**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 September 30, 2004**

**OR**

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

**For the transition period from ________to _________**

**Commission file number 0-20725**

**SIEBEL SYSTEMS, INC.**
(Exact Name of Registrant as Specified in Its Charter)



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

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

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







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

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

The number of shares outstanding of the Registrant's common stock, par value
      $.001 per share, as of October 20, 2004, was 508,172,487.







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

Table of Contents



|Part I.  Financial Information                                                                                                                       | Page
|---------------------------------------------------------------------------------------------------------------------------------------------------- | ----
|                                                                                                                                                     |     
|Item 1.   Financial Statements                                                                                                                       |     
|                                                                                                                                                     |     
|Consolidated Balance Sheets as of
          
December 31, 2003 and September 30, 2004                                                                | 1   
|                                                                                                                                                     |     
|Consolidated Statements of Operations and Comprehensive Income (Loss)
          
    for the three and nine months ended September 30, 2003 and 2004 | 2   
|                                                                                                                                                     |     
|Consolidated Statements of Cash Flows
          
    for the nine months ended September 30, 2003 and 2004                                           | 3   
|                                                                                                                                                     |     
|Notes to Consolidated Financial Statements                                                                                                           | 4   
|                                                                                                                                                     |     
|Item 2.   Management's Discussion and Analysis of Financial
                      Condition and Results of Operations                                | 20  
|                                                                                                                                                     |     
|Item 3.   Quantitative and Qualitative Disclosures About Market Risk                                                                                 | 60  
|                                                                                                                                                     |     
|Item 4. Controls and Procedures                                                                                                                      | 61  
|                                                                                                                                                     |     
|Part II.  Other Information                                                                                                                         
|                                                                                                                                                     |     
|Item 1.   Legal Proceedings                                                                                                                          | 63  
|                                                                                                                                                     |     
|Item 5.  Other Information                                                                                                                           | 64  
|                                                                                                                                                     |     
|Item 6.   Exhibits                                                                                                                                   | 64  
|                                                                                                                                                     |     
|**Signature**                                                                                                                                        | 65  

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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,  September 30,
                                                                               2003          2004
                                                                          ------------- -------------
Assets

Current assets:
   Cash and cash equivalents...........................................   $    583,532  $    506,574
   Short-term investments..............................................      1,439,674     1,647,162
                                                                          ------------- -------------
          Total cash, cash equivalents and short-term investments......      2,023,206     2,153,736

   Accounts receivable, net............................................        259,834       208,805
   Deferred income taxes...............................................         61,742        64,222
   Prepaids and other..................................................         52,186        47,557
                                                                          ------------- -------------
          Total current assets.........................................      2,396,968     2,474,320

Property and equipment, net............................................        157,391        93,730
Goodwill...............................................................        140,957       202,488
Intangible assets, net.................................................         10,786        24,066
Other assets...........................................................         42,406        37,300
Deferred income taxes..................................................         95,866        94,866
                                                                          ------------- -------------
          Total assets.................................................   $  2,844,374  $  2,926,770
                                                                          ============= =============

Liabilities and Stockholders' Equity

Current liabilities:
   Accounts payable....................................................   $     18,907  $     31,898
   Accrued expenses....................................................        333,270       317,462
   Restructuring obligations...........................................         53,676        36,397
   Deferred revenue....................................................        282,217       288,869
                                                                          ------------- -------------
          Total current liabilities....................................        688,070       674,626

Restructuring obligations, less current portion........................         97,919        78,474
Other long-term liabilities............................................          8,159         3,035
                                                                          ------------- -------------
          Total liabilities............................................        794,148       756,135
                                                                          ------------- -------------

Commitments and contingencies

Stockholders' equity:
  Common stock; $0.001 par value; 2,000,000 shares authorized;
     498,305 and 507,596 shares issued and outstanding, respectively...            498           508
  Additional paid-in capital...........................................      1,550,834     1,622,821
  Deferred compensation................................................         (1,479)       (3,021)
  Accumulated other comprehensive income...............................         58,650        49,366
  Retained earnings....................................................        441,723       500,961
                                                                          ------------- -------------
          Total stockholders' equity...................................      2,050,226     2,170,635
                                                                          ------------- -------------
          Total liabilities and stockholders' equity...................   $  2,844,374  $  2,926,770
                                                                          ============= =============`

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    Nine Months Ended
                                                                     September 30,        September 30,
                                                                --------------------- ----------------------
                                                                   2003       2004        2003       2004
                                                                ---------- ---------- ----------- ----------
Revenues:
   Software license...........................................  $ 110,003  $ 104,579  $  331,989  $ 326,207
   Professional services, maintenance and other...............    211,429    212,507     655,497    621,225
                                                                ---------- ---------- ----------- ----------
       Total revenues.........................................    321,432    317,086     987,486    947,432
                                                                ---------- ---------- ----------- ----------
Cost of revenues:
   Software license...........................................      5,974      3,010      14,963      9,054
   Professional services, maintenance and other...............    120,489    108,868     372,142    324,534
                                                                ---------- ---------- ----------- ----------
       Total cost of revenues.................................    126,463    111,878     387,105    333,588
                                                                ---------- ---------- ----------- ----------
            Gross margin......................................    194,969    205,208     600,381    613,844
                                                                ---------- ---------- ----------- ----------
Operating expenses:
   Product development........................................     71,432     69,718     226,177    217,279
   Sales and marketing........................................     82,756     76,500     276,804    241,166
   General and administrative.................................     27,319     27,114      81,860     76,200
   Restructuring and related expenses.........................    104,767      6,151     105,041      5,743
   Purchased in-process product development...................         --         --          --      6,000
                                                                ---------- ---------- ----------- ----------
       Total operating expenses...............................    286,274    179,483     689,882    546,388
                                                                ---------- ---------- ----------- ----------
            Operating income (loss)...........................    (91,305)    25,725     (89,501)    67,456
                                                                ---------- ---------- ----------- ----------
Other income (expense), net:
   Interest and other income, net.............................     14,140     11,698      44,562     33,804
   Loss on early extinguishment of debt.......................    (10,711)        --     (10,711)        --
   Interest expense...........................................     (4,827)      (174)    (14,575)      (728)
                                                                ---------- ---------- ----------- ----------
       Total other income (expense), net......................     (1,398)    11,524      19,276     33,076
                                                                ---------- ---------- ----------- ----------
            Income (loss) before income taxes.................    (92,703)    37,249     (70,225)   100,532
Income taxes (benefit)........................................    (33,373)    17,879     (25,281)    41,294
                                                                ---------- ---------- ----------- ----------
            Net income (loss).................................  $ (59,330) $  19,370  $  (44,944) $  59,238
                                                                ========== ========== =========== ==========

Diluted net income (loss) per share...........................  $   (0.12) $    0.04  $    (0.09) $    0.11
                                                                ========== ========== =========== ==========
Basic net income (loss) per share.............................  $   (0.12) $    0.04  $    (0.09) $    0.12
                                                                ========== ========== =========== ==========

Shares used in diluted share computation......................    493,933    533,303     490,049    540,416
                                                                ========== ========== =========== ==========
Shares used in basic share computation........................    493,933    506,706     490,049    503,983
                                                                ========== ========== =========== ==========
Comprehensive income (loss):
Net income (loss).............................................  $ (59,330) $  19,370  $  (44,944) $  59,238
Other comprehensive income (loss), net of taxes:
   Foreign currency translation adjustments...................     (2,586)     4,354      16,130     (2,305)
   Realized (gain) loss on marketable investments previously
      recognized in other comprehensive income................       (633)       (88)     (2,856)    (1,198)
   Unrealized gain (loss) on investments, net.................     (3,131)     3,690       2,568     (5,781)
                                                                ---------- ---------- ----------- ----------
       Other comprehensive income (loss)......................     (6,350)     7,956      15,842     (9,284)
                                                                ---------- ---------- ----------- ----------
            Total comprehensive income (loss).................  $ (65,680) $  27,326  $  (29,102) $  49,954
                                                                ========== ========== =========== ==========`

See accompanying notes to consolidated financial statements.

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

`Nine Months Ended
                                                                                   September 30,
                                                                            --------------------------
                                                                                 2003         2004
                                                                            ------------- ------------
Cash flows from operating activities:
   Net income (loss)....................................................... $    (44,944) $    59,238
   Adjustments to reconcile net income (loss) to net cash
    provided by operating activities:
      Write-off of property and equipment abandoned in restructuring.......       17,506        1,908
      Write-off of purchased in-process product development................           --        6,000
      Write-off of acquired technology.....................................        2,449           --
      Loss on early extnguishment of debt..................................       10,711           --
      Depreciation and amortization........................................      116,189       84,356
      Amortization of identifiable intangible assets.......................        5,051        7,219
      Stock-based compensation, net........................................        1,326        2,494
      Provision for (recovery of) doubtful accounts and sales returns......        7,434         (939)
      Tax benefit from exercise of stock options...........................           --       10,400
      Deferred income taxes................................................      (25,423)          16
      Write-down of cost-method investments to fair value..................          675        1,820
      Net realized gains on marketable investments.........................       (4,760)      (1,997)
      Changes in operating assets and liabilities:
         Accounts receivable...............................................       79,728       54,439
         Prepaids and other................................................       (1,062)       9,279
         Accounts payable and accrued expenses.............................      (26,353)      (5,604)
         Restructuring obligations.........................................       25,209      (38,354)
         Deferred revenue..................................................      (10,552)       4,802
                                                                            ------------- ------------
           Net cash provided by operating activities.......................      153,184      195,077
                                                                            ------------- ------------
Cash flows from investing activities:
   Purchases of property and equipment, net................................      (14,021)      (7,790)
   Purchases of short-term investments.....................................   (1,521,990)  (1,398,049)
   Sales and maturities of short-term investments..........................    1,522,069    1,167,923
   Proceeds from sale of marketable equity securities......................        5,593          505
   Purchase consideration for acquired businesses, net of cash received....       (1,680)     (76,556)
   Other non-operating assets and non-marketable securities................         (324)          --
                                                                            ------------- ------------
           Net cash used in investing activities...........................      (10,353)    (313,967)
                                                                            ------------- ------------
Cash flows from financing activities:
   Proceeds from issuance of common stock..................................       41,127       57,368
   Repurchase of convertible subordinated debentures.......................     (307,080)          --
   Repayments of capital lease obligations.................................       (9,549)      (9,398)
                                                                            ------------- ------------
           Net cash provided by (used in) financing activities.............     (275,502)      47,970
                                                                            ------------- ------------
Effect of exchange rate fluctuations.......................................       10,161       (6,038)
                                                                            ------------- ------------
Change in cash and cash equivalents........................................     (122,510)     (76,958)
Cash and cash equivalents, beginning of period.............................      667,511      583,532
                                                                            ------------- ------------
Cash and cash equivalents, end of period................................... $    545,001  $   506,574
                                                                            ============= ============
Supplemental disclosures of non-cash activities:
   Fair value of common stock and stock options issued for acquisitions.... $      1,670  $        --
                                                                            ============= ============`

See accompanying notes to consolidated financial statements.

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



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



1. Summary of Significant Accounting
Policies
2. Restructuring Obligations
3. The costs associated with the Company's workforce
reductions consist primarily of severance payments, COBRA benefits, payroll
taxes and other associated termination costs incurred in connection with the
2003 Restructuring.  The remaining obligations as of September 30, 2004 relate
to less than 10 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 the next six months.
4. The costs associated with the Company's facilities
consolidation primarily relate to lease termination costs, costs associated with
satisfying remaining lease commitments, and expected brokerage and other
re-letting costs, partially offset by estimated sublease income.
5. As part of the consolidation of the Company's facilities,
certain leasehold improvements, furniture and fixtures were abandoned.  As a
result, the Company recorded a non-cash charge equal to the net book value of
these abandoned assets in restructuring and related expenses.
6. In accordance with SFAS 146, the Company recorded the
facility-related expenses incurred in the 2004 Restructuring after giving effect
to the net present value of the related obligations.
7. The Company revised its estimated obligations with
respect to the 2003 Restructuring during the nine months ended September 30,
2004 as follows:
8. Employee termination costs—Due primarily to higher
than expected voluntary terminations associated with positions included in the
2003 Restructuring, the Company reduced its remaining obligations for employee
termination costs during the second quarter of 2004.
9. Facility-related costs—Due primarily to the real
estate markets in which the Company operates remaining at depressed levels
longer than originally anticipated, the Company extended the estimated sublease
commencement dates and/or reduced the estimated sublease rates on certain
restructured properties.  Partially offsetting these reductions in estimated
sublease income were favorable changes in estimates that resulted from the
Company entering into subleases sooner and/or at higher sublease rates than
originally anticipated on certain other restructured properties.
10. Represents the accretion of the 2003 and 2004
Restructuring obligations.  The Company will continue to accrete its obligations
related to the 2003 and 2004 Restructurings to the then present value and,
accordingly, will recognize additional accretion expense as a restructuring and
related expense in future periods.
11. The following is a summary of the net restructuring and
related expenses recognized during the three and nine months ended September 30,
2004 (in thousands):
12. Represents the Company's remaining lease commitments
related to properties included in the Restructurings.
13. Consists primarily of (i) estimated operating costs
(i.e., common area maintenance and property taxes) associated with restructured
properties, (ii) estimated commissions associated with anticipated subleases of
the restructured properties, and (iii) the remaining obligations related to
employee termination cost.
14. The Company estimated sublease income and the related
timing thereof based upon the opinions of independent real estate consultants,
current market conditions, the status of negotiations with potential subtenants,
and the location of the respective facility, among other factors.  The Company's
estimates of sublease income may vary significantly from actual amounts realized
depending, in part, on factors which may be beyond the Company's control, such
as the time periods required to locate and contract suitable subleases and the
market rates at the time of such subleases.
15. The Company has reduced the facility-related obligations
associated with the 2003 and 2004 Restructurings to their net present value.
Future accretion represents the interest component of these obligations and will
be recognized in future periods by the Company as an additional restructuring
and related expense and as an increase in the carrying amount of the 2003 and
2004 Restructuring obligations.
16. Convertible Subordinated
Debentures
17. Commitments and
Contingencies
18. Income Taxes
19. Acquisitions, Goodwill and
Intangible Assets
20. Net Income (Loss) per Share
21. Restricted Stock Units
22. Segment and Geographic
Information

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



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



Executive Summary



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



Overview of Our Business and Products



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



Our CRM applications enable an organization to better
manage its relationships with its customers, partners and employees.  A
substantial portion of our software license revenue is derived from our sales,
marketing and service automation solutions, which provide organizations with an
integrated approach to identifying, acquiring and retaining customers.  For
example, these applications assist (i) sales organizations with creating a
comprehensive view into the sales pipeline, thereby enabling sales professionals
to better manage opportunities; (ii) marketing organizations with increasing
campaign response rates and reducing customer-acquisition costs; and (iii)
service organizations with reducing response times with customers, thereby
improving customer satisfaction.



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



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



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



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



Internal Controls and Corporate Governance



We consider our internal controls over financial
reporting a high priority and will continue to do so through a continual review
of and resulting improvement in our internal controls.  Further, we have formed
an Internal Controls Committee, comprised primarily of senior financial and
legal personnel, which helps ensure our internal controls over financial
reporting are complete, accurate and appropriately documented.  As of September
30, 2004, our Internal Controls Committee and internal audit department have
completed their review and testing of the majority of the individual processes
that make up our internal controls, as required by Section 404 of the Sarbanes-Oxley
Act of 2002, or SOX, and we believe that we are on schedule to complete
the review of the remaining processes by the end of the year.   Based on the
testing performed to date, we have not identified any material weaknesses in our
internal controls.  In addition, we believe that our internal controls are
functioning as designed and provide reasonable assurance that transactions are
recorded as necessary to permit preparation of our financial statements in
accordance with accounting principles generally accepted in the United States.
With the work we have completed to date and planned, we believe that we are
well-positioned for our independent auditors to issue their audit report on our
internal controls for the year ended December 31, 2004.



In addition to maintaining robust internal controls, we
follow high professional standards in measuring and reporting our financial
performance.  Specifically, we have adopted a code of conduct for all of our
employees and directors that requires a high level of professionalism and
ethical behavior.  We believe that our accounting policies are prudent and
provide a clear view of our financial performance.  We utilize our internal
audit function to help ensure that we follow these accounting policies and
maintain our internal controls.  Further, our Disclosure Committee, comprised
primarily of senior financial and legal personnel, helps ensure the completeness
and accuracy of our financial results and disclosures.  In addition, prior to
the release of our financial results, key members of our management review our
operating results and key accounting policies and estimates with our Audit
Committee, which is comprised solely of independent members of our Board of
Directors.  Please refer to the section entitled "Item 10. Directors and
Executive Officers of the Registrant" of our Annual Report on Form 10-K for
the year ended December 31, 2003 for a further discussion of our policies
regarding corporate governance and our code of conduct.



Operating Environment during the Three and Nine Months Ended
September 30, 2004



From the first quarter of 2001 to the third quarter of
2003, macro-economic conditions generally deteriorated or stabilized at
depressed levels, with the information technology industry in which we operate
disproportionately impacted.  Beginning in the latter part of 2003, many key
economic indicators, such as the U.S. gross domestic product, or GDP, and
certain labor statistics, began to strengthen.  Many of these same economic
indicators continued to strengthen, albeit at slower growth rates, in the first
nine months of 2004.  Capital spending also moderately increased in the first
nine months of 2004; however, spending on information
technology—particularly business applications software—appears to
continue to lag the overall improvements in macro-economic indicators and
capital spending.



Further, many of our customers remain cautious in
completing their software purchases.  We attribute much of this cautiousness to
our customers' concerns regarding (i) the sustainability of the current economic
recovery, (ii) the current geopolitical environment (i.e., continued concerns
regarding future terrorist attacks and geopolitical conflicts) and (iii)
heightened uncertainty within the business application software industry, due in
part to the on-going unsolicited bid by Oracle Corporation for PeopleSoft, Inc.
We have also recently experienced an increase in the number of approvals
required by our customers prior to their execution of a software license and
service agreement, possibly due to our customers' efforts regarding the
Sarbanes-Oxley Act of 2002.  We believe these factors, among others, have led to
a lengthening of our sales cycle.



We believe the above factors have also impacted the
broader technology and software sectors, as a number of companies in these
sectors showed year-over-year declines in revenues during the nine months ended
September 30, 2004.  Despite these trends in our operating environment, we also
recognize that our performance during the first nine months of
2004—particularly the second quarter of 2004—did not meet our
expectations and, as announced in July 2004, we developed and began executing on
a plan to improve our execution and overall operating performance.  Our progress
to date against this plan is discussed further below.



Focus on Future Improvement in Our Operating Performance



In accordance with the plan announced in July 2004, we
have been reviewing and continue to review our business thoroughly, with our
primary focus in the following three areas: (i) revenue generation, (ii)
financial structure and (iii) leadership.  We are pleased with our progress to
date, as many of our key financial metrics improved sequentially during the
third quarter of 2004.



We believe the actions completed to date and our
continued execution against this plan will provide a strong foundation for
accelerated growth of our revenues, operating income and many other key
financial metrics in the future.  The following is a summary of our progress to
date:



Revenue Generation



As a result of our execution against the above mentioned
plan, our revenue performance during the third quarter of 2004 reflected
improved execution and sequential quarterly growth from the second quarter.
License, maintenance and professional services revenues increased sequentially
from the second quarter of 2004, despite a typically seasonally weak third
quarter.  The following is a summary of the growth on a sequential quarterly
basis:



- Total revenue
- License revenue
- Maintenance revenue
- Services and other revenue
- Total contract value for OnDemand

As outlined in July 2004, in order to improve our revenue
generation capability, we are focusing on the following areas:



- Small and medium-sized business ("SMB")
initiative



- Accelerate new growth initiatives



- New markets



- Analytics



During the third quarter of 2004 we expanded our business
analytics product line with new enterprise analytic applications organized into
four main application areas-customer analytics, financial analytics,
workforce/employee performance management and supply chain and supplier
analytics.  These pre-built, end-to-end business intelligence solutions enable
organizations to gain new levels of actionable intelligence across multiple
business functions.



- Business Integration Applications



- Global Services Organization



- Better aligning our selling model



- Investing in critical customer facing positions



Financial Structure

As outlined in our quarterly report on Form 10-Q for the
second quarter of 2004, we identified certain measures that we intended to
pursue in order to better align our costs with our revenues.  Some of these
measures included continuing to:



- reduce discretionary spending including, for example,
travel and entertainment ("T&E");
- consolidate our facilities and reduce other facilities
and related expenses;
- limit and closely monitor net capital
expenditures;
- streamline our information technology spending;
- utilize outsourced services where appropriate and cost
effective; and
- redeploy or, if appropriate, eliminate duplicative
activities, extraneous layers of management or unproductive
resources.



These measures and our on-going attention to cost controlsreduced our total costs and expenses by approximately $14.8 million during
the third quarter of 2004 compared to the second quarter of 2004.  These cost
savings were primarily derived from (i) $4.7 million in savings from
depreciation, which resulted from our continued close monitoring of capital
expenditures and streamlining of information technology spending, (ii) $3.8
million in savings in marketing-related expenditures, (iii) $3.4 million in net
savings from reductions in personnel- and facility-related expenditures, and
(iv) $2.9 million in savings related to T&E expenditures.   Partially
offsetting these cost savings were increases of (i) $4.3 million of additional
costs associated with our reinvestment in outside services in labor markets with
lower cost structures, (ii) a net $2.5 million from legal and professional fees
(primarily tax-related accruals), and (iii) $1.0 million of costs that vary
directly with revenues, such as commissions and "cost of license
revenues."  As a result of enacting the above measures, we were able to
improve our profitability sequentially and on a year-over-year basis, even as we
increased our investments in the key growth areas discussed above.



In addition, during the third quarter of 2004 we completed a
small restructuring of operations, which we believe may reduce our on-going
costs by an additional $2.6 million per year, or $650,000 per quarter.  We
intend to continue to closely monitor expenditures in the future and, when
deemed prudent, continue to implement the above measures.



Leadership

We had previously announced the appointments of Mr. Bruce
Cleveland as Senior Vice President and General Manger of our newly formed
OnDemand/SMB unit and Ms. Eileen McPartland as Senior Vice President, Global
Services.  In addition to these appointments, we have added the following
executives during the third quarter of 2004:



- Mr. Les Rechan



- Mr. Reid Drucker



We intend to continue to expand our leadership capabilities
throughout our organization.

Areas of Continued Focus

Notwithstanding the progress we made during the third quarter
of 2004, we intend to continue to improve in the following areas:

Revenue Generation

We are committed to improving our revenue generating
capability in underperforming areas, particularly our sales, marketing and
service automation product line and intend to renew our focus on execution
worldwide and continue to invest across our key products and verticals.  In
addition, we are focused on improving our revenue generation capability with
respect to (i) geographic regions that underperformed, such as Asia Pacific and
(ii) verticals that underperformed, such as communications and financial
services.

Financial Structure, While Supporting Growth Priorities

We will continue to remix our deployment of capital by
driving additional savings in non-revenue facing functions and investing in
strategic growth areas including (i) products such as analytics and
OnDemand/SMB, (ii) international geographies, particularly Japan, China, India
and Europe, and (iii) investing in additional services offerings.

Leadership Capability

We remain committed to furthering the prior two goals by
adding leadership talent in priority verticals and geographies.



Summary

While the environment remains challenging, we are encouraged
by our performance in the third quarter and we are cautiously optimistic for the
fourth quarter of 2004 and the future.  Our third quarter results demonstrate
positive early results across each of the above initiatives and our commitment
to return value to our stockholders, employees, partners and customers.

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



As discussed above, we believe we are executing against
our performance improvement plan and are beginning to realize the benefits in
our operating results, as evidenced by our performance in the third quarter of
2004.  Specifically, our operating results improved sequentially during the
third quarter of 2004 compared to the second quarter of 2004, with software
license revenues increasing by $9.8 million, or 10%; total revenues increasing
by $16.0 million, or 5%; "total cost and expenses, on-going"
decreasing by $6.8 million, or 2%; and operating income increasing by $21.7
million, or 539%.  In addition, we continued to achieve encouraging results in
our key growth initiatives.  For example, our analytics and business integration
product revenues increased sequentially by an aggregate of over 20% and the
total contract value of our Siebel CRM OnDemand service offering increased
sequentially by more than 30%.

In addition to improving our operating performance
sequentially from the second quarter of 2004, we also improved many of our key
financial metrics on a year-over-year basis during the third quarter of 2004.
The following is a brief summary of our key financial metrics and operating
results for the three and nine months ended September 30, 2003 and 2004 (in
thousands, except EPS, percentages and DSO):

`Three Months Ended September 30,     Nine Months Ended September 30,
                                                          ----------------------------------   --------------------------------
                                                                2003              2004               2003             2004
                                                          ----------------  ----------------   ---------------  ---------------
  Revenues:                                                                                                                    
   Software license...................................    $       110,003   $       104,579    $      331,989   $      326,207
   Maintenance........................................            110,046           118,059           331,839          347,350
   Professional services and other....................            101,383            94,448           323,658          273,875
                                                          ----------------  ----------------   ---------------  ---------------
        Total revenues................................    $       321,432   $       317,086    $      987,486   $      947,432
                                                          ================  ================   ===============  ===============
   Annualized total revenue per employee..............    $           243   $           260    $          234   $          259
                                                          ================  ================   ===============  ===============


  Cost and expenses:                                  
   Restructuring and acquisition-related expenses (1).    $       107,216   $         6,151    $      107,490   $       11,743
   All other costs and expenses, on-going (2).........            305,521           285,210           969,497          868,233
                                                          ----------------  ----------------   ---------------  ---------------
       Total costs and expenses.......................    $       412,737   $       291,361    $    1,076,987   $      879,976
                                                          ================  ================   ===============  ===============



  Other key operating statistics:                     
   Operating income (loss)............................    $       (91,305)  $        25,725    $      (89,501)  $       67,456
   Operating margin...................................                (28)%               8 %              (9)%              7 %
   Earnings (loss) per share, diluted ("EPS").........    $         (0.12)  $          0.04    $        (0.09)  $         0.11
   Cash flows from operations.........................    $        37,473   $        19,714    $      153,184   $      195,077

                                                            December 31,        March 31,          June 30,      September 30,
                                                                2003              2004               2004            2004
                                                          ----------------  ----------------   ---------------  ---------------
  Balance sheet statistics:                           
   Cash and short-term investments....................    $     2,023,206   $     2,132,927    $    2,120,565   $    2,153,736
   Deferred revenue...................................    $       282,217   $       311,375    $      314,474   $      288,869
   Days sales outstanding ("DSO").....................                 64                63                60               59
   Working capital....................................    $     1,708,898   $     1,788,076    $    1,738,287   $    1,799,694
   Total stockholders' equity.........................    $     2,050,226   $     2,112,214    $    2,121,151   $    2,170,635`

1. Please refer to "Cost of Revenues,"
"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



- Our Restructuring and cost control initiatives



- Operating income



- Cash and short-term investments



- Accounts receivable



- Deferred revenues



- Working capital



- Stockholders' equity



- Stock option overhang

Outlook



During our October 20, 2004 webcast discussion of our
financial results for the third quarter of 2004, we publicly disclosed our
guidance for the fourth quarter of 2004.  Our outlook is based solely on our
current expectations, which are based, in part, on our review of our current
sales pipeline, internal sales forecasts, recent surveys among information
technology executives, and current economic indicators.  We are cautiously
optimistic that our operating results may continue to improve on a sequential
quarterly basis in the fourth quarter of 2004.  For the fourth quarter of 2004,
we currently anticipate that our total revenues will be between $330 million and
$360 million.  We expect the individual components of our total revenues to be
within the following ranges:



- software license revenues—between $115 million and
$145 million;
- maintenance revenues—between $116 million and $120
million; and
- professional services and other revenues—between
$95 million and $103 million.



Our expectations regarding our revenues may be negatively
impacted by many factors, including (i) a deterioration in global economic
conditions and/or information technology spending; (ii) a continued lengthening
of our sales cycle and/or reduction in our sales pipeline; (iii) additional
terrorist attacks or threats of terrorist attacks; (iv) geopolitical
uncertainties, including continued hostilities involving the United States; (v)
corporate and consumer confidence in the economy, 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 key employees and attrition in general; and (ix) other
factors, including those described under "Risk Factors" below.



We expect total costs and expenses to increase in the
fourth quarter of 2004 from the levels incurred in the third quarter of 2004,
primarily due to (i) increases in expenses that vary directly with revenue
levels, such as "cost of revenues," incentive compensation and
commissions, and (ii) increases in personnel-related costs (i.e., salaries and
benefits) associated with increased investments in customer-facing and product
development personnel.  Partially offsetting these increases are continued cost
savings from the Restructurings, additional cost savings from the cost control
initiatives described previously and additional reductions in depreciation
expense.



As discussed further in Note 4 to the accompanying
unaudited 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.



We expect that the anticipated increases in our total
revenue levels will more than offset the anticipated modest increases in total
costs and expenses and, accordingly, we currently expect operating income and
margin for the fourth quarter of 2004 to increase from levels achieved in the
third quarter of 2004.  Our expectations regarding operating income depend on
our ability to continue 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 proposals, including
the estimated closing date and potential dollar amount of each transaction. We
aggregate these estimates periodically to generate a sales pipeline and then
evaluate the pipeline to identify trends in our business.  This pipeline
analysis and related estimates of revenue may differ significantly from actual
revenues in a particular reporting period as the estimates and assumptions were
made using the best available data at the time.  A variation in the pipeline or
in the conversion rate of the pipeline into contracts could cause us to plan or
budget inaccurately and thereby could adversely affect our business, financial
condition or results of operations.  In addition, because a substantial portion
of our software license contracts close in the latter part of a quarter,
management may not be able to adjust our cost structure to respond to a
variation in the conversion of the pipeline, which may adversely and materially
affect our business, financial condition or results of operations.



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



We currently expect our effective tax rate for the fourth
quarter of 2004 to be approximately 41%.  The estimated effective tax rate is
based on current tax law and our expected annual income and may be affected by
the jurisdictions in which profits are determined to be earned and taxed and our
ability to realize deferred tax assets.  Further, our projected effective income
tax rate for the remainder of 2004 does not take into account a new election
that is available under the U.S. income tax rules regarding the allocation
between U.S. and foreign jurisdictions of tax deductions attributable to
employee stock option compensation.  We have not yet determined the impact that
this election would have on our effective tax rate and operating results.



As discussed in Note 4 to the accompanying unaudited
consolidated financial statements, our U.S. Federal income tax returns for 1998
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 by us
in the accompanying consolidated financial statements.  We will continually
review our estimates related to our income tax obligations, including potential
assessments from the IRS of additional taxes, penalties and/or interest, and
revise our estimates if deemed necessary.  A revision in our estimates of our
tax obligations will be reflected as an adjustment to our income tax provision
at the time of the change in our estimates.  Such a revision could materially
impact our effective tax rate, income tax provision and net income.



Discussion of the Results of
Operations for the Three and Nine Months Ended September 30, 2003 and 2004



Revenues



Our total revenues decreased from $321.4 million and
$987.5 million during the three and nine months ended September 30, 2003,
respectively, to $317.1 million and $947.4 million during the three and nine
months ended September 30, 2004, respectively, representing year-over-year
declines of 1% and 4%, respectively.  Our total revenues decreased during the
third quarter of 2004 from the third quarter of 2003 primarily due to a $5.4
million decrease in our software license revenues, whereas the year-over-year
decrease in our total revenues during the nine months ended September 30, 2004
was primarily due to a $34.3 million decrease 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 and nine months ended September 30, 2003 and 2004 (in thousands,
except percentages):

`Three Months Ended September 30,           Nine Months Ended September 30,
                                    -----------------------------------------  ------------------------------------------
                                       2003        2004        Change    %       2003       2004        Change       %
                                    ----------  ----------  ---------- ------  ---------- ----------  ---------- --------
Software license revenues.......... $110,003    $104,579    $  (5,424)   (5)%  $331,989   $326,207    $  (5,782)    (2)%
Percentage of total revenues.......       34 %        33 %                           34 %       34 %`

Software license revenues decreased from the three and
nine months ended September 30, 2003 to the three and nine months ended
September 30, 2004, respectively, primarily due to (i) the continued
cautiousness on the part of our prospects and customers in setting and executing
on their capital spending budgets; (ii) a lengthening of our customers'
evaluation and approval time to complete a software purchase, possibly due to
our customers' efforts regarding the Sarbanes-Oxley Act of 2002; (iii)
reductions of the size of orders by our customers, possibly attributable to our
customers' own cost control initiatives; (iv) increased competitive dynamics in
the CRM application market; and (v) declines in revenues in certain of our
geographic regions (primarily Asia Pacific), industries (e.g., telecom) and
product lines (e.g., our core sales, marketing and service automation product
line).



While our software license revenues declined on a
year-over-year basis, we were able to grow software license revenues sequentially by
$9.8 million, or 10%, from the second quarter of 2004, primarily due to the
actions taken by management as described in the section above entitled
"Focus on Future Improvement in Our Operating Performance."  We are
cautiously optimistic that the actions we have taken thus far, coupled with our
continued execution against our operating performance plan, may result in
continued improvement in our software license revenues in the fourth quarter of
2004 and beyond.



One of the primary reasons for our cautious optimism is
the significant growth in our newest product lines, analytics and business
integration applications.  Specifically, analytics increased on a year-over-year
basis by 24% and 50% during the three and nine months ended September 30, 2004,
respectively, and business integration applications (primarily UCM) increased on
a year-over-year basis by 55% and 53% during the three and nine months ended
September 30, 2004, respectively.  The growth within these product lines
partially offset declines in our core sales, marketing and service automation
product line, which declined on a year-over-year basis by 17% and 11% during the
three and nine months ended September 30, 2004, respectively.  We are cautiously
optimistic that our continued execution against our operating performance plan
will allow us to return our sales, marketing and service automation product line
to sequential and year-over-year growth in the near future.  The following is a
summary of our software license revenues, by CRM product, for the three and nine
months ended September 30, 2003 and 2004 (in thousands):

`Three Months Ended      Nine Months Ended
                                                  September 30,           September 30,
                                              ----------------------  ---------------------
                                                 2003        2004        2003       2004
                                              ----------- ----------  ---------- ----------
   Sales, marketing and service automation..  $   81,176  $  67,397   $ 255,848  $ 227,163
   Analytics................................      22,176     27,429      50,927     76,139
   Business integration applications........       5,364      8,333      11,725     17,900
   Employee relationship management.........       1,287      1,420      13,489      5,005
                                              ----------- ----------  ---------- ----------
        Total...............................  $  110,003  $ 104,579   $ 331,989  $ 326,207
                                              =========== ==========  ========== ==========`

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         Nine Months Ended
                                                                  September 30,              September 30,
                                                             ---------------------------  ----------------------
Other key software license metrics:                             2003           2004          2003        2004
----------------------------------------------------------   -------------  ------------  ----------  ----------
Transactions equal to or greater than $5 million..........              3             2           7           8
Transactions between $1 million and $5 million............             16            30          73          68
Total number of transactions..............................            317           296       1,033         901
Average transaction size (in thousands)...................   $        347   $       353   $     321   $     362`

As the above table indicates, we are beginning to see the
benefits of our operating performance plan on a year-over-year basis in many of
the above metrics.  For example, the average transaction size increased on a
year-over-year basis during both the three and nine months ended September 30,
2004 and our largest transactions—those generating revenue of $1 million
and over—increased on a year-over-year basis from a total of 19
transactions during the third quarter of 2003 to 32 transactions during the
third quarter of 2004.  While the total number of transactions declined on
year-over-year basis during both the three and nine months ended September 30, 2004,
we are focused on driving revenue across customers of all sizes and intend to
continue to work to increase both the total number of transactions and further
increase our average transaction size.  We are cautiously optimistic that we
will achieve these objectives.



We base this cautious optimism in part on our improved
sequential quarterly performance in the third quarter of 2004 and other non-financial
metrics that we believe may provide a solid foundation to grow our
revenues.  For example, our customers continue to increase the deployment of
previous purchases of our software, which is evidenced by the increase in the
number of deployed users from approximately 2.2 million as of December 31, 2003
to approximately 2.8 million as of September 30, 2004.  In addition, we believe
our leadership position in the CRM application market and our corresponding
customer base provide us with a solid foundation to improve our performance.
Further, we continue to build on this customer base—software license
revenues from new customers or new projects at existing customers increased to
approximately 54% and 58% of total software license revenues during the three
and nine months ended September 30, 2004, respectively, compared to a range of
50% to 55% during each of the last three years.  We believe increases in our
customer base may provide increased future sales opportunities when and if
corporate capital expenditures return to normalized levels.



We market our products through our direct sales force,
and to a limited extent through distributors primarily in Europe, Asia Pacific,
Japan and Latin America.  International license revenues accounted for 46% and
47% of software license revenues during the three and nine months ended
September 30, 2003, respectively, and 33% and 39% during the three and nine
months ended September 30, 2004, respectively.  The decline in our international
software license revenues is primarily attributable to declines within Asia
Pacific, which declined on a year-over-year basis by $13.1 million and $17.2
million during the three and nine months ended September 30, 2004, respectively,
from the comparable periods in 2003.  We expect international software license
revenues will continue to account for a significant portion of our overall
software license revenues in the foreseeable future.  Because the majority of
our software license arrangements and related operating activities are
denominated in U.S. dollars, foreign currency exchange rates did not have a
significant impact on software license revenues, total revenues or net income
for any period presented.



Professional Services, Maintenance and Other



Professional services, maintenance and other revenues are
primarily comprised of implementation services and training services (i.e.,
professional services) and technical support and product updates (i.e.,
maintenance).  Our professional services are typically initiated and provided
over a period of three to nine months subsequent to the licensing of our
software and depend in large part upon our software license revenues in the
immediate preceding periods.  Substantially all of our professional services
arrangements are billed on a time and materials basis and, accordingly, are
recognized as the services are performed.



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



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



Professional services, maintenance and other revenues
increased in aggregate by $1.1 million, or 1%, from $211.4 million for the three
months ended September 30, 2003 to $212.5 million for the three months ended
September 30, 2004, and decreased by $34.3 million, or 5%, from $655.5 million
for the nine months ended September 30, 2003 to $621.2 million for the nine
months ended September 30, 2004.  This decrease was primarily due to a decline
in revenues derived from our implementation and training services, partially
offset by an increase in the installed base of customers receiving
maintenance.



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

`Three Months Ended September 30,           Nine Months Ended September 30,
                                    -----------------------------------------  ------------------------------------------
                                       2003        2004       Change     %        2003       2004       Change      %
                                    ----------  ----------  ---------- ------  ---------- ----------  ---------- --------
Maintenance:                                                                                                             
Absolute dollars................... $110,046    $118,059    $   8,013     7 %  $331,839   $347,350    $  15,511      5 %
Percentage of total revenues.......       34 %        37 %                           34 %       37 %
                                                                                                                         
Professional services and other:                                                                                         
Absolute dollars................... $101,383    $ 94,448    $  (6,935)   (7)%  $323,658   $273,875    $ (49,783)   (15)%
Percentage of total revenues.......       32 %        30 %                           32 %       29 %`

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



While maintenance revenues have continued to increase on
a year-over-year basis, professional services and other revenues, both in
absolute dollars and as a percentage of total revenues, decreased during the
three and nine months ended September 30, 2004 from the respective periods in
2003, primarily due to (i) a lag effect, as discussed further below and
elsewhere in this quarterly report, related to our software license revenues;
(ii) declines of $0.9 million and $4.1 million in our rebillable travel and
entertainment ("T&E") expenses during the three and nine months
ended September 30, 2004, respectively, primarily due to lower demand for our
professional services; and (iii) the effect of the transition to new leadership
in our Global Services Organization.



While each of these factors impacted our professional
services and other revenues, we believe the primary reason for the decrease in
our professional services revenues is a lag effect related to our software
license revenues.  Specifically, our implementation and training services are
initiated and performed over a period of three to nine months subsequent to the
initial software license and, as a result, our implementation and training
services typically vary with the amount of software license revenues generated
in the preceding three- to nine-month period.  Accordingly, we believe a
majority of the year-over-year declines in our professional services and other
revenues is due to previous declines in our software license revenues.



We have taken and will continue to take steps to improve
the performance of our Global Services Organization.  We are beginning to
realize the benefit of these efforts with modest sequential quarterly growth in
the third quarter of 2004, the second consecutive quarter of sequential growth,
and an improved pipeline of professional services contracts as we begin the
fourth quarter of 2004.  We are committed to realizing the benefits of these
efforts in an expansion of our professional services' margins, including further
cost controls, if necessary, to achieve our gross margin goals.  Despite our
focus to grow our professional service revenues, we expect to balance our growth
initiatives with our desire to manage our professional services organization to
ensure that it does not compete with our implementation partners.



Cost of Revenues



Total cost of revenues decreased by $14.6 million, or
12%, from $126.5 million during the three months ended September 30, 2003 to
$111.9 million during the three months ended September 30, 2004.  Total cost of
revenues decreased by $53.5 million, or 14%, from $387.1 million during the nine
months ended September 30, 2003 to $333.6 million during the nine months ended
September 30, 2004.  As a percentage of total revenues, cost of revenues
decreased from 39% (a gross margin of 61%) in each of the 2003 periods to 35% (a
gross margin of 65%) during each of the 2004 periods.



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



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



Software



Cost of software license revenues includes amortization
of acquired technology, third-party software royalties and product packaging,
production and documentation.  All costs incurred in the research and
development of software products and enhancements to existing products have been
expensed as incurred.  The following table sets forth our cost of software
license revenues in terms of absolute dollars and as a percentage of software
license revenues for the three and nine months ended September 30, 2003 and 2004
(in thousands, except percentages):

`Three Months Ended September 30,           Nine Months Ended September 30,
                                    -----------------------------------------  ------------------------------------------
                                       2003        2004       Change     %        2003       2004       Change      %
                                    ----------  ----------  ---------- ------  ---------- ----------  ---------- --------
Cost of software license revenues.. $  5,974    $  3,010    $  (2,964)  (50)%  $ 14,963   $  9,054    $  (5,909)   (39)%
Percentage of software
   license revenues................        5 %         3 %                            5 %        3 %`

Included in cost of software license revenues for the
three and nine months ended September 30, 2003 is a charge of $2.4 million
related to the abandonment in July 2003 of certain technology acquired from
Sales.com, Inc. ("Sales.com").  There were no abandonment charges in
any of the 2004 periods.  In addition to the decline in cost of software license
revenues due to this abandonment charge, cost of software license revenues
decreased from the 2003 periods to the 2004 periods primarily due to (i) a
further reduction of $0.4 million and $3.1 million, respectively, from the
cessation of amortization expense related to the technology acquired from
Sales.com, and (ii) reductions in third-party royalties resulting from
reductions in software license revenues and a shift to products with lower
royalties.  Partially offsetting these declines were increases in amortization
expense of $0.5 million and $0.9 million during the three and nine months ended
September 30, 2004, respectively, associated with technology acquired in
connection with our acquisition of Eontec on April 20, 2004.

Professional Services, Maintenance and Other



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

`Three Months Ended September 30,           Nine Months Ended September 30,
                                      -----------------------------------------  ------------------------------------------
                                         2003        2004       Change     %        2003       2004      Change       %
                                      ----------  ----------  ---------- ------  ---------- ----------  ---------- --------
Cost of professional services,
   maintenance, and other revenues... $120,489    $108,868    $ (11,621)  (10)%  $372,142   $324,534    $ (47,608)   (13)%
Percentage of professional services,
   maintenance, and other revenues...       57 %        51 %                           57 %       52 %`

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

`Year-Over-Year Change
                                                             ---------------------------
                                                             Three Months   Nine Months
                                                                Ended          Ended
                                                             September 30,  September 30,
Cost component:                                                  2004           2004
----------------------------------------------------------   -------------  ------------
Personnel-related costs (compensation, benefits, etc.)....   $       (807)  $   (11,158)
Outside consulting costs..................................             37        (4,575)
Facility-related costs (rent, maintenance, etc.)..........         (3,684)      (11,834)
Depreciation expense......................................         (6,711)      (14,346)
Rebillable T&E expenses...................................           (859)       (4,117)
Non-billable T&E expenses.................................         (1,102)       (4,813)
Amortization of intangibles...............................          1,664         4,108
Cost of training and other costs, net.....................           (159)         (873)
                                                             -------------  ------------
          Total year-over-year change.....................   $    (11,621)  $   (47,608)
                                                             =============  ============`

We were able to reduce our cost of professional services,
maintenance and other revenues on a year-over-year basis during the three and
nine months ended September 30, 2004 primarily due to (i) the Restructurings,
(ii) our cost control initiatives and (iii) further cost reductions in response
to declines in the demand for our professional services (i.e., implementation
and training services).  For example, personnel-related costs have declined as a
result of our reduction of average headcount in our Global Services Organization
from 2,185 and 2,305 in the three and nine months ended September 30, 2003,
respectively, to 1,905 and 1,955 in the three and nine months ended September
30, 2004, respectively.  On a year-to-date basis, we also reduced our use of
third-party consultants commensurate with the decline in our implementation
revenues and declines in the utilization rates of our personnel.  Finally, we
consolidated several of our facilities in connection with the Restructurings,
resulting in reductions in the facility-related component of our cost of
professional services, maintenance and other revenues.



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



Partially offsetting the above cost savings were the
following: (i) increases of $1.7 million and $4.1 million during the three and
nine months ended September 30, 2004, respectively, due to additional
amortization expense of intangible assets obtained in our acquisitions of Eontec
and UpShot, (ii) increases in compensation costs associated with additional
personnel obtained in our acquisitions of Eontec and UpShot and (iii) increases
in compensation costs associated with the renewal of merit increases and certain
incentive compensation.



Cost of professional services, maintenance and other
revenues as a percentage of the corresponding revenues decreased from 57% during
both the three and nine months ended September 30, 2003 to 51% and 52% during
the three and nine months ended September 30, 2004, respectively, primarily due
to (i) a higher percentage of our professional services, maintenance and other
revenues being derived from our higher-margin maintenance revenues in the 2004
periods compared to the 2003 periods and (ii) our reduction of personnel,
facility and other costs as discussed above.  Primarily as a result of these
factors, our gross margin related to our professional services, maintenance and
other revenues improved from 43% during both the three and nine months ended
September 30, 2003 to 49% and 48% during the three and nine months ended
September 30, 2004, respectively.  This year-over-year improvement in our gross
margin includes an offsetting impact of an increase in amortization expense
associated with intangible assets obtained in our acquisitions of Eontec and
UpShot.

Operating Expenses



Product Development



Product development expense includes costs associated
with the development of new products, enhancements of existing products, quality
assurance activities and vertical engineering.  These costs consist primarily of
employee salaries and benefits, occupancy costs, consulting costs and the cost
of software development tools and equipment.  The following table sets forth our
product development expense in terms of absolute dollars and as a percentage of
total revenues for the three and nine months ended September 30, 2003 and 2004
(in thousands, except percentages):

`Three Months Ended September 30,           Nine Months Ended September 30,
                                    -----------------------------------------  ------------------------------------------
                                       2003        2004       Change     %        2003       2004       Change      %
                                    ----------  ----------  ---------- ------  ---------- ----------  ---------- --------
Product development expense........ $ 71,432    $ 69,718    $  (1,714)   (2)%  $226,177   $217,279    $  (8,898)    (4)%
Percentage of total revenues.......       22 %        22 %                           23 %       23 %`

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

`Year-Over-Year Change
                                                             ---------------------------
                                                             Three Months   Nine Months
                                                                Ended          Ended
                                                             September 30,  September 30,
Cost component:                                                  2004           2004
----------------------------------------------------------   -------------  ------------
Personnel-related costs (compensation, benefits, etc.)....   $     (2,902)  $    (9,009)
Facility-related costs (rent, maintenance, etc.)..........         (2,219)       (7,025)
Depreciation expense......................................         (2,344)       (4,856)
Outside consulting costs..................................          5,816        11,441
Other, net................................................            (65)          551
                                                             -------------  ------------
          Total year-over-year change.....................   $     (1,714)  $    (8,898)
                                                             =============  ============`

Our personnel-related costs decreased on a year-over-year
basis during both the three and nine months ended September 30, 2004 primarily
due to reductions of product development headcount in connection with the
Restructurings, including the transition of a number of these positions to labor
markets with lower cost structures.  Specifically, the average headcount in our
product development organization decreased from 1,455 and 1,545 in the three and
nine months ended September 30, 2003, respectively, to 1,350 and 1,330 in the
three and nine months ended September 30, 2004, respectively.  In addition to
the reductions in our personnel costs, we have reduced the facility-related cost
component of product development expense, primarily as a result of the
consolidation of facilities in connection with the Restructurings.  Further, we
have continued to reduce our discretionary spending in areas such as capital
expenditures, resulting in declines in our depreciation expense.



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

Sales and Marketing



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

`Three Months Ended September 30,           Nine Months Ended September 30,
                                    -----------------------------------------  ------------------------------------------
                                       2003        2004       Change     %        2003       2004       Change      %
                                    ----------  ----------  ---------- ------  ---------- ----------  ---------- --------
Sales and marketing expense........ $ 82,756    $ 76,500    $  (6,256)   (8)%  $276,804   $241,166    $ (35,638)   (13)%
Percentage of total revenues.......       26 %        24 %                           28 %       25 %`

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

`Year-Over-Year Change
                                                             ---------------------------
                                                             Three Months   Nine Months
                                                                Ended          Ended
                                                             September 30,  September 30,
Cost component:                                                  2004           2004
----------------------------------------------------------   -------------  ------------
Personnel-related costs (compensation, benefits, etc.)....   $       (600)  $   (14,057)
Facility-related costs (rent, maintenance, etc.)..........           (375)       (4,565)
Depreciation expense......................................         (1,008)       (5,011)
Marketing and advertising.................................         (4,052)       (8,654)
T&E expenses..............................................            569        (1,655)
Sales commissions.........................................         (1,331)       (1,971)
Other, net................................................            541           275
                                                             -------------  ------------
          Total year-over-year change.....................   $     (6,256)  $   (35,638)
                                                             =============  ============`

Our personnel-related costs decreased on a year-over-year
basis during both the three and nine months ended September 30, 2004 primarily
due to reductions of sales and marketing headcount in connection with the
Restructurings.  Specifically, the average headcount in our sales and marketing
organizations decreased from 1,100 and 1,200 in the three and nine months ended
September 30, 2003, respectively, to 1,070 and 1,040 in the three and nine
months ended September 30, 2004, respectively.  These savings related to
personnel-related costs include the offsetting impact of increases in
compensation costs from the renewal of merit increases and certain other
incentive compensation.  In addition to the reductions in our personnel costs,
we have reduced the facility-related cost component of sales and marketing
expense, primarily as a result of the consolidation of facilities in connection
with the Restructurings.



We have also achieved aggregate decreases of $4.5 million
and $15.3 million related to depreciation expense, marketing and advertising
expenses, and T&E expenses during the three and nine months ended September
30, 2004, respectively, primarily due to the further realization of savings from
our cost control initiatives.  Our sales commission expense declined by $1.3
million and $2.0 million during the three and nine months ended September 30,
2004, respectively, primarily due to a decrease in our software license
revenues.



Sales and marketing expense decreased as a percentage of
total revenues from 26% and 28% for the three and nine months ended September
30, 2003, respectively, to 24% and 25% for the three and nine months ended
September 30, 2004, respectively, primarily due to the Restructurings and our
continued attention to our cost structure.

General and Administrative



General and administrative expense is comprised primarily
of costs associated with our executive and administrative personnel (e.g., the
CEO and finance, information technology, human resources and facilities
personnel) and consists primarily of salaries and occupancy costs, along with
bad debt, professional services expenses (e.g., audit fees, costs associated
with compliance with the Sarbanes-Oxley Act of 2002, or SOX, etc.) and 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
and nine months ended September 30, 2003 and 2004 (in thousands, except
percentages):

`Three Months Ended September 30,           Nine Months Ended September 30,
                                    -----------------------------------------  ------------------------------------------
                                       2003        2004       Change     %        2003       2004       Change      %
                                    ----------  ----------  ---------- ------  ---------- ----------  ---------- --------
General and adminstrative expense.. $ 27,319    $ 27,114    $    (205)   (1)%  $ 81,860   $ 76,200    $  (5,660)    (7)%
Percentage of total revenues.......        8 %         9 %                            8 %        8 %`

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

`Year-Over-Year Change
                                                             ---------------------------
                                                             Three Months   Nine Months
                                                                Ended          Ended
                                                             September 30,  September 30,
Cost component:                                                  2004           2004
----------------------------------------------------------   -------------  ------------
Facility-related costs (rent, maintenance, etc.)..........   $       (512)  $    (2,551)
Depreciation expense......................................         (2,440)       (5,588)
Bad debt expense..........................................         (1,542)       (8,369)
Personnel-related costs (compensation, benefits, etc.)....            822           632
Compensation related to restricted stock units ("RSUs")...            325         2,103
Legal and tax-related expense.............................          2,225         5,938
Professional services and other costs, net................            917         2,175
                                                             -------------  ------------
          Total year-over-year change.....................   $       (205)  $    (5,660)
                                                             =============  ============`

General and administrative expenses decreased on a
year-over-year basis primarily due to declines in our facilities-related costs,
depreciation expense and bad debt expense.  Our facility-related costs decreased
on a year-over-year basis during both the three and nine months ended September
30, 2004 primarily due to the consolidation of facilities in connection with the
Restructurings.   We have also continued to reduce our discretionary spending in
areas such as capital expenditures, resulting in declines in our depreciation
expense.  Bad debt expense decreased during the three and nine months ended
September 30, 2004, respectively, primarily due to the continued improvement in
our collection efforts, including further reductions in accounts receivable
levels, an improved accounts receivable aging and the recovery of amounts
previously written-off.



Partially offsetting these cost savings were increases in
personnel-related costs, compensation related to RSUs, legal expense and costs
of outside professional services.  Personnel-related costs increased on a
year-over-year basis during both the three and nine months ended September 30, 2004,
primarily due to (i) our continued investment in additional executive personnel
as outlined above under the section entitled "Focus on Future Improvement
in Our Operating Performance," (ii) renewal of merit increases and certain
incentive compensation and (iii) continued investment in additional financial
personnel as part of our on-going commitment to strong internal controls.  Our
average headcount in our administrative organization was 545 and 580 in the
three and nine months ended September 30, 2003, respectively, compared to 560
and 550 in the three and nine months ended September 30, 2004, respectively.
The year-over-year growth in our administrative organization during the third
quarter of 2004 compared to the third quarter of 2003 was primarily due to
growth in our information technology support personnel.



Further offsetting the above cost savings were (i)
increases in compensation costs of $0.3 million and $2.1 million during the
three and nine months ended September 30, 2004, respectively, associated with
the issuance of RSUs to certain executive officers in connection with their
commencement of employment; (ii) increases of $2.2 million and $5.9 million
during the three and nine months ended September 30, 2004, respectively, related
to increases in legal and tax-related expenses (please refer to Note 4 to the
accompanying unaudited consolidated financial statements for further discussion
of legal proceedings); and (iii) increases in professional services and certain
other costs of approximately $0.9 million and $2.2 million during the three and
nine months ended September 30, 2004, respectively, a significant portion of
which was associated with our compliance with SOX.

Restructuring and Related Expenses



As further described in Note 2 to the accompanying
unaudited financial statements, we initiated a series of restructurings of our
operations designed to better align our operating structure with expected
revenue levels.  We initiated and completed the first restructuring in 2002 (the
"2002 Restructuring"), the second restructuring in 2003 (the
"2003 Restructuring"), and the third restructuring in the third
quarter of 2004 (the "2004 Restructuring" and collectively with the
2002 Restructuring and 2003 Restructuring, the "Restructurings").



The 2002 and 2003 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 2004 Restructuring consisted primarily of the consolidation of
additional facilities (located primarily in North America and Asia Pacific) and
the abandonment of the related leasehold improvements and furniture and
fixtures.



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

`Employee      Facility-      Asset
                                                         Termination    Related     Abandonment
                                                          Costs (1)     Costs (2)     Costs (3)     Total
                                                         ------------ ------------- ------------ -----------
Restructuring obligations, December 31, 2003............ $     3,805  $    147,790  $        --  $  151,595
                                                         ------------ ------------- ------------ -----------
Restructuring and related expenses:
  Recognized related to the 2004 Restructuring (4)......          --         2,833        1,703       4,536
  Recognized related to changes in estimates (5)........      (1,465)          837          205        (423)
  Accretion related to the Restructurings (6)...........          --         1,630           --       1,630
                                                         ------------ ------------- ------------ -----------
     Total (7)..........................................      (1,465)        5,300        1,908       5,743
Cash payments...........................................      (1,557)      (39,002)          --     (40,559)
Non-cash charges........................................          --            --       (1,908)     (1,908)
                                                         ------------ ------------- ------------ -----------
Restructuring obligations, September 30, 2004........... $       783  $    114,088  $        --  $  114,871
                                                         ============ ============= ============
     Less: Restructuring obligations, short-term........                                             36,397
                                                                                                 -----------
     Restructuring obligations, long-term...............                                         $   78,474
                                                                                                 ===========`

1. The costs associated with our 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 September 30, 2004 relate to less than 10
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 the next six months.
2. The costs associated with our facilities consolidation
primarily relate to lease termination costs, costs associated with satisfying
remaining lease commitments, and expected brokerage and other re-letting costs,
partially offset by estimated sublease income.
3. As part of the consolidation of our facilities, certain
leasehold improvements, furniture and fixtures were abandoned.  As a result, we
recorded a non-cash charge equal to the net book value of these abandoned assets
in restructuring and related expenses.
4. In accordance with SFAS 146, we recorded the facility-related
expenses incurred in the 2004 Restructuring after giving effect to the
net present value of the related obligations.
5. We revised our estimated obligations with respect to the
2003 Restructuring during the nine months ended September 30, 2004 as
follows:
6. Employee termination costs—Due primarily to higher
than expected voluntary terminations associated with positions included in the
2003 Restructuring, we reduced our remaining obligations for employee
termination costs during the second quarter of 2004.
7. Facility-related costs—Due primarily to the real
estate markets in which we operate remaining at depressed levels longer than
originally anticipated, we extended the estimated sublease commencement dates
and/or reduced the estimated sublease rates on certain restructured properties.
Partially offsetting these reductions in estimated sublease income were
favorable changes in estimates that resulted from entering into subleases sooner
and/or at higher sublease rates than originally anticipated on certain other
restructured properties.
8. Represents the accretion of the 2003 and 2004
Restructuring obligations.  We will continue to accrete our obligations related
to the 2003 and 2004 Restructurings to the then present value and, accordingly,
will recognize additional accretion expense as a restructuring and related
expense in future periods.
9. The following is a summary of the net restructuring and
related expenses recognized during the three and nine months ended September 30,
2004 (in thousands):

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 our restructuring obligations in current operations based on
management's most current estimates.  Please refer to Note 2 to the accompanying
unaudited consolidated financial statements for a further discussion of our
Restructurings.



Purchased In-Process Product Development



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



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



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

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



Operating Income (Loss) and Operating Margin



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

`Three Months Ended September 30,           Nine Months Ended September 30,
                                    -----------------------------------------  ------------------------------------------
                                       2003        2004       Change     %        2003       2004       Change      %
                                    ----------  ----------  ---------- ------  ---------- ----------  ---------- --------
Operating income (loss)............ $(91,305)   $ 25,725    $ 117,030   128 %  $(89,501)  $ 67,456    $ 156,957    175 %
Operating margin...................    (28.4)%       8.1 %                         (9.1)%      7.1 %`

Our operating income (loss) and operating margin
increased favorably on a year-over-year basis during both the three and nine
months ended September 30, 2004 due primarily to (i) net year-over-year
reductions of $101.1 million and $95.7 million related to certain significant
and unusual charges (i.e., restructuring, asset abandonment and IPR&D
charges) and (ii) a $20.3 million and $101.3 million improvement in our
operating margins due to the cost savings obtained from the Restructurings and
our continued attention to cost controls.  Partially offsetting these
improvements in our operating margins were year-over-year declines in our total
revenues of $4.3 million and $40.1 million during the three and nine months
ended September 30, 2004, respectively.



Other Income (Expense), Net



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

`Three Months Ended      Nine Months Ended
                                                    September 30,          September 30,
                                               ---------------------  ---------------------
                                                  2003       2004        2003       2004
                                               ---------- ----------  ---------- ----------
Interest income............................... $  12,909  $  12,209   $  40,620  $  35,060
Loss on early extinguishment of debt..........   (10,711)        --     (10,711)        --
Interest expense..............................    (4,827)      (174)    (14,575)      (728)
Net gains on marketable investments...........     1,055        147       4,760      1,997
Write-down of cost-method investments.........      (269)      (275)       (675)    (1,821)
Other, net....................................       445       (383)       (143)    (1,432)
                                               ---------- ----------  ---------- ----------
                                               $  (1,398) $  11,524   $  19,276  $  33,076
                                               ========== ==========  ========== ==========`

Interest income represents earnings on our cash and
short-term investments.  During the three and nine months ended September 30,
2004, interest income decreased on a year-over-year basis by $0.7 million and
$5.6 million, respectively, primarily due to a decline in interest rates.



On September 30, 2003, we redeemed the $300.0 million
convertible subordinated debentures ("Debentures") in accordance with
their terms for $307.1 million.  In connection with this redemption, we incurred
a pre-tax charge to operations of $10.7 million, consisting of the $7.1 million
premium and the write-off of the remaining unamortized issuance costs of $3.6
million.  This pre-tax charge is reflected in the above table under the heading
"loss on early extinguishment of debt" for the three and nine months
ended September 30, 2003.  The decrease in interest expense is primarily due to
our redemption of the Debentures.  Interest expense for the three and nine
months ended September 30, 2004 primarily represents interest associated with
our capital lease obligations.



Net gains on marketable investments represent realized
gains recognized upon the sale of certain short-term debt instruments.  We hold
several minority interests, included in other assets, in companies having
operations or technology in areas within our strategic focus.  Write-down of
cost-method investments in the above table represents adjustments to certain of
these investments to the estimated fair value as the decline in these
investments was deemed to be other-than-temporary.  Other, net for all periods
presented is primarily comprised of banking fees and foreign currency
transaction gains or losses.



Provision for Income Taxes and Income Tax Benefit



During the three and nine months ended September 30,
2003, we recognized an income tax benefit of $33.4 million and $25.3 million,
respectively, and during the three and nine months ended September 30, 2004, we
recognized a provision for income taxes of $17.9 million and $41.3 million,
respectively.  Income taxes (benefit) as a percentage of pretax income (loss)
(the "Effective Rate") increased from 36% for both the three and nine
months ended September 30, 2003 to 48% and 41% for the three and nine months
ended September 30, 2004, respectively, primarily due to (i) additional tax
expense associated with a tentative settlement of certain IRS examinations,
which are discussed further in Note 4 to the accompanying unaudited consolidated
financial statements and (ii) certain expenses that are not deductible for
income tax purposes.  Please refer to Note 5 to the accompanying unaudited
consolidated financial statements for a reconciliation of our federal statutory
rate to our effective tax rate for the three and nine months ended September 30,
2004.



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.

As discussed in Note 4 to the accompanying unaudited
consolidated financial statements, our U.S. Federal income tax returns for 1998
through 2003 are currently under examination by the IRS.  During 2003 and 2004,
we received notices from the IRS of proposed adjustments to certain of these tax
returns.  In August 2004, the Company reached a tentative settlement with the
IRS with respect to the IRS's examination of our income tax returns for the
years 1998 to 2000, which we believe resolves all significant matters
outstanding with respect to our income tax returns for the tax years 1998 to
2000.

While the final resolution of the IRS's on-going
examination is uncertain, we believe that we have made adequate provision in the
accompanying unaudited consolidated financial statements for any adjustments
that the IRS has or may propose with respect to our U.S. Federal income tax
returns.  Based on currently available information, we believe that the ultimate
outcome of these examinations will not have a material adverse effect on our
financial position, cash flows or results of operations.  However, the final
determination of our tax obligations may exceed the amounts provided by us in
the accompanying unaudited consolidated financial statements.  We will
continually review our estimates related to our income tax obligations,
including potential assessments from the IRS of additional taxes, penalties
and/or interest, and revise our estimates, if deemed necessary.  We will reflect
any revision in our estimates of our tax obligations as an adjustment to our
income tax provision at the time of the change in our estimates.  Such a
revision could materially impact our effective tax rate, income tax provision
and net income.



Liquidity and Capital Resources



Overview



We derive our liquidity and capital resources
primarily from our cash flows from operations and from our working capital.  Our
working capital increased from $1,708.9 million as of December 31, 2003 to
$1,799.7 million as of September 30, 2004, primarily due to our positive
earnings during the nine months ended September 30, 2004.  With virtually no
debt and a strong working capital position, we believe that we have the
flexibility to continue investment 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.  Specifically, our cash, cash equivalents and short-term
investments increased from $2,023.2 million as of December 31, 2003 to $2,153.7
million as of September 30, 2004, representing approximately 71% and 74% of
total assets, respectively.  In addition, our days sales outstanding in accounts
receivable ("DSO") declined from 64 days as of December 31, 2003 to 59
days as of September 30, 2004.



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



Commitments



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



Cash Flows



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



Operations



Net cash provided by operating activities increased from
$153.2 million during the nine months ended September 30, 2003 to $195.1 million
for the nine months ended September 30, 2004, primarily due to the increase in
our earnings from a net loss of $44.9 million during the nine months ended
September 30, 2003 to net income of $59.2 million for the nine months ended
September 30, 2004.  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 (decreases) in deferred revenue (collectively representing net
cash inflows of $69.2 million and $59.2 million in the 2003 and 2004 periods,
respectively), partially offset by payments of accounts payable, accrued
expenses and restructuring obligations.



As we settle our remaining restructuring obligations ($114.9
million as of September 30, 2004), our future operating cash flows will be
reduced from what it otherwise would have been in the period of settlement.  We
currently estimate that we will settle $36.4 million of these obligations in the
next 12 months.



We currently anticipate that we will continue to operate a
cash-positive business in the fourth quarter of 2004.  Our ability to meet these
expectations depends on our ability to achieve positive earnings and maintain or
increase the level of our software license revenues, 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 change, or a reduction of capital expenditures by our
customers as a result of a downturn in the global economy, among other
factors.



Investing



Net cash used in investing activities was $10.4 million and
$314.0 million for the nine months ended September 30, 2003 and 2004,
respectively.  During each of these periods, our investment activities primarily
related to transactions within our short-term investments.  As discussed further
below, we repurchased our Debentures for $307.1 million during the nine months
ended September 30, 2003, in part funded from the proceeds from sales of short-term
investments.   Accordingly, we received net proceeds on sales of short-term
investments of $0.1 million during the nine months ended September 30, 2003,
compared to a net reinvestment of our cash balances into short-term investments
of $230.1 million during the comparable period in 2004.



We also utilize our cash position to invest in new property
and equipment, with net purchases of property and equipment of $14.0 million and
$7.8 million during the nine months ended September 30, 2003 and 2004,
respectively.  Capital expenditures decreased 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, (iii) the replacement of certain older computer and
information technology infrastructure, and (iv) the needs of an expanded
workforce.  Accordingly, we expect our total capital expenditures to be between
$7.5 million and $10 million for the fourth quarter of 2004.



The remaining cash flows used in investing activities for the
nine months ended September 30, 2004 consisted primarily of the acquisitions of
Ineto Services, Inc. for net cash consideration of $4.8 million and Eontec for
net cash consideration of approximately $71.1 million.  Please refer to Note 6
to the accompanying unaudited consolidated financial statements for a further
discussion of these acquisitions.

Financing



Net cash provided by (used in) financing activities increased
from a net cash outflow of $275.5 million during the nine months ended September
30, 2003 to net cash inflows of $48.0 million for the nine months ended
September 30, 2004.  The increase from net cash outflows in the 2003 period to
net cash inflows in the 2004 period was primarily due to repurchase of the
Debentures in 2003 for $307.1 million.  Please refer to Note 3 to the
accompanying unaudited consolidated financial statements for a further
discussion of this repurchase.  In addition, our cash provided by financing
activities continued to increase on a year-over-year basis due to an increase in
the proceeds from the issuance of common stock pursuant to the exercise of stock
options and our employee stock purchase plan (the "Purchase Plan").
During the nine months ended September 30, 2004, our cash flows from financing
activities were partially offset by our repayment of capital lease obligations,
with payments of $9.5 million and $9.4 million during the nine months ended
September 30, 2003 and 2004, respectively.



Off-Balance-Sheet Arrangements



We do not use off-balance-sheet arrangements with
unconsolidated entities or related parties.  Accordingly, our liquidity and
capital resources are not subject to off-balance-sheet risks from unconsolidated
entities.  As of September 30, 2004, we did not have any off-balance-sheet
arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.



We have entered into operating leases, expiring between
2004 and 2022, for most U.S. and international sales and support offices and
certain equipment in the normal course of business.  While these arrangements
are often referred to as a form of off-balance sheet financing, these
arrangements are not considered off-balance-sheet arrangements, as defined in
Item 303(a)(4)(ii) of SEC Regulation S-K.  Please refer to Note 4 to the
accompanying unaudited consolidated financial statements for detail of our
future minimum lease payments under our operating leases as of September 30,
2004.



Application of Critical Accounting
Policies and Use of Estimates



Use of Estimates



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

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



- Revenue recognition,
- Restructuring and related expenses,
- Impairment of long-lived assets,
- Provision for doubtful accounts,
- Acquired intangible assets,
- Stock-based compensation,
- Legal contingencies, and
- Income taxes.

Our management has reviewed our critical accounting
policies, our critical accounting estimates, and the related disclosures with
our Disclosure and Audit Committees.  These policies and our procedures related
to these policies are described further in our Annual Report on Form 10-K for
the year ended December 31, 2003 in Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations," under the
heading "Application of Critical Accounting Policies and Use of
Estimates."



Recent Accounting Pronouncements



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



We expect to apply the recognition and measurement
guidance in EITF 03-01 to other-than-temporary impairment evaluations beginning
in the fourth quarter of 2004.  We adopted the disclosure provisions of
EITF 03-01 for marketable investments as of December 31, 2003 and will adopt the
disclosure requirements for cost method investments as of December 31, 2004.  We
do not expect the adoption of EITF 03-01 to have a material effect on our
financial position, results of operations or cash flows.



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 existing stockholders.  Our stock option program
consists primarily of two plans: the Siebel Systems, Inc. 1996 Equity Incentive
Plan (the "1996 Plan"), and the Siebel Systems, Inc. 1998 Equity
Incentive Plan (the "1998 Plan" and 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.



Substantially all stock-based compensation grants are
made after a review by, and with the approval of, the Compensation Committee of
the Board of Directors.  All members of our Compensation Committee are
independent directors, as defined in the applicable rules for issuers traded on
The NASDAQ Stock Market.  Substantially all of our employees participate in one
of the above plans, thereby providing us the ability to meet our goal of long-term
retention of our employees.  Stock options granted under these plans expire
no later than ten years from the grant date and generally vest over five years.
Please refer to the "Report of the Compensation Committee of the Board of
Directors on Executive Compensation" appearing in "Item 11. Executive
Compensation" of our Annual Report on Form 10-K for the year ended December
31, 2003 for further information concerning our policies and the Compensation
Committee's policies regarding the use of stock-based compensation.



Section II.  Summary of Stock Option Activity During
2004



As the following table shows, stock options outstanding
decreased by 8.2 million, or 6%, during the nine months ended September 30,
2004, primarily due to forfeitures upon terminations.  Combined activity under
the Plans for the nine months ended September 30, 2004 is summarized as
follows:

`Shares                        Wtd. Avg.
                                                      Available     Number of        Exercise
                                                      for Grant      Options      Price per Share
                                                     ------------ --------------  ---------------
   Balances as of December 31, 2003................  192,295,796    143,902,815    $       13.20
     Issuances of restricted stock units, net......     (385,000)            --
     Options granted to employees..................   (6,770,500)     6,770,500    $        9.90
     Options granted to officers and directors.....   (3,487,000)     3,487,000    $       10.86
     Options exercised.............................           --     (5,685,521)   $        5.34
     Options canceled due to employee termination..   12,719,904    (12,790,543)   $       18.17
                                                     ------------ --------------  ---------------
   Balances as of September 30, 2004...............  194,373,200    135,684,251    $       12.83
                                                     ============ ==============`

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

`Options Outstanding              Options Exercisable
                 ---------------------------------------  -----------------------
                                 Wtd. Avg.    Wtd. Avg.                 Wtd. Avg.
                    Number       Remaining    Exercise      Number      Exercise
Options           of Shares    Life (Years)     Price      of Shares     Price
---------------- ------------  -------------  ----------  -----------  ----------
In-the-money      46,666,759            2.7    $   3.40   45,620,629    $   3.42
Out-of-the-money  89,017,492            5.9    $  17.77   45,414,625    $  20.77
                 ------------  -------------  ----------  -----------  ----------
                 135,684,251            4.8    $  12.83   91,035,254    $  12.08
                 ============                             ===========`

In-the-money stock options in the above table have
exercise prices below $7.54, the closing price of our common stock as of
September 30, 2004, and out-of-the money stock options have exercise prices
equal to or greater than $7.54.

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 restricted stock units, or RSUs, to existing or new employees,
and we will likely continue to do so in the future.  In addition, we have on
occasion assumed stock options of acquired businesses and rewarded existing
employees for high levels of performance with additional grants of stock options
(consideration of additional grants is typically scheduled to occur by the end
of the second quarter of each year).



In order to maintain the proper balance between the need
to attract and retain employees and minimize the dilution to existing
stockholders, effective January 1, 2003 we adjusted our equity guidelines to
reduce the size of stock option grants to new and existing employees.  In
addition, commencing in February 2003, we began granting stock options with a
contractual life of six years, as opposed to ten years for stock options granted
prior to such time.  In 2004, in addition to maintaining these guidelines for
new employees, we further reduced the size of our renewal grants to existing
employees from 17.8 million stock options granted in 2003 to 3.6 million stock
options granted during the first nine months of 2004.  Stock options granted in
2004 to existing employees, other than officers and members of our Board of
Directors, vest in full on December 31, 2004 and have a contractual life of five
years.



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

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

`Nine Months
                                                       Year Ended December 31,     Ended
                                                       -----------------------  September 30,
                                                          2002        2003         2004
                                                       ----------  -----------  -------------
Net options granted:                               
Stock options granted..............................       5,887       22,787        10,258
Stock options forfeited upon termination...........     (28,910)     (27,660)      (12,791)
                                                       ----------  -----------  -------------
      Net granted (forfeited)......................     (23,023)      (4,873)       (2,533)
                                                       ==========  ===========  =============
Dilution percentage (1)............................      (4.9)%       (1.0)%        (0.5)%
                                                       ==========  ===========  =============
Option overhang (2)................................        38 %         29 %          27 %
                                                       ==========  ===========  =============`

1. The potential dilution to stockholders from stock options
(the "Dilution Percentage") is calculated as new stock options granted
during the 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 for 2002 and
2003 represent our CEO and the four most highly compensated executive officers
for the respective year.  For all 2004 periods presented in this Quarterly
Report on Form 10-Q, Named Executive Officers represent our then-CEO (Thomas M.
Siebel) and the four most highly compensated executive officers, as disclosed in
Item 11 "Executive Compensation" of our Annual Report on Form 10-K for
the year ended December 31, 2003, along with our recently appointed CEO, J.
Michael Lawrie.



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

`Nine Months
                                                       Year Ended December 31,     Ended
                                                       -----------------------  September 30,
                                                          2002        2003          2004
                                                       ----------  -----------  -------------
Grants during the period as a percentage of
  total granted:                                   
      Named Executive Officers.....................         3.4 %        4.6 %        23.4 %
      All other officers and directors as a group..         0.3          3.3          10.6
                                                       ----------  -----------  -------------
         Total for all officers and directors......         3.7          7.9          34.0
      All other employees as a group...............        96.3         92.1          66.0
                                                       ----------  -----------  -------------
         Total all grants..........................       100.0 %      100.0 %       100.0 %
                                                       ==========  ===========  =============`

During the nine months ended September 30, 2004, stock
options granted to both our Named Executive Officers and "all other
officers and directors as a group" increased significantly compared to our
historical percentages for these same grant categories primarily due to stock
options granted to newly hired officers upon commencement of employment.
Specifically, grants to Named Executive Officers include an aggregate of 2.0
million stock options granted to our new CEO, J. Michael Lawrie, upon his
commencement of employment and grants to "all other officers and directors
as a group" include 0.5 million stock options granted to our new President,
EMEA Sales upon his commencement of employment.  These two grants represented
24% of all stock options granted during the nine months ended September 30,
2004.



Section IV. Accounting for Stock-Based Compensation



We account for our employee stock-based compensation
plans using the intrinsic value method, as prescribed by APB No. 25
"Accounting for Stock Issued to Employees" and interpretations thereof
(collectively "APB 25").  Accordingly, we record deferred compensation
costs related to our employee stock options when the market price of the
underlying stock on the date of grant exceeds the exercise price of the stock
option on the date of grant.  We record and measure deferred compensation for
stock options granted to non-employees at their fair value.  Deferred
compensation is expensed on a straight-line basis over the vesting period of the
related stock option, which is generally five years.



An alternative to the intrinsic value method of
accounting for stock-based compensation is the fair value approach prescribed by
SFAS No. 123 "Accounting for Stock-Based Compensation" ("SFAS
123").  We have continued to follow the intrinsic value method of APB 25,
as we believe the accounting for stock options under SFAS 123 could be extremely
confusing to investors, and perhaps may even misinform our stockholders.
Specifically, we believe the expense associated with stock options under SFAS
123 has no relationship to (i) the value realized by our employees; (ii) the
potential dilution to our stockholders; or (iii) the cost incurred by us.  In
addition, we believe the use of option valuation models as required by SFAS 123
is highly subjective.



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       Nine Months Ended
                                                                         September 30,            September 30,
                                                                    ----------------------   ----------------------
                                                                       2003        2004         2003        2004
                                                                    ----------  ----------   ----------  ----------
Net income (loss):                                                                                                 
  As reported.....................................................  $ (59,330)  $  19,370    $ (44,944)  $  59,238
                                                                    ----------  ----------   ----------  ----------
Compensation expense related to:
  Stock options dilutive to stockholders:                                                                          
    Stock-based compensation accounted for under APB 25...........        346         386        1,326       2,494
    In-the-money stock options and restricted stock units.........     (7,109)       (584)     (20,853)     (3,140)
    Stock purchase rights under the Purchase Plan.................     (1,904)     (2,554)      (3,973)     (8,071)
                                                                    ----------  ----------   ----------  ----------
       Subtotal...................................................     (8,667)     (2,752)     (23,500)     (8,717)
                                                                    ----------  ----------   ----------  ----------
  Stock options not dilutive to stockholders:                                                                      
    Out-of-the-money stock options................................    (35,738)    (35,109)    (108,320)   (120,002)
    Stock options cancelled for no consideration..................         --          --     (251,821)         --
    Stock options forfeited in connection with terminations.......     (6,390)         --      (29,337)     (1,940)
                                                                    ----------  ----------   ----------  ----------
       Subtotal...................................................    (42,128)    (35,109)    (389,478)   (121,942)
                                                                    ----------  ----------   ----------  ----------
       Total pro forma expense giving effect to SFAS 123..........    (50,795)    (37,861)    (412,978)   (130,659)
                                                                    ----------  ----------   ----------  ----------
  Pro forma net loss giving effect to SFAS 123....................  $(110,125)  $ (18,491)   $(457,922)  $ (71,421)
                                                                    ==========  ==========   ==========  ==========`

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 September 30,
2003 and 2004 were $9.76 and $7.54, respectively.



As the table above illustrates, total pro forma expense
for stock options includes $42.1 million and $389.5 million of expense during
the three and nine months ended September 30, 2003, respectively, and $35.1
million and $121.9 million of expense during the three and nine months ended
September 30, 2004, respectively, related to (i) stock options that were
cancelled by our Chairman for no consideration, (ii) stock options forfeited by
employees upon termination for no consideration, and (iii) stock options that
are significantly out of the money (e.g., the weighted-average exercise price of
the out-of-the-money stock options was $17.77 per share compared to a closing
price of $7.54 per share as of September 30, 2004).  These items represented 83%
and 94% of the pro forma expense for the three and nine months ended September
30, 2003, respectively, and 93% of the pro forma expense for both the three and
nine months ended September 30, 2004.



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



Section V. Executive and Director Stock-Based
Compensation



Executive Stock-Based Compensation



The following table sets forth certain information
regarding stock options granted to the Named Executive Officers during the nine
months ended September 30, 2004:

`Potential Realizable Value
                         Number of     Percent of                                   at Assumed Annual Rates of
                         Securities   Total Options                                  Stock Price Appreciation      Aggregate
                         Underlying    Granted to       Exercise or                   for the Option Term (4)    Black-Scholes
                          Options       Employees       Base Price     Expiration   --------------------------   Value on Date
     Officer Name       Granted (1)    in 2004 (2)     ($/Share) (3)      Date           5%            10%        of Grant (5)
----------------------  ------------  --------------  --------------  ------------  ------------  ------------  --------------
Thomas M. Siebel                 --             -- %  $          --            --   $        --   $        --   $          --
J. Michael Lawrie (6)     2,000,000           19.5 %  $       10.38    05/04/2010   $ 7,060,385   $16,017,606   $   7,503,600
R. David Schmaier           100,000            1.0 %  $       10.38    05/04/2010   $   353,019   $   800,880   $     361,500
Kenneth A. Goldman          100,000            1.0 %  $       10.38    05/04/2010   $   353,019   $   800,880   $     361,500
Edward Y. Abbo              100,000            1.0 %  $       10.38    05/04/2010   $   353,019   $   800,880   $     361,500
Steven M. Mankoff           100,000            1.0 %  $       10.38    05/04/2010   $   353,019   $   800,880   $     361,500`

1. Stock options vest 20% on May 5, 2005, and at a rate of
5% for each quarter of service thereafter, and have a term of six years.  The
stock option granted to Mr. Lawrie incorporates accelerated vesting and extended
exercise provisions upon a termination without cause or a change of control.
Please refer to Mr. Lawrie's offer letter, a copy of which is filed as Exhibit
10.3 to the Form 10-Q for the quarter ended June 30, 2004, for further
information.
2. Based on an aggregate of 10.3 million shares subject to
stock options granted to employees pursuant to our 1996 and 1998 Plans during
the nine months ended September 30, 2004, including grants to the Named
Executive Officers.
3. Under all stock option plans, the stock option exercise
price is equal to the fair market value on the date of grant.
4. The potential realizable value is calculated based on the
term of the option at the time of grant. Stock price appreciation of 5% and 10%
is assumed pursuant to rules promulgated by the SEC and does not represent our
prediction of our stock price performance or the actual value of the stock
options.
5. Represents the aggregate fair value of the stock options
on the date of grant (ranging from $3.62 to $3.75 per share), as calculated
using the Black-Scholes option valuation model.  The fair value does not
represent our prediction of our stock price performance, and historically has
had little to no relationship to the value that is actually realized.  Please
refer to Section IV above for a discussion of the limitations of SFAS
123.
6. Mr. Lawrie commenced employment on May 3, 2004 and was
appointed our CEO effective May 4, 2004.



In addition to the above grants of stock options, on May
5, 2004 we granted Mr. Lawrie an RSU for 350,000 shares of our common stock in
connection with his commencement of employment.  The terms of the RSU provide
that 150,000 of the underlying shares of common stock vested during the second
quarter of 2004 and the remaining 200,000 shares vest two years from his
commencement of employment.  In the event that Mr. Lawrie is terminated without
cause or in the event of a change of control (each as defined in Mr. Lawrie's
offer letter, which is filed as Exhibit 10.3 to the Form 10-Q for the quarter
ended June 30, 2004) within the first two years of Mr. Lawrie's employment, all
unvested units will immediately vest in full.



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

`December 31,
                                                       -----------------------  September 30,
                                                          2002        2003          2004
                                                       ----------  -----------  -------------
Stock options held by Named Executive
   Officers as a percentage of:                                                              
      Total options outstanding....................        29.3 %       18.7 %        21.3 %
                                                       ==========  ===========  =============
      Outstanding shares of common stock...........        11.2 %        5.4 %         5.7 %
                                                       ==========  ===========  =============`

The following table sets forth for each of the Named
Executive Officers the shares acquired and the value realized on each exercise
of stock options during the nine months ended September 30, 2004 and the number
and value of securities underlying unexercised stock options held by the Named
Executive Officers as of September 30, 2004:

`Number of
                                                    Securities Underlying         Value of Unexercised
                                                    Unexercised Options at       In-the-Money Options at
                         Shares                     September 30, 2004 (2)        September 30, 2004 (3)
                       Acquired on      Value      --------------------------  ----------------------------
    Officer Name        Exercise     Realized (1)  Exercisable  Unexercisable  Exercisable    Unexercisable
---------------------  -----------  -------------  -----------  -------------  -------------  -------------
Thomas M. Siebel               --   $         --   18,686,134             --   $ 86,937,062   $         --
J. Michael Lawrie (4)          --   $         --           --      2,000,000   $         --   $         --
R. David Schmaier         292,856   $  2,585,732    1,743,932        986,072   $  1,315,903   $    208,254
Kenneth A. Goldman             --   $         --    1,980,000        990,000   $         --   $         --
Edward Y. Abbo             96,200   $  1,172,732      560,000        400,000   $    820,400   $         --
Steven M. Mankoff          30,000   $    279,113      949,300        537,500   $  1,329,021   $         --`

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 September
30, 2004.
3. Based on the fair market value of our common stock as of
September 30, 2004 ($7.54 per share), minus the exercise price, multiplied by
the number of shares underlying the stock options.
4. Mr. Lawrie commenced employment on May 3, 2004 and was
appointed our CEO effective May 4, 2004.



Director Stock-Based Compensation



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



- Initial Grants—Each new non-employee director will
be granted an option to purchase 80,000 shares of our common stock as soon as
practicable following such director's appointment to the Board of
Directors.

- Annual Grants—Each non-employee director who has
served on the Board of Directors for more than six months will be granted an
option to purchase 20,000 shares of our common stock in January of each
year.



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



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



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



Section VI. Equity Compensation Plan Information



Information as of September 30, 2004 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).....    51,882,873    $     7.42           79,159,368
   Not approved by stockholders (2).    82,890,649    $    16.25          126,538,825
   Acquired companies' plans (3)....       910,729    $     8.78                   --
                                      -------------    ----------  -------------------
                                       135,684,251    $    12.83          205,698,193
                                      =============                ===================`

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



Risk Factors



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



Our total revenue and operating results may
fluctuate.



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



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



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



Our quarterly operating results may fluctuate.



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



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



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



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



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



We use a "pipeline" system, a common industry
practice, to forecast sales and trends in our business.  Our sales personnel
monitor the status of all proposals, including the estimated closing date and
potential dollar amount of each transaction. We aggregate these estimates
periodically to generate a sales pipeline and then evaluate the pipeline to
identify trends in our business.  This pipeline analysis and related estimates
of revenue may differ significantly from actual revenues in a particular
reporting period as the estimates and assumptions were made using the best
available data at the time.  A slowdown in the global economy, among other
factors, has caused and may continue to cause customer purchasing decisions to
be delayed, reduced in amount or canceled, all of which have reduced and could
continue to reduce the rate of conversion of the pipeline into contracts.  In
addition, because a substantial portion of our software license contracts close
in the latter part of a quarter, management may not be able to adjust our cost
structure to respond to a variation in the conversion of the pipeline into
contracts in a timely manner.  Our inability to respond to a variation in the
pipeline or in the conversion of the pipeline into contracts in a timely manner,
could cause us to plan or budget inaccurately and thereby could adversely affect
our business, financial condition or results of operations.



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



The revenue growth and profitability of our business
depends on the overall demand for business applications software and services,
particularly within the industries in which we offer specific versions of our
products.  Because we sell our products primarily to major corporate customers
in the high technology, telecommunications, financial services (including
insurance), pharmaceutical, utilities and consumer packaged goods industries,
our business depends on the overall economy and the economic and business
conditions within these industries.  For example, weak global economic
conditions in 2001, 2002 and 2003 significantly impacted capital spending,
particularly information technology spending within the industries listed above,
resulting in a decrease in our software license revenues in 2001, 2002 and 2003.
Future decreases in demand for computer software caused, in part, by weakness of
the global economy may result in a decrease in revenues, operating income and/or
our growth rates.



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 such 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.  For example, the equity
markets have reacted with significant declines in response to past terrorist
actions.  Further, as a result of past terrorist attacks and hostilities
involving the United States, we believe many of our customers and potential
customers 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 continued escalation of hostilities involving the
United States or other countries could adversely affect the growth rate of our
software license revenue and have an adverse effect on our business, financial
condition or results of operations.  In addition, any escalation in these events
or similar future events may disrupt our operations or those of our customers,
distributors and suppliers, which could adversely affect our business, financial
condition or results of operations.



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



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



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, the SEC and
NASDAQ, have recently issued new requirements and regulations and continue to
develop additional regulations and requirements in response to recent laws
enacted by Congress, most notably SOX.  Our efforts to comply with these new
regulations have resulted in, and are likely to continue to result in, increased
general and administrative expenses and a diversion of management time and
attention from revenue-generating activities to compliance activities.



In particular, our efforts to comply with Section 404 of
SOX and the related regulations regarding our required assessment of our
internal controls over financial reporting and our external auditors' audit of
that assessment has required, and continues to require, the commitment of
significant financial and managerial resources.  Although we believe that the
on-going review of our internal controls will enable us to provide an assessment
of our internal controls and our external auditors to provide their audit
opinion in our Annual Report on Form 10-K for the year ended December 31, 2004
as required by Section 404 of SOX, we can give no assurance that these efforts
will be completed on a timely and successful basis.



Moreover, because these laws, regulations and standards
are subject to varying interpretations, their application in practice may evolve
over time as new guidance becomes available.  This evolution may result in
continuing uncertainty regarding compliance matters and additional costs
necessitated by 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 1998 through 2003
are currently under examination by the IRS.  During 2003 and 2004, we received
notices from the IRS of proposed adjustments to these income tax returns.  In
addition, certain of our U.S. payroll tax returns (primarily related to taxes
associated with stock option exercises), U.S. sales and use tax returns, and
international sales and value added tax returns are currently under examination
and/or review by the applicable taxing authorities.  While we believe that we
have made adequate provisions related to the audits of these tax returns, the
final determination of our obligations may exceed the amounts provided for by us
in the accompanying consolidated financial statements.



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



Because of our limited history with our Siebel CRM
OnDemand subscription model, we cannot predict with any degree of certainty the
rate of the conversion of our sales pipeline, customer subscription renewals and
the impact these renewals will have on our revenue or operating results.



The market for on-demand or "hosted"
application services is relatively new and unproven, and it is uncertain whether
these services will achieve and sustain high levels of demand and market
acceptance.  Our success will depend in part on the willingness of enterprises
to increase their use of on-demand application services in general and for CRM
in particular.  If enterprises do not perceive the benefits of on-demand
application services, then the market for these services may not develop at all,
or it may develop more slowly than we expect, either of which could
significantly adversely affect our operating results.  In addition, if the
demand for our Siebel CRM OnDemand service does not materialize as expected, our
ability to recover our investment in UpShot Corporation and Ineto Services, Inc.
may be impaired.  As of September 30, 2004, the carrying value of the goodwill
and amortizable intangibles related to these entities was approximately $63.2
million and $6.7 million, respectively.



We began offering Siebel CRM OnDemand, a hosted
software application delivered as an online service, in the fourth quarter of
2003.  Siebel CRM OnDemand is offered on a subscription basis, rather than as a
perpetual license.  Siebel CRM OnDemand customers have no obligation to renew
their service subscriptions after the expiration of the initial subscription
period, which is typically 12 months.  Some former customers of acquired
businesses which are now a part of our CRM 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 Siebel CRM OnDemand is
based on the number of users, this could reduce our revenue generated from this
service.  We have limited historical data with respect to rates of customer
subscription renewals, so we cannot predict with any degree of certainty
customer renewal rates.  Our customers' renewal rates may decline or fluctuate
as a result of a number of factors, many of which are beyond our control,
including their inability to continue their operations and/or spending levels.
If our customers do not renew their subscriptions for our service, or if they
renew our service for fewer users, our expectations regarding future revenues
from this new product offering may be incorrect, which could adversely affect
our business, financial condition or results of operations.  Further, because of
our limited operating history related to this subscription model, we cannot
effectively estimate expense assumptions and thus we may not be able to
adequately predict profitability of this business.  Further, for the remainder
of 2004, we expect to invest more in our Siebel CRM OnDemand business than we
expect to realize in revenues from this business.

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

We have entered into strategic relationships with
hosting partners, including IBM and British Telecom, to provide our CRM OnDemand
service through computer hardware located at the facilities of these third
parties.  We do not control the operation of these facilities, which could be
subject to damage or interruption from a variety of sources, including
earthquakes, fires, power loss, telecommunications failures and similar events.
The occurrence of one of these events or other unanticipated problems at these
facilities could result in lengthy interruptions in our service.  In addition,
the failure by one of our hosting partners to provide the required data
communications capacity could result in interruptions in our service.
Interruptions in our service, 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 Siebel CRM OnDemand
service may be perceived as being insecure and customers may curtail or stop
using our service.

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



We may not 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
Eontec Limited in April 2004, Ineto in January 2004 and UpShot in November 2003.
We may not realize the anticipated benefits of these or any other acquisition
and each acquisition has numerous risks.  These risks include:



- difficulty assimilating the operations and personnel of
the acquired company;
- difficulty 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 transition and 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;
- we may incur acquisition-related costs or amortization
costs for acquired intangible assets that could impact our
profitability;
- we may incur unexpected costs which may adversely affect
operating results;
- our relationships with partner companies or third party
providers of technology or products could be adversely affected;
- our relationships with employees and customers could be
impaired;
- due diligence processes may fail to identify significant
issues with product quality, architecture and development, and legal and
financial contingencies, among other things; and
- we may incur significant exit charges if products
acquired in business combinations are unsuccessful.



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



We 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 in 1994 and
continuing throughout early 2001, our business grew rapidly.  Beginning in early
2001 and continuing through much of 2004, our revenues declined as a result of a
deterioration of the overall economy and information technology industry.  These
rapid changes in our business have placed a significant strain on our management
systems and resources.  In response to the deterioration in the information
technology industry, management completed a series of Restructurings, as
described more fully in Note 2 to the accompanying unaudited 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.



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



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



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



We currently account for stock options under APB 25 and,
accordingly, we only record compensation expense related to stock options if the
current market price of the underlying stock exceeds the exercise price of the
stock option on the date of grant.  On March 31, 2004, the FASB issued a draft
accounting pronouncement which, if implemented, will require us to expense stock
options in our statement of operations no later than July 1, 2005.  The draft
accounting pronouncement applies to all outstanding stock options that are not
vested at the effective date and grants of new stock options made subsequent to
the effective date.  The final statement is expected to be issued in the fourth
quarter of 2004.



If we are required to change our accounting policy in
accordance with this draft accounting pronouncement, we estimate that our
earnings in 2005 could be reduced by up to approximately $40.0 million per
quarter.  This estimate is based solely on the expense associated with stock
options outstanding as of September 30, 2004 (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 or expensive for
us to grant stock options to employees in the future.  In light of these
potential changes, we have considered modifying our equity compensation strategy
to emphasize equity incentives other than stock options.  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 stock options 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.



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



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



Our customers may not successfully implement our
products.



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
eBusiness Applications or CRM OnDemand or for any other reason are not
satisfied with Siebel eBusiness Applications or CRM OnDemand, our
business, financial condition or results of operations could be materially and
adversely affected.



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



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



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



Our success depends on gaining new customers and
maintaining relationships with our existing customers.  In particular, if the
number of software license transactions and/or the average size of these
transactions decrease, our software license revenue may be negatively impacted,
which may in turn negatively impact our services and total revenues.  For
example, during the nine months ended September 30, 2004, the number of
transactions generating software license revenues greater than $1 million
declined from 80 transactions in the nine months ended September 30, 2003 to 76
transactions in the nine months ended September 30, 2004, accounting for a
significant portion of the decline in our software license revenues.  The
failure to enter into these larger software license transactions and/or maintain
or increase the number of software license transactions could have a material
adverse effect on our business, financial condition or results of
operations.



Our distribution channels may create additional
risks.



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



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



The software market in which we compete is characterized
by (i) rapid technological change, (ii) frequent introductions of new products,
(iii) changing customer needs, and (iv) evolving industry standards.  To keep
pace with technological developments, evolving industry standards and changing
customer needs, we must support existing products and develop new products.  We
may not be successful in developing, marketing and releasing new products or
enhancements to Siebel eBusiness Applications or CRM OnDemand that
respond to technological developments, evolving industry standards or changing
customer requirements.  We may also experience difficulties that could delay or
prevent the successful development, introduction and sale of these new products
or enhancements.  In addition, these new products or enhancements may not
adequately meet the requirements of the marketplace and may not achieve any
significant degree of market acceptance.  If release dates of any future
products or enhancements to Siebel eBusiness Applications or CRM OnDemand
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 may not be able to compete effectively in the Internet-related
products and services market.



Siebel eBusiness Applications and Siebel CRM
OnDemand communicate through public and private networks over the Internet.  The
success of our products and services may depend, in part, on our ability to
continue developing products and services that are compatible with the Internet.
We cannot predict whether the demand for Internet-related products and services
will increase or decrease in the future.  The increased commercial use of the
Internet could require substantial modification and customization of our
products and services and the introduction of new products and services.
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.



We operate in a competitive and rapidly changing market.



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



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



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



Our customers and prospective customers are increasingly
evaluating their software procurement needs with a focus on the long term total
cost of ownership, which includes the cost of the license and the related
professional services, such as implementation, training and technical support.
With significantly lower license costs from competitive solutions, and no
license cost for internal projects, our success depends on our ability to
adequately communicate the relative capabilities of our products, the total cost
of ownership of the various alternative solutions (i.e., versus the cost of only
the license), and the total return on investment of each of the various
alternatives.



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



Internal Development



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



System Integrators



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



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



Other Competitors



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



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



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



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

Many leading companies in the market for business
applications software have been the subject of mergers, acquisitions and
divestitures during the last several years.  For example, Oracle Corporation
continues to actively pursue an acquisition of PeopleSoft, Inc.  We expect this
trend towards consolidation to continue as companies attempt to maintain or
extend their market and competitive positions in the rapidly changing business
applications software industry and as companies are acquired or are unable to
continue operations.  This industry consolidation may result in stronger
competitors that are better able to compete as sole-source vendors for
customers.  This could lead to more variability in our operating results due to
lengthening of the customer evaluation process and/or loss of business to these
stronger competitors, which may materially and adversely affect our business,
financial condition or results of operations.



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

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 reduce our business, financial condition or results of
operations.

Software errors or defects in our products could reduce
revenues.



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



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



Our performance depends on the continued service of our
key technical, sales and senior management personnel.  Our key employees have
not entered into employment agreements with us.  The loss of one or more of our
senior management personnel could have a material adverse effect on our
business, operating results and financial condition.  In recent years, we have
had members of our senior management announce their retirement or departure from
our company.  We replace these individuals with internal candidates and, if
deemed appropriate, individuals from outside our organization.  While our
internal candidates understand our business model, they must learn a new
position and take on additional or new responsibilities, which could take time
and result in the disruption to our 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 generally resulted in a temporary lack of focus and
reduced productivity that may have affected revenues in one or more quarters.
We cannot assure you that we will not continue to restructure our sales force or
that the transition issues associated with restructuring the sales force will
not recur.  Such restructuring or associated transition issues can be disruptive
and adversely impact our business and operating results.



We may not be able to protect our proprietary
information.



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



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



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



Our international operations involve unique risks.



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



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



Provisions in our charter documents may prevent,
discourage or delay certain corporate actions.



Our Board of Directors is authorized to issue up to
2,000,000 shares of preferred stock and to determine the price, rights,
preferences, privileges and restrictions, including voting rights, of those
shares without any further approval by our stockholders.  One of these shares
has been designated Series A1 Preferred Stock, which was issued in connection
with the acquisition of Janna Systems Inc. in 2000, and 100,000 shares have been
designated as Series A2 Junior Participating Preferred Stock, which were
authorized in connection with a stockholders' rights plan that we implemented in
2003.  Additional shares of preferred stock could be authorized or issued with
voting, liquidation, dividend and other rights superior to those of the common
stock.



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



---

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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



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



The following table summarizes as of September 30, 2004
our foreign currency forward contracts, by currency.  All of our foreign
currency forward contracts mature within one year.  Contract amounts are
representative of the expected payments to be made under these instruments (in
thousands):

`Contract Amount    Contract         Fair
                                           (Local Currency)    Amount       Value (US$)
                                           ----------------  -----------  -------------
Australian dollars ("AUD") (contracts
  to pay AUD/receive US$).................     (AUD) 13,347     US$9,472  $         (5)

Brazilian real ("BRL") (contracts to
  pay BRL/receive US$)....................     (BRL) 27,623     US$9,122  $       (273)

British pounds ("GBP") (contracts to
  pay GBP/receive EUR)....................     (GBP) 10,284   EUR 15,176  $        246

Canadian dollars ("CAD") (contracts
  to pay CAD/receive US$).................      (CAD) 2,407     US$1,943  $         52

Japanese yen ("JPY") (contracts to
  pay JPY/receive US$)....................  (JPY) 1,151,383    US$10,474  $         81

Korean won ("KRW") (contracts to pay
  KRW/receive US$)........................     (KRW) 98,000        US$83  $          3

Mexican pesos ("MXN") (contracts
  to pay MXN/receive US$).................     (MXN) 26,232     US$2,267  $         11

Singapore dollars ("SGD") (contracts
  to pay SGD/receive US$).................         (SGD) 57        US$62  $         24

Czech Republic koruna ("CZK") (contracts
  to receive CZK/pay EUR).................     (CZK) 37,250    EUR 1,183  $         (9)

Euros ("EUR") (contracts to receive
  EUR/pay US$)............................    (EUR) 182,073   US$222,336  $      1,761

Swedish krona ("SEK") (contracts to
  receive SEK/pay EUR)....................     (SEK) 10,705    EUR 1,176  $         3

Swiss francs ("CHF") (contracts to
  receive CHF/pay EUR)....................      (CHF) 2,419    EUR 1,576  $        (15)`

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

`Expected Maturity Date
                                     ------------------------------------------------------------------------
                                       2004      2005      2006      2007      2008   Thereafter     Total
                                     --------- --------- --------- --------- -------- ----------- -----------
US Treasury and Agency securities...  $71,181  $147,416  $224,842   $49,751   $8,913       9,136    $511,239
  Weighted average yield............     2.04%     2.19%     2.66%     3.03%    3.37%       3.56%

Corporate bonds.....................  $29,805  $159,755  $292,542  $165,009  $58,610      19,474    $725,195
  Weighted average yield............     2.01%     2.38%     2.60%     3.13%    3.55%       3.93%

Asset-backed securities.............  $19,762  $120,951  $196,494   $54,334   $7,301     $11,886    $410,728
  Weighted average yield............     1.92%     2.68%     3.01%     3.52%    4.30%       2.97%
                                     --------- --------- --------- --------- -------- ----------- -----------
Total short-term investments........ $120,748  $428,122  $713,878  $269,094  $74,824     $40,496  $1,647,162
                                     ========= ========= ========= ========= ======== =========== ===========`



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 September 30, 2004, the fair value of the above investments
would decline by approximately $23.7 million.



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



Item 4.	 Controls and Procedures



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



Section 302



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



As of September 30, 2004 (the "Evaluation
Date"), we evaluated the effectiveness of the design and operation of our
disclosure controls and procedures (the "Disclosure Controls"), as
such terms are defined in Rules 13a-15(e) and 15d-15(e) under the Securities and
Exchange Act of 1934 (the "Exchange Act"), and our internal controls
and procedures for financial reporting (the "Internal Controls").
This evaluation (the "Controls Evaluation") was done under the
supervision and with the participation of management, including our CEO and CFO.
Rules adopted by the SEC require that we present the conclusions of our CEO and
the CFO about the effectiveness of our Disclosure Controls and Internal Controls
based on and as of the date of the Controls Evaluation.



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



Our CEO and CFO note that during the three and nine
months ended September 30, 2004, there have been no changes in our Internal
Controls or in other factors that materially affected or are reasonably likely
to materially affect such controls, including any corrective actions with regard
to material weaknesses.  We have historically considered our Internal Controls
over financial reporting a high priority and strive to continually improve our
Internal Controls.  Accordingly, we have taken and will continue to take
corrective action as we discover deficiencies in our Internal Controls.



Section 404



Under Section 404, we are required to document all of our
Internal Controls over business and financial processes and procedures that may
affect our reported financial results.  In addition, we will issue a report on
the effectiveness of our Internal Controls over financial reporting, including a
statement as to whether or not such controls are effective.  In addition, our
independent auditors will perform an audit of our Internal Controls over
financial reporting and provide an assessment of those controls as of December
31, 2004.



Responsibility for Disclosure and Internal Controls



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



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

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



Limitations on the Effectiveness of Controls



Our management, including our CEO and CFO, does not
expect that our Disclosure Controls or our Internal Controls will prevent all
error and all fraud.  A control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met.  Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs.  Because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within a company have been detected.  These inherent limitations include
the realities that judgments in decision-making can be faulty and that
breakdowns can occur because of 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.



Scope of Our Controls Evaluation Under Section 404



As of December 31, 2003, we had substantially completed
the documentation and testing of our significant business and financial process
and procedures, representing approximately 50 individual processes, which may
materially impact our reported financial and operating results.  In accordance
with SOX, we will test our Internal Controls each year and, accordingly, we have
begun our testing for 2004 and expect to complete this testing prior to the
filing of our Annual Report on Form 10-K.  As of September 30, 2004, our
management and internal audit department have completed their review and testing
of the majority of our individual processes and we believe we are on schedule to
complete this testing prior to the filing of our Annual Report on Form 10-K.  In
addition, our auditors have begun their test work, which we also believe will be
completed in accordance with the requirements of SOX.  To date, we have found no
material weaknesses, as defined in the professional accounting literature and
described below, with our Internal Control structure.



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



Among other matters, we sought in our evaluation to
determine whether there were any control deficiencies (particularly
"significant deficiencies" or "material weaknesses") in our
Internal Controls, and whether we have identified any acts of fraud involving
personnel who have a significant role in our Internal Controls.  This
information was important both for our Controls Evaluation and because Item 5 in
the Section 302 Certifications require that the CEO and CFO disclose such
information to our Audit Committee of the Board of Directors and to our
independent auditors and to report on related matters in this section of the
quarterly report.  In professional auditing literature, a control deficiency
exists when the design or operation of a control does not allow management or
employees, in the normal course of performing their assigned functions, to
prevent or detect misstatements on a timely basis.  A "significant
deficiency" in the control structure exists when there is a control
deficiency, or combination of control deficiencies, that adversely affects a
company's ability to initiate, record, process or report external financial data
reliably in accordance with GAAP such that there is more than a remote
likelihood that a misstatement of the annual or interim financial statements
that is more than inconsequential in amount will not be prevented or detected.
A "material weakness" is defined in auditing literature as a
significant deficiency, or combination of significant deficiencies, that results
in more than a remote likelihood that a material misstatement of the annual or
interim financial statements will not be prevented or detected.



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



Evaluation of Our Disclosure Controls and Internal
Controls Under Section 404



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

---



Part II.  Other Information



Item 1.	  Legal Proceedings



On May 6, 2003, the Enforcement Division staff
("Staff") of the SEC contacted us and indicated that a May 1, 2003
article on CBS MarketWatch had raised questions regarding our compliance with
Regulation FD.  In August 2003, the 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, along with our officers, have
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 two of our
officers alleging, among other things, that we, along with our 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 has been scheduled for December 2004.  We believe the allegations in this
action are without merit and we intend to defend ourselves vigorously.



On March 10, 2004, William Wollrab, on behalf of himself
and purportedly on behalf of a class of our stockholders, filed an action in the
United States District Court for the Northern District of California against us
and certain of our officers.  This 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 the consolidated complaint in this case.  On April 12, 2004, Pamela
Plotkin, on behalf of herself and purportedly on behalf of a class of our
stockholders, filed an action in the Superior Court of California (the
"Superior Court") against us and certain members of our Board of
Directors.  These actions 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.  The Superior Court dismissed the complaint
by Ms. Plotkin on September 23, 2004, but gave Ms. Plotkin leave to file a new,
amended complaint.  We believe the allegations in these actions are without
merit and we intend to defend vigorously against these claims.



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

---



Item 5.	 Other Information















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           | Siebel Systems, Inc. Nonqualified Deferred Compensation Plan. (7)                                                                                       
|10.2           | Offer Letter, dated April 28, 2004, to J. Michael Lawrie. (8)                                                                                           
|31.1           | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (8)                                                                            
|31.2           | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (8)                                                                            
|32.1           | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (8)                                                                            



__________________

1. Incorporated by reference to the Registrant's 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 September 7, 2004.
8. Filed herewith.

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.





---

**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: November 5, 2004By:
    /s/ Kenneth A. GoldmanKenneth A. GoldmanSenior Vice President, Finance and
                                    Administration and
                                    Chief Financial Officer(Prinicipal Financial Officer)

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