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

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**FORM 10-Q**

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

**For the quarterly period ended June 30, 2004**

**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.**
(Exact Name of Registrant as Specified in Its Charter)



|**Delaware**                                                   | **94-3187233**                      
|-------------------------------------------------------------- | ------------------------------------
|(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.)

**2207 Bridgepointe ParkwaySan Mateo, CA   94404**(Address of Principal Executive Offices, Including Zip Code)

**(650) 477-5000**(Registrant's Telephone Number, Including Area Code)







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

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

The number of shares outstanding of the Registrant's common stock, par value
      $.001 per share, as of July 19, 2004, was 505,494,194.







**SIEBEL SYSTEMS, INC.
                                    FORM 10-Q
                 For the Quarterly Period Ended June 30, 2004**

Table of Contents



|Part I.  Financial Information                                                                                                                 | Page
|---------------------------------------------------------------------------------------------------------------------------------------------- | ----
|                                                                                                                                               |     
|Item 1.   Financial Statements                                                                                                                 |     
|                                                                                                                                               |     
|Consolidated Balance Sheets as of
          
December 31, 2003 and June 30, 2004                                                               | 1   
|                                                                                                                                               |     
|Consolidated Statements of Operations and Comprehensive Income (Loss)
          
    for the three and six months ended June 30, 2003 and 2004 | 2   
|                                                                                                                                               |     
|Consolidated Statements of Cash Flows
          
    for the six months ended June 30, 2003 and 2004                                           | 3   
|                                                                                                                                               |     
|Notes to Consolidated Financial Statements                                                                                                     | 4   
|                                                                                                                                               |     
|Item 2.   Management's Discussion and Analysis of Financial
                      Condition and Results of Operations                          | 19  
|                                                                                                                                               |     
|Item 3.   Quantitative and Qualitative Disclosures About Market Risk                                                                           | 57  
|                                                                                                                                               |     
|Item 4. Controls and Procedures                                                                                                                | 59  
|                                                                                                                                               |     

**Part II.  Other Information**



|Item 1.   Legal Proceedings                                   | 61
|------------------------------------------------------------- | --
|                                                              |   
|Item 4.   Submission of Matters to a Vote of Security Holders | 61
|                                                              |   
|Item 6.   Exhibits and Reports on Form 8-K                    | 63
|                                                              |   
|**Signature**                                                 | 64

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**Part I.  Financial Information**

**Item 1.  Financial Statements**

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

`December 31,    June 30,
                                                                               2003          2004
                                                                          ------------- -------------
Assets

Current assets:
   Cash and cash equivalents...........................................   $    583,532  $    642,077
   Short-term investments..............................................      1,439,674     1,478,488
                                                                          ------------- -------------
          Total cash, cash equivalents and short-term investments......      2,023,206     2,120,565

   Accounts receivable, net............................................        259,834       201,114
   Deferred income taxes...............................................         61,742        65,603
   Prepaids and other..................................................         52,186        55,771
                                                                          ------------- -------------
          Total current assets.........................................      2,396,968     2,443,053

Property and equipment, net............................................        157,391       111,949
Goodwill...............................................................        140,957       200,053
Intangible assets, net.................................................         10,786        26,844
Other assets...........................................................         42,406        39,048
Deferred income taxes..................................................         95,866        94,866
                                                                          ------------- -------------
          Total assets.................................................   $  2,844,374  $  2,915,813
                                                                          ============= =============

Liabilities and Stockholders' Equity

Current liabilities:
   Accounts payable....................................................   $     18,907  $     31,354
   Accrued expenses....................................................        333,270       321,056
   Restructuring obligations...........................................         53,676        37,882
   Deferred revenue....................................................        282,217       314,474
                                                                          ------------- -------------
          Total current liabilities....................................        688,070       704,766

Restructuring obligations, less current portion........................         97,919        85,128
Other long-term liabilities............................................          8,159         4,768
                                                                          ------------- -------------
          Total liabilities............................................        794,148       794,662
                                                                          ------------- -------------

Commitments and contingencies

Stockholders' equity:
  Common stock; $0.001 par value; 2,000,000 shares authorized;
     498,305 and 505,022 shares issued and outstanding, respectively...            498           505
  Additional paid-in capital...........................................      1,550,834     1,600,253
  Deferred compensation................................................         (1,479)       (2,608)
  Accumulated other comprehensive income...............................         58,650        41,410
  Retained earnings....................................................        441,723       481,591
                                                                          ------------- -------------
          Total stockholders' equity...................................      2,050,226     2,121,151
                                                                          ------------- -------------
          Total liabilities and stockholders' equity...................   $  2,844,374  $  2,915,813
                                                                          ============= =============`

See accompanying notes to consolidated financial statements.

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**SIEBEL SYSTEMS, INC.
Consolidated Statements of Operations and Comprehensive Income (Loss)**
(in thousands, except per share data; unaudited)

`Three Months Ended     Six Months Ended
                                                                       June 30,               June 30,
                                                                --------------------- ----------------------
                                                                   2003       2004        2003       2004
                                                                ---------- ---------- ----------- ----------
Revenues:
   Software...................................................  $ 109,894  $  94,829  $  221,986  $ 221,628
   Professional services, maintenance and other...............    223,405    206,230     444,068    408,718
                                                                ---------- ---------- ----------- ----------
       Total revenues.........................................    333,299    301,059     666,054    630,346
                                                                ---------- ---------- ----------- ----------
Cost of revenues:
   Software...................................................      4,268      2,837       8,989      6,044
   Professional services, maintenance and other...............    126,141    107,741     251,653    215,666
                                                                ---------- ---------- ----------- ----------
       Total cost of revenues.................................    130,409    110,578     260,642    221,710
                                                                ---------- ---------- ----------- ----------
            Gross margin......................................    202,890    190,481     405,412    408,636
                                                                ---------- ---------- ----------- ----------
Operating expenses:
   Product development........................................     75,474     75,537     154,745    147,561
   Sales and marketing........................................     93,876     78,409     194,048    164,666
   General and administrative.................................     28,175     27,512      54,541     49,086
   Restructuring and related expenses.........................        274     (1,006)        274       (408)
   Purchased in-process product development...................         --      6,000          --      6,000
                                                                ---------- ---------- ----------- ----------
       Total operating expenses...............................    197,799    186,452     403,608    366,905
                                                                ---------- ---------- ----------- ----------
            Operating income..................................      5,091      4,029       1,804     41,731
                                                                ---------- ---------- ----------- ----------
Other income, net:
   Interest and other income, net.............................     15,025     10,031      30,422     22,106
   Interest expense...........................................     (4,854)      (234)     (9,748)      (554)
                                                                ---------- ---------- ----------- ----------
       Total other income, net................................     10,171      9,797      20,674     21,552
                                                                ---------- ---------- ----------- ----------
            Income before income taxes........................     15,262     13,826      22,478     63,283
Income taxes..................................................      5,494      5,610       8,092     23,415
                                                                ---------- ---------- ----------- ----------
            Net income........................................  $   9,768  $   8,216  $   14,386  $  39,868
                                                                ========== ========== =========== ==========

Diluted net income per share..................................  $    0.02  $    0.02  $     0.03  $    0.07
                                                                ========== ========== =========== ==========
Basic net income per share....................................  $    0.02  $    0.02  $     0.03  $    0.08
                                                                ========== ========== =========== ==========

Shares used in diluted share computation......................    526,726    541,543     524,626    543,972
                                                                ========== ========== =========== ==========
Shares used in basic share computation........................    490,078    504,114     488,675    502,621
                                                                ========== ========== =========== ==========
Comprehensive income (loss):
Net income....................................................  $   9,768  $   8,216  $   14,386  $  39,868
Other comprehensive income (loss), net of taxes:
   Foreign currency translation adjustments...................     13,400     (2,815)     18,716     (6,659)
   Realized (gain) loss on marketable investments previously
      recognized in other comprehensive income................     (2,158)        22      (3,705)    (1,850)
   Unrealized gain (loss) on investments, net.................      4,759    (13,643)      7,181     (8,731)
                                                                ---------- ---------- ----------- ----------
       Other comprehensive income (loss)......................     16,001    (16,436)     22,192    (17,240)
                                                                ---------- ---------- ----------- ----------
            Total comprehensive income (loss).................  $  25,769  $  (8,220) $   36,578  $  22,628
                                                                ========== ========== =========== ==========`

See accompanying notes to consolidated financial statements.

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

`Six Months Ended
                                                                                     June 30,
                                                                            --------------------------
                                                                                 2003         2004
                                                                            ------------- ------------
Cash flows from operating activities:
   Net income.............................................................. $     14,386  $    39,868
   Adjustments to reconcile net income to net cash
    provided by operating activities:
      Write-off of property and equipment abandoned in restructuring.......        2,596           --
      Write-off of purchased in-process product development................           --        6,000
      Depreciation and amortization........................................       78,825       60,364
      Amortization of identifiable intangible assets.......................        3,950        4,255
      Compensation related to stock options, net...........................          980        2,108
      Provision for doubtful accounts and sales returns....................        5,828       (1,000)
      Tax benefit from exercise of stock options...........................           --        4,800
      Deferred income taxes................................................          (46)          16
      Write-down of cost-method investments to fair value..................          406        1,546
      Net realized gains on marketable investments.........................       (3,705)      (1,850)
      Changes in operating assets and liabilities:
         Accounts receivable...............................................       55,369       62,191
         Prepaids and other................................................        9,175         (190)
         Accounts payable and accrued expenses.............................      (27,468)      (3,396)
         Restructuring obligations.........................................      (43,376)     (29,756)
         Deferred revenue..................................................       18,791       30,407
                                                                            ------------- ------------
           Net cash provided by operating activities.......................      115,711      175,363
                                                                            ------------- ------------
Cash flows from investing activities:
   Purchases of property and equipment, net................................      (10,514)      (5,075)
   Purchases of short-term investments.....................................   (1,118,484)    (865,170)
   Sales and maturities of short-term investments..........................      952,188      802,083
   Proceeds from sale of marketable equity securities......................        5,338           --
   Purchase consideration for acquired businesses, net of cash received....       (1,500)     (74,909)
   Other non-operating assets and non-marketable securities................       (9,666)          --
                                                                            ------------- ------------
           Net cash used in investing activities...........................     (182,638)    (143,071)
                                                                            ------------- ------------
Cash flows from financing activities:
   Proceeds from issuance of common stock..................................       35,757       41,260
   Repayments of capital lease obligations.................................       (6,380)      (6,605)
                                                                            ------------- ------------
           Net cash provided by financing activities.......................       29,377       34,655
                                                                            ------------- ------------
Effect of exchange rate fluctuations.......................................       13,455       (8,402)
                                                                            ------------- ------------
Change in cash and cash equivalents........................................      (24,095)      58,545
Cash and cash equivalents, beginning of period.............................      667,511      583,532
                                                                            ------------- ------------
Cash and cash equivalents, end of period................................... $    643,416  $   642,077
                                                                            ============= ============
Supplemental disclosures of non-cash activities:
   Fair value of common stock and stock options issued for acquisitions.... $      1,670  $        --
                                                                            ============= ============`

See accompanying notes to consolidated financial statements.

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SIEBEL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



1. Summary of Significant Accounting
Policies
2. Restructuring Obligations
3. The costs associated with the Company's workforce
reductions consist primarily of severance payments, COBRA benefits, payroll
taxes and other associated employment termination costs.  The remaining
obligations as of June 30, 2004 relate to less than 10 terminations that have
yet to be completed, primarily due to regulatory requirements in certain
countries and the Company's ongoing transition of certain product development
positions overseas.  The Company expects to complete the reduction of the
remaining employees within the next six months.
4. 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.
5. Due primarily to higher than expected voluntary
terminations within positions included in our 2003 Restructuring, the Company
reduced its remaining obligations for employee termination costs during the
second quarter of 2004.
6. These costs represent 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.
7. During the three and six months ended June 30, 2004, the
Company recognized a benefit in its statement of operations related to changes
in its estimate of the 2003 Restructuring obligations, net of accretion expense.
The following is a summary of the net restructuring benefit recognized during
the first half of 2004:
8. Commitments and
Contingencies
9. Acquisitions, Goodwill and
Intangible Assets
10. Net Income per Share
11. Restricted Stock Units
12. Segment and Geographic
Information

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



The statements contained in this quarterly 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 quarterly report are based on
information available to us as of the date of this quarterly 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 quarterly report.



Executive Summary



Our consolidated financial statements are included in
Item 1 of this Quarterly Report on Form 10-Q.  The following discussion is
designed to provide a better understanding of these financial statements,
including (i) a brief discussion of our business and products, (ii) key factors
that impacted our performance in the first half of 2004, (iii) a summary of our
operating results and certain key financial metrics for the first half of 2004,
and (iv) our outlook for the third quarter of 2004, including certain risks that
may impact our 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 2, the section below entitled "Risk
Factors," and our consolidated financial statements, which are included in
Item 1 of this quarterly report.



Overview of Our Business and Products



We are a leading provider of business applications
software for the customer relationship management, or CRM, market.
Substantially all of our revenues are derived directly or indirectly from
perpetual licenses 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 CRM 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 sales,
marketing and service automation solutions, which provide organizations with an
integrated approach to identifying, acquiring and retaining customers.  For
example, these 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.



We also provide CRM software solutions that help
organizations better analyze corporate and customer data, lower the cost of
integrating software applications and manage their employee relationships.
Specifically, our business intelligence (otherwise known as analytics) and
integration software applications help organizations to more fully leverage the
value of their corporate information.  In addition, our analytics applications
assist organizations in analyzing large volumes of corporate data quickly and
easily, while our integration applications allow organizations to share data and
processes among different software applications.  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.



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.  We provide Siebel CRM OnDemand 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.



Our Global Services Organization, which is comprised of
our professional services and technical support organizations, provides (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 products and future product updates.



Our professional services are typically initiated and
provided over a period of three to nine 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
nine-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 consider 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.  Further, 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.  As of June 30,
2004, our Internal Controls Committee and internal audit department have
completed their review and testing of many of the individual processes that make
up our internal controls, as required by Section 404 of the Sarbanes-Oxley Act
of 2002, or SOX, and we believe that we are on schedule to complete the review
of the remaining processes by the end of the year.   Based on the testing
performed to date, 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
accounting principles generally accepted in the United States.  With the work we
have completed to date and planned, we believe that we are well-positioned for
our independent auditors to issue their audit report on our internal controls at
the end of 2004.



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 conduct for all of our
employees and directors that 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.  Further, our Disclosure Committee, comprised
primarily of senior financial and legal personnel, helps 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 our Annual Report on Form 10-K for
the year ended December 31, 2003 for a further discussion of our policies
regarding corporate governance and our code of conduct.



Operating Environment during the Three and Six Months Ended
June 30, 2004



From the first quarter of 2001 to the third quarter of
2003, macro-economic conditions have generally either deteriorated or stabilized
at depressed levels, with the information technology industry in which we
operate disproportionately impacted.  Beginning in the latter part of 2003, many
key economic indicators, such as the U.S. gross domestic product, or GDP, and
certain labor statistics, began to show signs of strengthening.  Many of these
same economic indicators continued to show signs of strengthening, albeit at
slower growth rates, in the first half of 2004.  Capital spending—and more
specifically information technology spending—also showed moderate
strengthening in the first half of 2004.  Spending on information technology,
however, appears to continue to lag the overall improvement in macro-economic
indicators and, in fact, may have declined in the second quarter of 2004.  For
example, based on a recent survey by the Institute of Supply Management, capital
spending is up over 10% year to date in 2004, yet it dropped for two consecutive
months during the second quarter of 2004 (i.e., May and June).



We experienced a similar trend within our operations in
the first half of 2004, with growth in the first quarter and declines in the
second quarter.  Despite recent improvements in macro-economic conditions, we
believe many of our customers remain cautious in completing their software
purchases.  We attribute much of our customers' cautiousness to their concerns
regarding the sustainability of the current economic recovery and the current
geopolitical environment (i.e., continued concerns regarding future terrorist
attacks and geopolitical conflicts).  Further, we have recently experienced an
increase in the number of approvals required by our customers prior to their
execution of a software license and service agreement, possibly due to our
customers' efforts regarding the Sarbanes-Oxley Act of 2002.  Both of these
factors have led to a lengthening of our sales cycle.  For example, our sales
cycle increased sequentially in the second quarter compared to that of the first
quarter of 2004.  Accordingly, the length of our sales cycle exceeded the length
we previously anticipated, notwithstanding the recent improvements in the
economy discussed above.



In addition to the lengthening of our sales cycle, many
of our customers and potential customers continue to restrict their software
procurement to well-defined current needs.  Accordingly, the number of our
larger software transactions (i.e., transactions greater than $1 million) and
our average transaction size were both negatively impacted in the second quarter
of 2004.  We believe the reduction in transaction size primarily results from
our customers' cost control initiatives.  We believe this trend has also
impacted the broader technology and software sectors, as a number of companies
in these sectors did not meet their expectations for the second quarter of 2004.
Despite these trends in our operating environment, we also recognize that our
performance did not meet our previously established guidance due in part to
slower than expected closure rates and our execution against our goals.
Accordingly, we are actively working to improve our execution and overall
operating performance, as discussed further below under the section entitled
"Focus on Future Improvement in Our Operating Performance."



Summary of Our Operating Results for 2004 and Certain
Key Financial Metrics



Despite the setback in our quest to return software
license and total revenues to sequential and year-over-year growth, we continued
to improve many of our other key operating metrics during the three and six
months ended June 30, 2004.  The following is a brief summary of our key
financial metrics and operating results for the three and six months ended June
30, 2003 and 2004 (in thousands, except EPS, percentages and DSO):

`Three Months Ended June 30,   Six Months Ended June 30,
                                                       ---------------------------   -------------------------
                                                           2003           2004           2003         2004
                                                       ------------   ------------   -----------  ------------
  Revenues:                                                                                                   
   Software license.................................   $   109,894    $    94,829    $  221,986   $   221,628
   Maintenance......................................       113,271        114,414       221,793       229,291
   Professional services and other..................       110,134         91,816       222,275       179,427
                                                       ------------   ------------   -----------  ------------
        Total revenues..............................   $   333,299    $   301,059    $  666,054   $   630,346
                                                       ============   ============   ===========  ============
   Annualized total revenue per employee............   $       233    $       249    $      230   $       259
                                                       ============   ============   ===========  ============

  Other key operating statistics:                   
   Total costs and expenses.........................   $   328,208    $   297,030    $  664,250   $   588,615
   Operating income.................................   $     5,091    $     4,029    $    1,804   $    41,731
   Operating margin.................................             2%             1%           --%            7%
   Earnings per share, diluted ("EPS")..............   $      0.02    $      0.02    $     0.03   $      0.07
   Cash flows from operations.......................   $    52,900    $    85,564    $  115,711   $   175,363

                                                       December 31,     March 31,      June 30,
                                                           2003           2004           2004
                                                       ------------    ------------   -----------
  Balance sheet statistics:                         
   Cash and short-term investments..................   $ 2,023,206     $ 2,132,927    $ 2,120,565
   Deferred revenue.................................   $   282,217     $   311,375    $   314,474
   Days sales outstanding ("DSO")...................            64              63             60
   Working capital..................................   $ 1,708,898     $ 1,788,076    $ 1,738,287
   Total stockholders' equity.......................   $ 2,050,226     $ 2,112,214    $ 2,121,151`

- Software license revenues

- Maintenance revenues



- Professional services and other revenues,

- Annualized total revenue per employee

- Our 2003 Restructuring and cost control initiatives

- Operating income

- Cash and short-term investments increased by $97.4
million, or 5%, from $2,023.2 million as of December 31, 2003 to $2,120.6
million as of June 30, 2004, representing approximately 71% and 73% of total
assets for each of these respective periods.  The increase in cash and short-term
investments was primarily due to our continued positive cash flows from
operations ($175.4 million for the first half of 2004), partially offset by
acquisition-related expenditures of $74.9 million (primarily related to our
acquisition of Eontec on April 20, 2004).

- Accounts receivable

- Deferred revenues

- Working capital

- Stockholders' equity

- Stock option overhang

Focus on Future Improvement in Our Operating
Performance



Our goals begin and end with our recognition that we run
our business for the benefit of our stockholders.  We acknowledge that we did
not perform as well as we had expected in the second quarter of 2004, and we are
committed to improving both our financial performance and our return to
stockholders.  We have been reviewing and continue to review our business
thoroughly and are prepared to take actions to improve our performance and
capabilities, with our primary focus in the following three areas: (i) revenue
generation, (ii) financial structure, and (iii) leadership.



Revenue Generation



We are focused on improving our revenue generation
capability, including building and managing as strong a pipeline as necessary to
achieve revenue growth.  We have taken steps to improve our efficiency and
effectiveness in managing our pipeline, not just for the third and fourth
quarters of 2004, but to provide for strong pipeline development for future
quarters as well, thereby improving the visibility and predictability of our
business across all geographies, products and customer verticals, and over time.
We also are focused on the following areas, among others, that we believe will
enable the growth of our revenues:

- Small and medium-sized business initiative

- Accelerate new growth initiatives

- New markets

- Analytics

- Universal Application Network, or UAN

- Global Services Organization

- Better aligning our selling model

- Investing in critical customer facing positions



Financial Structure

We continue to examine our financial structure in order to
maximize profitability and returns for stockholders.  Specifically, we are
evaluating where we deploy our resources to ensure that these resources are
deployed effectively and in a manner designed to reduce our costs.  We are in
the process of identifying measures that we believe will allow us to obtain
significant cost reductions from the second quarter of 2004 (up to $15.0
million) and thereby allow us to improve our profitability and redeploy
resources to higher growth areas.   Some of these measures include:



- continuing to reduce discretionary spending including, for example, travel
and entertainment;
- further consolidating our facilities, further driving down future facilities
and related expenses;
- further limiting and closely monitoring net capital expenditures, which
total only $5.1 million year-to-date in 2004 against year-to-date depreciation
of $50.4 million in 2004;
- further streamlining our information technology spending;
- further utilizing outsourced services where appropriate and cost effective;
and
- redeploying or, if appropriate, eliminating duplicative activities,
extraneous layers of management or unproductive resources.

While we continue to evaluate and streamline our operations,
particularly in non-revenue generating areas, we intend to continue to
selectively invest in product development and customer facing field sales and
service capabilities world-wide.

Leadership

We intend to improve our overall leadership capability to
ensure that we have the right team in place to capture the market opportunities.
We are in the process of adding additional senior leadership talent in critical
customer facing areas such as global vertical industry initiatives and
professional services.  To that end, we have recently appointed Mr. Bruce
Cleveland as Senior Vice President and General Manger of our newly formed
OnDemand/SMB unit and Ms. Eileen McPartland as Senior Vice President, Global
Services.  Mr. Cleveland has over 22 years in the high-tech industry, including
senior technical and marketing management positions at AT&T and Oracle, and
served with us in various management positions, including Senior Vice President,
Marketing from 1996 to 2002.  Ms. McPartland has over 20 years in various
professional services leadership roles, including positions with Ariba,
Accenture and SAP.  We have also hired an executive in our manufacturing and
automotive product vertical.  We intend to continue to expand our leadership
capabilities throughout our organization.



Summary

In summary, despite the decline in our revenue in the second
quarter of 2004, we believe that demand for our products and services remains
strong.  Our management team is focused on investing to drive revenues from the
opportunities we identified above and in helping our customers realize value
from their investments in our products and services.  We will make our
investments in revenue driving initiatives in a fiscally prudent manner and will
re-examine our cost structure for additional savings to ensure that we continue
to drive improvements in profitability.  We will continue to add to our
leadership team to ensure that we can successfully capture the opportunities
ahead.



While there have been gaps in our execution, we are working
to fill these gaps quickly.  We believe the above actions are necessary and
sufficient to return our operations to growth, to improve financial performance
and profitability, and ultimately to drive stockholder value and return.



Outlook



Our outlook is based solely on our current expectations,
which are based, in part, on our review of our current sales pipeline, recent
surveys among information technology executives, and current economic
indicators.  We are cautiously optimistic that our operating results may improve
on a sequential quarterly basis in the second half of 2004.  For the third
quarter of 2004, we currently anticipate that our total revenues will be between
$295 million and $330 million.  We expect the individual components of our total
revenues to be within the following ranges:



- software license revenues—between $90 million and $115
million;
- maintenance revenues—between $113 million and $119 million;
and
- professional services and other revenues—between $90 million and $104
million.



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



Prior to any restructuring-related charges that we may
incur related to our re-evaluation of our financial structure discussed above,
we expect "total costs and expenses" to decrease in the third quarter
of 2004 from the levels incurred in the second quarter of 2004 by up to $15.0
million, primarily due to continued cost savings from the 2003 Restructuring,
additional cost savings from the cost control initiatives described previously
and additional reductions in depreciation expense.  We expect increases in
expenses that vary directly with revenue levels, such as "cost of
revenues" and commissions, will partially offset these cost savings.  Based
on our expectations of increased revenue levels and modest declines in total
costs and expenses, we currently expect operating income and margin for the
third quarter of 2004 to increase from levels achieved in the second quarter of
2004.  Our expectations regarding operating income are prior to any
restructuring-related charges and depend on our ability to return our software
license and professional services revenues to sequential quarterly growth.



Uncertainty with respect to the timing and amount of our
future revenues could significantly impact the above expectations and 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.  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 or results of operations.



As discussed in more detail above, we are taking steps to
improve our financial performance, including re-evaluating our current
expenditure levels.  We have identified several areas where we believe we may
more efficiently invest our resources and, accordingly, we may further
restructure operations in the second half of 2004, including selective
reductions of certain non-revenue generating personnel and further consolidation
of our facilities.  We have not yet completed this analysis and, accordingly, we
have not yet determined the total restructuring charge associated with these
restructuring efforts.  We do not, however, expect that the charge associated
with these restructuring efforts will exceed $15.0 million.



We expect other income, net to remain comparable in the
third quarter of 2004 to levels obtained in the second quarter of 2004.



We currently expect our effective tax rate for the third
quarter of 2004 to be approximately 37%.  The estimated effective tax rate is
based on current tax law and our expected annual 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.  Further, our projected effective income
tax rate for the remainder of 2004 does not take into account a new election
that is available under the U.S. income tax rules regarding the allocation
between U.S. and foreign jurisdictions of tax deductions attributable to
employee stock option compensation.  We have not yet determined the impact that
this election would have on our effective tax rate and operating results.



As discussed in Note 3 to the accompanying unaudited
consolidated financial statements, our U.S. Federal income tax returns for 1998
through 2002 are currently under examination by the Internal Revenue Service
("IRS").  During 2003 and 2004, 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 the Three and Six Months Ended June 30, 2003 and 2004



Revenues



Our total revenues decreased from $333.3 million and
$666.1 million during the three and six months ended June 30, 2003,
respectively, to $301.1 million and $630.3 million during the three and six
months ended June 30, 2004, respectively, representing year-over-year declines
of 10% and 5%, respectively.  Our total revenues decreased during the second
quarter of 2004 from the second quarter of 2003 due to a $15.1 million decrease
in our software license revenues and a $17.2 million decrease in our
professional services and other revenues.  The declines in our total revenues
for the year-to-date period were primarily due to decreases within our
professional services and other revenues, as software license revenues remained
at comparable levels.



Our performance during the first half of 2004,
particularly our performance during the second quarter of 2004, was not
acceptable to us and did not meet our previously established guidance.  As
discussed in more detail under the above section entitled "Focus on Future
Improvement in Our Operating Performance," we are taking steps to improve
our performance, including actively working to improve our revenue generation
capability.  We are cautiously optimistic that we will be able to realize the
benefits of these efforts both in the short-term (e.g., sequential growth in
total revenues) and, more importantly, in the long-term (e.g., increasing rates
of growth both on a sequential and year-over-year basis).



In order to provide a better understanding of the
year-over-year changes and underlying trends in our revenues, we have provided the
following discussion of each of the individual components of our total
revenues:



Software



The following table sets forth our software license
revenues, both in absolute dollars and as a percentage of total revenues, for
the three and six months ended June 30, 2003 and 2004 (in thousands, except
percentages):

`Three Months Ended June 30,                Six Months Ended June 30,
                                  ----------------------------------------  -----------------------------------------
                                     2003       2004       Change     %        2003       2004       Change      %
                                  ---------  ----------  ---------- ------  ---------- ----------  ---------- -------
Software license revenues........ $109,894    $ 94,829   $ (15,065)  (14)%   $221,986   $221,628    $   (358)     --%
Percentage of total revenues.....       33%         32%                            33%        35%`

Software license revenues decreased by $15.1 million, or
14%, from the three months ended June 30, 2003 to the three months ended June
30, 2004, primarily due to unexpected delays in purchasing decisions by certain
prospects and customers near the end of the second quarter as described further
below.  Most of these transactions remain active opportunities for us going
forward.  Software license revenues for the six months ended June 30, 2004 were
comparable with levels for the six months ended June 30, 2003, primarily due to
our relatively stronger performance in the first quarter of 2004, which offset
our performance in the second quarter of 2004.



The year-over-year decrease in our software license
revenues during the second quarter of 2004 related primarily to the
underperformance of our sales, marketing and service automation product lines,
which declined 27% from the respective period in the prior year.  Partially
offsetting this decline were year-over-year increases in our newest product
lines, analytics and business integration applications, which increased by 54%
and 43%, respectively.  Software license revenues remained comparable during the
six months ended June 30, 2004 versus the respective period in 2003, primarily
due to year-over-year increases in our analytics and business integration
applications product lines of 69% and 50%, respectively, which offset declines
in our employee relationship management and sales, marketing and service
automation product lines of 71% and 9%, respectively.  The following is a
summary of our software license revenues by CRM product for the three and six
months ended June 30, 2003 and 2004 (in thousands):

`Three Months Ended       Six Months Ended
                                                     June 30,                June 30,
                                              ----------------------  ---------------------
                                                 2003        2004        2003       2004
                                              ----------- ----------  ---------- ----------
   Sales, marketing and service automation..  $   87,162  $  64,054   $ 174,671  $ 159,766
   Analytics................................      15,250     23,442      28,750     48,710
   Employee relationship management.........       3,251      1,289      12,203      3,585
   UAN and business integration.............       4,231      6,044       6,362      9,567
                                              ----------- ----------  ---------- ----------
        Total...............................  $  109,894  $  94,829   $ 221,986  $ 221,628
                                              =========== ==========  ========== ==========`

We believe the primary challenges we faced in the second
quarter of 2004—challenges that we are addressing—include (i) the
continued cautiousness on the part of our prospects and customers in setting and
executing on their capital spending budgets, (ii) a lengthening of our
customers' evaluation and approval time to complete a software purchase, (iii)
further reductions of the size of orders by our customers, and (iv) intense
competitive dynamics in the CRM application market.



We attribute much of our customers' cautiousness to their
concerns regarding the sustainability of the current economic recovery and the
current geopolitical environment in which we operate (e.g., continued concerns
regarding future terrorist attacks and geopolitical conflicts).  Further, we
have recently experienced an increase in the number of approvals required by our
customers prior to their execution of a software license agreement, possibly due
to their efforts regarding the Sarbanes-Oxley Act of 2002.  Both of these
factors have led to a lengthening of our sales cycle.  For example, our average
sales cycle increased sequentially in the second quarter compared to that of the
first quarter of 2004.



In addition to the lengthening of our sales cycle, many
of our customers and potential customers continue to restrict their software
procurement to well-defined current needs.  For example, fewer of our customers
are purchasing software for all divisions/segment of their enterprise, but
instead are focusing their current purchasing decisions on a particular division
or segment of their business, with the CRM needs of the remaining segments to be
addressed at some point in the future.  Accordingly, not only are our sales
cycles lengthening, but the number of individual sales cycles is increasing
(i.e., what has historically been a single multi-million dollar transaction has
now become a series of smaller transactions, each with its own sales cycle).  As
a result, both our larger software transactions (i.e., transactions greater than
$1 million) and our average transaction size declined in the second quarter of
2004.  We attribute these declines primarily to our customers' cost control
initiatives.



While we continue to see an increase in the competitive
dynamics in the CRM application market, we believe the increased competition has
had only a modest impact on our sales pipeline.  For example, while competition
within the CRM industry has intensified, based on our review of market share
data among the top four software vendors in the CRM marketplace, we believe that
we have maintained our market share at levels comparable to our historical
levels 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 nine months for professional services and 12 months for
maintenance after the licensing of our software), the above factors impacted our
software license revenues sooner and to a greater extent than they impacted our
professional services and other revenues.  Accordingly, our software license
revenues as a percentage of total revenues declined on a year-over-year basis in
the second quarter of 2004 from 33% in second quarter of 2003 to 32% in second
quarter of 2004.  Due to our relatively stronger performance in the first
quarter of 2004, software license revenues as a percentage of total revenues
increased on a year-over-year basis during the six months ended June 30, 2004
from 33% in the 2003 period to 35% in the 2004 period.



To provide further insight into current trends within our
software license revenues, we have included the following summary of certain key
operating metrics that we use to track our software license revenues:

`Three Months Ended        Six Months Ended
                                                                     June 30,                  June 30,
                                                             ------------------------  ----------------------
Other key software license metrics:                             2003         2004         2003        2004
----------------------------------------------------------   -----------  -----------  ----------  ----------
Transactions equal to or greater than $5 million..........            2            3           4           6
Transactions between $1 million and $5 million............           25           12          57          38
Total number of transactions..............................          319          299         716         605
Average transaction size (in thousands)...................   $      344   $      317   $     310   $     366`

We believe the declines in these metrics occurred
primarily for the reasons discussed above.  Despite the decreases in the
majority of these metrics, our customers continue to increase the deployment of
previous purchases of our software, which is evidenced by the increase in the
number of deployed users from approximately 2.2 million as of December 31, 2003
to approximately 2.6 million as of June 30, 2004.  In addition, we believe our
leadership position in the CRM application market and our corresponding customer
base provide us with a solid foundation to improve our performance.  Further, we
continue to build on this customer base—software license revenues from new
customers or new projects at existing customers increased to approximately 60%
of total software license revenues during both the three and six months ended
June 30, 2004, compared to a range of 50% to 55% during each of the last three
years.  We believe increases in our customer base may provide increased future
sales opportunities when and if corporate capital expenditures return to
normalized levels.



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% and
48% of software license revenues during the three and six months ended June 30,
2003, respectively, and 36% and 41% during the three and six months ended June
30, 2004, 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 exchange rates did not 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 implementation services and training services (i.e.,
professional services) and technical support and product updates (i.e.,
maintenance).  Our professional services are typically initiated and provided
over a period of three to nine months subsequent to the licensing of our
software and depend in large part upon our software license revenues in the
immediate preceding periods.  Substantially all of our professional services
arrangements are billed on a time and materials basis and, accordingly, are
recognized as the services are performed.



Our maintenance revenues depend upon both our software
license revenues and renewals of maintenance agreements by our existing customer
base.  Our customers typically pre-pay maintenance for the first year in
connection with a new software license and may renew on an annual basis
thereafter.  We reflect the prepayment of the maintenance contract in deferred
revenue and recognize the revenue ratably over the term of the maintenance
contract based on the number of days the contract is outstanding in each period.



Also included in professional services, maintenance and
other revenues for the three and six months ended June 30, 2004 is revenue from
our newest service offering, Siebel CRM OnDemand, which we introduced in the
fourth quarter of 2003.  Our customers typically pre-pay for this subscription
service, which we defer and recognize ratably over the term of the customer
contract based on the number of days the contract is outstanding in each period.
While the revenues derived from Siebel CRM OnDemand were not significant for the
three and six months ended June 30, 2004, we believe that Siebel CRM OnDemand
represents a significant growth opportunity for us.  For example, revenues from
Siebel CRM OnDemand continued to show significant growth during the second
quarter of 2004, with sequential quarterly growth of over 30% from the first
quarter of 2004.  In addition, the average number of users per transaction has
more than doubled from the number in the first quarter of 2004.  We intend to
continue to devote an increasing amount of our resources to this important
service offering.



Professional services, maintenance and other revenues
decreased in aggregate by $17.2 million, or 8%, from $223.4 million for the
three months ended June 30, 2003 to $206.2 million for the three months ended
June 30, 2004, and decreased by $35.4 million, or 8%, from $444.1 million for
the six months ended June 30, 2003 to $408.7 million for the six months ended
June 30, 2004.  This decrease was primarily due to a decline in revenues derived
from our implementation and training services, partially offset by an increase
in the installed base of customers receiving maintenance.



In order to better understand the changes within our
professional services, maintenance and other revenues, we have provided the
following table, which sets forth the individual components of these revenues in
terms of absolute dollars and as a percentage of total revenues (in thousands,
except percentages):

`Three Months Ended June 30,                Six Months Ended June 30,
                                  -----------------------------------------  -----------------------------------------
                                    2003        2004        Change     %        2003       2004       Change      %
                                  ---------   ---------   ---------- ------  ---------- ----------  ---------- -------
Maintenance:                                                                                                           
Absolute dollars................. $113,271    $114,414    $   1,143      1%  $221,793   $229,291    $   7,498      3%
Percentage of total revenues.....       34%         38%                            33%        36%
                                                                                                                       
Professional services and other:                                                                                       
Absolute dollars................. $110,134    $ 91,816    $ (18,318)  (17)%  $222,275   $179,427    $ (42,848)  (19)%
Percentage of total revenues.....       33%         30%                            34%        29%`

Our maintenance revenues, both in absolute dollars and as
a percentage of total revenues, increased during the three and six months ended
June 30, 2004 from the respective periods in 2003 primarily due to (i) stable
renewal rates among our existing customer base, which were nearly 90% in the
first half of 2004, and (ii) new maintenance agreements associated with
additional licenses of our software to new and existing customers.



While maintenance revenues have continued to increase on
a year-over-year basis, professional services and other revenues, both in
absolute dollars and as a percentage of total revenues, decreased during the
three and six months ended June 30, 2004 from the respective periods in 2003,
primarily due to (i) a lag effect, as discussed further below, related to our
software license revenues; (ii) declines of $1.1 million and $3.3 million in our
rebillable travel and entertainment ("T&E") expenses during the
three and six months ended June 30, 2004, respectively, primarily due to lower
demand for our professional services; (iii) a decline in our professional
services revenue in North America; and (iv) the effect of the transition to new
leadership in our Global Services Organization.



While each of these factors impacted our professional
services and other revenues, we believe the primary reason for the decrease in
our professional services revenues is a lag effect related to our software
license revenues.  Specifically, our implementation and training services are
initiated and performed over a period of three to nine months subsequent to the
initial software license and, as a result, our implementation and training
services typically vary directly with the amount of software license revenues
generated in the preceding three- to nine-month period.  Accordingly, we believe
a majority of the year-over-year declines in our professional services and other
revenues is due to previous declines in our software license revenues.  For
example, software license revenues for the trailing nine months ended December
31, 2003, which we believe would be a reasonable indicator, albeit not a perfect
indicator, of our professional services and other revenues for the six months
ended June 30, 2004, declined on year-over-year basis by 19%.  As indicated
above, our professional services and other revenues also declined by 19% on a
year-over-year basis during the six months ended June 30, 2004.



We have taken and will continue to take steps to improve
the performance of our Global Services Organization in order to return our
professional service revenues to positive sequential quarterly growth.  We are
beginning to realize the benefit of these efforts with modest sequential
quarterly growth in the second quarter of 2004 and an improved backlog of
professional services contracts as we begin the third quarter of 2004.  We are
committed to realizing the benefits of these efforts in an expansion of our
professional services' margins, including further cost controls, if necessary,
to achieve our 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.



Cost of Revenues



Total cost of revenues decreased by $19.8 million, or
15%, from $130.4 million during the three months ended June 30, 2003 to $110.6
million during the three months ended June 30, 2004 and decreased as a
percentage of total revenues from 39% (a gross margin of 61%) in the 2003 period
to 37% (a gross margin of 63%) during the 2004 period.  Total cost of revenues
decreased by $38.9 million, or 15%, from $260.6 million during the six months
ended June 30, 2003 to $221.7 million during the six months ended June 30, 2004
and decreased as a percentage of total revenues from 39% (a gross margin of 61%)
in the 2003 period to 35% (a gross margin of 65%) during the 2004 period.



The decline of our total cost of revenues, both in
absolute dollars and as a percentage of total revenues, during each of these
periods was primarily due to cost savings from the 2003 Restructuring, our cost
control initiatives and further reductions in our professional services staff
commensurate with the decline in our professional services and other
revenues.



In order to better understand the changes within our cost
of revenues and resulting gross margins, we have provided the following
discussion of the individual components of our cost of revenues:



Software



Cost of software license revenues 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.  The following table sets forth our cost of software
license revenues in terms of absolute dollars and as a percentage of software
license revenues for the three and six months ended June 30, 2003 and 2004 (in
thousands, except percentages):

`Three Months Ended June 30,                Six Months Ended June 30,
                                    -----------------------------------------  -----------------------------------------
                                       2003        2004       Change      %       2003       2004       Change      %
                                    ----------  ----------  ---------- ------  ---------- ----------  ---------- -------
Cost of software license revenues.. $  4,268    $  2,837    $  (1,431)  (34)%  $  8,989   $  6,044    $  (2,945)   (33)%
Percentage of software
   license revenues................        4%          3%                             4%         3%`

Cost of software license revenues decreased from the
three and six months ended June 30, 2003 to the three and six months ended June
30, 2004 primarily due to (i) a reduction of $1.3 million and $2.7 million,
respectively, from the cessation of amortization expense related to the
technology acquired from Sales.com, Inc., which was written-off at the time of
abandonment in July 2003, and (ii) reductions in third-party royalties resulting
from reductions in software license revenues and a shift to products with lower
royalties.  Partially offsetting these declines were increases in amortization
expense of $0.4 million associated with technology acquired in connection with
our acquisition of Eontec on April 20, 2004.



Professional Services, Maintenance and Other



Cost of professional services, maintenance and other
revenues consist primarily of personnel, facilities and systems costs incurred
to provide training, consulting, technical support and other global services.
The following table sets forth our cost of professional services, maintenance
and other revenues in terms of absolute dollars and as a percentage of these
revenues for the three and six months ended June 30, 2003 and 2004 (in
thousands, except percentages):

`Three Months Ended June 30,                Six Months Ended June 30,
                                       -----------------------------------------  -----------------------------------------
                                          2003        2004       Change      %       2003       2004       Change      %
                                       ----------  ----------  ---------- ------  ---------- ----------  ---------- -------
Cost of professional services,
   maintenance, and other revenues...  $ 126,141   $ 107,741   $ (18,400)  (15)%  $ 251,653  $ 215,666   $ (35,987)   (14)%
Percentage of professional services
   maintenance, and other revenues...         56%         52%                            57%        53%`

The following is a summary of the year-over-year changes
of our cost of professional services, maintenance and other revenues during the
three and six months ended June 30, 2004 from the respective period in 2003 (in
thousands):

`Year-Over-Year Change
                                                             ------------------------
                                                             Three Months  Six Months
                                                                Ended        Ended
                                                               June 30,     June 30,
Cost component:                                                  2004         2004
----------------------------------------------------------   -----------  -----------
Personnel-related costs (compensation, benefits, etc.)....   $   (5,754)  $  (10,351)
Outside consulting costs..................................       (1,126)      (4,612)
Facility-related costs (rent, maintenance, etc.)..........       (3,664)      (7,968)
Depreciation expense......................................       (5,757)      (7,636)
Rebillable T&E expenses...................................       (1,051)      (3,258)
Non-billable T&E expenses.................................       (2,188)      (3,711)
Amortization of intangibles...............................        1,465        2,443
Training and other costs, net.............................         (325)        (894)
                                                             -----------  -----------
          Total year-over-year change.....................   $  (18,400)  $  (35,987)
                                                             ===========  ===========`

We were able to reduce our cost of professional services,
maintenance and other revenues on a year-over-year basis during the three and
six months ended June 30, 2004 primarily due to the 2003 Restructuring, our cost
control initiatives and further cost reductions in response to declines in the
demand for our professional services (i.e., implementation and training
services).  For example, personnel-related costs have declined as a result of
our reduction of average headcount in our Global Services Organization from
2,320 and 2,365 in the three and six months ended June 30, 2003, respectively,
to 1,945 and 1,980 in the three and six months ended June 30, 2004,
respectively.  We also reduced our use of third-party consultants commensurate
with the decline in our implementation revenues and declines in the utilization
rates of our personnel.  Finally, we consolidated several of our facilities in
connection with the 2003 Restructuring, resulting in reductions in the facility-related
component of our cost of professional services, maintenance and other
revenues.



In addition to the savings from the 2003 Restructuring,
we have reduced our discretionary spending in areas such as (i) capital
expenditures, resulting in declines in depreciation expense; (ii) non-billable
T&E and rebillable T&E, both of which declined primarily due to
reductions in professional services personnel commensurate with the declines in
our professional services revenues; and (iii) training and other costs
commensurate with the declines in our training revenues.



Partially offsetting the above cost savings were
year-over-year increases during the three and six months ended June 30, 2004 related
to (i) increases of $1.5 million and $2.4 million during the three and six
months ended June 30, 2004, respectively, due to additional amortization expense
of intangible assets obtained in our acquisitions of Eontec and UpShot
Corporation ("UpShot"), and (ii) increases in compensation costs
associated with additional personnel obtained in our acquisitions of Eontec and
UpShot and associated with the renewal of merit increases and certain incentive
compensation.



Cost of professional services, maintenance and other
revenues as a percentage of the corresponding revenues decreased from 56% and
57% during the three and six months ended June 30, 2003, respectively, to 52%
and 53% during the three and six months ended June 30, 2004, respectively,
primarily due to (i) a higher percentage of our professional services,
maintenance and other revenues being derived from our higher-margin maintenance
revenues in the 2004 periods compared to the 2003 periods and (ii) our ability
to reduce personnel, facility and other costs as discussed above.  Primarily as
a result of these factors, our gross margin related to our professional
services, maintenance and other revenues improved from 44% and 43% during the
three and six months ended June 30, 2003, respectively, to 48% and 47% during
the three and six months ended June 30, 2004, respectively.  This year-over-year
improvement in our gross margin was partially offset by a decline in the
utilization rates of our professional services staff, which occurred primarily
in the first quarter of 2004, and amortization expense associated with
intangible assets obtained in our acquisitions of Eontec and UpShot.



Operating Expenses



Product Development



Product development expense 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 and benefits, occupancy costs, consulting costs and the cost
of software development tools and equipment.  The following table sets forth our
product development expense in terms of absolute dollars and as a percentage of
total revenues for the three and six months ended June 30, 2003 and 2004 (in
thousands, except percentages):

`Three Months Ended June 30,                Six Months Ended June 30,
                                    -----------------------------------------  -----------------------------------------
                                       2003        2004       Change      %       2003       2004       Change      %
                                    ----------  ----------  ---------- ------  ---------- ----------  ---------- -------
Product development expense........ $  75,474   $  75,537   $       63    --%  $ 154,745  $ 147,561   $  (7,184)    (5)%
Percentage of total revenues.......        23%         25%                            23%        23%`

The following is a summary of the year-over-year changes
of our product development expenses during the three and six months ended June
30, 2004 from the respective period in 2003 (in thousands):

`Year-Over-Year Change
                                                             ------------------------
                                                             Three Months  Six Months
                                                                Ended        Ended
                                                               June 30,     June 30,
Cost component:                                                  2004         2004
----------------------------------------------------------   -----------  -----------
Personnel-related costs (compensation, benefits, etc.)....   $   (2,299)  $   (6,107)
Facility-related costs (rent, maintenance, etc.)..........       (2,355)      (4,731)
Depreciation expense......................................         (694)      (2,535)
Outside consulting costs..................................        4,659        5,625
Other, net................................................          752          564
                                                             -----------  -----------
          Total year-over-year change.....................   $       63   $   (7,184)
                                                             ===========  ===========`

Our personnel-related costs decreased on a year-over-year
basis during both the three and six months ended June 30, 2004 primarily due to
reductions of product development headcount in connection with the 2003
Restructuring, including the transition of a number of these positions overseas
to labor markets with lower cost structures.  Specifically, the average
headcount in our product development organization decreased from 1,565 and 1,590
in the three and six months ended June 30, 2003, respectively, to 1,320 and
1,315 in the three and six months ended June 30, 2004, respectively.  In
addition to the reductions in our personnel costs, we have reduced the facility-related
cost component of product development expense, primarily as a result of
the consolidation of facilities in connection with the 2003 Restructuring.  We
have continued to reduce our discretionary spending in areas such as capital
expenditures, resulting in declines in our depreciation expense.



While we have reduced the personnel, facility and
depreciation components of our product development expense, we recognize that
our continued development of new products and new versions of and additional
modules for our existing products is critical to our revenue growth initiatives.
Accordingly, we have reinvested a significant portion of the above cost savings
in the following areas: (i) outside consultants performing a portion of our
quality assurance and testing activities in overseas labor markets with lower
cost structures, (ii) additional personnel obtained in acquired companies (e.g.,
personnel obtained in our acquisitions of Eontec and UpShot), and (iii)
increased investments in our personnel through the renewal of merit increases
and certain other incentive compensation.  We expect to continue to devote
substantial resources related to our product development efforts.



As a percentage of total revenues, product development
expense increased from 23% during the three months ended June 30, 2003 to 25%
during the three months ended June 30, 2004, primarily due to our continued
investment in product development despite declines in our revenues.  Product
development expense as a percentage of total revenues remained comparable during
the six months ended June 30, 2004 (23% in both the 2003 and 2004 periods),
primarily due to the 2003 Restructuring and our continued attention to our cost
structure.



Sales and Marketing



We continue to place significant emphasis, both
domestically and internationally, on direct sales through our sales force.
Sales and marketing expense is comprised primarily of costs associated with our
sales and marketing personnel and includes (i) salaries, commissions and
bonuses; (ii) facility-related (i.e., rent) and equipment-related (i.e.,
depreciation) expenses; (iii) T&E expenses; and (iv) promotional and
advertising expenses.  The following table sets forth our sales and marketing
expense in terms of absolute dollars and as a percentage of total revenues for
the three and six months ended June 30, 2003 and 2004 (in thousands, except
percentages):

`Three Months Ended June 30,                Six Months Ended June 30,
                                    -----------------------------------------  -----------------------------------------
                                       2003        2004       Change      %       2003       2004       Change      %
                                    ----------  ----------  ---------- ------  ---------- ----------  ---------- -------
Sales and marketing expense........ $  93,876   $  78,409   $ (15,467)  (16)%  $ 194,048  $ 164,666   $ (29,382)   (15)%
Percentage of total revenues.......        28%         26%                            29%        26%`

The following is a summary of the year-over-year changes
of our sales and marketing expenses during the three and six months ended June
30, 2004 from the respective period in 2003 (in thousands):

`Year-Over-Year Change
                                                             ------------------------
                                                             Three Months  Six Months
                                                                Ended        Ended
                                                               June 30,     June 30,
Cost component:                                                  2004         2004
----------------------------------------------------------   -----------  -----------
Personnel-related costs (compensation, benefits, etc.)....   $   (6,928)  $  (13,457)
Facility-related costs (rent, maintenance, etc.)..........       (1,855)      (4,140)
Depreciation expense......................................       (1,551)      (3,980)
Marketing and advertising.................................       (2,031)      (4,602)
T&E expenses..............................................         (989)      (2,224)
Sales commissions.........................................       (2,184)        (640)
Other, net................................................           71         (339)
                                                             -----------  -----------
          Total year-over-year change.....................   $  (15,467)  $  (29,382)
                                                             ===========  ===========`

Our personnel-related costs decreased on a year-over-year
basis during both the three and six months ended June 30, 2004 primarily due to
reductions of sales and marketing headcount in connection with the 2003
Restructuring.  Specifically, the average headcount in our sales and marketing
organizations decreased from 1,250 in both the three and six months ended June
30, 2003 to 1,025 in both the three and six months ended June 30, 2004.  These
savings related to personnel-related costs include the impact of increases in
compensation costs from the renewal of merit increases and certain other
incentive compensation.  In addition to the reductions in our personnel costs,
we have reduced the facility-related cost component of sales and marketing
expense, primarily as a result of the consolidation of facilities in connection
with the 2003 Restructuring.



We have also achieved aggregate decreases of $4.6 million
and $10.8 million related to depreciation expense, marketing and advertising
expenses, and T&E expenses during the three and six months ended June 30,
2004, respectively, primarily due to the further realization of savings from our
cost control initiatives.  Our sales commission expense declined by $2.2 million
and $0.6 million during the three and six months ended June 30, 2004,
respectively, due to a decrease in our software license revenues.



Sales and marketing expense decreased as a percentage of
total revenues from 28% and 29% for the three and six months ended June 30,
2003, respectively, to 26% for both the three and six months ended June 30,
2004, primarily due to the 2003 Restructuring and our continued attention to our
cost structure.



General and Administrative



General and administrative expense is comprised primarily
of costs associated with our executive and administrative personnel (finance,
human resource and facility) and consists primarily of salaries and occupancy
costs, along with bad debt expense.  The following table sets forth our general
and administrative expense in terms of absolute dollars and as a percentage of
total revenues for the three and six months ended June 30, 2003 and 2004 (in
thousands, except percentages):

`Three Months Ended June 30,                Six Months Ended June 30,
                                    -----------------------------------------  -----------------------------------------
                                       2003        2004       Change      %       2003       2004       Change      %
                                    ----------  ----------  ---------- ------  ---------- ----------  ---------- -------
General and adminstrative expense.. $  28,175   $  27,512   $    (663)   (2)%  $  54,541  $  49,086   $  (5,455)   (10)%
Percentage of total revenues.......         8%          9%                             8%         8%`

The following is a summary of the year-over-year changes
of our general and administrative expenses during the three and six months ended
June 30, 2004 from the respective period in 2003 (in thousands):

`Year-Over-Year Change
                                                             ------------------------
                                                             Three Months  Six Months
                                                                Ended        Ended
                                                               June 30,     June 30,
Cost component:                                                  2004         2004
----------------------------------------------------------   -----------  -----------
Facility-related costs (rent, maintenance, etc.)..........   $   (1,053)  $   (2,026)
Depreciation expense......................................       (1,902)      (3,148)
Personnel-related costs (compensation, benefits, etc.)....          150         (190)
Bad debt expense..........................................       (2,500)      (6,827)
Compensation related to restricted stock units............        1,778        1,778
Legal expense.............................................        1,692        3,701
Professional services and other costs, net................        1,172        1,257
                                                             -----------  -----------
          Total year-over-year change.....................   $     (663)  $   (5,455)
                                                             ===========  ===========`

Our facility-related costs decreased on a year-over-year
basis during both the three and six months ended June 30, 2004 primarily due the
consolidation of facilities in connection with the 2003 Restructuring.   We have
also continued to reduce our discretionary spending in areas such as capital
expenditures, resulting in declines in our depreciation expense.  Personnel-related
costs remained relatively flat on a year-over-year basis during both the
three and six months ended June 30, 2004, primarily due to the renewal of merit
increases and certain incentive compensation, which was offset by a reduction in
the average headcount in our administrative organization (primarily associated
with the 2003 Restructuring) from 590 and 595 in the three and six months ended
June 30, 2003, respectively, to 545 and 555 in the three and six months ended
June 30, 2004, respectively.



Bad debt expense decreased by $2.5 million and $6.8
million during the three and six months ended June 30, 2004, respectively,
primarily due to the continued improvement in our collection efforts, including
further reductions in accounts receivable levels, an improved accounts
receivable aging and the recovery of certain receivables previously
written-off.



Partially offsetting these cost savings were (i)
increases in compensation costs of $1.8 million for both the three and six
months ended June 30, 2004 associated with the issuance of restricted stock
units to our new Chief Executive Officer in connection with his commencement of
employment on May 3, 2004; (ii) increases of $1.7 million and $3.7 million
during the three and six months ended June 30, 2004, respectively, related to
increases in legal expenses (please refer to Note 3 to the accompanying
unaudited consolidated financial statements for further discussion of legal
proceedings); and (iii) increases in professional services and certain other
costs of approximately $1.2 million during both the three and six months ended
June 30, 2004, a significant portion of which was associated with our compliance
with SOX.



Restructuring and Related Expenses



As further described in Note 2 to the accompanying
unaudited financial statements, we completed two restructurings of our
operations, the first of which was initiated in 2002 and completed in December
2002 (the "2002 Restructuring"), and the second of which we initiated
in mid-2003 and completed in September 2003 (the "2003 Restructuring"
and collectively with the 2002 Restructuring, the "2002 and 2003
Restructurings").



The 2002 and 2003 Restructurings consisted primarily of
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 organization; (ii) the consolidation of excess
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.



The following table summarizes the restructuring and
related expenses incurred during the six months ended June 30, 2004, and the
remaining obligations related to the 2002 and 2003 Restructurings as of December
31, 2003 and June 30, 2004 (in thousands):

`Employee      Facility-
                                                            Termination     Related
                                                             Costs (1)     Costs (2)      Total
                                                           ------------ -------------- -----------
Restructuring obligations, December 31, 2003.............. $     3,805  $     147,790  $  151,595

Restructuring and related expenses:
  Recognized related to changes in estimate (3)...........      (1,478)          (101)     (1,579)
  Accretion related to the 2003 Restructuring (4).........          --          1,171       1,171
                                                           ------------ -------------- -----------
     Total (5)............................................      (1,478)         1,070        (408)
Cash payments.............................................      (1,544)       (26,633)    (28,177)
                                                           ------------ -------------- -----------
Restructuring obligations, June 30, 2004.................. $       783  $     122,227  $  123,010
                                                           ============ ==============
     Less: Restructuring obligations, short-term..........                                 37,882
                                                                                       -----------
     Restructuring obligations, long-term.................                             $   85,128
                                                                                       ===========`

1. The costs associated with our workforce reductions
consist primarily of severance payments, COBRA benefits, payroll taxes and other
associated employment termination costs.  The remaining obligations as of June
30, 2004 relate to less than 10 terminations that have yet to be completed,
primarily due to regulatory requirements in certain countries and our ongoing
transition of certain product development positions overseas.  We expect to
complete the reduction of the remaining employees within the next six
months.
2. 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. Due primarily to higher than expected voluntary
terminations within positions included in our 2003 Restructuring, we reduced our
remaining obligations for employee termination costs during the second quarter
of 2004.  Substantially all of the reduction of our restructuring obligations
occurred in the second quarter of 2004.
4. These costs represent the accretion of the 2003
Restructuring obligations ($0.6 million and $1.2 million during the three and
six months ended June 30, 2004, respectively).  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.
5. During the three and six months ended June 30, 2004, we
recognized a benefit to our statement of operations related to changes in
estimate of the 2003 Restructuring obligations, net of accretion expense.  The
following is a summary of the net restructuring benefit recognized during the
first half of 2004:

We incurred net restructuring and related expenses of
$274,000 during the three and six months ended June 30, 2003, consisting of (i)
$10.3 million associated with the 2003 Restructuring and (ii) a reversal of
$10.0 million of our restructuring obligations, which occurred due to higher
than anticipated sublease income at certain facilities included in our 2002
Restructuring.



The total restructuring charge and related cash outlay
are based on management's current estimates, which may change materially if
actual lease-related expenditures or sublease income differ from amounts
currently expected.  We will review the status of our restructuring activities
quarterly and, if appropriate, record changes to our restructuring obligations
in current operations based on management's most current estimates.  Please
refer to Note 2 to the accompanying unaudited consolidated financial statements
for a further discussion of our 2002 and 2003 Restructurings.



As discussed in more detail under the above section
entitled "Focus on Future Improvement in Our Operating Performance,"
we are taking steps to improve our financial performance, including
re-evaluating our current expenditure levels.  We have identified several areas
where we believe we may more efficiently invest our resources and, accordingly,
we may further restructure operations in the second half of 2004, including
selective reductions of certain non-revenue generating personnel and further
consolidation of our facilities.  We have not yet completed this analysis and,
accordingly, we have not yet determined the total restructuring charge
associated with these restructuring efforts.  We do not, however, expect that
the charge associated with these restructuring efforts will exceed $15.0
million.



Purchased In-Process Product Development



On April 20, 2004, we acquired Eontec, a global provider
of multichannel retail banking solutions.  We believe that Eontec's technology
and certain products and functionality under development, commonly referred to
as IPR&D, by Eontec at the time of purchase will enhance our current
offerings in the retail banking market.  We estimated the fair value of this
IPR&D, primarily related to Eontec's Internet banking and teller products,
to be approximately $6.0 million.  Because the IPR&D had not yet reached
technological feasibility and had no alternative future use, we reflected a $6.0
million expense under the heading "purchased in-process product
development" in the accompanying statement of operations for the both three
and six months ended June 30, 2004.



We estimated that the IPR&D relating to the Internet
banking and teller products were approximately 25% and 75% complete,
respectively, at the date of acquisition and we expect to incur up to an
additional $2.5 million to complete this development, with completion expected
in late 2004 or early 2005.  We estimated the fair value of the IPR&D using
the "income" valuation approach and a discount rate of 25%.  The
discount rate was selected based in part on our weighted average cost of capital
and determined after consideration of our rate of return on debt capital and
equity, the weighted average return on invested capital and the risk associated
with achieving forecasted cash flows.



Further, we also considered 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.  We also gave
consideration to the technologies' 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.  The
value assigned reflects the relative value and contribution of the
IPR&D.

Given the uncertainties of the commercialization process,
we cannot give assurances 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 and Operating Margin



The following table sets forth our operating income and
operating margin for the three and six months ended June 30, 2003 and 2004 (in
thousands, except percentages):

`Three Months Ended June 30,                Six Months Ended June 30,
                                    -----------------------------------------  -----------------------------------------
                                       2003        2004       Change      %       2003       2004       Change      %
                                    ----------  ----------  ---------- ------  ---------- ----------  ---------- -------
Operating income................... $   5,091   $   4,029   $  (1,062)  (21)%  $   1,804  $  41,731   $   39,927  2,213%
Operating margin...................       1.5%        1.3%                           0.3%       6.6%`

Operating income decreased on a year-over-year basis
during the three months ended June 30, 2004 due primarily to reductions in our
revenues and an in-process product development expense of $6.0 million
associated with our acquisition of Eontec, partially offset by cost savings from
the 2003 Restructuring and our continued attention to cost controls.  Operating
income and margin have increased on a year-over-year basis during the six months
ended June 30, 2004 due primarily to cost savings from the 2003 Restructuring
and our cost control initiatives, partially offset by declines in our revenues
and an in-process product development expense of $6.0 million associated with
our acquisition of Eontec.



Other Income, Net



For the three and six months ended June 30,
2003 and 2004, other income, net was comprised of the following (in
thousands):

`Three Months Ended      Six Months Ended
                                                      June 30,               June 30,
                                               ---------------------  ---------------------
                                                  2003       2004        2003       2004
                                               ---------- ----------  ---------- ----------
Interest income............................... $  13,475  $  11,152   $  27,711  $  22,851
Interest expense..............................    (4,854)      (234)     (9,748)      (554)
Net gains (losses) on marketable investments..     2,158        (22)      3,705      1,850
Write-down of cost-method investments.........      (153)      (463)       (406)    (1,546)
Other, net....................................      (455)      (636)       (588)    (1,049)
                                               ---------- ----------  ---------- ----------
                                               $  10,171  $   9,797   $  20,674  $  21,552
                                               ========== ==========  ========== ==========`

Interest income represents earnings on our cash and
short-term investments.  During the three and six months ended June 30, 2004,
interest income decreased on a year-over-year basis by $2.3 million and $4.9
million, respectively, primarily due to a decline in our cash and short-term
investments from $2,301.8 million as of June 30, 2003 to $2,120.6 million as of
June 30, 2004, along with a decline in interest rates.  Cash and short-term
investments decreased on a year-over-year basis due primarily to the redemption
of our $300.0 million convertible subordinated debentures (the
"Debentures") in accordance with their terms for $307.1 million on
September 30, 2003, partially offset by an increase in cash flows from
operations.



The decrease in interest expense is primarily due to our
redemption of the Debentures.  Interest expense for the three and six months
ended June 30, 2004 primarily represents interest associated with our capital
lease obligations.  Net gains and losses on marketable investments represent
realized gains or losses recognized upon the sale of certain short-term debt
instruments.  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.



Provision for Income Taxes



Income taxes totaled $5.5 million and $5.6 million for
the three months ended June 30, 2003 and 2004, respectively, and $8.1 million
and $23.4 million for the six months ended June 30, 2003 and 2004, respectively.
Income taxes as a percentage of pretax income (the "Effective Rate")
increased from 36% for both the three and six months ended June 30, 2003 to 41%
and 37% for the three and six months ended June 30, 2004, respectively,
primarily due to a higher percentage of our income being derived from
geographical locations with higher effective tax rates.



As part of the process of preparing our unaudited
consolidated financial statements, we are required to estimate our full-year
income and the related income tax expense in each jurisdiction in which we
operate.  Changes in the geographical mix or estimated level of annual pretax
income can impact our Effective Rate.  This process involves estimating our
current tax liabilities in each jurisdiction in which we operate, 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. While we have considered future taxable income and
the existence of prudent and feasible tax planning strategies in assessing our
valuation allowance, in the event we were to determine that we would not be able
to realize all or part of our net deferred tax assets in the future, we would
charge to income an adjustment to the valuation allowance in the period such
determination was made.



As discussed in Note 3 to the accompanying unaudited
consolidated financial statements, our U.S. Federal income tax returns for 1998
through 2002 are currently under examination by the IRS.  During 2003 and 2004,
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.  We will reflect any revision in our estimates of our tax
obligations 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.



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 increased from $1,708.9 million as of December 31, 2003 to
$1,738.3 million as of June 30, 2004, primarily due to our positive earnings
during the six months ended June 30, 2004.  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 increased from $2,023.2 million as of December 31, 2003 to $2,120.6
million as of June 30, 2004, representing approximately 71% and 73% of total
assets, respectively.  In addition, our days sales outstanding in accounts
receivable ("DSO") declined from 64 days as of December 31, 2003 to 60
days as of June 30, 2004.



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 revenues resulting from
a decline 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 the first half of 2004 and do not currently
anticipate repurchasing any of our common stock in the remainder of 2004.



Commitments



Our future fixed commitments have not changed
significantly since December 31, 2003.  Please refer to "Liquidity and
Capital Resources" in Item 7 of our Annual Report on Form 10-K for the year
ended December 31, 2003 for a further discussion of our future fixed
commitments, including a five-year schedule of future cash payments under these
obligations.



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



Net cash provided by operating activities increased from
$115.7 million during the six months ended June 30, 2003 to $175.4 million for
the six months ended June 30, 2004, primarily due to the increase in our net
income from $14.4 million during the six months ended June 30, 2003 to $39.9
million for the six months ended June 30, 2004, along with collections on
accounts receivable and prepayment of maintenance (i.e., increases in deferred
revenue).  During each of these periods, 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 and bad debt; (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 net collections of accounts receivable and
increases in deferred revenue (collectively representing cash inflows of $74.2
million and $92.6 million in the 2003 and 2004 periods, respectively), partially
offset by payments of accounts payable, accrued expenses and restructuring
obligations (collectively representing cash outflows of $70.8 million and $33.2
million in the 2003 and 2004 periods, respectively).



As we settle our remaining restructuring obligations ($123.0
million as of June 30, 2004), our future operating cash flows will be reduced
from what it otherwise would have been in the period of settlement.  We
currently estimate that we will settle $37.9 million of these obligations in the
next 12 months.



We currently anticipate that we will continue to operate a
cash-positive business in the third quarter of 2004.  Our ability to meet these
expectations depends on 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



Net cash used in investing activities was $182.6 million and
$143.1 million for the six months ended June 30, 2003 and 2004, respectively.
During each of these periods, our investment activities primarily related to
transactions within our short-term investments, with reinvestments of our cash
into short-term investments in net amounts of $166.3 million and $63.1 million
during the six months ended June 30, 2003 and 2004, respectively.



We also utilize our cash position to invest in new property
and equipment, with net purchases of property and equipment of $10.5 million and
$5.1 million during the six months ended June 30, 2003 and 2004, respectively.
Capital expenditures continued to decrease in the 2004 period primarily due to
(i) the reduction of our employees from approximately 5,590 at the end of the
second quarter of 2003 to approximately 4,865 at the end of the second quarter
of 2004, leading to a decrease in our information technology requirements for
computers and other equipment; (ii) the consolidation of our data centers,
resulting in a decrease in our information technology requirements for servers
and other equipment; and (iii) the reduction in the number of offices we are
occupying, which allowed us to reduce our purchases of tenant improvements,
furniture and fixtures.



In addition, in response to the weakening economy and as a
part of our cost control initiatives, we maintained our reduced capital
expenditure levels in the first half of 2004.  While we intend to continue to
closely monitor our capital expenditures, we expect that our capital
expenditures will increase in the second half of 2004 from levels incurred in
the first half of 2004 as we increase our investment in information technology
for (i) our CRM OnDemand product line, (ii) certain product development efforts,
(iii) the replacement of certain older computer and information technology
infrastructure, and (iv) the needs of an expanded workforce.  Specifically, we
expect our total capital expenditures to be between $15 million and $20 million
for the year ending December 31, 2004.



The remaining cash flows used in investing activities for the
six months ended June 30, 2004 consisted primarily of the acquisitions of Ineto
Services, Inc. for net cash consideration of $4.8 million and Eontec for net
cash consideration of approximately $70.2 million.  Please refer to Note 4 to
the accompanying unaudited consolidated financial statements for a further
discussion of these acquisitions.



Financing



Net cash provided by financing activities increased from
$29.4 million during the six months ended June 30, 2003 to $34.7 million for the
six months ended June 30, 2004 primarily as the result of an increase in the
proceeds from the issuance of common stock pursuant to the exercise of stock
options and our employee stock purchase plan (the "Purchase Plan").
Our cash flows from financing activities were partially offset by our repayment
of capital lease obligations, with payments of $6.4 million and $6.6 million
during the six months ended June 30, 2003 and 2004, respectively.



Off-Balance-Sheet Arrangements



We do not use off-balance-sheet arrangements with
unconsolidated entities or related parties.  Accordingly, our liquidity and
capital resources are not subject to off-balance-sheet risks from unconsolidated
entities.  As of June 30, 2004, 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, expiring between
2004 and 2022, for most U.S. and international sales and support offices and
certain equipment in the normal course of business.  While these arrangements
are often referred to as a form of off-balance sheet financing, these
arrangements are not considered off-balance-sheet arrangements, as defined in
Item 303(a)(4)(ii) of SEC Regulation S-K.  Please refer to Note 3 to the
accompanying unaudited consolidated financial statements for detail of our
future minimum lease payments under our operating leases as of June 30,
2004.





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.  In
other instances, changes in the accounting estimates from period to period are
reasonably likely to occur.  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 may 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."



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, 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,
- 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 further in our Annual Report on Form 10-K for
the year ended December 31, 2003 in Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations," under the
heading "Application of Critical Accounting Policies and Use of
Estimates."



Recent Accounting
Pronouncements



In June 2004, the Emerging Issues Task Force
("EITF") issued EITF No. 03-01 "The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments"
("EITF 03-01").  EITF 03-01 provides guidance with respect to
determining the meaning of other-than-temporary impairment and its application
to debt and equity securities within the scope of SFAS No. 115 "Accounting
for Certain Investments in Debt and Equity Securities" ("SFAS
115"), including investments accounted for under the cost method.



The recognition and measurement guidance in EITF 03-01
must be applied to other-than-temporary impairment evaluations in reporting
periods beginning after June 15, 2004.  We adopted the disclosure
provisions of EITF 03-01 for marketable investments as of December 31, 2003 and
will adopt the disclosure requirements for cost method investments for our
annual financial statements as of December 31, 2004.  We do not expect the
adoption of EITF 03-01 to have a material effect on our results of operations or
cash flows.  However, we may be required to present certain of our
"available for sale" investments with stated maturities greater than
12 months as long-term assets rather than as current assets, beginning with the
quarter ending September 30, 2004.  As of June 30, 2004, we have an aggregate of
$1,130.5 million of available for sale investments that may be subject to
presentation as long-term rather than as short-term investments.



Employee Stock Options



Section I.  Description of Plans



Since our 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" and collectively with the 1996 Plan,
the "Plans").  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.



On May 5, 2004, we amended the Plans to allow us to issue
restricted stock units ("RSUs").  RSUs are similar to restricted stock
in that they are issued for no, or nominal, consideration; however, the holder
is generally not entitled to the underlying shares of common stock until the RSU
vests.



Substantially all stock-based compensation 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 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. Executive
Compensation" of our Annual Report on Form 10-K for the year ended December
31, 2003 for further information concerning our policies and the Compensation
Committee's policies regarding the use of stock-based compensation.



Section II.  Summary of Stock Option Activity During
2004



As the following table shows, stock options outstanding
decreased by 6.2 million, or 4%, during the six months ended June 30, 2004,
primarily due to forfeitures upon terminations.  Combined activity under the
Plans for the six months ended June 30, 2004 is summarized as follows:

`Shares                       Wtd. Avg.
                                                      Available     Number of        Exercise
                                                      for Grant      Options      Price per Share
                                                     ------------ --------------  ---------------
   Balances as of December 31, 2003................  192,295,796    143,902,815    $       13.20
     Issuances of restricted stock units, net......     (280,000)            --
     Options granted to employees..................   (4,569,250)     4,569,250    $       11.01
     Options granted to officers and directors.....   (3,212,000)     3,212,000    $       11.14
     Options exercised.............................           --     (5,131,112)   $        5.49
     Options forfeited/canceled upon termination...    8,810,182     (8,828,230)   $       18.08
                                                     ------------ --------------  ---------------
   Balances as of June 30, 2004....................  193,044,728    137,724,723    $       13.04
                                                     ============ ==============`

The following table details the "in-the-money"
and "out-of-the-money" status of our stock options outstanding as of
June 30, 2004:

`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      74,171,232            3.7    $   5.47   52,598,441    $   4.11
Out-of-the-money  63,553,491            6.5    $  21.88   37,912,266    $  23.09
                 ------------  -------------  ----------  -----------  ----------
                 137,724,723            5.0    $  13.04   90,510,707    $  12.06
                 ============                             ===========`

In-the-money stock options in the above table have
exercise prices below $10.69, the closing price of our common stock as of June
30, 2004, and out-of-the money stock options have exercise prices equal to or
greater than $10.69.

Section III.  Dilution



Summary



Historically, equity ownership has been an important
component of total compensation for our employees.  Accordingly, substantially
all employees are granted stock options upon commencement of employment.  We
have granted restricted stock awards or RSUs to existing or new employees, and
we will likely continue to do so in the future.  In addition, 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).



In order to maintain the proper balance between the need
to attract and retain employees and minimize the dilution to existing
stockholders, effective January 1, 2003 we adjusted our equity guidelines to
reduce the size of stock option grants to new and existing employees.  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.  We maintained our adjusted guidelines in 2004 for new
employees and further reduced the size of our renewal grants to existing
employees from 17.8 million stock options granted in 2003 to 3.6 million stock
options granted during the first half of 2004.  Stock options granted in 2004 to
existing employees, other than officers and board of directors, vest in full on
December 31, 2004 and have a contractual life of five years.



Immediately upon voluntary or involuntary termination, an
employee forfeits all unvested equity instruments, unless the applicable
agreement provides otherwise.  Any vested equity instruments that are not
exercised within three months from the termination date are forfeited at the
expiration of the three months, unless the applicable agreement provides
otherwise.



Summarized below is the net dilution to our stockholders
during the years ended December 31, 2002 and 2003 and the six months ended June
30, 2004, along with our option overhang as of the end of each of these
respective periods (in thousands, except percentages):

`Six Months
                                                   Year Ended December 31,      Ended
                                                   -----------------------     June 30,
                                                       2002        2003          2004
                                                   -----------  ----------   -----------
Net options granted:                            
Stock options granted...........................       5,887      22,787         7,781
Stock options forfeited upon termination........     (28,910)    (27,660)       (8,828)
                                                   -----------  ----------   -----------
      Net granted (forfeited)...................     (23,023)     (4,873)       (1,047)
                                                   ===========  ==========   ===========
Dilution percentage (1).........................        (4.9)%      (1.0)%        (0.2)%
                                                   ===========  ==========   ===========
Option overhang (2).............................          38 %        29 %          27 %
                                                   ===========  ==========   ===========`

1. The potential dilution to stockholders from stock options
(the "Dilution Percentage") is calculated as new stock options granted
during the year, net of forfeitures by employees terminating employment, divided
by the total outstanding shares of common stock at the beginning of the
respective period.
2. Stock option overhang is calculated by dividing total
stock options outstanding by the total outstanding shares of common stock at the
end of each period.



Distribution of Grants



We continue to believe in broad-based employee stock
ownership.  As the table below indicates, we have continued to allocate the
majority of our stock options to employees who are not officers and directors.
"Named Executive Officers" in the below table for 2002 and 2003
represent our CEO and the four most highly compensated executive officers for
the respective year.  For all 2004 periods presented in this Quarterly Report on
Form 10-Q, Named Executive Officers represent our then-CEO (Thomas M. Siebel)
and the four most highly compensated executive officers, as disclosed in Item 11
"Executive Compensation" of our Annual Report on Form 10-K for the
year ended December 31, 2003.  In addition, we have also included our recently
appointed CEO, J. Michael Lawrie, as a Named Executive Officer for all 2004
periods.



Summarized below is the distribution of our stock options
for the years ended December 31, 2002 and 2003 and the six months ended June 30,
2004:

`Six Months
                                                       Year Ended December 31,     Ended
                                                       -----------------------    June 30,
                                                          2002         2003         2004
                                                       ----------  -----------   -----------
Grants during the period as a percentage of
  total granted:                                   
      Named Executive Officers.....................         3.4 %        4.6 %       30.8 %
      All other officers and directors as a group..         0.3          3.3         10.5
                                                       ----------  -----------   -----------
         Total for all officers and directors......         3.7          7.9         41.3
      All other employees as a group...............        96.3         92.1         58.7
                                                       ----------  -----------   -----------
         Total all grants..........................       100.0 %      100.0 %      100.0 %
                                                       ==========  ===========   ===========`

During the six months ended June 30, 2004, stock options
granted to both our Named Executive Officers and "all other officers and
directors as a group" increased significantly compared to our historical
percentages for these same grant categories primarily due to grants upon
commencement of employment.  Specifically, grants to Named Executive Officers
include an aggregate of 2.0 million stock options granted to our new CEO, J.
Michael Lawrie, upon his commencement of employment and grants to "all
other officers and directors as a group" include 0.5 million stock options
granted to our new President, EMEA Sales upon his commencement of employment.
These two grants represented 32% of all stock options granted during the six
months ended June 30, 2004.



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 No. 25
"Accounting for Stock Issued to Employees" and interpretations thereof
(collectively "APB 25").  Accordingly, deferred compensation is only
recorded if the market price of the underlying stock on the date of grant
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.



An alternative to the intrinsic value method of
accounting for stock options is the fair value approach prescribed by SFAS No.
123 "Accounting for Stock-Based Compensation" ("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 could be extremely confusing to
investors, and perhaps may even misinform our stockholders.  Specifically, we
believe the expense associated with stock options under SFAS 123 has no
relationship to (i) the value realized by our employees; (ii) the potential
dilution to our stockholders; or (iii) the cost incurred by us.  In addition, we
believe the use of option valuation models as required by SFAS 123 is highly
subjective.  Each of these assertions are discussed more fully in our Form 10-K
for the year ended December 31, 2003 and our Form 10-Q for the three months
ended March 31, 2004.



As required by SFAS 123, we have prepared a
reconciliation of our earnings as reported on our 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 and in accordance with SFAS 123, we added back all stock-based
compensation expense recorded in our statement of operations in accordance with
APB 25, 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 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):

`Three Months Ended        Six Months Ended
                                                                           June 30,                 June 30,
                                                                    ----------------------   ----------------------
                                                                       2003        2004         2003        2004
                                                                    ----------  ----------   ----------  ----------
Net income (loss):                                                                                                 
  As reported.....................................................  $   9,768   $   8,216    $  14,386   $  39,868
                                                                    ----------  ----------   ----------  ----------
Compensation expense related to:
  Stock options dilutive to stockholders:                                                                          
    Stock-based compensation accounted for under APB 25...........        475       1,913          980       2,108
    In-the-money stock options and restricted stock units.........     (7,118)     (6,884)     (13,412)    (11,096)
    Stock purchase rights under the Purchase Plan.................     (1,206)     (2,958)      (2,069)     (5,517)
                                                                    ----------  ----------   ----------  ----------
       Subtotal...................................................     (7,849)     (7,929)     (14,501)    (14,505)
                                                                    ----------  ----------   ----------  ----------
  Stock options not dilutive to stockholders:                                                                      
    Out-of-the-money stock options................................    (38,896)    (37,726)     (77,407)    (78,056)
    Stock options cancelled for no consideration..................         --          --     (251,821)         --
    Stock options forfeited in connection with terminations.......     (7,826)         --      (18,454)       (237)
                                                                    ----------  ----------   ----------  ----------
       Subtotal...................................................    (46,722)    (37,726)    (347,682)    (78,293)
                                                                    ----------  ----------   ----------  ----------
       Total pro forma expense giving effect to SFAS 123..........    (54,571)    (45,655)    (362,183)    (92,798)
                                                                    ----------  ----------   ----------  ----------
  Pro forma giving effect to SFAS 123.............................  $ (44,803)  $ (37,439)   $(347,797)  $ (52,930)
                                                                    ==========  ==========   ==========  ==========`

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 June 30, 2003
and 2004 were $9.48 and $10.69, respectively.



As the table above illustrates, total pro forma expense
for stock options includes $46.7 million and $347.7 million of expense during
the three and six months ended June 30, 2003, respectively, and $37.7 million
and $78.3 million of expense during the three and six months ended June 30,
2004, respectively, related to (i) stock options that were cancelled by our
Chairman for no consideration, (ii) stock options forfeited by employees upon
termination for no consideration, and (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 $21.88 per share compared to a closing price of $10.69
per share as of June 30, 2004).  These items represented 86% and 96% of the pro
forma expense for the three and six months ended June 30, 2003, respectively,
and 83% and 84% of the pro forma expense for the three and six months ended June
30, 2004, respectively.



Please refer to Note 1 to the accompanying unaudited
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 the six
months ended June 30, 2004:

`Potential Realizable Value
                         Number of     Percent of                                   at Assumed Annual Rates of
                         Securities   Total Options                                  Stock Price Appreciation     Aggregate
                         Underlying    Granted to       Exercise or                  for the Option Term (4)    Black-Scholes
                          Options       Employees       Base Price     Expiration   --------------------------  Value on Date
     Officer Name       Granted (1)    in 2004 (2)     ($/Share) (3)      Date           5%            10%       of Grant (5)
----------------------  ------------  --------------  --------------  ------------  ------------  ------------  --------------
Thomas M. Siebel                 --              --%  $          --            --   $        --   $        --   $         --
J. Michael Lawrie (6)     2,000,000            25.7%  $       10.38    05/04/2010   $ 7,060,385   $16,017,606   $  7,503,600
R. David Schmaier           100,000             1.3%  $       10.38    05/04/2010   $   353,019   $   800,880   $    361,500
Kenneth A. Goldman          100,000             1.3%  $       10.38    05/04/2010   $   353,019   $   800,880   $    361,500
Edward Y. Abbo              100,000             1.3%  $       10.38    05/04/2010   $   353,019   $   800,880   $    361,500
Steven M. Mankoff           100,000             1.3%  $       10.38    05/04/2010   $   353,019   $   800,880   $    361,500`

1. Stock options vest 20% on May 5, 2005, and at a rate of
5% for each quarter of service thereafter, and have a term of six years.  The
stock option granted to Mr. Lawrie incorporates accelerated vesting and extended
exercise provisions upon a termination without cause and/or a change of control.
Please refer to Mr. Lawrie's offer letter, a copy of which is filed as Exhibit
10.3 to this quarterly report, for further information.
2. Based on an aggregate of 7.8 million shares subject to
stock options granted to employees pursuant to our 1996 and 1998 Plans during
the six months ended June 30, 2004, 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 (ranging from $3.62 to $3.75 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 little to no relationship to the value that is actually realized.  Please
refer to Section IV above for a discussion of the limitations of SFAS
123.
6. Mr. Lawrie commenced employment on May 3, 2004 and was
appointed our CEO effective May 4, 2004.



In addition to the above grants of stock options, on May
5, 2004 we granted Mr. Lawrie an RSU for 350,000 shares of our common stock in
connection with his commencement of employment.  The terms of the RSU provide
that 150,000 of the underlying shares of common stock vested during the second
quarter of 2004 and the remaining 200,000 shares vest two years from his
commencement of employment.  In the event that Mr. Lawrie is terminated without
cause or in the event of a change of control (each as defined in Mr. Lawrie's
offer letter, which is filed as Exhibit 10.3 to this quarterly report) within
the first two years of Mr. Lawrie's employment, all unvested shares will
immediately vest in full.



We recorded $3.7 million of deferred compensation in
connection with the issuance of this RSU during the second quarter of 2004,
which we are amortizing on a straight-line basis over the vesting period.  We
have reflected an aggregate of $1.8 million of compensation expense associated
with this RSU in the accompanying unaudited statement of operations during the
three and six months ended June 30, 2004.



The following summarizes the distribution and dilutive
impact of the stock options held by our Named Executive Officers as of December
31, 2002 and 2003, and June 30, 2004:

`December 31,
                                                       ----------------------    June 30,
                                                          2002        2003         2004
                                                       ----------  ----------   -----------
Stock options held by Named Executive
   Officers as a percentage of:                                                            
      Total options outstanding....................        29.3 %      18.7 %       21.0 %
                                                       ==========  ==========   ===========
      Outstanding shares of common stock...........        11.2 %       5.4 %        5.7 %
                                                       ==========  ==========   ===========`

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 the six months ended June 30, 2004 and the number and
value of securities underlying unexercised stock options held by the Named
Executive Officers as of June 30, 2004:

`Number of
                                                     Securities Underlying        Value of Unexercised
                                                     Unexercised Options at      In-the-Money Options at
                         Shares                         June 30, 2004 (2)           June 30, 2004 (3)
                       Acquired on      Value      --------------------------  ----------------------------
    Officer Name        Exercise     Realized (1)  Exercisable  Unexercisable   Exercisable   Unexercisable
---------------------  -----------  -------------  -----------  -------------  -------------  -------------
Thomas M. Siebel               --   $         --   18,686,134             --   $145,237,800   $         --
J. Michael Lawrie (4)          --   $         --           --      2,000,000   $         --   $    420,000
R. David Schmaier         250,000   $  2,260,938    1,675,003      1,097,857   $  3,511,959   $    930,288
Kenneth A. Goldman             --   $         --    1,885,000      1,085,000   $     96,500   $    407,000
Edward Y. Abbo             96,200   $  1,172,732      535,000        425,000   $  1,915,300   $    407,000
Steven M. Mankoff          30,000   $    279,113      906,800        580,000   $  2,975,537   $    407,000`

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 June 30,
2004.
3. Based on the fair market value of our common stock as of
June 30, 2004 ($10.69 per share), minus the exercise price, multiplied by the
number of shares underlying the stock options.
4. Mr. Lawrie commenced employment on May 3, 2004 and was
appointed our CEO effective May 4, 2004.



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 stock 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 the six months ended June 30, 2004, we granted
20,000 stock options with an exercise price of $15.39 to each of our
non-employee directors, including James C. Gaither, Marc F. Racicot, Eric E.
Schmidt, Charles R. Schwab and George T. Shaheen.  The fair value of each of
these stock options on the date of grant was approximately $106,000, or $5.31
per share, as determined using the Black-Scholes option valuation model.  In
addition, we granted 80,000 stock options with an exercise price of $12.15 per
share to John W. White upon his appointment to the Board of Directors.  The fair
value of these stock options on the date of grant was approximately $351,000, or
$4.39 per share, as determined using the Black-Scholes option valuation model.



The exercise price per share of each of the stock options
granted to our Board of Director members during the six months ended June 30,
2004 per share was equal to the fair market value of common stock on the date of
grant.  Each of these stock options vest 20% on the one-year anniversary of the
date of grant, and at a rate of 5% for each quarter of service thereafter, and
have a term of six years.



Section VI. Equity Compensation Plan Information



Information related to each of our stock option plans is
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).....    51,549,613    $     7.48            82,000,646
   Not approved by shareholders (2).    85,194,258    $    16.46           124,389,353
   Acquired companies' plans (3)....       980,852    $     9.07                    --
                                      -------------    ----------  --------------------
                                       137,724,723    $    13.04           206,389,999
                                      =============                ====================`

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 13.3 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.

---



Risk Factors



Set forth below and elsewhere in this quarterly 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 quarterly report.  Prospective
and existing investors are strongly urged to carefully consider the various
cautionary statements and risks set forth in this quarterly 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, as well as other
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 and other 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.  Some of 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 the customer's 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.
The reader 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.



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



We use a "pipeline" system, a common industry
practice, to forecast sales and trends in our business.  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.  A slowdown in the global economy, 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.  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 into
contracts in a timely manner.  A variation in the pipeline or in the conversion
rate of the pipeline into contracts, or our inability to timely respond to a
variation in the conversion of the pipeline into contracts in a timely manner,
could cause us to plan or budget inaccurately and thereby could adversely affect
our business, financial condition or results of operations.



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 economy and the economic and business conditions within
these industries.  For example, weak global economic conditions in 2001, 2002
and 2003 significantly impacted capital spending, particularly information
technology spending within the industries listed above, resulting in a decrease
in our software license revenues in 2001, 2002 and 2003.  Future decreases in
demand for computer software caused, in part, by weakness of the global economy
may result in a decrease in revenues, operating income and/or our growth
rates.



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



Our operations could be negatively impacted if there are
additional terrorist attacks or threats of terrorist attacks, or if hostilities
involving the United States escalate.  In the past, terrorist attacks, including
attacks on the United States and internationally, have had a significant impact
on global economic conditions and our operations.  For example, the equity
markets have reacted with significant declines in response to past terrorist
actions.  Further, as a result of past terrorist attacks and hostilities
involving the United States, we believe many of our customers and potential
customers were much more cautious in setting and spending against their capital
expenditure budgets.  Subsequent terrorist acts and/or the threat of future
terrorist attacks 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.



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 of our product to the
customer is typically only a portion of the related hardware, software,
development, training and integration costs of implementing a large-scale
business 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, over many of which we have little or no control,
that may cause significant delays.  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 and increased competition, our sales cycle has
recently become longer than historical sales cycles.  For example, our average
sales cycle increased sequentially in the second quarter of 2004 compared to
that of the first quarter of 2004.



Our business is subject to changing regulation of
corporate governance and public disclosure that has increased both our costs and
the risk of noncompliance.



Because our common stock is publicly traded, we are
subject to certain rules and regulations of federal, state and financial market
exchange entities charged with the protection of investors and the oversight of
companies whose securities are publicly traded.  These entities, including the
Public Company Accounting Oversight Board, the SEC and Nasdaq, have recently
issued new requirements and regulations and continue to develop additional
regulations and requirements in response to recent laws enacted by Congress,
most notably SOX.  Our efforts to comply with these new regulations have
resulted in, and are likely to continue to result in, increased general and
administrative expenses and a diversion of management time and attention from
revenue-generating activities to compliance activities.



In particular, our efforts to comply with Section 404 of
SOX and the related regulations regarding our required assessment of our
internal controls over financial reporting and our external auditors' audit of
that assessment has required, and continues to require, the commitment of
significant financial and managerial resources.  Although we believe that the
ongoing review of our internal controls will enable us to provide an assessment
of our internal controls and our external auditors to provide their audit
opinion as of December 31, 2004 as required by Section 404 of SOX, we can give
no assurance that these efforts will be completed on a timely and successful
basis.



Moreover, because these laws, regulations and standards
are subject to varying interpretations, their application in practice may evolve
over time as new guidance becomes available.  This evolution may result in
continuing uncertainty regarding compliance matters and additional costs
necessitated by ongoing revisions to our disclosure and governance
practices.



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 through 2002
are currently under examination by the IRS.  During 2003 and 2004, we received
notices from the IRS of proposed adjustments to these income tax returns.  In
addition, certain of our U.S. payroll tax returns, primarily related to stock
option exercises, U.S. sales and use tax returns, and international sales and
value added tax returns are currently under examination and/or review by the
applicable taxing authorities.  While we believe that we have made adequate
provisions related to the audits of these income, payroll, sales and use, and
sales and value added tax returns, the final determination of our obligations
may exceed the amounts provided for by us in the accompanying consolidated
financial statements.



Specifically, we may receive assessments related to the
audits and/or reviews of our U.S. income, U.S. payroll, U.S. sales and use tax
returns, or our international sales and value added tax returns that exceed
amounts provided for by us.  In the event we are unsuccessful in reducing the
amount of such assessments, our business, financial condition or results of
operations could be adversely affected.  Further, 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.



Because of our limited history with our Siebel CRM
OnDemand subscription model, we cannot predict with any degree of certainty 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, which is typically 12 months.  Some former customers of acquired
businesses have elected not to renew their subscriptions.  In addition, our
customers may elect to 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 predict
with any degree of certainty customer renewal rates.  Our customers' renewal
rates may decline or fluctuate as a result of a number of factors, many of which
are beyond our control, including their inability to continue their operations
and/or spending levels.  If our customers do not renew their subscriptions for
our service, or if they renew our service for fewer users, 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, because of our limited operating history related to this
subscription model, we cannot effectively estimate expense assumptions and thus
we may not be able to adequately predict profitability of this business.
Further, for the remainder of 2004, we expect to invest more in our Siebel CRM
OnDemand business than we expect to realize in revenues from this business.

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 may be harmed.

The market for on-demand or "hosted"
application services is relatively 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, and Ineto Services, Inc., referred to herein as Ineto, may be impaired.
As of June 30, 2004, we have approximately $62.5 million of goodwill and $7.8
million of amortizable intangibles related to UpShot and Ineto.



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 acquisitions into our Siebel CRM OnDemand business.



In order to expedite our entrance into the hosted CRM
market, we acquired UpShot in November 2003 and Ineto in January 2004.  The
integration of these companies into a fully integrated Siebel OnDemand business
will take time and the remaining integration work may be difficult and time
consuming, particularly in light of this being a new business model for us.  The
combined companies must successfully complete the 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, 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 businesses.  If we do
not successfully complete the integration of these operations in a timely
manner, or at all, the combined companies 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.  For example, we recently completed two
acquisitions: Ineto in January 2004 and Eontec Limited in April 2004.  Please
refer to Note 4 to the accompanying unaudited consolidated financial statements
for a further discussion of these acquisitions.  Our ability to implement this
business 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 and other resources.  Failure to manage this strategy, or
unexpected difficulties encountered during the implementation of this strategy,
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 such acquisition.  We may not be able to
successfully assimilate the additional personnel, customers, operations,
acquired technology and products obtained in the acquisition of 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 incur future restructuring charges, which may
adversely impact our operations.



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.  As a result of removing these
facilities from our operations, we must 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.  Further, if we consolidate additional
facilities in the future, which is currently under consideration for the second
half of 2004, we may incur additional restructuring and related expenses, which
could have a material adverse effect on our business, financial condition or
results of operations.



We also 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 much of 2003, our revenues declined as a result of a
deterioration of 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 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 incur future restructuring charges, which may adversely
impact our operations."  In addition, if our operations return to positive
growth we may need to implement new systems or upgrade current systems.  The
failure to successfully implement such new or improved systems could materially
and adversely affect our business, financial condition or results of
operations.



Rapid change will require us to manage the size of our
employee base.



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 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, global
services staff, technical and sales support staff.  Although we currently invest
sufficient resources in our direct sales force, global services staff, and our
technical and sales support 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, global services, technical and sales
support personnel.  We may not be able to expand our direct sales force, global
services staff, and technical and sales 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
Public Company Accounting Oversight Board, the Securities and Exchange
Commission, 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 implementation of a new
accounting principle.



We currently account for stock options under APB 25 and,
accordingly, we only record compensation expense related to stock options if the
current market price of the underlying stock exceeds the exercise price of the
stock option on the date of grant.  On March 31, 2004, the FASB issued a draft
accounting pronouncement which, if implemented, will require us to expense stock
options in our statement of operations effective January 1, 2005.  The draft
accounting pronouncement applies to all outstanding stock options that are not
vested at the effective date and grants of new stock options made subsequent to
the effective date.  The final statement is expected to be issued in the third
quarter of 2004.



If we are required to change our accounting policy in
accordance with this draft accounting pronouncement, we estimate that our
earnings in 2005 could be reduced by up to approximately $35 million per
quarter.  This estimate is based solely on the expense associated with stock
options outstanding as of June 30, 2004 and therefore does not take into
consideration new stock option grants, which would increase this estimate, or
forfeitures of stock options, which would reduce this estimate.  This could
affect our ability to retain existing employees or attract qualified candidates,
and increase the cash compensation we pay to employees.



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, financial condition or results of operations.  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, Capgemini, Deloitte Consulting, IBM 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 relationships with
these significant 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, financial condition or
results of operations 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 are
attributable to sales of our sales, marketing and service automation products,
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 these
applications, 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/or the average size of these
transactions decrease, our software license revenue may be negatively impacted.
For example, during the six months ended June 30, 2004, the number of
transactions generating software license revenues greater than $1 million
declined from 61 transactions in the six months ended June 30, 2003 to 44
transactions in the six months ended June 30, 2004, accounting for a significant
portion of the decline in our total revenues.  The failure to enter into these
larger software license transactions and/or maintain or increase the number of
software license transactions could have a material adverse effect on our
business, financial condition or results of operations.



Our distribution channels may create additional
risks.



We have a number of relationships with resellers that
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.  Failure to minimize channel
conflicts could materially and adversely affect our business, operating results
and financial condition.



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
enhancements to 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 new products or
enhancements.  In addition, these new products or 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 and Siebel CRM
OnDemand communicate through public and private networks over the Internet.  The
success of our products and services may depend, in part, on our ability to
continue developing products and services that are compatible with the Internet.
Additionally, expansion in the sales of our products and services 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 products and services 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 services and the introduction
of new products and services.



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 services and the 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.



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 a 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
growing 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 custom applications.  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 for 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



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 a particular 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.; Microsoft
Corporation; ONYX Software Corporation; Pivotal Corporation; Salesforce.com,
Inc.; SAS Institute, 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.



Industry consolidation may lead to stronger competitors, which may harm
our operating results.

Many leading companies in the market for business
applications software have been the subject of mergers, acquisitions and
divestitures during the last several years.  We expect this trend towards
consolidation to continue as companies attempt to maintain or extend their
market and competitive positions in the rapidly changing business applications
software industry and as companies are acquired or are unable to continue
operations.  This industry consolidation may result in stronger competitors that
are better able to compete as sole-source vendors for customers.  This could
lead to more variability in our operating results due to lengthening of the
customer evaluation process and/or loss of business to these stronger
competitors, which 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 inability to replace, or any significant
delay in the replacement of, functionality provided by third-party software in
our products could materially and adversely reduce our business, financial
condition or results of operations.



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.  Our key employees have
not entered into employment agreements with us.  The loss of one or more of our
senior management personnel 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 have restructured, and may in the future restructure, 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.  Such restructuring or associated transition issues can be disruptive
and adversely impact our business and operating results.



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 proprietary rights 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 proprietary 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 own a significant portion of the outstanding
shares of our common stock.  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 (i) variations in quarterly
operating results; (ii) the gain or loss of significant orders; (iii) changes in
earning estimates by analysts; (iv) changes in our revenue and/or earnings
expectations as announced in our earnings call; (v) announcements of
technological innovations or new products by us or our competitors; (vi) changes
in the domestic and international economic, political and business conditions;
(vii) general conditions in the software and computer industries; (viii) the
recent lack of confidence in corporate governance and accounting practices; and
(ix) 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,
discourage or delay 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. in 2000, and 100,000 shares have been
designated as Series A2 Junior Participating Preferred Stock, which were
authorized in connection with a stockholders' rights plan that we implemented in
2003.  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 has already been authorized or issued, or 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 3. Quantitative and Qualitative Disclosures About Market
Risk

The tables below provide information about our
derivative financial instruments and other 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 June 30, 2004 our
foreign currency forward contracts, by currency.  All of our foreign currency
forward contracts mature within one 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) 21,287    US$14,678  $        (71)

Brazilian real ("BRL") (contracts to
  pay BRL/receive US$)....................     (BRL) 25,072     US$7,580  $       (109)

British pounds ("GBP") (contracts to
  pay GBP/receive EUR)....................      (GBP) 6,970   EUR 10,374  $        (45)

Canadian dollars ("CAD") (contracts
  to pay CAD/receive US$).................        (CAD) 660       US$423  $         64

Japanese yen ("JPY") (contracts to
  pay JPY/receive US$)....................  (JPY) 2,686,000    US$24,045  $       (913)

Korean won ("KRW") (contracts to pay
  KRW/receive US$)........................     (KRW) 84,000        US$64  $          9

Mexican pesos ("MXN") (contracts
  to pay MXN/receive US$).................     (MXN) 29,850     US$2,537  $        (18)

Singapore dollars ("SGD") (contracts
  to pay SGD/receive US$).................      (SGD) 1,687       US$979  $          8

Czech Republic koruna ("CZK") (contracts
  to receive CZK/pay EUR).................     (CZK) 45,500    EUR 1,417  $          8

Euros ("EUR") (contracts to receive
  EUR/pay US$)............................    (EUR) 155,474   US$185,118  $      3,889

Swedish krona ("SEK") (contracts to
  receive SEK/pay EUR)....................     (SEK) 10,000    EUR 1,088  $          6

Swiss francs ("CHF") (contracts to
  receive CHF/pay EUR)....................      (CHF) 2,984    EUR 1,931  $         49`

The following table summarizes our short-term investments
and the weighted average yields as of June 30, 2004 (in thousands, except
percentages):

`Expected Maturity Date
                                     ------------------------------------------------------------------------
                                       2004      2005      2006      2007      2008   Thereafter     Total
                                     --------- --------- --------- --------- -------- ----------- -----------
US Treasury and Agency securities...  $68,663  $120,788  $242,933   $30,596   $1,480       2,007    $466,467
  Weighted average yield............     1.38%     2.17%     2.80%     2.78%    3.50%       3.90%

Corporate bonds.....................  $48,804  $158,780  $275,762  $157,659  $24,195      14,038    $679,238
  Weighted average yield............     1.65%     2.45%     2.78%     2.62%    3.70%       4.58%

Asset-backed securities.............  $36,395  $139,427   $90,639   $49,934   $4,644     $11,744    $332,783
  Weighted average yield............     1.68%     2.52%     3.09%     3.36%    2.83%       3.48%
                                     --------- --------- --------- --------- -------- ----------- -----------
Total short-term investments........ $153,862  $418,995  $609,334  $238,189  $30,319     $27,789  $1,478,488
                                     ========= ========= ========= ========= ======== =========== ===========`

The securities in the above table, 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 June 30, 2004, the fair value of the above investments would
decline by approximately $21.1 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 4.	 Controls and Procedures



We have historically made our internal controls over
financial reporting a high priority and we 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 quarterly 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 SOX (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 June 30, 2004 (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 (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 our 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 the three and six months
ended June 30, 2004, there have been no changes in our Internal Controls or in
other factors that materially affected or are reasonably likely to materially
affect such controls, including any corrective actions with regard to material
weaknesses.  We have historically considered our Internal Controls over
financial reporting a high priority, and will strive to improve our Internal
Controls and take corrective action if we discover any deficiencies in our
Internal Controls.



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, we will issue a report on
the effectiveness of our internal controls over financial reporting, including a
statement as to whether or not such controls are effective.  In addition, our
independent auditors will perform an audit of our internal controls over
financial reporting and provide an assessment of those controls as of December
31, 2004.



Responsibility for Disclosure and Internal Controls



Our management, including our 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 quarterly
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 our 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 our transactions and dispositions of our
assets;
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 our 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 controls.  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 had 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 accordance
with SOX, we will test our internal controls each year and, accordingly, we have
begun our testing for 2004 and expect to complete this testing by the fourth
quarter.  As of June 30, 2004, our management and internal audit department have
completed their review and testing of many of our individual processes and we
believe we are on schedule to complete this testing by the end of the year.  In
addition, our auditors have begun their test work, which we also believe will be
completed in accordance with the requirements of SOX.  To date, we have found no
material weaknesses, as defined in the professional accounting literature and
described below, with our internal control structure.



Our evaluation of our Disclosure Controls and our
Internal Controls included a formal documentation and review of the controls'
objectives and designs, along with our controls' implementation and the effect
of the controls on the information generated for use in this quarterly 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 control deficiencies (particularly
"significant deficiencies" or "material weaknesses") in our
Internal Controls, and 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
quarterly report.  In professional auditing literature, a control deficiency
exists when the design or operation of a control does not allow management or
employees, in the normal course of performing their assigned functions, to
prevent or detect misstatements on a timely basis.  A "significant
deficiency" in the control structure exists when there is a control
deficiency, or combination of control deficiencies, that adversely affects a
company's ability to initiate, record, process or report external financial data
reliably in accordance with GAAP such that there is 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
significant deficiency, or combination of significant deficiencies, that results
in more than a remote likelihood that a material misstatement of the annual or
interim financial statements will not be prevented or detected.



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.

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Part II.  Other Information



Item 1.	  Legal Proceedings



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.  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.  On June 29, 2004, the SEC filed a lawsuit against us and two of
our officers alleging claims in connection with the statements described above.
We believe the allegations in this action are without merit and we intend to
defend vigorously against these claims.



On March 10, 2004, William Wollrab, on behalf of himself
and purportedly on behalf of a class of our stockholders, 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.  A number of follow-on
actions have been filed alleging substantially similar claims.  We believe the
allegations in these actions are 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

Our 2004 Annual Meeting of Stockholders was held on
June 23, 2004.  At the annual meeting, our stockholders (i) elected each of the
persons below to serve as a director until the 2007 Annual Meeting of
Stockholders or until their successor is elected, (ii) ratified the selection of
KPMG LLP as our independent auditors for the year ending December 31, 2004, and
(iii) rejected a stockholder proposal that requested that we adopt a policy that
the cost of future employee and director stock options be recognized in our
annual income statement (the "Stock Option Expensing Proposal").  The
following sets forth a summary of each of the proposals and the results of the
voting at the annual meeting.



Proposal 1—Election of Directors



Our Nominating and Corporate Governance Committee
reviewed the qualifications of C. Scott Hartz, Charles R. Schwab, George T.
Shaheen, and John W. White to serve as members of our Board of Directors, and
unanimously recommended that each nominee be submitted to our stockholders for
election to the Board of Directors until the 2007 Annual Meeting of Stockholders
or until their successor is elected.  The other directors whose terms of office
continued after the meeting are Thomas M. Siebel, James C. Gaither, Marc F.
Racicot, Patricia A. House, J. Michael Lawrie, and Eric E. Schmidt, Ph.D.  The
votes for and withheld from such nominees were as follows:

`Name                   For          Withheld
--------------------------   -------------  ---------------
C. Scott Hartz                422,155,055       14,363,088
Charles R. Schwab             397,527,651       38,990,492
George T. Shaheen             422,134,820       14,383,323
John W. White                 422,913,294       13,604,849`

Proposal 2—Ratification of Selection of Independent
Auditors



Our Audit Committee and Board of Directors selected KPMG
LLP as our independent auditors for the year ending December 31, 2004, and
directed that management submit the selection of independent auditors for
ratification by our stockholders at the annual meeting.  KPMG LLP has audited
our financial statements since our inception in 1993.  Our stockholders ratified
the selection of KPMG LLP as our independent auditors for the year ending
December 31, 2004, with 419,491,324 votes "For," 14,914,283 votes
"Against," and 2,112,536 votes of "Abstain."  There were no
"broker non-votes."



In addition to the above proposals submitted to our
stockholders by our Board of Directors, the Stock Option Expensing Proposal was
also submitted for our stockholders' consideration by one of our stockholders.
The following is a summary of the Stock Option Expensing Proposal and the
results of the voting at the annual meeting:



Proposal 3—Stock Option Expensing Proposal



The United Brotherhood of Carpenters Pension Fund,
beneficial owner of 8,200 shares, or less than 0.002%, of our common stock,
submitted the Stock Option Expensing Proposal to be voted on by our stockholders
at the annual meeting.  The Stock Option Expensing Proposal requested that we
adopt a policy that the cost of future employee and director stock options be
recognized in our annual income statement.



Our stockholders rejected this proposal with
approximately 51% of the votes cast against, which consisted of 133,745,562
votes "Against" and 31,096,310 votes of "Abstain."
Abstentions were treated as shares present and entitled to vote, so an
abstention had the same effect as a vote "Against" the proposal.
There were 158,699,707 votes "For" and 112,976,564 "broker
non-votes."

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Item 6.	 Exhibits and Reports on Form 8-K

(a)	Exhibits.

|Exhibit Number | Description of Document                                                                                                                                                                          
|-------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.1            | Share Purchase Agreement dated as of April 20, 2004, by and among Siebel Systems Ireland Holdings
Limited, Eontec Limited, the Selling Shareholders and Bernard Horn, as Shareholders' Agent. (1)
|3.1            | Amended and Restated Certificate of Incorporation of the Registrant, as amended to date. (2)                                                                                                     
|3.2            | Amended and Restated Bylaws of the Registrant. (3)                                                                                                                                               
|4.1            | Reference is made to Exhibit 3.1 and Exhibit 3.2.                                                                                                                                                
|4.2            | Specimen Stock Certificate. (4)                                                                                                                                                                  
|4.3            | Certificate of Designation of Series A1 Preferred Stock of the Registrant. (5)                                                                                                                   
|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 the Registrant 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. (8)                                                                                                                                         
|10.2           | Registrant's 1998 Equity Incentive Plan, as amended. (8)                                                                                                                                         
|10.3           | Offer Letter, dated April 28, 2004, to J. Michael Lawrie. (8) (9)                                                                                                                                
|10.4           | Form of Restricted Stock Unit Award Agreement and Notice. (8)                                                                                                                                    
|31.1           | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (8)                                                                                                                     
|31.2           | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (8)                                                                                                                     
|32.1           | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (8)                                                                                                                     

__________________

1. Incorporated by reference to the Registrant's Current Report on Form 8-K
filed on May 4, 2004.
2. Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2001.
3. Incorporated by reference to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 2002.
4. Incorporated by reference to the Registrant's Registration Statement on Form
S-1 (No. 333-03751), as amended.
5. Incorporated by reference to the Registrant's Current Report on Form 8-K
filed on November 27, 2000.
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. Filed herewith.
9. Confidential treatment has been requested for a portion of this
exhibit.



(b)	Reports on Form 8-K.



On April 2, 2004, the Registrant furnished a current
report on Form 8-K under Item 12 reporting preliminary results for the quarter
ended March 31, 2004.



On April 15, 2004, the Registrant furnished a current
report on Form 8-K under Item 12 reporting final results for the quarter ended
March 31, 2004.



On May 4, 2004, the Registrant furnished a current report
on Form 8-K under Items 2 and 7 reporting its acquisition of Eontec Limited on
April 20, 2004.

On June 30, 2004, the Registrant filed a current report
on Form 8-K/A, amending a previous current report on Form 8-K under Item 7,
reporting financial statements and financial information in connection with the
acquisition of Eontec Limited on April 20, 2004.



Availability of this Report



We intend to make this quarterly report on Form 10-Q
publicly available on our website (www.siebel.com) without charge immediately
following our filing with the Securities and Exchange Commission.  We assume no
obligation to update or revise any forward-looking statements in this quarterly
report on Form 10-Q, whether as a result of new information, future events or
otherwise, unless we are required to do so by law.

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**SIGNATURE**

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

SIEBEL SYSTEMS, INC.(Registrant)Dated: August 6, 2004By:
    /s/ Kenneth A. GoldmanKenneth A. GoldmanSenior Vice President, Finance and
                                    Administration and
                                    Chief Financial Officer(Prinicipal Financial Officer)

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