(a) The following documents are filed as part of this Annual Report on Form 10-K:

                                                                               December 31,
                                                                      ----------------------------
                                                                            2001          2002
                                                                      -------------- -------------
Assets

Current assets:
   Cash and cash equivalents......................................... $     799,090  $    667,511
   Short-term investments............................................       857,565     1,494,093
                                                                      -------------- -------------
          Total cash, cash equivalents, and short-term investments...     1,656,655     2,161,604

   Marketable equity securities......................................         8,254         4,613
   Accounts receivable, net..........................................       396,297       275,764
   Deferred income taxes.............................................        58,131        96,518
   Prepaids and other................................................        70,766        49,901
                                                                      -------------- -------------
          Total current assets.......................................     2,190,103     2,588,400

Property and equipment, net..........................................       353,242       273,024
Goodwill.............................................................        72,869        80,949
Intangible assets, net...............................................        19,000        10,354
Other assets.........................................................        56,905        37,580
Deferred income taxes................................................        52,725        42,711
                                                                      -------------- -------------
          Total assets............................................... $   2,744,844  $  3,033,018
                                                                      ============== =============

Liabilities and Stockholders' Equity

Current liabilities:
   Accounts payable.................................................. $      14,395  $     15,239
   Accrued expenses..................................................       350,282       319,622
   Restructuring obligations.........................................            --        42,703
   Deferred revenue..................................................       241,017       270,575
                                                                      -------------- -------------
          Total current liabilities..................................       605,694       648,139

Capital lease obligations, less current portion......................         3,048        15,574
Restructuring obligations, less current portion......................            --       111,845
Convertible subordinated debentures..................................       300,000       300,000
                                                                      -------------- -------------
          Total liabilities..........................................       908,742     1,075,558
                                                                      -------------- -------------

Commitments and contingencies

Stockholders' equity:
  Common stock; $0.001 par value; 2,000,000 shares authorized;
     466,950 and 486,428 shares issued and outstanding, respectively.           467           486
  Additional paid-in capital.........................................     1,357,422     1,486,612
  Notes receivable from stockholders.................................          (422)           --
  Deferred compensation..............................................        (8,362)       (3,438)
  Accumulated other comprehensive income.............................         6,174        28,681
  Retained earnings..................................................       480,823       445,119
                                                                      -------------- -------------
          Total stockholders' equity.................................     1,836,102     1,957,460
                                                                      -------------- -------------
          Total liabilities and stockholders' equity................. $   2,744,844  $  3,033,018
                                                                      ============== =============

                                                                        Year Ended December 31,
                                                                 --------------------------------------
                                                                     2000         2001         2002
                                                                 ------------ ------------ ------------
Revenues:                                                                                              
    Software.................................................... $ 1,114,753  $ 1,065,618  $   700,344
    Professional services, maintenance and other................     705,453    1,018,978      934,963
                                                                 ------------ ------------ ------------
        Total revenues..........................................   1,820,206    2,084,596    1,635,307
                                                                 ------------ ------------ ------------
Cost of revenues:
    Software....................................................      18,391       16,294       21,612
    Professional services, maintenance and other................     462,694      624,731      540,194
                                                                 ------------  -----------  -----------
        Total cost of revenues..................................     481,085      641,025      561,806
                                                                 ------------ ------------ ------------
        Gross margin............................................   1,339,121    1,443,571    1,073,501
                                                                 ------------ ------------ ------------
Operating expenses:
    Product development.........................................     238,020      333,661      366,230
    Sales and marketing.........................................     609,898      615,675      476,975
    General and administrative..................................     132,164      136,353      119,253
    Restructuring-related expenses..............................          --           --      205,305
    Merger-related expenses.....................................      36,504           --           --
                                                                 ------------ ------------ ------------
        Total operating expenses................................   1,016,586    1,085,689    1,167,763
                                                                 ------------ ------------ ------------
        Operating income (loss).................................     322,535      357,882      (94,262)
                                                                 ------------ ------------ ------------
Other income, net:
    Interest and other income, net..............................      79,784       64,528       58,491
    Interest expense............................................     (17,909)     (18,326)     (20,016)
                                                                 ------------ ------------ ------------
        Total other income, net.................................      61,875       46,202       38,475
                                                                 ------------ ------------ ------------
        Income (loss) before income taxes.......................     384,410      404,084      (55,787)
Income taxes (benefit)..........................................     162,511      149,509      (20,083)
                                                                 ------------ ------------ ------------
        Net income (loss).......................................     221,899      254,575      (35,704)
Accretion of preferred stock....................................     (98,755)          --           --
                                                                 ------------ ------------ ------------
        Net income (loss) available to common stockholders...... $   123,144  $   254,575  $   (35,704)
                                                                 ============ ============ ============

Diluted net income (loss) per common share...................... $      0.24  $      0.49  $     (0.08)
                                                                 ============ ============ ============
Basic net income (loss) per common share........................ $      0.29  $      0.56  $     (0.08)
                                                                 ============ ============ ============

Shares used in diluted share computation........................     522,321      522,970      475,617
                                                                 ============ ============ ============
Shares used in basic share computation..........................     423,067      457,031      475,617
                                                                 ============ ============ ============
Comprehensive income (loss): 
      Net income (loss)......................................... $   221,899  $   254,575  $   (35,704)
Other comprehensive income (loss), net of taxes:
    Foreign currency translation adjustments....................       1,836       (3,238)      18,500
    Realized (gain) loss on marketable investments previously
      recognized in other comprehensive income..................     (60,901)      (3,399)     (12,420)
    Unrealized gain (loss) on investments.......................     (17,444)       5,332       16,427
                                                                 ------------ ------------ ------------
      Other comprehensive income (loss).........................     (76,509)      (1,305)      22,507
                                                                 ------------ ------------ ------------
      Total comprehensive income (loss)......................... $   145,390  $   253,270  $   (13,197)
                                                                 ============ ============ ============

                                                                                                              Notes                        Accumulated
                                                                       Common Stock         Additional      Receivable                        Other                        Total
                                                       Preferred   ---------------------      Paid-in          from          Deferred      Comprehensive   Retained     Stockholders'
                                                         Stock      Shares      Amount        Capital      Stockholders    Compensation    Income (Loss)   Earnings        Equity
                                                      ----------   ---------  ----------   ------------   -------------   -------------   -------------   ----------   -------------
Balances, December 31, 1999.......................... $        3    402,779   $     403    $   461,270    $       (548)   $     (3,550)   $     83,988    $ 103,104    $    644,670
Stock option exercises...............................         --     29,498          29        147,382          (1,153)             --              --           --         146,258
Employee stock purchase plan issuances...............         --        885           1         40,088              --              --              --           --          40,089
Other common stock issuances, net....................         --        390          --          4,747              --              --              --           --           4,747
Convertible preferred stock issuance.................          1         --          --         19,974              --              --              --           --          19,975
Issuance of warrants.................................         --         --          --          1,176              --              --              --           --           1,176
Tax benefit from stock options.......................         --         --          --        185,613              --              --              --           --         185,613
Deferred compensation related to stock options.......         --         --          --         24,307              --         (24,307)             --           --              --
Forfeiture of stock options issued below fair value..         --         --          --         (1,167)             --           1,167              --           --              --
Amortization of stock-based compensation.............         --         --          --             --              --          11,491              --           --          11,491
Unrealized gain on marketable investments, net
  of taxes of ($47,938)..............................         --         --          --             --              --              --         (78,345)          --         (78,345)
Currency translation adjustment, net of taxes
  of $1,125..........................................         --         --          --             --              --              --           1,836           --           1,836
Repayments of stockholder notes......................         --         --          --             --              78              --              --           --              78
Conversion of mandatorily redeemable
   convertible preferred stock.......................         --      5,324           5        179,209              --              --              --           --         179,214
Conversion of convertible preferred stock............         (4)     3,516           4             --              --              --              --           --              --
Accretion of mandatorily redeemable
   convertible preferred stock.......................         --         --          --             --              --              --              --      (98,755)        (98,755)
Net income...........................................         --         --          --             --              --              --              --      221,899         221,899
                                                      ----------   ---------  ----------   ------------   -------------   -------------   -------------   ----------   -------------
Balances, December 31, 2000..........................         --    442,392         442      1,062,599          (1,623)        (15,199)          7,479      226,248       1,279,946
Stock option exercises...............................         --     20,597          21        108,089              --              --              --           --         108,110
Employee stock purchase plan issuances...............         --      1,470           1         48,282              --              --              --           --          48,283
Repurchase of common stock subject to vesting........         --       (143)         --           (237)             --              --              --           --            (237)
Tax benefit from stock options.......................         --         --          --         53,800              --              --              --           --          53,800
Forfeiture of stock options issued below fair value..         --         --          --         (2,953)             --           2,953              --           --              --
Amortization of stock-based compensation, net........         --         --          --           (112)             --           5,281              --           --           5,169
Unrealized gain on marketable investments, net
  of taxes of $1,185.................................         --         --          --             --              --              --           1,933           --           1,933
Currency translation adjustment, net of taxes
  of ($1,985)........................................         --         --          --             --              --              --          (3,238)          --          (3,238)
Issuance of common stock and stock options
  in connection with acquisitions....................         --      2,634           3         87,954              --          (1,397)             --           --          86,560
Repayments of stockholder notes......................         --         --          --             --           1,201              --              --           --           1,201
Net income...........................................         --         --          --             --              --              --              --      254,575         254,575
                                                      ----------   ---------  ----------   ------------   -------------   -------------   -------------   ----------   -------------
Balances, December 31, 2001..........................         --    466,950         467      1,357,422            (422)         (8,362)          6,174      480,823       1,836,102
Stock option exercises...............................         --     10,651          11         63,547              --              --              --           --          63,558
Employee stock purchase plan issuances...............         --      3,109           3         29,363              --              --              --           --          29,366
Common stock issuance in connection with
  Option Repurchase..................................         --      5,473           5         31,466              --              --              --           --          31,471
Restricted stock issuances...........................         --        200          --          1,447              --          (1,447)             --           --              --
Repurchase of common stock subject to vesting........         --       (217)         --           (392)             --              --              --           --            (392)
Forfeiture of stock options issued below fair value..         --         --          --         (1,424)             --           1,424              --           --              --
Amortization of stock-based compensation, net........         --         --          --         (1,048)             --           5,174              --           --           4,126
Unrealized gain on marketable investments, net
  of taxes of $2,671.................................         --         --          --             --              --              --           4,007           --           4,007
Currency translation adjustment, net of taxes
  of $11,339.........................................         --         --          --             --              --              --          18,500           --          18,500
Issuance of common stock in connection with
  acquisition earnouts...............................         --        262          --          6,231              --            (227)             --           --           6,004
Repayments of stockholder notes......................         --         --          --             --             422              --              --           --             422
Net loss.............................................         --         --          --             --              --              --              --      (35,704)        (35,704)
                                                      ----------   ---------  ----------   ------------   -------------   -------------   -------------   ----------   -------------
Balances, December 31, 2002.......................... $       --    486,428   $     486    $ 1,486,612    $         --    $     (3,438)   $     28,681    $ 445,119    $  1,957,460
                                                      ==========   =========  ==========   ============   =============   =============   =============   ==========   =============

SIEBEL SYSTEMS, INC.
Consolidated Statements of Cash Flows
(in thousands)

                                                                                          Year Ended December 31,
                                                                                   -------------------------------------
                                                                                      2000        2001          2002
                                                                                   ---------- ------------ -------------
Cash flows from operating activities:                                                                                    
   Net income (loss).............................................................. $ 221,899  $   254,575  $    (35,704)
   Adjustments to reconcile net income (loss) to net cash
    provided by operating activities:
      Depreciation and other amortization.........................................    35,352       93,179       145,238
      Amortization of goodwill....................................................    14,713       20,041            --
      Amortization of identifiable intangible assets..............................     1,326        6,518         8,646
      Compensation related to stock options, net..................................    11,491        5,169         4,126
      Compensation expense related to common shares issued in Option Repurchase...        --           --        31,471
      Write-off of property and equipment abandoned in restructuring..............        --           --        25,955
      Write-off of acquired companies' assets.....................................     2,298           --            --
      Provision for doubtful accounts and sales returns...........................    39,385       26,403        21,376
      Tax benefit from exercise of stock options..................................   185,613       53,800            --
      Deferred income taxes.......................................................   (62,059)     (11,636)      (50,431)
      Write-down of cost-method investments to fair value.........................        --        3,073         9,990
      Net realized gains on marketable investments................................   (60,901)      (3,399)      (12,420)
      Charitable contribution of marketable investments...........................    28,700           --            --
      Loss from equity method investee............................................     7,481           --            --
      Exchange of software for cost-method investments............................   (13,068)        (971)           --
      Loss on disposal of property and equipment..................................        13           --            --
      Changes in operating assets and liabilities:
         Accounts receivable......................................................  (264,251)     105,816        99,157
         Prepaids and other.......................................................   (53,095)      17,247        20,865
         Accounts payable and accrued expenses....................................   230,807      (19,616)      (19,172)
         Restructuring obligations................................................        --           --       154,548
         Deferred revenue.........................................................   112,864       38,002        29,558
                                                                                   ---------- ------------ -------------
           Net cash provided by operating activities..............................   438,568      588,201       433,203
                                                                                   ---------- ------------ -------------
Cash flows from investing activities:
   Purchases of property and equipment............................................  (162,161)    (245,945)      (70,809)
   Purchases of short-term investments............................................  (487,888)  (1,113,004)   (2,347,660)
   Sales and maturities of short-term investments.................................   290,088      668,028     1,718,362
   Purchase of marketable equity securities.......................................        --           --        (1,000)
   Proceeds from sale of marketable equity securities.............................    35,351          821         1,189
   Purchase consideration paid for acquired businesses, net of cash received......   (29,212)       8,555          (500)
   Other non-operating assets and non-marketable securities.......................   (18,084)     (23,068)        7,991
   Repayments from (advances to) affiliate, net...................................   (12,362)      10,579            --
                                                                                   ---------- ------------ -------------
           Net cash used in investing activities..................................  (384,268)    (694,034)     (692,427)
                                                                                   ---------- ------------ -------------
Cash flows from financing activities:
   Proceeds from issuance of common stock, net of repurchases.....................   189,173      156,156        92,532
   Proceeds from issuance of preferred stock......................................    19,975           --            --
   Proceeds from equipment financing..............................................        --           --        24,873
   Repayments of capital lease obligations........................................      (299)        (580)       (8,714)
   Repayments of stockholder notes................................................        78        1,201           422
                                                                                   ---------- ------------ -------------
           Net cash provided by financing activities..............................   208,927      156,777       109,113
                                                                                   ---------- ------------ -------------
Effect of exchange rate fluctuations..............................................     1,836       (3,238)       18,532
                                                                                   ---------- ------------ -------------
Change in cash and cash equivalents...............................................   265,063       47,706      (131,579)
Cash and cash equivalents, beginning of period....................................   486,321      751,384       799,090
                                                                                   ---------- ------------ -------------
Cash and cash equivalents, end of period.......................................... $ 751,384  $   799,090  $    667,511
                                                                                   ========== ============ =============

Supplemental disclosures of cash flows information:
   Cash paid for interest......................................................... $  16,324  $    17,029  $     18,455
                                                                                   ========== ============ =============

   Cash paid for income taxes..................................................... $  15,434  $    18,837  $     36,692
                                                                                   ========== ============ =============
Supplemental disclosures of non-cash activities:
   Purchase price payable to acquired companies................................... $   3,000  $        --  $         --
                                                                                   ========== ============ =============

   Conversion of preferred stock into common stock................................ $ 179,214  $        --  $         --
                                                                                   ========== ============ =============

   Common stock and stock options issued for acquisitions......................... $      --  $    87,957  $      6,004
                                                                                   ========== ============ =============

1. Summary of Significant Accounting Policies

The Company

Siebel Systems, Inc. (the "Company") is a leading provider of eBusiness applications software. Siebel eBusiness Applications are a family of enterprise applications software that enables an organization to better manage its most important relationships: its customer, partner and employee relationships. Siebel eBusiness Applications are designed to meet the information system requirements needed to manage these relationships for organizations of all sizes, from small businesses to the largest multinational organizations and government agencies. The Company's customer relationship management applications enable an organization to sell to, market to, and serve its customers across multiple channels and lines of business. The Company's partner relationship management applications seamlessly unite the organization's partners, resellers and customers in one global information system to facilitate greater collaboration and increased revenues, productivity and customer satisfaction. The Company's employee relationship management applications enable an organization to drive employee and organizational performance and increase employee satisfaction through the support of each stage of the employee life cycle. By deploying the comprehensive functionality of Siebel eBusiness Applications to better manage their customer, partner and employee relationships, the Company's customers achieve high levels of satisfaction from these constituencies and improve their competitiveness in their markets.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated.

Use of Estimates

The Company's consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires that the Company make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to revenue recognition, provision for doubtful accounts and sales returns, fair value of investments, fair value of acquired intangible assets and goodwill, useful lives of intangible assets and property and equipment, income taxes, restructuring obligations, and contingencies and litigation, among others. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ significantly from the estimates made by management with respect to these items and other items that require management's estimates.

Foreign Currency Translation

The Company considers the functional currency of its foreign subsidiaries to be the local currency, and accordingly, the foreign currency is translated into U.S. dollars using exchange rates in effect at period end for assets and liabilities and average exchange rates during each reporting period for the results of operations. Adjustments resulting from translation of foreign subsidiary financial statements are reported in accumulated other comprehensive income (loss). Gains or losses on foreign currency transactions are recognized in current operations and have not been significant to the Company's operating results in any period presented.

Fair Value of Financial Instruments

The fair value of the Company's cash, cash equivalents, short-term investments, accounts receivable and accounts payable approximate their respective carrying amounts. Based on the quoted market price of the convertible subordinated debentures, the fair value of the convertible subordinated debentures was $289,440,000 as of December 31, 2002. The fair value of the Company's derivative financial instruments (i.e., foreign exchange contracts) was $5,555,000 as of December 31, 2002.

Cash, Cash Equivalents, Short-Term Investments and Marketable Equity Securities

The Company considers all highly liquid investments with an original maturity of 90 days or less at the date of purchase to be cash equivalents. Short-term investments generally consist of highly liquid securities with original maturities in excess of 90 days. Marketable equity securities include the Company's investments in publicly traded companies in the high technology industry. The Company has classified its short-term investments and marketable equity securities as "available-for-sale." Such investments are carried at fair value with unrealized gains and losses, net of related tax effects, reported within accumulated other comprehensive income (loss). Realized gains and losses on available-for-sale securities are computed using the specific identification method.

The Company reviews the carrying value of its short-term investments and marketable equity securities, along with investments accounted for under the cost method, at the end of each reporting period to determine if any investments are impaired. This review includes an evaluation of historical and projected financial performance, expected cash needs and recent funding events. Other-than-temporary impairments are recognized in earnings if: (i) the market value of the investment is below its current carrying value for an extended period, which the Company generally defines as six to nine months; (ii) the issuer has experienced significant financial declines; or (iii) the issuer has experienced difficulties in raising capital to continue operations, among other factors.

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to a concentration of credit risk principally consist of short-term investments, trade accounts receivable and financial instruments used in foreign currency hedging activities. The Company primarily invests its excess cash in money market instruments, government securities, corporate bonds and asset-backed securities. The Company is exposed to credit risks related to the Company's short-term investments in the event of default or decrease in credit-worthiness of one of the issuers of the investments. The Company performs ongoing credit evaluations of its customers and generally does not require collateral on accounts receivable, as the majority of the Company's customers are large, well-established companies. The Company maintains reserves for potential credit losses, but historically has not experienced any significant losses related to any particular industry or geographic area since the Company's business is not concentrated on any one particular customer or customer base.

No single customer accounts for more than 10% of revenues for any period presented, and the Company's customers, which are primarily in the high technology, telecommunications, financial services (including insurance), pharmaceutical, utilities and consumer packaged goods industries, are sufficiently diverse that the Company does not consider itself significantly exposed to concentrations of credit risk. The counterparties to agreements relating to the Company's foreign currency contracts are large, multinational financial institutions. The amounts subject to credit risk arising from the possible inability of counterparties to meet the terms of their contracts are generally limited to the amounts, if any, by which the counterparty's obligations exceed the obligations of the Company to that counterparty.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation and amortization. Capital lease amortization is included with depreciation expense, and the associated accumulated amortization of $434,000 and $9,025,000 as of December 31, 2001 and 2002, respectively, is included with accumulated depreciation in the accompanying consolidated financial statements. Depreciation and amortization are calculated using the straight-line method over the shorter of the estimated useful lives of the respective assets, generally two to five years, or the lease term, if applicable. Leasehold improvements are amortized over the lesser of the lease term or the estimated useful lives of the improvements, generally seven years. Expenditures for maintenance and repairs are charged to expense as incurred. Cost and accumulated depreciation of assets sold or retired are removed from the respective property accounts, and the gain or loss is reflected in the consolidated statement of operations.

Intangible Assets and Goodwill

The Financial Accounting Standards Board ("FASB") issued SFAS No. 141 "Business Combinations" ("SFAS 141") and SFAS No. 142 "Goodwill and Other Intangible Assets" ("SFAS 142") in July 2001. SFAS 141 requires that all business combinations be accounted for using the purchase method, thereby prohibiting the pooling-of-interests method. SFAS 141 also specifies criteria for recognizing and reporting intangible assets apart from goodwill; however, assembled workforce must be recognized and reported in goodwill. SFAS 142 requires that intangible assets with an indefinite life should not be amortized until their life is determined to be finite, and all other intangible assets must be amortized over their useful life. SFAS 142 also requires that goodwill not be amortized but instead tested for impairment in accordance with the provisions of SFAS 142 at least annually and more frequently upon the occurrence of certain events (see "Impairment of Long-Lived Assets" below).

The Company adopted certain provisions of these pronouncements effective July 1, 2001, as required for goodwill and intangible assets acquired in purchase business combinations consummated after June 30, 2001. The Company adopted the remaining provisions of SFAS 141 and SFAS 142 effective January 1, 2002. There was not a cumulative transition adjustment upon adoption as of July 1, 2001 or January 1, 2002. SFAS 141 and SFAS 142 required the Company to perform the following as of January 1, 2002: (i) review goodwill and intangible assets for possible reclassifications; (ii) reassess the lives of intangible assets; and (iii) perform a transitional goodwill impairment test. The Company has reviewed the balances of goodwill and identifiable intangibles and determined that the Company does not have any amounts that are required to be reclassified from goodwill to identifiable intangibles, or vice versa. The Company has also reviewed the useful lives of its identifiable intangible assets and determined that the original estimated lives remain appropriate. The Company has completed the transitional goodwill impairment test and has determined that the Company did not have a transitional impairment of goodwill.

As required by SFAS 142, the Company has not amortized goodwill associated with acquisitions completed after June 30, 2001, for any period presented, and ceased amortization of goodwill associated with acquisitions completed prior to July 1, 2001, effective January 1, 2002. Prior to January 1, 2002, the Company amortized goodwill associated with the pre-July 1, 2001 acquisitions over three to five years using the straight-line method. Identifiable intangibles (acquired technology) are currently amortized over three years using the straight-line method. Please refer to Note 13 for further discussion of the Company's intangible assets and goodwill.

Impairment of Long-Lived Assets

The Company tests goodwill for impairment in accordance with SFAS 142. SFAS 142 requires that goodwill be tested for impairment at the "reporting unit" level ("Reporting Unit") at least annually and more frequently upon the occurrence of certain events, as defined by SFAS 142. Consistent with the Company's determination that it has only one reporting segment as defined in SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information," the Company has determined that it has only one Reporting Unit, specifically the license, implementation and support of its software applications. Goodwill is tested for impairment annually on July 1 in a two-step process. First, the Company determines if the carrying amount of its Reporting Unit exceeds the "fair value" of the Reporting Unit, which would indicate that goodwill may be impaired. If the Company determines that goodwill may be impaired, the Company compares the "implied fair value" of the goodwill, as defined by SFAS 142, to its carrying amount to determine if there is an impairment loss. The Company does not have any goodwill that it considers to be impaired.

On January 1, 2002, the Company adopted SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), which supersedes certain provisions of APB Opinion No. 30 "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" and supersedes SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." There was not a cumulative transition adjustment upon adoption. In accordance with SFAS 144, the Company evaluates long-lived assets, including intangible assets other than goodwill, for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable based on expected undiscounted cash flows attributable to that asset. The amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset.

In connection with the Company's restructuring of its operations and associated workforce reduction completed during 2002, the Company abandoned certain long-lived assets, consisting primarily of furniture, fixtures and leasehold improvements. Please refer to Note 2 for further discussion of the impairment charge recorded during 2002. The Company does not have any additional long-lived assets it considers to be impaired as of December 31, 2002.

Stock-Based Compensation

The Company accounts for its employee stock-based compensation plans using the intrinsic value method, as prescribed by APB No. 25 "Accounting for Stock Issued to Employees" and interpretations thereof (collectively "APB 25"). Accordingly, the Company records deferred compensation costs related to its employee stock options when the current market price of the underlying stock exceeds the exercise price of each option on the date of grant. The Company records and measures deferred compensation for stock options granted to non-employees, other than members of the Company's Board of Directors, at their fair value. Deferred compensation is expensed on a straight-line basis over the vesting period of the related stock option. The Company did not grant any stock options at exercise prices below the fair market value of the Company's common stock on the date of grant during the years ended December 31, 2000, 2001 and 2002.

As of December 31, 2001 and 2002, the Company's deferred compensation balances primarily related to restricted stock granted in 2002, as discussed further in Note 7, and the remaining unamortized portion of compensation expense associated with stock options granted by acquired companies and converted under the terms of the agreements between the Company and the companies acquired. The Company is amortizing the deferred compensation on a straight-line basis over the respective vesting periods, which range from three to five years. The accompanying consolidated statement of operations reflects stock-based compensation expense of $11,491,000, $5,169,000 and $4,126,000 for the years ended December 31, 2000, 2001 and 2002, respectively.

An alternative method to the intrinsic value method of accounting for stock-based compensation is the fair value approach prescribed by SFAS No. 123 "Accounting for Stock-Based Compensation," as amended by SFAS No. 148 "Accounting for Stock-Based Compensation - Transition and Disclosure" (hereinafter collectively referred to as "SFAS 123"). If the Company followed the fair value approach, the Company would be required to record deferred compensation based on the fair value of the stock option at the date of grant. The fair value of the stock option is required to be computed using an option-pricing model, such as the Black-Scholes option valuation model, at the date of the stock option grant. The deferred compensation calculated under the fair value method would then be amortized over the respective vesting period of the stock option.

Summarized below are the pro forma effects on net income (loss) and net income (loss) per share data, if the Company had elected to use the fair value approach prescribed by SFAS 123 to account for its employee stock-based compensation plans (in thousands, except per share data):

                                                                                         Year Ended December 31,
                                                                                   -----------------------------------
                                                                                      2000        2001        2002
                                                                                   ---------- ----------- ------------
 Net income (loss) available to common stockholders: 
   As reported.................................................................... $ 123,144  $  254,575  $   (35,704)
                                                                                   ---------- ----------- ------------
   Less compensation expense under SFAS 123 related to:
     In-the-money stock options...................................................    29,227      28,366       23,114
     Stock purchase rights under the Purchase Plan................................    16,515      21,634       23,087
                                                                                   ---------- ----------- ------------
        Total pro forma expense, in the money stock options and Purchase Plan.....    45,742      50,000       46,201
     Out-of-the-money stock options...............................................    83,853     232,294      261,160
     Stock options granted to the Company's CEO (cancelled in January 2003).......    40,087     132,181      110,553
     Stock options forfeited/cancelled in connection with terminations............    30,858     108,423       32,959
     Stock options repurchased on September 30, 2002..............................    85,720     284,836      595,297
                                                                                   ---------- ----------- ------------
        Total pro forma expense giving effect to SFAS 123.........................   286,260     807,734    1,046,170
                                                                                   ---------- ----------- ------------
   Pro forma giving effect to SFAS 123............................................ $(163,116) $ (553,159) $(1,081,874)
                                                                                   ========== =========== ============

 Diluted net income (loss) per share:                                                                                   
   As reported.................................................................... $    0.24  $     0.49  $     (0.08)
                                                                                   ========== =========== ============

   Pro forma giving effect to SFAS 123............................................ $   (0.39) $    (1.21) $     (2.27)
                                                                                   ========== =========== ============


 Basic net income (loss) per share:                                                                                     
   As reported.................................................................... $    0.29  $     0.56  $     (0.08)
                                                                                   ========== =========== ============

   Pro forma giving effect to SFAS 123............................................ $   (0.39) $    (1.21) $     (2.27)
                                                                                   ========== =========== ============

In-the-money stock options in the above table have exercise prices below the closing price of the Company's common stock on December 31, 2002, of $7.40, and out-of-the-money stock options have exercise prices equal to or greater than $7.40.

Consistent with the Company's accounting for deferred tax assets resulting from the exercise of employee stock options in the accompanying consolidated financial statements, the Company has not provided a tax benefit on the pro forma expense in the above table. Please refer to Note 9 for further discussion of the Company's accounting for deferred tax assets generated from the exercise of employee stock options.

The Company determined the assumptions to be used in computing the fair value of stock options or stock purchase rights as discussed in the remainder of this paragraph. The Company estimated the expected useful lives, giving consideration to the vesting and purchase periods, contractual lives, expected employee turnover, and the relationship between the exercise price and the fair market value of the Company's common stock, among other factors. The expected volatility was estimated giving consideration to the expected useful lives of the stock options, the Company's current expected growth rate, implied expected volatility in traded options for the Company's common stock, and recent volatility of the Company's common stock, among other factors. The risk-free rate is the U.S. Treasury bill rate for the relevant expected life. The fair value of options was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:

                                                                                          Year Ended December 31,
                                                                                    -----------------------------------
                                                                                       2000       2001        2002
                                                                                    ---------- ----------- ------------
 Risk-free interest rate..........................................................      6.12 %      3.83 %       1.99 %
 Expected life (in years).........................................................       3.4         3.4          3.4
 Expected volatility..............................................................        77 %        89 %         65 %

During 2000, 2001 and 2002, stock options with exercise prices equal to the market price of the Company's common stock at the grant date had weighted average fair values of $34.37, $16.15 and $9.77 per share for 2000, 2001 and 2002, respectively, as calculated using the Black-Scholes option valuation model. There were no grants in 2001 or 2002 at exercise prices below market price at the date of grant. Prior to their acquisition by the Company, certain acquired companies granted stock options at exercise prices below the market price of the acquired companies' common stock at the grant date. The weighted average fair value of employee stock options granted at exercise prices below market price at the grant date was $20.13 per share in 2000, as calculated using the Black-Scholes option valuation model.

The fair value of employees' stock purchase rights under the Company's Employee Stock Purchase Plan (the "Purchase Plan") was estimated using the Black-Scholes model with the following weighted average assumptions used for purchases:

                                                                                          Year Ended December 31,
                                                                                    -----------------------------------
                                                                                       2000       2001        2002
                                                                                    ---------- ----------- ------------
 Risk-free interest rate...........................................................     5.96 %      4.72 %       1.23 %
 Expected life (in years)..........................................................      0.5         0.5          0.5
 Expected volatility...............................................................       77 %        89 %         83 %

The weighted average estimated fair value of the common stock purchase rights granted under the Purchase Plan during 2000, 2001 and 2002 was $20.25, $22.60 and $7.43 per share, respectively, including the 15% discount from the quoted market price.

Derivative Instruments and Hedging Activities

On January 1, 2001, the Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). There was not a cumulative transition adjustment upon adoption on January 1, 2001. SFAS 133 establishes accounting and reporting standards for derivative instruments and hedging activities and requires that all derivatives be recognized as either assets or liabilities at fair value. If certain conditions are met, a derivative may be specifically designated and accounted for as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment; (b) a hedge of the exposure to variable cash flows of a forecasted transaction; or (c) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security, or a foriegn-currency-denominated forecasted transaction. Derivatives or portions of derivatives that are not designated as hedging instruments are adjusted to fair value through operations in the period of change in their fair value.

The Company operates internationally and thus is exposed to potential adverse changes in currency exchange rates. The Company has entered into foreign exchange contracts to reduce its exposure to foreign currency rate changes on receivables, payables and intercompany balances denominated in a non-functional currency. The objective of these contracts is to neutralize the impact of currency exchange rate movements on the Company's operating results. These contracts require the Company to exchange currencies at rates agreed upon at the contract's inception. These contracts reduce the exposure to fluctuations in exchange rate movements because the gains and losses associated with foreign currency balances and transactions are generally offset with the gains and losses of the foreign exchange contracts. Because the impact of movements in currency exchange rates on forward contracts generally offsets the related impact on the underlying items being hedged, these financial instruments help alleviate the risk that might otherwise result from certain changes in currency exchange rates. The Company does not designate its foreign exchange forward contracts as accounting hedges and, accordingly, the Company adjusts these instruments to fair value through operations. The Company does not hold or issue financial instruments for speculative or trading purposes.

Revenue Recognition

Substantially all of the Company's revenues are derived from the license of the Company's software products and the related professional services and customer support (maintenance) services. The Company's standard end user license agreement provides for an initial fee for use of the Company's products in perpetuity based on the number of named users. The Company licenses its software in multiple element arrangements in which the customer purchases a combination of software, maintenance and/or professional services (i.e., training, implementation services, etc.).

The Company recognizes revenue using the residual method pursuant to the requirements of Statement of Position No. 97-2 "Software Revenue Recognition" ("SOP 97-2"), as amended by Statement of Position No. 98-9, "Software Revenue Recognition with Respect to Certain Arrangements." Under the residual method, revenue is recognized in a multiple element arrangement when Company-specific objective evidence of fair value exists for all of the undelivered elements in the arrangement, but does not exist for one of the delivered elements in the arrangement. The Company allocates revenue to each element in a multiple element arrangement based on its respective fair value, with the fair value determined by the price charged when that element is sold separately. The Company defers revenue for the fair value of its undelivered elements (e.g., professional services and maintenance) and recognizes revenue for the remainder of the arrangement fee attributable to the delivered elements (i.e., software product) when the basic criteria in SOP 97-2 have been met.

Under SOP 97-2, revenue attributable to an element in a customer arrangement is recognized when persuasive evidence of an arrangement exists and delivery has occurred, provided the fee is fixed or determinable, collectibility is probable and the arrangement does not require significant customization of the software. If at the outset of the customer arrangement, the Company determines that the arrangement fee is not fixed or determinable, the Company defers the revenue and recognizes the revenue when the arrangement fee becomes due and payable. If at the outset of the customer arrangement, the Company determines that collectibility is not probable, the Company defers the revenue and recognizes the revenue when payment is received. The Company recognizes revenue from resellers upon sell-through to the end customer.

Professional services, maintenance and other revenues relate primarily to consulting services, maintenance and training. Maintenance revenues are recognized ratably over the term of the maintenance contract, typically 12 months. Consulting and training revenues are recognized as the services are performed and substantially all arrangements are on a time and materials basis. Such services primarily consist of implementation services related to the installation of the Company's products and do not include significant customization to or development of the underlying software code.

On January 1, 2002, the Company adopted Emerging Issues Task Force ("EITF") Issue No. 01-14 "Income Statement Characterization of Reimbursements Received for 'Out-of-Pocket' Expenses Incurred" ("EITF 01-14"). EITF 01-14 requires that certain out-of-pocket expenses rebilled to customers be recorded as revenue versus an offset to the related expense. The Company has reflected the out-of-pocket expenses rebilled to customers in professional services, maintenance and other revenues. Prior to the adoption of EITF 01-14, the Company recorded rebilled out-of-pocket expenses as an offset to the related expense. Comparative financial statements for prior periods have been conformed to the current year presentation. Amounts reclassified were not significant for any period presented.

Concurrent and Nonmonetary Transactions

The Company's customers include several of its suppliers and on occasion, the Company has purchased goods or services for the Company's operations from these vendors at or about the same time the Company has licensed its software to these same organizations (a "Concurrent Transaction"). Software license transactions that occur within six months (i.e., "at or about the same time") of a purchase by the Company from that same customer are reviewed by management for appropriate accounting and disclosure. The Company accounts for Concurrent Transactions in accordance with APB No. 29 "Accounting for Nonmonetary Transactions" and EITF No. 01-02 "Interpretations of APB Opinion 29," collectively referred to as "APB 29." Concurrent Transactions are separately negotiated, settled in cash, and recorded at terms the Company considers to be arm's length. In addition, the Company receives competitive bids for the goods or services purchased by the Company in connection with Concurrent Transactions and these goods or services were budgeted by the Company in advance of the transaction, where appropriate.

Prior to recognizing any revenue from a Concurrent Transaction, the Company ensures that: (i) the transaction meets its standard revenue recognition policies, as discussed above; (ii) the customer meets the Company's standard credit requirements; (iii) the transaction represents the culmination of the earnings process; and (iv) all goods or services purchased by the Company are necessary for its current operations and are expected to be placed into service shortly after purchase. If the Concurrent Transaction meets these requirements, the Company records the revenue at fair value, as defined by APB 29. The Company determines Fair Value based on a comparison of cash transactions for its software that are of similar size and on similar terms as the Concurrent Transaction or the Fair Value of the goods or services purchased by the Company, whichever is more readily determinable. During the years ended December 31, 2000, 2001 and 2002, the Company recognized $11,600,000, $76,400,000 and $50,571,000, respectively, of software license revenues from Concurrent Transactions. The Company did not have any Concurrent Transactions during the third and fourth quarters of 2002.

During 2000, the Company established a program whereby qualified start-up companies could obtain Siebel software in exchange for shares of their equity securities. Qualified start-up companies are generally companies that have received and are expected to continue to receive funding from top-tier venture capital firms, have passed a credit review consistent with other Siebel customers, and have a sound business model and experienced management team. The Company recognized approximately $13,100,000 and $1,000,000 of software license revenues related to this program during 2000 and 2001, respectively. The Company did not recognize any revenue from this program during 2002. During 2001, the Company also recognized approximately $2,900,000 of software license revenues from a publicly traded company with which it negotiated a strategic investment. The software license was separately negotiated and recorded at terms the Company considers to be arm's-length.

Cost of Revenues

Cost of software consists primarily of amortization of acquired technology, media, product packaging and shipping, documentation and other production costs, and third-party royalties. Cost of professional services, maintenance and other consists primarily of salaries, benefits, and allocated overhead costs related to consulting, training and other global services personnel, including cost of services provided by third-party consultants engaged by the Company.

Software Development Costs

Software development costs associated with new products and enhancements to existing software products are expensed as incurred until technological feasibility in the form of a working model has been established. To date, the time period between the establishment of technological feasibility and completion of software development has been short, and no significant development costs have been incurred during that period. Accordingly, the Company has not capitalized any software development costs to date.

Advertising

Advertising costs are expensed as incurred. Advertising expense is included in sales and marketing expense and amounted to $44,472,000, $31,800,000 and $16,080,000 in 2000, 2001 and 2002, respectively.

Provision for Doubtful Accounts

The Company initially records its provision for doubtful accounts and sales returns based on its historical experience and then adjusts this provision at the end of each reporting period based on a detailed assessment of its accounts receivable and related allowance.

Restructuring-Related Expenses

The Company's restructuring charges are comprised primarily of: (i) severance and associated employee termination costs related to the reduction of the Company's workforce; (ii) lease termination costs and other costs associated with permanently vacating its facilities ("abandonment"); and (iii) impairment costs related to certain abandoned long-lived assets. The Company accounts for each of these costs in accordance with SEC Staff Accounting Bulletin No. 100 "Restructuring and Impairment Charges." In addition, the Company accounts for the individual components of the Restructuring as discussed further below.

The Company accounts for the costs associated with the reduction of the Company's workforce in accordance with EITF Issue No. 94-3 "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)" ("EITF 94-3"). Accordingly, the Company records the liability related to these termination costs when the following conditions have been met: (i) management with the appropriate level of authority approves a termination plan that commits the Company to such plan and establishes the benefits the employees will receive upon termination; (ii) the benefit arrangement is communicated to the employees in sufficient detail to enable the employees to determine the termination benefits; (iii) the plan specifically identifies the number of employees to be terminated, their locations and their job classifications; and (iv) the period of time to implement the plan does not indicate changes to the plan are likely. The termination costs recorded by the Company are not associated with nor do they benefit continuing activities.

The Company accounts for costs associated with lease termination and/or abandonment in accordance with EITF Issue No. 88-10 "Costs Associated with Lease Modification or Termination" ("EITF 88-10"). Accordingly, the Company records the costs associated with lease termination and/or abandonment when the leased property has no substantive future use or benefit to the Company. Under EITF 88-10, the Company records the liability associated with lease termination and/or abandonment as the sum of the total remaining lease costs and related exit costs, less probable sublease income. The Company accounts for costs related to long-lived assets abandoned in accordance with SFAS 144 and, accordingly, charges to expense the net carrying value of the long-lived assets when the Company ceases to use the assets.

Inherent in the estimation of the costs related to the Company's restructuring efforts are assessments related to the most likely expected outcome of the significant actions to accomplish the restructuring. Changing business conditions may affect the assumptions related to the timing and extent of the Company's restructuring activities. The Company will review the status of restructuring activities on a quarterly basis and, if appropriate, record changes to its restructuring obligations in current operations based on management's most current estimates.

Income Taxes

The Company uses the asset and liability method of accounting for income taxes. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets are recognized for deductible temporary differences, along with net operating loss carryforwards and credit carryforwards, if it is more likely than not that the tax benefits will be realized. To the extent a deferred tax asset cannot be recognized under the preceding criteria, allowances are established. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled.

Net Income (Loss) Available per Common Share

Basic net income (loss) per share is computed using the weighted average number of shares of common stock outstanding. Diluted net income (loss) per share is computed using the weighted average number of shares of common stock and, when dilutive, potential common shares from stock options to purchase common stock, restricted common stock subject to repurchase by the Company, and warrants outstanding, using the treasury stock method. Dilutive net income (loss) per share also gives effect, when dilutive, to the conversion of the convertible subordinated debentures, preferred stock and mandatorily redeemable convertible preferred stock, using the if-converted method.

For basic and diluted net income (loss) per share, the Company has reduced net income (loss) by the accretion of mandatorily redeemable convertible preferred stock to arrive at the net income (loss) available to common stockholders. See Note 6.

Reclassifications

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

Recent Accounting Pronouncements

In June 2001, the FASB issued SFAS No. 143 "Accounting for Asset Retirement Obligations" ("SFAS 143"). SFAS 143 addresses the financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS 143 applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or normal use of the assets. SFAS 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The fair value of the liability is added to the carrying amount of the associated asset, and this additional carrying amount is expensed over the life of the asset. The Company is required to adopt SFAS 143 effective January 1, 2003. The Company does not expect the adoption of SFAS 143 to have a material effect on its consolidated financial position, results of operations or cash flows.

In July 2002, the FASB issued SFAS No. 146 "Accounting for Exit or Disposal Activities" ("SFAS 146"). SFAS 146 addresses the recognition, measurement and reporting of costs associated with exit and disposal activities (i.e., restructuring activities), including costs related to terminating a contract that is not a capital lease and termination benefits due to employees who are involuntarily terminated under the terms of a one-time benefit arrangement.

SFAS 146 supersedes EITF 94-3 and EITF 88-10 and therefore prohibits recognition of a liability based solely on an entity's commitment to a plan to exit an activity. SFAS 146 requires that: (i) liabilities associated with exit and disposal activities be measured at fair value and changes in the fair value of the liability at each reporting period be measured using an interest allocation approach; (ii) one-time termination benefits be expensed at the date the entity notifies the employee, unless the employee must provide future service, in which case the benefits are expensed ratably over the future service period; (iii) liabilities to terminate a contract be recorded at fair value when the contract is terminated; (iv) liabilities related to an existing operating lease/contract, unless terminated, be recorded at fair value, less estimated sublease income, and measured when the contract does not have any future economic benefit to the entity (i.e., the entity ceases to utilize the rights conveyed by the contract); and (v) all other costs related to an exit or disposal activity be expensed as incurred.

SFAS 146 is effective for exit or disposal activities initiated after December 31, 2002. Retroactive application of SFAS 146 is prohibited and, accordingly, liabilities recognized prior to the initial application of SFAS 146 must continue to be accounted for in accordance with EITF 94-3, EITF 88-10 or other applicable preexisting guidance. Accordingly, the Company will continue to account for its restructuring obligations recorded during 2002 in accordance with EITF 94-3, EITF 88-10 or other applicable preexisting guidance. The Company does not expect the adoption of SFAS 146 to have a material effect on its consolidated financial position, results of operations or cash flows.

In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("Interpretation 45"). Interpretation 45 elaborates on the existing disclosure requirements for most guarantees, including loan guarantees such as standby letters of credit, and provides new disclosure requirements regarding indemnification provisions, including indemnification provisions typically included in a software license arrangement. It also clarifies that at the time a guarantee is issued, the Company must recognize an initial liability for the fair value of the obligations it assumes under the guarantee and must disclose that information in its financial statements. The provisions related to recognizing a liability at inception of the guarantee do not apply to product warranties, indemnification provisions in the Company's software license arrangements, or to guarantees accounted for as derivatives. The initial recognition and measurement provisions apply on a prospective basis to guarantees issued or modified after December 31, 2002, and the disclosure requirements apply to guarantees outstanding as of December 31, 2002. The Company does not expect the adoption of Interpretation 45 to have a material effect on its consolidated financial position, results of operations or cash flows.

2. Restructuring

Throughout 2001 and 2002, the Company reduced the discretionary portion of its operating costs to near minimal levels. As a result of the continued downturn in the information technology industry during 2002, certain of the Company's key operating metrics, such as total revenue, operating margin and revenue per employee, continued to decline from the Company's historical levels. In response to this decline, the Company announced a restructuring of its operations and an associated workforce reduction (collectively, the "Restructuring") in July 2002 and completed the Restructuring in December 2002. The Restructuring was intended to: (i) strengthen the Company's competitive position; and (ii) reduce its cost structure and thereby improve the Company's revenue per employee, operating margin and overall operating performance.

The Company recognized a total charge related to this Restructuring of $205,305,000, of which the Company recognized $109,383,000 in the third quarter of 2002 and $95,922,000 in the fourth quarter of 2002. Total remaining cash outlays under the Restructuring are expected to be $154,548,000, of which $42,703,000 is expected to be made in 2003. The Restructuring charge is comprised primarily of: (i) severance and associated employee termination costs related to the reduction of the Company's workforce in 2002; (ii) lease termination costs and other costs associated with permanently vacating certain facilities; and (iii) impairment costs related to certain long-lived assets that were abandoned in connection with the Company's consolidation of its facilities. The following table summarizes the Company's Restructuring-related expenses incurred during 2002 and the related liabilities as of December 31, 2002 (in thousands):

                                                    Employee    Facility-     Asset
                                                  Termination    Related   Abandonment
                                                     Costs        Costs       Costs       Total
                                                  -----------  ----------- ------------ ----------
Restructuring-related expenses.................... $  23,649   $  155,701  $  25,955    $ 205,305
Cash payments in 2002.............................   (19,714)      (5,088)        --      (24,802)
Non-cash charges..................................        --           --    (25,955)     (25,955)
                                                  -----------  ----------- ------------ ----------
   Restructuring obligations, December 31, 2002... $   3,935   $  150,613  $      --      154,548
                                                  ===========  =========== ==========
   Less: Restructuring obligations, short-term....                                         42,703
                                                                                        ----------
   Restructuring obligations, long-term...........                                      $ 111,845
                                                                                        ==========

The remaining costs associated with permanently vacating facilities is primarily composed of net remaining lease obligations of $129,385,000 (gross lease obligations of $288,485,000 less estimated sublease income of $159,100,000), along with costs associated with demising and subleasing the vacated facilities of $21,228,000. The remaining costs associated with permanently vacating facilities will generally be paid over the remaining lease terms, ending at various dates through March 2022 or over a shorter period as the Company may negotiate with its lessors. See Note 5 for a summary of future lease commitments related to facilities that are part of the Restructuring. The lease commitments presented in Note 5 have not been reduced by estimated sublease income. The remaining costs associated with the reduction of the Company's workforce will be paid during 2003. The total Restructuring charge and related cash outlay are based on management's current estimates, which may change if further consolidations are required or if actual lease commitments or sublease income differ from amounts currently expected.

As part of the Restructuring, the Company reduced its workforce by a total of approximately 1,150 employees, or 16%. This workforce reduction affected substantially all of the Company's organizations and geographical regions. The costs associated with the Company's workforce reduction consist primarily of severance, COBRA benefits, payroll taxes and other associated employment termination costs.

As a result of the workforce reduction and previous employee attrition, certain of the Company's facilities were under-utilized, and certain facilities that were scheduled to be occupied in early 2003 were expected to be under-utilized. Accordingly, during the third and fourth quarters of 2002, the Company consolidated its workforce into existing facilities, thereby permanently removing from its operations certain facilities then occupied and facilities that the Company does not plan to occupy. The facilities permanently removed from the Company's operations were primarily located in Emeryville and San Mateo, California; Egham, England; and several smaller offices in North America and Europe. The costs associated with the Company's facilities consolidation primarily relate to lease termination costs, costs associated with satisfying remaining lease commitments, and expected brokerage and other re-letting costs, partially offset by estimated sublease income. The Company is in the process of negotiating with its lessors appropriate lease termination fees and/or seeking suitable subtenants of these facilities. The Company's estimates of the excess facilities charge may vary significantly depending, in part, on factors which may be beyond the Company's control, such as the Company's success in negotiating with lessors, the time periods required to locate and contract suitable subleases and the market rates at the time of such subleases. Adjustments to the facilities reserve will be made if further consolidations are required or if actual lease exit costs or sublease income differ from amounts currently expected.

As part of the consolidation of the Company's facilities, certain leasehold improvements, furniture and fixtures were abandoned in the third and fourth quarters of 2002. As a result, the Company recorded a non-cash charge equal to the net book value of these abandoned assets in Restructuring-related expenses.

3. Financial Statement Details

Cash, Cash Equivalents, Short-Term Investments and Marketable Equity Securities

Cash equivalents consist of securities with remaining maturities of 90 days or less at the date of purchase. Cash and cash equivalents, short-term investments, and marketable securities consisted of the following as of December 31, 2001 and 2002 (in thousands):

   December 31, 2001:                                             Unrealized
                                                             ---------------------
                                                     Cost       Loss       Gain       Market
                                                 ----------- ---------- ---------- -----------
   Cash and cash equivalents:
     Cash....................................... $   35,006  $      --  $      --  $   35,006
     Certificates of deposit....................        250         --         --         250
     Money market funds.........................    708,755         --         --     708,755
     U.S. treasury and agency securities........      3,730         --         --       3,730
     Corporate notes............................     51,362        (13)        --      51,349
                                                 ----------- ---------- ---------- -----------
                                                 $  799,103  $     (13) $      --  $  799,090
                                                 =========== ========== ========== ===========
   Short-term investments:
     U.S. treasury and agency securities........ $  241,355  $    (169) $   3,475  $  244,661
     Corporate notes............................    412,405       (445)     7,214     419,174
     Asset-backed securities....................    191,997       (311)     2,044     193,730
                                                 ----------- ---------- ---------- -----------
                                                 $  845,757  $    (925) $  12,733  $  857,565
                                                 =========== ========== ========== ===========

   Marketable equity securities................. $    7,902  $      --  $     352  $    8,254
                                                 =========== ========== ========== ===========


   December 31, 2002:                                             Unrealized
                                                             ---------------------
                                                     Cost       Loss       Gain       Market
                                                 ----------- ---------- ---------- -----------
   Cash and cash equivalents:
     Cash....................................... $   70,515  $      --  $      --  $   70,515
     Certificates of deposit....................      4,360         --         --       4,360
     Money market funds.........................    502,392         --         --     502,392
     U.S. treasury and agency securities........     11,989         --         --      11,989
     Corporate notes............................     72,245         --          3      72,248
     Asset-backed securities....................      6,003         --          4       6,007
                                                 ----------- ---------- ---------- -----------
                                                 $  667,504  $      --  $       7  $  667,511
                                                 =========== ========== ========== ===========
   Short-term investments:
     U.S. treasury and agency securities........ $  733,362  $      (1) $   5,762  $  739,123
     Municipal securities.......................     15,455         --        114      15,569
     Corporate notes............................    567,519        (87)    10,066     577,498
     Asset-backed securities....................    158,923       (172)     3,152     161,903
                                                 ----------- ---------- ---------- -----------
                                                 $1,475,259  $    (260) $  19,094  $1,494,093
                                                 =========== ========== ========== ===========

   Marketable equity securities................. $    4,629  $     (19) $       3  $    4,613
                                                 =========== ========== ========== ===========

Short-term investments as of December 31, 2001, consisted of $249,126,000 of securities that mature in less than one year, $608,439,000 of securities that mature in one to five years and no securities that mature in over five years. Short-term investments as of December 31, 2002, consisted of $385,195,000 of securities that mature in less than one year, $1,108,898,000 of securities that mature in one to five years and no securities that mature in over five years.

Accounts Receivable, Net

Accounts receivable, net consisted of the following (in thousands):

                                                              December 31,
                                                         ----------------------
                                                            2001        2002
                                                         ---------- -----------  
Trade accounts receivable............................... $ 442,968  $  321,877
Less: allowance for doubtful accounts and sales returns.    46,671      46,113
                                                         ---------- -----------
                                                         $ 396,297  $  275,764
                                                         ========== ===========

Changes in the allowance for doubtful accounts and sales returns for the years ended December 31, 2000, 2001 and 2002, are as follows (in thousands):

                                     Balance at    Provision for                  Balance at
                                     Beginning   Doubtful Accounts                 End of
                                      of Year       and Returns     Deductions      Year
                                    -----------  -----------------  ------------ -----------
  Year ended December 31, 2000..... $   13,168   $        39,385    $     8,904  $   43,649
  Year ended December 31, 2001.....     43,649            26,403         23,381      46,671
  Year ended December 31, 2002.....     46,671            21,376         21,934      46,113

Property and Equipment, Net

Property and equipment, net consisted of the following (in thousands):

                                                              December 31,
                                                         ----------------------
                                                            2001        2002
                                                         ---------- -----------  
Computers and equipment................................. $ 200,517  $  205,507
Furniture and fixtures..................................    91,000      84,184
Computer software.......................................    52,179      62,373
Computer equipment under capital lease..................     5,381      35,046
Corporate aircraft......................................     6,713       6,820
Buildings and land......................................       393         403
Leasehold improvements..................................   138,259     132,225
                                                         ---------- -----------
                                                           494,442     526,558
  Less: accumulated depreciation........................   141,200     253,534
                                                         ---------- -----------
                                                         $ 353,242  $  273,024
                                                         ========== ===========

Accrued Expenses

Accrued expenses consisted of the following (in thousands):

                                                              December 31,
                                                         ----------------------
                                                            2001        2002
                                                         ---------- -----------  
Accrued compensation.................................... $  82,728  $  100,398
Taxes...................................................   155,647     109,077
Other...................................................   111,907     108,539
                                                         ---------- -----------
                                                         $ 350,282  $  318,014
                                                         ========== ===========

Accumulated Other Comprehensive Income

Accumulated other comprehensive income consisted of the following (in thousands):

                                                              December 31,
                                                         ----------------------
                                                            2001        2002
                                                         ---------- ----------- 
Foreign currency translation adjustments, net of
   taxes of ($785) and $10,554, respectively............ $  (1,281) $   17,219
Unrealized gains on securities, net of taxes of
   $4,692 and $7,363, respectively......................     7,455      11,462
                                                         ---------- -----------
                                                         $   6,174  $   28,681
                                                         ========== ===========

Other Income, Net

Other income, net consisted of the following (in thousands):

                                                                     December 31,
                                                         ---------------------------------
                                                            2000        2001       2002
                                                         ---------- ----------- ---------- 

Interest income......................................... $  56,766  $   67,332  $  58,348
Interest expense........................................   (17,909)    (18,326)   (20,016)
Losses from equity method investee (Sales.com)..........    (7,481)         --         --
Charitable contributions................................   (30,705)     (1,404)        --
Net gains on marketable investments.....................    60,901       3,399     12,420
Write-down of cost-method investments...................        --      (3,073)    (9,990)
Other, net..............................................       303      (1,726)    (2,287)
                                                         ---------- ----------- ----------
                                                         $  61,875  $   46,202  $  38,475
                                                         ========== =========== ==========

During 2001 and 2002, the Company wrote down certain of its marketable equity securities to fair value, as the decline in these investments was deemed to be "other-than-temporary." Net gains on marketable investments in the above table include other-than-temporary losses related to these investments of $2,439,000 and $1,955,000 for 2001 and 2002, respectively. In addition, the Company holds several minority interests, included in other assets, in companies having operations or technology in areas within its strategic focus. During 2001 and 2002, the Company wrote down certain of these cost-method investments as the decline in these investments was deemed to be other-than-temporary (i.e., write-down of cost-method investments in the table above). Total other-than-temporary impairments recognized in other income, net were $5,512,000 and $11,945,000 during the years ended December 31, 2001 and 2002, respectively. There were no other-than-temporary impairments during the year ended December 31, 2000.

4. Convertible Subordinated Debentures

As of December 31, 2001 and 2002, the Company had $300,000,000 of convertible subordinated debentures (the "Debentures") outstanding. The seven-year-term Debentures mature September 15, 2006, bear interest at a rate of 5.50% per annum, and are convertible at the option of the holder into an aggregate of approximately 12,867,000 shares of the Company's common stock at any time prior to maturity, at a conversion price of approximately $23.32 per share, subject to adjustment under certain conditions. In accordance with the terms of the Debentures, the Company has the right to redeem the notes, in whole or in part beginning September 15, 2002. The redemption amount will range from $309,420,000 to $302,370,000, if the Debentures are redeemed between September 15, 2002, and September 14, 2006. Redemptions after September 14, 2006, will be at $300,000,000. The Company will pay accrued interest through the redemption date. The Company is not subject to any restrictive covenants related to the Debentures.

5. Commitments and Contingencies

Letters of Credit

As of December 31, 2002, the Company had secured letters of credit with banks totaling approximately $10,140,000. These letters of credit, which expire between February 2003 and November 2015, collateralize the Company's lease obligations to various third parties.

Legal Actions

The Company is subject to legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business. While the outcome of these proceedings and claims cannot be predicted with certainty, management does not believe that the outcome of any of pending legal matters will have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows.

Indemnifications

The Company sells software licenses and services to its customers under contracts which the Company refers to as Software License and Service Agreements (each an "SLSA"). Each SLSA contains the relevant terms of the contractual arrangement with the customer, and generally includes certain provisions for indemnifying the customer against losses, expenses, and liabilities from damages that may be awarded against the customer in the event the Company's software is found to infringe upon a patent, copyright, trademark, or other proprietary right of a third party. The SLSA generally limits the scope of and remedies for such indemnification obligations in a variety of industry-standard respects, including but not limited to certain time- and geography-based scope limitations and a right to replace an infringing product.

The Company believes its internal development processes and other policies and practices limit its exposure related to the indemnification provisions of the SLSA. In addition, the Company requires its employees to sign a proprietary information and inventions agreement, which assigns the rights to its employees' development work to the Company. To date, the Company has not had to reimburse any of its customers for any losses related to these indemnification provisions and no material claims are outstanding as of December 31, 2002. For several reasons, including the lack of prior indemnification claims and the lack of a monetary liability limit for certain infringement cases under the SLSA, the Company cannot determine the maximum amount of potential future payments, if any, related to such indemnification provisions.

Employee Benefit Plan

The Company has a 401(k) plan that allows eligible U.S. employees to contribute up to 20% of their compensation, limited to $11,000 in 2002. Employee contributions and earnings thereon vest immediately. Although the Company may make discretionary contributions to the 401(k) plan, none have been made to date.

Lease Obligations

During the year ended December 31, 2002, the Company entered into an equipment financing arrangement related to certain of the Company's computer equipment, whereby the Company received proceeds of $24,873,000. The Company has recorded this arrangement as a capital lease. The lease requires monthly payments of $589,000, which includes both principal and interest, through December 31, 2005.

As of December 31, 2002, the Company leased facilities and certain equipment under non-cancelable operating leases expiring between 2003 and 2022. The Company also leases certain assets, primarily computer equipment, under capital leases expiring between 2004 and 2005. Rent expense under operating leases for the years ended December 31, 2000, 2001 and 2002, was $72,871,000, $117,586,000 and $114,358,000, respectively.

Future minimum lease payments under both operating and capital leases as of December 31, 2002, are as follows (in thousands):

                                                                               Operating Leases
                                                                     --------------------------------------
                                                                        Leases
                                                           Capital      in the       All Other     Total
Year Ending December 31,                                   Leases    Restructuring    Leases     Operating
- -------------------------------------------------------- ----------  -------------  ----------  -----------
2003.................................................... $  11,486   $     37,789   $  88,389   $  126,178
2004....................................................    10,013         38,525      86,006      124,531
2005....................................................     6,479         34,534      82,383      116,917
2006....................................................        --         24,505      84,326      108,831
2007....................................................        --         22,687      80,806      103,493
2008, and thereafter....................................        --        130,445     524,692      655,137
                                                         ----------  -------------  ----------  -----------
     Total minimum lease payments.......................    27,978   $    288,485   $ 946,602   $1,235,087
                                                                     =============  ==========  ===========
     Amounts representing interest......................    (2,226)
                                                         ----------
     Present value of minimum lease payments............    25,752
     Less: capital lease obligations, short-term
        portion (included in accrued liabilities).......    10,178
                                                         ----------
     Capital lease obligations, long-term portion....... $  15,574
                                                         ==========

The lease commitments in the above table designated as "Leases in the Restructuring" include only the non-cancelable portion of lease commitments included in the Restructuring and, accordingly, have not been reduced by estimated sublease income. However, as required by EITF 88-10, the Company has reduced these lease commitments by estimated sublease income of $159,100,000 in determining the total Restructuring obligations of $154,548,000 recorded in the accompanying balance sheet as of December 31, 2002. Please refer to Note 2 for a further discussion of the Restructuring and the components of the related obligations.

6. Preferred Stock and Stockholders' Equity

Exchangeable Shares and Series A1 Preferred Stock

In connection with the acquisition of Janna Systems Inc. ("Janna") in November 2000, the Company issued certain Janna stockholders that were resident in Canada newly issued exchangeable shares (the "Exchangeable Shares") of a Canadian subsidiary of the Company that are currently exchangeable for the Company's common stock. Until November 30, 2005 (or earlier under certain circumstances), the Exchangeable Shares are exchangeable for the Company's common stock on a one-for-one basis at any time at the option of the holder. On November 30, 2005, any remaining outstanding Exchangeable Shares must convert on a one-for-one basis into the Company's common stock.

In connection with the acquisition of Janna, the Company issued one share of Series A1 Preferred Stock to Montreal Trust Company of Canada (the "Trustee"), as trustee on behalf of the holders of the Exchangeable Shares. The Series A1 Preferred Stock gives the holders of Exchangeable Shares the ability to vote on the same basis as the holders of the Company's common stock. The Trustee, as the holder of the Series A1 Preferred Stock, is entitled to a number of votes equal to the number of Exchangeable Shares outstanding.

Convertible Preferred Stock

During the year ended December 31, 2000, OnLink Technologies, Inc. ("OnLink") issued 697,000 shares of its Series C preferred stock for net proceeds of $19,975,000, resulting in an aggregate of 3,516,000 shares of its Series A, B and C convertible preferred stock outstanding. In connection with the Company's acquisition of OnLink, the holders of the preferred stock converted their shares pursuant to their existing terms on a one-for-one basis into shares of OnLink's common stock on October 2, 2000.

Mandatorily Redeemable Convertible Preferred Stock

Prior to the Company's acquisition of OpenSite Technologies, Inc. ("OpenSite"), OpenSite had issued an aggregate of 5,324,000 shares of its mandatorily redeemable convertible preferred stock (the "Redeemable Preferred Stock"), net of repurchases, in private placement transactions. In connection with the Company's acquisition of OpenSite, the holders of the Redeemable Preferred Stock converted their shares pursuant to their existing terms on a one-for-one basis into shares of OpenSite's common stock on May 17, 2000. Prior to the conversion of the Redeemable Preferred Stock, the holders of such stock had certain preferences over the holders of OpenSite's common stock, including liquidation preferences, dividend rights and redemption rights. In addition, the holders of the Redeemable Preferred Stock could require OpenSite to repurchase the Redeemable Preferred Stock at the then-current fair value of OpenSite's common stock, subject to certain restrictions. Accordingly, the Company recorded non-cash charges to stockholders' equity of $98,755,000 during the year ended December 31, 2000, to reflect the Redeemable Preferred Stock at its then-current redemption value. This charge to equity has been deducted from the Company's net income in calculating both basic and diluted earnings per share. As a result of the conversion of the Redeemable Preferred Stock, the Company stopped recording the accretion on the Preferred Stock on May 17, 2000.

Warrants for Common Stock

In May 2000, OnLink issued approximately 109,200 warrants for shares of common stock in connection with license agreements entered into with a customer. The warrants had an exercise price of $21.52 per share and were fully vested and exercisable at the time of issuance. OnLink recorded the fair value of these warrants of $1,176,000 at the time of issuance based on the Black-Scholes valuation model, using a risk-free interest rate of 4.85%, a contract life of three years and a volatility factor of 71.0%. The value of these warrants was amortized as a reduction to revenues over the term of the contract, which ended in 2001.

Stock Issued for Services

During 2000, prior to its acquisition by the Company, OpenSite issued 34,690 shares of common stock valued at $1,921,000 to settle a management fee. The shares were issued in accordance with the terms of the related agreement.

7. Stock Options

Overview of the Company's Employee Stock Option and Purchase Plans

The 1996 Equity Incentive Plan, which amended and restated the Company's 1994 Stock Option Plan, the 1996 Supplemental Stock Option Plan and the 1998 Equity Incentive Plan (collectively, the "Plans"), provide for the issuance of up to an aggregate of 460,000,000 shares of common stock to employees, directors and consultants. The Plans provide for the issuance of incentive and non-statutory stock options, restricted stock purchase awards, stock bonuses and stock appreciation rights.

Under the Plans, the exercise price for incentive stock options must be at least 100% of the fair market value on the date of the grant. Stock options granted under the Plans generally expire in six to ten years; however, incentive stock options granted to an optionee who owns common stock representing more than 10% of the voting power of all classes of the Company's common stock expire in five years. Vesting periods are determined by the Board of Directors and generally provide for shares to vest ratably over five years.

The Company has assumed certain stock options granted to former employees of acquired companies (the "Acquired Options"). The Acquired Options were assumed by the Company outside of the Plans, but all are administered as if issued under the Plans. All of the Acquired Options have been adjusted to give effect to the conversion under the terms of the agreements between the Company and the companies acquired. The Acquired Options generally become exercisable over a four-year period and expire ten years from the date of grant. No additional stock options will be granted under any of the acquired companies' plans.

The Plans and certain acquired companies' plans allow for the exercise of unvested stock options and the issuance of restricted stock. Shares of common stock issued to employees upon exercise of unvested stock options or grants of restricted stock are subject to repurchase by the Company at the lower of the original purchase price of the restricted stock or the fair value of the Company's common stock on the date of repurchase. The Company's ability to repurchase these shares expires at a rate equivalent to the vesting schedule of each stock option or share of restricted stock.

Option Repurchase

On August 29, 2002, the Company commenced an offer (the "Option Repurchase") to its employees to repurchase stock options with exercise prices equal to or greater than $40.00 per share ("Eligible Options"). Stock options to purchase an aggregate of 31,950,000 shares were eligible for tender at the commencement of the Option Repurchase, representing approximately 14% of the Company's outstanding stock options as of the commencement date. Members of the Company's Board of Directors were excluded from the Option Repurchase and, accordingly two individuals, the Company's Chairman and CEO and its Vice Chairman, Co-Founder and Vice President, Strategic Planning did not participate. The Company also excluded employees on a leave of absence (other than for medical, maternity, military, workers' compensation or other statutorily protected reasons) and employees who submitted a letter of resignation or received notice of termination prior to the termination of the offer period.

Eligible employees who participated in the Option Repurchase received, in exchange for the repurchase of tendered stock options, a fixed amount of consideration equal to the number of common shares underlying such tendered stock options, multiplied by $1.85. In accordance with terms of the Option Repurchase, employees who were due total consideration of $5,000 or less received the consideration (less applicable tax withholdings) in cash, and employees who were due more than $5,000 received the consideration (less applicable tax withholdings) in fully vested, non-forfeitable shares of the Company's common stock. The Company concluded that the consideration paid for the Eligible Options represented "substantial consideration" as required by Issue 39(f) of EITF Issue No. 00-23 "Issues Relating to Accounting for Stock Compensation Under APB Opinion No. 25 and FASB Interpretation No. 44," as the $1.85 per Eligible Option was at least the fair value for each Eligible Option, as determined using the Black-Scholes option-pricing model. In determining the fair value of the Eligible Options using the Black-Scholes option-pricing model, the Company used the following assumptions: (i) the expected remaining life was deemed to be the remaining term of the options, which ranged from approximately seven years to eight years; (ii) a volatility of 45.0% during the expected life; (iii) a risk-free interest rate of 4.0%; and (iv) no dividends. The repurchase amount of $1.85 offered by the Company for each Eligible Option was established at the commencement of the offer period and remained unchanged throughout the offer period.

Because substantial consideration was provided in exchange for repurchase of Eligible Options, as described in Issue 39(f) of EITF Issue No. 00-23, the Company concluded that variable accounting would not be required for stock options granted to participants more than six months prior to the date of the offer. Further, variable accounting is not required under Issue 39(a) of EITF Issue No. 00-23 for Eligible Options subject to the offer that were not surrendered for repurchase, because: (i) the shares of common stock offered were fully vested and non-forfeitable; and (ii) the number of common shares to be received by an employee who accepts the offer is based on the number of surrendered stock options multiplied by $1.85, divided by the fair value of the common stock at the date of repurchase. The Company further concluded that the "look back" and "look forward" provisions of FASB Interpretation No. 44, paragraph 45 apply to the stock options surrendered for repurchase. Because the Company had granted no stock options to the holders of the Eligible Options in the six months preceding the commencement of the tender offer period, variable accounting is not required for any of the Company's outstanding stock options not subject to the Option Repurchase. The Company does not intend to grant stock options to any participants in the Option Repurchase for at least six months following the conclusion of the tender offer period. If any stock options are granted to participants in the Option Repurchase within the six months following the end of the tender offer period, those stock options will receive variable accounting.

On September 30, 2002, the offer period ended and the Company repurchased 28,057,000 Eligible Options for total consideration of $51,905,000, consisting of $31,471,000 of fully vested, non-forfeitable shares of the Company's common stock (5,473,000 shares) and $20,434,000 in cash. The number of fully vested, non-forfeitable shares of the Company's common stock issued was determined by dividing the total consideration due (less the amount of applicable tax withholdings) by the closing price of the Company's common stock on September 30, 2002, of $5.75 per share. The Company recorded a compensation charge of $54,879,000 related to the Option Repurchase, consisting of $51,905,000 related to the consideration paid and $2,974,000 of associated employer payroll taxes and other costs. The Company has allocated this expense to the respective categories within the accompanying consolidated statement of operations based on the individual employee's functional responsibility.

While the shares of common stock issued under the Option Repurchase are fully vested and non-forfeitable, a total of 4,114,000 shares of common stock are subject to a "holding period" of one to four years, depending on the number of Eligible Options available to be tendered. Holders of these 4,114,000 fully vested, non-forfeitable shares issued in the Option Repurchase are prohibited from selling, transferring, making a short sale, granting any option to purchase or entering into any hedging transaction with the same economic effect as the sale of such shares during the holding period. Accordingly, 1,947,000, 1,947,000, 142,000 and 78,000 fully vested, non-forfeitable shares of the Company's common stock will be released from the holding period on October 1, 2003, 2004, 2005 and 2006, respectively. The remaining 1,359,000 shares of common stock issued in the Option Repurchase were freely tradable at issuance.

CEO Option Cancellation

From October 29, 1998 through October 24, 2001, the Company's Chief Executive Officer (the "CEO") was granted 25,950,000 stock options with exercise prices ranging from $4.91 to $59.81 per share. The CEO has received no stock option grants since October 24, 2001, nor has the CEO received any bonus since the first quarter of 2001. In addition, at the request of the Company's CEO, his salary was reduced to one dollar per year in the first quarter of 2001. In June 2002, the Company's CEO notified the Board of Directors of his intent to cancel certain of his outstanding stock options in order to further reduce net dilution from stock options to the Company's stockholders. On December 11, 2002, the Company's Compensation and Audit Committees of the Board of Directors approved the cancellation of these 25,950,000 stock options. In January 2003, the 25,950,000 stock options were cancelled and are no longer outstanding.

The stock options cancelled had a weighted average exercise price of $34.63, with exercise prices ranging from $4.91 to $59.81 per share, and represented all stock options granted to the Company's CEO subsequent to October 29, 1998. The stock options cancelled had a fair value of $56,100,000, as determined by the Black-Scholes option-pricing model. In determining the fair value of these stock options, the Company used the following weighted-average assumptions: (i) an expected remaining life of six years; (ii) a volatility of 50.0% during the expected life; (iii) a risk-free interest rate of 3.4%; and (iv) no dividends. The approach used to develop these weighted-average assumptions is the same as discussed below in the Section "Stock-Based Compensation." Differences between average useful life and volatility assumptions for these stock options, as compared to assumptions disclosed elsewhere herein, primary relate to differences in the characteristics of the stock options being valued (primarily differences in the average exercise price of the related stock options).

The Company provided no compensation in exchange for the cancellation of the CEO's stock options, and no additional stock options will be granted to the CEO for a period of at least six months following the cancellation, nor will the CEO receive any salary, other than the one dollar per year currently being paid, or bonus for a period of at least six months following the cancellation.

As a result of the cancellation of the Company's CEO's options in January 2003, the Company must accelerate the amortization of the remaining deferred compensation related to the cancelled stock options in accordance with SFAS 123. Accordingly, the Company's SFAS 123 earnings disclosure in the notes to the consolidated financial statements for the year ended December 31, 2003, will include a footnote disclosure charge of approximately $250,000,000 related to the acceleration of deferred compensation for the unvested portion of the cancelled options (approximately 42% of the options were not vested at cancellation). This amount will be in addition to the SFAS 123 expense related to all of the Company's other stock options.

However, as the result of the cancellation of the CEO's options, the notes to the Company's annual consolidated financial statements for future periods will no longer reflect SFAS 123 amortization of compensation expense related to the cancelled stock options. Specifically, the SFAS 123 compensation expense for the years ended December 31, 2003, 2004 and 2005, will be reduced by approximately $100,000,000, $95,000,000 and $55,000,000, respectively.

Stock Options Outstanding

Combined plan activity for the years ended December 31, 2000, 2001 and 2002, is summarized as follows:

                                                                 Shares                    Wtd. Avg.
                                                               Available    Number of      Exercise
                                                               for Grant      Shares    Price per Share
                                                              ------------ ------------ --------------- 
   Balances, December 31, 1999............................... 119,860,363  173,544,982   $        7.61
     Additional shares authorized............................  43,600,971           --
     Options granted to employees............................ (35,444,515)  35,444,515   $       62.09
     Options granted to officers and directors............... (11,320,000)  11,320,000   $       55.49
     Options exercised.......................................          --  (29,497,843)  $        4.98
     Options forfeited/canceled upon termination.............  15,028,952  (15,028,952)  $       13.87
                                                              ------------ ------------ ---------------
   Balances, December 31, 2000............................... 131,725,771  175,782,702   $       21.59
     Additional shares authorized............................  77,998,826           --
     Options granted to employees............................ (94,402,370)  94,402,370   $       25.40
     Options granted to officers and directors............... (16,434,000)  16,434,000   $       31.05
     Options exercised.......................................          --  (20,597,487)  $        5.25
     Options forfeited/canceled upon termination.............  18,290,320  (18,817,823)  $       36.90
                                                              ------------ ------------ ---------------
   Balances, December 31, 2001............................... 117,178,547  247,203,762   $       23.81
     Issuance of restricted stock............................    (200,000)          --
     Options granted to employees............................  (5,667,300)   5,667,300   $       20.62
     Options granted to officers and directors...............    (220,000)     220,000   $        6.20
     Options exercised.......................................          --  (10,650,943)  $        5.97
     Options forfeited/canceled upon termination.............  28,012,567  (28,910,626)  $       32.84
     Options repurchased.....................................  22,203,279  (28,056,712)  $       62.81
                                                              ------------ ------------ ---------------
   Balances, December 31, 2002............................... 161,307,093  185,472,781   $       17.42
                                                              ============ ============   =============

The following table summarizes information about the Company's stock options outstanding as of December 31, 2002:

                                     Options Outstanding                   Options Exercisable
                         ---------------------------------------------  --------------------------
                                           Wtd. Avg.       Wtd. Avg.                    Wtd. Avg.
        Range of            Number         Remaining        Exercise       Number       Exercise
      Exercise Prices      of Shares     Life (Years)        Price       of Shares        Price
- ------------------------ -------------   -------------  --------------  ------------ -------------
       $0.01  -    7.39    63,968,804             4.6    $       3.58    52,374,819   $      3.45
       $7.40  -   15.00    16,641,120             6.4    $       9.99     9,623,037   $     10.03
      $15.01  -   25.00    69,401,171             8.4    $      18.86    24,187,222   $     20.62
      $25.01  -   40.00    15,476,003             7.9    $      33.24     5,103,604   $     33.84
      $40.01  -   60.00    18,434,198             7.4    $      48.64     8,443,562   $     47.00
      $60.01  -   80.00     1,329,910             7.1    $      71.37       277,414   $     69.02
      $80.01  -  109.05       221,575             5.4    $      93.61       108,602   $     91.81
- ------------------------ -------------   -------------  --------------  ------------ -------------
       $0.01  -  109.05   185,472,781             6.8    $      17.42   100,118,260   $     13.73
                         =============                                  ============

As of December 31, 2000 and 2001, the Company had 55,301,000 and 72,889,000 exercisable stock options outstanding, respectively, with weighted average exercise prices of $5.94 and $15.23 per share, respectively.

The above tables do not reflect the cancellation of 25,950,000 of the Company's CEO's stock options in January 2003. The stock options cancelled had a weighted average exercise price of $34.63 per share and ranged from $4.91 to $59.81 per share. As discussed above, the Company did not and will not provide any consideration to its CEO in exchange for the cancellation of these options.

Restricted Stock

During the year ended December 31, 2002, the Company issued a total of 200,000 shares of restricted stock to certain of its employees for nominal consideration. The Company has recorded deferred compensation of $1,447,000 related to this issuance of restricted stock, which will be expensed on a straight-line basis over the five-year vesting period. The Company may repurchase any unvested shares of the restricted stock at the lower of (i) the original purchase price of the restricted stock; or (ii) the fair value of the Company's common stock. The Company's right to repurchase the shares lapses over the vesting period of the restricted stock. The Company has not issued any other restricted stock purchase awards, stock bonuses or stock appreciation rights.

As of December 31, 2001 and December 31, 2002, the Company had a total of 271,000 and 255,000 shares, respectively, of its common stock outstanding that were subject to repurchase by the Company as a result of the early exercise of stock options or issuance of restricted stock. No compensation expense has resulted at the time of the repurchases of the Company's restricted shares since the consideration paid by the Company equaled the lower of: (i) the original purchase price of the restricted stock; or (ii) the fair value of the Company's common stock.

Employee Stock Purchase Plan

In May 1996, the Company adopted the 1996 Employee Stock Purchase Plan (the "Purchase Plan") and reserved 5,600,000 shares for issuance thereunder. The Purchase Plan became effective upon the completion of the Company's initial public offering. In January 1997, the Board of Directors of the Company adopted an amendment to the Purchase Plan to increase the number of shares authorized for issuance under the Purchase Plan to 13,600,000 shares. The Purchase Plan permits eligible employees to purchase common stock, through payroll deductions of up to 15% of the employee's compensation, at a price equal to 85% of the fair market value of the common stock at either the beginning or the end of each offering period, whichever is lower. For the years ended December 31, 2000, 2001 and 2002, the Company issued 885,000, 1,470,000 and 3,109,000 shares, respectively, under the Purchase Plan with weighted average prices of $45.30, $32.85 and $9.45 per share, respectively. As of December 31, 2002, there were 929,000 shares available for future issuance under the Purchase Plan.

8. Net Income (Loss) per Share

The following is a reconciliation of the number of shares used in the basic and diluted net income (loss) per share computations for the periods presented (in thousands):

                                                                                         Year Ended December 31,
                                                                                    ----------------------------------
                                                                                      2000        2001        2002
                                                                                    ---------  ----------  -----------  
Shares used in basic net income (loss) per share computation......................   423,067     457,031      475,617
Effect of dilutive potential common shares resulting from
   stock options and common stock warrants........................................    95,886      65,690           --
Effect of dilutive potential common shares resulting from
   common stock subject to repurchase.............................................       829         249           --
Effect of dilutive convertible preferred stock....................................     2,539          --           --
                                                                                    ---------  ----------  -----------
Shares used in diluted net income (loss) per share computation....................   522,321     522,970      475,617
                                                                                    =========  ==========  ===========

Shares used in the diluted net income (loss) per share computation in the above table include the dilutive impact of the Company's stock options. The impact of the Company's stock options on shares used for the diluted earnings per share computation is calculated based on the average share price of the Company's common stock for each period using the treasury stock method. Under the treasury stock method, the tax-effected proceeds that would be hypothetically received from the exercise of all stock options with exercise prices below the average share price of the Company's common stock are assumed to be used to repurchase shares of the Company's common stock. The dilutive impact of the Company's stock options was calculated using an average price of the Company's common stock of $75.74 and $36.52 per share for the years ended December 31, 2000 and 2001, respectively. Because the Company reported a net loss during the year ended December 31, 2002, the Company excluded the impact of all stock options in the computation of dilutive earnings per share, as their effect would be anti-dilutive.

The Company excludes all potentially dilutive securities from its diluted net income (loss) per share computation when their effect would be anti-dilutive. The following common stock equivalents were excluded from the earnings per share computation, as their inclusion would have been anti-dilutive (in thousands):

                                                                                         Year Ended December 31,
                                                                                    ----------------------------------
                                                                                      2000        2001        2002
                                                                                    ---------  ----------  -----------  
Stock options excluded due to the exercise price exceeding the average
  fair value of the Company's common stock during the period......................    11,599      59,504       99,537
Weighted average stock options and restricted stock, calculated using
  the treasury stock method, that were excluded due to the Company
  reporting a net loss during the period..........................................        --          --       40,397
Weighted average shares issuable upon conversion of the convertible
  subordinated debentures.........................................................    12,867      12,867       12,867
Weighted average shares issuable upon conversion of the mandatorily
  redeemable convertible preferred stock..........................................     2,012          --           --
                                                                                    ---------  ----------  -----------
Total common stock equivalents excluded from diluted net income
  (loss) per share computation....................................................    26,478      72,371      152,801
                                                                                    =========  ==========  ===========

Under the treasury stock method, stock options with the exercise prices exceeding the average fair value of the Company's common stock during the period are excluded from the diluted earnings per share computation. These stock options had weighted average exercise prices of $89.82, $58.05 and $27.63 per share, respectively. In addition, as discussed above, stock options with exercise prices equal to or below the average fair value of the Company's common stock of $17.70 per share during 2002 were excluded from the diluted earnings per share computation because the Company reported a net loss during 2002.

9. Income Taxes

Income (loss) before tax expense (benefit) includes income from foreign operations of approximately $24,040,000, $145,469,000 and $26,113,000 for the years ended December 31, 2000, 2001 and 2002, respectively. The components of income tax expense (benefit) for the years ended December 31, 2000, 2001 and 2002, are as follows (in thousands):

                                                           December 31,
                                                 --------------------------------
                                                    2000       2001       2002
                                                 ---------- ---------- ----------
 Current:
   Federal...................................... $   9,168  $  48,626  $   9,322
   State........................................     5,384     19,047      1,772
   Foreign......................................    24,405     39,672     19,254
                                                 ---------- ---------- ----------
     Total current..............................    38,957    107,345     30,348
 Deferred:
   Federal......................................   (50,734)    13,493    (32,757)
   State........................................   (13,571)   (20,602)   (12,705)
   Foreign......................................     2,246     (4,527)    (4,969)
                                                 ---------- ---------- ----------
     Total deferred.............................   (62,059)   (11,636)   (50,431)

 Charge in lieu of taxes attributable
   to employer's stock option plans.............   185,613     53,800         --
                                                 ---------- ---------- ----------
     Total income tax expense (benefit)......... $ 162,511  $ 149,509  $ (20,083)
                                                 ========== ========== ==========

The differences between the income tax expense (benefit) computed at the federal statutory rate of 35% and the Company's actual income tax expense (benefit) for the years ended December 31, 2000, 2001 and 2002, are as follows:

                                                                        December 31,
                                                             --------------------------------
                                                                2000       2001       2002
                                                             ---------- ---------- ----------
  Expected income tax expense (benefit)....................      35.0 %     35.0 %    (35.0)%
  State income taxes (benefit), net of federal tax benefit.       4.7 %      4.4 %    (11.9)%
  Research and development credit..........................      (1.0)%     (1.3)%     (3.7)%
  Deferred compensation....................................       0.9 %      0.4 %      2.1 %
  Meals and entertainment..................................       0.7 %      0.5 %      3.5 %
  Foreign rate differential................................      (2.3)%     (3.0)%      7.4 %
  Other, net...............................................       4.3 %      1.0 %      1.6 %
                                                             ---------- ---------- ----------
    Total income taxes.....................................      42.3 %     37.0 %    (36.0)%
                                                             ========== ========== ==========

The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities as of December 31, 2001 and 2002, are as follows (in thousands):

                                                                December 31,
                                                            ---------------------
                                                               2001       2002
                                                            ---------- ----------
 Deferred tax assets:
   Allowance for doubtful accounts and returns............. $  15,747  $  13,823
   Accruals and reserves, not currently deducted
     for tax purposes......................................    11,179     66,444
   Credits and charitable contribution carryforwards.......    86,433    112,483
   Net operating loss carryforward.........................   506,781    555,035
   Depreciation and amortization...........................    52,725     44,521
   Other...................................................    13,231     12,219
                                                            ---------- ----------
     Deferred tax assets...................................   686,096    804,525
                                                            ---------- ----------
 Deferred tax liabilities:
   Unrealized gain on investments..........................    (4,692)    (4,470)
                                                            ---------- ----------
     Deferred tax liabilities..............................    (4,692)    (4,470)
                                                            ---------- ----------
 Valuation allowance.......................................  (570,548)  (660,826)
                                                            ---------- ----------

       Net deferred tax assets............................. $ 110,856  $ 139,229
                                                            ========== ==========

Deferred tax assets of approximately $661,000,000 at December 31, 2002, pertain to certain tax credits and net operating loss carryforwards resulting from the exercise of employee stock options. The Company has provided a valuation allowance on these deferred tax assets. The valuation allowance on these deferred tax assets will be reduced in the period in which the Company realizes a benefit on its tax return from a reduction of income taxes payable stemming from the utilization of these credits and losses. When realized, the tax benefit of these credits and losses will be accounted for as a credit to stockholders' equity rather than as a reduction of income tax expense.

As of December 31, 2002, the Company had federal and state net operating loss carryforwards of approximately $1,446,200,000 and $966,200,000, respectively, available to offset future taxable income. In addition, the Company had federal and state research and development credit carryforwards of $44,884,000 and $41,422,000, respectively, available to offset future tax liabilities. The Company's federal net operating loss ("NOL") carryforwards will begin to expire in 2011, if not utilized. The Company's state NOL carryforwards will begin to expire in 2004, if not utilized. The Company's federal research and development credit carryforward will begin to expire in 2011, if not utilized. The state research and development credit can be carried forward indefinitely.

The Company's U.S. Federal income tax returns and payroll tax returns for 1998, 1999 and 2000 are currently under examination by the Internal Revenue Service ("IRS"). To date, the IRS has not proposed any material adjustments to or assessments related to these returns. Should the IRS propose adjustments to the Company's U.S. Federal income tax returns as a result of its examination, the Company believes that it has made adequate provision in the financial statements for such adjustments, if any. The Company has not made any provision for potential assessments by the IRS related to its payroll tax returns in the accompanying financial statements, as the amount, if any, which the Company may have to pay is not currently estimable.

The Company provides United States income taxes on the earnings of foreign subsidiaries unless the subsidiaries' earnings are considered permanently reinvested outside the United States. As of December 31, 2002, the Company has unrecognized deferred tax liabilities of approximately $65,000,000 related to approximately $183,000,000 of cumulative net undistributed earnings of foreign subsidiaries. These earnings are considered permanently invested in operations outside the United States.

10. Related Party Transactions

A member of the Company's Board of Directors serves as an officer for one of the Company's customers. During the years ended December 31, 2001 and 2002, software license revenues from this customer totaled $707,000 and $1,531,000, respectively. There were not any significant related party transactions during the year ended December 31, 2000.

11. Segment and Geographic Information

The Company and its subsidiaries are principally engaged in the design, development, marketing and support of Siebel eBusiness Applications, its family of industry-specific eBusiness software applications. Substantially all revenues result from the license of the Company's software products and related professional services and customer support (maintenance) services. The Company's chief operating decision-maker (i.e., chief executive officer) reviews financial information presented on a consolidated basis, accompanied by disaggregated information about revenues by geographic region for purposes of making operating decisions and assessing financial performance. Accordingly, the Company considers itself to be in a single reporting segment, specifically the license, implementation and support of its software. The Company does not prepare reports for, or measure the performance of, its individual software applications and, accordingly, the Company has not presented revenues or any other related financial information by individual software product.

The Company evaluates the performance of its geographic regions based on revenues and gross margin only. The Company does not assess the performance of its geographic regions on other measures of income or expense, such as depreciation and amortization, operating income or net income. In addition, the Company's assets are primarily located in its corporate office in the United States and not allocated to any specific region. The Company does not produce reports for, or measure the performance of, its geographic regions on any asset-based metrics. Therefore, geographic information is presented only for revenues and gross margin.

Total international revenues for the years ended December 31, 2000, 2001 and 2002 were $648,547,000, $838,143,000 and $619,198,000, respectively. International software license revenues for the years ended December 31, 2000, 2001 and 2002, were $441,717,000, $479,335,000 and $290,799,000, respectively. The Company's international software license revenues are principally in Europe and Asia Pacific. The following geographic information is presented for the years ended December 31, 2000, 2001 and 2002 (in thousands):

                            United                Asia    Canada and
                  Year      States     Europe   Pacific  Latin America     Totals
                 ------- ----------- --------- --------- -------------  -----------
   Revenues:       2000  $1,171,659  $466,405  $ 96,043  $     86,099   $1,820,206
                   2001   1,246,453   626,567   120,951        90,625    2,084,596
                   2002   1,016,109   459,985    89,429        69,784    1,635,307

   Gross margin:   2000  $  828,630  $371,515  $ 75,381  $     63,595   $1,339,121
                   2001     823,164   478,082    87,610        54,715    1,443,571
                   2002     648,937   322,083    56,884        45,597    1,073,501

No single customer has accounted for 10% or more of total revenues in 2000, 2001 or 2002.

12. Business Combinations

The Company did not complete any business combinations accounted for as pooling-of-interests during the years ended December 31, 2001 and 2002. During the year ended December 31, 2000, the Company completed the following transactions, each of which has been accounted for as a pooling-of-interests:

Janna Systems Inc.

On November 15, 2000, the Company acquired Janna Systems Inc. ("Janna"), a leading provider of eBusiness solutions for the financial services industry. Under the terms of the agreement, each outstanding Janna common share was exchanged for 0.4970 newly issued shares of the Company's common stock or, at the election of Janna stockholders resident in Canada, 0.4970 of newly issued exchangeable shares (the "Exchangeable Shares") of a Canadian subsidiary of the Company that are currently exchangeable for the Company's common stock. This resulted in the issuance of 9,385,000 shares of the Company's common stock to the former Janna stockholders (which number assumes that all of the Exchangeable Shares have been exchanged for the Company's common stock). In addition, all outstanding stock options of Janna were converted into the right to acquire the Company's common stock at the same exchange ratio with a corresponding adjustment to the exercise price. All share data in the Company's consolidated financial statements reflects the Exchangeable Shares as having been exchanged for shares of the Company's common stock as of the earliest date presented.

OnLink Technologies, Inc.

On October 2, 2000, the Company acquired OnLink, a provider of eCommerce software. Under the terms of the agreement, each outstanding share of OnLink common stock was exchanged for 0.3308 newly issued shares of common stock of the Company. This resulted in the issuance of 7,400,000 additional shares of the Company's common stock. In addition, all outstanding stock options of OnLink were converted into the right to acquire the Company's common stock at the same exchange ratio with a corresponding adjustment to the exercise price.

OpenSite Technologies, Inc.

On May 17, 2000, the Company acquired OpenSite, a provider of dynamic commerce software. Under the terms of the agreement, each outstanding share of OpenSite common stock was exchanged for 0.2630 newly issued shares of common stock of the Company. This resulted in the issuance of 7,400,000 additional shares of the Company's common stock. In addition, all outstanding stock options of OpenSite were converted into the right to acquire the Company's common stock at the same exchange ratio with a corresponding adjustment to the exercise price.

In connection with the Company's acquisitions of Janna, OnLink and OpenSite, the Company expensed approximately $36,504,000 of direct merger-related expenses. These costs consisted of investment banker fees; compensation expense associated with the acceleration of stock options in accordance with their existing terms; integration charges related to duplicate facilities and equipment; legal, accounting and other professional fees; and other miscellaneous expenses. As of December 31, 2002, the Company had settled substantially all of these merger-related costs.

Each of the above transactions was accounted for as a pooling-of-interests and, accordingly, the financial position, results of operations and cash flows of each of the above companies have been combined with those of the Company for the same dates and periods as if the entities had been combined from the earliest date presented. The following table presents the results of operations of each of the separate companies prior to their acquisition and the combined amounts for the period subsequent to acquisition during the year ended December 31, 2000, as presented in the accompanying consolidated financial statements of the Company (in thousands):

 Total revenues:                                         
   Siebel................................... $ 1,780,205
   OpenSite.................................       3,709
   OnLink...................................       8,183
   Janna....................................      28,109
                                             ------------
                                             $ 1,820,206
                                             ============

 Net income (loss):                                      
   Siebel................................... $   243,051
   OpenSite.................................      (6,310)
   OnLink...................................     (13,450)
   Janna....................................      (1,392)
                                             ------------
                                             $   221,899
                                             ============

There were no adjustments to conform accounting methods or to eliminate intercompany transactions.

13. Acquisitions

During the three years in the period ended December 31, 2002, the Company completed the following transactions, each of which has been accounted for as a purchase:

nQuire Software, Inc.

On November 19, 2001, the Company acquired all of the outstanding securities of nQuire Software, Inc. ("nQuire"), a provider of Internet-based business analytics software. The Company acquired nQuire in order to capitalize on the expertise of the nQuire management team in the analytics market and their ability to develop new products using the Company's existing technology and technology acquired in the acquisition.

The Company acquired nQuire for consideration of $59,722,000, consisting of 2,259,810 shares of the Company's common stock valued at $58,416,000 and stock options to existing employees of nQuire to purchase 56,108 shares of its common stock valued at $1,306,000. The number of shares to be issued was not determined until November 19, 2001, and, accordingly, the common stock was valued based on the closing market price of the Company's common stock on that date. The Company valued the stock options issued to the employees of nQuire based on the Black-Scholes valuation model, using a risk-free interest rate of 5.0%, the expected remaining life of the option and a volatility factor of 90.0%. The purchase price was allocated to tangible net assets, including net deferred tax assets of $5,318,000, other current assets of $1,258,000, property and equipment of $105,000, assumed current liabilities of $2,872,000 and deferred compensation related to unvested stock options and restricted common stock of $1,397,000. Based in part on an independent valuation study of nQuire, the Company determined that there was no purchased in-process research and development and that the only identifiable intangible asset not subsumed into goodwill (i.e., assembled workforce) was "acquired technology" valued at $7,500,000. The acquired technology is currently being amortized over its useful life of three years using the straight-line method. The excess of the purchase price over the fair value of the identifiable tangible and intangible net assets acquired of $47,016,000 was recorded as goodwill. This amount is not deductible for tax purposes.

As a result of nQuire meeting certain revenue and product delivery targets during 2001 and 2002, as defined in the merger agreement, the Company issued an additional 262,000 shares valued at $6,231,000 during 2002. The Company recorded $6,004,000 of this additional consideration as goodwill and $227,000 as compensation expense. As a result of nQuire meeting certain revenue targets for the year ended December 31, 2002, as defined in the merger agreement, the Company issued an additional 207,000 shares valued at $1,670,000 in February 2003. The Company recorded $1,608,000 of this additional consideration as goodwill and the remaining $62,000 as compensation expense. In the event that nQuire meets certain post-closing revenue and product delivery targets for the year ended December 31, 2003, as defined in the merger agreement, the Company could issue the shareholders of nQuire an additional 525,000 shares of the Company's common stock (the "nQuire Earnout"). The ultimate value of the nQuire Earnout depends upon the market value of the Company's common stock when paid. The Company will record approximately 96.0% of the nQuire Earnout, if paid, as goodwill and the remaining 4.0% of the nQuire Earnout, if paid, as compensation expense. The Company will record the compensation portion of the payments when the Company determines that it is probable that the Company will be obligated to pay such amounts, and the goodwill portion will be recorded when actually paid.

Sales.com, Inc.

In December 1999, the Company sold a controlling interest in the voting equity of Sales.com, Inc. ("Sales.com") to various outside investors. As a result of the sale of the controlling interest in Sales.com, the Company accounted for the investment in Sales.com using the equity method during the year ended December 31, 2000. As a result of recording the Company's portion of Sales.com's losses, the carrying value of the Company's investment in Sales.com had been reduced to zero as of December 31, 2000.

On January 12, 2001, the Company reacquired all of the outstanding securities of Sales.com for total consideration of $28,235,000, consisting of the issuance of 373,618 shares of the Company's common stock valued at $26,900,000 and the issuance of stock options to purchase 49,895 shares of its common stock to existing employees of Sales.com valued at $1,335,000. The Company valued the stock options issued to the employees of Sales.com based on the Black-Scholes valuation model, using a risk-free interest rate of 5.0%, the expected remaining life of the option and a volatility factor of 77.0%. The purchase price was allocated to tangible net assets, including cash of $11,550,000, other current assets of $1,178,000, property and equipment of $385,000 and assumed current liabilities of $888,000. The excess of the purchase price over the fair value of the tangible net assets acquired of $16,010,000 was allocated to acquired technology. This amount is currently being amortized over three years using the straight-line method.

Wind S.r.l.

On September 27, 2000 (the "Initial Purchase"), and September 28, 2001 (the "Final Purchase"), the Company acquired 81% and 19%, respectively, of the outstanding shares of Wind S.r.l. ("Wind") for net cash consideration of $3,257,000 and $928,500, respectively. The Initial Purchase price was allocated to tangible net assets, including current assets of $654,000, assumed current liabilities of $430,000 and property and equipment of $103,000. The excess of the Initial Purchase price over the fair value of the tangible net assets acquired of $2,930,000 and the Final Purchase price of $928,500 were both allocated to goodwill. Goodwill was amortized using a three-year life through January 1, 2002, at which time amortization ceased in accordance with SFAS 142. During the first quarters of 2001 and 2002, the Company paid additional consideration to Wind's stockholders of approximately $814,000 and $780,000, respectively, based on Wind meeting certain revenue targets, as defined in the merger agreement. The Company recorded this additional consideration as compensation expense.

MOHR Development, Inc.

On June 22, 2000, the Company acquired all of the outstanding securities of MOHR Development, Inc. ("MOHR") for net cash consideration of $7,905,000 and an obligation to pay an additional $3,000,000 (the "MOHR Obligation"). The Company paid the MOHR Obligation in two equal installments in January 2001 and 2002. The purchase price of $10,905,000 was allocated to tangible net assets, including current assets of $799,000, assumed current liabilities of $2,031,000 and property and equipment of $115,000. The excess of the purchase price over the fair value of the tangible net assets acquired of $12,022,000 was allocated to goodwill. Goodwill was amortized using a three-year life through January 1, 2002, at which time amortization ceased in accordance with SFAS 142.

As a result of meeting certain revenue targets, as defined in the merger agreement, the Company paid additional consideration of $1,372,000 to MOHR's stockholders in the first quarter of 2001, of which $310,000 was recorded as goodwill and $1,062,000 as compensation expense. In addition, the Company paid additional consideration of $500,000 to MOHR's stockholders in the first quarter of 2002 and is obligated to pay an additional $1,500,000 in 2003. The Company recorded the 2002 payment as goodwill and has accrued the 2003 obligation as compensation expense as of December 31, 2002. If certain individuals meet certain post-closing conditions, as defined in the merger agreement, the Company could pay additional cash consideration of $500,000 in 2003. The Company will record this additional consideration, if paid, as goodwill.

Paragren Technologies, Inc.

On January 14, 2000, the Company acquired all of the outstanding securities of Paragren Technologies, Inc. ("Paragren") for cash consideration of $18,050,000. The purchase price was allocated to tangible net assets, including current assets of $942,000, assumed current liabilities of $1,442,000 and property and equipment of $976,000. The excess of the purchase price over the fair value of the tangible net assets acquired of $17,574,000 was allocated to goodwill. As a result of meeting certain revenue targets, as defined in the merger agreement, the Company paid additional consideration of $1,756,000 to Paragren's stockholders during the first quarter of 2001. The Company recorded this additional consideration as goodwill. Goodwill was amortized using a three-year life through January 1, 2002, at which time amortization ceased in accordance with SFAS 142.

Each of the above transactions was accounted for by the purchase method of accounting and, accordingly, the operating results of each of the acquired companies have been included in the accompanying consolidated financial statements of the Company from the date of acquisition. Pro forma information giving effect to these acquisitions has not been presented since the pro forma information would not differ materially from the historical results of the Company.

Intangible assets acquired in connection with the above acquisitions consisted of the following (in thousands):

                                                               December 31,
                                                         -------------------------
                                                            2001          2002
                                                         ----------  -------------  
Acquired technology..................................... $  26,747   $     26,747
Less: accumulated amortization..........................     7,747         16,393
                                                         ----------  -------------
     Intangible assets, net............................. $  19,000   $     10,354
                                                         ==========  =============

As of December 31, 2002, future amortization expense related to the acquired technology is as follows (in thousands):

Year Ending December 31,
- -------------------------------                                    
2003.................................................... $   7,837
2004....................................................     2,517
                                                         ----------
     Total.............................................. $  10,354
                                                         ==========

The changes in the carrying amount of goodwill during the year ended December 31, 2002, were as follows:

Balance as of December 31, 2001......................... $  72,869
Earnout payments to the stockholders of
   acquired companies...................................     8,112
Foreign currency fluctuation............................       (32)
                                                         ----------
Balance as of December 31, 2002......................... $  80,949
                                                         ==========

Summarized below are the effects on net income (loss) and net income (loss) per share data, if the Company had followed the amortization provisions of SFAS 142 for the years ended December 31, 2000 and 2001 (in thousands, except per share amounts):

                                                                  December 31,
                                                       -----------------------------------
                                                           2000         2001       2002
                                                       ------------  ---------- ----------
Net income (loss) available to common stockholders:
   As reported........................................ $   123,144   $ 254,575  $ (35,704)
   Add: goodwill amortization, net of taxes...........       9,269      12,626         --
                                                       ------------  ---------- ----------
     Adjusted net income (loss)....................... $   132,413   $ 267,201  $ (35,704)
                                                       ============  ========== ==========

Diluted net income (loss) per share:
   As reported........................................ $      0.24   $    0.49  $   (0.08)
   Add: goodwill amortization, net of taxes...........        0.01        0.02         --
                                                       ------------  ---------- ----------
     Adjusted diluted net income (loss) per share..... $      0.25   $    0.51  $   (0.08)
                                                       ============  ========== ==========

Basic net income (loss) per share:
   As reported........................................ $      0.29   $    0.56  $   (0.08)
   Add: goodwill amortization, net of taxes...........        0.02        0.02         --
                                                       ------------  ---------- ----------
      Adjusted basic net income (loss) per share...... $      0.31   $    0.58  $   (0.08)
                                                       ============  ========== ==========

14. Subsequent Events

Stockholder Rights Plan

On January 23, 2003, the Company's Board of Directors approved the adoption of a Stockholder Rights Plan (the "Rights Plan") and the authorization of 100,000 shares of Series A2 junior participating preferred stock, par value $0.001 per share (the "Junior Preferred Stock"). The Rights Plan is intended as a means to guard against abusive takeover tactics and to provide for fair and equal treatment for all stockholders in the event that an unsolicited attempt is made to acquire the Company. Accordingly, the Rights Plan will have certain anti-takeover effects.

Under the terms of the Rights Plan, stockholders of record on February 13, 2003, received a dividend distribution of one preferred share purchase right (a "Right") for each outstanding share of the Company's common stock. The Rights trade with the Company's common stock and no separate Right certificates will be distributed until such time as the Rights become exercisable as described below. Each Right entitles the holder to purchase from the Company one ten-thousandth of a share of Junior Preferred Stock at a price of $70.00 per one ten-thousandth of a share (the "Purchase Price"), subject to adjustment. Each one ten-thousandth of a share of Junior Preferred Stock is designed to be the economic equivalent of one share of the Company's common stock. However, until a Right is exercised, the holder of the Right will have no rights as a stockholder of the Company, including without limitation, the right to vote or receive dividends.

The Rights are not exercisable until the earlier to occur of (i) the date of a public announcement that a person, entity or group of affiliated or associated persons have acquired beneficial ownership of 15% or more of the Company's outstanding common stock (an "Acquiring Person") except that Thomas M. Siebel, the Company's Chairman and CEO, and his affiliates may have greater beneficial ownership without becoming an "Acquiring Person"; or (ii) ten business days (or such later date as may be determined by action of the Board of Directors prior to such time as any person or entity becomes an Acquiring Person) following the commencement of, or announcement of an intention to commence, a tender offer or exchange offer, the consummation of which would result in any person or entity becoming an Acquiring Person (the earlier of such dates being called the "Distribution Date"). The Rights will expire on February 12, 2013 (the "Final Expiration Date"), unless the Rights are earlier redeemed or exchanged by the Company. The exercise of Rights for shares of Junior Preferred Stock is at all times subject to the availability of a sufficient number of authorized but unissued Junior Preferred Stock.

In the event that any person or group of affiliated or associated persons becomes an Acquiring Person, each holder of a Right, other than Rights beneficially owned by the Acquiring Person and its associates and affiliates (which will thereafter be void), will for a 60-day period have the right to receive upon exercise that number of shares of common stock having a market value of two times the exercise price of the Right. If such number of shares is not and cannot be authorized, the Company may issue Junior Preferred Stock, cash, property, stock or a combination thereof in exchange for the Rights.

At any time prior to the earliest of (i) such time as a person has become an Acquiring Person; or (ii) the Final Expiration Date, the Board of Directors of the Company may redeem the Rights in whole, but not in part, at a price of $0.001 per Right (the "Redemption Price"). Following the expiration of these periods, the Rights become non-redeemable. Immediately upon any redemption of the Rights, the ability to exercise the Rights will terminate and the holders of Rights will be entitled to receive only the Redemption Price. The terms of the Rights may be amended by the Board of Directors of the Company without the consent of the holders of the Rights, except that from and after such time as the Rights are distributed no such amendment may adversely affect the interest of the holders of the Rights, excluding the interests of an Acquiring Person.

The Rights will cause substantial dilution to a person or group that attempts to acquire the Company on terms not approved by the Company's Board of Directors. The Company does not expect the Rights to interfere with any merger or other business combination approved by the Board of Directors, as the Rights may be amended to permit such acquisition or redeemed by the Company at $0.001 per Right prior to the earliest of (i) the time that a person or group has acquired beneficial ownership of 15% or more of the Common Shares; or (ii) the Final Expiration Date.

Until the Rights become exercisable, the Rights will have no dilutive impact on the Company's earnings per share data. The Rights are protected by customary anti-dilution provisions.

Series A2 Junior Participating Preferred Stock

The Junior Preferred Stock purchasable upon exercise of the Rights will not be redeemable. In the event of liquidation, the holders of the Junior Preferred Stock would be entitled to a minimum preferential liquidation payment of $10,000 per share, but would be entitled to receive an aggregate payment equal to 10,000 times the payment made per share of common stock. Each share of Junior Preferred Stock will have 10,000 votes, voting together with the Company's common stock. If issued, the Junior Preferred Stock will also be entitled to preferential dividends, when and if declared by the Board of Directors. Finally, in the event of any merger, consolidation or other transaction in which shares of the Company's common stock are exchanged, each share of Junior Preferred Stock will be entitled to receive 10,000 times the amount of consideration received per share of common stock. The Junior Preferred Stock would rank junior to any other series of the Company's preferred stock.

15. Selected Quarterly Financial Data (unaudited)

The following table presents selected quarterly information for 2001 and 2002 (in thousands, except share data):

                                                       First     Second    Third     Fourth
                                                      quarter   quarter   quarter   quarter
                                                     --------- --------- --------- ---------
  2001:                                                                                      
  Total revenues.................................... $598,750  $560,152  $437,890  $487,804
  Gross margin (1)..................................  416,749   391,648   285,801   349,373
  Net income........................................   76,921    76,557    35,197    65,900
  Diluted net income per share......................     0.15      0.15      0.07      0.13
  Basic net income per share........................     0.17      0.17      0.08      0.14


  2002:                                                                                      
  Total revenues.................................... $477,847  $405,562  $357,162  $394,736
  Gross margin (1) (2)..............................  341,419   275,219   207,548   249,315
  Net income (loss) (3).............................   64,621    29,775   (92,078)  (38,022)
  Diluted net income (loss) per share (4)...........     0.12      0.06     (0.19)    (0.08)
  Basic net income (loss) per share (4).............     0.14      0.06     (0.19)    (0.08)

1. The Company's gross margin in the above table for all quarters presented has been conformed to the presentation for the year ended December 31, 2002. Specifically, the Company's gross margin reflects the reclassification of certain expenses related to its information technology support group from operating expenses to cost of professional services, maintenance and other revenues. These reclassifications did not impact previously reported revenues, operating income, net income or earnings per share data.

   These expense reclassifications reduced the Company's gross margin from the previously reported amounts by $4,965,000, $4,509,000, $3,809,000, and $4,354,000 for the periods ended March 31, June 30, September 30, and December 31, 2001, respectively. These expense reclassifications reduced the Company's gross margin from the previously reported amounts by $5,119,000, $5,742,000, $7,691,000, and $9,418,000 for the periods ended March 31, June 30, September 30, and December 31, 2002, respectively.

2. As further described in Note 7, during the third quarter of 2002, the Company recorded a compensation charge of $54,879,000 related to the Option Repurchase. The Company has allocated this expense to the respective categories within the accompanying consolidated statement of operations based on the individual option holder's functional responsibility. Accordingly, gross margin for the third quarter of 2002 has been reduced by $14,119,000 for expenses incurred related to the repurchase of stock options held by the Company's professional service and technical support personnel.

3. The Company completed the Restructuring and the Option Repurchase during 2002, which are discussed further in Notes 2 and 7, respectively. Included in operating expenses for the third quarter of 2002 is a charge of $109,383,000 related to the Restructuring and a compensation charge of $54,879,000 related to the Option Repurchase. On an after-tax basis, these charges reduced net income by $105,128,000 during the third quarter of 2002. Included in operating expenses for the fourth quarter of 2002 is a charge of $95,922,000 related to the Restructuring. On an after-tax basis, these charges reduced net income by $61,390,000 during the fourth quarter of 2002.

4. The Company's third and fourth quarter operating results have been reduced by after-tax charges of $105,128,000 and $61,390,000, respectively, related to the Restructuring and Option Repurchase. Accordingly, the Company's diluted and basic loss per share data both include $0.22 per share during the third quarter of 2002 and $0.13 per share during the fourth quarter of 2002 related to these charges.