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

---

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

---

[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934

For the fiscal year ended December 31, 2003

OR

[  ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

For the transition period from ________to _________

Commission File Number: 0-20725

SIEBEL SYSTEMS, INC.



|Delaware                                                       | 94-3187233                       
|-------------------------------------------------------------- | ---------------------------------
|(State or Other Jurisdiction of Incorporation or Organization) | (IRS Employer Identification No.)

2207 Bridgepointe ParkwaySan Mateo, CA   94404

(650) 477-5000(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:  None
Securities registered pursuant to Section 12(g) of the Act:  Common Stock, $0.001 par value per share







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

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

Indicate by check mark whether the registrant is an accelerated filer (as defined
in Exchange Act Rule 12b-2). YES [X] NO [  ]

The aggregate market value of the voting stock held by nonaffiliates
of the registrant, based on the closing sale price of the Registrant's Common Stock on
June 30, 2003, as reported on the Nasdaq National Market was
approximately $3,801,041,000.  Shares of Common Stock held by each current
executive officer and director and by each person who is known by the
registrant to own 5% or more of the outstanding Common Stock have been
excluded from this computation in that such persons may be deemed to be
affiliates of the Registrant. Share ownership information of certain persons
known by the Registrant to own greater than 5% of the outstanding common
stock for purposes of the preceding calculation is based solely on
information on Schedule 13G filed with the Commission and is as of
June 30, 2003. This determination of affiliate status is not a
conclusive determination for other purposes.

The number of shares outstanding of the registrant's Common Stock, par
value $0.001 per share, as of  February 16, 2004, was 502,393,220.







TABLE OF CONTENTS

|Item       |                                                                                                              | Page
|---------- | ------------------------------------------------------------------------------------------------------------ | ----
|           | PART I.                                                                                                      |     
|Item 1.    | Business                                                                                                     | 1   
|Item 2.    | Properties                                                                                                   | 11  
|Item 3.    | Legal Proceedings                                                                                            | 11  
|Item 4.    | Submission of Matters to a Vote of Security Holders                                                          | 12  
|           | PART II.                                                                                                     |     
|Item 5.    | Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 12  
|Item 6.    | Selected Financial Data                                                                                      | 13  
|Item 7.    | Management's Discussion and Analysis of Financial Condition and Results of Operations                        | 14  
|Item 7a.   | Quantitative and Qualitative Disclosures About Market Risks                                                  | 63  
|Item 8.    | Financial Statements and Supplementary Data                                                                  | 64  
|Item 9.    | Changes in and Disagreements with Accountants on Accounting and Financial Disclosures                        | 64  
|Item 9A.   | Controls and Procedures                                                                                      | 64  
|           | PART III.                                                                                                    |     
|Item 10.   | Directors and Executive Officers of the Registrant                                                           | 67  
|Item 11.   | Executive Compensation                                                                                       | 72  
|Item 12.   | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               | 78  
|Item 13.   | Certain Relationships and Related Transactions                                                               | 79  
|Item 14.   | Principal Accountant Fees and Services                                                                       | 80  
|           | PART IV.                                                                                                     |     
|Item 15.   | Exhibits, Financial Statements and Reports on Form 8-K                                                       | 81  
|Signatures |                                                                                                              | 123 

---

The statements contained in this annual
report that are not historical are forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Forward-looking statements include, without limitation,
statements regarding the extent and timing of future revenues, restructuring and
other expenses and customer demand, statements regarding the development and
deployment of our products, and statements regarding reliance on third parties.
All forward-looking statements included in this annual report are based on
information available to us as of the date of this annual report. We assume no
obligation to update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise, unless we are required to
do so by law. We have based these forward-looking statements on our current
expectations and projections about future events. These forward-looking
statements are not guarantees of future performance and are subject to risks,
uncertainties and assumptions, including those in the section entitled "Risk
Factors" and elsewhere in this annual report.

PART I



Item 1. Business

Overview

Siebel Systems, Inc. is a leading
provider of business applications software. A comprehensive family of enterprise
applications, Siebel eBusiness Applications enable organizations to
better manage their most important relationships, including their interactions
with customers, partners and employees. Our applications are designed to support
these critical relationship management tasks while meeting the information
technology requirements of organizations of all sizes, from small businesses to
large multinational organizations and government agencies.

A substantial portion of our business applications is
focused on the Customer Relationship Management, or CRM, market. CRM is an
integrated approach to identifying, acquiring and retaining customers that helps
organizations maximize the value of customer interactions and improve corporate
performance. Our core sales, service and marketing applications help
organizations perform and coordinate these operations across multiple
communication channels (such as phone, fax, email and in person) and different
lines of business, while providing their customers with a single, consistently
high standard of service. The partner relationship management component of our
CRM applications helps an organization work collaboratively with its partners,
resellers and customers in one comprehensive information system to increase
revenues, drive customer satisfaction and reduce partnership management
costs.

Our CRM applications include versions designed to meet
the specific requirements of more than 20 vertical industries, enabling our
customers to become more competitive in their markets by achieving high levels
of customer, partner and employee satisfaction, and managing these critical
relationships for higher productivity and return on investment.

In addition to our CRM applications, we offer
applications to manage an organization's relationships with its employees.
Specifically, our employee relationship management applications enable an
organization to increase employee and organizational performance and improve
employee satisfaction by aligning employee performance with corporate objectives
and providing employees with the information resources they need to be
successful. 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. Our
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.

Siebel eBusiness Applications are complemented by
the products and services of members of our global strategic alliances, which
include industry-leading consulting, platform, software and content providers.
This global network of alliances helps ensure that we and our partners continue
to support our customers' rapidly evolving technology and business requirements,
both today and in the future.

Siebel Systems is principally engaged in the design,
development, marketing and support of Siebel eBusiness Applications.
Substantially all of our revenues are derived from a perpetual license of our
software products, the related professional services and the related customer
support, otherwise known as maintenance. We license our software in arrangements
in which the customer purchases a combination of software, maintenance and/or
professional services, such as our training and implementation services.
Maintenance, which includes technical support and product updates, is typically
sold with the related software license and is renewable at the option of the
customer on an annual basis after the first year. Our professional services and
technical support organizations, which we collectively refer to as our Global
Services Organization, provide a broad range of implementation services,
training, and technical support to our customers and implementation partners.
Our Global Services Organization has significant product and implementation
expertise and is committed to supporting customers and partners throughout every
phase of their adoption and use of Siebel eBusiness Applications.
Substantially all of our professional service arrangements are billed on a time
and materials basis. Payment terms for our arrangements are negotiated with our
customers and determined based on a variety of factors, including the customer's
credit standing and our history with the customer.

At our annual conference for worldwide users of our
software held in October 2003, we introduced an updated product strategy-CRM for
Everyone-which we believe will enable organizations to meet their CRM
requirements quickly, easily and affordably. CRM for Everyone encompasses our
Siebel eBusiness Applications and our new offering, Siebel CRM OnDemand,
a solution that offers CRM functionality as a service available over the
Internet. Siebel CRM OnDemand integrates with the on-premise Siebel
eBusiness Applications Software Suite, enabling organizations to deploy
our solutions in any combination of online hosted or on-premise delivery
models.

In addition to the current version of Siebel CRM
OnDemand, in 2004, CRM for Everyone will include a number of new features,
including:

- Siebel 7.7, our next release of the Siebel
eBusiness Applications Suite, featuring numerous new industry-specific
capabilities, various usability enhancements, additional total cost of ownership
improvements, extended wireless support, and new capabilities such as a
financial services customer relationship console for branch banking and a
customer loyalty application.
- Siebel Analytics 7.7, a new and enhanced analytics
platform and suite of customer analytics applications. We believe that we have
become a leader in analytics applications for the CRM industry and with the
Siebel Analytics 7.7 release, we will address the needs of the broader business
intelligence market.
- Further development of Siebel Business Integration
Applications. Siebel Business Integration Applications are a part of Universal
Application Network, or UAN, a product designed to assist customers in reducing
the cost of application ownership and maintenance. Universal Application Network
supports both the leading .NET and J2EE platforms, and emerging Web Services
standards for business process integration.

Products

By streamlining processes and providing
sales, marketing and service personnel with more complete customer information,
Siebel eBusiness Applications enable organizations to establish more
profitable customer relationships and decrease operating costs. For example,

- Sales organizations can shorten the sales cycle and
increase key sales-performance metrics such as revenue per sales representative,
average order size and revenue per customer.
- Marketing organizations can increase campaign response
rates and marketing-driven revenue while simultaneously decreasing
lead-generation and customer-acquisition costs.
- Customer service organizations can increase service-agent
productivity and customer retention while decreasing service costs, response
times and request-resolution times.
- Enterprises can analyze customer and other
information to uncover problems and opportunities, and then make fact-based
decisions to improve company performance.

We license components of our software
solutions on an individual user basis, either for a single solution or as part
of our suite of software applications. Software suite solutions are typically
offered on a license basis, with annual maintenance contracts for upgrades and
support. For those interested in receiving our CRM functionality as a service,
Siebel CRM OnDemand offers standard versions of our solutions delivered over the
Internet to the customer's web browser, with payments made on a subscription
basis.

The following table sets forth the individual products within our CRM For
Everyone product strategy:

|CRM for Everyone                                                                                                                                                                                                                                                                                                                                         
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Siebel eBusiness Applications Software
Suite                                                                                                                                                                                                                                                                                                             
|CRM Solutions:
                       Cross-Industry CRM Solutions
                      Industry Specific CRM Solutions
               Siebel Analytics
               Siebel Employee Relationship Management
               Universal Application Network and Siebel Business Integration Applications
               Siebel Universal Customer Master

Siebel eBusiness Applications Software Suite

The
Siebel eBusiness Applications Software Suite is a suite of business
software applications that is designed to enable companies to better manage
their ability to acquire, serve and retain customers. Specifically, we believe
our Siebel eBusiness Applications Software Suite enables companies we
serve to improve employee productivity, improve customer service and increase
customer satisfaction. The Siebel eBusiness Applications Software Suite
can be deployed on a variety of computer hardware types and different operating
systems.

The

CRM Solutions

Our CRM Solutions enable organizations to manage and
coordinate customer interactions across multiple channels, departments, lines of
business and geographies. We believe our CRM Solutions help organizations
maximize the value of customer interactions, whether the interaction involves
acquiring a new customer or resolving a problem at an existing customer, and
ultimately drive better customer satisfaction and improved corporate
performance.

We offer cross-industry and industry-specific versions of our
CRM Solutions. The following is a brief summary of each of these
applications:

Cross-Industry CRM Solutions

Cross-industry CRM Solutions consist of software
applications designed to facilitate sales, marketing and service at any company
in any industry. The following is a description of the major products included
in our cross-industry CRM Solutions:

- Siebel Sales
- Siebel Marketing
- Siebel Service
- Siebel Call Center
- Siebel Partner Relationship Management
- Siebel Customer Order Management
- Product and Catalog Management, which provides a
comprehensive catalog, search capability, and product configuration capability;
- Pricing and Contract Management, which ensures consistent
pricing across the organization and eases the burden and expense of adapting
pricing to changing market conditions or customer contracts; and
- Quote to Order Lifecycle Management, which ensures that
orders are accurate, complete and valid.
- Siebel Incentive Compensation Management

Industry-Specific CRM Solutions

We believe we have become a leading provider of CRM
software applications due in part to our recognition that each industry has
different business processes, competitive challenges and information systems
requirements, that cannot be addressed with a "one size fits all" approach.
Accordingly, we offer the Siebel eBusiness Applications Software Suite in
a wide range of industry-specific versions, designed to meet each industry's
unique requirements. Our industry solutions contain embedded "best practices"
for key business processes for that industry.

Our



|Consumer Sector
Apparel and Footwear
Consumer Goods
Retail                          | Communications
Wireless
Wireline
Media                                        
|----------------------------------------------------------------------------------- | ------------------------------------------------------------------------------
|Energy
Chemicals
Oil and Gas
Utilities                                              | Financial Services
Institutional Finance
Consumer Banking
Insurance
Healthcare
|Industrial
Automotive
High Technology 
Industrial Manufacturing
Aerospace & Defense | Life SciencesClinical
Medical Products
Pharmaceuticals                        
|Public Sector
Government
Homeland Security                                          | Travel and Transportation
Travel and Transportation
   Hospitality            

Siebel Analytics

Siebel Analytics is a family of applications that
make it possible for employees throughout an organization to analyze current and
historical information collected by the entity to detect problems or
opportunities, and then make fact-based decisions to improve the organization's
performance. Specifically, organizations can analyze sales, marketing, service,
manufacturing, customer and other corporate information. Siebel Analytics helps
organizations use the data collected in Siebel CRM Applications, as well as data
taken from other internal or external sources, such as information stored in
data warehouses or information collected by other software applications.
Information can be presented to employees in the form of standard or customized
reports, triggered alerts, the results of automated analysis such as data
mining, or can be displayed in other software applications that employees use
day-to-day, such as the customer profile screen that a call center agent uses
when interacting with a customer.

The general functionality of Siebel Analytics includes:
combining historical and current information from a variety of sources,
delivering necessary information to any and all employees tailored to each
user's needs, providing information that can be quickly and easily explored in
detail, and enabling automated analysis of volumes of data.

Siebel Employee Relationship Management

Siebel Employee Relationship Management, or ERM, is a set of
applications that supports organizational learning, organizational performance
and employee service. These applications include Siebel Learning, Siebel
Performance Management, and Siebel Employee Service. The following is a brief
summary of each of these applications:

- Siebel Learning
- Siebel Performance Management
- Siebel Employee Service

Universal Application Network and Siebel Business
Integration Applications

Historically, companies have found it difficult to
share data created by different software applications or to link multiple
applications together to create processes that work easily across different
corporate functions and organizational groups, such as sales and manufacturing.
Making data available from one application to another, as well as connecting
multiple applications together to create coordinated processes, is known as
"integration." Integration efforts have typically required significant time and
expense. Overall integration expense can be increased further by "custom
integrations," which are implemented one at a time and are unique to each
customer.

We, along with other leading technology companies, have
developed Universal Application Network to minimize the amount of customization
required for integration. Universal Application Network, or UAN, is a design and
set of technical standards for data and process integration that is supported by
leading integration consultants and makers of integration servers, the software
environment that shares data. Based on XML and Web Services standards, UAN
includes an industry-standard specification for defining business processes that
is supported by the leading providers of integration servers, including BEA
Systems, IBM, Microsoft, SeeBeyond, Tibco, Vitria and webMethods.

As part of UAN, we provide packaged software-Siebel Business
Integration Applications-that is based upon UAN standards and run on
industry-leading integration servers. The Siebel Business Integration Applications
provide pre-built data and process integration across multiple applications,
eliminating the custom development associated with traditional integration
approaches, thereby reducing the risk, cost and time of integration.

Siebel Universal Customer Master

Customer information can often be fragmented and
duplicated across business units and communication channels, resulting in an
incomplete view of the customer. Lack of unique, complete and correct customer
profiles can result in increased operating costs, higher customer attrition,
higher customer acquisition costs, exposure to credit risk, difficulty
differentiating service for different customer segments and an inability to
comply with privacy regulations.

Siebel Universal Customer Master, or Siebel UCM, is a
software application that provides organizations with a single master record of
customer information. This record can be used by multiple business units and
different software systems, ensuring that no matter where or how customer
information is used in the organization, it reflects the most accurate customer
information available. In addition to storing customer information, Siebel UCM
provides additional modules that enable organizations to store a single master
record of product or service requests, marketing campaigns and sales activities.
Siebel UCM supports several different integration technologies, which assists in
lowering its total cost of ownership.

Siebel CRM OnDemand

Siebel CRM OnDemand is a hosted software service
offering designed to allow companies to adopt CRM software solutions quickly,
easily and in a cost effective manner. Siebel CRM OnDemand offers a standard
range of sales, marketing and service software applications, along with certain
analytics functionality, to organizations interested in a software application
delivered as an online service. Siebel CRM OnDemand software is installed on and
run from the computers of a third-party "hosting" partner, which maintains the
software and the computers, while the functionality is received by the customer
over the Internet.

Please refer to Note 11 to the accompanying consolidated
financial statements for a summary of our software license revenues by software
product.

Product Development Expense

Since we introduced the first versions
of our products, we have expanded the functional and industry-specific breadth
and depth of our product footprint. Our competitive position has developed to a
large extent because of our emphasis on research and development. During 2003 we
continued to invest significant resources in product development to further
extend our functional and technological leadership and enhance customer
satisfaction. From 2001 to 2003 we invested over $1.0 billion-approximately
$333.7 million, $366.2 million and $308.9 million during 2001, 2002 and 2003,
respectively-in additional product development. As a result of these
investments, we released the latest version of our Siebel eBusiness
Applications in the third quarter of 2003 and our new product offering, Siebel
CRM OnDemand, in the fourth quarter of 2003. We believe our latest version of
Siebel eBusiness Applications and Siebel CRM OnDemand set the standard
for technology leadership in the CRM industry.

We currently expect that most of our development of new
products and enhancements to existing and future products will be developed
internally, with selective acquisitions to compliment and supplement our product
development pipeline when deemed prudent. We rely primarily on a combination of
patent, copyright, trade secret and trademark laws, confidentiality procedures
and contractual provisions to protect our proprietary rights. Please refer to
"Risk Factors-We may not be able to protect our proprietary information" for
further discussion of proprietary technology and intellectual property.

Our development efforts have resulted in leading CRM,
ERM, analytics, and integration software applications. We believe that our
current and future product development efforts will continue this history of
developing leading software applications. However, our existing and future
development efforts may not be completed within our anticipated schedules or, if
completed, the products may not have the features or quality necessary to make
them successful in the marketplace. We test all of our products prior to their
general release and only release our products after the products have equaled or
exceeded our high standards. Despite our vigorous testing, software products may
contain errors or failures, especially when first introduced or when new
versions are released, and could be affected by viruses. Please refer to "Risk
Factors-Software errors or defects in our products could reduce revenues" for
further discussion of risks associated with product development.

Professional Services

We provide a wide range of professional
services to Siebel customers and partners through our worldwide Global Services
Organization. Our Global Services Organization, which is comprised of over 2,000
Siebel professionals, is committed to supporting customers through every phase
of planning, designing, deploying and using Siebel eBusiness
Applications. With its unique access to internal Siebel Systems resources, our
Global Services Organization offers in-depth product knowledge and
industry-specific expertise through such offerings as implementation services, review and
validation services and user adoption services. The following is a brief summary
of the primary services offered by our Global Services Organization:

Implementation Services

While our customers frequently rely on third-party
systems integrators for the majority of their implementation services, our
Global Services Organization often provides a portion of these services to help
mitigate risk and ensure project success. Our Global Services Organization
partners with the world's leading systems integrators through the Siebel
Alliance Program to perform a portion of these implementation services, thereby
helping to ensure that our customers receive the full array of services
necessary to install, integrate, customize and deploy Siebel eBusiness
Applications.

Services offered by our Global Services Organization include
the Technical Account Manager program, Siebel Expert Services and Siebel Global
Competency Practices. Technical Account Managers serve as the customer's
technology advocate throughout the project by sharing their broad experience in
management, design, development and deployment. Siebel Expert Services help
mitigate project risk by delivering technical implementation audits and reviews
throughout the project life cycle. Siebel Global Competency Practices offer new
product and industry-specific expertise to help organizations define and
implement best practices and business processes for Siebel eBusiness
Applications.

Education and User Adoption Solutions



Our Global Services Organization provides comprehensive
education and adoption solutions for deploying Siebel eBusiness
Applications to end users. Through a variety of offerings, including technical
training, end user adoption and sales effectiveness methodologies, the Siebel
University and Siebel Multi-Channel Effectiveness Services groups help customers
and partners develop competencies needed to fully leverage Siebel
eBusiness Applications. Specific user adoption offerings help end users
understand and embrace new business processes and Siebel Systems' technologies
to achieve measurable business results.

Technical Support

Our Technical Support Organization offers a
comprehensive suite of global support programs designed to ensure implementation
success and customer satisfaction. Siebel Technical Support, which we refer to
as maintenance, is delivered from 12 support centers around the world, where
technical support engineers deliver responsive and accurate resolution of
service requests via the Internet, email and telephone.

Marketing and Sales

Our sales and service professionals are
located in 29 countries, with 37 offices in the United States and 47 offices
outside of the United States. Our ability to achieve revenue growth will depend
in large part on how successfully we recruit, train and retain sufficient direct
sales, technical and global services personnel and how well we continue to
establish and maintain relationships with our strategic partners. We believe
that the complexity of our products and the large-scale deployments anticipated
by our customers require a number of highly trained global services
personnel.

Our marketing and sales strategy is composed of the
following key elements:

Target Customers in a Broad Range of Industries and the
Public Sector

We continue to refine our products to meet the
specific requirements of a broad range of industries, such as automotive,
communications and media, finance, high technology, manufacturing, energy,
consumer goods, travel, transportation and life sciences. We have identified and
modeled business processes for more than 20 specific industries and industry
segments, and have embedded those business processes in our applications. By
ensuring that our applications accommodate a particular industry's needs and
methods of business, we believe that we provide greater value to our customers
and deepen their ongoing relationship with us. In addition to solutions for
commercial industries, we also provide a solution targeted towards the
requirements of the public sector, such as federal, state, and local
governments, as well as nonprofit organizations.

Maintain and Extend Advanced Technology Position

We provide what we believe to be the industry's most
comprehensive family of multi-channel business applications, enabling
organizations to sell to, market to and serve customers across multiple channels
and lines of business. Siebel eBusiness Applications enable organizations
to manage, synchronize and coordinate each customer interaction. Utilizing
advanced information technology, Siebel eBusiness Applications are built
on a component-based architecture that provides a broad range of functionality
for business applications deployments.

We intend to continue investing substantial resources in
technological research and development. Our current technological research and
development efforts include:

- Product Footprint:
- Siebel CRM OnDemand:
- Business Process Computing:
- Universal Application Network:
- Smart Web Architecture:
- Full Life Cycle Management to Reduce Total Cost of
Ownership:
- Global Deployment Support:

Develop and Maintain Strategic Alliances
Globally

Having long recognized the power and value of strategic
alliances, one of our core competencies is our ability to develop and maintain
long-term global strategic partnerships with some of the largest and most
influential corporations in the technology marketplace, including Accenture, Cap
Gemini Ernst & Young, Deloitte Consulting, Hewlett-Packard, IBM, Microsoft
and Sun Microsystems. These global strategic alliances with industry leaders
help ensure that we deliver solutions that meet our global customers' sales,
marketing and customer service requirements.

In addition, we have alliance relationships with more than
300 hardware, software, support, integration and training partners to help
ensure the successful deployment of Siebel eBusiness Applications across
the globe. We believe these alliances enable us to deliver the most
comprehensive suite of eBusiness solutions to our customers.

Our global partners as of December 31, 2003, include the
following industry leaders:



|Software and Content                                                                                                                                                                                                                                                                                                                                                    | System Integrator                                                                                                                                                                                                                                                                           | Platform                                                                                                                                                            
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Avaya, Inc.
BEA Systems, Inc.
BMC Software, Inc.
BT plc 
Cisco Systems, Inc.
D & B, Inc.
Genesys Telecommunications 
  Laboratories, Inc.
Group 1 Software, Inc.
IBM Corporation
Mercury Interactive Corporation
Portal Software, Inc.
Quest Software, Inc.
SeeBeyond Technology
  Corporation
TIBCO Software Corporation
VERITAS Software Corporation
webMethods, Inc. | Accenture LTD
Akibia, Inc.
BearingPoint, Inc.
Cap Gemini Ernst & Young S.A.
ClientLogic Corporation
Deloitte Consulting
Extraprise 
 
IBM Corporation
Inforte Corporation
Itochu Techno-Science Corporation
Lockheed Martin Corporation
Surebridge, Inc.
TeleAp S.p.A.
 
Unisys Corporation | AT&T Corp
Fujitsu Siemens Computers B.V.
Hewlett-Packard Company
IBM Corporation
Intel Corporation
Microsoft Corporation
Pitney Bowes, Inc.
 
Sun Microsystems, Inc.

Support Successful Customer
Implementations

Our success depends on our customers' successful
implementations of Siebel eBusiness Applications. To this end, we
actively support the customer's deployment efforts by providing Internet and
telephone technical support and comprehensive instructor-led training and by
assigning to each customer an account management team that consists of a sales
representative, a technical account manager and an executive sponsor.

Expand Global Capabilities

We currently have offices in Argentina, Australia,
Austria, Belgium, Brazil, Canada, China, Columbia, the Czech Republic, Denmark,
Finland, France, Germany, India, Ireland, Italy, Japan, Korea, Mexico, The
Netherlands, Norway, Portugal, Singapore, South Africa, Spain, Sweden,
Switzerland, the United Kingdom and the United States and have introduced
localized versions of Siebel eBusiness Applications in major European and
Asian markets. As market conditions warrant, we may increase our direct sales
and marketing activities worldwide.

International license revenues for 2001, 2002 and 2003 were
$479.3 million, $290.8 million and $240.3 million, respectively, representing
45%, 42% and 50% of software license revenues, respectively. Total international
revenues for 2001, 2002 and 2003 were $838.1 million, $619.2 million and $566.5
million, respectively, representing 40%, 38% and 42% of total revenues,
respectively. Please refer to Note 11 to the accompanying consolidated financial
statements for further discussion of our geographic operations.

Our international operations are subject to a variety of
risks, including: (i) foreign currency fluctuations; (ii) economic or political
instability; (iii) shipping delays; and (iv) various trade restrictions. Because
the vast majority of our software license arrangements are in U.S. dollars,
including many of our international license revenues, our exposure to foreign
currency fluctuations is limited. Please refer to "Risk Factors-Our
international operations involve unique risks" for further discussion of risks
related to foreign operations.

Competition

Our products target the market for
business applications software. This market is highly competitive, rapidly
changing, and significantly affected by new product introductions and the market
activities of other industry participants. Our products are specifically
targeted at the market for customer, partner and employee relationship
information systems, as well as the markets for analytics and application
integration. We face competition primarily from our customers' internal
information technology departments and systems integrators, as well as other
application software providers that offer a variety of products and services
designed to address these markets. We believe that most customer deployments
have been the result of large internal development projects, custom solutions
from systems integrators, or the application of personal and departmental
productivity tools to the global enterprise.

Beginning in 2001 and continuing throughout much of 2003,
the global economy impacted the competitive dynamics of the business
applications market in which we compete in a variety of ways. Specifically, our
customers and prospective customers are increasingly evaluating their software
procurement needs with a focus on the long term total cost of ownership, which
includes the cost of the license and the related professional services, such as
implementation, training, and technical support. With significantly lower
license costs from competitive solutions, and no license cost for internal
projects, our success depends on our ability to adequately communicate the
relative capabilities of our products, the total cost of ownership of the
various alternative solutions (i.e., versus the cost of only the license), and
the total return on investment of each of the various alternatives, as we
believe we compete favorably on each of the factors.

Due primarily to our recognition that each industry has
different business processes, which we addressed with the introduction of
industry-specific versions of our products, we believe we have become a leading
provider of business applications that manage customer, partner and employee
relationships. We have also undertaken a series of product initiatives to expand
the usefulness and reach of business application software functionality, while
at the same time reducing the total cost of ownership of our applications. To
respond to changing competitive dynamics and focus on the total cost of
ownership, we led a team of systems integrators and software vendors in a
collaborative effort to reduce the cost of integrating software applications.
Through this collaborative effort, we introduced UAN and Siebel Business
Integration Applications in the fourth quarter of 2002. UAN is designed to
address one of the primary challenges currently facing the software applications
industry: driving down the cost of application ownership and maintenance.

Similarly, in a collaborative effort with IBM, we
released in the fourth quarter of 2003 Siebel CRM OnDemand, a hosted software
offering designed to allow companies to adopt CRM software solutions quickly,
easily, and in a cost effective manner. In addition, to improve our customers'
ability to make productive use of the information captured in their business
applications and to address the growing business intelligence market, we have
continued to increase the allocation of our product development resources and to
expand our sales efforts related to Siebel Analytics.

A large number of personal, departmental, and other
products exist in thebusiness applications market. Our competitors
include a number of companies that compete with us primarily within a particular
product line (e.g., analytics, interactive selling, etc.) and/or the prospective
customer's industry (e.g., life sciences, financial services, etc.). These
companies include Amdocs Limited; CAS GmbH; Chordiant Software, Inc.; Dendrite
International, Inc.; E.piphany, Inc.; FrontRange Solutions, Inc.; Interact
Commerce Corporation; Kana Software, Inc.; ONYX Software Corporation; Pivotal
Corporation; Salesforce.com, Inc.; and StayinFront, Inc., among many others. In
addition, our competitors include several companies, such as Oracle Corporation,
PeopleSoft, Inc. and SAP AG, which compete in a majority of our product
lines.

We believe that we compete favorably in this marketplace
based on the following competitive advantages: breadth and depth of
functionality, modern and enduring Web-based product architecture, tailored
industry-specific design, an ability to manage all customer interactions across
multiple channels, configurable business objects, support for the global
enterprise, scalability allowing support for large user communities and
strategic alignments with industry leaders. In general, we have priced our
products at or above those of many of our competitors, and we believe this
pricing is justified by the scope of functionality delivered and the performance
characteristics afforded by our products. As a result, we have approximately 2.2
million deployed users, which we believe well exceeds that of our closest
competitors.

Please refer to "Risk Factors-To be successful, we must
effectively compete in the business applications market."

Employees

As of December 31, 2003, we had a total
of 4,972 employees, of which 1,019 were engaged in sales and marketing; 1,341
were engaged in product development; 2,077 were engaged in global services; and
535 were engaged in information technology support, finance and administration.
None of our employees are bound by employment agreements and none of our
employees are represented by a labor union. We have not experienced any work
stoppages and consider our relations with our employees to be good.

Availability of this Report

We intend to make this annual report
publicly available on our website (www.siebel.com) without charge immediately
following our filing with the Securities and Exchange Commission ("SEC"). We
assume no obligation to update or revise any forward-looking statements in this
annual report, whether as a result of new information, future events or
otherwise, unless we are required to do so by law. A copy of this annual report
is available without charge upon written request to: Corporate Secretary, Siebel
Systems, Inc., 2207 Bridgepointe Parkway, San Mateo, California 94404.

Further, a copy of this annual report is located at the
SEC's Public Reference Room at 450 Fifth Street, NW, Washington, D.C. 20549.
Information on the operation of the Public Reference Room can be obtained by
calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that
contains reports, proxy and information statements, and other information
regarding our filings at www.sec.gov.



Item 2. Properties

Our principal administrative, sales,
marketing, support and research and development facilities are located in San
Mateo, California, pursuant to leases that expire between September 2012 and
December 2015, and Emeryville, California, pursuant to a lease that expires in
March 2013. As of December 31, 2003, we were occupying approximately 667,000
square feet in our San Mateo locations and approximately 200,000 square feet in
our Emeryville location. We currently also occupy a number of domestic and
international sales and support offices pursuant to leases that expire between
2004 and 2022.

We believe that our current facilities are suitable and
adequate for our current needs and suitable additional or substitute space will
be available as needed to accommodate expansion of our operations. See Note 6 to
the Consolidated Financial Statements for information regarding our lease
obligations.



Item 3. Legal Proceedings

On August 22, 2003, we and our Board
of Directors settled a derivative suit filed by Teachers' Retirement System of
Louisiana ("TRSL"), a Louisiana public trust fund. We 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 our 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, we agreed: (i) to implement certain
enhancements to our 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 SEC contacted us and indicated that a May 1, 2003 article on CBS
MarketWatch had raised questions regarding our compliance with Regulation FD. In
August 2003, the SEC Staff notified us and two of our officers of the SEC
Staff's preliminary decision to recommend that the SEC take enforcement action
against us 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. We, along with our officers, have
filed submissions with the SEC in response to the SEC notices and we believe
that these submissions contain numerous meritorious defenses to these
allegations. As we disclosed during our 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, we expect that it will continue though its normal
course of civil action.

On March 10, 2004, William Wollrab, on behalf of himself and purportedly on behalf
of a class of our shareholders, filed an action in the United States District Court
for the Northern District of California against us and certain of our
officers.  This action alleges claims in connection with various public statements made
by us and seeks damages together with interest and reimbursement of costs and
expenses of litigation.  The action is in the very preliminary stages and has not yet been
served on either us or the named officers.  We anticipate that additional similar
actions may be filed in the future.  We believe the allegations in this action are completely
without merit and we intend to defend vigorously against these claims.

In addition, we are subject to legal proceedings and
claims, either asserted or unasserted, that 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 matters will have a material adverse effect on our consolidated financial
position, although results of operations or cash flows could be affected in a
particular period.



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

No matters were submitted to a vote
of our security holders during the fourth quarter of 2003.



PART II



Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities

(a) Our common stock is traded on the Nasdaq National
Market under the symbol "SEBL." The following high and low sales prices were
reported by Nasdaq in each quarter during the last two years:

`Quarter Ended               Low      High
------------------------------------ -------- --------
March 31, 2002...................... $ 27.25  $ 38.38
June 30, 2002.......................   12.55    34.27
September 30, 2002..................    5.72    14.92
December 31, 2002...................    5.33     9.50
March 31, 2003......................    7.15     9.89
June 30, 2003.......................    7.48    12.23
September 30, 2003..................    8.58    11.50
December 31, 2003...................    9.94    14.56`

As of December 31, 2003, we had approximately 1,740
holders of record of our common stock. Our policy has been to reinvest earnings
to fund future growth and, accordingly, we have never paid any cash dividends on
our common stock and do not expect to pay any such dividends in the foreseeable
future. The last reported sale price of our common stock as of February 16,
2004, was $13.92 per share.

(b) We have applied all of the proceeds of our initial public offering to our
operations.

(c) We did not repurchase any of our equity securities in the fourth quarter of
2003.

(d) The information required by this Item is incorporated by
reference from the section entitled "Section VI. Equity Compensation Plan
Information" in Item 7 of this annual report.



Item 6. Selected Financial Data

The following selected financial
data should be read in conjunction with our consolidated financial statements
and notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this annual report.
The selected financial data for each of the years in the three-year period ended
December 31, 2003, and as of December 31, 2002 and 2003, is derived from our
consolidated financial statements that have been included in this annual report.
The selected financial data as of December 31, 1999, 2000 and 2001 and for the
years ended December 31, 1999 and 2000, is derived from consolidated financial
statements that have not been included in this annual report.

For each of the periods presented, our financial data has
been restated to reflect the acquisitions of OnTarget, Inc. in 1999; and
OpenSite Technologies, Inc., OnLink Technologies, Inc. and Janna Systems Inc. in
2000; all of which have been accounted for as poolings-of-interests.

`Year Ended December 31,
                                                             ---------------------------------------------------------------
                                                                1999         2000         2001         2002         2003
                                                             -----------  -----------  -----------  -----------  -----------
                                                                     (in thousands, except per share data and employees)
Financial Data:                                                                                                              
   Total revenues..........................................  $  822,454   $1,820,206   $2,084,596   $1,635,307   $1,354,228
   Operating income (loss) (1) (2).........................  $  161,187   $  322,535   $  357,882   $  (94,262)  $  (33,739)
   Net income (loss) (1) (2)...............................  $  110,025   $  221,899   $  254,575   $  (35,704)  $   (3,396)
   Net income (loss) available to
    common stockholders (1) (2) (3)........................  $   56,861   $  123,144   $  254,575   $  (35,704)  $   (3,396)
   Diluted net income (loss) per common share (1) (2) (3)..  $     0.12   $     0.24   $     0.49   $    (0.08)  $    (0.01)
   Basic net income (loss) per common share (1) (2) (3)....  $     0.15   $     0.29   $     0.56   $    (0.08)  $    (0.01)
   Cash and short-term investments.........................  $  685,199   $1,152,584   $1,656,655   $2,161,604   $2,023,206
   Total assets............................................  $1,275,601   $2,161,741   $2,744,844   $3,033,018   $2,850,860
   Convertible subordinated debentures.....................  $  300,000   $  300,000   $  300,000   $  300,000   $       --
   Mandatorily redeemable convertible
    preferred stock........................................  $   80,459   $       --   $       --   $       --   $       --
   Total stockholders' equity..............................  $  644,670   $1,279,946   $1,836,102   $1,957,460   $2,050,226
   Cash flows from operations..............................  $   89,746   $  438,568   $  588,201   $  433,203   $  188,034
   Employees...............................................       3,604        7,389        7,403        5,909        4,972`

1. We completed a restructuring of our operations and an
associated workforce reduction during both 2002 and 2003; a tender offer for
certain employee options during 2002; and incurred a charge related to certain
acquired technology during 2003. Please refer to Notes 2, 8 and 3 to our
consolidated financial statements, respectively, for a further discussion of
each of these activities.
2. In accordance with SFAS No. 142 "Goodwill and Other
Intangible Assets" ("SFAS 142"), we ceased amortizing goodwill on January 1,
2002. Amortization of goodwill was not significant for any period presented in
the above table. Please refer to Note 3 to the accompanying consolidated
financial statements for a further discussion of the impact on our operations of
ceasing amortization of goodwill.
3. Net income has been reduced by the accretion of
OpenSite's mandatorily redeemable convertible preferred stock to determine net
income available to common stockholders. The accounting for OpenSite's
mandatorily redeemable convertible preferred stock required non-cash accretion
to the then current fair value of the common stock into which the mandatorily
redeemable convertible preferred stock was convertible. This resulted in a
non-cash charge to accretion and offsetting credit to mandatorily redeemable
convertible preferred stock for each of the years ended December 31, 1999 and
2000, the only periods in which the mandatorily redeemable convertible preferred
stock was outstanding. The amount of accretion for a statement of operations
period was dependent upon how much the fair value of OpenSite's common stock
fluctuated during that period. In connection with our acquisition of OpenSite,
the holders of the mandatorily redeemable convertible preferred stock converted
their shares pursuant to its existing terms on a one-for-one basis into shares
of OpenSite's common stock. Accordingly, we stopped recording accretion on the
mandatorily redeemable convertible preferred stock on May 17, 2000, the date of
acquisition.



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

Executive Summary

The following discussion is provided
to enable a better understanding of our operating results for 2003, including
(i) a brief discussion of our business and products, (ii) key factors that
impacted our performance during 2003, (iii) a summary of our operating results
and certain key financial metrics for 2003, and (iv) our outlook for 2004,
including certain risks that may impact our on-going operations. This executive
summary should be read in connection with the more detailed discussion and
analysis of our financial condition and results of operations in this Item 7,
the section below in this Item 7 entitled "Risk Factors", and our consolidated
financial statements, which are included following Item 15 of this annual
report.

Overview of Our Business and Products

We are a leading provider of business
applications software. Substantially all of our revenues are derived directly or
indirectly from a perpetual license of our software products. Specifically, we
license our software solutions in multi-element arrangements that include a
combination of our software, customer support and/or professional services
(e.g., training or implementation services). Payment terms for our customer
arrangements are negotiated with the individual customer and determined based on
a variety of factors, including the customer's credit standing and our history
with the customer.

Our software applications enable an organization to
better manage its relationships with its customers, partners and employees. A
substantial portion of our software license revenue is derived from our customer
relationship management, or CRM, solutions, which provide organizations with an
integrated approach to identifying, acquiring and retaining customers. For
example, our CRM applications: (i) provide sales organizations with a
comprehensive view into the sales pipeline, enabling sales professionals to
identify specific actions that will help them better manage opportunities to
rapid closure, (ii) assist marketing organizations to increase campaign response
rates and reduce customer-acquisition costs, and (iii) assist service
organizations to reduce response times with customers, improving customer
satisfaction.

In addition to licensing our CRM applications on a
per-user basis, we introduced Siebel CRM OnDemand in the fourth quarter of 2003.
Siebel CRM OnDemand is a hosted software solution that provides CRM
functionality over the Internet. Siebel CRM OnDemand is provided to our
customers for a monthly per-user subscription fee, with a typical contractual
period of one year. Siebel CRM OnDemand allows our customers to implement CRM
software solutions quickly, easily and cost effectively. Siebel CRM OnDemand
integrates with our on-premise licensed suite of products, enabling
organizations to deploy our solutions in any combination of online hosted or on-premise
delivery models.

In addition to our CRM applications, we provide software
solutions that help organizations manage their employee relationships, better
analyze corporate and customer data, and lower the cost of integrating software
applications. Specifically, our employee relationship management applications
enable an organization to increase employee and organizational performance and
improve employee satisfaction by aligning employee performance with corporate
objectives and providing employees with the information resources they need to
be successful. Our business intelligence (otherwise known as analytics) and
integration software applications help organizations to more fully leverage the
value of their corporate information. Specifically, our analytics applications
make it possible to analyze large volumes of corporate data quickly and easily,
while our integration applications allow organizations to share data and
processes among different software applications.

Our professional services and technical support
organizations provide: (i) implementation services (i.e., assistance with the
integration of our software with the customers' other software and hardware
applications), (ii) training services for our customers regarding how to use our
software, and (iii) customer support services, otherwise known as maintenance,
which include technical support for the related software product and future
product updates.

Our professional services are typically provided over a
period of three to six months subsequent to the licensing of our software and,
accordingly, our professional services revenues vary directly with the levels of
software license revenue generated in the preceding three to six month period.
Substantially all of our professional service arrangements are billed on a time
and materials basis. Maintenance is typically sold with the related software
license for a period of one year and is renewable at the option of the customer
on an annual basis thereafter. Our maintenance revenues depend upon both our
ability to generate additional software license revenue and annual renewals of
maintenance agreements by our existing customer base.

Internal Controls and Corporate Governance

We have historically considered our internal
controls over financial reporting a high priority and will continue to do so
through a continual review of and resulting improvement in our internal
controls. For example, we have substantially completed the documentation and
testing of our internal controls as required by Section 404 of the Sarbanes-Oxley
Act, or SOX, as of December 31, 2003, a year prior to the date required
for companies with a calendar year end. Based on the testing of our internal
controls, we believe that our internal controls are functioning as designed and
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of our financial statements in accordance with generally
accepted accounting principles in the United States. With the work we have
completed to date, we believe that we are well-positioned for our auditors to
issue their attestation report on our internal controls in 2004. In addition, we
have formed an Internal Controls Committee, comprised primarily of senior
financial and legal personnel, which helps ensure our internal controls over
financial reporting are complete, accurate and appropriately documented.

In addition to maintaining robust internal controls, we
follow high professional standards in measuring and reporting our financial
performance. Specifically, we have adopted a code of ethics for all of our
employees and directors, which requires a high level of professionalism and
ethical behavior. We believe that our accounting policies are prudent and
provide a clear view of our financial performance. We utilize our internal audit
function to help ensure that we follow these accounting policies and maintain
our internal controls. We have formed a Disclosure Committee, comprised
primarily of senior financial and legal personnel, to help ensure the
completeness and accuracy of our financial results and disclosures. In addition,
prior to the release of our financial results, key members of our management
review our operating results and key accounting policies and estimates with our
Audit Committee, which is comprised solely of independent members of our Board
of Directors. Please refer to the section entitled "Item 10. Directors and
Executive Officers of the Registrant" of this annual report for a further
discussion of our policies regarding corporate governance and our code of
ethics.

Operating Environment and Key Factors Impacting our
2003 Results

Our operating results for 2003 were impacted by
several factors, including macro-economic conditions, economic conditions in the
information technology industry and a general cautiousness and uncertainty
within the application software industry. In addition, we have carefully
reviewed our own performance and taken steps that we believe will improve our
performance, even in difficult macro- and micro-economic environments. For
example, as discussed further below, we completed a further restructuring of our
operations during 2003 that we believe will: (i) strengthen our competitive
position; (ii) reduce our cost structure, thereby improving our revenue per
employee, operating margin and overall operating performance; and (iii) better
align our management and organizational structure in order to return to
sequential quarterly revenue growth.

Our operating results for 2003 were comprised of two
distinct periods: (i) the first half of 2003, which was characterized by
declining sequential quarterly software license revenues and declining operating
margins; and (ii) the second half of 2003, which was characterized by
stabilizing revenue in the third quarter and increasing sequential quarterly
software license revenues in the fourth quarter, improvement in operating margin
and many of our key financial metrics, and a general growth in our operations,
as discussed further below. The following is a brief summary of some of the key
factors impacting our operating performance during 2003:

The Economy

We believe that much of the dichotomy in our
operating results for 2003 is attributable to economic factors, the decline in
the stock market and the associated confidence of corporations in the global
economy. Throughout 2001 and continuing through the first half of 2003, economic
conditions in many of the countries in which we operate either deteriorated or
stabilized at depressed levels. For instance, many of the leading economic
indicators showed signs of weakness during this period, corporate and consumer
confidence in the economy remained very cautious and unemployment in the United
States reached a nine-year high. Further, we believe that geopolitical
uncertainties, including hostilities involving the United States, exacerbated
corporations' general cautiousness in setting their capital spending budgets.

Beginning in July 2003 and continuing throughout the
second half of 2003, economic conditions in many of the countries in which we
operate began to show signs of strengthening. For instance, corporate and
consumer confidence in the economy improved, the U.S. gross domestic product, or
GDP, grew at annualized rate of over 8% in the third quarter and over 4% in the
fourth quarter of 2003, and the U.S. Department of Labor continued to report an
increase in the number of jobs created throughout the fourth quarter of
2003.

Our operating results mirrored the performance of the
global economy. Specifically, many of our key financial metrics (e.g., software
license revenues and operating margin) were below our expectations in the first
half of 2003, but showed signs of strengthening in the second half, particularly
the fourth quarter, of 2003. For example, our software license revenue increased
sequentially by 37% from the third to the fourth quarter of 2003. We also
achieved an operating margin of 15% in the fourth quarter, in advance of our
previous expectations of achievement in late 2004.

Economic Conditions in the Information Technology
Industry

We believe that the weak economic conditions that
persisted in the first half of 2003 disproportionately impacted the information
technology industry in which we operate. Many corporations intensified their
efforts to identify and realize potential cost savings in these difficult
economic circumstances. As a result, capital spending by corporations--specifically
information technology spending--was delayed. In addition, many
corporations made capital expenditures in previous years in anticipation of
future growth that did not materialize and, accordingly, these corporations have
reduced their current capital expenditures until their operations return to
positive growth.

As general economic conditions began to improve in the
second half of 2003, capital spending by corporations-specifically information
technology spending-increased. According to the U.S. Department of Commerce, one
of the major contributors to the increase in GDP in the second half of 2003 was
purchases of "equipment and software." Our operating results showed a similar
improvement in the second half of 2003 as we began to see an increase in the
number of companies evaluating their CRM needs. While it is still too early to
determine if the recent improvement in both general economic conditions and
information technology spending will continue, we believe demand levels may be
stabilizing and may also be showing signs of returning to positive growth.

General Cautiousness and Uncertainty

We believe that our results for much of 2003 were
negatively impacted by the general cautiousness and uncertainty in the
marketplace. Corporations monitored and continue to monitor global tensions and
evaluate the potential for another significant terrorist attack. Further, during
the first half of 2003, several of our direct and indirect competitors announced
their intention to merge or took steps to avoid being acquired by another
competitor, which only intensified the uncertainty and cautiousness within the
application software industry. As a result, we believe technology spending and,
more importantly application software spending, was negatively impacted during
the first six to nine months of 2003. For example, a survey of information
technology executives in mid 2003 indicated that 61% of such executives had or
intended to spend less than their full budget for capital expenditures in
2003.

While this cautiousness and uncertainty within the
economy negatively impacted our operating results in the first half of 2003, we
believe that the marketplace is generally becoming more "cautiously optimistic"
due in part to a tentative economic recovery. For example, recent surveys
indicate a growing number of information technology executives plan to increase
their company's spending on information technology. Once again, it is still too
early to determine if this recent improvement will continue, but we are
cautiously optimistic that our operating results may be showing signs of
returning to positive growth.

Summary of Our Operating Results for 2003 and Certain
Key Financial Metrics

Our operations and financial performance during
the first half of 2003 were directly and negatively impacted by the factors
discussed above. Specifically, many of our customers and potential customers:
(i) delayed the initiation of the purchasing process; (ii) increased the
evaluation time of a software purchase; and/or (iii) reduced their capital
expenditure budgets, thereby restricting their software procurement to
well-defined current needs. As a result of these and other factors, both the number
of software license revenue transactions and average transaction size were
negatively impacted during the first half of 2003, with individual transactions
generating license revenues greater than or equal to $5 million affected to the
greatest extent.

In order to reverse the decline in many of our key
financial metrics, such as software license revenue, revenue per employee, and
operating income, we took several steps to improve our operating performance and
sales execution, including the following:

- During 2002 and 2003, we maintained many of our
previously implemented cost controls. Specifically, management continued to
reduce advertising expenditures; maintained our Chief Executive Officer's salary
at one dollar per year; deferred merit increases; and reduced discretionary
expenditures, such as travel and recruiting.
- During 2003, we continued to reduce the discretionary
portion of our operating costs through the implementation of various new cost
control initiatives, including: (i) tying bonuses more closely to the
achievement of financial objectives, (ii) reducing depreciation, primarily
through reduced capital expenditures, and (iii) instituting additional
procedures to further reduce other discretionary expenditures, such as costs
related to outside consultants, travel and recruiting.
- Through our continued evaluation of economic conditions
in the information technology industry and based upon our expectations regarding
revenue levels, we initiated a further restructuring of our operations in the
second quarter of 2003 (the "2003 Restructuring"). The 2003 Restructuring was in
addition to the previously completed restructuring of our operations and an
associated workforce reduction in 2002 (the "2002 Restructuring" and
collectively with the 2003 Restructuring, the "2002 and 2003 Restructurings").
We completed the 2003 Restructuring in September 2003.
- In the second half of 2003, we began the process of
realigning our worldwide sales organization into three geographic operating
units-the Americas, Europe Middle East and Africa ("EMEA"), and Asia Pacific. We
completed this realignment in early January 2004 and, accordingly, appointed one
of our sales executives as the president of each of these geographical units.
Each of these presidents report directly to our CEO.

Due primarily to these actions, we were able to improve
several key operating metrics.

Key Financial Metrics for 2003

Despite the difficult economic challenges faced
throughout the first half of 2003, we were able to improve several key financial
metrics and performance indicators, particularly in the second half of 2003. The
following is a brief summary of our key financial metrics and operating results
for 2002 compared to 2003, along with a quarterly trend analysis for 2003:

`Year Ended December 31,            Year Ended December 31, 2003
                                                             ------------------------  -------------------------------------------------
                                                                 2002         2003         Q1          Q2           Q3           Q4
                                                             -----------  -----------  ----------- -----------  -----------  -----------
                                                                               (in thousands, except percentages and DSO)

  Revenues:                                                                                                                              
   Software license revenues...............................  $  700,344   $  482,274   $  112,092  $  109,894   $  110,003   $  150,285
   Maintenance revenues....................................     422,502      449,345      108,522     113,271      110,046      117,506
   Professional services and other revenues................     512,461      422,609      112,141     110,134      101,383       98,951
                                                             -----------  -----------  ----------- -----------  -----------  -----------
        Total revenues.....................................  $1,635,307   $1,354,228   $  332,755  $  333,299   $  321,432   $  366,742
                                                             ===========  ===========  =========== ===========  ===========  ===========
  Costs and expenses:                                      
   Restructuring and acquisition-related expenses (1)......  $  205,305   $  112,152   $       --  $      274   $  107,216   $    4,662
   All other costs and expenses (2)........................   1,524,264    1,275,815      336,042     327,934      305,521      306,318
                                                             -----------  -----------  ----------- -----------  -----------  -----------
        Total costs and expenses...........................  $1,729,569   $1,387,967   $  336,042  $  328,208   $  412,737   $  310,980
                                                             ===========  ===========  =========== ===========  ===========  ===========

  Other key financial statistics:                          
   Operating income (loss).................................  $  (94,262)  $  (33,739)  $   (3,287) $    5,091   $  (91,305)  $   55,762
   Operating margin........................................          (6)%         (2)%         (1)%         2 %        (28)%      15.20 %
   Cash and short-term investments.........................  $2,161,604   $2,023,206   $2,220,845  $2,301,751   $2,026,960   $2,023,206
   Days sales outstanding ("DSO")..........................          63           64           63          58           53           64
   Working capital.........................................  $1,940,261   $1,708,898   $1,966,169  $2,020,455   $1,756,169   $1,708,898
   Long-term debt..........................................  $  300,000   $       --   $  300,000  $  300,000   $       --   $       --
   Total stockholders' equity..............................  $1,957,460   $2,050,226   $1,975,710  $2,032,559   $1,972,664   $2,050,226
   Cash flows from operations..............................  $  433,203   $  188,034   $   62,811  $   52,900   $   37,473   $   34,850`

1. Please refer to "Restructuring and Related Expenses" and
"Purchased In-Process Product Development" in the following pages for a further
discussion of these expenses.
2. Represents total cost of revenues, product development
expense, sales and marketing, and general and administrative expenses. We
believe these expenses are more representative of our on-going
operations.

The following is a brief discussion of the above financial
metrics and an analysis of the reasons for the change between 2002 and 2003,
including recent trends in our results:

- Software license revenues

`Year Ended December 31, 2003
                                                             -------------------------------------------------
                                                                  Q1           Q2           Q3          Q4
                                                             -----------  -----------  ----------- -----------
  Software license summary:                                                                            (1)
   Software license revenues...............................  $  112,092   $  109,894   $  110,003  $  150,285
   Number of transactions greater than $5 million..........           2            2            3           5
   Number of transactions greater than $1 million..........          34           27           19          42
   Average transaction size................................  $      282   $      344   $      347  $      370
   Annualized total revenue per employee (2)...............  $      226   $      233   $      243  $      295`

1. Our fourth quarter is impacted by seasonality because
many of our customers utilize a significant portion of their capital budgets at
the end of their fiscal year and the fourth quarter is the end of our sales
quota year. We believe seasonality only accounts for a portion of the increase
in our results, as our software license revenues for the fourth quarter exceeded
our previous expectations and historical increases from the third quarter. For
example, fourth quarter amounts exceeded third quarter amounts by 37% in 2003
versus growth of 24% in comparable periods in 2002.
2. Calculated as total revenue for the quarter divided by
average employees for the quarter, the result of which is multiplied by four
(i.e., four quarters) to arrive at an annualized amount.

As the above table indicates, many of our software license
metrics improved throughout the year, particularly in the second half of 2003.
Specifically, we were able to:

- stabilize revenue in the third quarter and return our
software license revenues to sequential quarterly growth in the fourth quarter
of 2003;
- increase the number of our significant transactions. For
example, the number of transactions generating software license revenue greater
than $5 million increased from two in each of the first two quarters of 2003 to
three in the third quarter of 2003 and five in the fourth quarter of 2003.
Further, while the number of transactions generating software license revenue
greater than $1 million was consistent in both the first half and second half of
2003 (61 transactions in each of these periods), a greater proportion of these
transactions were in the $2 to $4 million range in the second half of 2003
compared to the first half of 2003;
- increase the average software license transaction size
throughout 2003 from $282,000 in the first quarter of 2003 to $370,000 in the
fourth quarter of 2003 (our best performance in over seven quarters); and
- increase our total revenue per employee throughout 2003
from $226,000 in the first quarter of 2003 to $295,000 in the fourth quarter of
2003.

Management believes much of this improvement is due to: (i)
an improving global economy; (ii) an increase in the number of customer
evaluations of CRM applications, with a conversion rate comparable to our
historical win rates; (iii) the continued realignment of our worldwide sales
organization; and (iv) some seasonality with respect to the fourth quarter.
While it is still too early to determine if this recent improvement will extend
to 2004, we believe that the above factors, coupled with our interactions with
our customers, indicate that demand levels may be stabilizing or even showing
signs of returning to positive growth.

- Maintenance revenues
- Professional services and other revenues
- Total revenue per employee
- Total quarterly costs and expenses
- Targeted quarterly operating margin
- Elimination of substantially all of our long-term
debt
- Cash and short-term investments
- Increase in overall liquidity
- Credit and collections
- Working capital
- Stockholders' equity
- Stock option overhang

Key Milestones Achieved during 2003

The following is a discussion of several key
non-financial milestones that we achieved during 2003:

- Industry analysts continued to acknowledge our product
leadership. For example, Gartner, Inc., a prominent information technology
research firm, listed us in the "leader" quadrant position in four of its 2004
CRM Magic Quadrant evaluations1and rated us "Positive" or "Strong
Positive" in six of its MarketScope research notes2 for the first
half of 2004. The Gartner Magic Quadrant and MarketScope evaluations provide an
objective and rigorous analysis of technology suppliers' global capabilities,
breadth and depth of functionality, proven scalability, technology innovation,
company viability and vision, and their installed customer base. Overall, these
reports assess a vendor's success in developing, selling, deploying, supporting
and extending its applications.3
- We believe that we were able to maintain our market
share at comparable levels to those achieved in 2002 in the majority of the
product categories in which we operate and to continue as the technology leader
in the CRM market.
- In the fourth quarter of 2003, we introduced Siebel CRM
OnDemand, a hosted CRM service designed to allow organizations to generate more
sales leads, enhance lead qualification and management, improve sales
forecasting, shorten sales cycles and provide improved customer service. To
further complement our Siebel CRM OnDemand product offering, we acquired UpShot
Corporation ("UpShot"), a leading provider of hosted sales automation software
applications, in November 2003.
- We continued our commitment to innovative product
development with the announcement of our new CRM for Everyone product strategy.
CRM for Everyone encompasses new industry-specific CRM products, a new analytics
platform and suite of analytics applications, new business integration
solutions, and Siebel CRM OnDemand.
- In addition to our internal development efforts, we
completed several key acquisitions during 2003, the most significant of which
was the acquisition of UpShot. In addition, we improved our portfolio of
technology, both developed and in the process of development, with the
acquisitions of certain technology related to our incentive compensation
solutions, business analytics solutions and outbound messaging
solutions.
- Our customer satisfaction levels continued at high
levels, with an overall customer loyalty rating of 98%, based on a survey
conducted in the third quarter of 2003. Customer loyalty is defined as customers
who indicate they intend to continue using, upgrade to, and/or purchase
additional products from us.

___________

1



2



3



The MarketScope is copyrighted January and February 2004 by Gartner, Inc. and
is reused with permission. The MarketScope is an evaluation of a marketplace at
and for a specific time period. It depicts Gartner's analysis of how certain
vendors measure against criteria for that marketplace, as defined by Gartner.
Gartner does not endorse any vendor, product or service depicted in the
MarketScope, and does not advise technology users to select only those vendors
with the highest rating. The MarketScope is intended solely as a research tool.
Gartner disclaims all warranties, express or implied, with respect to this
research, including any warranties of merchantability or fitness for a
particular purpose.

---

Outlook for 2004

We intend to continue to work to improve the
above financial metrics, including returning our software license and total
revenues to sequential quarterly growth and year-over-year growth as the year
progresses (i.e., not in the first quarter of 2004). Although uncertainty in
global economic conditions continues to make it difficult to predict product
demand, we currently anticipate that our software license revenues will increase
in 2004 compared to 2003 and that our maintenance revenues and professional
services/other revenues will remain comparable to or increase in 2004 compared
to 2003. Our ability to grow our maintenance and professional service revenues
depends primarily on our ability to continue to grow our quarterly software
license revenues. As our software license revenues return to positive growth, we
anticipate that our professional services revenue will also return to positive
growth and our maintenance revenue will increase incrementally.

Our expectations regarding our software license revenues
may be negatively impacted by many factors, including: (i) a deterioration in
global economic conditions and/or information technology spending; (ii)
corporate and consumer confidence in the economy; (iii) additional terrorist
attacks; (iv) geopolitical uncertainties, including continued hostilities
involving the United States; (v) continued intense competition, including new
technological innovations within our industry; (vi) the uncertainty in the
application software industry and resulting reductions in capital expenditures;
(vii) the loss of key employees; and (viii) other factors described under "Risk
Factors" below.

We expect "total costs and expenses" (excluding the
significant unusual charges discussed above incurred in 2003) to remain
comparable in 2004 to the levels in 2003. While we believe that the expense
savings from the 2003 Restructuring and our cost control initiatives will result
in a significant decrease in our annual operating expenses from where operating
expenses would have been absent the 2003 Restructuring, we expect these cost
savings to be offset or partially offset by: (i) a renewal of merit increases
for all employees; (ii) a growth in the number of employees in order to meet an
anticipated increase in demand for our products and services; (iii) an increase
in marketing expenditures; (iv) an increase in costs associated with our
compliance with SOX; and (v) an increase in expenses that vary directly with
revenues, such as commissions, incentive compensation and bad debt expense,
among others.

With regard to our cost savings, we achieved expense
savings from the 2003 Restructuring in the fourth quarter of 2003 (as compared
to the second quarter of 2003) in excess of our target of $30 million and we
expect to recognize up to an additional $10 million of quarterly savings by the
end of 2004 (an aggregate decrease in excess of $40 million in quarterly
expenses from where operating expense would have been absent the 2003
Restructuring). We expect that in 2004 we will obtain additional cost savings
from the 2003 Restructuring, primarily from an anticipated decline in
depreciation expense, decreases in facility-related expenditures and additional
savings from the relocation of a portion of our technical support, quality
assurance and other product development operations to lower cost labor markets.
We believe these quarterly savings of $40 million may be offset by increases in:
(i) compensation (e.g., increases in base compensation due to merit increases
and the expansion of our workforce (depending on revenue growth), along with
increases in incentive compensation), (ii) marketing expenditures, and (iii)
commissions, among other expense increases.

As a result of the anticipated increase in our revenues
coupled with our continued expense controls, we expect operating income and
margin to increase in 2004 from levels obtained in 2003. Our expectations
regarding operating income are directly dependent upon our ability to grow
software license revenues.

Our expectation regarding expenses, particularly certain
marketing and compensation-related expenses, and our operating margin may vary
from the above expectations, depending in part on the level of revenue and
profits. Specifically, our inability to estimate the timing and amount of our
future revenues could significantly impact our future operations. Our sales
personnel monitor the status of all proposals, including the estimated closing
date and potential dollar amount of each transaction. We aggregate these
estimates periodically to generate a sales pipeline and then evaluate the
pipeline to identify trends in our business. This pipeline analysis and related
estimates of revenue may differ significantly from actual revenues in a
particular reporting period as the estimates and assumptions were made using the
best available data at the time. Specifically, the slowdown in the global
economy and information technology spending, among other factors, has caused and
may continue to cause customer purchasing decisions to be delayed, reduced in
amount or canceled, all of which have reduced and could continue to reduce the
rate of conversion of the pipeline into contracts. A variation in the pipeline
or in the conversion rate of the pipeline into contracts could cause us to plan
or budget inaccurately and thereby could adversely affect our business,
financial condition or results of operations. In addition, because a substantial
portion of our software license contracts close in the latter part of a quarter,
management may not be able to adjust our cost structure to respond to a
variation in the conversion of the pipeline, which may adversely and materially
affect our business, financial condition and results of operations.

We currently expect our effective tax rate for 2004 to be
approximately 36%. The estimated effective tax rate is based on current tax law
and our expected income and may be affected by the jurisdictions in which
profits are determined to be earned and taxed and our ability to realize
deferred tax assets. As discussed in Note 10 to the accompanying consolidated
financial statements, our U.S. Federal income tax returns for 1998, 1999 and
2000 are currently under examination by the Internal Revenue Service ("IRS").
During 2003, we received notices from the IRS of proposed adjustments to these
tax returns. While the final resolution of the IRS's ongoing examination is
uncertain, we believe that we have made adequate provision in the accompanying
consolidated financial statements for any adjustments that the IRS has or may
propose with respect to our U.S. Federal income tax returns. The final
determination of our tax obligations may exceed the amounts provided by us in
the accompanying consolidated financial statements. We will continually review
our estimates related to our income tax obligations, including potential
assessments from the IRS of additional taxes, penalties and/or interest, and
revise our estimates, if deemed necessary. A revision in our estimates of our
tax obligations will be reflected as an adjustment to our income tax provision
at the time of the change in our estimates. Such a revision could materially
impact our effective tax rate, income tax provision, and net income.

Discussion of the Results of Operations for Each
of the Years Ended December 31, 2001, 2002 and 2003

Please refer to Note 1 to the
accompanying consolidated financial statements and the section entitled
"Application of Critical Accounting Policies and Use of Estimates" in the
following pages for a description of our accounting policies and our use of
estimates.

Revenues

Our total revenues declined on a year-over-year
basis during each of the last two years, declining from $2,084.6 million in 2001
to $1,635.3 million in 2002 and $1,354.2 million in 2003. This decrease is
primarily due to decreased software license revenues and the resulting impact on
our professional services revenues. As more fully explained below, our software
license revenues have decreased in each of the last two years primarily due to
the weak economic conditions.

Despite these weak economic conditions, we have taken
several steps to improve our overall financial performance, including a
realignment of our worldwide sales organization in the second half of 2003 and
the completion of the 2002 and 2003 Restructurings. As a result of these
efforts, we began to see improvement during 2003 of several of our key operating
metrics. For example, revenue per average employee increased from $246,000 per
employee in 2002 to $249,000 per employee in 2003, which is after a decline
during 2002 from $264,000 in 2001. In addition, we achieved revenue per average
employee of $295,000 in the fourth quarter of 2003, which were levels that have
not been obtained since the first quarter of 2001. While we do not expect to
achieve the levels obtained in the fourth quarter for the full year 2004
(primarily due to seasonality with respect to the fourth quarter of each year),
we do expect to continue to improve this metric in 2004 from the $249,000
achieved for the full year 2003. The following is a discussion of each component
of our total revenues.

Software

The following table sets forth our software
license revenues in terms of absolute dollars, as a percentage of total
revenues, and year-over-year changes to our software license revenues for 2001,
2002 and 2003 (in thousands, except percentages):

`Year Ended December 31,
                                                ----------------------------------------------
                                                     2001            2002            2003
                                                --------------  --------------  --------------
Software license revenue metrics:                                                             
   Software license revenues................... $ 1,065,618     $   700,344     $   482,274
   Year-over-year change, absolute dollars..... $   (49,135)    $  (365,274)    $  (218,070)
   Year-over-year change, percentage...........          (4)%           (34)%           (31)%
   Percentage of total revenues................          51 %            43 %            36 %`

Beginning in early 2001 and continuing through the first
half of 2003, our customers' purchasing decisions were impacted by, among other
factors: (i) the overall weakness of the global economy and the resulting
reductions in corporate capital expenditures; (ii) geopolitical uncertainties
and the resulting impact on the global economy; (iii) uncertainties in the
application software industry; and (iv) increased competitive dynamics in the
CRM application market. Accordingly, many of our customers and potential
customers have: (i) delayed the initiation of the purchasing process; (ii)
increased the evaluation time to complete a software purchase; and/or (iii)
reduced their capital expenditure budgets, thereby restricting their software
procurement to well-defined current needs.

As a result of these and other factors, our software
license revenues declined on a year-over-year basis during each of the last two
years, with a decrease of 34% in 2002 and 31% in 2003. While we believe that
each of the above factors has negatively impacted our software license revenues
to an extent, we believe that the primary reason for this decline has been the
weak global economy. We believe that the uncertainty in the software industry
and increased competition discussed previously had only an ancillary or modest
impact on our sales pipeline, such as impacting the timing of the conversion of
our sales pipeline. For example, while competition within the CRM industry has
intensified in recent years, based on our review of market share data among the
top five software vendors in the CRM marketplace, we believe that we have
maintained our market share at comparable levels with those in 2001 and 2002 in
the majority of the product categories in which we operate. Accordingly, we
believe that we continue to be a technology leader in the CRM applications'
market.

Because our software license revenues are recognized in
close proximity to the license of our software and because our professional
services and maintenance revenues are recognized as the services are performed
(typically three to six months after the licensing of our software), the above
factors impacted our software license revenues sooner and to a greater extent
than our professional services and other revenues. Accordingly, our software
license revenues as a percentage of total revenues has declined in each of the
last two years from 51% and 43% in 2001 and 2002, respectively, to 36% in 2003.

To better understand the decline in our software license
revenues, we have provided the following summary of certain key operating
metrics that we use to track the progress of our software license revenues:

- the number of transactions greater than $5 million
decreased from 32 and 23 in 2001 and 2002, respectively, to 12 in 2003;
- the number of transactions greater than $1 million
decreased from 228 and 163 in 2001 and 2002, respectively, to 122 in
2003;
- the total number of transactions decreased from 2,573 and
1,873 in 2001 and 2002, respectively, to 1,439 in 2003; and
- the average transaction size decreased from $414,000 and
$374,000 in 2001 and 2002, respectively, to $335,000 in 2003.

As illustrated by the decrease in the number of our
software license transactions from 2,573 in 2001 to 1,439 in 2003, the downturn
in the global economy has resulted in a significant decrease in the number of
customers evaluating new information technology solutions. The number of
customer evaluations has decreased, and more significantly to us, the number of
multi-million dollar transactions (i.e., the transactions greater than $1
million and $5 million above) and the average transaction size have declined in
2002 and 2003. We believe this occurred due to our customers restricting their
software procurement to well-defined current needs and reducing their capital
expenditure budgets in order to reduce expenses and conserve cash in a weak
global economy. Despite the decreases in these metrics, our customers continue
to increase the deployment of previous purchases of our software, as evidenced
by the increase in the number of deployed users from 590,000 at the beginning of
2001 to approximately 2.2 million in 2003.

Despite the recent difficult economic times, we are
committed to improving the performance of our sales operations and returning our
software license revenues to positive sequential quarterly growth. Although our
software license revenues decreased on a year-over-year basis, we have taken
several steps in the latter part of 2002 and throughout 2003 that we believe
will better position us for future growth, as follows:

- As discussed previously, we have completed the
realignment of our worldwide sales organization, which we believe will improve
cross-unit collaboration, better align our organizational structure with our
go-to-market strategy, and empower local managers with increased authority and
accountability. Further, we believe that the new organizational structure will
allow greater responsiveness to customers, faster decision making and an
improved focus of our resources on key growth areas.
- We continued to increase the number of transactions from
new customer projects, with 55%, 53% and 55% of software license revenues in
2001, 2002 and 2003, respectively, coming from new customer projects. We measure
revenues from new customer projects based upon software license transactions
from new customers, new divisions of existing customers and/or new projects at
existing customers. We believe that the growth of our customer base will provide
a competitive advantage through increased future sales opportunities when
corporate capital expenditures return to normalized levels.
- Many smaller software providers that compete with us fell
into financial difficulties during 2002 and 2003 as a result of what we believe
to be the reluctance of customers to procure their software needs from a vendor
lacking either a mature solution or secure financial outlook. We believe that we
are well positioned to offer the customers and potential customers of these
vendors the software solution they need.

We believe we are beginning to see the benefits of these
actions and an improving economy, as several key operating metrics improved
sequentially during 2003, particularly in the later part of 2003. The following
table shows the recent trend in certain of our key financial metrics related to
software license revenues (in thousands, except number of transactions):

`Year Ended December 31, 2003
                                                             -------------------------------------------------
                                                                  Q1           Q2           Q3          Q4
                                                             -----------  -----------  ----------- -----------
  Software license summary:                                                                            (1)
   Software license revenues...............................  $  112,092   $  109,894   $  110,003  $  150,285
   Number of transactions greater than $5 million..........           2            2            3           5
   Number of transactions greater than $1 million..........          34           27           19          42
   Average transaction size................................  $      282   $      344   $      347  $      370
   Annualized total revenue per employee (2)...............  $      226   $      233   $      243  $      295`

1. Our fourth quarter is impacted by seasonality in that
many of our customers utilize a significant portion of their capital budgets at
the end of their fiscal year and the fourth quarter is the end of our sales
quota year. Seasonality only accounts for a portion of the increase in our
results, as our software license revenues for the fourth quarter exceeded our
previous expectations. For example, fourth quarter amounts exceeded third
quarter amounts by 37% in 2003 versus growth of 24% in comparable periods in
2002.
2. Calculated as total revenue for the quarter divided by
average employees for the quarter and multiplying that result by four (i.e.,
four quarters) to arrive at an annualized amount.

As the above table indicates, many of our software
license metrics improved throughout the year, particularly in the second half of
2003. Specifically, we were able to:

- stabilize revenue in the third quarter and return our
software license revenues to sequential quarterly growth in the fourth quarter
of 2003;
- increase the number of our higher dollar value
transactions. For example, the number of deals generating software license
revenue greater than $5 million increased from two in each of the first two
quarters of 2003 to three in the third quarter of 2003 and five in the fourth
quarter of 2003. Further, while the number of transactions generating software
license revenue greater than $1 million was consistent in the first half and
second half of 2003 (61 transactions each), a greater proportion of these
transactions were in the $2 to $4 million range in the second half of 2003
compared to the first half of 2003;
- increase the average software license transaction size
throughout 2003 from $282,000 in the first quarter to $370,000 in the fourth
quarter (our best performance in over seven quarters); and
- increase our total revenue per employee throughout 2003
from $226,000 in the first quarter to $295,000 in the fourth quarter, primarily
due to the increase in software license revenue and the reduction in employees
from the 2002 and 2003 Restructurings.

Management believes much of the improvement in these
metrics was due to: (i) an improving global economy; (ii) an increase in the
number of customer evaluations of CRM applications; (iii) the continued
realignment of our worldwide sales organization; (iv) some seasonality with
respect to the fourth quarter; and (v) greater breadth of our products and the
strength of the industry-specific versions of our products.

We market our products through our direct sales force and
to a limited extent through distributors, primarily in Europe, Asia Pacific,
Japan and Latin America. International license revenues accounted for 45%, 42%
and 50% of software license revenues in 2001, 2002 and 2003, respectively. We
expect international software license revenues will continue to account for a
significant portion of our overall software license revenues in the foreseeable
future. Because the majority of our software license arrangements and related
operating activities are denominated in U.S. dollars, foreign currency did have
a significant impact on software license revenues, total revenues or net income
for any period presented.

Professional Services, Maintenance and Other

Professional services, maintenance and other
revenues are primarily comprised of professional services (i.e., implementation
services and training) and maintenance (i.e., technical support and product
updates). Also included in professional services, maintenance and other revenues
for 2003 is revenue from our newest product offering, Siebel CRM OnDemand, which
we introduced in the fourth quarter of 2003. The revenues derived from Siebel
CRM OnDemand were not significant for 2003. Our professional services are
typically provided over a period of three to six months subsequent to the
licensing of our software and depend in large part upon our software license
revenues. Our maintenance revenues depend upon both our software license
revenues and renewals of maintenance agreements by our existing customer
base.

The following table sets forth our professional services,
maintenance and other revenues in terms of absolute dollars and as a percentage
of total revenues for 2001, 2002 and 2003 (in thousands, except
percentages):

`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
                                                       ==============  ==============  ==============
   Percentage of total revenues.......................          49 %   $        57 %   $        64 %
                                                       ==============  ==============  ==============`

Our professional services, maintenance and other revenues
declined on a year-over-year basis by 8% in 2002 and 7% in 2003 due to a
decrease in our implementation and training revenues (i.e., professional
services revenues). For example, professional services revenues decreased from
2001 to 2002 by $153.8 million, or 23%, and decreased from 2002 to 2003 by $89.9
million, or 18%, which we believe is due to the deteriorating economic
conditions and resulting decline in software license revenues. Specifically,
because our professional services revenues are typically provided over a period
of three to six months subsequent to the initial software license, our
implementation and training services depend on the amount of software license
revenues generated in the preceding period. Therefore, a change in economic
conditions will generally impact our software license revenues first and our
professional services revenues shortly thereafter. In addition, as customers
continued to focus on reducing costs in difficult economic conditions, we have
seen progressive pricing pressure on the rates we charge for our professional
services resulting in a slight decrease in the overall hourly rate earned on our
professional services in 2003.

Because our professional services and other revenues
depend on our software license revenues in the preceding three- to six-month
period, we currently expect "professional services and other" revenue to
continue to decline on a sequential quarterly basis in the first quarter of
2004. However, if our software license revenues continue to improve as expected,
we believe that our professional services and other revenue will return to
positive growth shortly thereafter. We are committed to improving the
performance of our professional services organization and, accordingly, one of
our primary goals for 2004 is to return our professional services revenue to
sequential quarterly growth. We took steps in the fourth quarter of 2003 to
improve this performance and will continue to work to return our professional
service revenues to positive growth throughout 2004. Further, we are committed
to realizing the benefits of these efforts in an expansion of our professional
services' margins, including, if necessary, further rationalizing our
professional services headcount consistent with our revenue and gross margin
goals. Despite our focus to grow our professional service revenues, we expect to
balance our growth initiatives with our desire to manage our professional
services organization to ensure that it does not compete with our implementation
partners.

Offsetting the decline in our professional service
revenues were increases in our maintenance revenues that resulted from the
continued growth of our installed customer base receiving maintenance.
Specifically, maintenance revenues increased from 2001 to 2002 by $69.7 million,
or 20%, and increased from 2002 to 2003 by $26.8 million, or 6%. Our maintenance
revenues have increased on a year-over-year basis, primarily due to the renewal
of customer maintenance agreements and the signing of new maintenance agreements
at the time of a new software license. However, primarily due to weak economic
conditions, renewals of existing customers' maintenance agreements have become
more challenging, resulting in a slower growth rate in 2003. Specifically,
several of our customers have reduced the size of their employee base, thereby
impacting the number of users of our software and the maintenance revenues
derived therefrom. We expect that our maintenance revenues will remain
comparable to or increase in 2004 compared to the levels obtained in 2003.

Professional services, maintenance and other revenues
increased as a percentage of total revenues during both 2002 and 2003, primarily
due to growth in the number of customers receiving maintenance, coupled with a
comparatively sharper decrease in our software license revenues for the reasons
described above.

Cost of Revenues

The following table sets forth our cost of
revenues in absolute dollars and expressed as a percentage of total revenues for
2001, 2002 and 2003 (in thousands, except percentages):

`Year Ended December 31,
                                                       ----------------------------------------------
                                                            2001            2002            2003
                                                       --------------  --------------  --------------
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
                                                       ==============  ==============  ==============
   Percentage of total revenues.......................          31 %   $        34 %   $        37 %
                                                       ==============  ==============  ==============`

Total cost of revenues decreased on a year-over-year
basis during 2002 and 2003, primarily due to the decline in total revenues.
Total cost of revenues increased as a percentage of total revenues primarily due
to a decrease in the percentage of our revenues that was derived from software
license revenues, which are at higher margins than our professional services,
maintenance and other revenues. Please refer to the detailed discussion and
analysis of each of these components of total cost of revenues below, which we
believe will provide a better understanding of the changes within our total cost
of revenues.

As discussed further in Note 8 to the accompanying
consolidated financial statements, we completed the Option Repurchase in 2002.
Included in total cost of revenues for 2002 is a compensation charge of $14.1
million related to the repurchase of stock options held by our professional
service and technical support personnel. Further, included in total cost of
revenues for 2003 is a charge of $2.4 million related to the abandonment of
certain acquired technology obtained in the acquisition of Sales.com, Inc.
("Sales.com"). Please refer to Note 3 to the accompanying consolidated financial
statements for a further discussion of this abandonment. We view these charges
as significant special charges that make year-over-year comparisons of the costs
incurred difficult.

The following is a discussion of the year-over-year
changes within the individual components that comprise cost of revenues.

Software

The following table sets forth a summary of
certain components of our cost of software license revenues in absolute dollars
and expressed as a percentage of total software license revenues for 2001, 2002
and 2003 (in thousands, except percentages):

`Year Ended December 31,
                                                 -----------------------------------------------------
                                                        2001                  2002             2003
                                                 -------------------   ---------------  --------------
Cost of software license revenues:                                                                    
  Cost of software license revenues, on-going..  $  16,294      2 %    $21,612    3 %   $15,908    3 %
  Abandonment of acquired technology...........         --     --           --   --       2,449    1
                                                 ----------  -------   -------- ------  -------- -----
      Total....................................  $  16,294      2 %    $21,612    3 %   $18,357    4 %
                                                 ==========  =======   ======== ======  ======== =====`

In connection with the 2003 Restructuring, we performed
an evaluation of our product lines and existing development efforts to determine
if any products and/or development efforts should be discontinued. As a result
of this evaluation, we determined that we would no longer utilize the technology
(i.e., certain product modules and the remaining source code) acquired through
the acquisition of Sales.com. In reaching this conclusion, we considered the
following: (i) our recently developed modules and functionality utilizing the
J2EE platform were superior to the technology acquired from Sales.com, and (ii)
our development resources would be more effectively utilized on other projects,
particularly given the workforce reduction that occurred in the 2003
Restructuring. Accordingly, we determined that the carrying value of the
Sales.com acquired technology was no longer recoverable and therefore wrote off
the remaining unamortized balance of $2.4 million to cost of software license
revenue upon abandonment in July 2003. This charge represented 1% of software
license revenues during 2003. Based on our current evaluation of our acquired
technology, we do not expect another charge related to our acquired technology
in 2004. Accordingly, we believe that the remaining costs included in total cost
of software license revenues, as listed in the above table, are more
representative of our on-going operations.

Cost of software license revenues, on-going includes
amortization of acquired technology, third-party software royalties, and product
packaging, production and documentation. All costs incurred in the research and
development of software products and enhancements to existing products have been
expensed as incurred. Cost of software license revenues, on-going increased in
absolute dollars and as a percentage of software license revenues from 2001 to
2002 primarily due to: (i) an increase in amortization expense of $2.3 million
associated with the acquired technology obtained in the November 2001
acquisition of nQuire Software, Inc., as discussed in Note 3 to the accompanying
consolidated financial statements and (ii) a shift to products with higher
third-party royalties from products with either no royalty obligation or lower
royalty rates. Cost of software license revenues, ongoing decreased in absolute
dollars from 2002 to 2003 primarily due to: (i) the decrease in software license
revenues and (ii) a reduction of $2.2 million from the cessation of amortization
expense of the Sales.com acquired technology at the time of abandonment (July
2003). As a percentage of software license revenues, cost of software license
revenues, ongoing were consistent with the percentage of software license
revenues in 2002.

Professional Services, Maintenance and Other

The following table sets forth a summary of
certain components of our cost of professional services, maintenance and other
revenues in absolute dollars and expressed as a percentage of total professional
services, maintenance and other revenues, along with our gross margin related to
these services, for 2001, 2002 and 2003 (in thousands, except percentages):

`Year Ended December 31,
                                                 -------------------------------------------------------
                                                       2001                  2002              2003
                                                 -------------------   ----------------  ---------------
Cost of professional services,
  maintenance and other revenues:                                                                       
     On-going..................................  $ 624,731     61 %    $526,075   56 %   $487,840   56 %
     Compensation related to Option Repurchase.         --     --        14,119    2           --   --
                                                 ----------  -------   --------- ------  --------- -----
      Total....................................  $ 624,731     61 %    $540,194   58 %   $487,840   56 %
                                                 ==========  =======   ========= ======  ========= =====

Gross margin related to professional services
  maintenance and other revenues...........      $ 394,247     39 %    $394,769   42 %   $384,114   44 %
                                                 ==========  =======   ========= ======  ========= =====`

As described in Note 8 to the accompanying consolidated
financial statements, we completed a tender offer for certain of our stock
options during the third quarter of 2002 (the "Option Repurchase"). Included in
total cost of professional services, maintenance and other revenues for 2002 is
a compensation charge of $14.1 million related to the repurchase of stock
options held by our professional service and technical support personnel. As
indicated in the above table, this charge represented 2% of professional
services, maintenance and other revenues during 2002 and resulted in a
corresponding decline in our gross margin on professional services, maintenance
and other revenues of two percentage points.

Cost of professional services, maintenance and other
revenues, on-going consist primarily of personnel, facilities and systems costs
incurred to provide training, consulting and other global services. These costs
decreased by $98.7 million, or 16%, from 2001 to 2002 and decreased by $38.2
million, or 7%, from 2002 to 2003. These decreases were primarily due to: (i)
the reduction of headcount in response to the decrease in demand for our
implementation services; (ii) partial realization of the cost savings from the
2002 and 2003 Restructurings, including savings from the consolidation of our
facilities and the reduction of approximately 250 personnel in 2002 and 140
personnel in 2003; (iii) a reduction in the use of third-party contractors; and
(iv) the realization of savings from our cost control initiatives, including
reductions of discretionary expenditures such as travel and entertainment.
Partially offsetting these cost savings were increases in compensation costs
from the renewal of merit increases and certain other incentive compensation.

Cost of professional services, maintenance and other
revenues, on-going as a percentage of the corresponding revenues decreased from
61% in 2001 to 56% in 2002, primarily due to: (i) the continued growth of our
higher-margin maintenance revenues; (ii) a higher utilization of our global
services personnel; (iii) a reduction in the use of third-party contractors;
(iv) an acceleration of our cost control initiatives discussed above; and (v)
partial realization of the cost savings from the 2002 Restructuring. Primarily
as a result of these factors, our gross margin as a percentage of professional
services maintenance and other revenues improved from 39% in 2001 to 42% in 2002
(i.e., these factors accounted for a five percentage point improvement in our
gross margin percentage during 2002, which was partially offset by the two
percentage point impact of the Option Repurchase discussed above).

Cost of professional services, maintenance and other
revenues, on-going represented 56% of the corresponding revenues in both 2002
and 2003. While the above mentioned cost savings favorably impacted these costs
as a percentage of professional services, maintenance and other revenues during
2003, these benefits were offset by: (i) an increase in compensation expense as
a result of a renewal of merit increases and certain other incentive
compensation; (ii) a decrease in revenue from licenses of our Sales Methodology
Experts' (formerly Multi-Channel Services) products, which is included in "other
revenues" and is at higher margins than maintenance and professional services;
and (iii) a reduction in the rates that we were able to charge for our
implementation services. These same factors also negatively impacted our gross
margin as a percentage of professional services, maintenance and other revenues
during 2003, as these factors offset the favorable impact of our cost control
initiatives and the 2002 and 2003 Restructurings. The improvement in the gross
margin as a percentage of professional services, maintenance and other revenues
from 42% in 2002 to 44% in 2003 was primarily due to the absence of any charges
related to stock options in 2003 versus a two percentage point negative impact
from the Option Repurchase in 2002.

Operating Expenses

Product Development

The following table sets forth a summary of
certain components of our product development expense in absolute dollars and
expressed as a percentage of total revenues for 2001, 2002 and 2003 (in
thousands, except percentages):

`Year Ended December 31,
                                                 -------------------------------------------------------
                                                       2001                  2002              2003
                                                 -------------------   ----------------  ---------------
Product development expense:                                                                            
  Product development expense, on-going........  $ 333,661     16 %    $347,497   21 %   $308,852   23 %
  Compensation related to Option Repurchase....         --     --        18,733    1           --   --
                                                 ----------  -------   --------- ------  --------- -----
      Total....................................  $ 333,661     16 %    $366,230   22 %   $308,852   23 %
                                                 ==========  =======   ========= ======  ========= =====`

Included in product development expense for 2002 is a
compensation charge of $18.7 million related to the repurchase of stock options
held by our product development personnel. This charge represented 1% of total
revenues during 2002 and resulted in a corresponding increase to total product
development expense as a percentage of total revenues during 2002, as indicated
in the above table.

Product development expense, on-going includes costs
associated with the development of new products, enhancements of existing
products, quality assurance activities and vertical engineering. These costs
consist primarily of employee salaries, benefits, consulting costs and the cost
of software development tools and equipment. Product development expense,
on-going increased from 2001 to 2002 by $13.8 million, or 4%, primarily due to: (i)
our continued investment in the development of new products, new versions of our
existing products and additional modules and (ii) an increase in depreciation of
equipment utilized in our product development operations. Partially offsetting
these increases were: (i) expense savings from our cost control initiatives
described above and (ii) partial realization of cost savings from the reduction
of approximately 400 product development personnel and consolidation of the
remaining personnel into more highly utilized facilities in connection with the
2002 Restructuring.

Product development expense, on-going decreased from 2002
to 2003 by $38.6 million, or 11%, primarily due to: (i) further realization of
cost savings from the 2002 Restructuring; (ii) cost savings from the reduction
of approximately 230 quality assurance and product development personnel and
consolidation of the remaining personnel into more highly utilized facilities in
connection with the 2003 Restructuring; and (iii) further realization of cost
savings from our cost control initiatives. Partially offsetting these cost
savings were: (i) increased compensation costs from the renewal of merit
increases and certain other incentive compensation; (ii) increased costs from
outside consultants in connection with the further development of our latest
products, UAN and Siebel CRM OnDemand; and (iii) product development
expenditures from acquired companies (please refer to Note 3 to the accompanying
consolidated financial statements).

Product development expense as a percentage of total
revenues increased during each of the periods in the above table primarily as a
result of our continued investment in the research and development of new
products during a period in which our software license revenues decreased. As
noted above, the Option Repurchase accounted for an increase of one percentage
point in 2002.

In connection with the 2003 Restructuring, we: (i)
discontinued certain development projects; (ii) initiated a transition of a
portion of our quality assurance and testing activities overseas to labor
markets with lower cost structures; and (iii) consolidated our product
development management structure and eliminated nonessential development
positions in order to better align our cost structure with expected revenues.
Despite the reductions in personnel in our product development organization, we
anticipate that we will continue to devote substantial resources to develop new
products and new versions of and additional modules for our existing
products.

Sales and Marketing

The following table sets forth a summary of
certain components of our sales and marketing expense in absolute dollars and
expressed as a percentage of total revenues for 2001, 2002 and 2003 (in
thousands, except percentages):

`Year Ended December 31,
                                                 -------------------------------------------------------
                                                         2001                  2002              2003
                                                 -------------------   ----------------  ---------------
Sales and marketing expense:                                                                            
  Sales and Marketing expense, on-going........  $ 615,675     30 %    $464,743   28 %   $357,133   26 %
  Compensation related to Option Repurchase....         --     --        12,232    1           --   --
                                                 ----------  -------   --------- ------  --------- -----
      Total....................................  $ 615,675     30 %    $476,975   29 %   $357,133   26 %
                                                 ==========  =======   ========= ======  ========= =====`

Included in sales and marketing expense for 2002 is a
compensation charge of $12.2 million related to the repurchase of stock options
held by our sales and marketing personnel. This charge represented 1% of total
revenues during 2002 and resulted in a corresponding increase to total sales and
marketing expense as a percentage of total revenues, as indicated in the above
table.

Sales and marketing expense, on-going is comprised
primarily of costs associated with our sales and marketing personnel and
consists primarily of: (i) salaries, commissions and bonuses; (ii) facility-related
(i.e., rent) and equipment-related (i.e., depreciation) expenses; (iii)
travel and entertainment expenses; and (iv) promotional and advertising
expenses. These expenses decreased from 2001 to 2002 by $150.9 million, or 25%,
and decreased from 2002 to 2003 by an additional $107.6 million, or 23%. These
decreases were primarily due to: (i) the continued close monitoring of our
expenses and further implementation of our cost control initiatives, including
reductions in travel, entertainment, promotional and advertising expenditures;
(ii) the decrease in sales commissions and other incentive compensation by $17.5
million and $17.3 million in 2002 and 2003, respectively, that resulted from a
decrease in our software license revenues; (iii) the reduction of expenses as a
result of the 2002 Restructuring, including the reduction of approximately 420
sales and marketing personnel and consolidation of the remaining personnel into
more highly utilized facilities; and (iv) the partial realization of costs
savings from the 2003 Restructuring, including the reduction of approximately
160 sales and marketing personnel and consolidation of the remaining personnel
into more highly utilized facilities. Partially offsetting these costs savings
were increases in compensation expense associated with the renewal of certain
incentive compensation plans and the renewal of merit compensation increases for
some of our employees.

General and Administrative

The following table sets forth a summary of
certain components of our general and administrative expense in absolute dollars
and expressed as a percentage of total revenues for 2001, 2002 and 2003 (in
thousands, except percentages):

`Year Ended December 31,
                                                 -------------------------------------------------------
                                                      2001                  2002              2003
                                                 -------------------   ----------------  ---------------
General and administrative expense:                                                                     
  General and administrative expense, on-going.  $ 136,353      7 %    $109,458    7 %   $106,082    8 %
  Compensation related to Option Repurchase....         --     --         9,795   --           --   --
                                                 ----------  -------   --------- ------  --------- -----
      Total....................................  $ 136,353      7 %    $119,253    7 %   $106,082    8 %
                                                 ==========  =======   ========= ======  ========= =====`

Included in general and administrative expense for 2002
is a compensation charge of $9.8 million related to the repurchase of stock
options held by our general and administrative personnel. This charge
represented approximately 0.5% of total revenues during 2002 and had a nominal
impact on total general and administrative expense as a percentage of total
revenues, as indicated in the above table.

General and administrative expense consists primarily of
costs associated with our administrative personnel (finance, information
technology support, human resource and facility) and executive personnel and
consists primarily of salaries and occupancy costs, along with bad debt expense.
These expenses decreased from 2001 to 2002 by $26.9 million, or 20%, primarily
due to: (i) management's cost control initiatives described above; (ii) a $5.0
million decrease in our provision for doubtful accounts associated with reduced
receivable levels and an improved accounts receivable aging; (iii) the further
reduction of expenses in the second half of 2002 as a result of the 2002
Restructuring, including the reduction of approximately 80 general and
administrative personnel and consolidation of the remaining personnel into
higher-utilized facilities; and (iv) the elimination of the requirement to
amortize goodwill in 2002 as a result of the adoption of SFAS No. 142 "Goodwill
and Other Intangible Assets" ("SFAS 142"). Partially offsetting the decrease of
general administrative expenses, on-going during 2002 were increases in rent and
depreciation expense.

General and administrative expenses, on-going decreased
from 2002 to 2003 by $3.4 million, or 3%, primarily due to: (i) the further
reduction of expenses as a result of the 2003 Restructuring, including the
reduction of approximately 55 general and administrative personnel and the
consolidation of the remaining personnel into higher-utilized facilities, and
(ii) the further reduction of our provision for doubtful accounts by $16.2
million associated with reduced receivable levels, an improved accounts
receivable aging and the recovery of certain receivables previously written-off.
Partially offsetting these cost savings were increases in legal expenses (please
refer to Note 6 to the accompanying consolidated financial statements for
further discussion of legal proceedings), depreciation expense and compensation
expense associated with the renewal of merit compensation increases and certain
incentive compensation plans.

Restructuring and Related Expenses

As previously discussed, certain of our key
operating metrics declined during 2002 and 2003 from their historical levels. In
response to this decline, we initiated a series of steps that we believe will:
(i) strengthen our competitive position; (ii) reduce our cost structure thereby
improving our revenue per employee, operating margin and overall operating
performance; and (iii) better align our management structure in order to return
to sequential quarterly revenue growth. Specifically, we have taken the
following actions:

- We reduced the discretionary portion of our operating
costs through various cost control initiatives discussed above.
- In order to better align our operating structure with
anticipated revenue levels, we initiated the 2002 Restructuring, which we
completed in December 2002. The 2002 Restructuring consisted primarily of the
consolidation of excess facilities, reductions in our workforce and the
abandonment of certain assets in connection with the consolidation of excess
facilities.
- Based on our continued evaluation of economic conditions
in the information technology industry and our expectations regarding revenue
levels, we initiated the 2003 Restructuring in the second quarter of 2003, which
was completed in September 2003.

The 2003 Restructuring included the following key
measures: (i) the reduction of our workforce across all functional areas,
including reductions related to the consolidation of our management organization
and 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 our cost structure, we believe
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 our resources on key growth areas, such as our newest
product offering, Siebel CRM OnDemand.

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, we reduced our
workforce by approximately 1,150 employees, or 16% of our then-current
workforce. In connection with the 2003 Restructuring, we reduced or expect to
reduce our workforce by approximately 580 employees, or 10% of our then-current
workforce. As of December 31, 2003, we had completed approximately 445 of these
terminations and expect to complete the reduction of the remaining employees
within the next six months. We have not completed the separation of employment
with these remaining employees primarily due to regulatory requirements in
certain countries and our ongoing transition of certain product development
positions overseas. The workforce reductions affected substantially all of our
organizations and geographical regions. The costs associated with our workforce
reductions consist primarily of severance payments, COBRA benefits, payroll
taxes and other associated employment termination costs. Please refer to the
section entitled "Critical Accounting Policies and Use of Estimates" below for a
further discussion of our accounting for these obligations.
2. As a result of the workforce reductions and previous
employee attrition, certain of our facilities were under-utilized. Accordingly,
we consolidated our remaining workforce into under-utilized facilities and
ceased to utilize the then-vacated facilities. The facilities permanently
removed from our 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 our 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 our facilities, certain
leasehold improvements, furniture and fixtures were abandoned. As a result, we
recorded a non-cash charge equal to the net book value of these abandoned assets
in Restructuring and related expenses.
4. We 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 we assessed the time period over which reasonable
estimates could be made.
5. Primarily due to the real estate markets in which we
operate remaining at depressed levels longer than originally anticipated, we
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 our: (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. We believe that our estimates with
respect to our remaining obligations related to the 2002 and 2003 Restructurings
are appropriate as of December 31, 2003.
6. In accordance with SFAS 146, we 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. We will continue to accrete our 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.

Subject to the timely and successful implementation of
the 2003 Restructuring, we believe that the 2003 Restructuring will further
reduce our expense levels and a portion of the related cash requirements,
resulting in a cost structure that is better aligned with anticipated revenues.
Specifically, we expect the implementation of the 2003 Restructuring, along with
our cost control initiatives, will reduce our quarterly operating expenses by up
to $40 million from where operating expenses would have been absent the 2003
Restructuring. We achieved more than $30 million of these expense savings in the
fourth quarter of 2003 and expect to achieve the remaining expense savings by
the end of the fourth quarter of 2004.

The majority of the $40 million in quarterly expense
savings from the 2003 Restructuring are expected to be derived from: (i) our
workforce reduction, including expense reductions related to employee
compensation, employee benefits and other direct costs of up to $21 million;
(ii) a consolidation of our facilities, including reductions of rent and other
operating costs of up to $6 million; (iii) a decrease in depreciation expense of
up to $10 million, primarily due to reductions in capital expenditures, the
abandonment of certain leasehold improvements, furniture and fixtures, and
certain property and equipment becoming fully depreciated; and (iv) a decrease
in other operating costs of up to $3 million, including savings from relocating
a portion of our technical support, quality assurance and other product
development operations to lower cost labor markets.

The total charge and related cash outlay related to the
2002 and 2003 Restructurings 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.
We will review the status of our obligations related to the 2002 and 2003
Restructurings quarterly and, if appropriate, record changes in estimates
related to these obligations in current operations.

Because the benefits related to the 2003 Restructuring
are derived from management's estimates, which are based on currently available
information, the 2003 Restructuring may not achieve the benefits currently
anticipated or on the timetable or at the level currently contemplated. Please
refer to "We may not be able to successfully implement our 2002 and 2003
Restructurings, and such efforts may adversely impact our ability to retain and
attract future employees" under Risk Factors below for further discussion of the
risks associated with the 2002 and 2003 Restructurings.

Purchased In-Process Product Development

During 2003 we made selective acquisitions of
certain assets (primarily object and source code and other intellectual
property) in order to accelerate the development of selected projects in our
product pipeline. As described further below, we incurred an aggregate of $5.3
million of purchased in-process product development expense ("IPR&D") in
connection with the acquisition of these technologies.

Specifically, in order to further expand our entrance
into the analytics market, we entered into a worldwide, royalty-free perpetual
license to certain technologies and intellectual property rights owned by a
third-party provider of analytic software solutions. The license fee for this
technology was approximately $3.5 million. We expect to continue the development
of this technology, which we believe 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, we have reflected the $3.5 million
IPR&D charge in purchased in-process product development expense during
2003. We expect to incur a minimum of an additional $2.0 million of costs to
further develop this technology and integrate it with our existing analytics
technologies, which we believe may result in a new and enhanced suite of
analytics products.

In October 2003, we acquired certain assets (primarily
intellectual property) of Motiva, Inc. ("Motiva"), a provider of enterprise
incentive management ("EIM") software, for total consideration of approximately
$2.9 million. We expect the acquisition of these assets to accelerate our
penetration of the EIM market and expand customer choice in this market.
Further, we believe that Motiva's technology and the next generation of Motiva's
technology (under development by Motiva at the time of acquisition) will enhance
our current offerings in the EIM market. Specifically, we believe the
incorporation of Motiva's services-processing architecture will enable users of
our Siebel Incentive Compensation product to handle a much broader variety of
compensation plans with greater flexibility and increased performance. We are
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 we expect to incur up
to an additional $2.0 million to complete this development, with completion
expected by the second half of 2004. Based on our evaluation of the assets
acquired, we allocated an aggregate of approximately $1.5 million of the
purchase price to IPR&D at the date of acquisition. Because the IPR&D
acquired from Motiva had not yet reached technological feasibility and had no
alternative future uses, we have reflected the $1.5 million in purchased
in-process product development expense for 2003. We determined the fair value of
the IPR&D based on the anticipated net cash flows from the anticipated
future products, discounted using a risk adjusted discount rate of 30%.

In calculating the value of amounts assigned to IPR&D
for all of our completed acquisitions during 2003, we gave consideration to the
relevant market sizes and growth factors of the technologies, our intended use
of the products, expected industry trends, the anticipated nature and timing of
new product introductions by us and our competitors, individual product sales
cycles, and the estimated lives of each of the products' underlying technology.
The value assigned reflects the relative value and contribution of the
IPR&D. We also gave consideration to the technology's stage of completion,
the complexity of the work completed to date, the difficulty of completing the
remaining development, costs already incurred, and the expected cost to complete
the project.

Given the uncertainties of the
commercialization process, no assurance can be given that deviations from our
estimates will not occur. Accordingly, there is risk associated with the
realization of benefits related to commercialization of an in-process project
due to rapidly changing customer needs, the complexity of the technology and
growing competitive pressures. There can be no assurance that any project will
meet commercial success. Failure to successfully commercialize an in-process
project would result in the loss of the expected economic return inherent in the
fair value allocation. In addition, we will periodically evaluate our product
development timeline and modify our overall business plan in response to various
factors. Modifications to our business plan may include the reallocation of
resources among various alternative development projects.

Operating Income (Loss) and Operating Margin

Operating income was $357.9 million for 2001, as
compared to operating losses of $94.3 million and $33.7 million for 2002 and
2003, respectively. Operating margin was 17% in 2001, as compared to negative
operating margins of 6% and 2% in 2002 and 2003, respectively. We incurred
negative operating income and margins during 2002, primarily as the result of
the 2002 Restructuring and Option Repurchase, and incurred negative operating
income and margins during 2003, primarily due to the 2003 Restructuring and the
purchased in-process development expense discussed above.

In addition to the decreases in operating income and
margins due to these significant unusual expenses, our operating income and
operating margin have also decreased in 2002 and 2003 due to: (i) the
year-over-year decrease in total revenues and (ii) the comparatively sharper decrease in
software license revenues, which are at higher margins than professional
services, maintenance and other revenues. The decline in operating income and
operating margins was partially offset by: (i) management's cost control
initiatives; (ii) the partial realization of the benefits of the 2002 and 2003
Restructurings; and (iii) the elimination of the requirement to amortize
goodwill, which totaled $20.0 million during 2001.

As a result of our restructuring efforts and our
continued cost control efforts, we anticipate that our cost structure will be
better aligned with our anticipated future revenue levels. We believe that we
are already seeing the benefits of these cost savings and improvement in our
sales organization, as we achieved an operating margin of 15% in the fourth
quarter of 2003, nearly a year in advance of previous expectations. This was our
best performance in seven quarters.

Other Income, Net

For 2001, 2002 and 2003, other income, net was
comprised of the following (in thousands):

`Year Ended 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
                                                            ==========  ==========  ==========`

Interest income represents earnings on our cash and
short-term investments. Interest income decreased from 2001 to 2002 and from
2002 to 2003 primarily due to a decline in interest rates, which was partially
offset by an increase in the balances of our cash and short-term investments
(primarily in 2002 and the first half of 2003). Interest expense primarily
represents interest on our $300.0 million convertible subordinated debentures
(the "Debentures"). Interest expense increased in 2002 from the levels in 2001,
primarily as the result of interest expense associated with an increase in our
capital lease obligations. Interest expense decreased in 2003 primarily due to
the redemption of the Debentures in September 2003, as discussed further
below.

As described more fully in Note 5 to the accompanying
consolidated financial statements, we redeemed the Debentures in accordance with
their terms for $307.1 million on September 30, 2003. In connection with this
redemption, we incurred a pre-tax charge to operations of $10.7 million,
consisting of the $7.1 million premium and the write-off of the remaining
unamortized issuance costs of $3.6 million. This pre-tax charge is reflected in
the above table under the heading "Loss on early extinguishment of debt" for
2003.

During 2001, 2002 and 2003, net gains on marketable
investments resulted primarily from sales of certain short-term investments,
partially offset by net write-downs of $2.4 million and $2.0 million to our
marketable equity securities in 2001 and 2002, respectively, as the decline was
determined to be other-than-temporary. We hold several minority interests,
included in other assets, in companies having operations or technology in areas
within our strategic focus. Write-down of cost-method investments in the above
table represents adjustments to certain of these investments to the estimated
fair value as the decline in these investments was deemed to be other-than-temporary.
 Other, net for all periods presented is primarily comprised of
banking fees and foreign currency transaction gains or losses.

Income Taxes and Income Tax Benefit

Income taxes totaled $149.5 million for 2001, as
compared to an income tax benefit of $20.1 million and $1.9 million for 2002 and
2003, respectively. Income taxes as a percentage of pretax income (i.e., the
"Effective Rate") were 37% in 2001, as compared to an income tax benefit of 36%
in 2002 and 2003.

Please refer to Notes 1 and 10 to the accompanying
consolidated financial statements and the section entitled "Application of
Critical Accounting Policies and Use of Estimates" in the following pages for
description of our accounting policies and use of estimates related to our
income tax provision and/or income tax benefit.

Liquidity and Capital Resources

Overview

We derive our liquidity and capital resources
primarily from our cash flows from operations and from our working capital. Our
working capital decreased by 12%, from $1,940.3 million as of December 31, 2002,
to $1,708.9 million as of December 31, 2003. The decrease was primarily due to
the redemption of the Debentures, which was partially offset by our cash flows
from operations. With virtually no debt and a strong working capital position,
we believe that we have the flexibility to continue to invest in further
developing our technology and, when necessary or appropriate, make selective
acquisitions to continue to strengthen our product portfolio.

The significant components of our working capital are
liquid assets such as cash, short-term investments and trade accounts
receivable, reduced by accounts payable, accrued expenses, restructuring
obligations and deferred revenue. We continue to operate a cash-positive
business and, accordingly, we have been able to eliminate substantially all of
our long-term debt and maintain our cash and short-term investment balances at
over $2.0 billion. Specifically, our cash, cash equivalents and short-term
investments were $2,161.6 million and $2,023.2 million as of December 31, 2002
and 2003, respectively, representing approximately 71% of total assets as of
these dates. We also were able to keep our average payment terms related to our
license transactions near the lowest levels in our history (i.e., 29 days for
2003). The continued low payment terms on our license transactions assisted us
in maintaining our days sales outstanding in accounts receivable at 64 days as
of December 31, 2003, as compared to 63 days as of December 31, 2002, which are
impacted by the linearity of our revenues, especially software license revenues
and deferred revenues.

We believe our current working capital and anticipated
cash flows from operations will be adequate to meet our cash needs for our daily
operations and capital expenditures for at least the next 12 months. Our
liquidity could be negatively impacted by a decrease in demand for our products,
which are subject to rapid technological changes, or a reduction of capital
expenditures by our customers as a result of a downturn in the global economy,
among other factors. We did not repurchase any of our common stock during 2003
and do not currently anticipate repurchasing any of our common stock in
2004.

Commitments

As of December 31, 2003, our future fixed
commitments for cash payments are as follows (in thousands):

`Payments Due by Year
                                                             ----------------------------------------------------
                                                                       2005 to    2007 to   2009 and
Contractual Obligations                                        2004      2006      2008      Beyond      Total
------------------------------------------------------------ --------- --------- ---------- --------- -----------
Operating lease obligations (1)............................. $ 69,750  $132,897  $ 130,735  $381,693  $  715,075
Capital lease obligations (2)...............................   12,619     6,500         --        --      19,119
Restructuring obligations (3)...............................   63,649    87,146     65,644   167,479     383,918
Other long-term liabilities reflected on the balance sheet..      197       251         --     1,421       1,869
Current liabilities reflected on the balance sheet (4)......  622,553        --         --        --     622,553
Other purchase obligations (5)..............................   29,638    23,304        211        --      53,153
Long-term debt..............................................       --        --         --        --          --
                                                             --------- ---------  --------- --------- -----------
      Total fixed commitments............................... $798,406  $250,098  $ 196,590  $550,593  $1,795,687
                                                             ========= ========= ========== ========= ===========`

1. In connection with the 2002 and 2003 Restructurings, we
ceased to use certain of our facilities with noncancellable operating leases. We
have reflected the commitments related to these operating lease obligations in
the accompanying balance sheet as of December 31, 2003 and in the above table
under the heading "Restructuring obligations." Accordingly, operating lease
obligations in the above table only include operating lease obligations related
to our facilities and certain equipment that we continue to utilize in our
operations. Please refer to Note 6 to the accompanying consolidated financial
statements for a detailed summary of anticipated cash outlays related to our
operating leases.
2. Capital lease obligations in the above table represent
the gross expected cash outlays and, therefore, do not represent their net
present value as recorded in the accompanying consolidated balance sheet. Please
refer to Note 6 to the accompanying consolidated financial statements for a
detailed summary of anticipated cash outlays related to our capital
leases.
3. The Restructuring obligations in the above table
represent our gross expected cash outlays related to the settlement of these
obligations, primarily obligations related to noncancellable operating leases.
Accordingly, the Restructuring obligations in the above table have not been
reduced by estimated sublease income of $213.4 million nor have these
obligations been reduced to their net present value as presented in the
accompanying consolidated balance sheet. Please refer to Note 2 to the
accompanying consolidated financial statements for a detailed summary of our
future commitments related to the 2002 and 2003 Restructurings, including a
detail of contractual obligations, estimated operating costs and estimated
sublease income.
4. Current liabilities in the above table represent current
liabilities as presented in the accompanying consolidated balance sheet, reduced
by the current portion of capital lease obligations and restructuring
obligations, as we have included the current portion of these obligations in
separate line items in the above table.
5. Other purchase obligations in the above table represent
all open purchase orders for which we have not received the service or goods as
of December 31, 2003 and, therefore, have not been included as a liability in
the accompanying balance sheet. The majority of our "other purchase obligations"
relate to commitments related to telecommunication services.

As discussed above and further below, we believe that our
current working capital and anticipated cash flows from operations will be
adequate to meet our cash needs for our daily operations and the above
contractual obligations. Our objective is to maintain our cash and short-term
investments at or above $2.0 billion in order to provide sufficient cash for our
operations, including selective acquisitions.

Cash Flows

As discussed above, one of the primary sources of
our liquidity is our ability to generate positive cash flows from operations.
The following is a discussion of our primary sources and uses of cash in our
operating activities, along with significant sources and uses in our investing
and financing activities:

Operations

Cash provided by operating activities was $588.2
million, $433.2 million and $188.0 million for 2001, 2002 and 2003,
respectively. Despite the weak economic conditions, we have continued to operate
our business to produce positive cash flows from operations. Cash provided by
operating activities decreased on a year-over-year basis during both 2002 and
2003 primarily as the result of decreases in revenues and earnings that
occurred, in part, as a result of the weak global economic conditions.

During 2001, 2002 and 2003, our cash flows from operations
were primarily derived from: (i) our earnings from on-going operations prior to
non-cash expenses such as depreciation, amortization, bad debt, and the non-cash
portion of our Restructuring-related expenses (i.e., asset abandonment write-offs)
and Option Repurchase expenses; (ii) the tax benefit related to the
exercise of employee stock options, which reduces our cash outlay for income tax
expense; and (iii) changes in our working capital, which is primarily composed
of collections of accounts receivable and increases in restructuring obligations
and deferred revenue, and partially offset by payments of accounts payable and
accrued expenses.

Because the majority of the Restructuring obligations will be
paid over time or do not involve cash outlays, cash provided by operating
activities for the years ended December 31, 2002 and 2003 was only reduced by
the $24.8 million and $83.4 million, respectively, of cash payments made during
these periods related to these obligations. As we settle our remaining
Restructuring obligations ($158.1 million as of December 31, 2003), our future
operating cash flows will be reduced in the period of settlement. We currently
estimate that we will settle $53.7 million of these obligations in 2004.

We currently anticipate that we will continue to operate a
cash-positive business and as economic conditions improve return to sequential
annual growth of cash flows from operations. Our ability to meet these
expectations is directly dependent upon our ability to achieve positive earnings
and maintain or increase the level of our software license revenues. In
addition, our ability to generate future cash flows from operations could be
negatively impacted by a decrease in demand for our products, which are subject
to rapid technological change, or a reduction of capital expenditures by our
customers as a result of a downturn in the global economy, among other
factors.

Investing

Cash used in investing activities was $694.0 million,
$692.4 million and $41.2 million for 2001, 2002 and 2003, respectively. During
each of these periods, our investment activities primarily related to
transactions within our short-term investments. For 2001 and 2002, we reinvested
our cash into short-term investments in net amounts of $445.0 million and $629.3
million, respectively, as compared to net proceeds of $31.3 million in 2003 from
the sale of our short-term investments. We were able to continue to reinvest our
cash positions in short-term investments during 2001 and 2002 in increasing
amounts, as the weakened economy had not impacted our cash flows to the same
extent as our earnings.

During 2003, we determined that it would be prudent to redeem
our Debentures for $307.1 million, in part in order to realize savings of
approximately $16.5 million of annual interest expense. Accordingly, we sold a
portion of our short-term investments in 2003 in order to fund the redemption of
the Debentures. Accordingly, our cash used in investing activities decreased
during 2003 from the levels in 2001 and 2002 primarily due to the redemption of
the Debentures, along with the continued decrease in our cash flows from
operations (historically reinvested in short-term investments) for the reasons
described above.

We also utilize our cash positions to invest in new property
and equipment, with purchases of property and equipment of $245.9 million, $70.8
million and $15.0 million during 2001, 2002 and 2003, respectively. Capital
expenditures were significantly higher in 2001 compared to both 2002 and 2003,
primarily as a result of the following: (i) the expansion of our infrastructure
during 2001 to support the development and testing of Siebel 7; (ii) the
reduction of our information technology requirements for computers and other
equipment in 2002 and 2003 due to a reduction of our employees from
approximately 8,300 at the end of the first quarter of 2001 to approximately
5,000 at the end of 2003; and (iii) the reduction in the number of offices we
were occupying in 2002 and 2003 versus expansion of our facilities needs in
2001, which allowed us to reduce the purchase of tenant improvements, furniture
and fixtures. In addition, in response to the weakening economy and as a part of
our cost control initiatives, we reduced our capital expenditure budgets during
2003, thereby reducing our capital expenditures. We expect to continue to
closely monitor our capital expenditures. However, we currently expect our
capital expenditures to increase in 2004 from levels incurred in 2003 as a
result of our further investment in hosted CRM infrastructure and spending to
meet the information technology needs of an expanded workforce. Specifically, we
expect capital expenditures to be approximately $35.0 million in 2004.

Financing

Cash provided by financing activities was $156.8
million and $109.1 million for 2001 and 2002, respectively, as compared to cash
used in financing activities of $257.2 million for 2003. The decrease of our
financing activities from positive cash inflows in 2001 and 2002 to cash
outflows during 2003 was due to our redemption of the Debentures for cash
consideration of $307.1 million on September 30, 2003. For 2001, 2002 and 2003,
our remaining financing activities consisted primarily of net proceeds of $156.2
million, $92.5 million and $62.6 million, respectively, from the issuance of
common stock pursuant to the exercise of stock options and our employee stock
purchase plan. In addition, our financing activities for 2002 also included
$24.9 million of proceeds from an equipment financing. These cash inflows from
financing activities were partially offset during 2001, 2002 and 2003 by our
repayment of capital lease obligations, net of our collection of amounts due
under stockholder notes during 2001 and 2002.

Off-Balance Sheet Arrangements

We do not use off-balance-sheet
arrangements with unconsolidated entities or related parties, nor do we use
other forms of off-balance-sheet arrangements such as research and development
arrangements. Accordingly, our liquidity and capital resources are not subject
to off-balance-sheet risks from unconsolidated entities. As of December 31,
2003, we did not have any off-balance-sheet arrangements, as defined in Item
303(a)(4)(ii) of SEC Regulation S-K.

We have entered into operating leases for most U.S. and
international sales and support offices and certain equipment in the normal
course of business. These arrangements are oftentimes referred to as a form of
off-balance sheet financing. As of December 31, 2003, we leased facilities and
certain equipment under non-cancelable operating leases expiring between 2004
and 2022. Rent expense under operating leases for 2001, 2002 and 2003 was $117.6
million, $114.4 million and $93.3 million, respectively. Future minimum lease
payments under our operating leases as of December 31, 2003 are detailed
previously in "Liquidity and Capital Resources" in the section entitled
commitments.

We sell our software licenses and services to our
customers under contracts which we refer to as Software License and Service
Agreements, or "SLSA." Each SLSA contains the relevant terms of the contractual
arrangement with the customer, and generally includes provisions that indemnify
the customer against losses, expenses, and liabilities from damages that may be
awarded against the customer in the event our software is found to infringe upon
a third-party patent, copyright, trademark, or other proprietary right. 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.

We believe our internal development processes and other
policies and practices limit our exposure related to the indemnification
provisions of the SLSA. In addition, we require our employees to sign a
proprietary information and inventions agreement, which further protects our
confidential and proprietary information and assigns the rights of our
employees' development work to us. To date, we have not had to reimburse any of
our customers for any losses related to these indemnification provisions and we
are not aware of any material claims. Accordingly, we have not accrued any
liabilities related to such indemnifications in our accompanying consolidated
financial statements. We evaluate estimated losses for such indemnifications
under SFAS No. 5 "Accounting for Contingencies," as interpreted by
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others."

Application of Critical Accounting Policies and
Use of Estimates

Use of Estimates

Our consolidated financial statements are
prepared in accordance with accounting principles generally accepted in the
United States ("GAAP") and the application of GAAP requires management to make
estimates that affect our reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. In many
instances, we could have reasonably used different accounting estimates, and in
other instances changes in the accounting estimates are reasonably likely to
occur from period to period. Accordingly, actual results could differ
significantly from the estimates made by management. To the extent that there
are material differences between these estimates and actual results, our future
financial statement presentation of our financial condition or results of
operations will be affected.

On an ongoing basis, we evaluate our 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. We base our 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. We
refer to accounting estimates of this type as "critical accounting estimates,"
which are discussed further below.

Critical Accounting Policies

In addition to making critical accounting
estimates, we must ensure that our financial statements are properly stated in
accordance with GAAP. In many cases, the accounting treatment of a particular
transaction is specifically dictated by GAAP and does not require management's
judgment in its application, while in other cases, management's judgment is
required in selecting among available alternative accounting standards that
allow different accounting treatment for similar transactions (e.g., stock-based
compensation, restructuring activities, depreciation methodology, etc.). We
believe that the following accounting policies are critical to understanding our
historical and future performance, as these policies relate to the more
significant areas involving management's judgments and estimates: revenue
recognition, restructuring and related expenses, impairment of long-lived
assets, the provision for doubtful accounts, acquired intangible assets,
stock-based compensation, legal contingencies and income taxes.

Our management has reviewed our critical accounting
policies, our critical accounting estimates, and the related disclosures with
our Disclosure and Audit Committees. These policies and our procedures related
to these policies are described below. In addition, please refer to Note 1 to
the accompanying consolidated financial statements for a further description of
our accounting policies.

Revenue Recognition

Substantially all of our revenues are derived
primarily from providing: (i) licenses of our software; (ii) technical support
and product updates, otherwise known as maintenance; and (iii) professional
services, including implementation and training services. Our standard end user
license agreement provides for an initial fee for use of our products in
perpetuity based upon the number of named users. We license our 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 for a period of
one year; and (iii) a professional services arrangement on a time and materials
basis.

While the basis for software license revenue recognition is
substantially governed by the requirements of Statement of Position No. 97-2
"Software Revenue Recognition," as amended by Statement of Position No. 98-9
"Software Revenue Recognition with Respect to Certain Arrangements"
(collectively "SOP 97-2"), we exercise judgment and use estimates in connection
with the determination of the amount of software license, maintenance and
professional services revenues to be recognized in each accounting period.

Under the residual method prescribed by SOP 97-2, revenue is
recognized when company-specific objective evidence of fair value exists for all
of the undelivered elements in the arrangement (i.e., professional services and
maintenance), but does not exist for one or more of the delivered elements in
the arrangement (i.e., the software product). Each license arrangement requires
careful analysis to ensure that all of the individual elements in the license
transaction have been identified, along with the fair value of each element.

We allocate revenue to each undelivered element based on its
respective fair value, with the fair value determined by the price charged when
that element is sold separately. We determine 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 we charge 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.

In addition to evaluating the fair value of each element of
the arrangement, we consider whether the elements can be separated into separate
accounting units under SOP 97-2. In making this determination, we consider the
nature of services (i.e., consideration of whether the services are essential to
the functionality of the licensed product), degree of risk, availability of
services from other vendors, timing of payments and impact of milestones or
acceptance criteria on the realizability of the software license fee.

For substantially all of our software arrangements, we defer
revenue for the fair value of the maintenance and professional services to be
provided to the customer and recognize revenue for the software license when
persuasive evidence of an arrangement exists and delivery of the software has
occurred, provided the fee is fixed or determinable and collection is deemed
probable.

We evaluate each of these criteria as follows:

- Evidence of an arrangement
- Delivery
- Fixed or determinable fee
- Collection is deemed probable

Our customers typically pre-pay maintenance for the first
year in connection with a 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 our products and
training revenues. Our software is ready to use by the customer upon receipt.
While many of our customers may choose to tailor the software to fit their
specific needs, our implementation services do not involve significant
customization to or development of the underlying software code. Substantially
all of our professional services arrangements are billed on a time and materials
basis and, accordingly, are recognized as the services are performed, which is
typically over a three- to six-month period subsequent to the licensing of our
software.

Restructuring and Related Expenses

During 2002 and 2003, we initiated and completed
two separate restructurings of operations, herein referred to as the 2002
Restructuring and the 2003 Restructuring. We have accounted for the 2002 and
2003 Restructurings in accordance with SEC Staff Accounting Bulletin No. 100
"Restructuring and Impairment Charges" and other applicable accounting standards
as discussed below.

In June 2002, the Financial Accounting Standards
Board (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"). We adopted SFAS 146 effective January 1, 2003; therefore, the
2003 Restructuring was accounted for in accordance with SFAS 146. The adoption
of SFAS 146 did not impact our restructuring obligations recognized in
connection with the 2002 Restructuring, 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.

The following is a summary of the accounting principles
used to record and measure the 2002 and 2003 Restructurings and the associated
obligations:

2003 Restructuring

The expenses incurred in connection with the 2003
Restructuring are comprised primarily of: (i) severance and associated employee
termination costs related to the reduction of our workforce; (ii) lease
termination costs and/or costs associated with ceasing to use certain facilities
("Facilities Abandonment"); and (iii) impairment costs related to certain
long-lived assets abandoned.

As discussed above, we have accounted for the 2003
Restructuring in accordance with SFAS 146. SFAS 146 requires that a liability
for costs 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 measured at fair value and recorded 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.

In accordance with SFAS 146, we accounted for the individual
components of the 2003 Restructuring as follows:

- Severance:
- Facilities Abandonment:
- Asset Impairment/Abandonment:

2002 Restructuring

Restructuring obligations incurred prior to the
adoptions of SFAS 146 (i.e., the 2002 Restructuring) were accounted for and
continue to be accounted for in accordance with EITF 94-3 and EITF 88-10. The
expenses incurred in connection with the 2002 Restructuring are comprised
primarily of: (i) severance and associated employee termination costs related to
the reduction of our workforce; (ii) lease termination costs and/or costs
associated with Facilities Abandonment; and (iii) impairment costs related to
certain long-lived assets abandoned. We accounted for the individual components
of the 2002 Restructuring as follows:

- Severance:
- Facilities Abandonment:
- Asset Impairment/Abandonment:

Inherent in the estimation of the costs related to the 2002
and 2003 Restructurings are assessments related to the most likely expected
outcome of the significant actions to accomplish the exit activities. In
determining the charge related to the 2002 and 2003 Restructurings, we had to
make significant estimates related to the expenses associated with our excess
facilities. For example, in determining the charge for excess facilities, we
were required to estimate future sublease income (including both timing and
amount of the potential sublease income), future net operating expenses of the
facilities, and potential brokerage commissions, among other expenses.

The most significant of these estimates related to the timing
and extent of future sublease income in which to reduce our lease obligations.
Specifically, in determining our obligations related to facilities included in
the 2002 and 2003 Restructurings as of December 31, 2003, we reduced the
estimated cash outflows related to these obligations by estimated sublease
income of $213.4 million. We based our estimates of sublease income, in part, on
the opinions of independent real estate experts, current market conditions and
rental rates, the status of negotiations with potential subtenants, and the
location of the respective facility, among other factors. In addition, in
determining the 2002 Restructuring obligations we assessed the time period over
which reasonable estimates could be made.

In addition to estimating sublease income, we also estimated
the remaining operating costs (e.g., maintenance, utilities, property management
fees, etc.) and estimated brokerage commissions of the facilities exited in
connection with the 2002 and 2003 Restructurings. We based our estimates, in
part, on the opinions of independent real estate experts, current operating
expense levels in the individual facilities, an assessment of projected
increases in those costs and the location of the respective facility, among
other factors. In determining the 2002 Restructuring obligations we also
assessed the time period over which reasonable estimates could be made. As of
December 31, 2003, we have estimated future operating costs and brokerage
commissions for the facilities included in the 2002 and 2003 Restructurings to
be $84.0 million.

These estimates, along with other estimates made by
management in connection with the 2002 and 2003 Restructurings, may vary
significantly depending, in part, upon factors that may be beyond our control.
Specifically, these estimates will depend on our success in negotiating with
lessors, the time periods required to locate and contract suitable subleases and
the market rates at the time of such subleases. Adjustments to the facilities
reserve will be required if actual lease exit costs or sublease income differ
from amounts currently expected.

We have had and expect that we will continue to have
adjustments to our estimates of our obligations recorded in connection with the
2002 and 2003 Restructurings. For example, during 2003 we revised our estimates
related to obligations recorded in previous periods related to the 2002 and 2003
Restructurings, resulting in an additional charge of $14.9 million during 2003.
While we believe our estimates related to our 2002 and 2003 Restructuring
obligations are appropriate as of December 31, 2003, if our estimates regarding
sublease income, operating costs and brokerage commissions were to change by
10%, we would be required to record an additional charge to our operations of
approximately $30.0 million in the period of such change in estimate. We will
continue to review the status of our 2002 and 2003 Restructuring obligations on
a quarterly basis and, if appropriate, record changes to these obligations in
current operations based on management's most current estimates.

Impairment of Long-Lived Assets

We test goodwill for impairment in accordance with
SFAS 142, which 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
our determination that we have only one reporting segment, we have determined
that we have only one Reporting Unit, specifically the license, implementation
and support of our software applications. Goodwill is tested for impairment
annually on July 1 in a two-step process. First, we must determine if the
carrying amount of our Reporting Unit exceeds the "fair value" of the Reporting
Unit based on quoted market prices of our common stock, which would indicate
that goodwill may be impaired. If we determine that goodwill may be impaired, we
compare the "implied fair value" of the goodwill, as defined by SFAS 142, to its
carrying amount to determine the impairment loss, if any.

We evaluate all of our long-lived assets (primarily property
and equipment and intangible assets other than goodwill) for impairment in
accordance with the provisions of SFAS 144. SFAS 144 requires that long-lived
assets and intangible assets other than goodwill be evaluated 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. In accordance with SFAS 144, when a long-lived asset
or intangible asset is abandoned, the carrying value is charged to expense in
the period of abandonment.

During 2002 and 2003, we recorded impairment charges of $26.0
million and $17.5 million associated with certain furniture, fixtures and
leasehold improvements that we abandoned in connection with the 2002 and 2003
Restructurings. These assets, primarily leasehold improvements, were located in
facilities that we ceased to use. Based on our evaluation of these assets we
determined that the assets were not marketable for resale and oftentimes could
not be removed from the premises (e.g., the asset consisted of a dividing wall
or other permanent fixture). In addition, based on our assessment that we would
no longer be able to utilize the underlying source code or functionality of an
"acquired technology" intangible asset obtained in connection with the
acquisition of Sales.com, we recognized an impairment charge of $2.4 million
during 2003.

As of December 31, 2003, the net carrying value of our
leasehold improvements and intangible assets (i.e., the primary asset categories
that we have experienced impairment charges in the past) were $60.1 million and
$10.8 million, respectively. While we do not currently believe any of our
long-lived assets are impaired, and we do not anticipate an impairment in the near
term, if a change in circumstances were to occur requiring an assessment of
impairment, we would be required to evaluate whether the future cash flows
related to the asset will be greater than its carrying value at the time of the
impairment test. While our cash flow assumptions are consistent with the plans
and estimates we are using to manage our operations, there is significant
judgment in determining the cash flows attributable to our intangible assets
over their respective estimated useful lives. If such an evaluation resulted in
an impairment of any of our long-lived assets, such impairment would be recorded
in the period we make the impairment determination.

Provision for Doubtful Accounts

We initially record our provision for doubtful
accounts based on our 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 considers: (i) the aging of the accounts
receivable; (ii) trends within and ratios involving the age of the accounts
receivable; (iii) the customer mix in each of the aging categories and the
nature of the receivable (i.e. license, consulting, maintenance, etc.); (iv) our
historical provision for doubtful accounts, which have ranged on a quarterly
basis up to 3.5% of total revenues and on an annual basis between 0.5% and 2.2%
of total revenues; (v) the credit-worthiness of each customer; (vi) the economic
conditions of the customer's industry; and (vii) general economic conditions,
among other factors.

Should any of these factors change, the estimates made by
management will also change, which could impact the level of our future
provision for doubtful accounts. Specifically, if the financial condition of our
customers were to deteriorate, affecting their ability to make payments, an
additional provision for doubtful accounts may be required.

Acquired Intangible Assets

We account for our purchases of acquired companies in
accordance with SFAS No. 141 "Business Combinations" ("SFAS 141") and account
for the related acquired intangible assets in accordance with SFAS 142. In
accordance with SFAS 141, we allocate the cost of the acquired companies to the
identifiable tangible and intangible assets and liabilities acquired, with the
remaining amount being classified as goodwill. Certain intangible assets, such
as "acquired technology," are amortized to expense over time, while IPR&D,
if any, is recorded as an expense at the acquisition date.

The majority of entities acquired by us do not have
significant tangible assets and, as a result, a significant portion of the
purchase price is typically allocated to intangible assets and goodwill. Our
future operating performance will be impacted by the future amortization of
intangible assets, potential charges related to IPR&D, and potential
impairment charges related to goodwill or intangibles. As of December 31, 2003,
we had an aggregate of approximately $151.7 million reflected on the
accompanying consolidated balance sheet related to goodwill and intangible
assets. The allocation of the purchase price of the acquired companies to
intangible assets and goodwill requires management to make significant estimates
and assumptions, including estimates of future cash flows expected to be
generated by the acquired assets and the appropriate discount rate for these
cash flows. If different conditions should prevail, material write-downs of
intangible assets and/or goodwill could occur.

As required by SFAS 142, we have 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. As described above,
in lieu of amortizing goodwill, we test goodwill for impairment periodically and
record any necessary impairment in accordance with SFAS 142. Our "acquired
technology" intangible assets are currently amortized over a period of fourteen
months to three years, using the straight-line method. Our "customer
relationship" intangible asset is currently amortized over a period of six years
based on the customer attrition rates, currently estimated at approximately 30%
per year of the remaining acquired customers.

Stock-Based Compensation

We have elected to continue to account for our
employee stock-based compensation plans using the intrinsic value method, as
prescribed by APB No. 25 "Accounting for Stock Issued to Employees" and
interpretations thereof (collectively "APB 25") versus the fair value method
allowed by SFAS No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123").
Accordingly, deferred compensation is only recorded if the current price of the
underlying stock exceeds the exercise price on the date of grant. We record and
measure deferred compensation for stock options granted to non-employees at
their fair value. Deferred compensation is expensed on a straight-line basis
over the vesting period of the related stock option, which is generally five
years. Please refer to the section entitled "Employee Stock Options" for further
discussion of the accounting for our stock-based compensation plans.

Legal Contingencies

As discussed further in Note 10 to the
accompanying consolidated financial statements, certain of our payroll tax
returns, both in the United States and internationally, are currently under
examination by the applicable taxing authority. We believe we have made adequate
provision in the accompanying consolidated financial statements for any
adjustments the taxing authorities may propose with respect to our international
payroll tax returns. We have not made any provision for potential assessments by
the IRS related to our U.S. payroll tax returns in the accompanying consolidated
financial statements, primarily as it relates to stock option exercises, as the amount that we may have to pay is not
currently estimable.

We will continually review our estimates related to our
payroll tax obligations, including potential assessments from the IRS of
additional payroll taxes, penalties and/or interest, and revise our estimates,
if deemed necessary. A revision in our estimates of our payroll tax obligations
will be reflected as an adjustment to operating expenses in the period that the
change in estimate occurs. We will allocate such a revision in estimate to the
appropriate expense category (i.e., product development, sales and marketing,
etc.) based upon the individual employee's functional responsibility in which
the additional obligation relates. Such a revision could materially impact our
future expense levels and net income.

We are also currently involved in various claims and legal
proceedings as discussed further in Note 6 to the accompanying consolidated
financial statements. Periodically, we review the status of each significant
matter and assess our potential financial exposure. If the potential loss from
any claim or legal proceeding is considered probable and the amount can be
reasonably estimated, we accrue a liability for the estimated loss. Significant
judgment is required in both the determination of probability and the
determination as to whether an exposure is reasonably estimable. In determining
the probability of an unfavorable outcome of a particular contingent liability
and whether such liability is reasonably estimable, we consider the individual
facts and circumstances related to the liability, opinions of legal and tax
counsel, recent legal and tax rulings by the appropriate regulatory bodies,
among other factors.  Because of uncertainties related to these matters,
accruals are based only on the best information available at the time. As
additional information becomes available, we reassess the potential liability
related to our pending claims and litigation and may revise our estimates
accordingly. Such revisions in the estimates of the potential liabilities could
have a material impact on our results of operations and financial position.

Income Taxes

As of December 31, 2003, our valuation allowance on
deferred tax assets pertains to certain tax credits and net operating loss
carryforwards resulting from the exercise of certain employee stock options. The
valuation allowance will be reduced in the period in which we realize the
benefit from the utilization of these credits and losses to reduce our income
taxes payable on our income tax return. 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.

We are required to estimate our income taxes in each of the
jurisdictions in which we operate. This involves estimating our current tax
liabilities in each jurisdiction, including the impact, if any, of additional
taxes resulting from tax examinations as well as making judgments regarding the
recoverability of deferred tax assets. To the extent recovery of deferred tax
assets is not likely based on our estimation of future taxable income in each
jurisdiction, a valuation allowance is established. Tax liabilities can involve
complex issues and may require an extended period to resolve. We have considered
future taxable income and the existence of prudent and feasible tax planning
strategies in assessing the need for an additional valuation allowance on our
remaining deferred tax assets and have concluded that no additional allowance is
currently required. In the event we were to determine that we would not be able
to realize all or part of our net deferred tax assets, an adjustment to the
deferred tax assets would be charged to income in the period such determination
was made.

As discussed in Note 10 to the accompanying consolidated
financial statements, our U.S. Federal income tax returns for 1998, 1999 and
2000 are currently under examination by the IRS. During 2003, we received
notices from the IRS of proposed adjustments to these tax returns. While the
final resolution of the IRS's ongoing examination is uncertain, we believe that
we have made adequate provision in the accompanying consolidated financial
statements for any adjustments that the IRS has or may propose with respect to
our U.S. Federal income tax returns. The final determination of our tax
obligations may exceed the amounts provided for by us in the accompanying
consolidated financial statements. We will continually review our estimates
related to our income tax obligations, including potential assessments from the
IRS of additional taxes, penalties and/or interest, and revise our estimates, if
deemed necessary. A revision in our estimates of our tax obligations will be
reflected as an adjustment to our income tax provision at the time of the change
in our estimates. Such a revision could materially impact our effective tax
rate, income tax provision and net income.

Adoption of Accounting Standards

During 2003, we adopted new
accounting standards related to the accounting for and disclosure of revenue
derived from our hosted software solution, Siebel CRM OnDemand; restructuring
obligations (i.e., costs associated with exit and disposal activities); asset
retirement obligations; and guarantees. The adoption of these accounting
standards did not have a material impact on our consolidated financial position,
results of operations or cash flows. Please refer to Note 1 to the accompanying
consolidated financial statements for further discussion of the accounting
standards adopted during 2003.

Seasonality

Our first quarter revenues have
typically been lower than the revenues in the immediately preceding fourth
quarter because (i) many of our customers utilize a significant portion of their
capital budgets at the end of their fiscal year, (ii) the majority of our
customers begin a new fiscal year on January 1, and (iii) capital expenditures
tend to be lower in an organization's first quarter than in its fourth quarter.
We anticipate that this seasonality will continue. The seasonality between the
fourth quarter and first quarter may be impacted by a variety of factors,
including changes in the global economy, renewed terrorist attacks and other
factors. Please refer to "Risk Factors-Our quarterly operating results may
fluctuate."

Employee Stock Options

Section I. Description of Plans

Since inception, we have believed in broad-based
employee stock ownership. Accordingly, our stock option program has been
instrumental in attracting and retaining talented employees and aligning their
interests with the interests of existing stockholders. Our stock option program
consists primarily of two plans: the Siebel Systems, Inc. 1996 Equity Incentive
Plan (the "1996 Plan"), and the Siebel Systems, Inc. 1998 Equity Incentive Plan
(the "1998 Plan"). Stock options granted to executive officers, key employees
and non-employee directors are made under the 1996 Plan and stock options
granted to employees other than officers and directors are made under the 1998
Plan. Our Board of Directors and stockholders have approved the 1996 Plan, and
our Board of Directors has approved the 1998 Plan.

All stock option grants are made after a review by, and
with the approval of, the Compensation Committee of the Board of Directors. All
members of our Compensation Committee are independent directors, as defined in
the applicable rules for issuers traded on The Nasdaq Stock Market.
Substantially all of our employees participate in one of the above plans,
thereby providing us the ability to meet our goal of long-term retention of our
employees. Stock options granted under these plans expire no later than ten
years from the grant date (2003 grants expire six years from grant date) and
generally vest over five years. Please refer to the "Report of the Compensation
Committee of the Board of Directors on Executive Compensation" appearing in Item
11 of this annual report for further information concerning our policies and the
Compensation Committee's policies regarding the use of stock options.

Section II. Significant Actions Taken During 2002 and
2003 Related to Stock Options

Historically, stock options have been an
important component of total compensation for our employees. Accordingly,
substantially all employees are granted stock options upon commencement of
employment. We have on occasion assumed stock options of acquired businesses and
rewarded existing employees for high levels of performance with additional
grants of stock options (consideration of additional grants is typically
scheduled to occur by the end of the second quarter of each year).

These factors, coupled with significant growth in our
employee base, resulted in a significant number of outstanding stock options
relative to shares outstanding as of December 31, 2001 (we had 247.2 million
stock options outstanding as compared to 467.0 common shares outstanding).

During 2002 and 2003, we took several steps to reduce the
number of stock options outstanding from the levels outstanding as of December
31, 2001. These actions, each of which is described further below included: (i)
the repurchase of 28.1 million employee stock options in September 2002 in connection
with the Option Repurchase; (ii) the cancellation of 26.0 million stock options
in January 2003; and (iii) significantly reduced levels of stock option grants
during 2002 and 2003, coupled with forfeitures of stock options by terminated
employees. We believe that our actions will continue to align the interests of
our employees and management with the interests of our stockholders.

As a result of these actions, stock options outstanding
decreased by 61.7 million during 2002 and 41.6 million during 2003 (an aggregate
of 103.3 million, or 42% since December 31, 2001). Further, these actions
resulted in a decrease in stock options outstanding relative to shares
outstanding ("Stock Option Overhang") as follows (in thousands, except
percentages):

`Shares of
                                                  Common     Stock        Stock
                                                  Stock      Options      Option
                                               Outstanding Outstanding   Overhang
                                               ----------- ----------- ------------
December 31, 2001............................    466,950     247,204           53 %
                                               =========== =========== ============
December 31, 2002............................    486,428     185,473           38 %
                                               =========== =========== ============
December 31, 2003............................    498,305     143,903           29 %
                                               =========== =========== ============`

The following is a discussion of the actions we have
taken during 2002 and 2003:

Option Repurchase

As discussed further in Note 8 to the accompanying
consolidated financial statements, we completed a tender offer during 2002 to
repurchase 28.1 million stock options for total consideration of $51.9 million,
consisting of $31.5 million of fully vested, non-forfeitable shares of the our
common stock (5.5 million shares) and $20.4 million in cash. A total of 4.1
million of these shares were subject to a holding period. We offered to
repurchase these stock options primarily through the issuance of shares of our
common stock in order to: (i) improve employee morale by eliminating
"out-of-the-money" stock options; (ii) reduce the net future dilution to existing
stockholders; and (iii) better align employees' interests with those of
stockholders. As a result of the Option Repurchase, outstanding stock options
decreased by 11% from the levels as of December 31, 2001, representing net
potential dilution to existing stockholders of 5%. The potential dilution to
stockholders is calculated as the stock options canceled less the 5.5 million
shares of common stock issued in exchange for the stock options, divided by the
number of shares of common stock outstanding as of December 31, 2001.

CEO Option Cancellation

As described more fully in Note 8 to the accompanying
consolidated financial statements, at the request of our CEO, we cancelled
approximately 26.0 million of our CEO's stock options in January 2003. The stock
options cancelled had exercise prices ranging from $4.91 to $59.81 per share and
a Black-Scholes calculated fair value of $56.1 million at the time of
cancellation (stock options that were "in-the-money" at the time of cancellation
represented $30.2 million, or 54%, of the total fair value at cancellation).
This cancellation represented all stock options granted to our CEO since October
1998. Our CEO requested the cancellation of these stock options primarily to
reduce the number of outstanding stock options relative to the number of shares
outstanding. As a result of this cancellation, outstanding stock options
decreased by 14% from the levels as of December 31, 2002, representing net
potential dilution to existing stockholders of 5%. The potential dilution to
stockholders is calculated as the stock options canceled, divided by the number
of shares of common stock outstanding as of December 31, 2002. We have provided
no compensation in exchange for the cancellation of the CEO's stock options, nor
will we provide any compensation in the future in exchange for such
cancellation.

Grants and Forfeitures

In order to maintain the proper balance between the
need to attract and retain employees and minimize the dilution to existing
stockholders, we adjusted our compensation structure in 2002 to significantly
reduce the number of stock options issued to new and existing employees. We
maintained these new equity based compensation guidelines in 2003. In addition,
commencing in February 2003, we began granting stock options with a contractual
life of six years, as opposed to ten years for stock options granted prior to
such time.

In accordance with these revised guidelines, we evaluate
whether to grant a merit award of stock options to existing employees and
officers by the end of the second quarter of each year. Accordingly, during the
second quarter of 2003, we granted an aggregate of 17.8 million stock options to
our employees and officers in recognition of their performance and future
potential with us. During 2002, we limited the stock options granted, such that
substantially all stock option grants during 2002 related to newly hired
employees. The remaining grants during 2003 primarily relate to grants to
employees upon commencement of employment. Our Chairman and CEO did not receive
any stock option grants during 2002 or 2003.

Immediately upon voluntary or involuntary termination, an
employee forfeits all unvested stock options. Any vested stock options of the
terminated employee that are not exercised within 90 days from the termination
date are forfeited at the expiration of the 90 days. Employees forfeited a total
of 28.9 million and 27.7 million stock options during 2002 and 2003,
respectively, in connection with their termination (the majority of which
occurred as a result of the 2002 and 2003 Restructurings).

During 2003, stock option grants, net of forfeitures by
employees upon termination, resulted in a net decrease in our outstanding stock
options of 3% from the levels as of December 31, 2002, representing a decrease
in net potential dilution to existing stockholders of 1%. The potential dilution
to stockholders from stock options (the "Dilution Percentage") is calculated as
new stock options granted during the year, net of stock options forfeited by
employees terminating employment, divided by the total outstanding shares of
common stock at the beginning of the year. As described above, the Dilution
Percentage for 2003 only reflects forfeitures by employees upon termination and,
accordingly, does not reflect the voluntary cancellation of stock options of our
CEO discussed above. The decrease in the net Dilution Percentage in 2003 of 1%
compares to a decrease of 5% during the year ended December 31, 2002 and an
increase of 21% during the year ended December 31, 2001.

Section III. General Option Information

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
                                                              ============ ============`

We continue to believe in broad-based employee stock
ownership. As the table below indicates, we have continued to allocate the vast
majority of our stock options to employees who are not officers and directors.
"Named Executive Officers" in the below table and in the remainder of this
annual report represent our CEO and four most highly compensated executive
officers for the respective year. Named Executive officers for 2003 are
disclosed in Item 11 of this annual report. Summarized below is the distribution
of our stock options for 2001, 2002 and 2003:

`Year Ended December 31,
                                                                            -----------------------------------
                                                                               2001       2002         2003
                                                                            ---------- ----------- ------------ 
Grants during the period as a percentage of total stock options granted:
  Named Executive Officers................................................      12.4 %       3.4 %        4.6 %
  All other officers and directors as a group.............................       2.4         0.3          3.3
                                                                            ---------- ----------- ------------
    Total for all officers and directors..................................      14.8         3.7          7.9
  All other employees as a group..........................................      85.2        96.3         92.1
                                                                            ---------- ----------- ------------
    Total all grants......................................................     100.0 %     100.0 %      100.0 %
                                                                            ========== =========== ============`

The above table does not reflect the cancellation of
stock options granted to our CEO in 2001. After considering the cancellation of
these stock options, during the past three years more than 90% of our stock
options were distributed to employees who were not officers or directors.

The following table details the "in-the-money" and
"out-of-the-money" status of our stock options outstanding as of December 31,
2003:

`Options Outstanding                   Options Exercisable
                            ------------------------------------------------  --------------------------
                                               Wtd. Avg.        Wtd. Avg.                     Wtd. Avg.
                               Number          Remaining         Exercise        Number       Exercise
    Options                   of Shares      Life (Years)         Price        of Shares        Price
--------------------------  -------------    -------------  ----------------  ------------ -------------
In-the-Money                  79,163,463              4.2    $         5.48    55,000,190   $      4.23
Out-of-the-Money              64,739,352              7.2    $        22.65    33,633,273   $     23.64
--------------------------  -------------    -------------  ----------------  ------------ -------------
                             143,902,815              5.5    $        13.20    88,633,463   $     11.59
                            =============                                     ============`

In-the-money stock options in the above table have
exercise prices below the closing price of our common stock as of December 31,
2003, of $13.92 and out-of-the money stock options have exercise prices equal to
or greater than $13.92.

For additional information regarding our employee stock
option plans, please refer to Notes 1 and 8 to the accompanying consolidated
financial statements.

Section IV. Accounting for Stock-Based Compensation

We account for our employee stock-based
compensation plans using the intrinsic value method, as prescribed by APB 25.
Accordingly, deferred compensation is only recorded if the current market price
of the underlying stock exceeds the exercise price of the stock option on the
date of grant. We record and measure deferred compensation for stock options
granted to non-employees at their fair value. Deferred compensation is expensed
on a straight-line basis over the vesting period of the related stock option,
which is generally five years. There were no grants of stock options at exercise
prices below the fair market value of our common stock on the dates of grant
during 2001, 2002 and 2003.

An alternative to the intrinsic value method of
accounting for stock options is the fair value approach under SFAS 123. We have
continued to follow the intrinsic value method of APB 25, as we believe the
accounting for stock options under SFAS 123 is highly subjective and does not
necessarily reflect the economic substance of an employee stock option.
Specifically, the compensation cost under SFAS 123 is recognized ratably over
the vesting period, regardless of whether the stock options' exercise prices are
below the fair value of our common stock. In fact, the value of a stock option,
as measured by the fair value of our common stock less the exercise price,
actually has an inverse relationship with the amount of expense recognized under
SFAS 123. Accordingly, the stock options with the largest unrealized
appreciation in value at any point in time will generally have the smallest
amount of expense under SFAS 123 and the stock options that are out-of-the money
or have the smallest unrealized appreciation will have the largest amount of
expense associated with them under SFAS 123. We believe this paradox could be
extremely confusing to investors, and perhaps even misleading.

To better illustrate this disparity between the expense
recognized under SFAS 123 and the "realized value" related to a stock option, we
have provided the following information related to our stock options granted
during 2000. Specifically, excluding options assumed in acquisitions, during
2000 we granted stock options with weighted-average exercise prices of $62.42
per share (weighted-average fair values on the date of grant of $35.60 per
share, as calculated using the Black-Scholes option valuation model). As of
December 31, 2003, the holders of these stock options have realized, as
described below, a total of $8.8 million on these stock options, versus $1,588.9
million of expense, if we had followed the recognition provisions of SFAS 123
versus the footnote disclosure provisions. In other words, if we followed SFAS
123, we would recognize an expense equal to approximately 180 times the benefit
received by our employees. The amount "realized" represents the actual realized
gains upon exercise of the stock options, plus the unrealized gains on stock
options that remain outstanding as of December 31, 2003 (i.e., closing price as
of December 31, 2003 of $13.92 less the applicable exercise price). As this
illustration indicates, the expensing of the fair value of a stock option can be
a very unreliable indicator of the benefit that will ultimately be realized by
an employee. Accordingly, we believe that expensing stock options, especially in
light of the disparity between the amounts expensed and the benefits realized by
our employees, may not be meaningful and may actually obscure our current
disclosures of the amounts realized by our executive officers on stock options
(disclosed in Section V below of this annual report).

In addition, compensation expense related to vested stock
options that are subsequently forfeited or canceled is reflected as an expense,
despite the fact that the stock options did not provide an equivalent monetary
value in compensation to the employee or dilute existing stockholders.
Subsequent to cancellation of a stock option, no additional compensation expense
for that cancelled stock option is reported in the pro forma disclosure of
stock-based compensation.

Further, under the fair value approach, employee stock
options are required to be valued at grant date using an option valuation model,
such as the Black-Scholes or Binomial models. We believe there are limitations
to the appropriateness of these option valuation models, including the fact that
these option valuation models were developed for use in estimating the fair
value of traded options, which have no vesting restrictions, are fully
transferable, and typically have shorter terms. In addition, in accordance with
SFAS 123, we must use subjective assumptions, including expected stock price
volatility and the expected remaining life as inputs to the Black-Scholes option
valuation model. The number of subjective assumptions required is increased
exponentially under the Binomial model. Because our stock-based awards have
characteristics significantly different from those of traded options and because
changes in the subjective input assumptions can materially affect the fair value
estimate, in our opinion, the existing models that are available to value stock
options do not provide an appropriate measure of the fair value of stock-based
awards to our employees.

As required by SFAS 123, we have prepared a
reconciliation of our earnings as reported on the statement of operations to the
earnings that we would have reported if we had followed SFAS 123 in accounting
for our stock-based compensation arrangements. For purposes of this
reconciliation, we added back all stock-based employee compensation expense
recorded in accordance with APB 25 in the statement of operations, then deducted
the pro forma stock-based employee compensation expense determined under SFAS
123. This pro forma effect on earnings represents the amortization of the
deferred compensation that is computed using the Black-Scholes option valuation
model at the date of the stock option grant. Summarized below are the pro forma
effects on our net income (loss), as if we had elected to use the fair value
approach prescribed by SFAS 123 to account for our employee stock-based
compensation plans (in thousands):

`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)
                                                                                     ========== ============ ============`

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 $631.8 million, $1,000.0 million and $412.9 million
of expense during 2001, 2002 and 2003 related to: (i) our 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., we repurchased the stock options in 2002 for $54.9
million versus the $595.3 million 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.

Please refer to Note 1 to the accompanying consolidated
financial statements for a further discussion of the fair value approach
prescribed by SFAS 123, including the assumptions used to determine the fair
value of and resulting SFAS 123 expense related to stock options granted, and
the procedures followed by us in determining those assumptions.

Section V. Executive and Director Stock-Based
Compensation

Executive Stock-Based Compensation

The following table sets forth certain
information regarding stock options granted to the Named Executive Officers
during 2003:

`Potential Realizable Value
                              Number of       Percent of                                    at Assumed Annual Rates of
                             Securities      Total Options                                  Stock Price Appreciation for      Aggregate
                             Underlying       Granted to       Exercise or                       the Option Term (4)        Black-Scholes
                               Options         Employees        Base Price     Expiration  ------------------------------   Value on Date
 Officer Name                Granted (1)      in 2003 (2)     ($/Share) (3)       Date           5%              10%         of Grant (5)
--------------------------  -------------    -------------- ----------------  ------------ -------------   --------------   -------------
Thomas M. Siebel                      --               -- %  $           --            --  $         --    $          --    $         --
R. David Schmaier                300,000             1.32 %  $         8.66    04/30/2009  $    883,568    $   2,004,515    $    942,000
Kenneth A. Goldman               250,000             1.10 %  $         8.66    04/30/2009  $    736,307    $   1,670,430    $    785,000
Edward Y. Abbo                   250,000             1.10 %  $         8.66    04/30/2009  $    736,307    $   1,670,430    $    785,000
Steven M. Mankoff                250,000             1.10 %  $         8.66    04/30/2009  $    736,307    $   1,670,430    $    785,000`

1. Options vest 20% on May 1, 2004, and at a rate of 5% for
each quarter of service thereafter, and have a term of six years.
2. Based on an aggregate of 22.8 million shares subject to
options granted to employees pursuant to our 1996 and 1998 Plans during 2003,
including grants to the Named Executive Officers.
3. Under all stock option plans, the stock option exercise
price is equal to the fair market value on the date of grant.
4. The potential realizable value is calculated based on the
term of the option at the time of grant. Stock price appreciation of 5% and 10%
is assumed pursuant to rules promulgated by the SEC and does not represent our
prediction of our stock price performance or the actual value of the stock
options.
5. Represents the aggregate fair value of the stock options
on the date of grant ($3.14 per share), as calculated using the Black-Scholes
option valuation model. The fair value does not represent our prediction of our
stock price performance, and historically has had no relationship whatsoever to
the value that is actually realized. Please refer to Section IV above for a
discussion of the limitations of SFAS 123, along with an example of the
disparity between the fair value under the Black-Scholes option valuation model
and the value realized by an optionholder.

The following summarizes the distribution and dilutive
impact of the stock options held by our Named Executive Officers as of December
31, 2001, 2002 and 2003:

`Year Ended December 31,
                                                                                      ------------------------------------
                                                                                        2001        2002         2003
                                                                                      ---------- ------------ ------------
Stock options held by Named Executive Officers as a percentage of:                                                         
  Total options outstanding.........................................................      23.8 %       29.3 %       18.7 %
                                                                                      ========== ============ ============
  Outstanding shares of common stock................................................      12.6 %       11.2 %        5.4 %
                                                                                      ========== ============ ============`

The following table sets forth for each of the Named
Executive Officers the shares acquired and the value realized on each exercise
of stock options during 2003 and the number and value of securities underlying
unexercised options held by the Named Executive Officers as of December 31,
2003:

`Number of
                                                                  Securities Underlying         Value of Unexercised
                                                                 Unexercised Options at        In-the-Money Options at
                               Shares                             December 31, 2003 (2)         December 31, 2003 (3)
                             Acquired on         Value        -----------------------------  -----------------------------
 Officer Name                 Exercise       Realized (1)      Exercisable    Unexercisable   Exercisable    Unexercisable
--------------------------  -------------   --------------    --------------  -------------  --------------  ------------- 
Thomas M. Siebel                      --    $          --        18,486,135       199,999     $205,259,888    $ 2,202,739
R. David Schmaier                257,143    $   2,820,659         1,582,860     1,340,000     $  6,399,567    $ 3,414,841
Kenneth A. Goldman                    --    $          --         1,420,000     1,450,000     $         --    $ 1,315,000
Edward Y. Abbo                        --    $          --           516,200       440,000     $  3,845,518    $ 1,675,550
Steven M. Mankoff                     --    $          --           826,800       590,000     $  4,803,794    $ 1,315,000`

1. Based on the fair market value of our common stock on the
exercise date, minus the exercise price, multiplied by the number of shares
exercised.
2. Represents the total number of shares of our common stock
subject to stock options held by the Named Executive Officers as of December 31,
2003.
3. Based on the fair market value of our common stock as of
December 31, 2003 ($13.92 per share), minus the exercise price, multiplied by
the number of shares underlying the stock options.

Director Stock-Based Compensation

Our directors do not currently receive any cash
compensation for service on the Board of Directors or any committee thereof, but
are eligible for reimbursement for certain expenses incurred in attending Board
of Directors and committee meetings. Historically, our non-employee directors
have received discretionary periodic stock option grants under the 1996 Plan for
service on our Board of Directors. In May 2003, after considering the criteria
relating to awarding stock options and general market conditions, our Board of
Directors approved the following formal guidelines relating to the grant of
stock options to our non-employee directors:

- Initial Grants-Each new non-employee director will be
granted an option to purchase 80,000 shares of our common stock as soon as
practicable following such director's appointment to the Board of
Directors.
- Annual Grants-Each non-employee director who has served
on the Board of Directors for more than six months will be granted an option to
purchase 20,000 shares of our common stock in January of each
year.

We do not intend for stock options granted to
non-employee directors to qualify as incentive stock options under the Internal
Revenue Code. We believe that these option grant guidelines will motivate and
reward our non-employee directors for their service in a manner that is
consistent with good corporate practice and the independence requirements of the
Nasdaq National Market applicable to members of boards of directors and
compensation committees. Notwithstanding the foregoing guidelines, from time to
time, including prior to any option grant made to any non-employee director, the
Compensation Committee of the Board of Directors will review the appropriateness
and adequacy of these compensation guidelines, taking into consideration actual
performance by us and the non-employee director and such other factors and
circumstances as deemed necessary and appropriate, and exercising such other
power and authority as may be permitted or required under the 1996 Plan.

During 2003, we granted 80,000 stock options with an
exercise price of $9.12 per share to C. Scott Hartz upon his appointment to our
Board of Directors and 20,000 stock options with an exercise price of $8.66 per
share to Marc F. Racicot in recognition of his performance as a member of our
Board of Directors. The exercise price per share was equal to the fair market
value of common stock on the date of grant (based on the closing sales price
reported on the Nasdaq Stock Market on the date immediately preceding the date
of grant). On the date of grant, the stock options issued to Messrs. Hartz and
Racicot had fair values of $267,200, or $3.34 per share, and $62,800, or $3.14
per share, respectively, as determined using the Black-Scholes option valuation
model. At the one year anniversary of each grant, 20% of the shares subject to
such grant vest and become exercisable, with the remaining shares vesting
thereafter in 16 equal quarterly installments upon the director's completion of
each quarter of service on the Board of Directors. The term of options granted
under the 1996 Plan is six years.

Directors who are also our employees are eligible to
receive options under the 1996 Plan and to participate in our 2003 Employee
Stock Purchase Plan, which was adopted by the Board of Directors in May 2003 and
approved by stockholders in June 2003, and our 401(k) Plan.

Section VI. Equity Compensation Plan Information

The number of shares issuable upon exercise of
outstanding stock options, the weighted-average exercise price of the
outstanding options, and the number of stock options remaining for future
issuance for each of our plans are summarized as follows:

`Number of Shares
                                        Number of     Weighted     Remaining Available
                                      Shares to Be     Average         for Future
                                       Issued Upon    Exercise       Issuance Under
                                       Exercise of    Price of     Equity Compensation
                                       Outstanding   Outstanding   Plans (Excluding
           Plan Category                 Options      Options     Options Outstanding)
------------------------------------  ------------- ------------  -------------------
 Equity compensation plans:
   Approved by shareholders (1).....    51,851,201   $     7.18           86,542,346
   Not approved by shareholders (2).    90,937,255   $    16.69          120,753,450
   Acquired companies' plans (3)....     1,114,359   $     8.66                   --
                                      -------------   ----------  -------------------
                                       143,902,815   $    13.20          207,295,796
                                      =============               ===================`

1. Represents shares available under the 1996 Plan, which is
used for grants to our officers and directors. The shares remaining available
for future issuance amount also includes 15.0 million shares available under our
2003 Employee Stock Purchase Plan.
2. Represents shares available under the 1998 Plan, which is
used for grants to our employees other than officers and directors.
3. We have assumed certain stock options granted to former
employees of acquired companies (the "Acquired Options"). All of the Acquired
Options have been adjusted to give effect to the conversion under the terms of
the agreements between us and the companies acquired. The Acquired Options
generally become exercisable over a four-year period and expire ten years from
the date of grant. Additional stock options will not be granted under any of the
acquired companies' plans, and these plans have not been approved by our
stockholders.

Summary of the 1998 Equity Incentive Plan

The following is a summary of the major
provisions of the 1998 Plan:

Shares Reserved for Issuance: The 1998 Plan
reserves for issuance up to 240 million shares of our Common Stock pursuant to
the exercise of stock options, the receipt of stock bonus awards and the
purchase of restricted stock. The number of shares available for future grant
and previously granted but unexercised options is subject to adjustment for any
future stock dividend, splits, mergers, combinations, or other changes in
capitalization as described in the 1998 Plan.

Eligibility: Nonstatutory stock options, stock
bonus awards, and rights to acquire restricted stock may be granted to
consultants and to employees who are not our officers.

Stock Options: Nonstatutory stock options, which
are not intended to satisfy the requirements of Section 422 of the Code, may be
granted under the 1998 Plan. The exercise price of a stock option may not be
less than eighty-five percent (85%) of the fair market value of the stock
underlying the stock option on the date of grant. Payment of the exercise price
may be made in cash, by delivery of other shares of our common stock, by
promissory note, or in any other form of legal consideration approved by the
Board of Directors. Stock options granted under the 1998 Plan have a maximum
term of ten (10) years. A stock option generally is exercisable in installments
based on the continuous service of the optionholder. If an optionholder's
service to us terminates for any reason, the stock option remains exercisable
for a period of approximately three (3) months or such longer period as may be
determined by the Board of Directors up to the remainder of the stock option
term.

Stock Bonus Awards and Rights to Acquire Restricted
Stock: Stock bonus awards may be granted in consideration for the past
services rendered to us by the recipient. The purchase price of a restricted
stock award may not be less than eighty-five percent (85%) of the fair market
value of the stock on the date of grant. The purchase price may be paid in cash,
by deferred payment, or in any other form of legal consideration approved by the
Board of Directors. Stock bonus and restricted stock awards may be subject to a
vesting schedule based on the continuous service of the recipient or may be
fully vested at the time of grant. If the recipient's continuous service with us
terminates, unvested stock received pursuant to a stock bonus award will be
forfeited back to us and unvested stock purchased pursuant to a restricted stock
award will be repurchased by us.

Cancellation and Re-Grant of Stock Options: The
1998 Plan provides that the Board of Directors may, at its discretion, effect,
with the consent of the adversely affected optionholder, (i) the reduction of
the exercise price of any outstanding stock options under the 1998 Plan to the
then fair market value of the underlying stock and/or (ii) the cancellation of
any of the outstanding stock options and the grant in substitution therefor a
new stock option covering the same or a different number of shares of common
stock, a stock bonus, the right to acquire restricted stock, cash and/or other
valuable consideration as determined by the Board of Directors. In the event
that the Board of Directors elects to cancel a stock option and grant a new
stock option to that same optionholder within six months of such cancellation,
we may incur negative accounting consequences. Accordingly, we have no intention
at this time to re-price any of our stock options or cancel and re-grant any of
our stock options.

Corporate Transactions:In the event of a
dissolution, liquidation or sale of substantially all of our assets, a merger or
consolidation in which we are not the surviving corporation, or a reverse merger
in which we are the surviving corporation but the shares of our common stock
outstanding immediately preceding the merger are converted by virtue of the
merger into other property, whether in the form of securities, cash or
otherwise, then any surviving corporation or an affiliate of such surviving
corporation will assume any outstanding stock awards under the 1998 Plan or
substitute similar stock awards for such outstanding stock awards or such stock
awards will continue in full force and effect. If the surviving corporation and
its affiliates refuse to assume, substitute or continue the stock awards, then,
with respect to stock awards held by recipients whose continuous service with us
has not terminated, the time during which such stock awards may be exercised
shall be accelerated and the stock awards shall terminate if not exercised prior
to such event.

Risk Factors

Set forth below and elsewhere in
this annual report and in the other documents we file with the SEC are risks and
uncertainties that could cause actual results to differ materially from the
results contemplated by the forward-looking statements contained in this annual
report. Prospective and existing investors are strongly urged to carefully
consider the various cautionary statements and risks set forth in this annual
report and our other public filings.

Our total revenue and operating results may fluctuate.

We have experienced and in the future may
experience a shortfall in revenue or earnings or otherwise fail to meet public
market expectations, which could materially and adversely affect our business
and the market price of our common stock. Our total revenue and operating
results may fluctuate significantly because of a number of factors, many of
which are outside of our control. These factors include:

- Corporate and consumer confidence in the economy,
evidenced, in part, by stock market levels;
- Changes in the domestic and international economic,
business and political conditions;
- Economic conditions within the information technology
industry;
- Level of product and price competition;
- Length of our sales cycle and customer licensing
patterns;
- Size and timing of individual license
transactions;
- Delay or deferral of customer implementations of our
products;
- Success in expanding our Global Services Organization,
direct sales force and indirect distribution channels;
- Timing of new product introductions and product
enhancements;
- Appropriate mix of products licensed and services
sold;
- Levels of international transactions;
- Activities of and acquisitions by competitors;
- Timing of new hires and the allocation of our
resources;
- Increases in the cost of software and professional
services;
- Changes in foreign currency exchange rates;
- Success of integrating and achieving the anticipated
benefits of our acquired companies; and
- Our ability to develop and market new products and
control costs.

One or more of the foregoing factors may cause our
operating expenses to be disproportionately high during any given period or may
cause our net revenue and operating results to fluctuate significantly. Based
upon the preceding factors, we may experience a shortfall in revenue or earnings
or otherwise fail to meet public market expectations, which could materially and
adversely affect our business, financial condition, results of operations and
the market price of our common stock.

Our quarterly operating results may fluctuate.

Our total revenue and operating results may vary
significantly from quarter to quarter. The main factors that may affect these
fluctuations are:

- Domestic and international economic, business and
political conditions;
- Economic conditions within the information technology
industry;
- The discretionary nature of our customers' purchase and
budget cycles;
- The size and complexity of our license
transactions;
- The potential delays in recognizing revenue from license
transactions;
- The timing of new product releases;
- Hiring additional personnel, including sales staff,
programmers and other staff;
- Seasonal variations in operating results; and
- Variations in the fiscal or quarterly cycles of our
customers.

Each customer's decision to implement our products and
services is discretionary, involves a significant commitment of resources and is
subject to its budget cycles. In addition, the timing of license revenue is
difficult to predict because of the length of our sales cycle. We base our
operating expenses on anticipated revenue trends. Because a high percentage of
these expenses are relatively fixed, a delay in recognizing revenue from license
transactions could cause significant variations in operating results from
quarter to quarter and could result in operating losses. If these expenses
precede, or are not subsequently followed by, increased revenues, our business,
financial condition or results of operations could be materially and adversely
affected.

As a result of these and other factors, revenues for any
quarter are subject to significant variation, and we believe that period-to-period
comparisons of our results of operations are not necessarily meaningful.
You should not rely on these comparisons as indications of future performance.
Our future quarterly operating results from time to time may not meet the
expectations of market analysts or investors, which would likely have an adverse
effect on the price of our common stock.

Economic conditions could adversely affect our revenue
growth and ability to forecast revenue.

The revenue growth and profitability of our
business depends on the overall demand for business applications software and
services, particularly within the industries in which we offer specific versions
of our products. Because our sales are primarily to major corporate customers in
the high technology, telecommunications, financial services (including
insurance), pharmaceutical, utilities and consumer packaged goods industries,
our business depends on the overall economic conditions and the economic and
business conditions within these industries. The progressive weakening of the
global economy, the weakening of the information technology industry, and the
weakening of the business conditions within the industries listed above has
caused a decrease in our software license revenues in 2001, 2002 and 2003. A
decrease in demand for computer software caused, in part, by a continued
weakening of the economy, domestically or internationally, may result in a
continued decrease in revenues and growth rates.

Hostilities involving the United States and/or
terrorist attacks could harm our business.

The financial, political, economic and other
uncertainties following the terrorist attacks upon the United States resulted in
many of our customers and potential customers becoming much more cautious in
setting their capital expenditure budgets, thereby restricting their software
procurement to well-defined current needs. Subsequent terrorist acts and/or the
threat of future outbreak or continued escalation of hostilities involving the
United States or other countries could adversely affect the growth rate of our
software license revenue and have an adverse effect on our business, financial
condition or results of operations. In addition, any escalation in these events
or similar future events may disrupt our operations or those of our customers,
distributors and suppliers, which could adversely affect our business, financial
condition or results of operations.

A variation in the conversion of our revenue pipeline
to contracts could adversely affect our revenues and ability to forecast
operations.

Our revenue pipeline estimates may not
consistently correlate to actual revenues in a particular quarter or over a
longer period of time. A slowdown in the economy, domestically and
internationally, has caused and may continue to cause customer purchasing
decisions to be delayed, reduced in amount or canceled, all of which have
reduced and could continue to reduce the rate of conversion of the pipeline into
contracts. A variation in the pipeline or in the conversion of the pipeline into
contracts could cause us to plan or budget inaccurately and thereby could
adversely affect our business, financial condition or results of operations. In
addition, primarily due to a substantial portion of our license revenue
contracts closing in the latter part of a quarter, management may not be able to
adjust our cost structure in response to a variation in the conversion of the
pipeline into contracts in a timely manner, thereby adversely affecting our
business, financial condition or results of operations.

The length of time required to engage a client and to
implement our products may be lengthy and unpredictable.

The timing of the sales and implementation of our
products and services is lengthy and not predictable with any degree of
accuracy. Prior sales and implementation cycles should not be relied upon as any
indication of future cycles. The license of our software products is often an
enterprise-wide decision by prospective customers and generally requires us to
provide a significant level of education to prospective customers regarding the
use and benefits of our products. In addition, the implementation of our
products involves a significant commitment of resources by prospective customers
and is commonly associated with reengineering efforts that may be performed by
the customer or third-party systems integrators. The cost to the customer of our
product is typically only a portion of the related hardware, software,
development, training and integration costs of implementing a large-scale
eBusiness software system. For these and other reasons, the period between
initial contact and the implementation of our products is often lengthy and is
subject to a number of factors that may cause significant delays, over many of
which we have little or no control. These factors include the size and
complexity of the overall project and delays in our customers' implementation of
Web-based computing environments. A delay in the sale or implementation of even
a limited number of license transactions could have a material adverse effect on
our business, financial condition or results of operations and cause our
operating results to vary significantly from quarter to quarter. As a result of
current economic conditions, our sales cycle has recently become longer than
historical sales cycles.

An unfavorable government review of our income and
payroll tax returns or changes in our effective tax rates could adversely affect
our operating results.

Our operations are subject to income, payroll and
transaction taxes in the United States and in multiple foreign jurisdictions. We
exercise judgment in determining our worldwide provision for income taxes, and
in the ordinary course of our business, there may be transactions and
calculations where the ultimate tax determination is uncertain. Further, the
rules related to the remittance of certain payroll taxes are onerous and the
compliance with these filing requirements is often difficult to determine.

Our U.S. Federal income tax returns for 1998, 1999 and
2000 are currently under examination by the Internal Revenue Service ("IRS").
During 2003, we received notices from the IRS of proposed adjustments to these
tax returns. In addition, certain of our payroll tax returns, both in the U.S.
and internationally, are currently under examination by the applicable taxing
authority. While we believe that we have made adequate provision related to the
audits of our U.S. income tax returns and certain international payroll tax
returns, the final determination of our income and payroll tax obligations may
exceed the amounts provided for by us in the accompanying consolidated financial
statements. Further, we have not made any provision in the accompanying
consolidated financial statements for potential assessments by the IRS related
to our U.S. payroll tax returns, primarily as it relates to stock option exercises, as the amount that we may have to pay
is not currently estimable.

We may receive an assessment related to the audit of our
U.S. income and payroll tax returns/international payroll tax returns that
exceeds amounts provided for by us. In the event we are unsuccessful in reducing
the amount of such assessment, our business, financial condition or results of
operations could be adversely affected. Specifically, if additional taxes and/or
penalties are assessed as a result of these audits, there could be a material
effect on our income tax provision, operating expenses and net income in the
period or periods for which that determination is made.

We do not have an adequate history with our Siebel CRM
OnDemand subscription model to predict the rate of the conversion of our sales
pipeline, customer subscription renewals and the impact these renewals will have
on our revenue or operating results.

We began offering Siebel CRM OnDemand, a hosted
software application delivered as an online service, in the fourth quarter of
2003. Siebel CRM OnDemand is offered on a subscription basis, rather than as a
perpetual license. Siebel CRM OnDemand customers have no obligation to renew
their service subscriptions after the expiration of the initial subscription
period and in fact, some former UpShot customers have elected not to renew their
subscriptions. In addition, our customers may renew their service for fewer
users. Because the fee structure for Siebel CRM OnDemand is based on the number
of users, this could reduce our revenue generated from this service. We have
limited historical data with respect to rates of customer subscription renewals,
so we cannot accurately predict customer renewal rates. Our customers' renewal
rates may decline or fluctuate as a result of a number of factors, including
their inability to continue their operations and/or spending levels. If our
customers do not renew their subscriptions for our service, our expectations
regarding future revenues from this new product offering may be incorrect, which
could adversely affect our business, financial condition or results of
operations. Further, we do not have an adequate operating history related to
this subscription model to effectively estimate expense assumptions and thus we
may not be able to adequately predict profitability of this business. Further,
we currently expect to invest significantly more in our Siebel CRM OnDemand
business model than we expect to realize in revenues from this hosted service in
2004.

The market for Siebel CRM OnDemand and on-demand
application services is immature and volatile, and if it does not develop or
develops more slowly than we expect, our business will be harmed.

The market for on-demand or "hosted"
application services is new and unproven, and it is uncertain whether these
services will achieve and sustain high levels of demand and market acceptance.
Our success will depend in part on the willingness of enterprises to increase
their use of on-demand application services in general and for CRM, in
particular. If enterprises do not perceive the benefits of on-demand application
services, then the market for these services may not develop at all, or it may
develop more slowly than we expect, either of which could significantly
adversely affect our operating results. In addition, if the demand for our
Siebel CRM OnDemand service does not materialize as expected, our ability to
recover our investment in UpShot Corporation, referred to herein as UpShot, may
be impaired. As of December 31, 2003, we have approximately $58.6 million of
goodwill and $7.4 million of amortizable intangibles related to UpShot.

Interruptions or delays in our Siebel CRM OnDemand
service from our third-party hosting partners could impair the delivery of our
service and harm our business.

We have entered into strategic relationships with
hosting partners, including IBM and British Telecom, to provide our CRM OnDemand
service through computer hardware located at the facilities of these third
parties. We do not control the operation of these facilities, which could be
subject to damage or interruption from a variety of sources, including
earthquakes, fires, power loss, telecommunications failures and similar events.
The occurrence of one of these events or other unanticipated problems at these
facilities could result in lengthy interruptions in our service. In addition,
the failure by one of our hosting partners to provide the required data
communications capacity could result in interruptions in our service.
Interruptions in our service may reduce our revenue, cause us to issue credits
or pay penalties, cause customers to terminate their subscriptions and adversely
affect our renewal rates.

If our security measures are breached and an
unauthorized party obtains access to a customer's data, our Siebel CRM OnDemand
service may be perceived as being insecure and customers may curtail or stop
using our service.

Our Siebel CRM OnDemand service
involves the storage and transmission of customers' proprietary information, and
security breaches could expose us to a risk of loss of this information,
litigation and potential liability. Because techniques used to obtain
unauthorized access or to sabotage systems change frequently and generally are
not recognized until launched against a target, we may be unable to anticipate
these techniques or to implement adequate preventative measures. If an actual or
perceived breach of our security occurs, the market perception of the
effectiveness of our security measures could be harmed and we could lose
existing customers and our ability to obtain new customers.

We may not successfully complete the integration of our
recent acquisition of UpShot Corporation into our Siebel CRM OnDemand business
model.

In order to expedite our entrance into the hosted
CRM market, we acquired UpShot in November 2003. The integration of UpShot into
a fully integrated Siebel OnDemand business model will take time and the
remaining integration work may be difficult, time consuming, particularly in
light of this being a new business model. The combined company must successfully
complete its integration of, among other things, certain product and service
offerings, product development, sales and marketing, administrative and customer
service functions, and management information systems. In addition, we must
retain the key management, key employees, customers, distributors, vendors and
other business partners of both companies in order to achieve certain desired
synergies. It is possible that these integration efforts will not be completed
as efficiently as planned or will distract management from the operations of the
combined company's business. If we do not successfully complete the integration
of the operations of UpShot in a timely manner, or at all, the combined company
may not realize the anticipated benefits of the acquisition to the extent
anticipated, which could adversely affect our business, financial condition or
results of operations.

We need to successfully integrate our other
acquisitions.

Our business strategy includes pursuing
opportunities to grow our business, internally and through selective
acquisitions, investments, joint ventures and strategic alliances. Our ability
to implement this strategy depends, in part, on our success in making such
acquisitions, investments, joint ventures and strategic alliances on
satisfactory terms and successfully integrating them into our operations.
Implementation of this strategy may impose significant strains on our
management, operating systems and financial resources. Failure to manage this
growth, or unexpected difficulties encountered during expansion, could have an
adverse effect on our business, financial condition or results of
operations.

Integration of personnel and operations relating to our
previous or future acquisitions may disrupt our business and management.

We have in the past and may in the future acquire
additional companies, products or technologies. We may not realize the
anticipated benefits of any acquisition or investment. We may not be able to
successfully assimilate the additional personnel, operations, acquired
technology and products acquired from these companies into our business. In
particular, we will need to assimilate and retain key professional services,
sales, engineering and marketing personnel. Key personnel from the acquired
companies have in certain instances decided, and they may in the future decide,
to pursue other opportunities. In addition, it may be necessary to integrate
products of these companies with our technology, and it is uncertain whether we
may accomplish this easily or at all. These integration difficulties could
disrupt our ongoing business, distract management and employees or increase
expenses. Acquisitions are inherently risky, and we may also face unexpected
costs, which may adversely affect operating results in any quarter. In addition,
our profitability may suffer because of acquisition-related costs or
amortization costs for acquired intangible assets.

We may not be able to successfully implement our 2002
and 2003 Restructurings, and such efforts may adversely impact our ability to
retain and attract future employees.

During 2002 and 2003, we completed a
restructuring of our operations involving, among other things, the reduction of
our workforce and the consolidation of excess facilities (collectively the "2002
and 2003 Restructurings"). As part of the 2002 and 2003 Restructurings, we
ceased to use certain of our leased facilities. The removal of these facilities
from our operations will require us to negotiate certain lease terminations
and/or subleases of our facilities. We cannot predict when or if we will be
successful in negotiating lease termination agreements or subleases of our
facilities on terms acceptable to us. Should we be unsuccessful in such
negotiations or if the negotiated terms are less favorable than currently
anticipated, we may be required to materially increase our Restructuring and
related expenses in future periods. In addition, the 2002 and 2003
Restructurings may not achieve all of the benefits we currently anticipate or on
the timetable contemplated.

Workforce reductions, including the ones we completed in
2002 and 2003, could result in a lack of focus and reduced productivity by our
remaining employees, which in turn may affect our revenues in a future quarter.
In addition, prospects and current customers may decide to delay or not purchase
our products due to the perceived uncertainty caused by the 2002 and 2003
Restructurings. We cannot assure you that we will not reduce or otherwise adjust
our workforce again in the future or that the related transition issues
associated with such a reduction will not occur again. In addition, employees,
whether or not directly affected by the reduction, may seek future employment
with our business partners, customers or competitors. Although our employees are
required to sign a confidentiality agreement at the time of hire, we cannot
assure you that the confidential nature of certain proprietary information will
be maintained in the course of such future employment. Further, we believe that
our future success will depend in large part upon our ability to attract and
retain highly skilled personnel. We may have difficulty attracting such
personnel as a result of a perceived risk of future workforce reductions.

If we do not successfully manage the size of our
operations, our business may be negatively impacted.

If we fail to manage the size of our operations
effectively, our business, financial condition or results of operations could be
materially and adversely affected. Since we began operations in 1994 and
continuing throughout early 2001, our business grew rapidly. Beginning in early
2001 and continuing through 2003, our revenues have declined as a result of
deterioration in the overall economy and information technology industry. These
rapid changes in our business have placed a significant strain on our management
systems and resources. In response to the continued deterioration in the
information technology industry, management completed the 2002 and 2003
Restructurings. The 2002 and 2003 Restructurings have particular risks, many of
which are discussed above under "We may not be able to successfully implement
our 2002 and 2003 Restructurings, and such efforts may adversely impact our
ability to retain and attract future employees." In addition, if we return to
growth in the future, that growth may require us to implement new systems or
upgrade current systems, and the failure to successfully implement such new or
improved systems could materially and adversely affect our business.

Rapid change will require us to manage the size of our
employee base, particularly our direct sales force and global support staff.

The majority of our expenses are personnel-related
costs such as employee compensation and benefits, along with the cost of
the infrastructure (occupancy and equipment) to support our employee base. The
failure to adjust our employee base, particularly our direct sales force and
technical and global services staff, to the appropriate level to support our
revenues could materially and adversely affect our business, operating results
and financial condition. In addition, expanding the distribution of our products
may place new and increased demands on our direct sales force and technical and
sales support staff. Although we currently invest sufficient resources in our
direct sales force and our technical and global services staff, there are only a
limited number of qualified personnel in these areas. Our ability to achieve
expanded distribution and revenue growth in the future will depend, in part, on
our success in recruiting and training sufficient direct sales, technical and
global services personnel. We may not be able to expand our direct sales force
and technical support staff as necessary to support our operations.

If requirements relating to accounting treatment for
employee stock options are changed, we may be forced to change our business
practices or our earnings may be affected.

Generally accepted accounting principles in the
United States are subject to interpretation by the Financial Accounting
Standards Board, or FASB, the American Institute of Certified Public
Accountants, the Securities and Exchange Commission, or SEC, and various bodies
formed to promulgate and interpret appropriate accounting principles. A change
in these principles or interpretations could have a significant effect on our
reported financial results, and could affect the reporting of transactions
completed before the announcement of a change.

For example, we currently account for the issuance of
stock options under APB No. 25 "Accounting for Stock Issued to Employees."
However, several companies have recently elected to change their accounting
policies and begun to record the fair value of stock options as an expense.
Although the standards have not been finalized and the timing of a final
statement has not been established, FASB has announced its support for recording
expense for the fair value of stock options granted. If we were required to
change our accounting policy in accordance with Statement of Financial
Accounting Standards (SFAS) No. 123 "Accounting for Stock-Based Compensation"
and SFAS No. 148 "Accounting for Stock-Based Compensation-Transition and
Disclosure," and retroactively restate prior periods as if we had adopted these
standards for all periods presented, then our cost of revenues and operating
expenses would have increased by approximately $449.1 million for fiscal 2003.
As a result, we may decide to reduce the number of stock options granted to
employees or to grant options to fewer employees. This could affect our ability
to retain existing employees and attract qualified candidates, and increase the
cash compensation we would have to pay to them.

We rely on strategic relationships with systems
integrators, distributors, resellers and technology vendors.

Failure to maintain existing strategic
relationships with systems integrators, distributors, resellers and technology
vendors, or to establish new relationships in the future, could have a material
adverse effect on our business. We have established strategic relationships with
a number of organizations that we believe are important to our sales, marketing
and support activities and the implementation of our products. We believe that
our relationships with these organizations provide marketing and sales
opportunities for our direct sales force and expand the distribution of our
products. These relationships allow us to keep pace with the technological and
marketing developments of major software vendors and provide us with technical
assistance for our product development efforts.

In particular, we have established non-exclusive
strategic relationships with Accenture, Cap Gemini Ernst & Young, Deloitte
Consulting, IBM Corporation and BearingPoint, among others. A significant
portion of our revenues has historically been derived from customers that have
engaged systems integrators with which we have a relationship. Any deterioration
of our relationship with these significant third-party systems integrators could
have a material adverse effect on our business, financial condition or results
of operations. We also have relationships with technology vendors such as
Hewlett-Packard, Microsoft and Sun Microsystems, among others. Failure to
maintain existing relationships on terms equally favorable to us, or to
establish new relationships in the future, could have a material adverse effect
on our business, financial condition or results of operations.

Our current and potential customers may also rely on
third-party systems integrators to develop, deploy or manage Siebel
eBusiness Applications. If we do not adequately train a sufficient number
of systems integrators, or if these integrators do not have, or do not devote,
the resources necessary to implement our products, our business, financial
condition or results of operations could be materially and adversely
affected.

Our customers may not successfully implement our
products.

If existing customers have difficulty deploying
Siebel eBusiness Applications or for any other reason are not satisfied
with Siebel eBusiness Applications, our business, operating results and
financial condition could be materially and adversely affected. Many of our
customers purchase and implement our products in phases. Our customers
frequently deploy our products to large numbers of sales, marketing and customer
service personnel. These end users may not accept our products. Our products are
also being deployed on a variety of computer hardware platforms and used with a
number of third-party software applications and programming tools. This use may
present significant technical challenges, particularly as large numbers of
personnel attempt to use our products concurrently.

A limited number of products provide a substantial part
of our license revenues.

A majority of our software license revenues in
2003 are attributable to sales of our CRM applications, particularly Siebel
Sales, Siebel Service, Siebel Call Center, Siebel Interactive Selling and
related products. We have also expanded our product offerings to include Siebel
Analytics, Siebel Employee Relationship Management, Universal Application
Network and Siebel CRM OnDemand. We expect that our CRM applications and our
recent product offerings, along with the related consulting, maintenance and
training services, will continue to account for a majority of our future
revenues. Factors adversely affecting the cost and pricing of, or demand for,
these products, such as competition or technological change, could have a
material adverse effect on our business, financial condition or results of
operations.

Our software license revenue is dependent on our
ability to enter into significant software license transactions with new and
existing customers.

Our success depends on gaining new customers and
maintaining relationships with our existing customers. In particular, if the
number of software license transactions and the average size of these
transactions decrease, our software license revenue may be negatively impacted.
Both the number of transactions generating software license revenues and the
average size of these transactions have declined over the past two years.
Specifically, the number of transactions generating software license revenues
greater than $5 million has decreased from 32 transactions in 2001 and 23
transactions in 2002, to 12 transactions in 2003. In addition, the average size
of these transactions has decreased in each of the last two years from $414,000
in 2001 and $374,000 in 2002, to $335,000 in 2003. Consequently, our software
license revenue also decreased in both 2002 and 2003. The failure to enter into
significant software license transactions with new and existing customers could
have a material adverse effect on our business, financial condition or results
of operations. No single customer has accounted for 10% or more of our software
license revenues in 2001, 2002 or 2003.

Our distribution channels may create additional
risks.

Failure to minimize channel conflicts could
materially and adversely affect our business, operating results and financial
condition. We have a number of relationships with resellers, which assist us in
obtaining broad market coverage. We have generally avoided exclusive
relationships with resellers of our products. Discount policies and reseller
licensing programs are intended to support each distribution channel with a
minimum level of channel conflicts.

Our continued success will require us to keep pace with
technological developments, evolving industry standards and changing customer
needs.

The software market in which we compete is
characterized by: (i) rapid technological change; (ii) frequent introductions of
new products; (iii) changing customer needs; and (iv) evolving industry
standards. To keep pace with technological developments, evolving industry
standards and changing customer needs, we must support existing products and
develop new products. We may not be successful in developing, marketing and
releasing new products or new versions of Siebel eBusiness Applications
that respond to technological developments, evolving industry standards or
changing customer requirements. We may also experience difficulties that could
delay or prevent the successful development, introduction and sale of these
enhancements. In addition, these enhancements may not adequately meet the
requirements of the marketplace and may not achieve any significant degree of
market acceptance. If release dates of any future products or enhancements to
Siebel eBusiness Applications are delayed, or if these products or
enhancements fail to achieve market acceptance when released, our business,
operating results and financial condition could be materially and adversely
affected. In addition, new products or enhancements by our competitors may cause
customers to defer or forego purchases of our products, which could have a
material adverse effect on our business, financial condition or results of
operations.

We may not be able to compete effectively in the
Internet-related products and services market.

Siebel eBusiness Applications communicate
through public and private networks over the Internet. The success of our
products may depend, in part, on our ability to continue developing products
that are compatible with the Internet. Additionally, expansion in the sales of
our service depends on the continued acceptance of the Internet as a
communications and commerce platform for enterprises. The Internet could lose
its viability as a business tool due to delays in the development or adoption of
new standards and protocols to handle increased demands of Internet activity,
security, reliability, cost, ease-of-use, accessibility, and quality-of-service.
The performance of the Internet and its acceptance as a business tool has been
harmed by "viruses," "worms," and similar malicious programs and the Internet
has experienced a variety of outages and other delays as a result of damage to
portions of its infrastructure. If for any reason the Internet does not remain a
widespread communications medium and commercial platform, the demand for our
service would be significantly reduced, which would harm our business. We cannot
predict with any assurance whether the demand for Internet-related products and
services will increase or decrease in the future. The increased commercial use
of the Internet could require substantial modification and customization of our
products and the introduction of new products.

Critical issues concerning the commercial use of the
Internet, including security, privacy, demand, reliability, cost, ease of use,
accessibility, quality of service and potential tax or other government
regulation remain unresolved and may affect the use of the Internet as a medium
to support the functionality of our products and distribution of our software.
If these critical issues are not favorably resolved, our business, financial
condition or results of operations could be materially and adversely
affected.

We operate in a competitive and rapidly changing market.

If the Web-based applications market fails to
grow, our business, operating results and financial condition could be
materially and adversely affected. The market for Web-based applications
software is relatively new, highly competitive and rapidly changing. We market
our products primarily to customers who have migrated or are in the process of
migrating their enterprise computing systems to Web-based computing
environments. Our future financial performance will partly depend on the
continued growth of organizations successfully adopting Web-based computing
environments.

To be successful, we must effectively compete in the
business applications market.

Our products target the market for business
applications software. This market is highly competitive, rapidly changing, and
significantly affected by new product introductions and the market activities of
other industry participants. Our products are specifically targeted at the
market for customer, partner and employee relationship information systems, as
well as the markets for analytics and application integration. We face
competition primarily from our customers' internal information technology
departments and systems integrators, as well as other application software
providers that offer a variety of products and services designed to address
these markets. We believe that most customer deployments have been the result of
large internal development projects, custom solutions from systems integrators,
or the application of personal and departmental productivity tools to the global
enterprise. We may not be able to compete successfully against such internal
development efforts.

Beginning in 2001 and continuing throughout the first
half of 2003, the global economy impacted the competitive dynamics of the
business applications market in which we compete in a variety of ways.
Specifically, our customers and prospective customers are increasingly
evaluating their software procurement needs with a focus on the long term total
cost of ownership, which includes the cost of the license and the related
professional services, such as implementation, training, and technical support.
With significantly lower license costs from competitive solutions, and no
license cost for internal projects, our success depends on our ability to
adequately communicate the relative capabilities of our products, the total cost
of ownership of the various alternative solutions (i.e., versus the cost of only
the license), and the total return on investment of each of the various
alternatives.

The following is discussion of each of the individual
competitive environments in which we operate:

Internal Development

Many of our customers and potential customers have in
the past attempted to develop sales, marketing, customer service and employee
relationship information systems in-house, either alone or with the help of
systems integrators. Internal information technology departments have staffed
projects to build their own systems utilizing a variety of tools. In some cases,
such internal development projects have been successful in satisfying the needs
of an organization. To compete successfully, our products must conform to the
customer's information technology standards, scale to meet the needs of large
enterprises, operate globally and cost less than the result of an internal
development effort. We may not be able to compete effectively against these
internal development efforts.

Custom System Integration Projects

We also face competition from systems integrators
engaged by companies to build a custom development application. The introduction
of a systems integrator typically increases the likelihood of success for the
customer. To successfully compete in this area, we must demonstrate and provide
to the customer the cost savings and advantages of a configurable, upgradable
and commercially supported product developed by a dedicated professional
software organization.

We frequently rely on a number of systems consulting and
systems integration firms for a substantial portion of implementation and other
global services, as well as recommendations of our products during the
evaluation stage of the purchase process. Although we seek to maintain close
relationships with these service providers, many of them have similar and often
more established relationships with our competitors. If we are unable to develop
and retain effective, long-term relationships with these third parties, our
competitive position could be materially and adversely affected. Further, some
of these third parties have significantly greater resources than we do and may
market software products that compete with us and may otherwise reduce or
discontinue their relationships with or support of us and our products.

Other Competitors

A large number of personal, departmental, and other
products exist in thebusiness applications market. Our competitors
include a number of companies that compete with us primarily within a particular
product line (e.g., analytics, interactive selling, etc.) and/or the prospective
customer's industry (e.g., life sciences, financial services, etc.). These
companies include Amdocs Limited; CAS GmbH; Chordiant Software, Inc.; Dendrite
International, Inc.; E.piphany, Inc.; FrontRange Solutions, Inc.; Interact
Commerce Corporation; Kana Software, Inc.; ONYX Software Corporation; Pivotal
Corporation; Salesforce.com, Inc.; and StayinFront, Inc., among many others. In
addition, our competitors include several companies, such as Oracle Corporation,
PeopleSoft, Inc. and SAP AG, which compete in a majority of our product
lines.

Some of these competitors have longer operating histories;
significantly greater financial, technical, marketing and other resources;
significantly greater name recognition; a broader product offering; and a larger
installed base of customers than we do. In addition, many competitors have
well-established relationships with our current and potential customers. As a result,
these competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements or to devote greater resources
to the development, promotion and sale of their products than we can.

There are many factors that may increase competition in
the business systems market, including: (i) entry of new competitors; (ii)
alliances among existing competitors; (iii) alliances between our competitors
and systems integrators; (iv) consolidation in the software industry or among
systems integrators; and (v) technological changes or changes in the use of the
Internet. Increased competition may result in price reductions, reduced gross
margins or loss of market share, any of which could materially and adversely
affect our business, financial condition, or results of operations. We may not
be able to compete successfully against current and future competitors or
competitive pressures faced by us may materially and adversely affect our
business, financial condition or results of operations.

If we do not maintain our relationships with
third-party vendors, interruptions in the supply of our products may result.

We may not be able to replace the functionality
provided by the third-party software currently offered with our products if that
software becomes obsolete or incompatible with future versions of our products
or is not adequately maintained or updated. Portions of our products incorporate
software that was developed and is maintained by third-party software
developers. Although we believe there are other sources for these products, any
significant interruption in the supply of these products could adversely impact
our sales unless and until we can secure another source. We depend in part on
these third parties' abilities to enhance their current products, to develop new
products on a timely and cost-effective basis and to respond to emerging
industry standards and other technological changes. The absence of or any
significant delay in the replacement of functionality provided by third-party
software in our products could materially and adversely affect our sales.

Software errors or defects in our products could reduce
revenues.

Software products frequently contain errors or
failures, especially when first introduced or when new versions are released,
and could be affected by viruses. We have, in the past, been forced to delay the
commercial release of products until the software problems have been corrected.
We could lose revenues as a result of software viruses, errors or defects,
including defects in third-party products with which our products work. Our
products are intended for use in applications that may be critical to a
customer's business. As a result, we expect that our customers and potential
customers will have a greater sensitivity to product defects than the market for
software products generally. Testing errors may also be found in new products or
releases after commencement of commercial shipments, resulting in loss of
revenue or delay in market acceptance, damage to our reputation, or increased
service and warranty costs, any of which could have a material adverse effect
upon our business, financial condition or results of operations.

If we cannot hire enough qualified employees or if we
lose key employees, it will adversely affect our ability to manage our business,
develop our products and increase our revenues.

Our performance depends on the continued service
of our key technical, sales and senior management personnel, particularly Thomas
M. Siebel, our Chairman and CEO. Our key employees have not entered into
employment agreements with us. The loss of one or more of our executive officers
could have a material adverse effect on our business, operating results and
financial condition. In recent years, we have had members of our senior
management announce their retirement or departure from our company. We replace
these individuals with internal candidates and, if deemed appropriate,
individuals from outside our organization. While our internal candidates
understand our business model, they must learn a new position and take on
additional or new responsibilities, which could take time and result in the
disruption to our ongoing operations. To integrate into our company, new senior
personnel must spend a significant amount of time learning our business model
and management systems, in addition to performing their regular duties.
Accordingly, until new senior personnel become familiar with our business model
and systems, their integration may result in some disruption to our ongoing
operations. Additionally, we may need to hire additional personnel in general or
to replace internal candidates who have been promoted and as a result, we may
experience increased compensation costs that are not offset by either improved
productivity or higher prices.

We periodically have restructured our sales force,
which can be disruptive.

We continue to rely heavily on our direct sales
force. In recent years, we have restructured or made other adjustments to our
sales force in response to factors such as management changes, product changes
and other internal considerations. Changes in the structure of the sales force
and sales force management have generally resulted in a temporary lack of focus
and reduced productivity that may have affected revenues in one or more
quarters. We cannot assure you that we will not continue to restructure our
sales force or that the transition issues associated with restructuring the
sales force will not recur.

We may not be able to protect our proprietary
information.

We rely primarily on a combination of patent,
copyright, trade secret and trademark laws; confidentiality procedures; and
contractual provisions to protect our proprietary rights. We also believe that
the technological and creative skills of our personnel, new product
developments, frequent product enhancements, name recognition and reliable
product maintenance are essential to establishing and maintaining a technology
leadership position. We seek to protect our software, documentation and other
written materials under patent, trade secret and copyright laws, which afford
only limited protection. Any patents issued to us may be invalidated,
circumvented or challenged. Any of our pending or future patent applications,
whether or not being currently challenged, may not be issued with the scope of
the claims we seek, if at all. Furthermore, others may develop technologies that
are similar or superior to our technology or design around our patents.

Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy aspects of our products or to obtain
and use information that we regard as proprietary. Policing unauthorized use of
our products is difficult. In addition, the laws of some foreign countries do
not protect our proprietary rights as fully as do the laws of the United States.
Our means of protecting our proprietary rights in the United States or abroad
may not be adequate. We have entered into agreements with substantially all of
our customers that require us to place Siebel eBusiness Applications
source code into escrow. Such agreements generally provide that such parties
will have a limited, non-exclusive right to use such code if: (i) there is a
bankruptcy proceeding by or against us; (ii) we cease to do business; or (iii)
we fail to meet our support obligations.

Although we do not believe that we are infringing any
proprietary rights of others, third parties may claim that we have infringed
their intellectual property rights. Furthermore, former employers of our former,
current or future employees may assert claims that such employees have
improperly disclosed to us the confidential or proprietary information of such
former employers. Any such claims, with or without merit, could: (i) be
time-consuming to defend; (ii) result in costly litigation; (iii) divert management's
attention and resources; (iv) cause product shipment delays; and (v) require us
to pay monetary damages or enter into royalty or licensing agreements. A
successful claim of product infringement against us and our failure or inability
to license or create a workaround for such infringed or similar technology may
materially and adversely affect our business, financial condition or results of
operations.

Our international operations involve unique risks.

Our revenues are primarily derived from large
multinational companies. To service the needs of these companies, we must
provide worldwide product support services. We have expanded and in the future
may expand our international operations and enter additional international
markets. This will require significant management attention and financial
resources that could adversely affect our operating margins and earnings. We may
not be able to maintain or increase international market demand for Siebel
eBusiness Applications. If we do not, our international sales will be
limited and our business, financial condition or results of operations could be
materially and adversely affected.

Our international operations are subject to a variety of
risks, including: (i) foreign currency fluctuations; (ii) economic or political
instability; (iii) shipping delays; and (iv) various trade restrictions. Any of
these risks could have a significant impact on our ability to deliver products
on a competitive and timely basis. Significant increases in the level of customs
duties, export quotas or other trade restrictions could also have an adverse
effect on our business, financial condition or results of operations. In
situations where direct sales or purchases are denominated in foreign currency,
any fluctuation in the exchange rate may adversely affect our business,
financial condition or results of operations. Generally, we manage our foreign
currency exchange rate risk by entering into contracts to sell or purchase
foreign currency at the time a foreign currency receivable or payable is
generated. When the foreign currency asset or liability is extinguished, the
contract is liquidated, and the resulting gain or loss on the contract mitigates
the exchange rate risk of the associated asset or liability. In certain
instances, we have not hedged foreign currency receivables and payables when the
forward contracts in the relevant currency were not readily available or were
not cost-effective.

Our current officers, directors and entities affiliated with
us may be able to exercise control over matters requiring stockholder
approval.

Our current officers, directors and entities
affiliated with us together beneficially owned a significant portion of the
outstanding shares of common stock as of December 31, 2003. While these
stockholders do not hold a majority of our outstanding common stock, they will
be able to exercise significant influence over matters requiring stockholder
approval, including the election of directors and the approval of mergers,
consolidations and sales of our assets. This may prevent or discourage tender
offers for our common stock.

Our stock price may continue to be volatile.

Our stock price has fluctuated substantially
since our initial public offering in June 1996. The trading price of our common
stock is subject to significant fluctuations in response to variations in
quarterly operating results; the gain or loss of significant orders; changes in
earning estimates by analysts; changes in our revenue and/or earnings
expectations as announced in our earnings call; announcements of technological
innovations or new products by us or our competitors; changes in the domestic
and international economic, political and business conditions; general
conditions in the software and computer industries; the recent lack of
confidence in corporate governance and accounting practices; and other events or
factors. In addition, the stock market in general has experienced extreme price
and volume fluctuations that have affected the market prices for many companies
in industries similar or related to ours and that have been unrelated to the
operating performance of these companies. These market fluctuations have
adversely affected and may continue to adversely affect the market price of our
common stock.

Provisions in our charter documents may prevent certain
corporate actions.

Our Board of Directors is authorized to issue up
to 2,000,000 shares of preferred stock and to determine the price, rights,
preferences, privileges and restrictions, including voting rights, of those
shares without any further approval by our stockholders. One of these shares has
been designated Series A1 Preferred Stock, which was issued in connection with
the acquisition of Janna Systems Inc., and 100,000 shares have been designated
as Series A2 Junior Participating Preferred Stock, which was authorized in
connection with a stockholders' rights plan that we implemented in January 2003.
Please refer to Note 7 to the accompanying consolidated financial statements for
a more detailed description of the Series A1 Preferred Stock and Series A2
Junior Participating Preferred Stock. Additional shares of preferred stock could
be authorized or issued with voting, liquidation, dividend and other rights
superior to those of the common stock.

The rights of the holders of common stock will be subject
to and may be adversely affected by the rights of the holders of any preferred
stock that may be issued in the future. The issuance of the Series A2 Junior
Participating Preferred Stock or the authorization of additional classes of
preferred stock by our Board of Directors in the future, while providing
desirable flexibility in connection with possible acquisitions and other
corporate purposes, could make it more difficult for a third party to acquire a
majority of our outstanding voting common stock. In addition, the following
factors could also delay or make more difficult a merger, tender offer or proxy
contest: (i) our classified Board of Directors; (ii) certain provisions of our
certificate of incorporation; (iii) certain provisions of our bylaws; and (iv)
certain provisions of Delaware law.



Item 7A. Quantitative and Qualitative Disclosures About
Market Risk

The tables below provide information about our
derivative financial instruments and financial instruments that are subject to
market risk. The first table includes our foreign currency contracts used to
minimize the impact of changes in currency rates on existing foreign currency
receivables, payables and intercompany balances, which are subject to exchange
rate risk. The second table includes our available-for-sale short-term
investments, which are subject to interest rate risk.

We manage our foreign currency exchange rate risk by
entering into contracts to sell or buy foreign currency at the time a foreign
currency receivable or payable is generated. When the foreign currency asset or
liability is extinguished, the contract is liquidated, and the resulting gain or
loss on the contract mitigates the exchange rate risk of the associated asset or
liability.

The following table summarizes as of December 31, 2003,
our foreign currency forward contracts, by currency. All of our foreign currency
forward contracts mature within a year. Contract amounts are representative of
the expected payments to be made under these instruments (in thousands):

`Contract Amount   Contract        Fair
                                             (Local Currency)   Amount     Value (US$)
                                             ----------------  ---------  -------------
Australian dollars ("AUD") (contracts
  to pay AUD/receive US$)...................     (AUD) 12,342   US$8,604  $       (456)

Brazilian real ("BRL") (contracts to
  pay BRL/receive US$)......................     (BRL) 23,489   US$7,866  $         10

British pounds ("GBP") (contracts to
  pay GBP/receive EUR)......................      (GBP) 7,116  EUR 10,027 $         83

Canadian dollar ("CAD") (contracts to
  pay CAD/receive US$)......................      (CAD) 6,663   US$5,093  $        (28)

Japanese yen ("YEN") (contracts to
  pay YEN/receive US$)......................  (YEN) 1,383,836  US$12,661  $       (325)

Korea won ("KRW") (contracts to
  pay KRW/receive US$)......................    (KRW) 709,200     US$591  $          1

Mexican peso ("MXN") (contracts
  to pay MXN/receive US$)...................     (MXN) 13,500   US$1,219  $         29

Singapore dollars ("SGD") (contracts
  to pay SGD/receive US$)...................      (SGD) 5,723   US$3,345  $         20

Czech Republic koruna ("CZK") (contracts
  to receive CZK/pay EUR)...................     (CZK) 50,900  EUR 1,590  $        (37)

Euro ("EUR") (contracts to receive
  EUR/pay US$)..............................    (EUR) 188,150  US$220,665 $     13,877

Swedish krona ("SEK") (contracts to
  receive SEK/pay EUR)......................     (SEK) 14,330  EUR 1,595  $        (39)

Swiss franc ("CHF") (contracts to
  receive CHF/pay EUR)......................      (CHF) 5,658  EUR 3,629  $         16`

The following table summarizes our short-term investments
and the weighted average yields, 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
                                    =========  =========  =========  =========  ========  ==========  ===========`

As of December 31, 2003, we had an investment portfolio
of fixed income securities, excluding those classified as cash and cash
equivalents, of $1,439.7 million. These securities, like all fixed income
instruments, are subject to interest rate risk and, accordingly, if market
interest rates increase, these investments will decline in value. If market
interest rates were to increase immediately and uniformly by 100 basis points
from levels as of December 31, 2003, the fair value of the portfolio would
decline by approximately $23.0 million.

We manage our interest rate risk by maintaining an
investment portfolio with debt instruments of high credit quality and relatively
short average maturities. We also manage interest rate risk by maintaining
sufficient cash and cash equivalent balances such that we are typically able to
hold our investments to maturity.



Item 8. Financial Statements and Supplementary
Data

Our consolidated financial
statements, together with related notes and the report of KPMG LLP, our
independent auditors, are set forth on the pages indicated in Item 15.



Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure

Not applicable.



Item 9A. Controls and Procedures

We have historically made our
internal controls over financial reporting a high priority and continue to do
so. Our Internal Controls Committee, comprised primarily of senior financial and
legal personnel, assists us in ensuring that our internal controls over
financial reporting are complete, accurate and appropriately documented. In
addition, our internal audit department reviews and tests our internal controls
in order to ensure that the internal controls are designed appropriately and are
operating as designed. The Sarbanes-Oxley Act of 2002 ("SOX") and resulting
rules adopted by the Securities and Exchange Commission ("SEC") served as a
catalyst for us to formalize many of our processes, controls and procedures that
we have instituted to ensure proper financial reporting. The following is a
summary of the procedures that we have undertaken with respect to Section 302 of
SOX ("Section 302") and Section 404 of SOX ("Section 404").

Section 302

Attached as Exhibits 31 and 32 to this annual
report are two separate forms of certifications of our CEO and CFO. The
certifications attached as Exhibits 31.1 and 31.2 are required in accordance
with Section 302 of the Sarbanes-Oxley Act of 2002 (the "Section 302
Certifications"). The information contained below relates to the Controls
Evaluation referred to in the Section 302 Certifications, and should be read
with the Section 302 Certifications for a more complete understanding of the
topics presented.

As of December 31, 2003 (the "Evaluation Date"), we
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures (the "Disclosure Controls"), as such terms are defined
in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934,
as amended (the "Exchange Act"), and our internal controls and procedures for
financial reporting (the "Internal Controls"). This evaluation (the "Controls
Evaluation") was done under the supervision and with the participation of
management, including our CEO and CFO. Rules adopted by the SEC require that we
present the conclusions of the CEO and the CFO about the effectiveness of our
Disclosure Controls and Internal Controls based on and as of the date of the
Controls Evaluation.

Based upon the Controls Evaluation, our CEO and CFO have
concluded that, subject to the limitations noted below under Section 404, our
Disclosure Controls are effective in alerting them on a timely basis to material
information related to us (including our consolidated subsidiaries) that is
required to be included in our reports filed or submitted under the Exchange
Act.

Our CEO and CFO note that during 2003, there have been no
changes in Internal Controls or in other factors that could materially affect or
are reasonably likely to affect such controls, including any corrective actions
with regard to significant deficiencies and material weaknesses.

Section 404

Under Section 404, we are required to document
all of our internal controls over business and financial processes and
procedures that may affect our reported financial results. In addition, when
fully adopted, we will issue a report on the effectiveness of our internal
control over financial reporting, including a statement as to whether or not our
internal controls over financial reporting are effective. In addition, our
independent auditors will perform an attestation, which is similar to an audit,
of our internal controls and provide an assessment of those controls over
financial reporting.

Responsibility for Disclosure and Internal Controls

Our management, including the CEO and CFO, has
the responsibility of establishing and maintaining adequate disclosure and
internal controls over our financial reporting. Disclosure Controls are
procedures that are designed with the objective of ensuring that information
required to be disclosed in our reports filed under the Exchange Act, such as
this annual report, is recorded, processed, summarized and reported within the
time periods specified in the SEC rules and forms. Disclosure Controls are also
designed with the objective of ensuring that such information is accumulated and
communicated to our management, including the CEO and CFO, as appropriate to
allow timely decisions regarding required disclosure.

Internal controls are a set of processes designed by, or
under the supervision of, our principal executive and principal financial
officers, or persons performing similar functions, and effected by our Board of
Directors, management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles ("GAAP") and includes those policies and procedures that:

1. pertain to the maintenance of records that in reasonable
detail accurately and fairly reflect the transactions and dispositions of the
assets of the issuer;
2. provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with GAAP, and that receipts and expenditures are being made only in
accordance with authorizations of our management and directors; and
3. provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition of our assets
that could have a material effect on the financial statements.

Limitations on the Effectiveness of Controls

Our management, including the CEO and CFO, does
not expect that our Disclosure Controls or our Internal Controls will prevent
all error and all fraud. A control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within a company have been detected. These inherent limitations include the
realities that judgments in decision-making can be faulty and that breakdowns
can occur because of simple error or mistake. Additionally, controls can be
circumvented by the individual acts of some persons, by collusion of two or more
people, or by management override of the control. The design of any system of
controls also is based in part upon certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions. In addition,
over time, controls may become inadequate because of changes in conditions, or
the degree of compliance with the policies or procedures may deteriorate.
Because of the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and not be detected.

Scope of Our Controls Evaluation Under Section 404

As of December 31, 2003, we have substantially
completed the documentation and testing of our significant business and
financial process and procedures, representing approximately 50 individual
processes, which may materially impact our reported financial and operating
results. In addition, our management and internal audit department have
completed their review of these policies and procedures and our internal audit
department has completed their testing of our compliance with and the adequacy
of these policies and procedures.

Our evaluation of our Disclosure Controls and our
Internal Controls included a formal documentation and review of the controls'
objectives and design, along with our controls' implementation and the effect of
the controls on the information generated for use in this annual report. In the
course of the Controls Evaluation, we sought to identify data errors, controls
problems or acts of fraud and to confirm that appropriate corrective action,
including process improvements, were being undertaken. We also sought to deal
with other controls matters in the controls evaluation, and in each case if a
problem was identified, we considered what revision, improvement or correction
to make in accordance with our on-going procedures.

Among other matters, we sought in our evaluation to
determine whether there were any "significant deficiencies" or "material
weaknesses" in our Internal Controls, or whether we have identified any acts of
fraud involving personnel who have a significant role in our Internal Controls.
This information was important both for our controls evaluation generally and
because item 5 in the Section 302 Certifications require that the CEO and CFO
disclose such information to our Audit Committee of the Board of Directors and
to our independent auditors and to report on related matters in this section of
the annual report. In professional auditing literature, "significant
deficiencies" are referred to as "reportable conditions," which are control
issues that could have a significant adverse effect on the ability to initiate,
record, process, or report external financial data reliably in accordance with
GAAP. A significant deficiency could be a single deficiency, or a combination of
deficiencies, that results in more than a remote likelihood that a misstatement
of the annual or interim financial statements that is more than inconsequential
in amount will not be prevented or detected. A "material weakness" is defined in
auditing literature as a particularly serious reportable condition where the
internal control does not reduce to a relatively low level the risk that
misstatements caused by error or fraud may occur in amounts that would be
material in relation to the financial statements and not be detected within a
timely period by employees in the normal course of performing their assigned
functions.

We will perform this type of evaluation on a quarterly
basis so that the conclusions concerning controls effectiveness can be reported
in our quarterly reports and annual report. Our Internal Controls are also
evaluated on an on-going basis by our internal audit department and by other
personnel in our finance organization. The overall goals of these various
evaluation activities are to monitor our Disclosure Controls and our Internal
Controls and to make modifications as necessary. Our intent in this regard is
that the Disclosure Controls and the Internal Controls will be maintained as
dynamic systems that change (including with improvements and corrections) as
conditions warrant.

Evaluation of Our Disclosure Controls and Internal
Controls Under Section 404

Based upon our management's review and our
internal audit department's testing of our internal controls, we believe that
our internal controls provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with GAAP. We believe we are well positioned to be in
compliance with Section 404 when all provisions of Section 404 are effective,
including our ability to issue a report on our internal controls and obtain an
attestation report on our internal controls from our auditors.

While we believe our controls provide reasonable
assurance regarding the reliability of our financial reporting and the
preparation of financial statements, we have not included the report by
management on our internal controls as contemplated by Section 404 (currently
effective at the end of 2004 for calendar year end companies) in this annual
report. We have chosen not to do so, as the SEC and other regulatory agencies
are still in the process of determining the exact standards required under
Section 404 in order for us to be in a position to issue such report. For
example, we utilize a third party service company to process our payroll. While
we have many controls that we believe supplement the controls at the third party
service provider, it is currently unclear as to what level of assurance the SEC
and other regulatory agencies will require regarding the internal controls of
these third party service providers. We believe it is prudent to wait to issue a
formal report on our internal controls until such time as the standards for
these third parties are established and a more complete framework regarding such
management report is established. Based on the procedures performed as of
December 31, 2003, we believe we are well positioned to issue the report on
management's assessment of our internal controls for 2004.



PART III



Item 10. Directors and Executive Officers of the
Registrant

(a) Executive Officers

The following sets forth certain information
regarding our executive officers as of March 8, 2004, and their ages as of such
date:



|Name
Thomas M. Siebel
Patricia A. House
R. David Schmaier
Kenneth A. Goldman
Edward Y. Abbo
  Carlos Y. Chou
  Gary W. Hanna
Mark D. Hanson
  Herbert D. Hunt
Steven M. Mankoff 
  Mark E. Sunday
Neil M. Weston | Age
51
49
40
54
39
  42
  43
  43
  56
42
  49
55 | Position
Chairman and Chief Executive Officer
Vice Chairman, Co-Founder and Vice President, Strategic Planning
Executive Vice President
Senior Vice President, Finance and Administration and Chief Financial Officer
Senior Vice President, Technology and Chief Technology Officer
  President, Asia Pacific
  President, Americas Sales
  Senior Vice President, Corporate Development
  Senior Vice President, Global Services
Senior Vice President, Technical Services
  Senior Vice President, Information Technology and Chief Information Officer
President, EMEA Sales
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Thomas M. Siebel

Patricia A. Househas been with Siebel Systems
since our inception in July 1993 and has served as our Vice Chairman, Co-Founder
and Vice President, Strategic Planning since January 2001. From February 1996 to
January 2001, she served as our Co-Founder and Executive Vice President and from
July 1993 to February 1996 as our Co-Founder and Senior Vice President,
Marketing. Ms. House currently serves on the board of directors of Levi Strauss
& Co. Ms. House was elected to serve on our Board of Directors through our
2006 Annual Meeting of Stockholders.

R. David Schmaierhas served as our Executive Vice
President since January 2001. Mr. Schmaier served as our Senior Vice President,
Products from January 1998 to January 2001 and as our Vice President, Product
Marketing from October 1995 to January 1998. Mr. Schmaier joined us in 1994 as
Director, Product Marketing.

Kenneth A. Goldmanhas served as our Senior Vice
President, Finance and Administration and Chief Financial Officer since August
2000. From July 1996 to July 2000, Mr. Goldman served as Executive Vice
President of Finance and Chief Financial Officer of Excite@Home, Inc. From 1992
to 1996, Mr. Goldman served as Senior Vice President of Finance and Chief
Financial Officer of Sybase, Inc. Mr. Goldman serves on the board of directors
of Juniper Networks, Inc. Mr. Goldman was a member of FASAC (the Financial
Accounting Standards Board Advisory Counsel) from December 1999 through December
2003.

Edward Y. Abbo has served as our Senior Vice
President, Technology and Chief Technology Officer since April 2002. Mr. Abbo
served as our Senior Vice President, Industry Applications from June 2001 to
April 2002 and as our Senior Vice President, Industry Solutions from January
2001 to June 2001. From July 1994 to December 2000, Mr. Abbo held a variety of
senior engineering positions within Siebel Systems.

Carlos Y. Chou has served as our President, Asia
Pacific Sales since January 2004. Mr. Chou served as our President, Siebel
Systems Japan from March 2002 to January 2004, and as a Vice President in our
Alliances and Channels groups from November 1999 to March 2002. Mr. Chou joined
us in September 1999 as a General Manager in Sales for our Asia Pacific and
Latin America regions. Prior to joining us, Mr. Chou worked at Oracle
Corporation from 1994 to 1999, where he held senior management positions in
applications sales, including Vice President CRM Global Strategic Sales from
November 1998 to August 1999.

Gary W. Hanna has served as our President, America
Sales since January 2004. Mr. Hanna has served in a variety of sales management
positions since joining the Company in 1997, including Vice President from
January 2002 to January 2004 and Regional Manager from December 1997 to January
2002. Prior to joining the Company, from 1989 to 1997, Mr. Hanna worked in a
variety of sales management positions at Oracle Corporation.

Mark D. Hanson has served as our Senior Vice
President, Corporate Development since January 2001. Mr. Hanson also served as
our Senior Vice President, Investor Relations from October 2002 to October 2003
and as our Vice President, Corporate Development from December 1998 to January
2001. From 1984 to March 1998, Mr. Hanson served in a variety of senior
management positions in the high technology industry, including positions at
Visigenic Software, Inc.; Sybase, Inc.; Macromedia, Inc.; and Informix
Software.

Herbert D. Hunthas served as our Senior Vice
President, Global Services since November 2003 and served as Vice President,
Global Services and Chief Technical Officer from September 2001 to November
2003. From 1969 to September 2001, Mr. Hunt served in a variety of sales and
services executive positions at IBM. Mr. Hunt's last position at IBM was Vice
President, World Wide CRM Reengineering and Business Processes.

Steven M. Mankoffhas served as our Senior Vice
President, Technical Services since January 2001 and served as our Vice
President, Technical Services from March 1998 to December 2000. From October
1994 to February 1998, Mr. Mankoff held a variety of senior services positions
within Siebel Systems.

Mark E. Sundayhas served as our Senior Vice
President, Information Technology and Chief Information Officer since January
2002, and served as our Vice President, Information Technology and Chief
Information Officer from August 1999 to January 2002. Prior to joining the
Company, from August 1989 to August 1999, Mr. Sunday served in a number of
information technology leadership positions, including Chief Information
Officer, Semiconductor Products Sector, at Motorola, Inc., an electronics and
communications equipment company.

Neil M. Westonhas served as our President, EMEA
Sales since January 2004. From October 2002 to December 2003, Mr. Weston served
as President, Global Sales with eWise Systems, a supplier of account aggregation
software. From September 2001 to September 2002, Mr. Weston served as Vice
President, Asia Pacific with Vignette Corporation, a supplier of content
management software. From May 1997 to July 2001, Mr. Weston served in a variety
of sales management positions with Siebel Systems, including Vice President from
May 2000 to July 2001 and Managing Director, United Kingdom from May 1997 to May
2000.

Our current officers, directors and entities affiliated
with us together beneficially owned a significant portion of the outstanding
shares of our common stock as of December 31, 2003. While these stockholders do
not hold a majority of our outstanding common stock, they will be able to
exercise significant influence over matters requiring stockholder approval,
including the election of directors and the approval of mergers, consolidations
and sales of our assets. This may prevent or discourage tender offers for our
common stock.

(b) Directors

The following sets forth certain information
regarding our Board of Directors as of March 8, 2004, and their ages as of such
date:



|Name
Thomas M. Siebel
Patricia A. House
   C. Scott Hartz
   Charles R. Schwab
George T. Shaheen
James C. Gaither
Marc F. Racicot
Eric E. Schmidt, Ph.D. | Age
51
49
                  57
                  66
59
                  66
55
49 | Position
Chairman
Vice Chairman
Director (1)
   Director (2)
Director (1)
Director (1) (3)
Director (2) (3)
Director (2) (3)
|-------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------

(1)   Member of the Audit Committee of the Board of Directors.
                   (2)   Member of the Compensation Committee of the Board of Directors.
                   (3)   Member of the Corporate Governance and Nominating Committee of the Board of Directors.

Directors Continuing in Office until the 2004 Annual
Meeting of Stockholders

C. Scott Hartz has served as a Director of Siebel
Systems since July 2003. From 1995 to January 2002, Mr. Hartz served as Chief
Executive Officer of PwC Consulting, one of the world's largest consulting
organizations, where he held various positions since 1970. Mr. Hartz serves on
the board of directors of Erie Indemnity Company, a provider of management
services to the member companies of the Erie Insurance Group, and is a managing
partner of Spire Capital Group LLC, where he focuses on the commercialization of
early-stage technologies from universities and government and private research
institutions. He also serves on The Wharton School's Graduate Executive Board
and Lehigh University's Business School Advisory Board. Mr. Hartz also serves on
the Greater Philadelphia Advisory Board of the Salvation Army. Mr. Hartz was
named one of Consulting Magazine's "Top 10 Most Influential Consultants" in 1999
and 2000. Mr. Hartz received a B.S. degree in Economics from Lehigh University
and an MBA degree from The Wharton School at the University of Pennsylvania.

Charles R. Schwab has served as a Director of
Siebel Systems since October 1994. Since November 1997, Mr. Schwab has been the
Chairman of The Charles Schwab Corporation, a brokerage firm that he founded in
1971. Mr. Schwab also served as The Charles Schwab Corporation's Co-Chief
Executive Officer from 1997 to 2003 and as its Chief Executive Officer from 1987
until 1997. Mr. Schwab also serves as a director of The Gap, Inc. and is
Co-Founder and Chairman of the Schwab Foundation for Learning and Chairman of All
Kinds of Minds Institute. Mr. Schwab received a B.A. in Economics from Stanford
University and an M.B.A. from the Graduate School of Business at Stanford
University.

George T. Shaheen has served as a Director of
Siebel Systems since October 1995. From September 1999 until April 2001, Mr.
Shaheen served as President, Chief Executive Officer and Chairman of the Board
of Directors of Webvan Group, Inc. From 1989 to September 1999, Mr. Shaheen was
the Managing Partner and Chief Executive Officer of Andersen Consulting (now
Accenture). Mr. Shaheen was a partner of Andersen Consulting from 1977 to
September 1999 and held various other positions at Andersen Consulting from 1967
to 1977. Mr. Shaheen currently serves on the Advisory Board of the
Marcus & Millichap Company. Mr. Shaheen is a member of the Board of Advisors for the
Northwestern University J.L. Kellogg Graduate School of Business. Mr. Shaheen
received a B.S. in Marketing and an M.B.A. from Bradley University.

Directors Continuing in Office until the 2005 Annual
Meeting of Stockholders



Thomas M. Siebel.Mr. Siebel's biography is
incorporated by reference from Item 10(a) of this annual report above.

James C. Gaither has served as a Director of
Siebel Systems since February 1994. Since July 2000, Mr. Gaither has been a
Managing Director of Sutter Hill Ventures, a Silicon Valley based venture
capital firm. From February 1994 to April 1998, Mr. Gaither served as Secretary
of the Company. From 1971 to 2000, Mr. Gaither was a Partner of, and
from 2000 to 2003 served as Senior Counsel to, the law firm Cooley
Godward LLP. Prior to beginning his law practice with the firm in 1969, he
served as law clerk to The Honorable Earl Warren, Chief Justice of the United
States; Special Assistant to the Assistant Attorney General in the U.S.
Department of Justice; and Staff Assistant to the President of the United
States, Lyndon Johnson. Mr. Gaither is a former president of the Board of
Trustees at Stanford University and is a former member of the Board of Trustees
of the Carnegie Endowment for International Peace and RAND. He is currently on
the boards of The William and Flora Hewlett Foundation and the Carnegie
Endowment for International Peace, and serves as the Chairman of the Board of
The James Irvine Foundation. Mr. Gaither is a member of the board of directors
of nVidia Corporation and Levi Strauss & Co. Mr. Gaither has also served as
Chairman of the Stanford Board of Trustees. Mr. Gaither received a B.A. in
Economics from Princeton University and a J.D. from Stanford University.

Marc F. Racicot has served as a Director of Siebel
Systems since April 2001. Since February 2001, Mr. Racicot has been a Partner of
the law firm Bracewell & Patterson L.L.P. From 1993 until January 2001, Mr.
Racicot served as the Governor of the State of Montana and from 1989 until 1993
he served as its Attorney General. Prior to being elected Attorney General in
1989, Mr. Racicot was an Assistant Attorney General and Special Prosecutor for
the State of Montana. Mr. Racicot began his legal career as a prosecutor in the
United States Army in West Germany, eventually becoming the Chief Prosecutor for
the largest U.S. military jurisdiction in Europe. While serving as an Army JAG
Officer, he taught business and criminal law for the University of Maryland. Mr.
Racicot serves as the Chairman of the Republican National Committee and is on
the Board of Directors for Jobs for America's Graduates and The Corporation for
National Service as well as the Board of Visitors for the University of Montana
School of Law.

Directors Continuing in Office until the 2006 Annual
Meeting of Stockholders

Patricia A. House. Ms. House's biography
is incorporated by reference from Item 10(a) of this annual report above.

Eric E. Schmidt, Ph.D. has served as a Director of
Siebel Systems since May 1996. Since July 2001, Dr. Schmidt has been the
Chairman and Chief Executive Officer of Google, Inc., a provider of Internet
search technology. From April 1997 to July 2001, Dr. Schmidt was the Chairman of
the Board of Directors and the Chief Executive Officer of Novell, Inc., a
software supplier for large networks. From 1983 to 1997, Dr. Schmidt held
various positions at Sun Microsystems, Inc., including Chief Technology Officer;
Corporate Executive Officer; President, Sun Technology Enterprises; Vice
President, General Systems Group; and Vice President and General Manager,
Software Products division. Prior to joining Sun Microsystems, Inc., Dr. Schmidt
was a member of the research staff at the Computer Science Lab at Xerox Palo
Alto Research Center (PARC). He also held positions at Bell Laboratories and
Zilog, Inc. Dr. Schmidt received a B.S. in Electrical Engineering from Princeton
University and an M.S. in Electrical Engineering and a Ph.D. in Computer Science
from the University of California at Berkeley.

Code of Ethics

We have adopted the Siebel Systems, Inc. Code of
Conduct, a code of ethics with which every person who works for us is expected
to comply. The Code of Conduct is publicly available on our website under
Investor Information at the following URL:

http://www.siebel.com/about/investor_information/corporate_governance/

If any substantive amendments are made to the Code of
Conduct or we grant any waiver, including any implicit waiver, from a provision
of the code to our Chief Executive Officer, Chief Financial Officer or Corporate
Controller, we will disclose the nature of the amendment or waiver on our
website or in a report on Form 8-K, as required by applicable laws.

Committees of the Board of Directors

The Board of Directors has determined that each
member of the Audit Committee, Compensation Committee and Nominating and
Corporate Governance Committee meets the applicable laws and regulations
regarding "independence" and that each member is free of any relationship that
would interfere with his individual exercise of independent judgment. Each of
the committees has authority to engage legal counsel or other experts or
consultants, as it deems appropriate to carry out its responsibilities.

During 2003, the Board of Directors held six meetings and
acted by unanimous written consent four times. The Board of Directors has
appointed an Audit Committee, a Compensation Committee and a Nominating and
Corporate Governance Committee.

Audit Committee

Our Audit Committee currently consists of Messrs.
Gaither, Hartz and Shaheen. The Audit Committee assists the Board of Directors
in its oversight of the integrity of our financial statements; our compliance
with legal and regulatory requirements; our independent auditor's qualifications
and performance of our internal audit function and independent auditors. The
Audit Committee has the authority to discuss with management and the independent
auditor the periodic financial statements, earnings guidance and press releases,
our risk assessment and management policies, any audit problems or difficulties
and management's response thereto; resolve financial reporting conflicts and
disagreements between management and the independent auditors; determine the
engagement and compensation of the independent auditors; approve the retention
of the independent auditors to perform any proposed permissible non-audit
services; monitor the rotation of partners of the independent auditors on the
engagement team as required by law; review our financial reporting and
accounting standards and principles and significant changes thereto; review and
approve internal audit staff functions and our internal system of financial
controls and the results of internal audits; review the auditors' report on our
financial statements and annually review all relationships between the
independent auditor and us; prepare and review the Audit Committee report
included in our proxy statement filed with the Securities and Exchange
Commission; set hiring policies of employees or former employees of our
independent auditor; review and investigate any matters pertaining to the
integrity of management including conflicts of interest, related-party
transactions or adherence to standards of business conduct as required by our
internal policies and the law; and establish procedures for the handling of
complaints regarding accounting, internal accounting controls or auditing
matters.

The Board of Directors has determined that Messrs. Hartz
and Shaheen are audit committee financial experts (as currently defined under
SEC rules implementing Section 407 of the Sarbanes-Oxley Act of 2002) and all
members of the Audit Committee are independent (as independence is defined in
Rules 4350(d)(2)(A)(i) and (ii) of the NASD listing standards). We believe that
the composition of our Audit Committee meets the requirements for independence
under, and the functioning of our Audit Committee complies with, the applicable
requirements of the Sarbanes-Oxley Act of 2002, the Nasdaq National Market and
SEC rules and regulations. We intend to comply with future requirements to the
extent they become applicable to us. The Audit Committee met fourteen times
during 2003 and acted by unanimous written consent once. The Audit Committee has
adopted a written charter, which is publicly available on our website under
Investor Information at the following URL:

http://www.siebel.com/downloads/about/pdf/audit_committee_charter.pdf

Compensation Committee

Our Compensation Committee currently consists of
Messrs. Schmidt, Schwab and Racicot. The committee carries out the Board of
Directors' overall responsibility related to executive compensation; assists the
Board of Directors in developing and evaluating executive candidates and the
development of executive succession plans; reviews and approves the evaluation
process and compensation structure of our officers and other senior management;
evaluates the performance and approves the compensation of our senior executive
officers; reviews and approves the compensation and other terms of employment of
our CEO; maintains regular contact with the Company's leadership; and prepares
and reviews the Compensation Committee report included in the proxy statement.
The compensation committee also has full power and authority to administer our
incentive compensation and other stock-based plans, bonus plans, pension and
profit sharing plans and other compensation-related plans.

We believe that the composition of our compensation committee
meets the requirements for independence under, and the functioning of our
Compensation Committee complies with, any applicable requirements of the
Sarbanes-Oxley Act of 2002, the Nasdaq National Market and SEC rules and
regulations. We intend to comply with future requirements to the extent they
become applicable to us. The Compensation Committee met twice during 2003 and
acted by unanimous written consent eight times. The Compensation Committee has
adopted a written charter, which is publicly available on our website under
Investor Information at the following URL:

http://www.siebel.com/downloads/about/pdf/compensation_committee_charter.pdf

Nominating and Corporate Governance Committee

Our Nominating and Corporate Governance
Committee currently consists of Messrs. Gaither, Racicot and Schmidt. The
Nominating and Corporate Governance Committee oversees all aspects of our
corporate governance functions on behalf of the Board of Directors; identifies,
reviews and evaluates candidates to serve as members of the Board of Directors;
reviews the Board of Directors' committee structure and recommends directors to
serve as committee members; makes recommendations to the Board of Directors
regarding corporate governance issues; develops, recommends and oversees a
periodic self-evaluation process for the Board of Directors and its committees;
and makes such other recommendations to the Board of Directors regarding affairs
relating to the members of the Board of Directors, including director
compensation and benefits.

Our Board of Directors has adopted a process by which
stockholders may communicate with it or any of its members regarding nominations
of directors or other matters. Stockholders who wish to communicate with the
Board of Directors may do so by sending written communications addressed to the
Corporate Secretary at our principal offices, 2207 Bridgepointe Parkway, San
Mateo, California 94404. All stockholder communications that are received for
the attention of the Board of Directors will be compiled by the Corporate
Secretary and submitted to the Nominating and Corporate Governance Committee on
a periodic basis. Nominations of directors or other matters put forth by our
stockholders will be reviewed by the Nominating and Corporate Governance
Committee, who will determine whether these matters should be presented to the
Board of Directors. The Nominating and Corporate Governance Committee will give
serious consideration to all such matters and make its determination on matters
to be presented to the Board of Directors in accordance with its charter and
applicable laws.

We believe that the composition of our nominating and
corporate governance committee meets the requirements for independence under,
and the functioning of our nominating and corporate governance committee
complies with, any applicable requirements of the Sarbanes-Oxley Act of 2002,
the Nasdaq National Market and SEC rules and regulations. We intend to comply
with future requirements to the extent they become applicable to us. The
Nominating and Corporate Governance Committee met twice during 2003 and acted by
unanimous written consent once. The Nominating and Corporate Governance
Committee has adopted a written charter, which is publicly available on our
website under Investor Information at the following URL:

http://www.siebel.com/downloads/about/pdf/nom_corp_gov_com.pdf

Section 16(a) Beneficial Ownership Reporting
Compliance

Section 16(a) of the Securities Exchange Act of
1934 requires our directors and executive officers, and persons who own more
than 10% of a registered class of our equity securities, to file with the SEC
initial reports of ownership and reports of changes in ownership of common stock
and other equity securities of Siebel Systems. Officers, directors and greater
than 10% stockholders are required by SEC regulation to furnish us with copies
of all Section 16(a) forms they file.

To our knowledge, based solely on a review of the copies
of such reports furnished to us and written representations that no other
reports were required, during the year ended December 31, 2003, all Section
16(a) filing requirements applicable to our officers, directors and greater than
10% beneficial owners were complied with, except for the following late filings:
Messrs. Abbo and Hunt each filed his initial report of ownership late.



Item 11. Executive Compensation

(a) Compensation of Executive Officers

Summary Compensation Table

The following table provides information for
2001, 2002 and 2003 regarding the compensation awarded or paid to, or earned by,
our CEO and each of our four most highly compensated executive officers and a
former officer who would have been listed but for the fact that he was no longer
an executive officer as of December 31, 2003. We refer to these individuals
elsewhere in this annual report as "Named Executive Officers."

`Long-term
                                                                                                               Compensation
                                                                                                                  Awards
                                                                                                                -----------        All
                                                                                Annual Compensation             Securities        Other
                                                                  --------------------------------------------  Underlying       Compen-
    Officer Name                        Position                   Year    Salary (1)     Bonus      Other (2)  Options (#)     sation (4)
---------------------   ----------------------------------------  ------  -----------  -----------  ----------  -----------   ------------
Thomas M. Siebel        Chairman and CEO                           2003   $        1   $1,250,000   $      --           --     $       --
                                                                   2002            1           --          --           --             --
                                                                   2001            1           --          --    7,950,000 (3)         --

R. David Schmaier       Executive Vice President                   2003      500,000    1,000,000          --      300,000             --
                                                                   2002      400,000      500,000          --           --             --
                                                                   2001      429,167           --          --    1,330,000             --

Kenneth A. Goldman      Senior Vice President, Finance             2003      400,000      425,000          --      250,000             --
                          and Administration and                   2002      320,000      200,000          --           --      2,775,000
                          Chief Financial Officer                  2001      343,333           --          --    2,170,000             --

Edward Y. Abbo          Senior Vice President, Technology          2003      300,000      500,000          --      250,000             --
                          and Chief Technology Officer             2002      200,000      250,000          --           --        370,000
                                                                   2001      214,583           --          --      290,000             --

Steven M. Mankoff       Senior Vice President,                     2003      300,000      500,000          --      250,000             --
                           Technical Services                      2002      200,000      250,000          --           --        370,000
                                                                   2001      214,583           --          --      640,000             --`

1. The salaries of certain of our executives were reduced by
20% in April 2001 as part of our cost control initiatives. Effective January 1,
2003, the salaries of these executives were returned to the levels prior to the
reduction in April 2001.
2. In accordance with SEC rules, other annual compensation
in the form of perquisites and other personal benefits has been omitted where
the aggregate amount of such perquisites and other personal benefits constitutes
less than the lower of $50,000 or 10% of the total annual salary and bonus for
the Named Executive Officer for the fiscal year.
3. This stock option grant was cancelled in full, at the request of
Mr. Siebel, in January 2003.
4. Amounts set forth under "All Other Compensation"
represent 316,350, 42,180 and 42,180 shares of our common stock issued to Mr.
Goldman, Mr. Abbo and Mr. Mankoff, respectively, as part of the consideration
received in connection with the 2002 tender offer to repurchase certain stock
options with exercise prices greater than $40 per share.

Stock Option Grants in the Year Ended December 31, 2003

We grant stock options to our executive officers
and directors under the 1996 Plan, which is scheduled to terminate on May 16,
2006. As of December 31, 2003, stock options to purchase a total of 51.9 million
shares were outstanding under the 1996 Plan, and stock options to purchase 71.5
million shares remained available for grant under this plan. We grant options to
our other employees under the 1998 Plan. As of December 31, 2003, stock options
to purchase a total of 90.9 million shares were outstanding under the 1998 Plan,
and options to purchase 120.8 million shares remained available for grant under
this plan. The information related to the summary of the 1998 Plan is
incorporated by reference from the section entitled "Section VI. Equity
Compensation Plan Information" in Item 7 of this annual report.

The information related to stock options granted to our
Named Executive Officers during 2003 is incorporated by reference from the
section entitled "Section V. Executive and Director Stock-Based Compensation" in
Item 7 of this annual report.

Aggregated Stock Option Exercises for the Year Ended
December 31, 2003, and Stock Option Values as of December 31, 2003

The information required by this Item is
incorporated by reference from the section entitled "Section V. Executive and
Director Stock-Based Compensation" in Item 7 of this annual report.

Employment, Severance and Change of Control
Agreements

We do not have any employment, severance or
change of control agreements with any Named Executive Officer.

(b) Compensation of Directors

The information required by this Item is incorporated
by reference from the section entitled "Section V. Executive and Director
Stock-Based Compensation" in Item 7 of this annual report.

Compensation Committee Interlocks and Insider
Participation

As of December 31, 2003, our Compensation
Committee consisted of Drs. Eric E. Schmidt and A. Michael Spence and Mr. Marc
C. Racicot. Effective March 1, 2004, Dr. Spence resigned from the Board of
Directors and the Compensation Committee, and Mr. Charles R. Schwab was
appointed to the Compensation Committee. The Compensation Committee is currently
comprised of Dr. Schmidt and Messrs. Schwab and Racicot. No member of this
Committee was at any time during the year ended December 31, 2003, or at any
other time an officer or employee of Siebel Systems. None of our executive
officers has served on the board of directors or compensation committee of any
other entity that has or has had one or more executive officers serving as a
member of our Board of Directors.

See "Item 13. Certain Relationships and Related
Transactions" for a description of transactions between us, members of the
Compensation Committee and/or entities affiliated with members of the
Compensation Committee.

---

Report of the Compensation Committee of the Board of
Directors on Executive Compensation

Our Board of Directors has delegated to the
Compensation Committee of the Board (the "Committee") the power and authority to
review, modify and approve the overall compensation strategy and policies for
the Company. As of the last fiscal year, our Committee consisted of Drs. Eric E.
Schmidt and A. Michael Spence and Mr. Marc F. Racicot. Effective March 1, 2004,
Dr. Spence resigned from the Compensation Committee, and Mr. Charles R. Schwab
was appointed to the Compensation Committee. The Committee is currently
comprised of three non-employee directors: Dr. Schmidt and Messrs. Schwab and
Racicot. The Committee is responsible for, among other things: (i) reviewing and
approving corporate performance goals and objectives relevant to the
compensation of our executive officers and other senior management, based upon
our business needs and consistent with the interests of our stockholders; (ii)
administering our executive compensation plans, programs and policies; (iii)
monitoring corporate performance and its relationship to compensation of
executive officers; and (iv) making appropriate recommendations to the Board
concerning matters of executive compensation.

Compensation Philosophy

The policies of the Committee with respect to
executive officers, including our CEO, are to provide compensation sufficient to
attract, motivate and retain executives of outstanding ability and potential. To
emphasize sustained performance of our executive officers, the Committee has
adopted policies to align executive compensation with the creation of
stockholder value as measured in the equity markets. These policies are
implemented using a mix of the following key elements:

- We pay base salaries that are generally competitive with
other leading high technology companies with which we compete for personnel. To
ensure that our salaries are sufficient to attract and retain highly qualified
executives and other key employees, we regularly compare salaries with those of
our competitors (including using independent compensation consultants and
surveys) and set salary parameters based on this review;
- We pay cash bonuses based on the achievement of specific
operating goals and discretionarily based on high levels of performance;
and
- We provide our executive officers and key employees with
equity-based incentives pursuant to our 1996 Equity Incentive Plan, 1998 Equity
Incentive Plan and Employee Stock Purchase Plan in order to motivate them to
achieve our long-term goals and to align their interests with those of our
non-employee stockholders.

In 2002, we retained an independent human resource
consulting firm to conduct a global benefits and compensation review. As a
result of the findings of this study, at the beginning of 2003, we launched a
compensation initiative that we believe will continue to attract top talent. Our
base salaries on average are at or above industry averages, and total cash
compensation on average is targeted at or above the industry averages. Under
restructured discretionary bonus and stock option programs, potential awards are
tied to individual and corporate performance.

In addition, we have significantly realigned our business
and restructured our equity and other compensation programs to serve the best
interests of our stockholders. These actions included:

- The salaries of executives with the title of Senior Vice
President and above were maintained in 2002 at levels which had been reduced by
20% in April 2001. Effective January 1, 2003, the salaries of these executives
were returned to the levels prior to the reduction in April 2001.
- The salary of our CEO has been maintained at annual
salary of $1 for 2001, 2002 and 2003.
- In 2002, we adjusted our compensation structure to reduce
the guidelines regarding the number of stock options issued to our
employees.
- In September 2002, we completed the Option Repurchase,
under which approximately 28.1 million shares underlying employee stock options
were cancelled in exchange for common stock or cash.
- In January 2003, we cancelled for no consideration
approximately 26.0 million shares subject to stock options held by our Chairman
and CEO, Thomas M. Siebel, at his request. These stock options represented all
options that had been granted to Mr. Siebel during the past four years,
including all options granted to him from October 1998 through October 2001 (the
date of his last option grant).
- Since March 2003, all of our stock options have been
granted with terms of six years. Prior to that time, our stock option grants
generally had terms of ten years.

Cash Compensation

Base Salary

The Committee recognizes the importance of
maintaining compensation practices and levels of compensation competitive with
other leading high technology companies with which we compete for personnel.
Base salary represents the fixed component of the executive compensation
program. Our philosophy regarding base salaries is to be at or above the
comparable industry median. Base salary levels are established based on an
annual review of published executive salary levels at high technology companies
with comparable revenues and on the basis of individual performance. The
industry group index shown on the Performance Measurement Comparison Graph
included in this annual report includes many of the larger software companies
included in our compensation survey. Periodic increases in base salary are the
result of individual contributions evaluated against established annual and
long-term performance objectives and an annual salary survey of high technology
companies with comparable revenues.

Cash Bonuses

Cash bonus awards are designed to reward our
executives and other senior managers for assisting us in achieving our
operational goals through exemplary individual performance. Bonuses, if any, are
linked to both the achievement of specified individual and corporate goals as
well as a review of personal performance, which is determined at the discretion
of the Committee.

In January 2004, the Committee reviewed Siebel Systems'
corporate performance goals. These goals were comprised of five broad
objectives: (i) operate a cash-positive, profitable business, including the
restructuring of our operations; (ii) maintain and improve customer
satisfaction levels; (iii) maintain and improve our market leadership;
(iv) maintain our product leadership in business applications software,
including releasing the latest version of our products and the introduction of
Siebel CRM OnDemand, our hosted software service; and (v) continue to develop
solutions for our customers that lower the total cost of integrating software
applications.

In reviewing our 2003 performance goals, the Committee
noted that revenue levels stabilized in mid 2003 and returned to sequential
quarterly growth in the second half of 2003 and cost controls resulted in the
further reduction of expenses in 2003. In particular, the Committee noted that
we (i) achieved positive cash flows from operations in 2003 of
$188.0 million, (ii) eliminated substantially all of our long-term debt
with the redemption of the Debentures, (iii) achieved our targeted operating
margin of 15% during the fourth quarter of 2003, in advance of expectations,
(iv) maintained our customer satisfaction levels, (v) maintained our
market share at comparable levels with those achieved in 2002 in the majority of
product categories in which we operate, and (vi) continued our technology
leadership in the customer relationship management market with the release of
Siebel 7.5.3 in the third quarter of 2003 and the introduction of Siebel
CRM OnDemand, our hosted software service, in the fourth quarter of 2003.

In February 2004, the Committee reviewed the 2003
corporate performance goals and determined that all of the goals had been
achieved. Based on such achievement, the Committee awarded bonuses to its
executive officers at amounts equal to or exceeding targeted bonus levels.
Bonuses for our executive officers ranged from 85% to 200% of 2003 base
compensation paid to such executive officers.

Equity Compensation

Our 1996 Equity Incentive Plan, 1998 Equity Incentive
Plan and Employee Stock Purchase Plan have been established to provide all of
our employees, including executive officers, with an opportunity to share, along
with our stockholders, in our long-term performance. The Committee strongly
believes that a primary goal of the compensation program should be to provide
key employees who have significant responsibility for our management, growth and
future success with an opportunity to increase their ownership of Siebel
Systems. The interests of stockholders, executives and employees should thereby
be closely aligned. Executives are eligible to receive stock options at the
discretion of the Committee, giving executives the right to purchase shares of
our common stock in the future at a price equal to fair market value at the date
of grant. All grants must be exercised according to the provisions of our 1996
Equity Incentive Plan or 1998 Equity Incentive Plan, as applicable. All
outstanding options held by executive officers vest over a period of five years
and generally expire six to ten years from the date of grant.

As total cash compensation for our executive officers is
targeted to be competitive with high technology companies with comparable
revenue, we have used stock options to incentivize, attract and motivate our
executive officers. The goal of the Committee historically has been to provide
equity compensation for executive officers, including the Chief Executive
Officer, which equals or exceeds levels at comparable companies. However, during
2002 and 2003, we reduced our option grant guidelines such that equity
compensation is competitive with that provided by high technology companies with
comparable revenue. In addition, we maintained our option grant guidelines for
existing employees (including our executive officers) at levels designed to
correlate directly with each employee's individual performance. After
considering the criteria relating to awarding stock options and general market
conditions, the Committee determined to grant stock options to all of our
executive officers, other than our CEO, in 2003 in recognition of their
performance and future potential with us. Options granted to our executive
officers vest over a five-year period and expire six years from the date of
grant. See "Option Grants in the Year Ended December 31, 2003" for a
summary of stock options granted to our Named Executive Officers.

Section 162(m) of the Internal Revenue Code (the
"Code") limits us to a deduction for federal income tax purposes of no more than
$1 million of compensation paid to certain named executive officers in a
taxable year. Compensation above $1 million may be deducted if it is
"performance-based compensation" within the meaning of the Code. The Committee
intends to satisfy the requirements for "performance-based compensation" with
respect to compensation awarded to our Named Executive Officers whenever
possible and to the extent then practicable.

Chief Executive Officer Compensation

The Committee uses the procedures described above in
setting the annual salary, bonus and stock option awards for Thomas M. Siebel,
our Chairman and CEO. At his request, during 2003, we maintained Mr. Siebel's
reduced base salary level of $1. As discussed above, the Committee determined
that the 2003 corporate performance goals had been achieved. The Committee
concluded that Mr. Siebel was a very significant contributor in accomplishing
these objectives and, accordingly, the Committee awarded Mr. Siebel a bonus of
$1.25 million. At Mr.
Siebel's request, the Committee did not grant any options to Mr. Siebel in 2003.
Additionally, in January 2003, at Mr. Siebel's request, we cancelled 26.0
million stock option shares held by him for no consideration, as further
described above. These stock options represented all options that had been
granted to Mr. Siebel from October 1998 through October 2001 (the date of his
last stock option grant). The total fair value (using the Black-Scholes option
valuation model) of the 26.0 million stock option shares cancelled was
approximately $56.1 million at the time of cancellation.

Summary

The Committee believes that the compensation of our
executives is appropriate and competitive with the compensation programs
provided by other leading software companies with which we compete for
executives and employees. The Committee believes its compensation strategy,
principles and practices result in a compensation program tied to stockholder
returns and linked to the achievement of our annual and longer-term financial
and operational results on behalf of our stockholders.

Compensation Committee

Marc F. Racicot
                   Eric E. Schmidt
                   Charles R. Schwab

---

Performance Measurement Comparison

This section is not "soliciting material," is not
deemed "filed" with the SEC and is not to be incorporated by reference in any of
our filings under the Securities Act of 1933 or the Securities Exchange Act of
1934 whether made before or after the date hereof and irrespective of any
general incorporation language in any such filing.

The following graph shows the total stockholder return of an
investment of $100 in cash on December 31, 1998 for (i) our common stock; (ii)
the Nasdaq Computer & Data Processing Index; and (iii) the S&P 500
Index. All values assume reinvestment of the full amount of all dividends and
are calculated as of December 31 of each year:



`Cumulative Total Return
                             ------------------------------------------------------
                                                                 Nasdaq Computer
            Measurement           Siebel           S&P 500           and Data
            Period (1)       Systems, Inc. (1)    Index (2)     Processing Index (2)
         -----------------   ------------------  ------------   -------------------
            12/31/1998                 $100.00       $100.00               $100.00
            06/30/1999                  195.40        112.38                125.44
            12/31/1999                  495.03        121.04                219.99
            06/30/2000                  963.91        120.53                177.31
            12/31/2000                  797.05        110.02                101.25
            06/29/2001                  552.78        102.66                 96.18
            12/31/2001                  329.78         96.95                 81.54
            06/28/2002                  167.60         84.19                 59.79
            12/31/2002                   87.22         75.52                 56.23
            06/28/2003                  111.77         84.40                 63.55
            12/31/2003                  164.07         97.18                 74.08`

1. Assumes that $100.00 was invested on December 31, 1998,
in our common stock, after giving effect to a 2-for-1 split of our common stock
in each of November 1999 and September 2000, and at the closing sales price for
our common stock on that date. No cash dividends have been declared on our
common stock. Stockholder returns over the indicated period should not be
considered indicative of future stockholder returns.
2. Assumes that $100.00 was invested on December 31, 1998,
in each index and that all dividends were reinvested. The Nasdaq Computer &
Data Processing Index is calculated by the Center for Research in Securities
Prices. The S&P 500 Index is calculated by Standard & Poor's, a division
of the McGraw-Hill Companies, Inc.

From our initial public offering in June 1996 to December
31, 2003, the price of our common stock has increased from $1.06 to $13.92 per
share as of December 31, 2003, an increase of approximately 1,200%.



Item 12. Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder Matters

The following table sets forth
certain information regarding the beneficial ownership of our outstanding common
stock as of December 31, 2003 by: (i) each director; (ii) each Named Executive
Officer; (iii) all of our executive officers and directors as a group; and (iv)
all those known by us to be beneficial owners of more than 5% of our common
stock:

`Amount and
                                           Nature of
                                           Beneficial    Percent
Name and Address of Beneficial Owner (1)  Ownership (2)  of Class
----------------------------------------  ------------  -----------
Thomas M. Siebel (3)....................   57,348,475       11.09 %
Patricia A. House (4)...................    8,682,991        1.72 %
R. David Schmaier (5)...................    2,182,697           *
Kenneth A. Goldman (6)..................    1,796,534           *
Edward Y. Abbo (7)......................      690,258           *
Steven M. Mankoff (8)...................    1,441,522           *
Eric E. Schmidt, Ph.D. (9)..............    1,583,208           *
A. Michael Spence, Ph.D. (10)...........    1,091,400           *
Charles R. Schwab (11)..................    3,268,510           *
George T. Shaheen (12)..................    1,562,280           *
James C. Gaither (13)...................      660,856           *
Marc F. Racicot (14)....................       31,000           *
C. Scott Hartz..........................        2,000           *
All directors and executive officers as
  a group (16 persons) (15).............   81,202,852       15.19 %`

__________________

*	Represents beneficial ownership of less than 1%.

1. Unless otherwise provided, the address for each of the
beneficial owners listed is c/o Siebel Systems, Inc., 2207 Bridgepointe Parkway,
San Mateo, CA 94404.
2. Beneficial ownership is determined in accordance with the
rules of the Securities and Exchange Commission (the "SEC") and generally
includes voting or investment power with respect to securities. Except as
indicated by footnote, and subject to community property laws where applicable,
the persons named in the table above have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by them.
Percentage of beneficial ownership is based on 498,305,489 shares of Common
Stock and exchangeable shares outstanding as of December 31, 2003.
3. Includes 32,249,732 shares held as trustee under the
Siebel Living Trust u/a/d 7/27/93; 2,349,904 shares held by Siebel Asset
Management, L.P., of which Mr. Siebel is a general partner; and 1,635,860 shares
held by Siebel Asset Management III, L.P., of which Mr. Siebel is a general
partner. Also includes 2,426,845 shares held by the Thomas and Stacey Siebel
Foundation. Also includes 18,686,134 shares issuable upon exercise of
outstanding stock options exercisable within 60 days of December 31,
2003.
4. Includes 89,364 shares held by Patricia A. House Separate
Property UTA 1/21/00 Patricia A. House TTEE. Also includes 7,562,860 shares
issuable upon exercise of outstanding stock options exercisable within 60 days
of December 31, 2003.
5. Includes 8,956 shares held by Mr. Schmaier's minor
children. Also includes 1,743,932 shares issuable upon exercise of outstanding
stock options exercisable within 60 days of December 31, 2003.
6. Includes 279,364 shares held by the Goldman-Valeriote
Family Trust and 14,670 shares held by Mr. Goldman's minor children. Also
includes 1,502,500 shares issuable upon exercise of outstanding stock options
exercisable within 60 days of December 31, 2003.
7. Includes 568,700 shares issuable upon exercise of
outstanding options exercisable within 60 days of December 31, 2003.
8. Includes 856,800 shares issuable upon exercise of
outstanding options exercisable within 60 days of December 31, 2003.
9. Includes 208 shares held by Dr. Schmidt's wife. Also
includes 1,407,000 shares issuable upon exercise of outstanding stock options
exercisable within 60 days of December 31, 2003.
10. Includes 206,000 shares held by A. Michael Spence,
Trustee or Successor Trustee under The A. Michael Spence Revocable Trust u/a/d
October 26, 1996, and 380,000 shares held by the Spence Family Investments LP.
Also includes 1,800 shares held by A. Michael Spence TTEE by James Graham Spence
Trust, 1,800 shares held by A. Michael Spence TTEE by Cathy B. Spence
Irrevocable Trust and 1,800 shares held by A. Michael Spence TTEE by Marya W.
Spence Irrevocable Trust. Also includes 500,000 shares issuable upon exercise of
outstanding stock options exercisable within 60 days of December 31,
2003.
11. Includes 300,000 shares held by the Schwab Family
Partners to which Mr. Schwab disclaims beneficial ownership and 18,000 shares
held by Mr. Schwab's spouse. Also includes 552,000 shares issuable upon exercise
of outstanding stock options exercisable within 60 days of December 31,
2003.
12. Includes 50,280 shares held by the Shaheen Revocable
Trust. Also includes 1,512,000 shares issuable upon exercise of outstanding
stock options exercisable within 60 days of December 31, 2003.
13. Includes 507,200 shares issuable upon exercise of
outstanding stock options exercisable within 60 days of December 31,
2003.
14. Includes 31,000 shares issuable upon exercise of
outstanding stock options exercisable within 60 days of December 31,
2003.
15. Includes 36,170,751 shares issuable upon exercise of
stock options held by all executive officers and directors currently exercisable
or exercisable within 60 days of December 31, 2003. See footnotes (3) through
(14) above.

Equity Compensation Plan Information

The information required by this Item is
incorporated by reference from the section entitled "Section VI. Equity
Compensation Plan Information" in Item 7 of this annual report.



Item 13. Certain Relationships and Related
Transactions

First Virtual Air LLC, a company
wholly-owned by Thomas M. Siebel, our Chairman and CEO, makes an aircraft that
it leases available to us for business use. Through a sublease agreement between
us and First Virtual Air, we incur certain costs associated with operating and
maintaining the aircraft, and we contract with third parties to perform the
services related to this operation and maintenance. To the extent that Mr.
Siebel uses the aircraft for personal use, he has agreed to reimburse us for the
operating costs incurred by us related to such personal use. During 2003, First
Virtual Air reimbursed us for $345,000 of our operating costs related to Mr.
Siebel's personal use of the aircraft.

During 2003, we leased two corporate aircraft and owned
one aircraft. We operate and maintain these aircraft, contracting with third
parties to perform the services related to this operation and maintenance. On a
limited basis, certain of our officers have used these aircraft for personal
use, and we report the standard industry fare level for all personal travel as
income for these officers. We have also entered into an arrangement pursuant to
which Mr. Siebel may use the aircraft for personal use, provided that he
reimburses us for the operating costs, valued at fair market rates as determined
by applicable rules, associated with this personal use. During 2003, Mr. Siebel
reimbursed us for $55,000 of our operating costs related to his nominal personal
use of two of these aircraft.

Entities affiliated with Mr. Siebel lease office space at
our principal offices, 2207 Bridgepointe Parkway, San Mateo, California 94404.
During 2003, Mr. Siebel reimbursed us $74,600 for the use of this office space.
We leased an apartment owned by Mr. Siebel at 2 Boulevard Suchet, Paris, France
for certain business-related use associated with our European
Executive-in-Residence program.  This program was established in 1999 and provides
for members of our executive management team to relocate to Europe on a rotating
basis in order to establish closer relationships with our European customers and
partners.  The lease rate for 2003 was €1 per year. We
have reflected the fair value of our use of this apartment, estimated at
approximately $235,000, as rent expense and addition to equity in the
accompanying consolidated financial statements. In addition, during 2003 we
reimbursed Mr. Siebel a total of $107,000 for rent owed by us as of December 31,
2002.  Mr. Siebel did not use this apartment for any purpose during 2003.

We believe that the foregoing transactions were on terms
no less favorable than could be obtained from unaffiliated third parties.

In 1996, Siebel Systems and its Chief Executive Officer were sued by a former
employee.  The lawsuit contained several causes of action that we believe were frivolous--especially
those filed against Mr. Siebel in his individual capacity as Chief Executive Officer.  We
have a longstanding practice of vigorously defending ourselves and our officers against any and
all frivolous claims, and this case was no exception.  After receiving a favorable jury verdict
in this case, a malicious prosecution lawsuit was filed against the
plaintiff's attorneys on behalf of Mr. Siebel.  We have incurred litigation fees and expenses
in connection with his malicious prosecution suit, which is currently on appeal.  During 2003,
we incurred fees totaling approximately $143,000 in this matter.  We believe that our principled
strategy of seeking any and all means of redress to protect ourselves and our officers from
meritless or malicious lawsuits has been highly beneficial to us, since we believe it has had
and continues to have a strong deterrent effect on other potential plaintiffs and their
attorneys who may be considering frivolous actions against us and our officers.

We have entered into indemnity agreements with certain
employees, officers and directors that provide, among other things, that we will
indemnify such employee, officer or director, under the circumstances and to the
extent provided for therein, for expenses, damages, judgments, fines and
settlements he or she may be required to pay in actions or proceedings which he
or she is or may be made a party by reason of his or her position as an
employee, officer, director or other agent of Siebel Systems, and otherwise to
the full extent permitted under Delaware law and our Bylaws.



Item 14. Principal Accountant Fees And
Services

The Audit Committee is responsible
for appointing, setting compensation, and overseeing the work of our independent
auditors. In 2003, the Audit Committee established its current policy regarding
pre-approval of all audit and permissible non-audit services provided by our
independent auditors. This policy mandates: (i) that a quarterly budget for both
audit and non-audit services be provided to the Audit Committee and (ii) that no
auditor engagements for non-audit services may be entered into without
pre-approval of the Audit Committee. The policy also prohibits our auditors from
performing services that are prohibited pursuant to Section 201 of the
Sarbanes-Oxley Act of 2002, which includes services such as bookkeeping services,
financial systems consulting services and internal audit services.

The following is a summary of fees, all of which were
approved by the Audit Committee, billed by KPMG LLP for audit and other
professional services during 2002 and 2003:

`2002         2003
                                                                     ------------  -----------
Audit Fees:                                                                                   
  Audit Review and Preparation--Consists of fees billed for
    audit of consolidated financial statements and review of
    interim financial statements..................................   $ 1,169,000   $1,537,000
  Statutory Audits--Consists of fees billed in relation to
    required statutory audits of foreign subsidiaries.............       447,000      500,000
  SEC Compliance--Consists of fees billed for assistance              (included     (included
    with our SEC filings..........................................     in above)     in above)
                                                                     ------------  -----------
       Total Audit Fees...........................................     1,616,000    2,037,000
                                                                     ------------  -----------

Audit-Related Fees:                                               
  Consists of fees billed in relation to due diligence related to
    mergers and acquisitions, internal control reviews and
    consultation concerning financial accounting and reporting
     standards (including Sarbanes-Oxley compliance)..............            --       50,000
                                                                     ------------  -----------

Tax Fees:                                                         
  Tax Compliance--Consists of fees billed in relation to
    preparation and review of income tax returns..................       219,000      492,000
  General Tax Advice--Consists of fees billed in relation to
    advice on tax matters.........................................       263,000      507,000
  Tax Planning and Business Strategy Consulting--Consists
    of tax planning and business strategy consulting services.....            --           --
                                                                     ------------  -----------
       Total Tax Fees.............................................       482,000      999,000
                                                                     ------------  -----------

All Other Fees:                                                   
  Other Product and Service Fees..................................            --           --
                                                                     ------------  -----------
       Total All Fees.............................................   $ 2,098,000   $3,086,000
                                                                     ============  ===========`

The Audit Committee has determined the rendering of the
professional services (i.e., audit-related and tax) described in the above table
by KPMG LLP is compatible with maintaining the auditors' independence. During
2003, all of the hours expended on our audit by KPMG LLP were provided by KPMG
LLP's permanent employees.



PART IV



Item 15. Exhibits, Financial Statements and Reports
on Form 8-K

(a)

1.	Financial Statements



|                                                         | Page
|-------------------------------------------------------- | ----
|Independent Auditors' Report                             | 84  
|Consolidated Financial Statements:                       |     
|Balance Sheets                                           | 85  
|Statements of Operations and Comprehensive Income (Loss) | 86  
|Statements of Stockholders' Equity                       | 87  
|Statements of Cash Flows                                 | 88  
|Notes to Consolidated Financial Statements               | 89  

2.	Exhibits

The exhibits in the accompanying index to exhibits are
filed or incorporated by reference as part of this annual report.



(b)	Reports on Form 8-K



On October 2, 2003, the Registrant furnished a current
report on Form 8-K reporting under Item 12 announcing preliminary results for
the quarter ended September 30, 2003.

On October 15, 2003, the Registrant furnished a current
report on Form 8-K reporting under Item 12 announcing final results for the
quarter ended September 30, 2003.

On November 18, 2003, the Registrant filed a current
report on Form 8-K reporting under Items 2 and 7 announcing its acquisition of
UpShot Corporation on November 3, 2003.

---

EXHIBIT INDEX

|Exhibit Number | Description of Document                                                                                                                                                    
|-------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.1            | Arrangement Agreement dated September 11, 2000, among the Registrant, certain indirectly
wholly owned subsidiaries of the Registrant, and Janna Systems Inc. (1)           
|2.2            | Agreement and Plan of Merger and Reorganization dated October 14, 2003, among the Registrant,
Underground Acquisition Corp. and UpShot Corporation. (2)                    
|3.1            | Amended and Restated Certificate of Incorporation of the Registrant, as amended to date. (3)                                                                               
|3.2            | Amended and Restated Bylaws of the Registrant. (4)                                                                                                                         
|4.1            | Reference is made to Exhibit 3.1 and Exhibit 3.2.                                                                                                                          
|4.2            | Specimen Stock Certificate. (5)                                                                                                                                            
|4.3            | Certificate of Designation of Series A1 Preferred Stock of the Registrant. (1)                                                                                             
|4.4            | Indenture between the Registrant, as Issuer, and Chase Manhattan Bank and Trust Company,
National Association, as Trustee, dated September 15, 1999. (6)                   
|4.5            | Certificate of Designation of Series A2 Junior Participating Preferred Stock. (7)                                                                                          
|4.6            | Rights Agreement dated as of January 29, 2003, between Siebel Systems, Inc. and Mellon
Investors Services LLC, as Rights Agent. (7)                                        
|4.7            | Form of Rights Certificate. (7)                                                                                                                                            
|10.1           | Registrant's 1996 Equity Incentive Plan, as amended. (4)                                                                                                                   
|10.2           | Registrant's Employee Stock Purchase Plan, as amended. (8)                                                                                                                 
|10.3           | Form of Indemnity Agreement entered into between the Registrant and its officers and directors. (5)                                                                        
|10.4           | Registrant's Deferred Compensation Plan, dated January 10, 1997. (9)                                                                                                       
|10.5           | Master Alliance Agreement, dated March 17, 1995, between the Registrant and
Andersen Consulting LLP. (5)(10)                                                               
|10.6           | Assignment Agreement, dated September 20, 1995, by and between the Registrant
and Thomas M. Siebel. (5)                                                                    
|10.7           | Lease Agreement, dated June 4, 1996, by and between the Registrant and Crossroad Associates
and Clocktower Associates. (5)                                                 
|10.7.1         | Amendments to Lease Agreement, by and between the Registrant and Crossroad Associates and
Clocktower Associates. (11)                                                      
|10.7.2         | Seventeenth Amendment of Lease, dated February 5, 2003, by and between Registrant and Crossroads
Associates and Clocktower Associates, and ancillary documents thereto. (4)
|10.8           | Lease Agreement, dated March 11, 1999, by and between the Registrant and Sobrato Interests III,
as amended. (12)                                                           
|10.8.1         | First Amendment to Lease  dated June 11, 1999 and Second Amendment to Lease dated
July 31, 1999. (13)                                                                      
|10.9           | Lease Agreement, dated March 11, 1999, by and between the Registrant and Sobrato Interests III,
as amended. (12)                                                           
|10.9.1         | First Amendment to Lease  dated June 11, 1999 and Second Amendment to Lease dated
July 31, 1999. (13)                                                                      
|10.10          | Lease Agreement, dated June 11, 1999, by and between the Registrant and Sobrato Interests III,
as amended. (12)                                                            
|10.10.1        | First Amendment to Lease  dated September 23, 2000. (13)                                                                                                                   
|10.11          | Office Lease Agreement, dated September 14, 2000, by and between the Registrant and Wilson Equity
Office, LLC.  (14)                                                       
|10.11.1        | First Amendment to Office Lease Agreement, dated December 21, 2001, and Second Amendment to
Office Lease Agreement, dated September 25, 2002. (14)                         
|10.12          | Lease, dated December 29, 2000, by and between the Registrant and PW Acquisitions VIII, LLC. (4)                                                                           
|10.12.1        | First Amendment to Lease dated April 29, 2003 between Bay Meadows Park Place Investors, LLC,
as landlord, and Siebel Systems, Inc., as tenant. (15)                        
|10.13          | Registrant's 1998 Equity Incentive Plan, as amended. (4)                                                                                                                   
|10.14          | Form of Registrant's Restricted Stock Grant Notice. (4)                                                                                                                    
|10.15          | Registrant's 2003 Employee Stock Purchase Plan. (16)                                                                                                                       
|21.1           | Subsidiaries of the Registrant. (17)                                                                                                                                       
|23.1           | Independent Auditors' Consent. (17)                                                                                                                                        
|31.1           | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (17)                                                                                              
|31.2           | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (17)                                                                                              
|32.1           | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (17)                                                                                              

_________________

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.

---





INDEPENDENT AUDITORS' REPORT





The Board of Directors and Stockholders
                   Siebel Systems, Inc.:

We have audited the accompanying consolidated balance
sheets of Siebel Systems, Inc. and subsidiaries (the "Company") as of December
31, 2002 and 2003, and the related consolidated statements of operations and
comprehensive income, stockholders' equity and cash flows for each of the years
in the three-year period ended December 31, 2003. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

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

In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of Siebel Systems, Inc. and subsidiaries as of December 31, 2002 and
2003, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 2003, in conformity with
accounting principles generally accepted in the United States of America.

As discussed in Notes 1 and 3 to the
consolidated financial statements, the Company changed its method of accounting
for goodwill in 2002.

/s/ KPMG LLP

Mountain View, California
                   January 30, 2004

---



SIEBEL SYSTEMS, INC.Consolidated Balance Sheets
               (in thousands; except per share data)

`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
                                                                      ============== =============`

See accompanying notes to consolidated financial statements.

---



SIEBEL SYSTEMS, INC.

       Consolidated Statements of Operations and Comprehensive Income (Loss)
               (in thousands, except per share data)

`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
                                                             ============ ============ ============`

See accompanying notes to consolidated financial statements.

---



SIEBEL SYSTEMS, INC.

                Consolidated Statements of Stockholders' Equity

                                (in thousands)

`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
                                                      =========  ==========   ============   =============   =============   =============   ==========   =============`

See accompanying notes to consolidated financial statements.

---



`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
2. Restructuring
3. 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.
4. 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.
5. 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.
6. 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.
7. 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.
8. 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.
9. 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.
10. 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.
11. 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.
12. 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.
13. Represents the Company's remaining lease commitments
related to properties included in the Restructuring.
14. 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.
15. 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.
16. 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.
17. Acquisitions
18. Financial Statement Details
19. Convertible Subordinated Debentures
20. Commitments and Contingencies
21. Stockholders' Rights Plan and Preferred Stock
22. Stock Options and Employee Stock Purchase Plans
23. Net Income (Loss) per Share
24. Income Taxes
25. Segment and Geographic Information
26. Selected Quarterly Financial Data (unaudited)
27. 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.
28. 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.
29. 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.
30. 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.
31. 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.

---

SIGNATURES

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



| |                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | SIEBEL SYSTEMS, INC.

Date:  March 8, 2004

By:	/s/ Kenneth A. Goldman
Kenneth A. Goldman

Senior Vice President, Finance and Administration
and Chief Financial Officer

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each of the
persons whose signature appears below hereby constitutes and appoints Thomas M.
Siebel and Kenneth A. Goldman, each of them acting individually, as his or her
attorney-in-fact, each with the full power of substitution, for him or her in
any and all capacities, to sign any and all amendments to this Annual Report on
Form 10-K, and to file the same, with all exhibits thereto and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises as fully to all intents and purposes as he or she might
or could do in person, hereby ratifying and confirming our signatures as they
may be signed by our said attorney-in-fact and any and all amendments to this
Annual Report on Form 10-K.

Pursuant to the requirements of the Securities Exchange
Act of 1934, this Annual Report on Form 10-K has been signed below by the follow
persons in the capacities and on the dates indicated.



|Signature                                        | Title                                                                                                                                           | Date          
|------------------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------- | --------------
|/s/ Thomas M. SiebelThomas M. Siebel             | Chairman, Chief  Executive
    Officer and Director
    (Principal Executive Officer)                                                           | March 8, 2004 
|/s/ Kenneth A. GoldmanKenneth A. Goldman         | Senior Vice President Finance
       and Administration and Chief
       Financial Officer (Principal
   Financial and Accounting
     Officer) | March 8, 2004 
|/s/ Patricia A. HousePatricia A. House           | Vice Chairman and Vice President,
Strategic Planning                                                                                            | March 10, 2004
|/s/ C. Scott HartzC. Scott Hartz                 | Director                                                                                                                                        | March 9, 2004 
|/s/ James C. GaitherJames C. Gaither             | Director                                                                                                                                        | March 9, 2004 
|/s/ Marc F. RacicotMarc F. Racicot               | Director                                                                                                                                        | March 9, 2004 
|/s/ Eric E. Schmidt, Ph.D.Eric E. Schmidt, Ph.D. | Director                                                                                                                                        | March 9, 2004 
|/s/ Charles R. SchwabCharles R. Schwab           | Director                                                                                                                                        | March 9, 2004 
|/s/ George T. ShaheenGeorge T. Shaheen           | Director                                                                                                                                        | March 8, 2004 

---