UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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 March 31, 2005

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 April 22, 2005 was 516,674,822.







SIEBEL SYSTEMS, INC.
                                    FORM 10-Q
                 For the Quarterly Period Ended March 31, 2005

Table of Contents



|Part I.  Financial Information                                                                                                          | Page
|--------------------------------------------------------------------------------------------------------------------------------------- | ----
|                                                                                                                                        |     
|Item 1.   Financial Statements                                                                                                          |     
|                                                                                                                                        |     
|Consolidated Balance Sheets as of
          
December 31, 2004 and March 31, 2005                                                       | 1   
|                                                                                                                                        |     
|Consolidated Statements of Operations and Comprehensive Income (Loss)
          
    for the three months ended March 31, 2004 and 2005 | 2   
|                                                                                                                                        |     
|Consolidated Statements of Cash Flows
          
    for the three months ended March 31, 2004 and 2005                                 | 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                                                                    | 53  
|                                                                                                                                        |     
|Item 4. Controls and Procedures                                                                                                         | 55  
|                                                                                                                                        |     
|Part II.  Other Information                                                                                                            
|                                                                                                                                        |     
|Item 1.   Legal Proceedings                                                                                                             | 56  
|                                                                                                                                        |     
|Item 5.  Other Information                                                                                                              | 57  
|                                                                                                                                        |     
|Item 6.   Exhibits                                                                                                                      | 58  
|                                                                                                                                        |     
|Signature                                                                                                                               | 59  

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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,   March 31,
                                                                               2004          2005
                                                                          ------------- -------------
Assets

Current assets:
   Cash and cash equivalents...........................................   $    560,377  $    545,340
   Short-term investments..............................................      1,686,111     1,650,936
                                                                          ------------- -------------
          Total cash, cash equivalents and short-term investments......      2,246,488     2,196,276

   Accounts receivable, net............................................        293,527       254,951
   Deferred income taxes...............................................         17,542        22,542
   Prepaids and other..................................................         53,894        34,396
                                                                          ------------- -------------
          Total current assets.........................................      2,611,451     2,508,165

Property and equipment, net............................................         83,908        78,568
Goodwill...............................................................        208,306       286,886
Intangible assets, net.................................................         23,004        42,693
Other assets...........................................................         36,937        33,757
Deferred income taxes..................................................        123,828       116,487
                                                                          ------------- -------------
          Total assets.................................................   $  3,087,434  $  3,066,556
                                                                          ============= =============

Liabilities and Stockholders' Equity

Current liabilities:
   Accounts payable....................................................   $     10,048  $     18,522
   Accrued expenses....................................................        346,672       266,652
   Restructuring obligations...........................................         30,639        29,953
   Deferred revenue....................................................        357,223       365,979
                                                                          ------------- -------------
          Total current liabilities....................................        744,582       681,106

Restructuring obligations, less current portion........................         75,227        67,354
Other long-term liabilities............................................         20,981        24,506
                                                                          ------------- -------------
          Total liabilities............................................        840,790       772,966
                                                                          ------------- -------------

Commitments and contingencies

Stockholders' equity:
  Common stock; $0.001 par value; 2,000,000 shares authorized;
     508,953 and 516,095 shares issued and outstanding, respectively...            509           516
  Additional paid-in capital...........................................      1,635,652     1,723,011
  Deferred compensation................................................         (2,993)      (13,150)
  Accumulated other comprehensive income...............................         70,541        44,277
  Retained earnings....................................................        542,935       538,936
                                                                          ------------- -------------
          Total stockholders' equity...................................      2,246,644     2,293,590
                                                                          ------------- -------------
          Total liabilities and stockholders' equity...................   $  3,087,434  $  3,066,556
                                                                          ============= =============`

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
                                                                      March 31,
                                                                ---------------------
                                                                   2004       2005
                                                                ---------- ----------
Revenues:
   Software license...........................................  $ 126,799  $  74,978
   Professional services, maintenance and other...............    202,488    223,960
                                                                ---------- ----------
       Total revenues.........................................    329,287    298,938
                                                                ---------- ----------
Cost of revenues:
   Software license...........................................      3,207      3,898
   Professional services, maintenance and other...............    108,214    112,964
                                                                ---------- ----------
       Total cost of revenues.................................    111,421    116,862
                                                                ---------- ----------
            Gross margin......................................    217,866    182,076
                                                                ---------- ----------
Operating expenses:
   Product development........................................     72,633     74,717
   Sales and marketing........................................     86,398     92,274
   General and administrative.................................     21,699     25,618
   Restructuring and related expenses.........................        571        492
   Purchased in-process product development...................         --     10,890
                                                                ---------- ----------
       Total operating expenses...............................    181,301    203,991
                                                                ---------- ----------
            Operating income (loss)...........................     36,565    (21,915)
                                                                ---------- ----------
Other income (expense), net:
   Interest and other income, net.............................     12,075     15,994
   Interest expense...........................................       (320)      (231)
                                                                ---------- ----------
       Total other income (expense), net......................     11,755     15,763
                                                                ---------- ----------
            Income (loss) before income taxes.................     48,320     (6,152)
Income taxes (benefit)........................................     17,340     (2,153)
                                                                ---------- ----------
            Net income (loss).................................  $  30,980  $  (3,999)
                                                                ========== ==========

Diluted net income (loss) per share...........................  $    0.06  $   (0.01)
                                                                ========== ==========
Basic net income (loss) per share.............................  $    0.06  $   (0.01)
                                                                ========== ==========

Shares used in diluted share computation......................    546,401    512,963
                                                                ========== ==========
Shares used in basic share computation........................    501,128    512,963
                                                                ========== ==========
Comprehensive income (loss):
Net income (loss).............................................  $  30,980  $  (3,999)
Other comprehensive income (loss), net of taxes:
   Foreign currency translation adjustments...................     (3,844)   (18,765)
   Realized loss (gain) on marketable investments previously
      recognized in other comprehensive income................     (1,123)       143
   Unrealized gain (loss) on investments, net.................      4,163     (7,643)
                                                                ---------- ----------
       Other comprehensive income (loss)......................       (804)   (26,265)
                                                                ---------- ----------
            Total comprehensive income (loss).................  $  30,176  $ (30,264)
                                                                ========== ==========`

See accompanying notes to consolidated financial statements.

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

`Three Months Ended
                                                                                    March 31,
                                                                            --------------------------
                                                                                 2004          2005
                                                                            ------------- ------------
Cash flows from operating activities:
   Net income (loss)....................................................... $     30,980  $    (3,999)
   Adjustments to reconcile net income (loss) to net cash
    provided by operating activities:
      Write-off of purchased in-process product development................           --       10,890
      Depreciation and other amortization..................................       31,478       18,019
      Amortization of identifiable intangible assets.......................        1,710        3,088
      Stock-based compensation, net........................................          195        1,012
      Provision for (recovery of) doubtful accounts and sales returns......       (1,000)          --
      Tax benefit from exercise of stock options...........................        1,500       51,379
      Deferred income taxes................................................         (465)          --
      Net realized loss (gain) on cost-method investments..................        1,083       (2,059)
      Net realized loss (gain) on marketable investments...................       (1,872)         238
      Changes in operating assets and liabilities:
         Accounts receivable...............................................       30,234       51,900
         Prepaids and other................................................       14,305       22,171
         Accounts payable and accrued expenses.............................      (33,843)     (95,742)
         Restructuring obligations.........................................      (13,641)      (9,051)
         Deferred revenue..................................................       29,135           71
                                                                            ------------- ------------
           Net cash provided by operating activities.......................       89,799       47,917
                                                                            ------------- ------------ 
Cash flows from investing activities:
   Purchases of short-term investments.....................................     (413,446)    (249,872)
   Sales and maturities of short-term investments..........................      382,507      268,648
   Purchases of property and equipment, net................................         (225)      (3,096)
   Proceeds from sale of venture investments...............................           --        4,979
   Purchase consideration for acquired businesses, net of cash received....       (4,817)     (93,088)
                                                                            ------------- ------------
           Net cash used in investing activities...........................      (35,981)     (72,429)
                                                                            ------------- ------------
Cash flows from financing activities:
   Proceeds from issuance of common stock..................................       29,379       24,749
   Repayments of capital lease obligations.................................       (3,278)      (2,024)
                                                                            ------------- ------------
           Net cash provided by financing activities.......................       26,101       22,725
                                                                            ------------- ------------
Effect of exchange rate fluctuations.......................................       (3,766)     (13,250)
                                                                            ------------- ------------
Change in cash and cash equivalents........................................       76,153      (15,037)
Cash and cash equivalents, beginning of period.............................      546,542      560,377
                                                                            ------------- ------------
Cash and cash equivalents, end of period................................... $    622,695  $   545,340
                                                                            ============= ============`

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. Stock options—The Company records and measures deferred compensation for
stock options granted to its employees and members of its Board of Directors when the market price
of the underlying stock exceeds the exercise price of the stock option on the date of the grant. The
Company records and measures deferred compensation for stock options granted to non-employees based
on the fair value of the stock options.
3. Restricted stock and restricted stock units ("RSUs")—The Company records and
measures deferred compensation for restricted stock and RSUs based on the market price of the
Company's common stock on the date of grant.
4. Restructuring Obligations
5. The costs associated with the Company's workforce reductions consist
primarily of severance payments, COBRA benefits, payroll taxes and other associated termination
costs incurred in connection with the 2003 Restructuring. The remaining obligations as of March 31,
2005 relate to less than five terminations that have yet to be completed, primarily due to
regulatory requirements in certain countries outside the U.S. The Company expects to complete these
terminations within 2005.
6. 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.
7. The Company will continue to accrete its obligations related to the
Restructurings to the then present value and, accordingly, will recognize additional accretion
expense as a restructuring and related expense in future periods.
8. Commitments and Contingencies
9. Acquisitions, Goodwill and Intangible Assets
10. Net Income (Loss) per Share
11. Restricted Stock and Restricted Stock Units
12. 2005
13. 2006
14. Segment and Geographic Information
15. Subsequent Events

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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 our consolidated financial statements, including a brief discussion of our
business and products, key factors that impacted our performance, a summary of our operating results
and certain key financial metrics, and our outlook for the second quarter of 2005. 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 entitled "Risk Factors" in this Item
2, and our consolidated financial statements and notes 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
front office. We consider the front office to include those areas of business activity that involve
customer interactions, such as sales, marketing and service. We are principally engaged in the
design, development, marketing, sale and support of our front-office businessapplications. A
majority of our revenues are derived from perpetual licenses of our software products, the related
professional services, such as training and implementation services, and the related customer
support, otherwise known as maintenance. Specifically, we license our software in arrangements in
which the customer purchases a combination of software, maintenance and/or professional services.
Payment terms for our arrangements are negotiated with our customers and are based on a variety of
factors, including the customer's credit standing and our history with the customer.

Siebel Business Applications—our comprehensive family of front-office
business applications—are designed to help organizations better manage their customer, partner and
employee relationships, analyze critical customer data, and execute customer-focused business
processes. Our applications are designed to support these critical tasks while meeting the
information technology requirements of any kind of organization, any type of user and any budget.
Siebel Business Applications can be installed on premise, delivered as a hosted service over the
Internet, or deployed as a combination of the two.

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

Our front-office solutions also include our customer and business
intelligence applications (also known as analytics), customer data integration solutions, and a
deeper set of service offerings to assist our customers in maximizing the value received from our
products. Specifically, our analytics applications assist customers in analyzing large volumes of
corporate data quickly and easily. These analytics applications can access and aggregate information
contained in systems across the enterprise—including financial management, human resources and
supply chain systems—helping managers and front-line employees make informed decisions. Our customer
data integration solutions enable organizations to more fully leverage the value of their corporate
information by allowing them to share data and processes among different software applications.

In addition to licensing our applications on a per-user basis, we also offer
two hosted software solutions, Siebel CRM OnDemand and Siebel Contact OnDemand, as services
available over the Internet. Siebel CRM OnDemand offers customers CRM and analytics functionality
and Siebel Contact OnDemand offers customers call center functionality. We provide these OnDemand
solutions for a monthly per-user subscription fee, with a typical contractual period of one year.
Our OnDemand solutions allow our customers to implement software solutions quickly, easily and
cost-effectively. Our OnDemand solutions integrate with the on-premise Siebel Application Suite, enabling
organizations to deploy our solutions in any combination of online hosted or on-premise delivery
models.

Siebel Services, our professional services organization, provides (i)
implementation services (i.e., assistance with the integration of our software with other software
and hardware applications), (ii) change management services (i.e., end user adoption consulting and
training services for our customers regarding how to better use our software), (iii) testing and
managed services (i.e., assistance with operating, maintaining, testing and optimizing our
applications) and (iv) technical support and customer care services (i.e., trouble-shooting the
related software products and future product updates). Siebel Services has significant product and
implementation expertise and is committed to supporting customers and systems integrators throughout
every phase of their adoption and use of Siebel Business Applications.

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 services
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.

Improvement of Our Operating Performance

In July 2004 we announced an operating performance
improvement plan (the "Improvement Plan"), which we believe will help us return our operations to
sustainable revenue growth and expand our operating margins. As part of the Improvement Plan
we have been reviewing and continue to review our business thoroughly, with our primary
focus in the following three areas: revenue generation, financial structure and leadership. A
summary of the key elements of our Improvement Plan is included in Item 7 of our annual report on
Form 10-K for the year ended December 31, 2004. We intend to further refine this plan in 2005 to
further address our revenue generation capabilities and better align our financial structure with
current revenue levels.

While we believe we are making progress towards achieving the objectives of
the Improvement Plan, we clearly took a step back in the first quarter of 2005. After experiencing
solid improvement in many of our key financial metrics during the third and fourth quarters of 2004,
we underperformed in the first quarter of 2005, with our software license revenues declining by
$51.8 million, or 41%, from $126.8 million in the first quarter of 2004 to $75.0 million in the
first quarter of 2005. While there are numerous factors that we believe may have contributed to the
shortfall in our license revenues in the first quarter, we recognize that our execution was the
primary factor.

We intend to improve our revenue generation capabilities and are committed to
improving our execution and delivering more consistent growth. Some of the challenges that we faced
during the first quarter of 2005—challenges we must address and are addressing—include:

- We 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 Section 404 of the Sarbanes-Oxley Act of 2002, or SOX. These more
stringent governance and purchasing requirements lengthened the purchasing cycle. Accordingly, our
close ratio in the first quarter of 2005 was lower than we have typically achieved and
anticipated.
- Many of our customers' and potential customers' budgeting processes were
delayed during the first quarter of 2005, resulting in a delay of our customers' purchasing
decisions. As a result, we believe the first quarter of 2005 was more seasonal than we had
expected.
- Several transactions slipped into the second quarter and second half of the
year. It is important to note that we have since closed some of this business.
- We have added many new members to our management team in recent months who
are still learning our business processes and products, while simultaneously engaging new and
existing customers. Despite this initial learning curve, we believe our new leadership team has put
the right plan in place to grow our business and we expect to see tangible benefits from their
expertise in the near future.

We are taking immediate steps to remedy the setback that we experienced in
the first quarter of 2005 and we are confident that we will be successful in our endeavors. For
example, we have or intend to:

- Implement a new account planning and customer engagement model. The focus of
this model is on growing the size and quality of our pipeline for the second half of the year and
beyond.
- Ensure that our entire executive management team's primary focus is on
monitoring and closing business.
- Revitalize our partners and alliance program. Historically, we have found
these relationships to be enormously important in building the size and quality of our
pipeline.
- Launch a new marketing campaign and message—"it's all about the customer"—which
communicates our commitment to customer value.
- Simplify our sales management and organization structure to promote clarity,
responsiveness and accountability.

Notwithstanding the setback in our quest to improve our revenue generation
capabilities, we believe the underlying demand for our products exists. The shortfall in our results
was largely a result of addressable execution issues. We intend to address our execution issues and
will take action to improve our profitability until we see improving core software license revenue
or sufficient offsetting growth in other areas of our business. Specifically to improve our
profitability at the current revenue levels and to allow for expansion of margins as revenues
improve, we intend to implement additional cost control measures. In the first phase of our new cost
control initiatives, we intend to reduce discretionary sales, marketing and general and
administrative spending, including selective reductions in personnel. In the second phase of our
cost control initiatives, we plan to optimize and reprioritize our development projects and
resources such that we focus on areas that represent growth opportunities and have shown growth in
the last few quarters. Likewise, we are going to review our investments in some of the less
promising geographic areas that are not showing positive results. We expect that these actions will
improve operating margins in the second quarter and beyond.

Despite the shortfall in our software license revenues, there were a number
of positive areas in our business during the first quarter of 2005. Professional services and other
revenues increased by $13.8 million or 16%, from $87.6 million during the first quarter of 2004 to
$101.4 million during the first quarter of 2005. Maintenance renewals remained very solid during the
quarter at nearly 90%, with maintenance revenues growing by 7% from $114.9 million in the first
quarter of 2004 to $122.6 million in the first quarter of 2005. Our OnDemand total contract value
was approximately $11.2 million as of March 31, 2005, up over 250% compared to the same period in
2004, and the number of subscribers increased on a year-over-year basis by 16,600, nearly doubling.
Our latest version of CRM OnDemand has recently been recognized by a leading research firm as a
leader in hosted CRM capability. Our small and medium-sized business ("SMB") initiative—introduced
in the second half of 2004 as part of our Improvement Plan—exceeded our goals. Finally, the number
of live users of our software increased by nearly 300,000 during the first quarter of 2005 to 3.2
million users.

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

The following is a brief summary of our key financial metrics and
operating results for the three months ended March 31, 2004 and 2005 (in thousands, except EPS,
percentages and DSO):

`Three Months Ended March 31,
                                                          ----------------------------------
                                                                2004              2005
                                                          ----------------  ----------------
  Revenues:                                                                                                                    
   Software license...................................    $       126,799   $        74,978
   Maintenance........................................            114,877           122,578
   Professional services and other....................             87,611           101,382
                                                          ----------------  ----------------
        Total revenues................................    $       329,287   $       298,938
                                                          ================  ================
   Annualized total revenue per employee..............    $           269   $           232
                                                          ================  ================


  Cost and expenses:                                  
   Restructuring and acquisition-related expenses (1).    $           571   $        11,382
   All other costs and expenses, on-going (2).........            292,151           309,471
                                                          ----------------  ----------------
       Total costs and expenses.......................    $       292,722   $       320,853
                                                          ================  ================



  Other key operating statistics:                     
   Operating income (loss)............................    $        36,565   $       (21,915)
   Operating margin...................................                 11%               (7)%
   Earnings (loss) per share, diluted ("EPS").........    $          0.06   $         (0.01)
   Cash flows from operations.........................    $        89,799   $        47,917  

                                                             December 31,       March 31,
                                                                2004              2005
                                                          ----------------  ----------------
  Balance sheet statistics:                           
   Cash and short-term investments....................    $     2,246,488   $     2,196,276
   Deferred revenue...................................    $       357,223   $       365,979
   Days sales outstanding ("DSO").....................                 67                77
   Working capital....................................    $     1,866,869   $     1,827,059
   Total stockholders' equity.........................    $     2,246,644   $     2,293,590`

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

- Software license revenues

- Maintenance revenues
- Professional services and other revenues,
- Annualized total revenue per employee
- Total costs and expenses
- Operating income
- Cash and short-term investments
- Accounts receivable
- Deferred revenues,
- Working capital
- Stockholders' equity

Outlook

Our outlook for the second quarter of 2005 discussed below is based,
in part, on our review of our current sales pipeline, internal sales forecasts, recent surveys among
information technology executives and current economic indicators. For the second quarter of 2005,
we currently anticipate that our total revenues will be between $310 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 $100 million;
- maintenance revenues—between $121 million and $123 million; and
- professional services and other revenues—between $100 million and $105
million.

Our expectations regarding our revenues and ability to execute against those
expectations 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, as evidenced, in part, by the
levels of the stock market; (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 or inability to hire enough key
employees and attrition in general; and (ix) other factors, including those described under "Risk
Factors" below.

We expect total costs and expenses in the second quarter of 2005 to
approximate the levels in the first quarter, primarily due to the additional cost controls discussed
previously. Our expectations regarding our total costs and expenses are prior to costs associated
with employee separations, including the costs discussed in Note 8 to the accompanying unaudited
consolidated financial statements, and any other restructuring-related costs that may be incurred,
if any. We expect these cost savings to be offset by (i) an increase in expenses that vary directly
with revenues, such as "cost of professional services revenues," incentive compensation and
commissions, and (ii) increases in personnel-related costs (i.e., salaries) associated with merit
increases that were effective April 1, 2005.

As discussed further in Note 3 to the accompanying consolidated financial
statements, certain of our U.S. payroll tax returns, U.S. sales and use tax returns and
international sales and valued 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 tax returns, the final determination of our obligations may exceed the amounts
provided for by us. Specifically, we may receive assessments related to the audits and/or reviews of
these tax returns that exceed amounts provided for by us. In the event we are unsuccessful in
reducing the amount of such assessments, our estimates related to our total costs and expenses could
be adversely affected.

As a result of the anticipated increases in our total revenue levels, we
currently expect operating income and margin to increase in the second quarter of 2005 from levels
obtained in first quarter. Our expectations regarding operating income depend in large part on our
ability to grow our software license and professional services revenues.

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 potential transactions, 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. 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 we expect that a
substantial portion of our software license contracts will continue to close in the latter part of a
quarter, management would 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.

We expect other income, net for the second quarter of 2005 to be between
approximately $13.0 million and $15.0 million.

We currently expect our effective tax rate for the second quarter of 2005 to
be approximately 35%. 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.

As discussed in Note 3 to the accompanying consolidated financial statements,
our U.S. Federal income tax returns for 2001 through 2003 are currently under examination by the
Internal Revenue Service ("IRS"). While the final resolution of the IRS's on-going examination is
uncertain, we believe that we have made adequate provision in the accompanying consolidated
financial statements for any adjustments that the IRS has or may propose with respect to our U.S.
Federal income tax returns. The final determination of our tax obligations may exceed the amounts
provided for by us in the accompanying consolidated financial statements. We will continually review
our estimates related to our income tax obligations, including potential assessments from the IRS of
additional taxes, penalties and/or interest, and revise our estimates, if deemed necessary. A
revision in our estimates of our tax obligations will be reflected as an adjustment to our income
tax provision at the time of the change in our estimates. Such a revision could materially impact
our effective tax rate, income tax provision and net income.

Discussion of the Results of Operations for the Three Months Ended March 31, 2004 and 2005

Revenues

Our total revenues decreased from $329.3 million during the three
months ended March 31, 2004 to $298.9 million during the three months ended March 31, 2005,
representing a year-over-year decline of 9%. Our total revenues decreased during 2005 primarily due
to a $51.8 million decrease in our software license revenues, partially offset by an increase of
$21.5 million in our professional services, maintenance and other revenues.	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 months ended March 31, 2004
and 2005 (in thousands, except percentages):

`Three Months Ended March 31,
                                      -----------------------------------------
                                        2004        2005        Change     %
                                      ----------  ----------  ---------- ------                                            
Software license revenues............ $126,799    $ 74,978    $ (51,821)  (41)%
Percentage of total revenues.........       38%         25%`

Software license revenues decreased by 41% from the three months ended March
31, 2004 to the three months ended March 31, 2005 primarily due to our inability to properly execute
in building and closing an adequate sales pipeline for the quarter. Also contributing to this
decline were (i) increases in the seasonality of our results between the fourth quarter and first
quarter and (ii) a weaker information technology spending environment—particularly spending on
enterprise application software.

The year-over-year decline in our software license revenues during the three
months ended March 31, 2005 was across all of our product lines, with our core sales, marketing and
service automation product line declining by 44%, our analytics product line declining by 31% and
our customer data integration product line declining by 19%. The following is a summary of our
software license revenues, by front-office product, for the three months ended March 31, 2004 and
2005 (in thousands):

`Three Months Ended
                                                    March 31,
                                              ----------------------
                                                 2004        2005
                                              ----------- ----------                       
   Sales, marketing and service automation..  $   98,008  $  54,686
   Customer and business analytics..........      25,268     17,448
   Customer data integration................       3,523      2,844
                                              ----------- ----------
        Total...............................  $  126,799  $  74,978
                                              =========== ==========`

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 the progress of our on-premise software license revenues:

`Three Months Ended
                                                                       March 31,
                                                             ---------------------------
Other key software license metrics:                              2004           2005
----------------------------------------------------------   -------------  ------------                        
Transactions equal to or greater than $5 million..........              3             1
Transactions between $1 million and $5 million............             26            21
Total number of transactions..............................            306           244
Average transaction size (in thousands)...................   $        414   $       307`

As the above table indicates, the declines in our revenues were primarily
associated with our largest transactions—those generating revenue of $1 million and over—which
decreased on a year-over-year basis from a total of 29 transactions during the first quarter of 2004
to 22 transactions during the first quarter of 2005. Further, our average transaction size decreased
from $414,000 in the first quarter of 2004 to $307,000 in the first quarter of 2005 due primarily to
the decline in these larger transactions (particularly the transactions generating revenue in excess
of $5.0 million). The total number of transactions declined from 306 transactions in the 2004 period
to 244 transactions in the 2005 period, primarily due to our inability to close our pipeline as
discussed previously. As further outlined above under "Improvement of Our Operating Performance," we
have taken and will continue to take the necessary steps to improve our revenue generation
capabilities and overall execution across all product lines, geographic regions and transaction
sizes.

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 43% of software license revenues during the
three months ended March 31, 2004 and 2005, 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
composed 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 prepay
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 during each period.

Also included in professional services, maintenance and other revenues is
revenue from our newest service offerings, Siebel CRM OnDemand and Siebel Contact OnDemand. Our
customers typically prepay for these subscription services, which we defer and recognize ratably
over the term of the customer contract based on the number of days the contract is outstanding
during each period.

Professional services, maintenance and other revenues increased by $21.5
million, or 11%, from $202.5 million for the three months ended March 31, 2004 to $224.0 million for
the three months ended March 31, 2005 primarily due to (i) growth in our professional service and
other revenues, including increases associated with additional service offerings from the products
of edocs and growth of our CRM OnDemand hosted service offering, and (ii) an increase in our
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 March 31,
                                      -----------------------------------------
                                         2004        2005        Change    %
                                      ----------  ----------  ---------- ------
Maintenance:                                                                                                               
Absolute dollars..................... $114,877    $122,578    $   7,701     7%
Percentage of total revenues.........       35%         41%
                                                                                                                           
Professional services and other:                                                                                           
Absolute dollars..................... $ 87,611    $101,382    $  13,771    16%
Percentage of total revenues.........       27%         34%`

Our maintenance revenues, in absolute dollars and as a percentage of total
revenues, increased during the first quarter of 2005 compared to the first quarter of 2004,
primarily due to new maintenance agreements entered into in connection with the license of our
software to new and existing customers. In addition to expanding our customer base receiving
maintenance, we continue to maintain strong renewal rates within our existing customer base, with
renewal rates of approximately 90%.

Our professional services and maintenance revenues increased sequentially for
the fourth consecutive quarter, growth we attribute primarily to the Improvement Plan we implemented
in July 2004. Specifically, professional services and other revenues, both in absolute dollars and
as a percentage of total revenues, increased during the three months ended March 31, 2005 from the
respective period in 2004, primarily due to (i) growth of our CRM OnDemand hosted service offering
and continued improvement of our existing service offerings, representing increases aggregating $8.5
million, (ii) additional service offerings associated with the products of edocs, representing an
increase of $3.6 million and (iii) an increase in our revenue from rebillable T&E expenses of
$1.7 million.

While we are pleased with this continued improvement in our professional
services revenues, due to the dependency of our professional services on previous software license
revenues, we recognize that we must return our software license revenues to positive sequential
growth in order to continue this positive trend. Specifically, because our professional services are
initiated and performed over a three- to nine-month period subsequent to signing the software
license, trends in these revenues generally follow trends in our software license revenues by three
to nine months.

Cost of Revenues

The following table sets forth our cost of revenues, both in absolute
dollars and as a percentage of total revenues, for the three months ended March 31, 2004 and 2005
(in thousands, except percentages):

`Three Months Ended March 31,
                                      -----------------------------------------
                                         2004        2005        Change    %
                                      ----------  ----------  ---------- ------                                            
Cost of revenues..................... $111,421    $116,862    $   5,441     5%
Percentage of total revenues.........       34%         39%
Gross Margin.........................       66%         61%`

The increase in our cost of revenues during the first quarter of 2005
compared to the first quarter of 2004 was primarily due to an increase in the demand for our
professional services and maintenance services, which in turn resulted in an increase in the
corresponding cost of revenues. Cost of revenues increased as a percentage of our total revenues
primarily due to a higher percentage of our revenues being derived from our professional services,
which are at lower margins than our software license 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
months ended March 31, 2004 and 2005 (in thousands, except percentages):

`Three Months Ended March 31,
                                      -----------------------------------------
                                         2004        2005        Change    %
                                      ----------  ----------  ---------- ------                                            
Cost of software license revenues.... $  3,207    $  3,898    $     691    22%
Percentage of software
   license revenues..................        3%          5%`

Cost of software license revenues increased in absolute dollars and as a
percentage of software license revenues from the first quarter of 2004 to the first quarter of 2005
primarily due to increases in amortization expense of $1.0 million associated with our acquisitions
of Eontec in April 2004 and edocs on January 14, 2005. Partially offsetting these increases were net
declines in costs that vary directly with software license revenues such as third-party royalties
and product packaging and shipping costs.

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 professional 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 months ended March 31, 2004 and 2005 (in thousands,
except percentages):

`Three Months Ended March 31,
                                      -----------------------------------------
                                         2004        2005        Change    %
                                      ----------  ----------  ---------- ------                                            
Cost of professional services,
   maintenance, and other revenues... $108,214    $112,964    $   4,750     4%
Percentage of professional services,
   maintenance, and other revenues...       53%         50%`

The following is a summary of the year-over-year changes of our cost of
professional services, maintenance and other revenues during the three months ended March 31, 2005
from the respective period in 2004 (in thousands):

`Year-Over-
Cost component:                                               Year Change
----------------------------------------------------------   -------------              
Outside consulting and cost of training...................   $      8,680
Personnel-related costs (compensation, benefits, etc.)....          3,250
Rebillable T&E expenses...................................          1,690
Amortization of intangibles...............................            354
Depreciation expense......................................         (5,250)
Facility-related costs (rent, utilities, etc.)............         (2,588)
Non-billable T&E expenses.................................         (1,386)
                                                             -------------
          Total year-over-year change.....................   $      4,750
                                                             =============`

Cost of professional services, maintenance and other revenues increased on a
year-over-year basis during the three months ended March 31, 2005 primarily due to an increase in
the demand for our professional services and maintenance offerings. Specifically, as a result of the
increase in the demand for these services we increased the use of outside consultants commensurate
with the increase in demand for our services in order to supplement customer engagements in lieu of
hiring additional personnel. Accordingly, outside consulting and cost of training increased on
year-over-year basis in the first quarter of 2005.

Personnel-related costs also increased on a year-over-year basis during 2005,
primarily due to additional incentive compensation earned as a result of the continued improvement
in our professional services revenues and margins. Specifically, while the demand for our
professional services increased during the first quarter of 2005 compared to the first quarter of
2004, we were able to meet this increased demand with a smaller workforce (average headcount of
2,020 in the three months ended March 31, 2004 compared to 1,980 in the three months ended March 31,
2005) through the improvement in our utilization rates (i.e., utilization rates increased on a
year-over-year basis by nearly 15%).

Similarly, as a result of the increased demand for these services, rebillable
T&E expenses increased commensurate with the increases in our professional services revenues.
Also contributing to the increase in our cost of professional services, maintenance and other
revenues during the first quarter of 2005 compared to the first quarter of 2004 was an increase of
$0.4 million related to amortization expense that resulted from intangible assets obtained in our
acquisitions of edocs and Eontec.

Partially offsetting the above increases in cost of professional services
revenues were further reductions in these costs due to our cost control initiatives (e.g., the
Restructurings, as described more fully in Note 2 to the accompanying unaudited consolidated
financial statements and our continued attention to expense reduction). For example, previous
reductions in our capital expenditures resulted in further declines in depreciation expense and
previous consolidations of our facilities have resulted in further reductions in our
facility-related expenses. In addition, we continue to monitor discretionary expenditures, such as
non-billable T&E expenses, resulting in further reductions in our cost of professional services,
maintenance and other revenues.

Cost of professional services, maintenance and other revenues as a percentage
of the corresponding revenues decreased from 53% during the three months ended March 31, 2004 to 50%
during the three months ended March 31, 2005, primarily due to the higher utilization rate of our
professional services staff. Accordingly, our gross margin related to our professional services,
maintenance and other revenues improved from 47% during the three months ended March 31, 2004 to 50%
during the three months ended March 31, 2005.

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 months ended March 31, 2004 and 2005 (in thousands, except
percentages):

`Three Months Ended March 31,
                                      -----------------------------------------
                                         2004        2005        Change    %
                                      ----------  ----------  ---------- ------                                            
Product development expense.......... $ 72,633    $ 74,717    $   2,084     3%
Percentage of total revenues.........       22%         25%`

The following is a summary of the year-over-year changes of our product
development expenses during the three months ended March 31, 2005 from the respective period in 2004
(in thousands):

`Year-Over-
Cost component:                                               Year Change
----------------------------------------------------------   -------------              
Personnel-related costs (compensation, benefits, etc.)....   $      6,175
Outside consulting and other costs, net...................            990
Depreciation expense......................................         (4,008)
T&E expenses..............................................         (1,073)
                                                             -------------
          Total year-over-year change.....................   $      2,084
                                                             =============`

Personnel-related costs increased on a year-over-year basis during the three
months ended March 31, 2005, primarily due to an increase in the number of personnel devoted to our
product development efforts, including additional personnel obtained in our acquisitions of edocs
and Eontec. Specifically, the average headcount in our product development organization increased
from 1,315 in the three months ended March 31, 2004 to 1,450 in the three months ended March 31,
2005. Similarly, we continue to supplement our investment in product development with outside
consultants performing a portion of our quality assurance and testing activities in labor markets
with lower cost structures. The above headcount data does not include these outside consultants.

Partially offsetting these increases were further reductions in our product
development costs due to our cost control initiatives (e.g., the Restructurings and our continued
attention to expense reduction). For example, previous reductions in our capital expenditures
resulted in further declines in depreciation expense and the continued close monitoring of
discretionary expenditures resulted in further reductions in our T&E expenses.

As a percentage of total revenues, product development expense increased from
22% during the three months ended March 31, 2004 to 25% during the three months ended March 31,
2005, primarily due to our continued investment in product development despite declines in our
revenues.

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 composed
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 months ended March 31, 2004 and 2005 (in thousands,
except percentages):

`Three Months Ended March 31,
                                      -----------------------------------------
                                         2004        2005        Change    %
                                      ----------  ----------  ---------- ------                                            
Sales and marketing expense.......... $ 86,398    $ 92,274    $   5,876     7%
Percentage of total revenues.........       26%         31%`

The following is a summary of the year-over-year changes of our sales and
marketing expenses during the three months ended March 31, 2005 from the respective period in 2004
(in thousands):

`Year-Over-
Cost component:                                               Year Change
----------------------------------------------------------   -------------              
Personnel-related costs (compensation, benefits, etc.)....   $      9,059
Facility-related costs (rent, utilities, etc.)............          1,754
T&E expenses..............................................            800
Marketing and advertising.................................            563
Depreciation expense......................................         (2,805)
Sales commissions.........................................         (4,011)
Other, net................................................            516
                                                             -------------
          Total year-over-year change.....................   $      5,876
                                                             =============`

Personnel-related costs increased on a year-over-year basis during the three
months ended March 31, 2005 primarily due to an increase in the number of personnel in our sales and
marketing organizations, including additional personnel obtained in our acquisitions of edocs and
Eontec. Specifically, the average headcount in our sales and marketing organizations increased from
1,025 in the three months ended March 31, 2004 to 1,150 in the three months ended March 31, 2005. As
a result of the increase in the number of personnel within these organizations, the facility-related
and the T&E expense components of our sales and marketing expense increased on a year-over-year
basis during the first quarter of 2005. In addition, we increased our investment in marketing and
advertising during the first quarter of 2005 in order to better strengthen our sales pipeline for
future periods.

Partially offsetting these increases were further reductions in our sales and
marketing costs due to our cost control initiatives (e.g., the Restructurings and our continued
attention to expense reduction). For example, previous reductions in our capital expenditures
resulted in further declines in depreciation expense during the first quarter of 2005. Our sales
commission expense declined by $4.0 million during the three months ended March 31, 2005, primarily
due to a decrease in our software license revenues.

Sales and marketing expenses increased as a percentage of total revenues from
26% during the three months ended March 31, 2004 to 31% for the three months ended March 31, 2005,
primarily due to our increased investment in our sales and marketing activities during a period in
which our revenues declined.

General and Administrative

General and administrative expense is composed primarily of costs
associated with our executive and administrative personnel (e.g., the CEO and legal, finance,
information technology, human resources and facilities personnel) and consists primarily of (i)
salaries and occupancy costs, (ii) provision for doubtful accounts (i.e., bad debt expense), (iii)
professional services expenses (e.g., audit fees and costs associated with compliance with the
Sarbanes-Oxley Act of 2002, or SOX) and (iv) legal expenses. 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 months ended March 31, 2004 and 2005 (in thousands, except percentages):

`Three Months Ended March 31,
                                      -----------------------------------------
                                         2004        2005        Change    %
                                      ----------  ----------  ---------- ------                                            
General and adminstrative expense.... $ 21,699    $ 25,618    $   3,919    18%
Percentage of total revenues.........        7%          9%`

The following is a summary of the year-over-year changes of our general and
administrative expenses during the three months ended March 31, 2005 from the respective period in
2004 (in thousands):

`Year-Over-
Cost component:                                               Year Change
----------------------------------------------------------   -------------              
Personnel-related costs (compensation, benefits, etc.)....   $      3,082
Legal and tax-related expenses............................          1,223
Bad debt expense..........................................          1,000
Professional services and other costs, net................            314
Depreciation expense......................................           (918)
T&E expenses..............................................           (782)
                                                             -------------
          Total year-over-year change.....................   $      3,919
                                                             =============`

The personnel-related cost component of general and administrative expenses
increased on a year-over-year basis during the three months ended March 31, 2005 primarily due to
(i) our continued investment in additional executive personnel as outlined above under the section
entitled "Improvement of Our Operating Performance," and (ii) continued investment in additional
financial and administrative personnel as part of our on-going commitment to strong internal
controls. Specifically, our average headcount in our administrative organization increased from 540
in the three months ended March 31, 2004 to 570 in the three months ended March 31, 2005.

General and administrative expenses also increased on a year-over-year basis
due to further increases in legal and tax-related expenditures. Please refer to Note 3 to the
accompanying unaudited consolidated financial statements for a further discussion of these legal and
tax-related matters. Bad debt expense increased on a year-over-year basis during the first quarter
of 2005, primarily due to a higher recovery rate of amounts previously written-off during the 2004
period compared to the level of recoveries during the 2005 period. We continue to maintain strong
collection efforts, including further reductions in accounts receivable levels and an improved
accounts receivable aging.

Partially offsetting these increases were further reductions in our general
and administrative costs due to our cost control initiatives (e.g., the Restructurings and our
continued attention to expense reduction). For example, previous reductions in our capital
expenditures resulted in further declines in depreciation expense and the continued close monitoring
of discretionary expenditures resulted in further reductions in our T&E expenses.

General and administrative expense increased as a percentage of total
revenues from 7% during the three months ended March 31, 2004 to 9% for the three months ended March
31, 2005, primarily due to our increased investment in our general and administrative organization
during a period in which our revenues declined.

Restructuring and Related Expenses

As further described in Note 2 to the accompanying unaudited
financial statements, we initiated a series of restructurings of our operations designed to better
align our operating structure with expected revenue levels (the "Restructurings"). The
Restructurings included the following key measures: (i) the reduction of our workforce across all
functional areas; (ii) the consolidation of our excess facilities; (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 to labor
markets with lower cost structures.

The following table summarizes the restructuring and related expenses
incurred during the three months ended March 31, 2005, and the remaining obligations related to the
Restructurings as of December 31, 2004 and March 31, 2005 (in thousands):

`Employee        Facility-
                                                           Termination      Related
                                                            Costs (1)       Costs (2)     Total
                                                         ---------------- ------------- -----------
Restructuring obligations, December 31, 2004............ $           265  $    105,601  $  105,866

Restructuring and related expenses:
  Accretion related to the Restructurings (3)...........              --           492         492
                                                         ---------------- ------------- -----------
     Total..............................................              --           492         492
Cash payments...........................................             (24)       (9,027)     (9,051)
                                                         ---------------- ------------- -----------
Restructuring obligations, March 31, 2005............... $           241  $     97,066  $   97,307
                                                         ================ =============
     Less: Restructuring obligations, short-term........                                    29,953
                                                                                        -----------
     Restructuring obligations, long-term...............                                $   67,354
                                                                                        ===========`

1. The costs associated with our workforce reductions consist primarily of
severance payments, COBRA benefits, payroll taxes and other associated termination costs. The
remaining obligations as of March 31, 2005 relate to less than five terminations that have yet to be
completed, primarily due to regulatory requirements in certain countries outside the U.S. We expect
to complete these terminations within 2005.
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. We will continue to accrete our obligations related to the Restructurings to
the then present value and, accordingly, will recognize additional accretion expense as a
restructuring and related expense in future periods.

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

Purchased In-Process Product Development

On January 14, 2005, we acquired all of the issued and outstanding
shares of edocs, a leading provider of electronic bill presentment and customer self-service
software solutions. edocs' solutions enable companies to improve customer service and increase
customer loyalty while reducing the cost of serving their customers. Companies use edocs' solutions
to move the most common customer inquiries and transactions—such as billing, account management and
service order issues—from expensive channels such as paper correspondence and contact center calls
to lower-cost self-service and assisted care channels such as the web, email and chat. We believe
that edocs' existing technology and certain products and functionality under development by edocs at
the time of purchase will enhance our current self-service offerings.

The technology being developed by edocs at the time of our acquisition, which
is commonly referred to as IPR&D, primarily related to edocs' products designed specifically for
the telecommunications, healthcare and credit card industries. We estimated the fair value of the
IPR&D acquired in our acquisition of edocs to be $10.9 million. Because the IPR&D had not
yet reached technological feasibility and had no alternative future use, we reflected a $10.9
million expense under the heading "purchased in-process product development" in the accompanying
unaudited statements of operations for the three months ended March 31, 2005.

At the date of our acquisition of edocs, there were six products under
development, with percentage completion for each of the IPR&D products ranging from
approximately 50% to 75%. We expect to incur between $1.5 and $2.5 million to complete the
development of these products.  We expect to complete these products at various dates in 2005.
We determined the fair values of the IPR&D using the "income" valuation approach and discount
rates ranging from 20% to 32%.  The discount rates selected were based in part on
considerations of the rate of return implied by the purchase price and the risk associated with
achieving forecasted cash flows for edocs.

Further, in calculating the value of amounts assigned to IPR&D, 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 technologies. 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. There is risk
associated with the realization of benefits related to commercialization of an in-process project
due to rapidly changing customer needs, the complexity of the technology and growing competitive
pressures. There can be no assurance that any project will meet commercial success. Failure to
successfully commercialize an in-process project would result in the loss of the expected economic
return inherent in the fair value allocation. In addition, we will periodically evaluate our product
development timeline and modify our overall business plan in response to various factors.
Modifications to our business plan may include the reallocation of resources among various
alternative development projects.

Operating Income (Loss) and Operating Margin

The following table sets forth our operating income (loss) and
operating margin for the three months ended March 31, 2004 and 2005 (in thousands, except
percentages):

`Three Months Ended March 31,
                                      -----------------------------------------
                                         2004        2005        Change    %
                                      ----------  ----------  ---------- ------                                            
Operating income (loss).............. $ 36,565    $(21,915)   $ (58,480) (160)%
Operating margin.....................     11.1%       (7.3)%`

Our operating income (loss) and operating margin decreased on a
year-over-year basis during the three months ended March 31, 2005 primarily due to (i) a year-over-year
increase of $10.9 million related to the IPR&D charges associated with our acquisition of edocs,
(ii) declines in our total revenues of $30.3 million during the three months ended March 31, 2005,
and (iii) increases in total costs and expenses of $17.3 million, primarily due to increases in
personnel-related costs associated with an expanded workforce.

Other Income (Expense), Net

For the three months ended March 31, 2004 and 2005, other income, net
was comprised of the following (in thousands):

`Three Months Ended
                                                        March 31,
                                                  ---------------------
                                                     2004       2005
                                                  ---------- ----------                       
Interest income.................................. $  11,699  $  14,773
Interest expense.................................      (320)      (231)
Net gain (loss) on marketable investments........     1,872       (238)
Gain on (write-down of) cost-method investments..    (1,083)     2,059
Other, net.......................................      (413)      (600)
                                                  ---------- ----------
                                                  $  11,755  $  15,763
                                                  ========== ==========`

Interest income represents earnings on our cash and short-term investments.
Interest income increased on a year-over-year basis during the first quarter of 2005 primarily due
to an increase in interest rates. Interest expense primarily represents interest associated with our
capital lease obligations.

Net gain (loss) on marketable investments represents realized gains or losses
recognized upon the sale of certain short-term debt instruments. During the first quarter of 2005,
we sold substantially all of our venture investment portfolio for approximately $5.0 million
resulting in a gain on these cost-method investments of $2.1 million. Write-down of cost-method
investments in the above table during the three months ended March 31, 2004 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 and Income Tax Benefit

During the three months ended March 31, 2004, we recognized a
provision for income taxes of $17.3 million, compared to an income tax benefit of $2.2 million
during the three months ended March 31, 2005. Income taxes (benefit) as a percentage of pretax
income (loss) (the "Effective Rate") decreased from 36% during the three months ended March 31, 2004
to (35%) for the three months ended March 31, 2005, primarily due to higher percentage of our
earnings being derived from jurisdictions with lower tax rates.

As part of the process of preparing 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.

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 was $1,866.9 million and
$1,827.1 million as of December 31, 2004 and March 31, 2005, respectively. With virtually no debt
and a strong working capital position, we believe that we have the flexibility to continue to invest
in further development of 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.

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 2004 or 2005.

Commitments

Our future fixed commitments have not changed significantly since
December 31, 2004. Please refer to "Liquidity and Capital Resources" in Item 7 of our Annual Report
on Form 10-K for the year ended December 31, 2004 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, investing and financing activities:

Operations

Net cash provided by operating activities was $89.8 million and $47.9
million during the three months ended March 31, 2004 and 2005, respectively. Cash provided by
operating activities decreased on a year-over-year basis during 2005 primarily as the result of
decreases in revenues and earnings.

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 net cash inflows of $59.4 million and $52.0 million
in the 2004 and 2005 periods, respectively), partially offset by payments of accounts payable,
accrued expenses and restructuring obligations.

Because the majority of our restructuring obligations will be paid over time,
cash provided by operating activities for the three months ended March 31, 2004 and 2005 was reduced
by $13.6 million and $9.1 million, respectively, of cash payments made during these periods related
to these obligations. As we settle our remaining restructuring obligations ($97.3 million of
remaining obligations, net of estimated sublease income, as of March 31, 2005), our future operating
cash flows will be reduced from what they otherwise would have been in the period of settlement. We
currently estimate that we will settle $30.0 million of these obligations in the next 12 months.

We currently anticipate that we will continue to operate a cash-positive business
in the second quarter of 2005. 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,
including maintaining or improving the linearity of our revenues compared to our historical levels.
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 changes, 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 $36.0 million and $72.4 million
for the three months ended March 31, 2004 and 2005, respectively. During each of these periods, our
investment activities primarily related to transactions within our short-term investments. For the
three months ended March 31, 2004, we reinvested our cash into short-term investments in net amounts
of $30.9 million compared to net sales of short-term investments of $18.8 million during the three
months ended March 31, 2005. The decrease in our purchases of short-term investments on a
year-over-year basis during the first quarter of 2005 was primarily due to our purchase of edocs, as discussed
further below.

We also utilize our cash position to invest in new property and equipment, with
net purchases of property and equipment of $0.2 million and $3.1 million during the three months
ended March 31, 2004 and 2005, respectively. Capital expenditures were unusually low in the 2004
period primarily due to (i) the reduction/delay of our capital spending where possible; (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.

We intend to continue to closely monitor our capital expenditures, while making
selective investments in additional information technology for (i) our CRM OnDemand product line,
(ii) certain product development efforts and (iii) the replacement of certain older computer and
information technology infrastructure. Accordingly, we expect our total capital expenditures to be
between $25.0 million and $35.0 million for 2005.

The remaining cash flows used in investing activities for the three months ended
March 31, 2004 and 2005 consisted primarily of the acquisition of Ineto Services, Inc. for net cash
consideration of $4.8 million in 2004 and the acquisition of edocs for net cash consideration of
approximately $93.1 million in 2005. Please refer to Note 4 to the accompanying unaudited
consolidated financial statements for a further discussion of our acquisition of edocs.

Financing

Net cash provided by financing activities was $26.1 million and $22.7
million for the three months ended March 31, 2004 and 2005, respectively. Our financing activities
consisted primarily of net proceeds of $29.4 million and $24.7 million during the three months ended
March 31, 2004 and 2005, respectively, from the issuance of common stock pursuant to the exercise of
stock options and our employee stock purchase plan (the "Purchase Plan"). Our cash inflows from
financing activities were partially offset by our repayment of capital lease obligations, with
payments of $3.3 million and $2.0 million during the three months ended March 31, 2004 and 2005,
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 March 31, 2005, 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 2005 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 March 31, 2005.

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 on-going 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, restructuring
activities, depreciation methodology, etc.). We believe that the following accounting policies are
critical to understanding our historical and future performance, as these policies relate to the
more significant areas involving management's judgments and estimates:

- Revenue recognition,
- Restructuring and related expenses,
- Impairment of long-lived assets,
- Provision for doubtful accounts,
- Acquired intangible assets,
- Stock-based compensation,
- Legal and tax 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, 2004 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

Stock-Based Compensation

In December 2004, the FASB issued SFAS 123R. SFAS 123R addresses all
forms of SBP awards, including shares issued under the Purchase Plan, stock options, restricted
stock, restricted stock units, and stock appreciation rights. SFAS 123R will require us to record
compensation expense for SBP awards based on the fair value of the SBP awards. Under SFAS 123R,
restricted stock and restricted stock units will generally be valued by reference to the market
value of freely tradable shares of our common stock. Stock options, stock appreciation rights and
shares issued under the Purchase Plan will generally be valued at fair value determined through an
option valuation model, such as a lattice model or the Black-Scholes model (the model which we
currently use for our footnote disclosure). SFAS 123R is effective for annual periods beginning
after June 15, 2005 and, accordingly, we must adopt the new accounting provisions effective January
1, 2006.

Upon adoption of SFAS 123R on January 1, 2006, we expect that the on-going
application of SFAS 123R subsequent to adoption will result in a reduction to our quarterly earnings
for 2006 by up to $35.0 million per quarter. This estimate is based solely on the expense associated
with stock options outstanding as of March 31, 2005 (including stock-based compensation under the
Purchase Plan) 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.

Income Taxes

In December 2004, the FASB issued two FASB Staff Positions ("FSP")
related to the American Jobs Creation Act of 2004 (the "AJCA"). FSP No. 109-1 "Application of
FASB Statement No.
109, Accounting for Income Taxes, to the Tax Deduction on Qualified
Production Activities" ("FSP 109-1") requires companies that qualify for a deduction for domestic
production activities under the AJCA to account for the deduction as a special deduction under FASB
Statement No. 109.

FSP No. 109-2 "Accounting and Disclosure Guidance for the Foreign Earnings
Repatriation Provision within the American Jobs Creation Act of 2004" ("FSP 109-2") allows companies
additional time to evaluate whether foreign earnings will be repatriated under the repatriation
provisions of the AJCA and requires specified disclosures for companies needing the additional time
to complete the evaluation. Once a decision is made to repatriate the foreign earnings, companies
must reflect the deferred tax liabilities attributable to foreign earnings in the period that the
decision is made to remit those earnings.

Seasonality

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

Employee Stock Options

Section I. Description of Plans

Since our inception, our stock option program has been instrumental
in attracting and retaining talented employees and aligning their interests with the interests of
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 together with the 1996 Plan, the "Plans"). Stock options granted to
executive officers, key employees and non-employee members of our Board of Directors are made under
the 1996 Plan and stock options granted to non-officer employees 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.

All stock-based compensation grants are made after a review by, and with the
approval of, the Compensation Committee of the Board of Directors or the full Board of Directors or,
for director equity grants, the Nominating and Corporate Governance 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. Stock options granted under the Plans expire no later than
ten years from the grant date and generally vest over five years.

On January 5, 2005, the Compensation Committee of our Board of Directors
established a performance stock program for 2005 (the "Performance Stock Plan"), pursuant to which
our executive officers and select other employees were
grantedRSUs under the Plans. A similar performance-based plan for 2005 through which stock
options, rather than RSUs, were granted was also adopted on January 5, 2005 (the "Performance Option
Plan" and collectively with the Performance Stock Plan, the "Performance Plans") for employees not
covered by the Performance Stock Plan.

Shares granted under the Performance Stock Plan and Performance Option Plan
generally vest on the fourth and third anniversaries of the date of grant, respectively; provided,
however that a portion of the shares will accelerate and become vested upon achievement of all or a
specified portion of certain defined objective financial performance goals. Specifically, the
Compensation Committee has approved the following four performance goals for 2005 and 2006:

- 2005
- 2006

The revenue-based targets set forth above will be adjusted upward to
incorporate any revenue from companies acquired during the relevant year (excluding the acquisition
of edocs, Inc. in 2005) and the operating margin-based targets will be adjusted for the impact of
any acquisitions and certain unusual charges (e.g., stock-based compensation, restructuring
expenses, etc.).

These performance goals have been established for vesting purposes only and
in no way are intended to estimate the actual levels of revenue or operating margin that we expect
to achieve. Accordingly, these goals should not be interpreted to update or supersede our previously
disclosed guidance on revenue and operating margins or any guidance that we may provide in the
future. Rather, these performance goals are meant to incentivize our employees to outperform our
publicly disclosed guidance.

For each goal that is fully achieved, vesting will be accelerated for 25% of
the total shares granted, such that half of such accelerated shares will vest on January 31 of the
year in which the Compensation Committee determines that a goal has been met and the remaining half
will vest on January 31 of the following year.

Section II. Summary of Stock Option Activity during the First Quarter of 2005

Combined activity under the Plans for the three months ended March
31, 2005 is summarized as follows:

`Shares                        Wtd. Avg.
                                                         Available     Number of        Exercise
                                                         for Grant      Options      Price per Share
                                                        ------------ --------------  ---------------
   Balances as of December 31, 2004...................  195,942,345    132,712,132    $       12.78
     Issuances of restricted stock and/or units, net..   (1,288,211)            --
     Options granted to employees.....................   (6,960,796)     6,960,796    $        8.68
     Options granted to officers and directors........     (150,000)       150,000    $        8.67
     Options exercised................................           --     (5,010,399)   $        2.40
     Options canceled due to employee termination.....    3,834,979     (3,836,087)   $       19.38
                                                        ------------ --------------  ---------------
   Balances as of March 31, 2005......................  191,378,317    130,976,442    $       12.75
                                                        ============ ==============`

The following table details the "in-the-money" and "out-of-the-money" status
of our stock options outstanding as of March 31, 2005:

`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      66,132,224            3.2    $   5.46   46,618,532    $   4.26
Out-of-the-money  64,844,218            5.7    $  20.20   43,002,481    $  21.73
                 ------------  -------------  ----------  -----------  ----------
                 130,976,442            4.4    $  12.75   89,621,013    $  12.64
                 ============                             ===========`

In-the-money stock options in the above table have exercise prices below the
closing price of our common stock as of March 31, 2005 of $9.13 and out-of-the money stock
options have exercise prices equal to or greater than $9.13.

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 also granted RSUs to existing and 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 that time.
In 2004 and 2005, in addition to maintaining these guidelines for new employees, we further reduced
the size of our renewal grants to existing employees.

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, 2003 and 2004 and the three months ended March 31, 2005, along with our option
overhang as of the end of each of these respective periods (in thousands, except percentages):

`Three Months
                                                       Year Ended December 31,      Ended
                                                       -----------------------    March 31,
                                                          2003        2004          2005
                                                       ----------  -----------  -------------
Net options granted:                               
Stock options granted..............................      22,787       11,995         7,111
Stock options forfeited upon termination...........     (27,660)     (16,143)       (3,836)
                                                       ----------  -----------  -------------
      Net granted (forfeited)......................      (4,873)      (4,148)        3,275
                                                       ==========  ===========  =============
Dilution percentage (1)............................          (1)%         (1)%           1 %
                                                       ==========  ===========  =============
Option overhang (2)................................          29 %         26 %          25 %
                                                       ==========  ===========  =============`

1. The potential dilution to stockholders from stock options (the "Dilution
Percentage") is calculated as new stock options granted during the period, 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

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 and the remainder of this annual report represent our then-CEO and the
four most highly compensated executive officers for the respective year. Information for Named
Executive Officers for the first quarter of 2005 were identified using 2004 compensation information
and include Thomas M. Siebel, J. Michael Lawrie, R. David Schmaier, Kenneth A. Goldman, Edward Y.
Abbo and Neil M. Weston. Summarized below is the distribution of our stock options for the years
ended December 31, 2003 and 2004 and the three months ended March 31, 2005:

`Three Months
                                                       Year Ended December 31,      Ended
                                                       -----------------------    March 31,
                                                          2003        2004          2005
                                                       ----------  -----------  -------------
Grants during the period as a percentage of
  total granted:                                   
      Named Executive Officers.....................         4.6 %       23.3 %          -- %
      All other officers and directors as a group..         3.3          5.7           2.1
                                                       ----------  -----------  -------------
         Total for all officers and directors......         7.9         29.0           2.1
      All other employees as a group...............        92.1         71.0          97.9
                                                       ----------  -----------  -------------
         Total all grants..........................       100.0 %      100.0 %       100.0 %
                                                       ==========  ===========  =============`

During the first quarter of 2005, our Named Executive Officers and members of
our board of directors received RSUs or restricted stock in addition to or in place of stock
options. Please refer to section entitled "Section V. Executive and Director Stock-Based
Compensation" below for a further discussion of these grants.

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, we record deferred compensation costs,
if any, related to our stock-based compensation as follows:

- Stock options—We record and measure deferred compensation for stock options
granted to our employees and members of our Board of Directors when the market price of the
underlying stock exceeds the exercise price of the stock option on the date of the grant. We record
and measure deferred compensation for stock options granted to non-employees based on the fair value
of the stock options.
- Restricted stock and RSUs—We record and measure deferred compensation for
restricted stock and RSUs based on the market price of our common stock on the date of grant.

Deferred compensation is expensed on a straight-line basis over the
respective vesting period of the equity instrument. The terms of our stock options and restricted
stock vary, but generally provide for ratable vesting over five years, with 20% of the underlying
shares vesting one year from grant and the remaining shares vesting 5% quarterly thereafter. The
terms of our RSUs provide for vesting that ranges from approximately three months to five years. We
did not grant any stock options at exercise prices below the fair market value of our common stock
during any period presented.

An alternative to the intrinsic value method of accounting for stock-based
compensation is the fair value approach prescribed by SFAS 123. If we followed the fair value
approach, we would record deferred compensation based on the fair value of the stock option at the
date of grant as determined using the Black-Scholes option valuation model. The deferred
compensation calculated under the fair value method would then be amortized on a straight-line basis
over the respective vesting period of the stock option.

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.

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. In accordance with
SFAS 123, in preparing this reconciliation we must first add back all stock-based compensation
expense reflected in our statement of operations, then deduct the stock-based employee compensation
expense determined under SFAS 123. Summarized below are the pro forma effects on our earnings 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
                                                                          March 31,
                                                                    ----------------------
                                                                       2004        2005
                                                                    ----------  ----------
Net income (loss):                                                                                                 
  As reported.....................................................  $  30,980   $  (3,999)
                                                                    ----------  ----------                         
Compensation expense related to:
  Stock options dilutive to stockholders:                                                                          
    Stock-based compensation accounted for under APB 25...........        195       1,012
    In-the-money stock options and restricted stock units.........     (4,308)     (4,224)
    Stock purchase rights under the Purchase Plan.................     (2,559)     (2,228)
                                                                    ----------  ----------
       Subtotal...................................................     (6,672)     (5,440)
                                                                    ----------  ----------                         
  Stock options not dilutive to stockholders:                                                                      
    Out-of-the-money stock options................................    (37,336)    (23,355)
    Stock options forfeited in connection with terminations.......     (3,135)         --
                                                                    ----------  ----------
       Subtotal...................................................    (40,471)    (23,355)
                                                                    ----------  ----------
       Total pro forma expense giving effect to SFAS 123..........    (47,143)    (28,795)
                                                                    ----------  ----------                         
  Tax benefit related to SFAS 123 expense.....................             --       2,287
                                                                    ----------  ----------                         
  Pro forma net loss giving effect to SFAS 123................      $ (16,163)  $ (30,507)
                                                                    ==========  ==========`

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 March 31, 2004 and
2005 were $11.53 and $9.13, respectively.

As the table above illustrates, total pro forma expense for stock options
includes $40.5 million and $23.4 million of expense during the three months ended March 31, 2004 and
2005, respectively, related to (i) stock options forfeited by employees upon termination for no
consideration and (ii) 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 $20.20 per share compared to a
closing price of $9.13 per share as of March 31, 2005). These items represented 86% and 81% of the
pro forma expense for the three months ended March 31, 2004 and 2005, respectively.

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

Section V. Executive and Director Stock-Based Compensation

Executive Stock-Based Compensation

We did not grant any stock options to our Named Executive Officers
during the three months ended March 31, 2005. Instead of granting stock options to our executive
officers, we granted our Named Executive Officers an RSU under the Performance Stock Plan discussed
above under Section I. The following table sets forth certain information regarding the RSUs options
granted to the Named Executive Officers during the three months ended March 31, 2005:

`Number of      Percent of
                         Securities     Total RSUs
                         Underlying     Granted to                     Fair Value as
                            RSUs         Employees      Fair Value at   of March 31,
     Officer Name         Granted       in 2005 (4)     Grant Date (5)    2005 (6)
----------------------  ------------   --------------  --------------  --------------
Thomas M. Siebel                 --              -- %  $          --   $          --
J. Michael Lawrie (1)            --              -- %  $          --   $          --
R. David Schmaier                --              -- %  $          --   $          --
Kenneth A. Goldman          100,000 (2)         7.8 %  $     867,000   $     913,000
Edward Y. Abbo               50,000 (3)         3.9 %  $     433,500   $     456,500
Neil M. Weston               30,000 (3)         2.4 %  $     260,100   $     273,900`

1. Mr. Lawrie resigned as our CEO effective April 12, 2005.
2. Mr. Goldman received two RSUs for a total of 100,000 shares of our common
stock (each RSU representing 50,000 shares of our common stock). The first RSU vests in full on
January 31, 2006 and the second RSU vests based on certain defined objective financial performance
goals, as described in note 3 below.
3. The RSUs vest upon achievement of all or a specified portion of certain
defined objective financial performance goals, or if the goals are not met, on the fourth
anniversary of the grant date. Specifically, the Compensation Committee has approved the following
four performance goals for 2005 and 2006:
4. 2005
5. 2006
6. Based on an aggregate of 1.3 million shares subject to RSUs granted to
employees pursuant to the Plans during the three months ended March 31, 2005, including grants to
the Named Executive Officers.
7. The fair value on the grant date is calculated as the product of the number
of underlying shares and the fair value of our common stock on the date of grant.
8. Represents the aggregate fair value of the RSUs on March 31, 2005, calculated
as the product of the number of underlying shares and the fair value of our common stock on March
31, 2005 of $9.13.

The following summarizes the distribution and dilutive impact of the stock
options held by our Named Executive Officers as of December 31, 2003 and 2004 and March 31,
2005:

`Three Months
                                                       Year Ended December 31,     Ended
                                                       -----------------------    March 31,
                                                          2003        2004          2005
                                                       ----------  -----------  -------------
Stock options held by Named Executive
   Officers as a percentage of:                                                              
      Total options outstanding....................        18.7 %       20.9 %        19.3 %
                                                       ==========  ===========  =============
      Outstanding shares of common stock...........         5.4 %        5.5 %         4.9 %
                                                       ==========  ===========  =============`

The following table sets forth for each of the Named Executive Officers the
shares acquired and the value realized on exercise of stock options during the three months ended
March 31, 2005 and the number and value of securities underlying unexercised options held by the
Named Executive Officers as of March 31, 2005:

`Number of
                                                     Securities Underlying       Value of Unexercised
                                                    Unexercised Options at      In-the-Money Options at
                         Shares                        March 31, 2005 (2)          March 31, 2005 (3)
                       Acquired on      Value      --------------------------  ----------------------------
    Officer Name        Exercise     Realized (1)  Exercisable  Unexercisable   Exercisable   Unexercisable
---------------------  -----------  -------------  -----------  -------------  -------------  -------------
Thomas M. Siebel        2,500,000   $ 21,272,007   16,186,134             --   $112,464,639   $         --
J. Michael Lawrie (4)          --   $         --           --      2,000,000   $         --   $         --
R. David Schmaier              --   $         --    1,957,504        772,500   $  2,441,672   $    219,492
Kenneth A. Goldman             --   $         --    2,170,000        800,000   $     41,125   $     76,375
Edward Y. Abbo                 --   $         --      560,000        350,000   $  1,181,538   $     76,375
Neil M. Weston                 --   $         --      100,000        400,000   $         --   $         --`

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 March 31, 2005.
3. Based on the fair market value of our common stock as of March 31, 2005
($9.13 per share), minus the exercise price, multiplied by the number of shares underlying the stock
options.
4. Mr. Lawrie resigned as our CEO effective April 12, 2005. As a result of Mr.
Lawrie's resignation, 0.8 million of the 2.0 million stock options in the above table became
immediately vested. Mr. Lawrie has until April 11, 2006 to exercise these stock
options.

Director Stock-Based Compensation

Historically, our directors have not received any cash compensation
for service on the Board of Directors or any committee thereof, but have been eligible for
reimbursement for certain expenses incurred in attending Board of Directors' and committee
meetings.

On January 31, 2005, the Nominating and Corporate Governance Committee of our
Board of Directors approved 2005 compensation for our non-employee directors such that each
non-employee director would receive compensation equivalent to the fair value of a stock option to
purchase 20,000 shares of our common stock (based on the Black-Scholes valuation model and the fair
market value of our common stock on the date of grant) to be allocated as follows: 50% in cash and
50% in shares of restricted stock that vest in full on January 31, 2006. Accordingly, in the first
quarter of 2005 we awarded each of James C. Gaither, C. Scott Hartz, Marc F. Racicot, Eric E.
Schmidt, George T. Shaheen and John W. White compensation of $32,500 in cash and 3,750 shares of
restricted stock that will vest in full on January 31, 2006 in consideration for their service as a
director in 2005.

On April 12, 2005, Mr. Shaheen, a member of our Board of Directors,
accepted an offer of employment from our Board of Directors to serve as our Chief Executive Officer,
effective as of April 13, 2005. Per the terms of Mr. Shaheen's offer letter, all existing stock
options and restricted stock granted to Mr. Shaheen in his capacity as a member of our Board of
Directors ceased vesting as of the first day of his employment. Further, Mr. Shaheen has volunteered
to reimburse us cash consideration of $23,418, representing the pro rata portion of the $32,500 paid
to him in his capacity as a non-employee member of our Board of Directors for the period from April
13, 2005 to December 31, 2005.

We believe that these 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 applicable to members of boards of directors and
compensation committees. Notwithstanding the foregoing guidelines, from time to time, the Nominating
and Corporate Governance 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.

Section VII. Equity Compensation Plan Information

Information as of March 31, 2005 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 stockholders (1)...................    48,081,461    $     7.92           75,500,018
   Not approved by stockholders (2)...............    82,088,103    $    15.62          125,207,182
   Acquired companies' plans (3)..................       806,878    $     9.33                   --
                                                    -------------    ----------  -------------------
                                                     130,976,442    $    12.75          200,707,200
                                                    =============                ===================`

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
9.3 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 operating results may fluctuate.

We have experienced in the past, and may experience in the future, 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, expenses 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;
- Economic conditions within the key industries in which we derive our
revenues, including the manufacturing and distribution, communications, financial services, life
sciences and public sector industries;
- Legal and other costs relating to defending intellectual property, regulatory
enforcement actions and other types of litigation;
- Level of product and price competition;
- Length of our sales cycle and the discretionary nature of our customers'
purchase and budget cycles;
- Size and timing of individual license transactions;
- Levels of international license transactions;
- Delay or deferral of customer implementations of our products;
- Success in expanding our professional services organization, direct sales
force and indirect distribution channels;
- Our ability to develop or acquire and market new products and services and
control costs;
- Timing of new product introductions and product enhancements;
- Appropriate mix of products licensed and services sold;
- Activities of and acquisitions by competitors;
- Success of, and costs associated with, integrating and achieving the
anticipated benefits of our acquisitions;
- Timing of new hires and the allocation of our resources;
- Increases in the cost of software and professional services;
- Variations in marketing expenditures and our success in generating additional
sales pipeline from those expenditures;
- The size of and conversion rates of our sales pipeline;
- Changes in foreign currency exchange rates;
- Changes in domestic and foreign tax laws;
- Seasonal variations in operating results;
- Variations in the fiscal or quarterly cycles of our customers; and
- Changes in accounting principles generally accepted in the United
States.

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, which could materially and adversely
affect our business, financial condition, results of operations and the market price of our common
stock.

Further, 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.

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 potential
transactions, 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. 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 cancelled, 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. Our inability to respond to a variation in the
pipeline or in the conversion of the pipeline into contracts in a timely manner, or at all, could
cause us to plan or budget inaccurately and thereby could adversely affect our business, financial
condition or results of operations.

Increases in services revenues as a percentage of total revenues may
decrease overall margins.

We realize lower margins on our professional services and maintenance
revenues than on our software license revenues. In addition, we may contract with certain third
parties to supplement the services we provide to customers, which generally yields lower margins
than our internal services business. As a result, if services revenues increase as a percentage of
total revenues or if we increase our use of third parties to provide services, our margins would be
negatively impacted.

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.
Further, as a result of past terrorist attacks and hostilities involving the United States, we
believe many of our customers and potential customers have been much more cautious in setting and
spending against their capital expenditure budgets. Subsequent terrorist acts and/or the threat of
future terrorist attacks or escalation of hostilities involving the United States or other countries
could adversely affect the growth rate of our 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 software products involves a significant
commitment of resources by prospective customers and may involve reengineering efforts performed by
the customer or third-party systems integrators. The cost of our software 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 purchase and implementation of our software products is often
lengthy and is subject to a number of factors, many of which we have little or no control over, and
which can result in significant delays. These factors include the size and complexity of the overall
project and delays in our customers' implementation of web-based computing environments, among
others. 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.

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

We are subject to 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, or PCAOB, 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 control 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. 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 on-going 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 indirect taxes in
the United States and in multiple foreign jurisdictions. We exercise judgment in determining our
worldwide provision for these taxes, and in the ordinary course of our business there may be
transactions and calculations where the ultimate tax determination is uncertain.

Our U.S. Federal income tax returns for 2001 through 2003 are currently under
examination by the IRS. In addition, certain of our U.S. payroll tax returns (primarily related to
taxes associated with stock option exercises), state 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 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 OnDemand subscription model, we
cannot predict our revenue or operating results.

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 front-office
applications 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 may develop more slowly than
we expect, either of which could significantly and adversely affect our operating results. In
addition, if the demand for our OnDemand services does not materialize as expected, our ability to
recover our investments in UpShot Corporation and Ineto Services, Inc. ("Ineto") may be
impaired.

We began offering Siebel CRM OnDemand, a hosted CRM application delivered as
an online service, in the fourth quarter of 2003, and Siebel Contact OnDemand, a hosted contact
center application, in the first quarter of 2004. These OnDemand solutions are offered on a
subscription basis, rather than as a perpetual license. Our 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 which are now a part of our
OnDemand business 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 our OnDemand solutions
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.

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

We have entered into strategic relationships with hosting providers,
including IBM and British Telecom, to provide our 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 providers to provide the required data
communications capacity could result in interruptions in our service. Interruptions in our service,
among other things, 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 OnDemand service may be perceived as being insecure and customers
may curtail or stop using our service.

Our 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 realize the anticipated benefits of past or future acquisitions,
and integration of acquisitions may disrupt our business and management.

We have in the past and may in the future acquire additional
companies, products or technologies. Most recently, we acquired edocs, Inc. in January 2005, Eontec
Limited in April 2004, and Ineto in January 2004. We may not realize the anticipated benefits of
these or any other acquisition and each acquisition has numerous risks. These risks include:

- difficulty in assimilating the operations and personnel of the acquired
company;
- difficulty in effectively integrating the acquired technologies or products
with our current products and technologies;
- difficulty in maintaining controls, procedures and policies during the
transition and integration;
- disruption of our on-going business and distraction of our management and
employees due to integration issues;
- inability to retain key technical and managerial personnel from the acquired
business;
- inability to retain key customers, distributors, vendors and other business
partners of the acquired business;
- inability to achieve the financial and strategic goals for the acquired and
combined businesses;
- incurrence of acquisition-related costs or amortization costs for acquired
intangible assets that could impact our operating results;
- impairment of our relationships with employees, customers, partners or
third-party providers of technology or products;
- failure of the due diligence processes to identify significant issues with
product quality, architecture and development, or legal and financial contingencies, among other
things; and
- incurrence of significant exit charges if products acquired in business
combinations are unsuccessful.

Ultimately, if we do not successfully complete the integration of acquired
businesses in a timely manner, or at all, we may not realize the anticipated benefits of the
acquisitions to the extent anticipated, which could adversely affect our business, financial
condition or results of operations.

We may incur future restructuring charges, which may adversely impact our
operations.

During 2002, 2003 and 2004, we initiated a series of restructurings
of our operations involving, among other things, the reduction of our workforce and the
consolidation of excess facilities (the "Restructurings"). As part of the Restructurings, we ceased
to use certain of our leased facilities and, accordingly, we are negotiating 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. If we are not successful negotiating terms acceptable to us, or at all, we may be required to
materially increase our restructuring and related expenses in future periods. Further, if we
consolidate additional facilities in the future, 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 and continuing throughout early 2001, our business grew rapidly. Beginning
in early 2001 and continuing through much of 2004, our revenues declined in part as a result of a
deterioration of the overall economy and information technology industry. These 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 a series of
Restructurings, as described more fully in Note 2 to the accompanying consolidated financial
statements. The 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.

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, professional services staff, and technical and sales
support staff. Although we currently believe that we invest sufficient resources in our direct sales
force, professional 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, professional services, and technical and sales support personnel. If we are
not be able to expand our direct sales force, professional services staff, and technical and sales
support staff as necessary to support our operations, our business and operations could be
harmed.

Decreased effectiveness of equity compensation could negatively impact our
ability to attract and retain employees, and a modification to our equity compensation strategy or
recent changes in accounting for equity compensation could adversely affect our earnings.

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

We currently account for stock options under APB 25 and, accordingly, we
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 December 15, 2004, the
FASB issued SFAS 123R, which will require us to expense stock options in our statement of operations
no later than January 1, 2006. SFAS 123R 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.

Upon adoption of SFAS 123R on January 1, 2006, we estimate that our earnings
in 2006 could be reduced by up to approximately $35.0 million per quarter. This estimate is based
solely on the expense associated with stock options outstanding as of March 31, 2005 (including
stock-based compensation under the Purchase Plan) 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.

We have historically used stock options and other forms of equity
compensation as key components of our employee compensation program in order to align employees'
interests with the interests of our stockholders, encourage employee retention, and provide
competitive compensation packages. The changing regulatory landscape could make it more difficult
and expensive for us to grant stock options to employees in the future. In light of these changes,
we have modified and anticipate that we may further modify our equity compensation strategy to
emphasize equity incentives other than stock options, including increased use of certain
performance-related features. If employees believe that the incentives that they would receive under
a modified strategy are less attractive, we may find it difficult to attract, retain and motivate
employees. In addition, the use of alternative equity incentives may increase our compensation
expense and may negatively impact our earnings. To the extent that new regulations make it more
difficult or expensive to grant equity instruments to employees, we may incur increased compensation
costs, further change our equity compensation strategy or find it increasingly difficult to attract,
retain and motivate employees, each of which could materially and adversely affect our business,
financial condition or results of operations.

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

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. 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.

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. Our current and potential customers may also rely on third-party systems
integrators to develop, deploy or manage Siebel Business 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.

We also have relationships with technology vendors such as Hewlett-Packard,
Intel, Microsoft and Sun Microsystems, among others. Failure to maintain existing relationships with
such vendors on acceptable terms, or to establish new relationships with technology vendors in the
future, could have a material adverse effect on 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.

Portions of our products incorporate software that was developed and
is maintained by third-party software developers. 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. 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 affect our business, financial condition or results of
operations.

Our customers may not successfully implement our products.

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. If existing customers have difficulty deploying Siebel Business Applications or our
OnDemand solutions or for any other reason are not satisfied with Siebel Business Applications or
our OnDemand solutions, our business, financial condition or results of operations could be
materially and adversely affected.

Our distribution channels may create additional risks.

We have a number of relationships with third-party resellers that
assist us in selling our products. We generally do not have exclusive relationships with these
resellers. In an effort to minimize channel conflicts among our resellers, we have implemented
certain policies and licensing programs with each of our resellers. These policies and programs may
not effectively minimize or eliminate all channel conflicts. Failure to minimize channel conflicts
could result in lost sales opportunities or impair our relationship with our third-party resellers
or customers, among other consequences, which 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 Business Applications or our OnDemand solutions 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 Business Applications
or our OnDemand solutions are delayed, or if these products or enhancements fail to achieve market
acceptance when released, our business, operating results or 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 cannot predict the demand for Internet-related products and
services.

Siebel Business Applications and our OnDemand solutions 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. 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. Further, critical issues concerning the commercial use of the Internet, including
security, privacy, demand, reliability, cost, ease-of-use, accessibility, quality of service, the
impact of "viruses," "worms" and similar malicious programs, 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.

If the web-based applications market fails to grow at the pace we expect or
at all, our business, financial condition or results of operations 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 against others in the
business applications market.

Our products are designed for the front-office business applications
software market. This market is highly competitive, rapidly changing, and significantly affected by
new product introductions and the activities of other market participants. Our products are
specifically targeted at the CRM market, as well as the markets for business analytics and customer
data 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 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 our
strengths in the relative capabilities of our products, the total cost of ownership of the various
alternative solutions, and the total return on investment of each of these alternatives.

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

Internal Development

We believe that our primary competition comes from custom-built
applications. Specifically, many of our customers and potential customers have in the past developed
CRM, customer and business intelligence and certain customer data integration solutions in-house,
either alone or with the help of systems integrators. In some cases, these internal development
projects have been successful in satisfying the needs of the 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 an internal development effort. We
may not be able to compete effectively against these internal development efforts.

Systems Integrators

We also face competition from systems integrators engaged by companies to
build custom applications. To successfully compete in this area, we must demonstrate and provide to
the customer the cost savings and advantages of a configurable, upgradeable 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 professional 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.; Kana Software, Inc.; Microsoft Corporation; ONYX Software Corporation;
Pivotal Corporation; The Sage Group; Salesforce.com, Inc.; SAS Institute, Inc.; and StayinFront,
Inc., among many others. In addition, our competitors include several companies, such as Oracle
Corporation 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
applications software 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. For example, Oracle Corporation completed its acquisition of PeopleSoft, Inc. during the
fourth quarter of 2004. 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 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 a specified term of employment with us. The loss of one or more of our senior
management personnel could have a material adverse effect on our business, financial condition or
results of operations. In particular, in April 2005, upon mutual agreement between ourselves and J.
Michael Lawrie, Mr. Lawrie resigned as our Chief Executive Officer and our Board of Directors
appointed George T. Shaheen as our Chief Executive Officer. In addition, 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 on-going 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 on-going 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 resulted in a temporary lack of focus and reduced
productivity that may have affected revenues in one or more quarters. If we continue to restructure
our sales force, then the transition issues associated with restructuring the sales force may recur.
Such restructuring or associated transition issues can be disruptive and adversely impact our
business and operating results.

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 can be affected by viruses. We have in
the past been, and may in the future be, 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.

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 in our products. 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 Business 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 Business Applications and our OnDemand
solutions. 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 stock price may continue to be volatile.

The trading price of our common stock has fluctuated substantially
since our initial public offering in June 1996. The trading price 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 earnings estimates by analysts; (iv) changes in our revenue
and/or earnings expectations as announced in our earnings calls; (v) announcements of technological
innovations or new products by us or our competitors; (vi) changes in domestic and international
economic, political and business conditions; (vii) general conditions in the software and computer
industries; (viii) the recent lack of public 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 March 31, 2005 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) 12,700     US$9,722  $         20

Brazilian real ("BRL") (contracts to
  pay BRL/receive US$)....................     (BRL) 30,635    US$11,082  $        249

British pounds ("GBP") (contracts to
  pay GBP/receive EUR)....................     (GBP) 10,175   EUR 14,696  $          3

Canadian dollars ("CAD") (contracts
  to pay CAD/receive US$).................      (CAD) 5,322     US$4,417  $         21

Japanese yen ("JPY") (contracts to
  pay JPY/receive US$)....................  (JPY) 1,237,434    US$11,815  $        218

Korean won ("KRW") (contracts to receive
  KRW/pay US$)............................     (KRW) 15,433         US$8  $          7

Mexican pesos ("MXN") (contracts
  to pay MXN/receive US$).................     (MXN) 21,132     US$1,861  $         16

Singapore dollars ("SGD") (contracts
  to pay SGD/receive US$).................      (SGD) 1,779     US$1,078  $         --

Czech Republic koruna ("CZK") (contracts
  to receive CZK/pay EUR).................      (CZK) 4,145      EUR 139  $          2

Euros ("EUR") (contracts to receive
  EUR/pay US$)............................    (EUR) 221,153   US$289,250  $     (3,993)

Swedish krona ("SEK") (contracts to
  receive SEK/pay EUR)....................      (SEK) 7,639      EUR 846  $         (6)

Swiss francs ("CHF") (contracts to
  receive CHF/pay EUR)....................      (CHF) 4,666    EUR 3,003  $         18`

The following table summarizes our short-term investments and the weighted
average yields as of March 31, 2005 (in thousands, except percentages):

`Expected Maturity Date
                                     -------------------------------------------------------------------------
                                       2005      2006      2007      2008       2009   Thereafter     Total
                                     --------- --------- --------- --------- --------- ----------- -----------
US Treasury and Agency securities... $115,601  $175,206   $75,322   $25,016  $  6,548   $    --     $397,693
  Weighted average yield............     3.09%     3.78%     4.12%     3.82%     4.30%       --

Corporate bonds..................... $110,869  $263,310  $258,056   $83,764  $ 78,064    $10,570    $804,633
  Weighted average yield............     3.38%     3.71%     4.04%     4.33%     4.57%      3.26%

Asset-backed securities.............  $70,161  $224,647   $94,633   $39,159  $ 16,233     $3,777    $448,610
  Weighted average yield............     3.53%     3.84%     4.04%     4.52%     4.82%      3.22%
                                     --------- --------- --------- --------- -------- ----------- -----------
Total short-term investments........ $296,631  $663,163  $428,011  $147,939  $100,845    $14,347  $1,650,936
                                     ========= ========= ========= ========= ======== =========== ===========`

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 March 31, 2005, the fair value of the above investments would decline
by approximately $23.6 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, if necessary.

Item 4.	 Controls and Procedures

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

Under the supervision and with the participation of our management, including
our principal executive officer and principal financial officer, we conducted an evaluation of our
disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated
under the Securities Exchange Act of 1934 (the "Exchange Act"). Based on this evaluation, our
principal executive officer and our principal financial officer concluded that our disclosure
controls and procedures were effective as of the end of the period covered by this quarterly
report.

Responsibility for Disclosure and Internal Control

Our management, including our CEO and CFO, has the responsibility of
establishing and maintaining adequate Disclosure Control and Internal Control over our financial
reporting. Disclosure Control is a set of procedures that is designed to ensure that information
required to be disclosed in reports filed or furnished with the SEC, such as this quarterly report,
is recorded, processed, summarized and reported within the time periods specified in the SEC rules
and forms. Disclosure Control is also designed to ensure 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 Control is a set of processes designed by, or under the supervision
of, our principal executive and 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 accounting principles generally accepted in the United States
("GAAP"). Internal Control 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.

Our CEO and CFO note that during the three months ended March 31, 2005, there
have been no changes in our Internal Control 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 Control a high priority and
strive to continually improve our Internal Control. Accordingly, we have taken and will continue to
take corrective action if and as we discover deficiencies in our Internal Control.

Limitations on the Effectiveness of Controls

Our management, including our CEO and CFO, does not expect that our
Disclosure Control or our Internal Control 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 a 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.

Part II. Other Information



Item 1.	 Legal Proceedings

Regulation FD

On May 6, 2003, the Enforcement Division staff ("Staff") of the
Securities & Exchange Commission ("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 Staff notified us and two of our officers of the 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 and the officers filed submissions with the SEC in
response to the SEC notices that we believe contained numerous meritorious defenses to these
allegations. Despite these submissions, on June 29, 2004, the SEC filed a lawsuit in the United
States District Court of the Southern District of New York against us and the two officers alleging,
among other things, that we and the officers violated Regulation FD in connection with the
statements described above.

In September 2004, we filed a motion to dismiss the complaint. A hearing on
the motion occurred on March 15, 2005. We believe the allegations in this action are without merit
and we intend to defend vigorously against them. Due to the uncertainty surrounding the litigation
process, there exists the possibility that we may incur costs in excess of amounts already
recognized. We cannot currently estimate the amount of such additional costs, if any.

Stock Option Grant Inquiry

On March 7, 2005, the SEC provided us with a copy of an order of
investigation regarding certain stock option grants by a number of companies, including us. The SEC
has advised us that this is a confidential fact finding inquiry and has confirmed that the issuance
of the order does not indicate that it has concluded that we have violated any securities laws. We
intend to cooperate with the SEC as this investigation continues to develop. In accordance with the
disclosures required by SFAS 5, we are unable to estimate the potential financial impact this matter
could have on us.

Shareholder Class Actions

On March 10, 2004, William Wollrab, on behalf of himself and
purportedly on behalf of a class of our stockholders, filed a complaint in the United States
District Court for the Northern District of California against us and certain of our officers. This
complaint was consolidated and amended on August 27, 2004, with the Policemen's Annuity and Benefit
Fund of Chicago being appointed to serve as lead plaintiff. In October 2004, we filed a motion for
dismissal of this case, which was granted on January 28, 2005. Plaintiffs in this case filed a
second amended complaint on February 28, 2005, and we intend to file a motion to dismiss as soon as
practical.

On April 12, 2004, Pamela Plotkin, on behalf of herself and purportedly on
behalf of a class of our stockholders, filed a complaint in the Superior Court of California (the
"Superior Court") against us and certain members of our Board of Directors. The Superior Court
dismissed the complaint by Ms. Plotkin on September 23, 2004, but gave Ms. Plotkin leave to file a
new, amended complaint, which was subsequently filed by Ms. Plotkin. The Superior Court dismissed
the amended complaint on December 28, 2004, but again gave Ms. Plotkin leave to file a new, amended
complaint. Ms. Plotkin filed a new amended complaint on January 14, 2005. On February 2, 2005, the
parties to this complaint agreed to stay (i.e., place on hold) the entire case until June 1,
2005.

These complaints allege claims in connection with various public statements
made by us and seek damages together with interest and reimbursement of costs and expenses of
litigation. We believe the allegations in each of these actions are without merit and we intend to
defend vigorously against these claims.

General

We are subject to legal proceedings and claims, either asserted or
unasserted, which arise in the ordinary course of business. While the outcome of these proceedings
and claims cannot be predicted with certainty, management does not believe that the outcome of any
pending legal matter will have a material adverse effect on our consolidated financial position,
although results of operations or cash flows could be affected in a particular period.



Item 5. Other Information

In recent weeks, a number of stories have been written
concerning potential strategic opportunities for Siebel Systems.   While it is our
firm policy not to comment on such stories, we believe that their unusual intensity in this
instance and the heavy trading volume of our stock over the past several days warrants
clarification.

Over the past several years, we have from time to time considered a diverse
range of strategic opportunities to maximize stockholder value, including but not limited to
potential significant acquisitions by us, restructurings of our equity, equity repurchases,
strategic alliances and offers to purchase us.  In evaluating such opportunities, we regularly
engage outside financial and legal experts and our independent directors as necessary to aid us in
our analysis and consideration.  Such activities are quite common and are regularly under
various stages of consideration in the normal course of business.

Similarly, potential opportunities have recently been presented to us that
continue to be evaluated and discussed in a manner that is consistent with our past practices
and the fiduciary duties of our officers and directors, with the goal of determining what the Board
of Directors believes is in our stockholders' best interests.  These activities include the
involvement of independent directors, outside experts and independent advisors. Such
activities continue to be conducted in the normal course of business and should not be interpreted
to suggest that any of these current potential opportunities will or will not be consummated. 
There are none under current consideration that have progressed to the point at which the full Board
of Directors has met to consider them.

We undertake no obligation and do not intend to make any further announcement
regarding the exploration of potential strategic opportunities, except as required by law.  We
continue to be entirely focused on growing our business, generating profit, adding customer value
and serving the long-term interests of our customers, employees and stockholders.



Item 6.	 Exhibits



|Exhibit Number | Description of Document                                                                                                                                 
|-------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1            | Amended and Restated Certificate of Incorporation of the Registrant, as amended to date. (1)                                                            
|3.2            | Amended and Restated Bylaws of the Registrant. (2)                                                                                                      
|4.1            | Reference is made to Exhibit 3.1 and Exhibit 3.2.                                                                                                       
|4.2            | Specimen Stock Certificate. (3)                                                                                                                         
|4.3            | Certificate of Designation of Series A1 Preferred Stock of the Registrant. (4)                                                                          
|4.4            | Indenture between the Registrant, as Issuer, and Chase Manhattan Bank and Trust Company,
National Association, as Trustee, dated September 15, 1999. (5)
|4.5            | Certificate of Designation of Series A2 Junior Participating Preferred Stock. (6)                                                                       
|4.6            | Rights Agreement dated as of January 29, 2003, between the Registrant and Mellon Investors
Services LLC, as Rights Agent. (6)                           
|4.7            | Form of Rights Certificate. (6)                                                                                                                         
|10.1           | Registrant's Performance Stock Plan. (7)                                                                                                                
|10.2           | Non-Employee Director Compensation Arrangement. (8)                                                                                                     
|10.3           | Regristrant's Executive Bonus Plan. (7)                                                                                                                 
|10.4           | Regristrant's Amended and Restated Nonqualified Deferred Compensation Plan. (9)                                                                         
|10.5           | Form of Nonstatutory Stock Option Agreement and Notice. (10)                                                                                            
|10.6           | Form of Incentive Stock Option Agreement and Notice. (10)                                                                                               
|10.7           | 2004 Executive Bonus Arrangement. (8)                                                                                                                   
|10.8           | Offer of Emloyment by and between the Registrant and George T. Shaheen, dated as of April 12, 2005. (11)                                                
|10.9           | Separation and Consulting Agreement by and between the Registrant and J. Michael Lawrie, dated
as of April 15, 2005. (12)                               
|31.1           | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (10)                                                                           
|31.2           | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (10)                                                                           
|32.1           | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (10)                                                                           

__________________

1. Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2001.
2. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 2002.
3. Incorporated by reference to the Registrant's Registration Statement on Form S-1 (No. 333-03751), as amended.
4. Incorporated by reference to the Registrant's Current Report on Form 8-K filed on November 27,
2000.
5. Incorporated by reference to the Registrant's Registration Statement on Form S-3 (No. 333-91777)
filed on November 30, 1999.
6. Incorporated by reference to the Registrant's Current Report on Form 8-K filed on January 29,
2003.
7. Incorporated by reference to the Registrant's Current Report on Form 8-K filed on January 11,
2005.
8. Incorporated by reference to the Registrant's Current Report on Form 8-K filed on February 24,
2005.
9. Incorporated by reference to the Registrant's Current Report on Form 8-K filed on March 8,
2005.
10. Filed herewith.
11. Incorporated by reference to the Registrant's Current Report on Form 8-K filed on April 18,
2005.
12. Incorporated by reference to the Registrant's Current Report on Form 8-K filed on April 20,
2005.

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: May 6, 2005By:
    /s/ Kenneth A. GoldmanKenneth A. GoldmanSenior Vice President, Finance and
                                    Administration and
                                    Chief Financial Officer(Prinicipal Financial Officer)

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