company’s initial public offering at $12.00 pershare, the same price paid by investors in the public offering. The Companyalso issued a warrant to EDS in January 2000 to purchase 1,200,000 sharesof its common stock at $6.67 per share. The warrant, which was fully vested andexercisable as to 1,200,000 shares expired on July 31, 2002 without beingexercised.

**Note 11.   InterimFinancial Results (unaudited)**

Thefollowing table sets forth certain unaudited consolidated financial informationfor each of the four quarters for the years ended December 31, 2004 and2003.
| ** **                             | ** ** | **Quarter ended 2004**                                   | ** ** | **Quarter ended 2003** | ** ** |
|----------------------------------------|------------|--------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                             | ** ** | **31-Dec**                                                         | ** ** | **30-Sep**                       | ** ** | **30-Jun** | ** ** | **31-Mar** | ** ** | **31-Dec** | ** ** | **30-Sep** | ** ** | **30-Jun** | ** ** | **31-Mar** | ** ** |
| ** **                             | ** ** | **(in thousands, except per share data)** | ** ** |
| Net revenues                           |       | $                                                                  | 45,760     |                             | $          | 41,732 |   | $ | 41,869 |   | $ | 34,437 |   | $ | 40,806 |   | $ | 32,356 |   | $ | 28,857 |   | $ | 35,822 |   |
| Gross profit                           |       | 34,552                                                             |       | 30,756                           |       | 30,873 |   | 23,981 |   | 31,684 |   | 22,016 |   | 18,009 |   | 23,729 |   |
| Net income (loss)                      |       | 3,946                                                              |       | 1,310                            |       | 869 |   | (5,783 | ) | 759 |   | (4,849 | ) | (17,283 | ) | (6,125 | ) |
| Basic net  earnings (loss) per share   |       | $                                                                  | 0.05       |                             | $          | 0.02 |   | $ | 0.01 |   | $ | (0.07 | ) | $ | 0.01 |   | $ | (0.06 | ) | $ | (0.21 | ) | $ | (0.07 | ) |
| Diluted net earnings  (loss) per share |       | $                                                                  | 0.04       |                             | $          | 0.01 |   | $ | 0.01 |   | $ | (0.07 | ) | $ | 0.01 |   | $ | (0.06 | ) | $ | (0.21 | ) | $ | (0.07 | ) |

 

Quarterly data may not sumto the full year data reported in the Company’s consolidated financialstatements due to rounding.

55

----

**Item9:   Changes in and Disagreements with Accountants on Accounting andFinancial Disclosure**

Not applicable.

**Item 9A:   Controls and Procedures**

**Evaluationof Disclosure Controls and Procedures**

We maintain “disclosure controls and procedures” assuch term is defined in Rule 13a-15(e) under the SecuritiesExchange Act of 1934 (the “Exchange Act”) that are designed to ensure thatinformation required to be disclosed by us in reports that we file or submitunder the Exchange Act is recorded, processed, summarized, and reported withinthe time periods specified in Securities and Exchange Commission rules andforms, and that such information is accumulated and communicated to ourmanagement, including our Chief Executive Officer and Chief Financial Officer,as appropriate, to allow timely decisions regarding required disclosure. Inevaluating and designing our disclosure controls and procedures, managementrecognized that disclosure controls and procedures, no matter how wellconceived and operated can provide only reasonable, not absolute assurance thatthe objectives of the disclosure controls and procedures are met. Additionally,in designing disclosure controls and procedures, our management was required toapply its judgment in evaluating the cost-benefit relationship of possibledisclosure controls and procedures. The design of any disclosure controls andprocedures is based in part upon certain assumptions about the likelihood offuture events and there can be no assurance that any design will succeed inachieving its stated goals under all potential future conditions.

Based on their evaluationas of the end of the period covered by this Annual Report on Form 10-K,our Chief Executive Officer and Chief Financial Officer have concluded that ourdisclosure controls and procedures were effective.

**Management’sReport on Internal Control over Financial Reporting**

Management is responsible for establishing andmaintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) ofthe Exchange Act. Because of its inherent limitations, internal control overfinancial reporting may not prevent or detect misstatements. Also, projectionsof any evaluation of effectiveness to future periods are subject to the riskthat controls may become inadequate due to changes in conditions, or that thedegree of compliance with the policies or procedures may deteriorate.

We assessed the effectiveness of the Company’sinternal control over financial reporting as of December 31, 2004. Inmaking this assessment, we used the criteria set forth by the Committee ofSponsoring Organizations of the Treadway Commission (“COSO”) in *Internal Control-Integrated Framework*. Based on ourassessment using those criteria, we concluded that our internal control overfinancial reporting was effective as of December 31, 2004.

Ernst and Young LLP, theindependent registered public accounting firm that audited our financialstatements included in this Annual Report on Form 10-K has issued anattestation report on management’s assessment of the internal control overfinancial reporting which appears further below.

**Changesin Internal Control over Financial Reporting**

There were no changes inour internal control over financial reporting that occurred during the periodcovered by this Annual Report on Form 10-K that materially affected,or is reasonably likely to materially affect, our internal control overfinancial reporting.

56

----

**Reportof Independent Registered Public Accounting Firm on Internal Control overFinancial Reporting**

**Report of Independent RegisteredPublic Accounting Firm**

TheBoard of Directors and Stockholders of SeeBeyondTechnology Corporation

We have audited management’s assessment, included inthe accompanying Management’s Report on Internal Control over FinancialReporting appearing above, that SeeBeyondTechnology Corporation maintained effective internal control overfinancial reporting as of December 31, 2004 based on criteria established in *InternalControl—Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (the COSO criteria). SeeBeyond Technology Corporation’smanagement is responsible for maintaining effective internal control overfinancial reporting and for its assessment of the effectiveness of internalcontrol over financial reporting. Our responsibility is to express an opinionon management’s assessment and an opinion on the effectiveness of the company’sinternal control over financial reporting based on our audit.

We conducted our audit inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether effective internal control overfinancial reporting was maintained in all material respects. Our audit includedobtaining an understanding of internal control over financial reporting,evaluating management’s assessment, testing and evaluating the design andoperating effectiveness of internal control, and performing such otherprocedures as we considered necessary in the circumstances. We believe that ouraudit provides a reasonable basis for our opinion.

A company’s internalcontrol over financial reporting is a process designed to provide reasonableassurance regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with generallyaccepted accounting principles. A company’s internal control over financialreporting includes those policies and procedures that (1) pertain to the maintenanceof records that, in reasonable detail, accurately and fairly reflect thetransactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements. Also, projections of any evaluation of effectiveness tofuture periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.

In our opinion, management’sassessment that SeeBeyond TechnologyCorporation maintained effective internal control over financialreporting as of December 31, 2004, is fairly stated, in all materialrespects, based on the COSO criteria. Also, in our opinion, SeeBeyond Technology Corporationmaintained, in all material respects, effective internal control over financialreporting as of December 31, 2004, based on the COSO criteria.

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the consolidated balance sheets ofSeeBeyond Technology Corporation as of December 31, 2004 and 2003, and therelated consolidated statements of operations, stockholders’ equity andcomprehensive income (loss), and cash flows for each of the three years in theperiod ended December 31, 2004 and our report dated March 3, 2005expressed an unqualified opinionthereon.
|                            | /s/  Ernst & Young LLP |
|----------------------------|---------------------------------|
| Orange County,  California |
| March 3,  2005        |

 

57

----

 

**PART III**

Certain informationrequired by Part III is omitted from this report on Form 10-Kin that the registrant will file its definitive Proxy Statement for its AnnualMeeting of Stockholders to be held on June 17, 2005, pursuant toRegulation 14A of the Securities Exchange Act of 1934, as amended (the “ProxyStatement”), not later than 120 days after the end of the fiscal yearcovered by this report, and certain information contained in the ProxyStatement is incorporated herein by reference.

**Item10:   Directors and Executive Officers of the Registrant**

(a)          Executive officers—Theinformation required by this item relating to executive officers isincorporated by reference to the section entitled “Executive Officers” in theProxy Statement.

(b)         Directors—The informationrequired by this item relating to directors is incorporated by reference to thesection entitled “Election of Directors” in the Proxy Statement.

(c)          Section 16(a) Information—Theinformation required by Item 405 of Regulation S-K is incorporated byreference in the section entitled “Section 16(a) Beneficial OwnershipReporting Compliance” in the Proxy Statement.

**Item11:   Executive Compensation of the Registrant**

The information requiredby this item regarding executive compensation is incorporated by reference tothe sections entitled “Compensation of Executive Officers” and “Compensation ofDirectors” in the Proxy Statement.

**Item12:   Security Ownership of Certain Beneficial Owners and Management**

The information requiredby this item regarding security ownership of certain beneficial owners andmanagement is incorporated by reference to the section entitled “StockOwnership” in the Proxy Statement.

**Item13:   Certain Relationships and Related Transactions**

The information requiredby this item regarding certain relationships and related transactions isincorporated by reference to the sections entitled “Certain Relationships andRelated Transactions” in the Proxy Statement.

**Item14:   Principal Accounting Fees and Services**

The information required by this item regardingprincipal accounting fees and services is incorporated by reference to thesections entitled “Principal Accounting Fees and Services” in the ProxyStatement.

58

----

**PART IV**

**Item15:   Exhibits and Financial Statement Schedule**

(a)          The following documentsare filed as part of this Form 10-K:

1.                 FinancialStatements.   Please see the accompanying Index to the ConsolidatedFinancial Statements, which appears on page 34 of this report.

2.                 FinancialStatement Schedule.   Please see page 62 of this report. All otherschedules required to be filed under item 15(d) are not applicable.

3.                 Exhibits.
| Exhibit No. | ** ** | ** **                                                                                                                                                                                                         | ** ** | **Description** |
|------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|
| 3.1(f)           |       | Restated  Certificate of Incorporation of the Registrant                                                                                                                                                           |
| 3.2(f)           |       | Bylaws  of the Registrant                                                                                                                                                                                          |
| 4.1(a)           |       | Specimen  common stock certificates                                                                                                                                                                                |
| 10.1(f)          |       | Form of  Indemnification Agreement between the Registrant and each of its directors  and officers                                                                                                             |
| 10.2(n)(c)       |       | Amended  and Restated 1998 Stock Plan                                                                                                                                                                              |
| 10.3(a)(c)       |       | 2000  Employee Stock Purchase Plan and form of agreements thereunder                                                                                                                                               |
| 10.5(a)          |       | Registration  Rights Agreement dated May 8, 1998, as amended                                                                                                                                                  |
| 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 Exchange  Limited and the Registrant for premises in Berkshire, United Kingdom                                                            |
| 10.17(f)         |       | Lease  Agreement as of July 1, 2001 between Trust Company of Australia Limited  and the Registrant for premises in Melbourne, Australia                                                                       |
| 10.18(g)         |       | Lease  Agreement between Monrovia Technology Campus LLC and the Registrant dated  November 28, 2000 for premises in Monrovia, California                                                                      |
| 10.19(g)         |       | Sublease  Agreement between the Registrant (Tenant) and The Employees Retirement System  of The State Of Hawaii (Landlord) and Loopnet (Subtenant) dated  April 23, 2002 for premises in Monrovia, California |
| 10.20(g)         |       | Third  Amendment to the Loan and Security Agreement dated as of June 30, 2002  between the Registrant and Comerica Bank—California                                                                       |
| 10.22(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                                                                        |

59

----

 
| 10.25(c)(h) |   | Change of Control Letter Agreement between Alex  Demetriades and the Registrant dated March 19, 2001                                                                     |
|-------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.26(c)(k) |   | Form of  Change of Control Letter Agreement between the Registrant and certain of its  executive officers.                                                               |
| 10.27(c)(l) |   | Employment  Letter Agreement between the Registrant and H. Carvel Moore dated  July 21, 2003.                                                                            |
| 10.28(l)    |   | Fifth  Amendment to the Loan and Security Agreement dated December 24, 2002  between the Registrant and Comerica Bank—California  dated March 26, 2003         |
| 10.29(l)    |   | Sixth  Amendment to the Loan and Security Agreement dated December 24, 2002  between the Registrant and Comerica Bank—California  dated May 30, 2003           |
| 10.30(c)(m) |   | Employment  Letter Agreement between the Registrant and Thor Culverhouse dated  September 8, 2003.                                                                       |
| 10.31(o)    |   | Lease  Agreement between Mr. T. Devendar Reddy and STC Systems Private Limited  dated April 22, 2004 for premises in Hyderabad, India                               |
| 10.32(o)    |   | Equipment  Lease Agreement between Mrs. T. Jhansi Reddy and STC Systems Private  Limited dated April 22, 2004 for equipment at leased premises in  Hyderabad, India |
| 10.33(o)    |   | Seventh  Amendment to the Loan and Security Agreement dated December 24, 2002  between the Registrant and Comerica Bank-California dated July 29, 2004              |
| 14.1        |   | Code  of Ethics                                                                                                                                                               |
| 21.1        |   | List  of subsidiaries                                                                                                                                                         |
| 23.1        |   | Consent  of Independent Registered Public Accounting Firm                                                                                                                     |
| 31.1        |   | Rule 13a-14(a)/  15d-14(a) Certification of Chief Executive Officer                                                                                                 |
| 31.2        |   | Rule  13a-14(a)/ 15d-14(a) Certification of the Chief Financial Officer.                                                                                                 |
| 32.1        |   | Section 1350  Certifications of Chief Executive Officer and Chief Financial Officer                                                                                      |

----

 
| (a) |   | Incorporated by reference to an exhibit in the Registrant’s  Registration Statement on Form S-1 File No. 333-330648.                        |
|-----|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (b) |   | Incorporated by reference to an exhibit in the  Registrant’s Quarterly Report on Form 10-Q filed with the  Commission on November 14, 2000. |
| (c) |   | Denotes a management contract or compensatory plan  arrangement.                                                                                           |
| (d) |   | Incorporated by reference to an exhibit in the  Registrant’s Quarterly Report on Form 10-Q filed with the  Commission on May 15, 2001.      |
| (e) |   | Incorporated by reference to an exhibit in the  Registrant’s Annual Report on Form 10-K filed with the Commission on  March 30, 2001.       |
| (f) |   | Incorporated by reference to an exhibit in the  Registrant’s Annual Report on Form 10-K filed with the Commission on  February 8, 2002.     |
| (g) |   | Incorporated by reference to an exhibit in the  Registrant’s Quarterly Report on Form 10-Q filed with the  Commission on August 14, 2002.   |
| (h) |   | Incorporated by reference to an exhibit in the  Registrant’s Annual Report on Form 10-K filed with the Commission on  March 28, 2003.       |
| (k) |   | Incorporated by reference to an exhibit in the  Registrant’s Annual Report on Form 10-K/A filed with the  Commission on May 30, 2003.       |
| (l) |   | Incorporated by reference to an exhibit in the  Registrant’s Quarterly Report on Form 10-Q filed with the  Commission on August 14, 2003.   |
| (m) |   | Incorporated by reference to an exhibit in the  Registrant’s Quarterly Report on Form 10-Q filed with the  Commission on November 14, 2003. |
| (n) |   | Incorporated by reference to an exhibit in the  Registrant’s Proxy Statement on Schedule 14A filed with the Commission  on April 29, 2004   |
| (o) |   | Incorporated by reference to an exhibit in the  Registrant’s Quarterly Report on Form 10-Q filed with the  Commission on August 9, 2004.    |

 

60

----

 

**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the Registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized, on March 9, 2005.
|                            | **Signature** | ** **                                         | ** ** | ** ** | **Title** | ** ** |
|----------------------------|---------------|----------------------------------------------------|------------|------------|-----------|------------|
| */s/ JAMES T. DEMETRIADES* | * *      | Chief Executive  Officer and Director              |
| James T. Demetriades       |          | *(Principal Executive Officer)*                    |
| */s/ BARRY J. PLAGA*       | * *      | Executive Vice  President, Chief Financial Officer |
| Barry J. Plaga             |          | *(Principal Financial and Accounting Officer)*     |
| */s/ RAYMOND J. LANE*      | * *      | Chairman of the Board of  Directors                |
| Raymond J. Lane            |          |                                               |
| */s/ JOHN BUCKLEY*         | * *      | Director                                           |
| John Buckley               |          |                                               |
| */s/ SALAH M. HASSANEIN*   | * *      | Director                                           |
| Salah M. Hassanein         |          |                                               |
| */s/ STEVEN A. LEDGER*     | * *      | Director                                           |
| Steven A. Ledger           |          |                                               |

 

61

----

**SEEBEYOND TECHNOLOGY CORPORATIONSCHEDULE II—VALUATION AND QUALIFYING ACCOUNTSYear Ended December 31, 2004, 2003 and 2002(In thousands)**
| ** **                                                          | ** ** | **Balance at**               | ** ** | ** **    | ** ** | ** **        | ** ** | **Balance at End** | ** ** |
|---------------------------------------------------------------------|------------|-----------------------------------|------------|---------------|------------|-------------------|------------|------------------------------|------------|
| ** **                                                          | ** ** | **Beginning of Period** | ** ** | **Additions** | ** ** | **Deductions(A)** | ** ** | **of Period**           | ** ** |
| Year ended  December 31, 2004  Allowance for doubtful accounts |       |                              | $          | 2,373         |       |              |       | $                            | 67         |   |   |   | $ | 834 |   |   |   | $ | 1,606 |   |   |
| Year ended  December 31, 2003  Allowance for doubtful accounts |       |                              | 2,539      |          |       |              | 727        |                         |       |   | 893 |   |   |   | 2,373 |   |   |
| Year ended  December 31, 2002  Allowance for doubtful accounts |       |                              | 1,837      |          |       |              | 933        |                         |       |   | 231 |   |   |   | 2,539 |   |   |

----

(A)       Actualwrite-offs of uncollectible accounts receivable.

62

----