(b) Reports on Form 8-K

_________________

1. Incorporated by reference to the Registrant's Current Report on Form 8-K filed on November 27, 2000.
2. Incorporated by reference to the Registrant's Current Report on Form 8-K filed on November 18, 2003.
3. Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001.
4. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2002.
5. Incorporated by reference to the Registrant's Registration Statement on Form S-1 (No. 333-03751), as amended.
6. Incorporated by reference to the Registrant's Registration Statement on Form S-3 (No. 333-91777) filed on November 30, 1999.
7. Incorporated by reference to the Registrant's Current Report on Form 8-K filed on January 29, 2003.
8. Incorporated by reference to the Registrant's Registration Statement on Form S-8 (No. 333-07983), as amended.
9. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1996.
10. Confidential treatment has been granted with respect to portions of this exhibit.
11. Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.
12. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1999.
13. Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000.
14. Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2002.
15. Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2003.
16. Incorporated by reference to the Registrant's Registration Statement on Form S-8 (No. 333-106671) filed on June 30, 2003.
17. Filed Herewith.

                                                                               December 31,
                                                                      ----------------------------
                                                                            2002          2003
                                                                      -------------- -------------
Assets

Current assets:
   Cash and cash equivalents......................................... $     667,511  $    583,532
   Short-term investments............................................     1,494,093     1,439,674
                                                                      -------------- -------------
          Total cash, cash equivalents, and short-term investments...     2,161,604     2,023,206

   Marketable equity securities......................................         4,613           118
   Accounts receivable, net..........................................       275,764       259,834
   Deferred income taxes.............................................        96,518        61,742
   Prepaids and other................................................        49,901        52,068
                                                                      -------------- -------------
          Total current assets.......................................     2,588,400     2,396,968

Property and equipment, net..........................................       273,024       157,391
Goodwill.............................................................        80,949       140,957
Intangible assets, net...............................................        10,354        10,786
Other assets.........................................................        37,580        48,892
Deferred income taxes................................................        42,711        95,866
                                                                      -------------- -------------
          Total assets............................................... $   3,033,018  $  2,850,860
                                                                      ============== =============

Liabilities and Stockholders' Equity

Current liabilities:
   Accounts payable.................................................. $      15,239  $     18,907
   Accrued expenses..................................................       319,622       333,270
   Restructuring obligations.........................................        42,703        53,676
   Deferred revenue..................................................       270,575       282,217
                                                                      -------------- -------------
          Total current liabilities..................................       648,139       688,070

Restructuring obligations, less current portion......................       111,845       104,405
Capital lease obligations and other, less current portion............        15,574         8,159
Convertible subordinated debentures..................................       300,000            --
                                                                      -------------- -------------
          Total liabilities..........................................     1,075,558       800,634
                                                                      -------------- -------------

Commitments and contingencies

Stockholders' equity:
  Common stock; $0.001 par value; 2,000,000 shares authorized;
     486,428 and 498,305 shares issued and outstanding, respectively.           486           498
  Additional paid-in capital.........................................     1,486,612     1,550,834
  Deferred compensation..............................................        (3,438)       (1,479)
  Accumulated other comprehensive income.............................        28,681        58,650
  Retained earnings..................................................       445,119       441,723
                                                                      -------------- -------------
          Total stockholders' equity.................................     1,957,460     2,050,226
                                                                      -------------- -------------
          Total liabilities and stockholders' equity................. $   3,033,018  $  2,850,860
                                                                      ============== =============

                                                                       Year Ended December 31,
                                                             --------------------------------------
                                                                 2001         2002         2003
                                                             ------------ ------------ ------------
Revenues:                                                                                          
    Software................................................ $ 1,065,618  $   700,344  $   482,274
    Professional services, maintenance and other............   1,018,978      934,963      871,954
                                                             ------------ ------------ ------------
        Total revenues......................................   2,084,596    1,635,307    1,354,228
                                                             ------------ ------------ ------------ 
Cost of revenues:
    Software................................................      16,294       21,612       18,357
    Professional services, maintenance and other............     624,731      540,194      487,840
                                                             ------------  -----------  -----------
        Total cost of revenues..............................     641,025      561,806      506,197
                                                             ------------ ------------ ------------
        Gross margin........................................   1,443,571    1,073,501      848,031
                                                             ------------ ------------ ------------
Operating expenses:
    Product development.....................................     333,661      366,230      308,852
    Sales and marketing.....................................     615,675      476,975      357,133
    General and administrative..............................     136,353      119,253      106,082
    Restructuring and related expenses......................          --      205,305      104,391
    Purchased in-process product development................          --           --        5,312
                                                             ------------ ------------ ------------
        Total operating expenses............................   1,085,689    1,167,763      881,770
                                                             ------------ ------------ ------------
        Operating income (loss).............................     357,882      (94,262)     (33,739)
                                                             ------------ ------------ ------------

Other income, net:
    Interest and other income, net..........................      64,528       58,491       54,071
    Loss on early extinguishment of debt....................          --           --      (10,711)
    Interest expense........................................     (18,326)     (20,016)     (14,927)
                                                             ------------ ------------ ------------
        Total other income, net.............................      46,202       38,475       28,433
                                                             ------------ ------------ ------------
        Income (loss) before income taxes...................     404,084      (55,787)      (5,306)
Income tax provision (benefit)..............................     149,509      (20,083)      (1,910)
                                                             ------------ ------------ ------------
        Net income (loss)................................... $   254,575  $   (35,704) $    (3,396)
                                                             ============ ============ ============

Diluted net income (loss) per share......................... $      0.49  $     (0.08) $     (0.01)
                                                             ============ ============ ============
Basic net income (loss) per share........................... $      0.56  $     (0.08) $     (0.01)
                                                             ============ ============ ============

Shares used in diluted share computation....................     522,970      475,617      491,961
                                                             ============ ============ ============
Shares used in basic share computation......................     457,031      475,617      491,961
                                                             ============ ============ ============
Comprehensive income (loss): 
      Net income (loss)..................................... $   254,575  $   (35,704) $    (3,396)
Other comprehensive income (loss), net of taxes:
    Foreign currency translation adjustments................      (3,238)      18,500       35,331
    Realized gain on marketable investments previously
      recognized in other comprehensive income..............      (3,399)     (12,420)      (6,737)
    Unrealized gain on investments..........................       5,332       16,427        1,375
                                                             ------------ ------------ ------------
      Other comprehensive income (loss).....................      (1,305)      22,507       29,969
                                                             ------------ ------------ ------------
      Total comprehensive income (loss)..................... $   253,270  $   (13,197) $    26,573
                                                             ============ ============ ============

                                                                                                 Notes                        Accumulated
                                                         Common Stock          Additional      Receivable                        Other                        Total
                                                      ---------------------      Paid-in          from          Deferred     Comprehensive    Retained     Stockholders'
                                                       Shares      Amount        Capital      Stockholders    Compensation   Income (Loss)    Earnings        Equity
                                                      ---------  ----------   ------------   -------------   -------------   -------------   ----------   -------------
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
Change in 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
Change in 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
Stock option exercises...............................   10,747          11         56,800              --              --              --           --          56,811
Employee stock purchase plan issuances...............      927           1          5,834              --              --              --           --           5,835
Contribution of leased facilities and other..........        --         --            246              --              --              --           --             246
Repurchase of common stock subject to vesting........       (4)         --             (9)             --              --              --           --              (9)
Forfeiture of stock options issued below fair value..       --          --           (282)             --             282              --           --              --
Amortization of stock-based compensation, net........       --          --            (37)             --           1,677              --           --           1,640
Change in unrealized gain on marketable
  investments, net of taxes of ($3,574)..............       --          --             --              --              --          (5,362)          --          (5,362)
Currency translation adjustment, net of taxes
  of $21,654.........................................       --          --             --              --              --          35,331           --          35,331
Issuance of common stock in connection with
  acquisition earnouts...............................      207          --          1,670              --              --              --           --           1,670
Net loss.............................................       --          --             --              --              --              --       (3,396)         (3,396)
                                                      ---------  ----------   ------------   -------------   -------------   -------------   ----------   -------------
Balances, December 31, 2003..........................  498,305   $     498    $ 1,550,834    $         --    $     (1,479)   $     58,650    $ 441,723    $  2,050,226
                                                      =========  ==========   ============   =============   =============   =============   ==========   =============

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

                                                                                          Year Ended December 31,
                                                                                   ---------------------------------------
                                                                                       2001         2002          2003
                                                                                   ------------ ------------ -------------
Cash flows from operating activities:                                                                                      
   Net income (loss).............................................................. $   254,575  $   (35,704) $     (3,396)
   Adjustments to reconcile net income (loss) to net cash
    provided by operating activities:
      Depreciation and other amortization.........................................      93,179      145,238       150,938
      Write-off of property and equipment abandoned in restructuring..............          --       25,955        17,506
      Loss on early extinguishment of debt........................................          --           --        10,711
      Write-off of acquired technology............................................          --           --         2,449
      Write-off of purchased in process product development.......................          --           --         5,312
      Amortization of identifiable intangible assets..............................       6,518        8,646         6,295
      Compensation related to stock options, net..................................       5,169        4,126         1,640
      Compensation expense related to common shares issued in Option Repurchase...          --       31,471            --
      Amortization of goodwill....................................................      20,041           --            --
      Provision for doubtful accounts and sales returns...........................      26,403       21,376         5,184
      Tax benefit from exercise of stock options..................................      53,800           --            --
      Deferred income taxes.......................................................     (11,636)     (50,431)      (15,449)
      Write-down of cost-method investments to fair value.........................       3,073        9,990         3,350
      Net realized gains on marketable investments................................      (3,399)     (12,420)       (6,737)
      Exchange of software for cost-method investments............................        (971)          --            --
      Changes in operating assets and liabilities:
         Accounts receivable......................................................     105,816       99,157        12,775
         Prepaids and other.......................................................      17,247       20,865       (20,425)
         Accounts payable and accrued expenses....................................     (19,616)     (19,172)        7,334
         Restructuring obligations................................................          --      154,548         2,824
         Deferred revenue.........................................................      38,002       29,558         7,723
                                                                                   ------------ ------------ -------------
           Net cash provided by operating activities..............................     588,201      433,203       188,034
                                                                                   ------------ ------------ -------------
Cash flows from investing activities:
   Purchases of property and equipment............................................    (245,945)     (70,809)      (14,958)
   Purchases of short-term investments............................................  (1,113,004)  (2,347,660)   (1,980,246)
   Sales and maturities of short-term investments.................................     668,028    1,718,362     2,011,534
   Purchase consideration paid for acquired businesses, net of cash received......       8,555         (500)      (62,574)
   Purchase of marketable equity securities.......................................          --       (1,000)           --
   Proceeds from sale of marketable equity securities.............................         821        1,189         5,593
   Other non-operating assets and non-marketable securities.......................     (23,068)       7,991          (519)
   Repayments from (advances to) affiliate, net...................................      10,579           --            --
                                                                                   ------------ ------------ -------------
           Net cash used in investing activities..................................    (694,034)    (692,427)      (41,170)
                                                                                   ------------ ------------ -------------
Cash flows from financing activities:
   Proceeds from issuance of common stock, net of repurchases.....................     156,156       92,532        62,636
   Repurchase of convertible subordinated debentures..............................          --           --      (307,080)
   Repayments of capital lease obligations........................................        (580)      (8,714)      (12,766)
   Proceeds from equipment financing..............................................          --       24,873            --
   Repayments of stockholder notes................................................       1,201          422            --
                                                                                   ------------ ------------ -------------
           Net cash provided by financing activities..............................     156,777      109,113      (257,210)
                                                                                   ------------ ------------ -------------
Effect of exchange rate fluctuations..............................................      (3,238)      18,532        26,367
                                                                                   ------------ ------------ -------------
Change in cash and cash equivalents...............................................      47,706     (131,579)      (83,979)
Cash and cash equivalents, beginning of period....................................     751,384      799,090       667,511
                                                                                   ------------ ------------ -------------
Cash and cash equivalents, end of period.......................................... $   799,090  $   667,511  $    583,532
                                                                                   ============ ============ =============

Supplemental disclosures of cash flows information:
   Cash paid for interest......................................................... $    17,029  $    18,455  $     18,807
                                                                                   ============ ============ =============

   Cash paid for income taxes..................................................... $    18,837  $    36,692  $     12,912
                                                                                   ============ ============ =============
Supplemental disclosures of non-cash activities:
   Purchase price payable to acquired companies................................... $        --  $     1,607  $         --
                                                                                   ============ ============ =============
   Common stock and stock options issued for acquisitions......................... $    87,957  $     6,004  $         --
                                                                                   ============ ============ =============

See accompanying notes to consolidated financial statements.

SIEBEL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies

The Company

Siebel Systems, Inc. (the "Company") is a leading provider of business 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 ("CRM") applications enable an organization to sell to, market to, and serve its customers across multiple channels and lines of business. 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.

Siebel eBusiness Applications also include integration and business intelligence (otherwise known as analytics) applications that help organizations more fully leverage the value of their corporate information. The integration applications allow organizations to share data and processes among different software applications, while the analytics applications make it possible to analyze large volumes of corporate data quickly and easily.

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. The fair value of the Company's derivative financial instruments, principally foreign currency contracts utilized to offset foreign currency transaction gains and losses, was $13,151,000 as of December 31, 2003. The fair value of these derivative financial instruments is reflected in "prepaids and other" in the accompanying consolidated balance sheet.

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.

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 its 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, public sector 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 $9,025,000 and $21,808,000 as of December 31, 2002 and 2003, 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.

Asset Retirement Obligations

On January 1, 2003, the Company adopted SFAS No. 143 "Accounting for Asset Retirement Obligations" (SFAS 143"), which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The adoption of SFAS 143 did not have a material impact on the Company's financial condition, results of operations or cash flows. 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 depreciated over the life of the asset.

All of the Company's existing asset retirement obligations are associated with commitments to return property subject to operating leases to the original condition upon lease termination. As of the date of adoption, the Company recorded a $1,834,000 long-term asset retirement liability and a corresponding increase in leasehold improvements. This amount represents the net present value of the expected future cash flows associated with returning certain of the Company's leased properties to original condition. The Company's remaining expected future cash flows required to fulfill its long-term asset retirement obligations of $1,869,000 is reflected in "capital lease obligations and other, long-term" in the accompanying consolidated balance sheet as of December 31, 2003.

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 specifies criteria for recognizing and reporting intangible assets apart from 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. Based on this review, the Company determined: (i) that it does not have any amounts that were required to be reclassified from goodwill to identifiable intangibles, or vice versa, (ii) the original estimated useful lives of its identifiable intangible assets remain appropriate, and (iii) that it 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 the adoption of SFAS 142, the Company amortized goodwill over a period of three to five years using the straight-line method.

Identifiable intangibles consist of "acquired technology" and customer relationships. The acquired technology intangible assets are being amortized over a period of fourteen months to three years using the straight-line method and the customer relationship intangible asset is being amortized over a period of six years based on customer attrition rates, currently estimated at approximately 30% per year of the remaining acquired customers. Please refer to Note 3 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"). 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.

Contingent Liabilities

The Company has a number of unresolved regulatory, legal and tax matters, as discussed further in Notes 6 and 10.  The Company provides for contingent liabilities in accordance with SFAS No. 5 "Accounting for Contingencies" ("SFAS 5"). In accordance with SFAS 5, a loss contingency is charged to income when: (i) it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements and (ii) the amount of the loss can be reasonably estimated. Disclosure in the notes to the financial statements is required for loss contingencies that do not meet both those conditions if there is a reasonable possibility that a loss may have been incurred. Gain contingencies are not recorded until realized.

Periodically, the Company reviews the status of each significant matter to assess the potential financial exposure. If a potential loss is considered probable and the amount can be reasonably estimated as defined by SFAS 5, the Company reflects the estimated loss in its results of operations. Significant judgment is required to determine the probability that a liability has been incurred and whether such liability is reasonably estimable. Because of uncertainties related to these matters, accruals are based only on the best information available at the time. Further, estimates of this nature are highly subjective, and the final outcome of these matters could vary significantly from the amounts that have been included in the accompanying consolidated financial statements. As additional information becomes available, the Company reassesses the potential liability related to our pending claims and litigation and may revise its estimates accordingly. Such revisions in the estimates of the potential liabilities could have a material impact on our results of operations and financial position.

Accounting for and Disclosure of Guarantees

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 were effective as of December 31, 2002. The adoption of Interpretation 45 did not have a material impact on the Company's consolidated financial position, results of operations or cash flows.

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 referred to as "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 stock 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, based on the fair value of the stock options. 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 2001, 2002 and 2003.

As of December 31, 2002 and 2003, the Company's deferred compensation balances primarily related to stock awards issued in the fourth quarter of 2002 and the remaining unamortized portion of compensation expense associated with stock options granted by certain 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 is generally five years.

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" (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.

As required by SFAS 123, the Company has prepared a reconciliation of its net income (loss) as reported on the statement of operations to the net income (loss) that the Company would have reported if it had followed SFAS 123 in accounting for its stock-based compensation arrangements. For purposes of this reconciliation, the Company added back all stock-based employee compensation expense recorded in accordance with APB 25 in the statement of operations, then deducted the stock-based employee compensation expense determined under SFAS 123. Summarized below are the pro forma effects on net income (loss) and net income (loss) per share data, as 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,
                                                                                     ------------------------------------
                                                                                        2001        2002         2003
                                                                                     ---------- ------------ ------------
Net income (loss):
As reported......................................................................... $ 254,575  $   (35,704) $    (3,396)
                                                                                     ---------- ------------ ------------
Compensation expense related to:
   Stock options accounted for in accordance with APB 25............................     5,169        4,126        1,640
   In-the-money stock options.......................................................  (159,444)     (27,205)     (32,253)
   Stock purchase rights under the Purchase Plan....................................   (21,634)     (23,087)      (5,591)
                                                                                     ---------- ------------ ------------
      Pro forma expense related to "in-the-money" stock options and Purchase Plan...  (175,909)     (46,166)     (36,204)
   Out-of-the-money stock options...................................................   (52,810)    (200,764)    (147,947)
   Stock options cancelled for no consideration.....................................  (132,181)    (110,553)    (251,821)
   Stock options forfeited/cancelled in connection with terminations................  (161,998)     (93,390)     (13,092)
   Stock options repurchased on September 30, 2002..................................  (284,836)    (595,297)          --
                                                                                     ---------- ------------ ------------
      Total pro forma expense giving effect to SFAS 123.............................  (807,734)  (1,046,170)    (449,064)
                                                                                     ---------- ------------ ------------
Pro forma giving effect to SFAS 123................................................. $(553,159) $(1,081,874) $  (452,460)
                                                                                     ========== ============ ============

Diluted net income (loss) per share:                                                                                       
As reported......................................................................... $    0.49  $     (0.08) $     (0.01)
                                                                                     ========== ============ ============

Pro forma giving effect to SFAS 123................................................. $   (1.21) $     (2.27) $     (0.92)
                                                                                     ========== ============ ============


Basic net income (loss) per share:                                                                                         
As reported......................................................................... $    0.56  $     (0.08) $     (0.01)
                                                                                     ========== ============ ============

Pro forma giving effect to SFAS 123................................................. $   (1.21) $     (2.27) $     (0.92)
                                                                                     ========== ============ ============

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 10 for further discussion of the Company's accounting for deferred tax assets generated from the exercise of employee stock options.

In-the-money stock options in the above table have exercise prices below the closing price of our common stock as of the end of each of the respective periods, and out-of-the-money stock options have exercise prices equal to or greater than the closing price of our common stock as of the end of each of the respective periods. The closing prices as of December 31, 2001, 2002 and 2003 were $27.98, $7.40 and $13.92, respectively.

As the table above illustrates, total pro forma expense for stock options includes $631,825,000, $1,000,004,000 and $412,860,000 of expense during 2001, 2002 and 2003 related to: (i) the Company's CEO's stock options that were cancelled for no consideration; (ii) stock options forfeited by employees upon termination for no consideration; (iii) stock options that are significantly out of the money (e.g., the weighted-average exercise price of the out-of-the-money stock options was $22.65 per share compared to a closing price of $13.92 per share as of December 31, 2003); and (iv) stock options repurchased for consideration substantially less than is reflected in the table above as a pro forma expense (i.e., the Company repurchased the stock options in 2002 for $54,879,000 versus the $595,297,000 reflected in the above table for 2002 as required by SFAS 123). These items represented 78%, 96% and 92% of the pro forma expense in the above table for 2001, 2002 and 2003, respectively.

The Company determined the assumptions 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 stock 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,
                                                                                      ------------------------------------
                                                                                        2001        2002         2003
                                                                                      ---------- ------------ ------------
 Risk-free interest rate............................................................      3.83 %       1.99 %       1.78 %
 Expected life (in years)...........................................................       3.4          3.4          3.1
 Expected volatility................................................................        89 %         65 %         46 %

Using the Black-Scholes option valuation model, stock options granted during 2001, 2002 and 2003 had weighted average fair values of $16.15, $9.77 and $3.04 per share, respectively. There were no grants in 2001, 2002 or 2003 at exercise prices below market price at the date of grant.

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

                                                                                             Year Ended December 31,
                                                                                      ------------------------------------
                                                                                        2001        2002         2003
                                                                                      ---------- ------------ ------------
 Risk-free interest rate.............................................................     4.72 %       1.23 %       1.05 %
 Expected life (in years)............................................................      0.5          0.5          0.6
 Expected volatility.................................................................       89 %         83 %         47 %

The weighted average estimated fair value of the common stock purchase rights granted under the Purchase Plan during 2001, 2002 and 2003 was $22.60, $7.43 and $2.40 per share, respectively, including the 15% discount from the quoted market price. As discussed further in Note 8, the first offering period for the 2003 Employee Stock Purchase Plan (the "2003 Purchase Plan") is from July 1, 2003, to January 31, 2004. Accordingly, the Company has estimated the expected life of the purchase rights granted under the 2003 Purchase Plan during the six months ended December 31, 2003, to be seven months (i.e., 0.6 years).

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. SFAS 133 requires that all derivatives be recognized as either assets or liabilities at fair value. If the derivative is a hedge, depending on the nature of the hedge, changes in fair value will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings.

For derivative instruments that hedge the exposure to variability in expected future cash flows that are attributable to a particular risk and that are designated as cash flow hedges, the net gain or loss on the derivative instrument is reported as a component of other comprehensive income in stockholders' equity and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. To receive hedge accounting treatment, cash flow hedges must be highly effective in achieving offsetting changes to expected future cash flows on hedged transactions. For derivative instruments that hedge the exposure to changes in the fair value of an asset or a liability or an identified portion thereof that are attributable to a particular risk and that are designated as fair value hedges, the net gain or loss on the derivative instrument as well as the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized in earnings in the current period. The net gain or loss on the effective portion of a derivative instrument that is designated as an economic hedge of the foreign currency translation exposure of the net investment in a foreign operation is reported in the same manner as a foreign currency translation adjustment. For derivative instruments not designated as hedging instruments, changes in fair value are recognized in earnings in the current period.

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 (i.e., included in "other income"). 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 three primary sources: (i) licensing software, (ii) providing technical support and product updates, otherwise known as maintenance and (iii) providing professional services, including implementation and training 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 typically purchases a combination of: (i) our software products, (ii) a maintenance arrangement, which is generally priced as a percentage of the software license fees and provides for technical support and product updates over a period of one year, and (iii) a professional services arrangement on a time and materials basis.

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.

The Company determines the fair value of the maintenance portion of the arrangement based on the renewal price of the maintenance charged to the customer based on full deployment of the licensed software products and the fair value of the professional services portion of the arrangement based on the hourly rates that the Company charges for these services when sold independently from a software license. If evidence of fair value cannot be established for the undelivered elements of a license agreement, the entire amount of revenue from the arrangement is deferred and recognized over the period that these elements are delivered.

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. For substantially all of the Company's software arrangements, these criteria have been met upon delivery of the software to the end customer. Accordingly, the Company defers revenue for the fair value of the maintenance and professional services to be provided to the customer and recognizes revenue for the software license upon delivery.

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.

The Company's professional services, maintenance and other revenues relate primarily to maintenance and professionals services. The Company's customers typically prepay maintenance for the first year in connection with new software license and the related revenue is deferred and recognized ratably over the term of the initial maintenance contract. Maintenance is renewable by the customer on an annual basis thereafter. Rates for maintenance, including subsequent renewal rates, are typically established based upon a specified percentage of net license fees as set forth in the arrangement.

Professional services revenue primarily consists of implementation services related to the installation of the Company's software products and training revenues. The Company's software is ready to use by the customer upon receipt and, therefore, the Company's implementation services do not involve significant customization to or development of the underlying software code. Substantially all of our professional services arrangements are on a time and materials basis and, accordingly, are recognized as the services are performed.

Revenues derived from Siebel CRM OnDemand, our hosted CRM solution introduced in the fourth quarter of 2003, are included in "professional services, maintenance and other revenues." The Company accounts for its hosted arrangements in accordance with EITF No. 00-21 "Revenue Arrangements with Multiple Deliverables" ("EITF 00-21"). The majority of Siebel CRM OnDemand customers purchase a combination of the Company's hosting service, maintenance and/or professional services. In accordance with EITF 00-21, the Company evaluates whether each of these elements represent a separate unit of accounting, as defined by EITF 00-21, using all applicable facts and circumstances, including: (i) whether the Company sells or could readily sell the element unaccompanied by the other elements, (ii) whether the element has standalone value to the customer, (iii) whether there is objective reliable evidence of the fair value of the undelivered item, and (iv) whether there is a general right of return.

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, 2001 and 2002, the Company recognized $76,400,000 and $50,571,000, respectively, of software license revenues from Concurrent Transactions. The Company did not have any Concurrent Transactions during 2003.

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

The Company expenses the costs of producing advertisements at the time production occurs and expenses the cost of communicating the advertising in the period in which the advertising is used. Advertising expense is included in sales and marketing expense and amounted to $31,800,000, $16,080,000 and $14,694,000 in 2001, 2002 and 2003, respectively.

Provision for Doubtful Accounts

The Company initially records its provision for doubtful accounts based on its historical experience and then adjust this provision at the end of each reporting period based on a detailed assessment of our accounts receivable and allowance for doubtful accounts. In estimating the provision for doubtful accounts, management evaluates the collectibility of its accounts receivable based on a combination of factors. In cases where the Company is aware of circumstances that may impair a specific customer's ability to meet their financial obligations to it, the Company records a specific allowance against amounts due from the customer, and thereby reduce the net recognized receivable to the amount it reasonably believes will be collected. For all other customers, we recognize allowances for doubtful accounts based on the length of time the receivables are past due, industry and geographic concentrations, the current business environment and our historical experience.

Restructuring and Related Expenses

In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 supersedes Emerging Issues Task Force ("EITF") Issue No. 94-3 "Liability Recognition for Certain Employee Termination Benefits and Other Costs To Exit an Activity (Including Certain Costs Associated with a Restructuring)" ("EITF 94-3") and EITF Issue No. 88-10 "Costs Associated with Lease Modification or Termination" ("EITF 88-10"). The Company adopted SFAS 146 effective January 1, 2003; therefore, the restructuring activities initiated in the second quarter of 2003 and completed in the third quarter of 2003 (i.e., the 2003 Restructuring as defined in Note 2) were accounted for in accordance with SFAS 146. The adoption of SFAS 146 did not impact the Company's restructuring obligations recognized in 2002 as these obligations must continue to be accounted for in accordance with EITF 94-3 and EITF 88-10 and other applicable pre-existing guidance.

SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred, as opposed to when management commits to an exit plan. SFAS 146 also requires that: (i) liabilities associated with exit and disposal activities be measured at fair value, (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 related to an operating lease/contract be recorded at fair value 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 (iv) all other costs related to an exit or disposal activity be expensed as incurred. The Company estimates the fair value of its lease obligations included in the 2003 Restructuring based on the present value of the remaining lease obligation, operating costs, and other associated costs, less estimated sublease income.

The Company has historically provided substantially the same termination benefits at the time of a non-performance based workforce reduction and, as a result, the Company determined that SFAS 146 did not apply to its employee termination obligations incurred in connection with its 2003 restructuring. The Company has accounted for the employee termination obligations incurred during 2003, with the exception of those created under labor law (e.g., the WARN Act), in accordance with SFAS No. 112 "Employers' Accounting for Postemployment Benefits, an Amendment of FASB Statements No. 5 and 43." The Company has accounted for obligations incurred during 2003 under the WARN Act and local labor law in accordance with SFAS No. 88 "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits." Under SFAS 112 and SFAS 88, the Company records these obligations, when the obligations are estimable and probable.

Restructuring obligations incurred prior to the adoption of SFAS 146 (i.e., the 2002 Restructuring, as defined in Note 2) were accounted for and continue to be accounted for in accordance with EITF 94-3 and EITF 88-10. Specifically, the Company accounts for the costs associated with the reduction of its workforce in accordance with EITF 94-3. Accordingly, the Company recorded the liability related to these termination costs when the following conditions were 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.

In 2002, the Company accounted for costs associated with lease termination and/or abandonment in accordance with EITF 88-10. Accordingly, the Company recorded 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 liability associated with lease termination and/or abandonment represents the sum of the total remaining lease costs and related exit costs, less probable sublease income. Accordingly, the Company has not reduced the obligations incurred in 2002 to their net present value.

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.

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) per 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.

Reclassifications

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

Recent Accounting Pronouncements

In January 2003, the FASB issued Interpretation No. 46 "Consolidation of Variable Interest Entities" ("FIN 46"). This interpretation of Accounting Research Bulletin No. 51 "Consolidated Financial Statements" addresses consolidation by business enterprises of variable interest entities ("VIEs") that either: (1) do not have sufficient equity investment at risk to permit the entity to finance its activities without additional subordinated financial support, or (2) the equity investors lack an essential characteristic of a controlling financial interest. As of December 31, 2003, the Company does not have any entities that require disclosure or consolidation as a result of adopting the provisions of FIN 46.

2. Restructuring

Background

Beginning in 2001 and continuing through the first half of 2003, economic conditions in many of the countries in which the Company operates either deteriorated or stabilized at depressed levels. In addition, there appears to have been a disproportionate impact on capital spending, particularly information technology spending, by corporations. As a result, certain of the Company's key operating metrics, such as total revenue, operating margin and revenue per employee, declined from the Company's historical levels. In response to this decline, the Company initiated a series of steps that it believes will: (i) strengthen the Company's competitive position; (ii) reduce its cost structure, thereby improving its revenue per employee, operating margin and overall operating performance; and (iii) better align its management structure in order to return to sequential quarterly revenue growth. Specifically, the Company took the following actions:

• The Company reduced the discretionary portion of its operating costs through various cost control initiatives, including: (i) reducing advertising expenditures; (ii) maintaining the CEO's salary at one dollar per year; (iii) deferring merit increases; (iv) eliminating the majority of bonuses (from July 2001 to June 2002) or realigning bonuses more closely with achievement of financial objectives (commencing in July 2002); (v) reducing depreciation, primarily through reduced capital expenditures; and (vi) reducing other discretionary expenditures, such as costs related to outside consultants, travel and recruiting.

• In order to further align our operating structure with anticipated revenue levels, the Company restructured its operations during the third and fourth quarters of 2002 (the "2002 Restructuring"). The 2002 Restructuring consisted primarily of the consolidation of excess facilities, reductions in its workforce and the abandonment of certain assets in connection with the consolidation of excess facilities.

• Based on the Company's continued evaluation of economic conditions in the information technology industry and its expectations regarding revenue levels, the Company initiated a further restructuring of its operations in the second quarter of 2003 (the "2003 Restructuring" and collectively with the 2002 Restructuring, the "2002 and 2003 Restructurings"). The Company completed the 2003 Restructuring in September 2003.

Summary of the 2002 and 2003 Restructurings

The Company initiated the 2002 Restructuring in July 2002 and completed all activities related to the 2002 Restructuring in December 2002. The 2002 Restructuring was designed to reduce our operating costs in order to better align its operating structure with expected revenue levels. The 2002 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.

Due in part to the continued weakening in the global economy and reduced revenue expectations, the Company initiated the 2003 Restructuring in the second quarter of 2003 in order to continue to lower its cost structure and improve its overall operating performance. Specifically, the 2003 Restructuring included the following key measures: (i) the reduction of its workforce across all functional areas, including reductions related to the consolidation of its management organization and its sales force organization; (ii) the consolidation of additional facilities, including ceasing operations in certain geographic locations; (iii) the abandonment of certain long-lived assets, including leasehold improvements, furniture and fixtures; and (iv) the transfer of certain technical support, quality assurance and other product development positions overseas to labor markets with lower cost structures.

In addition to reducing the Company's cost structure, the Company believes the 2003 Restructuring will result in: (i) a flatter, more responsive and efficient management reporting structure; (ii) a more focused sales organization providing greater responsiveness to customers and faster decision making; and (iii) a continued focus of its resources on key growth areas, such as the Company's newest product offering, Siebel CRM OnDemand, a hosted CRM service designed to meet the growing market demand for fast, easy, and affordable CRM software.

Summary of Restructuring and Related Expenses and the Associated Obligations as of December 31, 2002 and 2003

The following table summarizes the expenses incurred in connection with the 2002 and 2003 Restructurings and the related obligations as of December 31, 2002 and 2003 (in thousands):

                                                                 Employee      Facility-      Asset
                                                               Termination      Related     Abandonment
                                                                Costs (1)      Costs (2)     Costs (3)      Total
                                                              -------------  ------------  ------------  -----------
Restructuring obligations, July 1, 2002...................... $         --   $        --   $        --   $       --
Restructuring and related expenses recognized in 2002 (4)....       23,649       155,701        25,955      205,305
Cash payments................................................      (19,714)       (5,088)           --      (24,802)
Non-cash charges.............................................           --            --       (25,955)     (25,955)
                                                              -------------  ------------  ------------  -----------
Restructuring obligations, December 31, 2002.................        3,935       150,613            --      154,548
                                                              -------------  ------------  ------------  -----------
Restructuring and related expenses recognized in 2003:
  Recognized related to changes in estimate (5)..............       (1,199)       15,524           566       14,891
  Recognized related to the 2003 Restructuring (6)...........       15,585        56,266        16,940       88,791
  Accretion related to the 2003 Restructuring (7)............           --           709            --          709
                                                              -------------  ------------  ------------  -----------
     Total recognized in 2003................................       14,386        72,499        17,506      104,391
Cash payments................................................      (14,516)      (68,836)           --      (83,352)
Non-cash charges.............................................           --            --       (17,506)     (17,506)
                                                              -------------  ------------  ------------  -----------
Restructuring obligations, December 31, 2003................. $      3,805   $   154,276   $        --      158,081
                                                              =============  ============  ============
     Less: Restructuring obligations, short-term.............                                                53,676
                                                                                                         -----------
     Restructuring obligations, long-term....................                                            $  104,405
                                                                                                         ===========

1. In connection with the 2002 Restructuring, the Company reduced its workforce by approximately 1,150 employees, or 16% of its then-current workforce. In connection with the 2003 Restructuring, the Company reduced or expects to reduce its workforce by approximately 580 employees, or 10% of its then-current workforce. As of December 31, 2003, the Company had completed approximately 445 of these terminations and expects to complete the reduction of the remaining employees within the next six months. The Company has not completed the separation of employment with these remaining employees primarily due to regulatory requirements in certain countries and its ongoing transition of certain product development positions overseas. The workforce reductions affected substantially all of the Company's organizations and geographical regions. The costs associated with the Company's workforce reductions consist primarily of severance payments, COBRA benefits, payroll taxes and other associated employment termination costs.

2. As a result of the workforce reductions and previous employee attrition, certain of the Company's facilities were under-utilized. Accordingly, the Company consolidated its remaining workforce into under-utilized facilities and ceased to utilize the then-vacated facilities. The facilities permanently removed from the Company's operations during both 2002 and 2003 were located primarily in Emeryville and San Mateo, California; Atlanta, Georgia; Europe; and several smaller offices in North America. 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.

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

4. In accordance with EITF 94-3 and EITF 88-10, the Company recorded 2002 Restructuring and related expenses in an amount equal to the gross value of the related obligations without consideration to the net present value of such obligations. In addition, in determining the 2002 Restructuring obligations, the Company assessed the time period over which reasonable estimates could be made.

5. Primarily due to the real estate markets in which the Company operates remaining at depressed levels longer than originally anticipated, the Company extended the estimated sublease commencement dates and/or reduced the estimated sublease rates on certain restructured properties. Partially offsetting these reductions in estimated sublease income were favorable changes in estimates that resulted from the Company's: (i) termination of certain leases at more favorable terms than originally anticipated and (ii) entering into subleases sooner than previously expected and/or at higher sublease rates than originally anticipated on certain other restructured properties. The Company believes that its estimates with respect to its remaining obligations related to the 2002 and 2003 Restructurings are appropriate as of December 31, 2003.

6. In accordance with SFAS 146, the Company recorded the facility-related expenses incurred in the 2003 Restructuring after giving effect to the net present value of the related obligations.

7. Represents the accretion of the 2003 Restructuring obligations. The Company will continue to accrete its obligations related to the 2003 Restructuring to the then present value and, accordingly, will recognize additional accretion expense as a Restructuring and related expense in future periods.

The following table summarizes the time period in which the Company anticipates settling its remaining Restructuring obligations as of December 31, 2003 (in thousands):

                                                         Operating         Other      Estimated      Total
                                                           Lease       Restructuring   Sublease   Restructuring
Year Ending December 31,                               Obligation (1)    Costs (2)    Income (3)  Obligations
- ----------------------------------------------------  --------------  -------------- ----------- -------------
2004................................................  $      47,115   $      16,534  $   (7,567) $     56,082
2005................................................         36,140          10,661     (20,218)       26,583
2006................................................         30,775           9,570     (22,038)       18,307
2007................................................         26,531           6,106     (19,297)       13,340
2008................................................         25,685           7,322     (18,086)       14,921
2009 and thereafter.................................        129,889          37,590    (126,217)       41,262
                                                      --------------  -------------- ----------- -------------
     Total restructuring obligations, gross.........  $     296,135   $      87,783  $ (213,423)      170,495
                                                      ==============  ============== ===========
     Future accretion (4)...........................                                                  (12,414)
                                                                                                 -------------
     Present value of minimum lease payments........                                                  158,081
     Less: restructuring obligations, short-term....                                                   53,676
                                                                                                 -------------
     Restructuring obligations, long-term portion...                                             $    104,405
                                                                                                 =============

1. Represents the Company's remaining lease commitments related to properties included in the Restructuring.

2. Consists primarily of: (i) estimated operating costs (i.e., common area maintenance and property taxes) associated with restructured properties; (ii) estimated commissions associated with anticipated subleases of the restructured properties; and (iii) the remaining obligations related to employee termination cost.

3. The Company estimated sublease income and the related timing thereof based in part on the opinions of independent real estate consultants, current market conditions, the status of negotiations with potential subtenants, and the location of the respective facility, among other factors. The Company's estimates of sublease income may vary significantly depending, in part, on factors which may be beyond the Company's control, such as the time periods required to locate and contract suitable subleases and the market rates at the time of such subleases.

4. The Company has reduced the facility-related obligations associated with the 2003 Restructuring to their net present value. Future accretion represents the interest component of these obligations and will be recognized by the Company as an additional Restructuring and related expense and as an increase in the carrying amount of the 2003 Restructuring obligations.

The total Restructuring charge and related cash outlay are based on management's current estimates, which may change materially if further consolidations are required or if actual lease-related expenditures or sublease income differ from amounts currently expected. The Company will review the status of its Restructuring activities quarterly and, if appropriate, record changes to its Restructuring obligations in current operations based on management's most current estimates.

3. Acquisitions

The Company did not complete any acquisitions in 2002. The following is a summary of the Company's acquisitions during 2001 and 2003, each of which has been accounted for as a purchase:

2003 Acquisitions

Acquisition of UpShot Corporation

On November 3, 2003, by way of a merger of a wholly-owned subsidiary of Siebel Systems with and into UpShot Corporation ("UpShot"), Siebel Systems acquired all of the outstanding shares of UpShot, a leading provider of a hosted CRM service, for initial cash consideration of $55,984,000 (the "Initial Purchase Price"). The Initial Purchase Price consists of the following: (i) the payment of cash consideration of $50,250,000 for all outstanding securities of UpShot, which includes $250,000 of UpShot shareholders' transaction expenses assumed by the Company; (ii) the payment of $4,508,000 related to an UpShot note payable and related accrued interest assumed in the acquisition; (iii) transaction costs of $2,140,000, consisting primarily of professional fees incurred related to investment bankers, attorneys, accountants and valuation advisors; and (iv) a reduction in the purchase price of $914,000 for proceeds from the exercise of stock options by UpShot employees on the date of acquisition. As of December 31, 2003, the Company had paid $55,440,000 of the Initial Purchase Price and expects to pay the remaining $544,000 in early 2004.

The Company expects the acquisition of UpShot to accelerate its penetration of the hosted CRM market and expand customer choice in this market. Further, the Company believes the acquisition of UpShot will allow it to capitalize on the expertise of the UpShot management team in the hosted CRM market and their ability to develop new products using the Company's existing technology.

In accordance with the purchase method of accounting prescribed by SFAS 141, the Company allocated the Initial Purchase Price of $55,984,000 to the tangible net assets and liabilities and intangible assets acquired, based on their estimated fair values. Under the purchase method of accounting, the Initial Purchase Price does not include the contingent earnout amounts described below. The Initial Purchase Price has been allocated as follows (in thousands):

Tangible assets:                                                    
   Cash and cash equivalents........................  $         578
   Accounts receivable and other current assets.....          2,094
   Property and equipment...........................            260
   Other assets-long term...........................            267
                                                      --------------
        Total tangible assets.......................          3,199
                                                      --------------
Intangible assets:                                                  
   Customer relationships...........................          6,700
   Acquired technology..............................          1,200
   Goodwill.........................................         58,387
                                                      --------------
        Total intangible assets.....................         66,287
                                                      --------------
Liabilities assumed:                                                
   Accounts payable and other accrued liabilities...         (9,707)
   Deferred revenue.................................         (3,769)
   Other liabilities-long term......................            (26)
                                                      --------------
        Total liabilities assumed...................        (13,502)
                                                      --------------
        Net assets acquired.........................  $      55,984
                                                      ==============

Based in part on the assistance of a third-party valuation firm, the Company allocated $6,700,000 of the purchase price to a "customer relationship" intangible asset and $1,200,000 of the purchase price to an "acquired technology" intangible asset. The acquired technology intangible asset is currently being amortized over a period of fourteen months using the straight-line method and the customer relationship intangible asset is being amortized over a period of six years based on the estimated customer attrition rates, currently estimated at approximately 30% per year of the remaining acquired customers.

The fair values of the customer relationship and acquired technology intangible assets were determined using the "income" and "relief from royalty" valuation approaches, respectively. The Company utilized a 20% discount rate to determine the present values of the estimated net cash flows of each of these assets. The discount rate selected was based in part on the Company's weighted average cost of capital and determined after consideration of the Company's rate of return on debt capital and equity, the weighted average return on invested capital and the risk associated with achieving forecasted cash flows. In performing this purchase price allocation, the Company considered, among other factors, its intention for future use of the acquired assets, analyses of historical financial performance and estimates of future performance of UpShot's technology.

The excess of the purchase price over the fair value of the identifiable tangible and intangible net assets acquired of $58,387,000 was assigned to goodwill. In accordance with SFAS 142, goodwill will not be amortized but will be tested for impairment at least annually. This amount is not expected to be deductible for tax purposes. The operating results of UpShot have been included in the Company's consolidated financial statements from the date of acquisition.

As a result of UpShot meeting certain revenue and revenue related targets, as defined in the merger agreement, during the fourth quarter of 2003, the Company paid the former holders of UpShot common stock additional consideration of $192,000, which the Company recorded as goodwill as of December 31, 2003. In the event certain revenue, revenue-related and product delivery targets defined in the merger agreement are met during 2004, the Company could be required to pay up to an additional $9,750,000 to the former holders of UpShot common stock and an additional $9,750,000 to the former employees of UpShot who are current employees of the Company at the time of payment. All amounts paid by the Company to the UpShot shareholders will be recorded as an increase to goodwill and amounts paid to the former employees of UpShot will be recorded as compensation expense when earned.

The following table presents unaudited summarized combined results of operations of the Company and UpShot, on a pro forma basis, as though the companies had been combined as of January 1, 2002. The following amounts are in thousands, except per share amounts.

                                                                December 31,
                                                      ------------------------------
                                                            2002            2003
                                                      --------------  -------------- 
Total revenues......................................  $   1,639,836   $   1,359,145
Net loss............................................  $     (47,231)  $     (12,220)
Basic and diluted net loss per share................  $       (0.10)  $       (0.02)

The above unaudited pro forma summarized results of operations are intended for informational purposes only and, in the opinion of management, are neither indicative of the financial position or results of operations of the Company had the acquisition actually taken place as of January 1, 2002, nor indicative of the Company's future results of operations. In addition, the above unaudited pro forma summarized results of operations do not include potential cost savings from operating efficiencies or synergies that may result from the Company's acquisition of UpShot.

Acquisition of Certain Assets of Motiva, Inc.

On October 13, 2003, the Company acquired certain assets (primarily intellectual property) of Motiva, Inc. ("Motiva"), a provider of enterprise incentive management ("EIM") software, for total consideration of $2,921,000 ($2,300,000 cash purchase price plus $100,000 of acquisition related costs and $521,000 of liabilities assumed or incurred in connection with this acquisition). The Company expects the acquisition of these assets to accelerate the Company's penetration of the EIM market and expand customer choice in this market. Further, the Company believes that Motiva's technology and the next generation of its technology (under development by Motiva at the time of acquisition) will enhance the Company's current offerings in the EIM market. Specifically, the Company believes the incorporation of Motiva's services-processing architecture will enable users of Siebel Incentive Compensation to handle a much broader variety of compensation plans with greater flexibility and increased performance. The Company is targeting availability for an enhanced integrated offering utilizing portions of the existing and under development Motiva technology in the second half of 2004.

Substantially all of the assets acquired from Motiva related to various forms of intellectual property (i.e., existing technology and technology under development). The technology under development was approximately 25% complete at the date of acquisition and the Company expects to incur up to an additional $2,000,000 to complete this development, with completion expected by the second half of 2004. Based on the Company's evaluation of the assets acquired, the Company allocated the purchase price to two identifiable intangible assets: "acquired technology" of approximately $900,000 and in-process research and development ("IPR&D") of approximately $1,513,000.

The Company determined the fair value of the assets acquired based on the anticipated net cash flows of each asset, discounted using a risk adjusted discount rate of approximately 20% for the acquired technology and 30% for the IPR&D. The Company is amortizing the acquired technology over its estimated useful life of three years using the straight-line method and included the IPR&D portion in "purchased in-process product development" in the accompanying statement of operations. The excess of the purchase price over the fair value of the identifiable tangible and intangible net assets acquired of $159,000 was recorded as goodwill. This amount is expected to be deductible for tax purposes.

The Company has included the operating results of Motiva in its consolidated financial statements from the date of acquisition. Pro forma information giving effect to this acquisition has not been presented because the pro forma information would not differ materially from the historical results of the Company.

Acquisition of Certain Analytics Technology

In order to further expand the Company's entrance into the analytics market, the Company entered into a worldwide, royalty-free perpetual license to certain technologies (including object code, source code, and documentation) and intellectual property rights (including copyrights, patent rights, and trade secret rights) owned by a third-party provider of analytic software solutions. The license fee for this technology was $3,450,000. The Company expects to continue the development of this technology, which it believes will result in a further expansion of our analytics' suite, with the completion of the first products using this technology expected in the second half of 2004. Because the technology obtained in this license had no alternative future uses, the Company has reflected the license fee of $3,450,000 in purchased in-process product development expense during 2003. The Company expects to incur an additional $2,000,000 to $3,000,000 of costs to further develop this technology and integrate it with the Company's existing analytics technologies, which the Company believes will result in a new and enhanced suite of analytics products.

Acquisition of Certain Assets of BoldFish, Inc.

In March 2003, the Company acquired certain assets of BoldFish, Inc. ("BoldFish"), a developer of permission-based outbound messaging solutions, for an initial payment of $1,000,000. The purchase price was allocated to tangible net assets totaling $136,000 (current assets of $92,000 and property and equipment of $44,000) and identifiable intangible assets (acquired technology) valued at $376,000. The acquired technology is currently being amortized over its estimated 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 $488,000 was recorded as goodwill. This amount is expected to be deductible for tax purposes. As a result of BoldFish meeting certain product delivery targets, as defined in the merger agreement, during 2003, the Company paid an additional $270,000 of purchase consideration to BoldFish, which the Company recorded as goodwill.

The Company has included the operating results of BoldFish in its consolidated financial statements from the date of acquisition. Pro forma information giving effect to this acquisition has not been presented because the pro forma information would not differ materially from the historical results of the Company.

2001 Acquisitions

The following acquisitions have been accounted for by the purchase method of accounting and, accordingly, the operating results 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.

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 the issuance of stock options to existing employees of nQuire to purchase 56,108 shares of the Company's common stock valued at $1,306,000. 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 IPR&D 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 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 and 207,000 shares valued at $1,670,000 during 2003. The Company reflected $7,612,000 of this additional consideration as goodwill and $289,000 as compensation expense during 2002.

Sales.com, Inc.

On January 12, 2001, the Company acquired all of the outstanding securities of Sales.com, Inc. ("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, which the Company assigned a three-year estimated life and amortized using the straight-line method.

In connection with the 2003 Restructuring, the Company performed an evaluation of its product lines and existing development efforts to determine if any products and/or development efforts should be discontinued. As a result of this evaluation, in July 2003 the Company determined that it would no longer utilize the technology acquired through the acquisition of Sales.com (i.e., certain product modules and the remaining Sales.com source code). In reaching this conclusion, the Company considered the following: (i) the Company's recently developed modules and functionality utilizing the J2EE platform was superior to the technology acquired from Sales.com, and (ii) the Company's product development resources would be more effectively utilized on other projects, particularly given the workforce reduction that occurred in the 2003 Restructuring. Accordingly, the Company determined that the carrying value of the Sales.com acquired technology was no longer recoverable and therefore wrote off the remaining unamortized balance of $2,449,000 during the third quarter of 2003. The Company has reflected this charge of $2,449,000 in the accompanying consolidated statement of operations for 2003, under the caption "cost of software revenues."

Intangible Assets and Goodwill

Goodwill

The changes in the carrying amount of goodwill during 2002 and 2003 were as follows (in thousands):

                                                                     December 31,
                                                               ------------------------
                                                                   2002         2003
                                                               -----------  -----------
Balance as of beginning of the year........................... $   72,869   $   80,949
Earnout payments to the stockholders of
   acquired companies.........................................      8,112          962
Goodwill obtained in acquisitions of businesses...............         --       59,034
Foreign currency fluctuation..................................        (32)          12
                                                               -----------  -----------
Balance as of the end of the year............................. $   80,949   $  140,957
                                                               ===========  ===========

As required by SFAS 142, the Company does not amortize its goodwill balances, but instead tests its goodwill for impairment in accordance with the provisions of SFAS 142 annually on July 1 and more frequently upon the occurrence of certain events. Summarized below are the effects on net income (loss) and net income (loss) per share data, if the Company had followed the non-amortization provisions of SFAS 142 for 2001 (in thousands, except per share amounts):

                                                                   December 31,
                                                       -----------------------------------
                                                           2001         2002       2003
                                                       ------------  ---------- ----------
Net income (loss):
   As reported........................................ $   254,575   $ (35,704) $  (3,396)
   Add: goodwill amortization, net of taxes...........      12,626          --         --
                                                       ------------  ---------- ----------
     Adjusted net income (loss)....................... $   267,201   $ (35,704) $  (3,396)
                                                       ============  ========== ==========

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

Basic net income (loss) per share:
   As reported........................................ $      0.56   $   (0.08) $   (0.01)
   Add: goodwill amortization, net of taxes...........        0.02          --         --
                                                       ------------  ---------- ----------
      Adjusted basic net income (loss) per share...... $      0.58   $   (0.08) $   (0.01)
                                                       ============  ========== ==========

Intangible Assets

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

                                                              December 31, 2002              December 31, 2003
                                                      ------------------------------ -------------------------------------
                                                        Acquired        Customer       Acquired      Customer
                                                        Technology     Relationship   Technology  Relationship     Total
                                                      --------------  -------------- ----------- -------------   ---------
Acquired technology.................................  $      26,747   $          --  $    9,977  $      6,700    $ 16,677
Less: accumulated amortization......................         16,393              --       5,549           342       5,891
                                                      --------------  -------------- ----------- -------------   ---------
     Intangible assets, net.........................  $      10,354   $          --  $    4,428  $      6,358    $ 10,786
                                                      ==============  ============== =========== =============   =========

As discussed previously, the Company wrote-off the remaining unamortized balance of the acquired technology obtained in the acquisition of Sales.com in July 2003. This asset had a net carrying value of $2,449,000 (cost of $16,010,000 less accumulated amortization of $13,561,000) at the time of abandonment in July 2003. In addition, the Company wrote-off a fully amortized acquired intangible asset with a cost and accumulated value of $3,236,000 in November 2003.

Based on identified intangible assets recorded as of December 31, 2003, and assuming no subsequent impairment of the underlying assets, amortization expense is expected to be as follows (in thousands):

Year Ending December 31,
- -------------------------------                                           
2004.......................................................... $    5,691
2005..........................................................      1,776
2006..........................................................      1,204
2007..........................................................        747
2008..........................................................        746
2009 and thereafter...........................................        622
                                                               -----------
     Total.................................................... $   10,786
                                                               ===========

4. 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, 2002 and 2003 (in thousands):

   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
                                                 =========== ========== ========== ===========

   December 31, 2003:                                            Unrealized
                                                             ---------------------
                                                     Cost       Loss       Gain       Market
                                                 ----------- ---------- ---------- -----------
   Cash and cash equivalents:
     Cash....................................... $   39,911  $      --  $      --  $   39,911
     Certificates of deposit....................     16,505         --         --      16,505
     Money market funds.........................    432,050         --         --     432,050
     U.S. treasury and agency securities........     36,990         --         --      36,990
     Corporate notes............................     52,122        (53)        --      52,069
     Asset-backed securities....................      6,002         --          5       6,007
                                                 ----------- ---------- ---------- -----------
                                                 $  583,580  $     (53) $       5  $  583,532
                                                 =========== ========== ========== ===========
   Short-term investments:
     U.S. treasury and agency securities........ $  384,085  $    (237) $   2,117  $  385,965
     Corporate notes............................    659,281       (671)     7,405     666,015
     Asset-backed securities....................    386,409       (497)     1,782     387,694
                                                 ----------- ---------- ---------- -----------
                                                 $1,429,775  $  (1,405) $  11,304  $1,439,674
                                                 =========== ========== ========== ===========

   Marketable equity securities................. $       80  $      --  $      38  $      118
                                                 =========== ========== ========== ===========

As of December 31, 2003, all of the unrealized losses in the above table relate to cash equivalents and short-term investment securities that have been in a continuous unrealized loss position for less than one year. In addition, each of the securities have investment grade ratings and are in an unrealized loss position due solely to interest rate changes, sector credit rating changes, or company-specific rating changes. In addition, the Company expects to receive the full principal and interest due on these securities and has the ability to hold these securities to maturity. Accordingly, we do not believe that these securities are impaired as of December 31, 2003 and therefore have not recognized an "other-than-temporary" impairment on these investments.

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. The following is a summary of the maturities of short-term investments as of December 31, 2003 (in thousands, except percentages):

                                                               Expected Maturity Date
                                    -----------------------------------------------------------------------------
                                      2004       2005       2006       2007       2008    Thereafter     Total
                                    ---------  ---------  ---------  ---------  --------  ----------  -----------
US Treasury and Agency securities..  $82,536   $182,927   $106,857     $7,105    $6,540          --     $385,965
  Weighted average yield...........     1.34%      1.62%      2.31%      2.79%     3.33%

Corporate bonds....................  $99,399   $198,663   $252,696    $85,552   $29,705          --     $666,015
  Weighted average yield...........     1.56%      1.92%      2.24%      3.00%     3.55%

Asset-backed securities............ $111,827   $157,018   $103,764     $5,239    $1,030      $8,816     $387,694
  Weighted average yield...........     1.57%      2.16%      2.88%      2.04%     2.45%       2.23%
                                    ---------  ---------  ---------  ---------  --------  ----------  -----------
Total short-term investments....... $293,762   $538,608   $463,317    $97,896   $37,275      $8,816   $1,439,674
                                    =========  =========  =========  =========  ========  ==========  ===========

Accounts Receivable, Net

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

                                                                      December 31,
                                                               ------------------------
                                                                   2002         2003
                                                               -----------  -----------   
Trade accounts receivable..................................... $  321,877   $  300,501
Less: allowance for doubtful accounts and sales returns.......     46,113       40,667
                                                               -----------  -----------
                                                               $  275,764   $  259,834
                                                               ===========  ===========

Changes in the allowance for doubtful accounts and sales returns for 2001, 2002 and 2003, 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, 2001.. $   43,649  $          26,403   $   23,381  $  46,671
Year ended December 31, 2002..     46,671             21,376       21,934     46,113
Year ended December 31, 2003..     46,113              5,184       10,630     40,667

The decrease in the provision of doubtful accounts and sales returns from 2001 to 2002 and from 2002 to 2003 is primarily due to reduced receivable levels, improvement in the aging of our receivables and the recovery of certain receivables previously written-off.

Property and Equipment, Net

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

                                                                     December 31,
                                                               ------------------------
                                                                   2002         2003
                                                               -----------  -----------   
Computers and equipment....................................... $  205,507   $  212,588
Furniture and fixtures........................................     84,184       68,492
Computer software.............................................     62,373       66,886
Computer equipment under capital lease........................     35,046       40,192
Corporate aircraft............................................      6,820        6,820
Buildings and land............................................        403          479
Leasehold improvements........................................    132,225      125,557
                                                               -----------  -----------
                                                                  526,558      521,014
  Less: accumulated depreciation..............................    253,534      363,623
                                                               -----------  -----------
                                                               $  273,024   $  157,391
                                                               ===========  ===========

Accrued Expenses

Accrued expenses consisted of the following (in thousands):

                                                                     December 31,
                                                               ------------------------
                                                                   2002         2003
                                                               -----------  -----------   
Accrued compensation.......................................... $  100,398   $  119,758
Taxes.........................................................    109,077      109,657
Other.........................................................    110,147      103,855
                                                               -----------  -----------
                                                               $  319,622   $  333,270
                                                               ===========  ===========

Accumulated Other Comprehensive Income

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

                                                                      December 31,
                                                               ------------------------
                                                                   2002         2003
                                                               -----------  -----------  
Foreign currency translation adjustments, net of
   taxes of $10,554 and $32,208, respectively................. $   17,219   $   52,550
Unrealized gains on securities, net of taxes of
   $7,363 and $3,789, respectively............................     11,462        6,100
                                                               -----------  -----------
                                                               $   28,681   $   58,650
                                                               ===========  ===========

Other Income, Net

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

                                                                             December 31,
                                                               --------------------------------------
                                                                   2001         2002         2003
                                                               -----------  -----------  ------------  

Interest income............................................... $   67,332   $   58,348   $    52,052
Interest expense..............................................    (18,326)     (20,016)      (14,927)
Loss on early extinguishment of debt..........................         --           --       (10,711)
Net gains on marketable investments...........................      3,399       12,420         6,737
Write-down of cost-method investments.........................     (3,073)      (9,990)       (3,350)
Other, net....................................................     (3,130)      (2,287)       (1,368)
                                                               -----------  -----------  ------------
                                                               $   46,202   $   38,475   $    28,433
                                                               ===========  ===========  ============

The Company holds several minority interests in companies having operations or technology in areas within its strategic focus. As of December 31, 2002 and 2003, the Company has reflected the carrying value of these cost-method investments of $10,538,000 and $7,714,000, respectively, in other long-term assets. During 2001, 2002 and 2003, 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). As of December 31, 2003, the fair value of the Company's cost-method investments approximates their carrying value.

The Company reviews the carrying value of its short-term investments, marketable equity securities, and 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 of the issuer, expected cash needs and recent funding events at the issuer. 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.

5. Convertible Subordinated Debentures

In September 1999, the Company issued $300,000,000 of convertible subordinated debentures (the "Debentures") and in connection therewith incurred $8,684,000 of issuance costs (the "Issuance Costs"). On September 30, 2003, the Company redeemed all of the Debentures in accordance with their terms for $307,080,000, plus accrued interest of $688,000. In connection with this redemption, the Company incurred a pre-tax charge to operations of $10,711,000, consisting of a $7,080,000 redemption premium and the write-off of the remaining unamortized Issuance Costs of $3,631,000. The Company has reflected the $10,711,000 loss on the early extinguishment of the debt in "Other income, net" during 2003.

Prior to redemption, the Debentures bore interest at a rate of 5.50% per annum, had a maturity date of September 15, 2006, and were convertible at the option of the holder into an aggregate of 12,867,000 shares of the Company's common stock at a conversion price of $23.32 per share.

6. Commitments and Contingencies

Letters of Credit

As of December 31, 2003, the Company had secured letters of credit with banks totaling approximately $18,898,000. These letters of credit, which expire between June 2004 and November 2015, collateralize certain of the Company's lease obligations to various third parties.

Legal Actions

On August 22, 2003, the Company and its Board of Directors settled a derivative suit filed by Teachers' Retirement System of Louisiana ("TRSL"), a Louisiana public trust fund.  The Company firmly believed that TRSL's claims were without merit, but settled the case to avoid the costs and management time involved in litigation. The settlement was approved by the court on October 14, 2003. The derivative suit alleged, among other things, that members of the Company's Board of Directors breached their fiduciary duties by authorizing excessive executive compensation.  The derivative plaintiffs sought compensatory and other damages, rescission of certain stock options and other relief. As part of the settlement, the Company agreed: (i) to implement certain enhancements to its corporate governance policies and (ii) not to oppose the application to the court by TRSL's attorneys for reimbursement of their legal fees in connection with the lawsuit, not to exceed $900,000, which was paid in the fourth quarter of 2003.

On May 6, 2003, the Enforcement Division staff ("Staff") of the Securities & Exchange Commission ("SEC") contacted the Company and indicated that a May 1, 2003 article on CBS MarketWatch had raised questions regarding the Company's compliance with Regulation FD. In August 2003, the SEC Staff notified the Company and two of its officers of the SEC Staff's preliminary decision to recommend that the SEC take enforcement action against the Company and these officers in regard to statements allegedly made prior to and during an April 30, 2003 dinner. No such enforcement action has been initiated, and no findings have been issued. The Company and its officers have filed submissions with the SEC in response to the SEC notices and the Company believes that these submissions contain numerous meritorious defenses to these allegations. As the Company disclosed during its earnings call on January 21, 2004, it appears that this matter may soon go before the SEC for a decision. If the SEC decides to pursue this matter, the Company expects that it will continue though its normal course of civil action.

In addition, 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 pending legal matter will have a material adverse effect on the Company's consolidated financial position, although results of operations or cash flows could be affected in a particular period.

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, 2003. 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 $12,000 in 2003. 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, 2003, the Company leased facilities and certain equipment under non-cancelable operating leases expiring between 2004 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 2001, 2002 and 2003, was $117,586,000, $114,358,000 and $93,337,000, respectively.

Future minimum lease payments under both operating and capital leases as of December 31, 2003, are as follows (in thousands):

                                                                Capital      Operating
Year Ending December 31,                                         Leases        Leases
- -------------------------------------------------------------- -----------  -----------
2004.......................................................... $   12,619   $   69,750
2005..........................................................      6,500       67,445
2006..........................................................         --       65,452
2007..........................................................         --       65,434
2008..........................................................         --       65,301
2009 and thereafter...........................................         --      381,693
                                                               -----------  -----------
     Total minimum lease payments.............................     19,119   $  715,075
                                                                            ===========
     Amounts representing interest............................       (987)
                                                               -----------
     Present value of minimum lease payments..................     18,132
     Less: capital lease obligations, short-term
        portion (included in accrued liabilities).............     11,841
                                                               -----------
     Capital lease obligations, long-term portion............. $    6,291
                                                               ===========

Operating lease commitments related to properties included in the 2002 and 2003 Restructurings are not reflected in the above table, as the Company has reflected the fair value of these obligations in the accompanying consolidated balance sheet under the caption "Restructuring obligations." Please refer to Note 2 for further discussion of the Restructuring obligations, including a five-year summary of anticipated settlement dates of such obligations.

7. Stockholders' Rights Plan and Preferred Stock

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. The Rights Plan is not intended to prevent a takeover of the Company on terms that are favorable and fair to all stockholders and will not interfere with a merger approved by the Board of Directors.

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 will be exercisable only if a person or a group acquires or announces a tender offer to acquire 15% or more of the Company's common stock (an "Acquiring Person"), with limited exceptions as defined in the Rights Plan.

The Rights trade with the Company's common stock and no separate Rights 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. 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.

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. The Rights, which expire on February 12, 2013, are redeemable for $0.001 per Right. The terms of the Rights may be amended by the Company's Board of Directors 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.

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.

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.

8. Stock Options and Employee Stock Purchase Plans

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.

CEO Stock Option Cancellation

In June 2002, the Company's CEO notified the Board of Directors of his intent to cancel 25,950,000 shares subject to outstanding stock options in order to 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 stock options. In January 2003, the 25,950,000 stock options were cancelled and therefore are no longer outstanding. Accordingly, the only stock options granted to the Company's CEO that remain in effect were granted in January 1998 or earlier.

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 at the time of cancellation (stock options that were "in-the-money" at the time of cancellation represented $30,150,000, or 54%, of the total fair value at cancellation), 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% 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 in Note 1 under the Section "Stock-Based Compensation." Differences between average useful life and volatility assumptions for these stock options, as compared to assumptions disclosed elsewhere herein, primarily relate to differences in the characteristics of the stock options being valued.

The Company provided no compensation in exchange for the cancellation of its CEO's stock options and has not modified the cash or equity components of his compensation subsequent to such cancellation.

Option Repurchase

On September 30, 2002, the Company completed a tender offer (the "Option Repurchase") for employee stock options with exercise prices equal to or greater than $40.00 per share ("Eligible Options"). 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. Eligible employees who participated in the Option Repurchase received $1.85 in consideration in exchange for each tendered stock option. 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 repurchased 28,057,000 Eligible Options in connection with the Option Repurchase 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 were subject to a "holding period" of one to four years, depending on the number of Eligible Options available to be tendered. The remaining 1,359,000 shares of common stock issued in the Option Repurchase were freely tradable at issuance. During the holding period, holders of the 4,114,000 fully vested, non-forfeitable shares 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. In accordance with terms of the Option Repurchase, the Company released 1,947,000 shares of its common stock from the holding period on October 1, 2003. The terms of the Option Repurchase provide that the Company will release the remaining shares of common stock as follows: 1,947,000 shares on October 1, 2004, 142,000 shares on October 1, 2005, and 78,000 shares on October 1, 2006.

The Company determined that variable accounting did not apply to the stock options subject to the Option Repurchase or any stock options that were granted prior to or after the completion of the Option Repurchase because: (i) 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" ("EITF 00-23"); (ii) Issue 39(a) of EITF Issue No. 00-23 did not apply, because the shares of common stock offered were fully vested and non-forfeitable; and (iii) the Company did not grant any stock options to the holders of the Eligible Options in the six months preceding the commencement of the Option Repurchase or subsequent to the completion of the Option Repurchase.

Stock Options Outstanding

Combined plan activity for 2001, 2002 and 2003, is summarized as follows:

                                                                 Shares                    Wtd. Avg.
                                                               Available    Number of      Exercise
                                                               for Grant      Shares    Price per Share
                                                              ------------ ------------ --------------- 
   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
     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............................... 161,507,093  185,472,781   $       17.42
     Options granted to employees............................ (20,987,275)  20,987,275   $        9.20
     Options granted to officers and directors...............  (1,800,000)   1,800,000   $        8.63
     Options exercised.......................................          --  (10,746,800)  $        5.29
     Options forfeited/canceled upon termination.............  27,625,978  (27,660,441)  $       20.95
     Options cancelled by the Company's CEO..................  25,950,000  (25,950,000)  $       34.63
                                                              ------------ ------------ ---------------
   Balances, December 31, 2003............................... 192,295,796  143,902,815   $       13.20
                                                              ============ ============

The following table summarizes information about the Company's stock options outstanding as of December 31, 2003:

                                        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  -   13.92             79,163,463              4.2    $         5.48    55,000,190   $       4.23
$13.93  -   25.00             50,973,134              7.3    $        18.44    25,685,992   $      19.13
$25.01  -   40.00             10,889,898              6.8    $        33.01     6,169,152   $      33.34
$40.01  -   60.00              1,663,701              6.2    $        46.38     1,192,826   $      46.29
$60.01  -   80.00              1,121,010              6.6    $        71.99       545,997   $      71.68
$80.01  -  109.05                 91,609              6.6    $        93.71        39,306   $      92.56
- --------------------------  -------------    -------------  ----------------  ------------ --------------
$ 0.01  -  109.05            143,902,815              5.5    $        13.20    88,633,463   $      11.59
                            =============                                     ============

As of December 31, 2001 and 2002, the Company had 72,889,000 and 100,118,260 exercisable stock options outstanding, respectively, with weighted average exercise prices of $15.23 and $13.73 per share, respectively.

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 is being 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, 2002 and December 31, 2003, the Company had a total of 255,000 and 175,000 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

The Company's 1996 Employee Stock Purchase Plan, as amended, (the "1996 Purchase Plan") provided for the issuance of up to a total of 13,600,000 shares its common stock thereunder. The 1996 Purchase Plan was terminated on June 30, 2003, as all shares of common stock available under this plan were issued as of June 30, 2003. Prior to termination, the 1996 Purchase Plan permitted 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.

In May 2003, the Company's Board of Directors adopted the Siebel Systems, Inc. 2003 Employee Stock Purchase Plan (the "2003 Purchase Plan" and collectively with the 1996 Purchase Plan, the "Purchase Plan"). The 2003 Purchase Plan was approved by stockholders on June 11, 2003. The 2003 Purchase Plan permits eligible employees to purchase shares of the Company's common stock through payroll deductions of up to 15% of such employees' total compensation during the offering period. The purchase price per share at which shares of the Company's common stock may be purchased under the 2003 Purchase Plan is the lower of 85% of: (i) the fair market value of a share of the Company's common stock on the first day of the offering or (ii) the fair market value of a share of the Company's common stock on the last day of the offering. The maximum length for an offering period under the 2003 Purchase Plan is 27 months. Currently, each offering period, other than the first offering period, is six months long and shares are purchased on the last day of each offering period. The first offering period is seven months long (July 1, 2003 to January 31, 2004).

For the years ended December 31, 2001, 2002 and 2003, the Company issued 1,470,000, 3,109,000 and 927,000 shares, respectively, under the 1996 Purchase Plan with weighted average prices of $32.85, $9.45 and $6.29 per share, respectively. As of December 31, 2003, no shares of the Company's common stock had been issued under the 2003 Purchase Plan, as the first purchase period ended on January 31, 2004. As a result, the number of Purchase Plan shares issued during 2003 declined from the levels in 2002. There are 15,000,000 shares of the Company's common stock reserved for issuance under the 2003 Purchase Plan.

9. 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,
                                                                                      -----------------------------------
                                                                                        2001        2002         2003
                                                                                      ---------  -----------  -----------  
Shares used in basic net income (loss) per share computation........................   457,031      475,617      491,961
Effect of dilutive potential common shares resulting from
   stock options and common stock warrants..........................................    65,690           --           --
Effect of dilutive potential common shares resulting from
   common stock subject to repurchase...............................................       249           --           --
                                                                                      ---------  -----------  -----------
Shares used in diluted net income (loss) per share computation......................   522,970      475,617      491,961
                                                                                      =========  ===========  ===========

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. Because the Company reported a net loss during 2002 and 2003, the Company excluded the impact of stock options in the computation of dilutive earnings per share for these periods, as their effect would be anti-dilutive. The dilutive impact of the Company's stock options on shares used for the diluted earnings per share computation for 2001 is calculated based on the average share price of the Company's common stock using the treasury stock method. Under the treasury stock method, the 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 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,
                                                                                      -----------------------------------
                                                                                        2001        2002         2003
                                                                                      ---------  -----------  -----------  
Stock options excluded due to the exercise price exceeding the average
  fair value of the Company's common stock during the period........................    59,504       99,537       68,466
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       36,484
Weighted average shares issuable upon conversion of the convertible
  subordinated debentures...........................................................    12,867       12,867           --
                                                                                      ---------  -----------  -----------
Total common stock equivalents excluded from diluted net income
  (loss) per share computation......................................................    72,371      152,801      104,950
                                                                                      =========  ===========  ===========

Under the treasury stock method, stock options with exercise prices exceeding the average share price of the Company's common stock during the applicable period are excluded from the diluted earnings per share computation. These stock options had weighted average exercise prices of $58.05, $27.63 and $22.07 per share during 2001, 2002 and 2003, 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 and $10.18 per share during 2002 and 2003, respectively, were excluded from the diluted earnings per share computation because the Company reported a net loss during these periods.

As discussed in Note 5, the Company redeemed the Debentures on September 30, 2003 and, accordingly, the Debentures are no longer outstanding and therefore are not potentially dilutive as of December 31, 2003.

10. Income Taxes

Income (loss) before tax expense (benefit) includes income from foreign operations of approximately $145,469,000, $26,113,000 and $3,634,000 for 2001, 2002 and 2003, respectively. The components of income tax expense (benefit) for 2001, 2002 and 2003 are as follows (in thousands):

                                                                        December 31,
                                                            --------------------------------
                                                               2001       2002       2003
                                                            ---------- ---------- ----------
 Current:                                                                                   
   Federal................................................. $  48,626  $   9,322  $   5,297
   State...................................................    19,047      1,772      1,198
   Foreign.................................................    39,672     19,254      7,044
                                                            ---------- ---------- ----------
     Total current.........................................   107,345     30,348     13,539 
 Deferred:                                                                                  
   Federal.................................................    13,493    (32,757)    (6,223)
   State...................................................   (20,602)   (12,705)    (9,118)
   Foreign.................................................    (4,527)    (4,969)      (108)
                                                            ---------- ---------- ----------
     Total deferred........................................   (11,636)   (50,431)   (15,449)

 Charge in lieu of taxes attributable
   to employer's stock option plans........................    53,800         --         --
                                                            ---------- ---------- ----------
     Total income tax expense (benefit).................... $ 149,509  $ (20,083) $  (1,910)
                                                            ========== ========== ==========

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 2001, 2002 and 2003 are as follows:

                                                                        December 31,
                                                             --------------------------------
                                                               2001       2002       2003
                                                             ---------- ---------- ----------
  Expected income tax expense (benefit)....................      35.0 %    (35.0)%    (35.0)%
  State income taxes (benefit), net of federal tax benefit.       4.4 %    (11.9)%    (71.2)%
  Research and development credit..........................      (1.3)%     (3.7)%    (40.4)%
  Deferred compensation....................................       0.4 %      2.1 %      7.3 %
  Meals and entertainment..................................       0.5 %      3.5 %     20.5 %
  Foreign rate differential................................      (3.0)%      7.4 %     81.6 %
  Other, net...............................................       1.0 %      1.6 %      1.2 %
                                                             ---------- ---------- ----------
    Total income tax expense (benefit).....................      37.0 %    (36.0)%    (36.0)%
                                                             ========== ========== ==========

The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities as of December 31, 2002 and 2003 are as follows (in thousands):

                                                                 December 31,
                                                            ---------------------
                                                               2002       2003
                                                            ---------- ----------
 Deferred tax assets:                                                            
   Allowance for doubtful accounts and returns............. $  13,823  $  12,633
   Accruals and reserves, not currently deducted
     for tax purposes......................................    66,444     81,088
   Tax credit carryforwards................................    97,326    109,591
   Net operating loss carryforward.........................   570,192    602,101
   Depreciation and amortization...........................    44,521     41,462
   Other...................................................    12,219      5,036
                                                            ---------- ----------
     Deferred tax assets...................................   804,525    851,911
                                                            ---------- ----------
 Deferred tax liabilities:
   Unrealized gain on investments..........................    (4,470)    (2,306)
                                                            ---------- ----------
     Deferred tax liabilities..............................    (4,470)    (2,306)
                                                            ---------- ----------
 Valuation allowance.......................................  (660,826)  (691,997)
                                                            ---------- ----------

       Net deferred tax assets............................. $ 139,229  $ 157,608
                                                            ========== ==========

As of December 31, 2003, the Company had a valuation allowance on its deferred tax assets of approximately $692,000,000, of which approximately $660,000,000 pertains to certain tax credits and net operating loss ("NOL") 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.

The remaining valuation allowance of $32,000,000 pertains to certain acquisition-related tax credits and NOL carryforwards that may be limited under Section 382 of the Internal Revenue Code. If an "ownership change," as defined in Section 382, occurs or has occurred, a corporation's ability to utilize NOL and tax credit carryforwards may be subject to restriction. If the Company realizes a tax benefit related to these NOL and tax credits carryforwards, the tax benefit will be accounted for as a credit to goodwill rather than as a reduction of income tax expense.

As of December 31, 2003, the Company had federal and state net operating loss carryforwards of approximately $1,515,900,000 and $1,102,000,000, respectively, available to offset future taxable income. In addition, the Company had federal and state research and development credit carryforwards of $46,401,000 and $48,093,000, respectively, available to offset future tax liabilities. The Company's federal 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 for 1998, 1999 and 2000 are currently under examination by the Internal Revenue Service ("IRS"). During 2003, the Company received notices from the IRS of proposed adjustments to these tax returns. While the final resolution of the IRS's ongoing examination is uncertain, the Company believes it has made adequate provision in the accompanying consolidated financial statements for any adjustments that the IRS has or may propose with respect to the U.S. Federal income tax returns. Although the final resolution of the IRS audit is uncertain, based on currently available information, management believes that the ultimate outcome will not have a material adverse effect on the Company's financial position, cash flows or overall trends in results of operations. The Company may receive an assessment related to the audit of its U.S. income tax returns that exceeds amounts provided for by the Company. In the event of such an assessment, there exists the possibility of a material adverse impact on the Company's results of operations for the period in which the matter is ultimately resolved, or an unfavorable outcome becomes probable and reasonably estimable.

Certain of the Company's payroll tax returns, both in the U.S. and internationally, are currently under examination by the applicable taxing authority. The Company believes it has made adequate provision in the accompanying consolidated financial statements for any adjustments the taxing authorities may propose with respect to its international payroll tax returns. The Company has not made any provision in the accompanying consolidated financial statements for potential assessments by the IRS related to its U.S. payroll tax returns, primarily as it relates to stock option exercises, as the amount that the Company may have to pay is not currently estimable. The Company may receive an assessment related to the audit of its U.S. and international payroll tax returns that exceeds amounts provided for by the Company. In the event of such an assessment, there exists the possibility of a material adverse impact on the Company's results of operations for the period in which the matter is ultimately resolved, or an unfavorable outcome becomes probable and reasonably estimable.

The Company provides U.S. income taxes on the earnings of foreign subsidiaries unless the subsidiaries' earnings are considered indefinitely reinvested outside the United States. As of December 31, 2003, the Company has unrecognized deferred tax liabilities of approximately $65,000,000 related to approximately $180,000,000 of cumulative net undistributed earnings of foreign subsidiaries. These earnings are considered indefinitely invested in operations outside the U.S., as we intend to utilize these amounts to fund future expansion of our international operations.

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 evaluates the performance of its geographic regions based only on revenues. 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 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. The following geographic information for total revenues is presented for 2001, 2002 and 2003 (in thousands):

            United                Asia     Canada and
  Year      States     Europe   Pacific   Latin America    Totals
 ------- ----------- --------- --------- -------------  -----------
   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
   2003     787,704   418,129   104,126        44,269    1,354,228

International software license revenues for the 2001, 2002 and 2003 were $479,335,000, $290,799,000 and $240,261,000, respectively. The Company's international software license revenues are derived from countries principally in Europe and Asia Pacific, which includes Japan.

Prior to 2003, the Company did not measure the performance of its individual software applications for internal management reporting purposes. The following is a summary of our software license revenues by product, in terms of absolute dollars and as a percentage of total software license revenues, for 2003 (in thousands, except percentages):

Software license revenue by product:                                
   CRM solutions...............................  $ 366,073     76 %
   Analytics...................................     77,291     16
   Employee relationship management ("ERM")....     18,149      4
   UAN and business integration applications...     20,761      4
                                                 ----------  -------
        Total..................................  $ 482,274    100 %
                                                 ==========  =======

At times the Company licenses a combination of its products to its customers, with the actual product selection and number of licensed users determined subsequent to the initial license. The Company refers to these licenses as "Enterprise Licenses." The Company recognizes revenue from its Enterprise Licenses upon delivery of the first copy, or product master, for all of the products within the license, as all products have been licensed and delivered, and the customer has the right of use. During 2003, software license revenues from Enterprise Licenses were $64,060,000, or 13% of total software license revenues. The Company estimates the allocation of the revenue from these Enterprise Licenses to individual software products based upon the expected usage by its customers and in a manner consistent with its determination of compensation for its sales personnel. The actual deployment of Enterprise Licenses by the Company's customers may differ from the revenue allocated in the above table.

The following is a summary of the Company's service revenues, by service offering, for 2001, 2002 and 2003 (in thousands):

                                                                    Year Ended December 31,
                                                       ----------------------------------------------
                                                            2001            2002            2003
                                                       --------------  --------------  --------------
Professional services, maintenance and other revenues:                                               
  Maintenance......................................... $   352,763     $   422,502     $   449,345
  Professional services and other.....................     666,215         512,461         422,609
                                                       --------------  --------------  --------------
      Total........................................... $ 1,018,978     $   934,963     $   871,954
                                                       ==============  ==============  ==============

No single customer has accounted for 10% or more of total revenues in 2001, 2002 or 2003.

12. Selected Quarterly Financial Data (unaudited)

The following table presents selected quarterly information for 2002 and 2003 (in thousands, except share data):

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


  2003:                                                                                      
  Total revenues.................................... $332,755  $333,299  $321,432  $366,742
  Gross margin......................................  202,522   202,890   194,969   247,650
  Net income (loss) (4).............................    4,618     9,768   (59,330)   41,548
  Diluted net income (loss) per share (5)...........     0.01      0.02     (0.12)     0.08
  Basic net income (loss) per share (5).............     0.01      0.02     (0.12)     0.08

1. During the third quarter of 2002, the Company's gross margin has been reduced by $14,119,000 related to a compensation charge incurred in connection with the Option Repurchase.

2. Net income for the third quarter of 2002 has been reduced by a charge of $109,383,000 related to the 2002 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 2002 Restructuring. On an after-tax basis, these charges reduced net income by $61,390,000 during the fourth quarter of 2002.

3. The Company's diluted and basic loss per share data include an impact of $0.22 and $0.13 per share during the third and fourth quarters of 2002, respectively, related to the 2002 Restructuring and Option Repurchase.

4. The Company's pre-tax loss for the third quarter of 2003 includes the following charges: (i) a charge of $107,216,000 related to the 2003 Restructuring ($104,767,000 of Restructuring and related expenses and $2,449,000 related to an asset impairment) and (ii) a charge of $10,711,000 related to the Company's repurchase of its convertible subordinated debentures. On an after-tax basis, these charges reduced net income by $75,473,000 during the third quarter of 2003. The Company's pre-tax loss for the fourth quarter of 2003 includes a charge of $5,312,000 related to IPR&D. On an after-tax basis, these charges reduced net income by $3,400,000 during the fourth quarter of 2003.

5. The Company's diluted and basic loss per share data include an impact of $0.15 and $0.01 per share during the third and fourth quarters of 2003, respectively, related to the charges described in item number four above.