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

FORM 10-K

Commission File No. 000-30207

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

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

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

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

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

DOCUMENT INCORPORATED BY REFERENCE

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

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

Table of Contents

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FORWARD LOOKING STATEMENTS

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

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

Trademarks

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

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PART I

Item 1: Business

Overview

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

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

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

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

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

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

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

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

Products

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

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

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

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

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

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

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

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

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

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

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

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

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

Professional Services

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

Sales, Alliances and Marketing

Sales

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

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

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

Alliances

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

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

Marketing

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

Product Development

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

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

Customer Service and Support

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

Competition

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

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

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

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

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Intellectual Property and Proprietary Rights

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

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

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

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

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

Employees

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

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

Available Information

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

Item 2: Properties

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

Item 3: Legal Proceedings

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

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

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

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

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PART II

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

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

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

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

Item 6: Selected Consolidated Financial Data

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

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

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

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

Overview

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Critical Accounting Policies

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

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

•

revenue recognition;



•

estimating allowance for doubtful accounts, and



•

accounting for income taxes.

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

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

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

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

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

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

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

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

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

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Results of Operations

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

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

Revenues

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

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

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

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

Costs of Revenues

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

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

Operating Expenses

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

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

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

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

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

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

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

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

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

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

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

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

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Interest and Other Income (Expense), Net

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

Interest Expense

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

Income Taxes

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

Liquidity and Capital Resources

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Recently Issued Accounting Pronouncements

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

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

Risks Related to SeeBeyond

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

•

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.

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

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

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

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

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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;



•

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



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



•

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 the technological life cycles of our products are difficult to estimate. We believe we must continue to enhance our current products and concurrently develop and introduce new products that anticipate emerging technology standards and keep pace with competitive and technological developments. Failure to do so will harm our ability to compete. As a result, we are required to continue to make substantial product development investments.

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

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

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

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

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

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

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

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

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

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

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

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

•

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.

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

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

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

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

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

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

•

effectively manage our direct sales force;



•

effectively manage our professional services organization;



•

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

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

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

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

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

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Item 7A: Quantitative and Qualitative Disclosure about Market Risk

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

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

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

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Item 8: Financial Statements and Supplementary Data

SEEBEYOND TECHNOLOGY CORPORATION

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

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REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders of
SeeBeyond Technology Corporation

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

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

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

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

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SEEBEYOND TECHNOLOGY CORPORATION

CONSOLIDATED BALANCE SHEETS

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

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SEEBEYOND TECHNOLOGY CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

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

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SEEBEYOND TECHNOLOGY CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(In thousands)