SEEBEYOND TECHNOLOGY CORP - 10-Q Quarterly Report

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

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

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

The number of shares outstanding of the registrant's Common Stock, $0.0001 par value, as of August 12, 2002 was 83,493,936.

SeeBeyond Technology Corporation and Subsidiaries
Condensed Consolidated Balance Sheets

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

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

SeeBeyond Technology Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

The accompanying unaudited condensed consolidated financial statements have been prepared by SeeBeyond Technology Corporation (the "Company" or "SeeBeyond") in accordance with the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted in accordance with such rules and regulations. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position of the Company, and its results of operations and cash flows. These condensed consolidated financial statements should be read in conjunction with the annual audited consolidated financial statements and notes as of and for the year ended December 31, 2001 included in the Company's Form 10-K filed with the Securities and Exchange Commission on February 8, 2002.

The results of operations for the three and six months ended June 30, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002 or any other interim period, and the Company makes no representations related thereto.

The consolidated financial statements include the account of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

Certain prior year amounts have been reclassified to conform to the current year presentation.

The Company recognizes revenue when an agreement has been signed by both parties or other persuasive evidence of an arrangement exists, the software has been shipped or electronically delivered, the fees are fixed or determinable, collection of the resulting receivable is probable and no other significant obligations remain. For multiple element arrangements where vendor-specific objective evidence of fair value exists for all undelivered elements, we account for the delivered elements in accordance with the "residual method" prescribed by Statement of Position 98-9. Vendor-specific objective evidence of fair value is based on the price a customer is required to pay when the element is sold separately. The Company enters into arrangements with end users, which may include the sale of licenses of software, maintenance and services under the arrangement or various combinations of each element, including the sale of such elements separately.

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

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

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

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

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

In November 2001, the Financial Accounting Standards Board ("FASB") issued an announcement on the topic of "Income Statement Characterization of Reimbursements Received for Out-of-Pocket Expenses Incurred," which was subsequently incorporated in Emerging Issues Task Force ("EITF") No. 01-14. EITF No. 01-14 requires companies to characterize reimbursements received for out of pocket expenses as revenues in the statement of operations. Historically, the Company has netted reimbursements received for out-of-pocket expenses against the related expenses in the accompanying condensed consolidated statements of operations. The Company adopted the announcement in the quarter ended June 30, 2002. Reimbursable out-of-pocket expenses reclassified as service revenues were $676 and $1,356 for the three months ended June 30, 2002 and 2001, respectively, and $1,196 and $2,713 for the six months ended June 30, 2002 and 2001, respectively.

In July 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" and No. 142, "Goodwill and Other Intangible Assets" which were adopted by the Company on January 1, 2002. SFAS No. 141 eliminates the pooling-of-interests method of accounting for business combinations and changes the criteria to recognize intangible assets apart from goodwill. Under SFAS No. 142 goodwill and indefinite lived intangible assets are no longer amortized but reviewed annually, or more frequently if impairment indicators arise, for impairment. The impact of adoption of the new standards has not had a material impact on the results of operations or financial position of the Company.

In October 2001, SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which supercedes SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 144 addresses the accounting and reporting for the impairment or disposal of long-lived assets, including discontinued operations. The Company adopted SFAS No. 144 on January 1, 2002 and the adoption did not have a material impact on the Company's results of operations and financial position.

SeeBeyond has developed a comprehensive solution for business integration, enabling the seamless flow of information across systems applications and enterprises in real-time, on a global basis. The Company operates in one industry segment, which is the development and marketing of a comprehensive solution for business integration where all key integration technologies, including application-to-application, business-to-business and business process management, are seamlessly integrated.

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

No single customer accounted for more than 10% of the Company's net revenues during the three months or six months ended June 30, 2002. One customer accounted for 11.7% of the Company's net revenues during the three months ended June 30, 2001 and no single customer accounted for more than 10% of the Company's net revenues during the six months ended June 30, 2001.

Basic net loss per share is computed on the basis of the weighted average number of common shares outstanding. Diluted net loss per share is computed on the basis of the weighted average number of common shares outstanding plus the effect of outstanding stock warrants and outstanding stock options using the "treasury stock" method.

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

Options to purchase 18,340,417 and 17,220,194 shares of common stock were outstanding as of June 30, 2002 and 2001, respectively, but were not included in the calculations of diluted net loss per share because their effect would be antidilutive. Common stock warrants to purchase 1,850,000 shares were not included in the calculations of diluted net loss per share because their effect would be antidilutive.

In November 2000, the Company established a $15.0 million line of credit facility (the "Line") with a lending institution that bears interest at an annual rate of either prime plus 0.5% or the London InterBank Offered Rate ("LIBOR") rate plus 2.50% (payable monthly) and was to expire May 31, 2002. In October 2001, the Company amended the Line to extend the expiration date through May 31, 2003. As of June 30, 2002, $6.3 million was available under the Line and there were no borrowings outstanding. The Company may use up to $5.0 million of the Line to issue letters of credit. As of June 30, 2002, $2.9 million was available for the issuance of letters of credit. The Line is secured by intellectual property rights, accounts receivable and certain other assets and is subject to certain borrowing base restrictions. The Line was amended effective June 30, 2002 to adjust the financial covenant requirements. In connection with the amendment a requirement to maintain a certain minimum cash balance at the lending institution was implemented as a condition to borrow against the Line.

In addition to the Line, the Company has a $2.0 million equipment line (the "Lease Line") with the same lending institution providing the Line. The Lease Line bears interest at an annual rate of either prime plus 0.75%, or the LIBOR rate plus 2.75% (payable monthly) and expires on November 30, 2004. The rate at June 30, 2002 was 5.5%. The Company was allowed to draw against the Lease Line through November 30, 2001. Interest is payable monthly and principal is payable in 36 monthly installments commencing in December 2001. As of June 30, 2002, there was $1.6 million outstanding under the Lease Line and is secured by certain assets of the Company.

Beginning on July 3, 2002, several purported class action shareholder complaints were filed in the United States District Court for the Central District of California against the Company and several of our officers and directors. The actions are purportedly brought on behalf of purchasers of common stock of SeeBeyond Technology Corporation between December 10, 2001 and April 22, 2002 and between April 23, 2001 and April 22, 2002. The actions generally allege that during the class periods, defendants made false statements about SeeBeyond's operating results and business, while concealing material information. The plaintiffs seek unspecified monetary damages. The Company believes these lawsuits are without merit and intends to defend against them vigorously.

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

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

In February 2002, the Company completed a public offering of 6,572,623 shares of common stock at $9.57 per share and realized proceeds, net of underwriting discounts, commissions and issuance costs, of approximately $58.9 million.

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

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

On August 15, 2001 the Company provided one of its executive officers with a loan of $500,000 pursuant to a promissory note with an annual interest rate of 8.5% that was repayable to the Company on February 15, 2002. The promissory note was subsequently amended in February 2002 to reflect a June 16, 2002 repayment date. As of June 30, 2002, a partial payment in the amount of $39,000 has been applied against the loan balance outstanding. The loan balance is included in prepaid expenses and other current assets as of June 30, 2002.

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

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

During the three months and six months ended June 30, 2002, the Company recorded approximately $0 and $209,000, respectively, in consulting and referral fees payable to EDS. An affiliate of EDS is a member of the Company's Board of Directors. EDS is also a stockholder of the Company. In May 2000, EDS purchased 1,200,000 shares in a private placement concurrent with the Company's initial public offering at $12.00 per share, the same price paid by investors in the public offering. The Company also issued a warrant to EDS in January 2000 to purchase 1,200,000 shares of its common stock at $6.67 per share. The warrant, which was fully vested and exercisable as to 1,200,000 shares, expired on July 31, 2002.

In August 2002, the Company amended the $15 million Line as to certain covenants, effective June 30, 2002.

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

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

We were founded in 1989 and sold our first products and services in 1991 under the name "Software Technologies Corporation." From 1991 to 1998 our sales and marketing efforts were primarily focused on customers in the healthcare industry. In 1998, we began to significantly increase our sales and marketing expenses to target customers in other vertical markets, such as financial services/insurance, manufacturing, retail/e-Commerce/services, telecommunications, energy services and government. Following the launch in November 1999 of the fourth generation of its primary product with the introduction of e*Gate 4.0, we launched the next version of its eBusiness Integration Suite ("eBI Suite") version 4.5, in June 2001. In anticipation of this release, we accelerated the growth of our product development, services and sales and marketing organizations. We incurred significant losses in 1999 and 2000, and as of June 30, 2002, we had an accumulated deficit of approximately $107 million.

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

We currently have operations in sixteen countries outside of the United States. Revenues derived from international sales were 33% of total revenues for the six months ended June 30, 2002 compared to 32% of total revenues for the six months ended 2001. We believe that international revenues will continue to be significant in future periods. To date, we have not experienced significant seasonality of revenues. However, we expect that our future results will fluctuate in response to the fiscal or quarterly budget cycles of our customers.

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

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

Our costs and expenses are classified as cost of license revenues, cost of services revenues, cost of maintenance revenues, research and development, sales and marketing and general and administrative. Each category, except cost of license revenues, includes related expenses for salaries, employee benefits, incentive compensation, bonuses, travel, telephone, communications, rent and allocated facilities and professional fees.

Cost of license revenues includes the cost of third-party licensed software embedded or bundled with our products. Cost of services revenues consists of compensation and related overhead costs for personnel engaged in implementation consulting and services, training and out-of-pocket expenses. Cost of maintenance revenues includes compensation and related overhead costs for personnel engaged in maintenance and support activities. For the three months ended June 30, 2002, our gross margin was 99.1% on our license revenues, 12.1% on our services revenues and 79.1% on our maintenance revenues. We expect in the future to continue to earn substantially higher gross margins on our license and maintenance revenues compared to our services revenues. As a result, our overall gross margin depends significantly on our revenue mix.

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

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

In March 2001, we entered into a four-year co-marketing agreement with a strategic marketing partner and issued a warrant to purchase 625,000 shares of common stock at an exercise price of $11.34 per share. The warrant expires in March 2006 and 175,000 shares under the warrant were exercisable immediately. The remaining 450,000 shares subject to the warrant are performance based and shall vest and become exercisable over the thirty-six month period following the issuance of the warrant provided the warrant holder has achieved various milestones related to providing certain sales an marketing support. As of June 30, 2002, a total of 350,000 shares subject to the warrant were vested. The unvested portion of the warrant was valued as of the date of issuance and is being amortized as a charge to marketing expense over the term of the co-marketing agreement. The value of the unvested portion of the warrant will be adjusted in each reporting period based on changes in the fair value of the warrants until such date as the warrants are fully vested. There is no obligation for this strategic partner to make future product purchases from us.

In connection with stock option grants to our employees, we have recorded deferred stock compensation totaling $8.5 million through June 30, 2002, of which approximately $600,000 remains to be amortized. This amount represents the difference between the exercise price and the deemed fair value of our common stock on the date the options were granted multiplied by the number of option shares granted. This amount is included as a component of stockholders' equity and is being amortized by charges to operations over the vesting period of the options, consistent with the method described in Financial Accounting Standards Board Interpretation No. 28. We recognized amortization of deferred compensation expense of approximately $215,000 and $486,000 for the three months ended June 30, 2002 and 2001, respectively. The amortization of the remaining deferred stock compensation will result in additional charges to operations through 2004. The amortization of stock compensation is classified as a separate component of operating expenses in our consolidated statements of operations.

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to

make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions.

Our significant accounting policies are described in Note 1 to the annual consolidated financial statements as of and for the year ended December 31, 2001, included in our Form 10-K filed with the Securities and Exchange Commission on February 8, 2002. We believe our most critical accounting policies include the following:

Revenue recognition. We recognize revenue when an agreement has been signed by both parties or other persuasive evidence of an arrangement exists, the software has been shipped or electronically delivered, the fees are fixed or determinable, collection of the resulting receivable is probable, and no other significant obligations remain. For multiple element arrangements where vendor specific objective evidence of fair value exists for all undelivered elements, we account for the delivered elements in accordance with the "residual method" prescribed by Statement of Position 98-9. Vendor specific-objective evidence of fair value is based on the price a customer is required to pay when the element is sold separately.

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

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

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

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

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

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

Accounting for income taxes. We record a valuation allowance to reduce our deferred tax assets by the amount of tax benefits we estimate, based on available evidence is not expected to be realized. Tax benefits will not be realized if we do not generate sufficient taxable income in the future to apply the deferred tax balance against. As of June 30, 2002, a valuation allowance equal to the value of the deferred tax assets was maintained. In the event we were to determine that we would be able to realize our deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax asset would increase income in the period such a determination was made.

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

Foreign Currency Translation. The functional currency for our foreign operations is the local currency. The financial statements of foreign subsidiaries have been translated into United States dollars. Asset and liability accounts have been translated using the exchange rate in effect at the balance sheet date. Revenue and expense accounts have been translated using the average exchange rate for the period. The gains and losses associated with the translation of the financial statements resulting from the changes in exchange rates from period to period have been reported in the other comprehensive income or loss account in stockholders' equity. To the extent assets and liabilities of the foreign operations are realized or the foreign operations are expected to pay back the intercompany debt in the foreseeable future, amounts previously reported in other comprehensive income or loss account would be included in net income or loss in the period in which the transaction occurs. Transaction gains or losses, other than intercompany debt deemed to be of a long-term nature, are included in net income or loss in the period in which they occur.

The following table sets forth our results of operations for the three months and six months ended June 30, 2002 and 2001 respectively, expressed as a percentage of total revenues:

Total revenues. Total revenues for the three months ended June 30, 2002 decreased 34.8% from the same period last year, from $51.7 million to $33.7 million. Total revenues for the three months ended June 30, 2002 decreased primarily due to the decrease in license revenues as a result of delayed purchasing decision making by our customers due to cost-cutting pressures, reduced capital spending budgets and general economic weakness.

License revenues. License revenues for the three months ended June 30, 2002, decreased 54% from the same period last year, from $31.2 million to $14.3 million. License revenues for the three months ended June 30, 2002, as a percentage of total revenues were 42%, as compared to 60% for the same period in the previous year. The decreases in license revenues were due primarily due to the decrease in license revenues as a result of delayed purchasing decision making by our customers due to cost-cutting pressures, reduced capital spending budgets and general economic weakness.

Services revenues. Services revenues for the three months ended June 30, 2002, decreased 27% from the same period in the previous year, from $13.7 million to $10.0 million. Services revenues for the three months ended June 30, 2002, as a percentage of total revenues were 30% as compared to 27% for the same period in the previous year. The decrease in the absolute dollar amount of services

revenues was due primarily to the decline in consulting revenues that resulted from the corresponding decrease in license revenues for the three months ended June 30, 2002 and the three months ended March 31, 2002, as compared to the three months ended June 30, 2001 and the three months ended March 31, 2002.

Maintenance revenues. Maintenance revenues for the three months ended June 30, 2002, increased 38% from the same period in the previous year, from $6.8 million to $9.4 million. Maintenance revenues for the three months ended June 30, 2002, as a percentage of total revenues were 28%, as compared to 13% for the same period in the previous year. The increase in the absolute dollar amount of maintenance revenues was due primarily to the renewals of prior period maintenance contacts associated with the increase in our cumulative license revenue.

Cost of license revenues. Cost of license revenues for the three months ended June 30, 2002, was approximately $130,000, compared to $654,000 in the same period in the previous year. Cost of license revenues consists primarily of the cost of third party licensed software embedded or bundled with our products. This decrease was due to a decrease in revenues during the three months ended June 30, 2002 from the sale of our products with third party embedded or bundled software.

Cost of services revenues. Cost of services revenues for the three months ended June 30, 2002, decreased 25% from the same period in the previous year, from $11.7 million to $8.8 million. Cost of services revenues for the three months ended June 30, 2002, as a percentage of total revenues were 26%, as compared to 23% for the same period in the previous year. This decrease in the absolute dollar amount was due primarily to the decrease in professional services staff and the related costs associated with decreased services revenues. We expect that cost of services revenues will increase slightly in absolute dollars for the foreseeable future.

Cost of maintenance revenues. Cost of maintenance revenues for the three months ended June 30, 2002, increased 67% from the same period in the previous year, from approximately $1.2 million to $2.0 million. Cost of maintenance revenues as a percentage of total revenues was 6% for the three months ended June 30, 2002, as compared to 2% for the same period in the previous year. The increases in cost of maintenance revenue were due primarily to an increase in maintenance related headcount. We expect that costs of maintenance revenues will increase slightly in absolute dollars for the foreseeable future.

Research and development expenses. Research and development expenses for the three months ended June 30, 2002, increased 14% from the same period in the previous year, from $7.1 million to $8.1 million. Research and development expenses as a percentage of total revenues were 24% for the quarter ended June 30, 2002 as compared to 14% for the same period in the prior year. The increases in research and development expenses were due primarily to the increase in the number of software developers and quality assurance personnel to support our product development, documentation and testing activities related to the development and release of the latest versions of our products. We anticipate that research and development expenses will continue to increase in absolute dollars for the remainder of 2002 as we continue to invest in additional headcount and the development of new products.

Sales and marketing expenses. Sales and marketing expenses for the three months ended June 30, 2002, decreased 43% from the same period in the previous year, from $29.8 million to $17.1 million. Sales and marketing expenses as a percentage of total revenues were 51% for the quarter ended June 30, 2002 as compared to 58% for the same period in the prior year. This decrease in sales and marketing expense was due primarily to a decrease in marketing personnel and promotional and public

relations activities. We anticipate that our sales and marketing expense will increase in absolute dollars for the remainder of 2002, primarily as a result of our hiring of additional sales representatives.

General and administrative expenses. General and administrative expenses for the three months ended June 30, 2002, decreased 16% from the same period in the previous year, from $5.7 million to $4.8 million. General and administrative expenses as a percentage of total revenues were 14% for the quarter ended June 30, 2002 as compared to 11% for the same period in the prior year. The decrease in the absolute dollar amount in general and administrative expenses was due primarily to the completion of the reduction in workforce during the three months ended September 30, 2001. We anticipate general and administrative expenses to increase slightly in absolute dollars for the foreseeable future.

Amortization of goodwill. Amortization of goodwill for the three months ended June 30, 2002, was $0, compared to $96,000 for the same period in the prior year. The decrease in amortization of goodwill was a result of the implementation of FAS 123 whereby goodwill is no longer amortized but reviewed periodically for impairment.

Amortization of sales and marketing warrants. Amortization of warrants for the three months ended June 30, 2002, was $(41,000), compared to $1.6 million for the same period in the prior year. The decrease in amortization of warrants was a result of warrants issued to strategic alliance partners being fully amortized or cancelled as well as a decrease in the value of the unvested portion of a warrant issued to a strategic marketing partner. The amortization of warrant expense for the three months ended June 30, 2002 and the remaining warrant expense to be recognized going forward relate to this warrant issued under a four-year co-marketing agreement with a strategic partner. The value of the unvested portion of the warrant will be adjusted in each reporting period based on changes in the fair value of the warrant until such date as the warrant is fully vested and therefore the amount of amortization for such warrant is subject to fluctuation based on the value of our stock.

Amortization of stock-based compensation. Amortization of stock-based compensation for the three months ended June 30, 2002, was approximately $215,000, compared to $486,000 for the same period in the previous year.

Other income (expense), net consists primarily of interest income (expense). Other income, net for the three months ended June 30, 2002, was approximately $339,000 compared to other income of $(25,000) for the same period last year. The increase in income was primarily due to an increase in interest income due to larger cash balances as a result of our secondary public stock offering in February 2002.

Results of operations for the six months ended June 30, 2002 and June 30, 2001:

Total revenues for the six months ended June 30, 2002 decreased 27% from the same period last year, from $102.5 million to $74.6 million.

License revenues. License revenues for the six months ended June 30, 2002, decreased 45% from the same period last year, from $63.7 million to $35.3 million. License revenues for the six months ended June 30, 2002, as a percentage of total revenues were 47%, as compared to 62% for the same period in the previous year. The decreases in license revenues were due primarily to the global economic slowdown and a decline in information technology spending in general.

Services revenues. Services revenues for the six months ended June 30, 2002, decreased 21% from the same period in the previous year, from $26.3 million to $20.7 million. Services revenues for the six months ended June 30, 2002, as a percentage of total revenues increased to 28%, as compared to 26% for the same period in the previous year. The decrease in the absolute dollar amount of services revenues was due primarily to the decline in consulting revenues that resulted from the corresponding decrease in license revenues for the six months ended June 30, 2002, as compared to the six months ended June 30, 2001.

Maintenance revenues. Maintenance revenues for the six months ended June 30, 2002, increased 47% from the same period in the previous year, from $12.6 million to $18.5 million. Maintenance revenues for the six months ended June 30, 2002, as a percentage of total revenues were 25%, as compared to 12% for the same period in the previous year. The increase in the absolute dollar amount of maintenance revenues was due primarily the renewals of prior period maintenance contacts associated with the increase in our cumulative license revenue.

Cost of license revenues. Cost of license revenues for the six months ended June 30, 2002, was approximately $1.2 million compared to $1.1 million in the same period in the previous year.

Cost of services revenues. Cost of services revenues for the six months ended June 30, 2002, decreased 27% from the same period in the previous year, from $23.3 million to $17.0 million. Cost of services revenues as a percentage of total revenues remained at 23% for the six months ended June 30, 2002, as compared to the same period in the previous year. The decrease in the absolute dollar amount of cost of services revenues was due primarily to the decrease in professional services staff and the related costs associated with decreased services revenues. We expect that cost of services revenues will increase slightly in absolute dollars for the foreseeable future.

Cost of maintenance revenues. Cost of maintenance revenues for the six months ended June 30, 2002, increased 76% from the same period in the previous year, from approximately $2.1 million to $3.7 million. Cost of maintenance revenues as a percentage of total revenues was 5% for the six months ended June 30, 2002, as compared to 2% for the same period in the previous year. The increase in the absolute dollar amount of the cost of maintenance revenues is due to an increase in maintenance revenues from the same period in the previous year.

Research and development expenses. Research and development expenses for the six months ended June 30, 2002, increased 13% from the same period in the previous year, from $14.0 million to $15.8 million. The increase in the absolute dollar amount in research and development expenses was due primarily to the increase in the number of software developers and quality assurance personnel to support our product development, documentation and testing activities related to the development and release of the latest versions of our products. Research and development expenses as a percentage of

total revenues were 21% for the six months ended June 30, 2002, as compared to 14% for the same period in the previous year. This increase was due primarily to the decrease in total revenues for the six months ended June 30, 2002, as compared to the same period in the previous year.

Sales and marketing expenses. Sales and marketing expenses for the six months ended June 30, 2002, decreased 45% from the same period in the previous year, from $57.3 million to $31.6 million. Sales and marketing expenses as a percentage of total revenues for the six months ended June 30, 2002, was 42%, as compared to 56% for the same period in the previous year. These decreases in sales and marketing expenses were due primarily to a decrease in marketing staff and promotional and public relations activities as well as a decrease in total revenues for the six months ended June 30, 2002, as compared to the same period in the previous year.

General and administrative expenses. General and administrative expenses for the six months ended June 30, 2002, decreased 23% from the same period in the previous year, from $11.7 million to $9.0 million. General and administrative expenses as a percentage of total revenues for the six months ended June 30, 2002, was 12%, as compared to 11% for the same period in the previous year. The decrease in the absolute dollar amount in general and administrative expenses was due primarily to the completion of the reduction in workforce during the three months ended September 30, 2001.

Amortization of goodwill. Amortization of goodwill for the six months ended June 30, 2002, was $0, compared to $128,000 for the same period in the prior year. The decrease in amortization of goodwill was a result of the implementation of SFAS 123 whereby goodwill is no longer amortized but reviewed periodically for impairment.

Amortization of sales and marketing warrants. Amortization of warrants for the six months ended June 30, 2002, was $400,000, compared to $2.9 million for the same period in the prior year. The decrease in amortization of warrants was a result of warrants issued to strategic alliance partners being fully amortized or cancelled as well as a decrease in the value of the unvested portion of a warrant issued to a strategic marketing partner.

Amortization of stock-based compensation. Amortization of stock-based compensation for the six months ended June 30, 2002, was approximately $480,000 compared to $1.1 million for the same period in the previous year.

Other income (expense), net consists primarily of interest income (expense). Other income (expense), net for the six months ended June 30, 2002, was approximately $532,000 compared to $116,000 for the same period last year. The increase in income was primarily due to an increase in interest income due to larger cash balances as a result of the Company's second public offering in February 2002.

As of June 30, 2002, we had cash and cash equivalents of $109.3 million, an increase of $62.3 million from $47.0 million held as of December 31, 2001.

Net cash provided by operating activities was $3.8 million during the six months ended June 30, 2002, as compared with cash used of $(595,000) in the same period in the previous year. This period over period increase in cash provided by operating activities reflects a decrease in net loss and a decrease in accounts receivable offset by increases in prepaid expenses and other current assets and decreases in accounts payable and accrued expenses.

During the six months ended June 30, 2002, our accounts receivable decreased $8.7 million from $41.1 million at December 31, 2001 to $32.4 million at June 30, 2002. This decline was primarily due to

a decrease in revenue during the three months ended June 30, 2002 as compared to the three months ended December 31, 2001. The timing of receivable collections and revenue recorded within a given quarter will affect our accounts receivable going forward.

Net cash used in investing activities was $5.3 million during the six months ended June 30, 2002, as compared with $6.1 million in the same period in the previous year. The decrease primarily was due to lower capital expenditures. We expect capital expenditures in the next six months to be at the same approximate levels as the last six months.

Net cash provided by financing activities was $62.7 million during the six months ended June 30, 2002, as compared with $11.1 million in the same period in the previous year. This increase was due primarily to the completion of the second public stock offering in February 2002.

In October 2001, we extended our $15.0 million senior line of credit facility to May 31, 2003. The line of credit bears interest at a rate of prime plus .5%, payable monthly. As of June 30, 2002, $6.3 million was available under the credit facility and there were no borrowings outstanding.

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

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

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

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

We have incurred substantial losses since 1998 as we increased funding of the development of our products and technologies and expanded our sales and marketing organization. As of June 30, 2002, we had an accumulated deficit of $106.7 million. We may continue to incur losses in future periods and we may not achieve or maintain profitability on a quarterly or annual basis.

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

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

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

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

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

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

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

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

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

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

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

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

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

Revenues from the sale of products and services outside the United States accounted for 35% of our total revenues for the three months ended June 30, 2002 and 37% of our total revenues for the same period in 2001. Revenues from the sale of products and services in the United Kingdom as a percent of our total revenues were 12% for the three months ended June 30, 2002 and 23% for the same period in 2001. We believe that revenues from sales outside the United States will continue to account for a material portion of our total revenues for the foreseeable future. We are exposed to several risks inherent in conducting business internationally, such as:

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

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

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

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

The market for business integration software is rapidly evolving. We earn substantially all of our license revenues from sales of our Business Integration Suite. We expect to earn substantially all of our revenues in the foreseeable future from sales of our Business Integration Suite and related products

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

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

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

Third parties may claim that we have infringed their current or future intellectual property rights. We expect that software developers in our market will increasingly be subject to infringement claims as the number of products in different software industry segments overlap. Any claims, with or without merit, could be time-consuming, result in costly litigation, prevent product shipment or cause delays, or require us to enter into royalty or licensing agreements, any of which could harm our business. Patent litigation in particular has complex technical issues and inherent uncertainties. In the event an

infringement claim against us is successful and we cannot obtain a license on acceptable terms, license a substitute technology or redesign our products to avoid infringement, our business would be harmed. Furthermore, former employers of our current and future employees may assert that our employees have improperly disclosed to us or are using their confidential or proprietary information.

We currently expect that our current cash resources will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months. After that, we may need to raise additional funds, and we may not be able to obtain additional debt or equity financing on favorable terms, or at all. If we raise additional equity financing, our stockholders may experience significant dilution of their ownership interests and the per share value of our common stock could decline. If we engage in debt financing, we may be required to accept terms that restrict our ability to incur additional indebtedness and that force us to maintain specified liquidity or other ratios, any of which could harm our business. If we need additional capital and cannot raise it on acceptable terms, we may not be able to, among other things:

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

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

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

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

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

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

Our Chief Executive Officer, President and Founder, James T. Demetriades beneficially owns approximately 28.8% of our outstanding common stock. Our executive officers and directors beneficially own, in the aggregate, approximately 38.5% of our outstanding common stock. As a result, these stockholders will be able to exercise a significant level of control over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This could have the effect of delaying or preventing a change of control of SeeBeyond and will make some transactions difficult or impossible without the support of these stockholders.

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

Interest rate risk. We maintain our funds in money market and certificate of deposit accounts at financial institutions. Our exposure to market risk due to fluctuations in interest rates relates primarily

to our interest earnings on our cash deposits. These securities are subject to interest rate risk in as much as their fair value may fall if market interest rates increase. If market interest rates were to increase immediately and uniformly by 10% from the levels prevailing as of December 31, 2001, the fair value of the portfolio would not decline by a material amount. We do not use derivative financial instruments to mitigate risks. However, we do have an investment policy that would allow us to invest in short-term and long-term investments such as money market instruments and corporate debt securities. Our policy attempts to reduce such risks by typically limiting the maturity date of such securities, placing our investments with high credit quality issuers and limiting the amount of credit exposure with any one issuer.

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

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

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

The annual meeting of SeeBeyond Technology Corporation stockholders was held on May 16, 2002, during which the following two proposals were voted on:

Proposal One: Election of two Class II Directors for the ensuing three year term

		For		Against
Salah M. Hassanein		74,915,945		349,910
George Abigail		72,936,516		2,329,339

Proposal Two: Ratification of the appointment of Ernst & Young LLP as independent auditors

Exhibit No.		Description
3.1(1)		Restated Certificate of Incorporation of the Registrant
3.2(1)		Bylaws of the Registrant
4.1*		Specimen common stock certificates
10.1(1)		Form of Indemnification Agreement between the Registrant and each of its directors and officers
10.2*+		1989 Stock Plan
10.3*+		2000 Employee Stock Purchase Plan and form of agreements there under
10.4*		Warrant dated January 31, 2000 issued to EDS
10.5*		Registration Rights Agreement dated May 8, 1998, as amended
10.6*		Lease Agreement dated June 6, 1997 between the Registrant and Boone/Fetter/Occidental I for premises in Monrovia, California
10.7*		Lease Agreement dated June 10, 1999 between the Registrant and Franklin Select Realty Trust for premises in Redwood Shores, California
10.8*		Lease Agreement dated December 30, 1991 between the Registrant and the Demetriades Family Trust (dated December 20, 1983) for premises in Arcadia, California
10.9**		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**		Lease Agreement between Grant Regent, LLC and the Registrant dated August 2, 2000 for premises in New York, New York
10.11##		Lease Agreement dated October 9, 2000 between S & F Huntington Millennium LLC and the Registrant for premises in Monrovia, California
10.12+##		Employment Agreement between the Registrant and Rangaswamy Srihari
10.13##		Loan and Security Agreement, dated December 4, 2000, between the Registrant and Comerica Bank—California
10.14++		Warrant Purchase Agreement and Warrant dated March 16, 2001 issued to General Motors Corporation
10.15(a)		Amendment to the Loan and Security Agreement dated as of June 25, 2001, between the Registrant and Comerica Bank-California
10.16(a)		Second amendment to the Loan and Security Agreement dated October 31, 2001, between the Registrant and Comerica Bank-California
10.17(a)		Lease Agreement dated as of February 24, 2001 between MWB Business Eschange Limited and the Registrant for premises in Berkshire, United Kingdom
10.18(a)		Lease Agreement as of July 1, 2001 between Trust Company of Australia Limited and the Registrant for premises in Melbourne, Australia
10.19		Lease Agreement between Monrovia Technology Campus LLC and the Registrant dated November 28, 2000 for premises in Monrovia, California
10.20		Sublease Agreement between the Registrant (Tenant) and The Employees Retirement System of The State Of Hawaii (Landlord) and Loopnet (Subtenant) dated May 15, 2002 for premises in Monrovia, California
10.21		Amendment to the Loan and Security Agreement dated as of June 30, 2002 between the Registrant and Comerica Bank—California
99.1		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350.

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, on August 14, 2002.

PART I—FINANCIAL INFORMATION
Item 1.	Financial Statements:
	Condensed Consolidated Balance Sheets as of June 30, 2002 (unaudited) and December 31, 2001	3
	Condensed Consolidated Statements of Operations (unaudited) for the three months and six months ended June 30, 2002 and 2001	4
	Condensed Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2002 and 2001	5
	Notes to Condensed Consolidated Financial Statements (unaudited)	6
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	12
Item 3.	Quantitative and Qualitative Disclosure About Market Risk	28
PART II—OTHER INFORMATION
Item 1.	Legal Proceedings	30
Item 2.	Changes in Securities and Use of Proceeds	30
Item 4.	Submission of Matters to a Vote of Security Holders	30
Item 6.	Exhibits and Reports on Form 8-K	31
SIGNATURES		33

In thousands, except share and per share data				June 30, 2002			December 31, 2001
				(unaudited)
Assets:
	Current assets:
		Cash and cash equivalents		$	109,292		$	47,039
		Accounts receivable, net of allowances of $1,905 and $1,837 at June 30, 2002 and December 31, 2001, respectively			32,356			41,111
		Prepaid expenses and other current assets			5,479			3,446

			Total current assets		147,127			91,596
		Property and equipment, net			14,181			12,399
		Related party receivable			—			366
		Goodwill			1,123			1,123
		Other assets			1,275			280

			Total assets	$	163,706		$	105,764

Liabilities and stockholders' equity:
	Current liabilities:
		Accounts payable		$	6,880		$	8,671
		Accrued compensation and related			12,634			15,087
		Accrued expenses			6,235			5,548
		Deferred revenues			24,867			23,858
		Equipment line payable—current portion			542			542

			Total current liabilities		51,158			53,706
	Equipment line payable				1,086			1,412

			Total liabilities		52,244			55,118
	Stockholders' equity:
		Preferred stock, $.0001 par value—10,000,000 shares authorized; no shares issued and outstanding as of December 31, 2001 and 2000			—			—
		Common stock, $.0001 par value—200,000,000 shares authorized; 83,489,998 and 74,750,485 shares issued and outstanding as of June 30, 2002 and December 31, 2001, respectively			8			7
		Additional paid-in capital			218,952			157,750
		Deferred stock compensation			(716	)		(3,432	)
		Accumulated other comprehensive loss			(115	)		(1,183	)
		Accumulated deficit			(106,667	)		(102,496	)

			Total stockholders' equity		111,462			50,646

			Total liabilities and stockholders' equity	$	163,706		$	105,764

			Three Months Ended June 30,						Six Months Ended June 30,
In thousands, except per share data			Three Months Ended June 30,						Six Months Ended June 30,
In thousands, except per share data			2002			2001			2002			2001
Revenues:
	License (net of amortization of warrants of $0 and $210 and $0 and $1,116 for the three months and six months ended June 30, 2002 and 2001, respectively.)		$	14,269		$	31,222		$	35,338		$	63,651
	Services			9,960			13,713			20,705			26,272
	Maintenance			9,441			6,806			18,509			12,570

		Total revenues		33,670			51,741			74,552			102,493
Costs and expenses:
	Costs of license revenues			130			654			1,189			1,097
	Costs of services revenues (exclusive of stock-based compensation of $34 and $76 and $76 and $166 for the three months and six months) ended June 30, 2002 and 2001, respectively.)			8,751			11,650			17,001			23,303
	Costs of maintenance revenues			1,978			1,197			3,695			2,076
	Research and development (exclusive of stock-based compensation $39 and $85 and $86 and $187 for the three months and six months) ended June 30, 2002 and 2001, respectively.)			8,109			7,103			15,764			14,025
	Sales and marketing (exclusive of stock-based compensation of $125 and $289 and $281 and $631 for the three months and six months) ended June 30, 2002 and 2001, respectively.)			17,106			29,841			31,606			57,335
	General and administrative (exclusive of stock-based compensation $17 and $36 and $37 and $80 for the three months and six months) ended June 30, 2002 and 2001, respectively.)			4,831			5,681			9,041			11,692
	Amortization of goodwill			—			96			—			128
	Amortization of sales and marketing warrants			(41	)		1,602			400			2,865
	Amortization of stock-based compensation			215			486			480			1,064

		Total costs and expenses		41,079			58,310			79,176			113,585

Loss from operations				(7,409	)		(6,569	)		(4,624	)		(11,092	)
Other income (expense):
	Interest, net			339			(25	)		532			116

Loss before income tax provision				(7,070	)		(6,594	)		(4,092	)		(10,976	)
Provision for income tax				(4	)		251			79			251

Net loss			$	(7,066	)	$	(6,845	)	$	(4,171	)	$	(11,227	)

Basic and diluted net loss per share			$	(0.08	)	$	(0.10	)	$	(0.05	)	$	(0.16	)

Number of shares used in calculating basic and diluted net loss per share				83,360			71,152			81,096			70,661

				Six Months Ended June 30,
In thousands				Six Months Ended June 30,
In thousands				2002			2001
Cash flows from operating activities:
	Net loss			$	(4,171	)	$	(11,227	)
	Adjustments to reconcile net loss to net cash used in operating activities:
		Loss on disposal of fixed assets			—			142
		Depreciation and amortization			2,888			2,284
		Provision for doubtful accounts receivable			50			142
		Amortization of goodwill			—			128
		Amortization of sales and marketing warrants			400			2,865
		Amortization of other warrants			—			1,116
		Amortization of stock-based compensation			480			1,064
	Changes in assets and liabilities:
		Accounts receivable			8,705			(1,660	)
		Prepaid expenses and other current assets			(2,033	)		(912	)
		Accounts payable			(1,791	)		(1,910	)
		Accrued compensation related and other expenses			(1,766	)		4,400
		Deferred revenue			1,009			2,973

			Net cash provided by (used in) operating activities:		3,771			(595	)
Cash flows from investing activities:
	Purchases of property and equipment				(4,670	)		(6,959	)
	Payments to acquire companies, net of cash acquired				—			(47	)
	Related party receivable				366			—
	Other				(995	)		902

			Net cash used in investing activities		(5,299	)		(6,104	)
Cash flows from financing activities:
	Net borrowings (repayments) on bank lines of credit				(326	)		4,900
	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				3,464			3,588
	Proceeds from issuance of common stock pursuant to employee stock purchase plan				563			2,650

			Net cash provided by financing activities		62,713			11,138
Effect of exchange rate changes on cash and cash equivalents					1,068			(570	)

Net increase in cash and cash equivalents					62,253			3,869
Cash and cash equivalents at beginning of the period					47,039			29,428

Cash and cash equivalents at end of the period				$	109,292		$	33,297

			Three Months Ended June 30,				Six Months Ended June 30,
			2002		2001		2002		2001
Revenues:
	North America		$	21,828	$	32,796	$	50,032	$	69,588
	Europe			9,286		14,974		18,497		25,421
	Pacific Rim			2,556		3,971		6,023		7,484

		Total revenues	$	33,670	$	51,741	$	74,552	$	102,493

			June 30, 2002		December 31, 2001
Long-lived assets:
	North America		$	13,508	$	11,520
	Europe			2,084		2,382
	Pacific Rim			987		266

		Total long-lived assets	$	16,579	$	14,168

For:		74,491,587
Against:		739,598
Abstain:		34,670
Broker Non Vote:		0

		SeeBeyond Technology Corporation

/s/ BARRY J. PLAGA Barry J. Plaga		Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)