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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

For the transition period from                              to                             

Commission File No. 000-30207

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 November 11, 2002 was 83,607,388.

SeeBeyond Technology Corporation and Subsidiaries
INDEX

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

SeeBeyond Technology Corporation and Subsidiaries
Condensed Consolidated Balance Sheets

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

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

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

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

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

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

Note 1.    Basis of Presentation

        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 nine months ended September 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.

Note 2.    Revenue Recognition

        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.

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        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.

Note 3.    Recently Issued Accounting Pronouncements

        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. Reimbursable out-of-pocket expenses reclassified as service revenues were approximately $806,000 and $1,011,000 for the three months ended September 30, 2002 and 2001, respectively, and approximately $2,003,000 and $3,724,000 for the nine months ended September 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

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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.

Note 4.    Operations by Reportable Segments and Geographic Area

        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 nine months ended September 30, 2002 and 2001.

Note 5.    Computation of Net Loss Per Share

        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.

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        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 20,782,726 and 16,321,863 shares of common stock were outstanding as of September 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 650,000 shares were not included in the calculations of diluted net loss per share because their effect would be antidilutive.

Note 6.    Commitments, Contingencies and Debt

Bank Line of Credit and Lease Line Payable

        In November 2000, the Company established a $15.0 million line of credit facility (the "Line") with a lending institution that bears interest at an annual rate of either prime plus 0.5% or the London InterBank Offered Rate ("LIBOR") rate plus 2.50% (payable monthly) and 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 September 30, 2002, $7.9 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 September 30, 2002, $1.4 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 September 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 September 30, 2002, there was $1.4 million outstanding under the Lease Line and is secured by certain assets of the Company.

Legal Proceedings

        Beginning on July 3, 2002, several purported class action shareholder complaints were filed in the United States District Court for the Central District of California against the Company and several of our officers and directors. The actions are purportedly brought on behalf of purchasers of common

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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.

        On September 5, 2002, a derivative lawsuit was filed by a purported Company shareholder in the Superior Court of California for the County of Los Angeles (the "Wardlow Complaint"). The Wardlow Complaint names certain of the Company's present and former officers and directors as defendants. The Company has also been named as a nominal defendant in the Wardlow Complaint. The principal allegation of the Wardlow Complaint is that the defendants breached their fiduciary duties to the Company through the dissemination of allegedly misleading and inaccurate information and other allegations.

Note 7.    Comprehensive Loss

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

        Total comprehensive loss was as follows (in thousands):

Note 8.    Stockholders' Equity

Secondary Public Offering

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

Common Stock Warrants

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

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

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Note 9.    Related Party Transactions

        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 September 30, 2002, a partial payment in the amount of $79,000 has been applied against the loan balance outstanding. The loan balance amounting to approximately $481,000 including interest is included in prepaid expenses and other current assets as of September 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 one of its executive officers, who is also a significant stockholder, related to certain life insurance premiums paid on behalf of the officer / stockholder. The amount due to the Company was paid in full in March 2002.

        During the three months and nine months ended September 30, 2002, the Company recorded approximately $0 and $209,000, respectively, in consulting and referral fees payable to EDS. An affiliate of EDS was a member of the Company's Board of Directors through September 9, 2002. 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 without being exercised.

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

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

Overview

        We were founded in 1989 and sold our first products and services in 1991 under the name "Software Technologies Corporation." From 1991 to 1998 our sales and marketing efforts were primarily focused on customers in the healthcare industry. In 1998, we began to significantly increase our sales and marketing expenses to target customers in other vertical markets, such as financial services/insurance, manufacturing, retail/e-Commerce/services, telecommunications, energy services and government. In November 1999 we launched the fourth generation of our product e*Gate 4.0, which introduced a fully distributed fault tolerant architecture. We are currently shipping an enhanced version of our eBusiness Integration Suite ("eBI Suite"), version 4.5.2 to our customers and expect to ship the next generation of our product suite, version 5.0 in 2003. We incurred significant losses in 1999, 2000 and 2001 and as of September 30, 2002, we had an accumulated deficit of approximately $115 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 35% of total revenues for the nine months ended September 30, 2002 compared to 32% of total revenues for the nine months ended September 30, 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.

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

        Cost of license revenues includes the cost of third-party licensed software embedded or bundled with our products. Cost of services 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 September 30, 2002, our gross margin was 94.7% on our license revenues, 14.5% on our services revenues and 81.4% on our maintenance revenues. We expect in the future to continue to earn substantially higher gross margins on our license and maintenance revenues as 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. As a result of the December 2001 private placement of 2,574,298 shares of our common stock, the exercise price of this warrant was adjusted to $5.83 per share. The warrant expires in March 2006 and 175,000 shares under the warrant were exercisable immediately. The remaining 450,000 shares subject to the warrant are performance based and shall vest and become exercisable over the thirty-six month period following the issuance of the warrant provided the warrant holder has achieved various milestones related to providing certain sales an marketing support. As of September 30, 2002, a total of 450,000 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 September 30, 2002, of which approximately $407,000 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 $169,000 and $409,000 for the three months ended September 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.

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Critical Accounting Policies

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

        Our significant accounting policies are described in Note 1 to the annual consolidated financial statements as of and for the year ended December 31, 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:

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revenue recognition,



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estimating valuation allowances,



•

accounting for income taxes and



•

foreign currency translation.

        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

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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 September 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.

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Results of Operations

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

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Results of operations for the three months ended September 30, 2002 and 2001:

Revenues

        Total revenues.    Total revenues for the three months ended September 30, 2002 decreased 17% from the same period last year, from $43.1 million to $35.7 million. Total revenues for the three months ended September 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 September 30, 2002, decreased 38% from the same period last year, from $21.5 million to $13.4 million. License revenues for the three months ended September 30, 2002, as a percentage of total revenues were 38%, as compared to 50% for the same period in the previous year. The decreases in license revenues were due primarily to 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 September 30, 2002, decreased 13% from the same period in the previous year, from $13.5 million to $11.8 million. Services revenues for the three months ended September 30, 2002, as a percentage of total revenues were 33% as compared to 31% 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 September 30, 2002 and the three months ended June 30, 2002, as compared to the three months ended September 30, 2001 and the three months ended June 30, 2001.

        Maintenance revenues.    Maintenance revenues for the three months ended September 30, 2002, increased 30% from the same period in the previous year, from $8.1 million to $10.5 million. Maintenance revenues for the three months ended September 30, 2002, as a percentage of total revenues were 29%, as compared to 19% 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 revenues.

Cost of revenues

        Cost of license revenues.    Cost of license revenues for the three months ended September 30, 2002, was approximately $707,000, compared to $370,000 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. The increase was due to an increase in revenues during the three months ended September 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 September 30, 2002, decreased 4% from the same period in the previous year, from $10.5 million to $10.1 million. Cost of services revenues for the three months ended September 30, 2002, as a percentage of total revenues were 30%, as compared to 24% for the same period in the previous year. The 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 September 30, 2002, increased 36% from the same period in the previous year, from approximately $1.4 million to $1.9 million. Cost of maintenance revenues as a percentage of total revenues was 4% for the three months ended September 30, 2002, as compared to 3% for the same period in the previous year. The increases in cost of maintenance revenue were due primarily to an increase in

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maintenance related headcount. We expect that costs of maintenance revenues will increase slightly in absolute dollars for the foreseeable future.

Operating expenses

        Research and development expenses.    Research and development expenses for the three months ended September 30, 2002, increased 20% from the same period in the previous year, from $7.5 million to $9.0 million. Research and development expenses as a percentage of total revenues were 25% for the quarter ended September 30, 2002 as compared to 17% 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 September 30, 2002, decreased 17% from the same period in the previous year, from $21.4 million to $17.7 million. Sales and marketing expenses as a percentage of total revenues remained at 51% for the quarter ended September 30, 2002, the same level as in the same period in the prior year. This decrease in the absolute dollar amount in sales and marketing expenses 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.

        General and administrative expenses.    General and administrative expenses for the three months ended September 30, 2002, decreased 8% from the same period in the previous year, from $5.0 million to $4.6 million. General and administrative expenses as a percentage of total revenues remained at 12% for the quarter ended September 30, 2002, the same level as in 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 decrease slightly in absolute dollars for the foreseeable future.

        Amortization of goodwill.    Amortization of goodwill for the three months ended September 30, 2002, was $0, compared to $95,000 for the same period in the prior year. The decrease in amortization of goodwill was a result of the adoption of SFAS No. 142 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 September 30, 2002, was $(56,000), compared to $980,000 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 September 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 September 30, 2002, was approximately $169,000, compared to $409,000 for the same period in the previous year.

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Other income (expense), net

        Other income (expense), net consists primarily of interest income (expense). Other income, net for the three months ended September 30, 2002, was approximately $336,000 compared to other income of $223,000 for the same period last year. The increase in other 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 nine months ended September 30, 2002 and September 30, 2001:

Revenues

        Total revenues.    Total revenues for the nine months ended September 30, 2002 decreased 24% from the same period last year, from $145.6 million to $110.3 million. Total revenues for the nine months ended September 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 nine months ended September 30, 2002, decreased 43% from the same period last year, from $85.2 million to $48.8 million. License revenues for the nine months ended September 30, 2002, as a percentage of total revenues were 44%, as compared to 58% 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 nine months ended September 30, 2002, decreased 18% from the same period in the previous year, from $39.7 million to $32.5 million. Services revenues for the nine months ended September 30, 2002, as a percentage of total revenues increased to 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 nine months ended September 30, 2002, as compared to the nine months ended September 30, 2001. The increase in services revenues as a percentage of total revenues was due primarily to the decrease in total revenues for the nine months ended September 30, 2002, as compared to the nine months ended September 30, 2001.

        Maintenance revenues.    Maintenance revenues for the nine months ended September 30, 2002, increased 40% from the same period in the previous year, from $20.7 million to $29.0 million. Maintenance revenues for the nine months ended September 30, 2002, as a percentage of total revenues were 26%, as compared to 15% for the same period in the previous year. The increase in the absolute dollar amount of maintenance revenues was due primarily the renewals of prior period maintenance contacts associated with the increase in our cumulative license revenues. The increase in maintenance revenue as a percentage of total revenues was due primarily to the decrease in total revenues for the nine months ended September 30, 2002, as compared to the nine months ended September 30, 2001.

Cost of revenues

        Cost of license revenues.    Cost of license revenues for the nine months ended September 30, 2002, was approximately $1.9 million compared to $1.5 million in the same period in the previous year. This increase was due to an increase in revenues during the nine months ended September 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 nine months ended September 30, 2002, decreased 20% from the same period in the previous year, from $33.8 million to $27.1 million. Cost of services revenues as a percentage of total revenues remained at 24% for the quarter ended

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September 30, 2002, the same level as in the same period in the prior 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 nine months ended September 30, 2002, increased 65% from the same period in the previous year, from approximately $3.4 million to $5.6 million. Cost of maintenance revenues as a percentage of total revenues was 5% for the nine months ended September 30, 2002, as compared to 2% for the same period in the previous year. The increases in the cost of maintenance revenues were due primarily to an increase in maintenance related headcount.

        Research and development expenses.    Research and development expenses for the nine months ended September 30, 2002, increased 14% from the same period in the previous year, from $21.6 million to $24.7 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 22% for the nine months ended September 30, 2002, as compared to 15% for the same period in the previous year. This increase was due primarily to the decrease in total revenues for the nine months ended September 30, 2002, as compared to the same period in the previous year.

        Sales and marketing expenses.    Sales and marketing expenses for the nine months ended September 30, 2002, decreased 37% from the same period in the previous year, from $78.8 million to $49.3 million. Sales and marketing expenses as a percentage of total revenues for the nine months ended September 30, 2002, was 45%, as compared to 53% 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 nine months ended September 30, 2002, as compared to the same period in the previous year.

        General and administrative expenses.    General and administrative expenses for the nine months ended September 30, 2002, decreased 18% from the same period in the previous year, from $16.7 million to $13.7 million. General and administrative expenses as a percentage of total revenues for the nine months ended September 30, 2002, remained at 12%, the same level as in 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 nine months ended September 30, 2002, was $0, compared to $223,000 for the same period in the prior year. The decrease in amortization of goodwill was a result of the adoption of SFAS No. 142 whereby goodwill is no longer amortized but reviewed periodically for impairment.

        Amortization of sales and marketing warrants.    Amortization of warrants for the nine months ended September 30, 2002, was $344,000, compared to $3.9 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 nine months ended September 30, 2002, was approximately $649,000 compared to $1.5 million for the same period in the previous year.

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Other income (expense), net

        Other income (expense), net consists primarily of interest income (expense). Other income (expense), net for the nine months ended September 30, 2002, was approximately $868,000 compared to $339,000 for the same period last year. The increase in other 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.

Liquidity and capital resources

        As of September 30, 2002, we had cash and cash equivalents of $99.6 million, an increase of $52.6 million from $47.0 million held as of December 31, 2001.

        Net cash used in operating activities was $1.9 million during the nine months ended September 30, 2002, as compared with $6.9 million in the same period in the previous year. This period over period decrease in cash used in operating activities reflects a decrease in net loss, a decrease in accounts receivable and increase in accounts payable, offset by increases in prepaid expenses and other current assets and decreases in accrued expenses.

        During the nine months ended September 30, 2002, our accounts receivable decreased $6.9 million from $41.1 million at December 31, 2001 to $34.2 million at September 30, 2002. This decline was primarily due to a decrease in revenue during the three months ended September 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 $8.8 million during the nine months ended September 30, 2002, as compared with $7.1 million in the same period in the previous year. The increase primarily was due to increases in capital expenditures and other assets and a decrease in related party receivable. We expect capital expenditures in the next three months to increase compared to the last three months.

        Net cash provided by financing activities was $62.5 million during the nine months ended September 30, 2002, as compared with $12.4 million in the same period in the previous year. This increase was due primarily to the completion of the secondary 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 0.5%, payable monthly. As of September 30, 2002, $7.9 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.

Risks Related to SeeBeyond

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

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

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

        We rely significantly upon customers making large information technology purchasing decisions as a source of revenue. From 2001 through the first nine 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 a large accumulated deficit, we may incur future losses and we may not achieve or maintain profitability.

        We have incurred substantial losses since 1998 as we increased funding of the development of our products and technologies and expanded our sales and marketing organization. As of September 30, 2002, we had an accumulated deficit of $114.8 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 operating results fluctuate significantly, and an unanticipated decline in revenues or gross margin may disappoint securities analysts or investors and result in a decline in our stock price.

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

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

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

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

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

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

        Substantially all of our license revenues have been, and are expected to continue to be, derived from the license of our Business Integration Suite. Accordingly, our future operating results will depend on the demand for our Business Integration Suite by future customers, including new and enhanced releases that are subsequently introduced. Our latest version of 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.

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

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

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

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

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

        The market for our products is intensely competitive, evolving and subject to rapid technological change. We expect the intensity of competition to increase in the future. As a result of increased competition, we may have to reduce the price of our products and services, and we may experience reduced gross margins and loss of market share, any one of which could significantly reduce our future revenues and operating results. Our current competitors include vendors offering e-Business application integration, 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.

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

        Revenues from the sale of products and services outside the United States accounted for 38% of our total revenues for the three months ended September 30, 2002 and 33% 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 16% for the three months ended September 30, 2002 and 15% 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:

•

fluctuations in currency exchange rates, which could result in increased expenses;



•

unexpected changes in regulatory requirements, including imposition of currency exchange controls, applicable to our business or to the Internet, which could result in increased costs of doing business overseas;



•

difficulties and costs of staffing and managing international operations;



•

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



•

reduced protection for intellectual property rights in some countries.

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

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

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

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

        We currently serve a customer base with a wide variety of constantly changing hardware, software applications and 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 ability to integrate our products with multiple platforms and existing, or legacy, systems and to modify our products as new versions of software applications are introduced;

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the portability of our products, particularly the number of operating systems and databases that our products can source or target;



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our ability to anticipate and support new standards, especially Internet standards;



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the integration of additional software modules under development with our existing products; and



•

our management of software being developed by third parties for our customers for use with our products.

        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 may not grow as quickly as we anticipate, which would cause our revenues to fall below expectations.

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

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

        From time to time, we have been subject to litigation. Several putative securities class action lawsuits are currently pending against us, our directors and officers. The plaintiffs in these suits allege 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.

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

        We depend upon our ability to develop and protect our proprietary technology and intellectual property rights to distinguish our product from our competitors' products. The unauthorized use by others of our proprietary rights could materially harm our business. We rely on a combination of copyright, trademark and trade secret laws, as well as confidentiality agreements and licensing arrangements, to establish and protect our proprietary rights. We currently have no issued patents. Despite our efforts to protect our proprietary rights, existing laws afford only limited protection. Attempts may be made to copy or reverse engineer aspects of our products or to obtain and use information 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.

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

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

        We currently expect 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:

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develop or enhance our products and services;



•

maintain or expand our sales and marketing organizations;



•

acquire complementary technologies, products or businesses;



•

expand operations, in the United States or internationally;



•

hire, train and retain employees; or



•

respond to competitive pressures or unanticipated working capital requirements.

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

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

        We depend on the continued service of our key technical, sales and senior management personnel, including our 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.

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

        We must plan and manage our growth effectively in order to offer our products and services and achieve revenue growth and profitability in a rapidly evolving market. 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:

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effectively manage our direct sales force;



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effectively manage our professional services organization;



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hire and retain qualified software engineers;



•

improve our operational, financial and management controls;



•

improve our reporting systems and procedures;



•

enhance our management and information control systems; and



•

effectively manage, train and motivate our workforce.

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

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

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

28

addition, our stockholders are unable to act by written consent. These and other provisions could make it more difficult for a third party to acquire us, even if doing so would benefit our stockholders.

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

        Our Chief Executive Officer, President and Founder, James T. Demetriades beneficially owns approximately 30% of our outstanding common stock. Our executive officers and directors beneficially own, in the aggregate, approximately 40% 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.

Item 3:    Quantitative and Qualitative Disclosure About Market Risk

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

        Interest rate risk.    We maintain our funds in money market and certificate of deposit accounts at financial institutions. Our exposure to market risk due to fluctuations in interest rates relates primarily to our interest earnings on our cash deposits. These securities are subject to interest rate risk in as much as their fair value may fall if market interest rates increase. If market interest rates were to increase immediately and uniformly by 10% from the levels prevailing as of December 31, 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.

Item 4.    Controls and Procedures

        Based on their evaluation as of a date within 90 days of the filing date of this Report on Form 10-Q, the Company's chief executive officer and chief financial officer have concluded that the Company's disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934 (the "Exchange Act")) are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date the chief executive officer and chief financial officer completed their evaluation.

29

PART II—OTHER INFORMATION

Item 1.    Legal Proceedings

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

        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.

Item 2.    Changes in Securities and Use of Proceeds

(a)

Modification of Constituent Instruments

Not applicable

(b)

Change in Rights

Not applicable

(c)

Changes in Securities

Not applicable

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

Not applicable

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Item 6.    Exhibits and reports on Form 8-K

(a)

Exhibits.

31

*

Incorporated by reference to an exhibit in the Registrant's Registration Statement on Form S-1 File No. 333-330648.

**

Incorporated by reference to an exhibit in the Registrant's Quarterly Report on Form 10-Q filed with the Commission on November 14, 2000.

+

Denotes a management contract or compensatory plan arrangement.

++

Incorporated by reference to an exhibit in the Registrant's Quarterly Report on Form 10-Q filed with the Commission on May 15, 2001.

#

Incorporated by reference to an exhibit in the Registrant's Current Report on Form 8-K filed with the Commission on December 20, 2001

##

Incorporated by reference to an exhibit in the Registrant's Annual Report on Form 10-K filed with the Commission on March 30, 2001.

(1)

Incorporated by reference to an exhibit in the Registrant's Annual Report on Form 10-K filed with the Commission on February 8, 2002.

(2)

Incorporated by reference to an exhibit in the Registrant's Quarterly Report on Form 10-Q filed with the Commission on August 14, 2002.

(b)

Reports on Form 8-K.

None.

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Signature

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

33

CERTIFICATION OF CHIEF EXECUTIVE OFFICER
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, James T. Demetriades, certify that:

1.

I have reviewed this quarterly report on Form 10-Q of SeeBeyond Technology Corporation.

2.

Based on my knowledge, this quarterly report does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report.

3.

Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.

The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a.

designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b.

evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date")

c.

presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.

The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

a.

all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

b.

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6.

The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date:    November 14, 2002

34

CERTIFICATION OF CHIEF FINANCIAL OFFICER
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Barry J. Plaga, certify that:

1.

I have reviewed this quarterly report on Form 10-Q of SeeBeyond Technology Corporation.

2.

Based on my knowledge, this quarterly report does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report.

3.

Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.

The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a.

designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b.

evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date")

c.

presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.

The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

a.

all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

b.

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6.

The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date:    November 14, 2002

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