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

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**FORM 10-Q**

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

**For the quarterly period ended June 30, 2003**

**OR**

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

**For the transition period from ________to _________**

**Commission file number 0-20725**

**SIEBEL SYSTEMS, INC.**
(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 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 Exchange Act Rule 12b-2). YES [X] NO [  ]

The number of shares outstanding of the Registrant's common stock, par value
      $.001 per share, as of July 17, 2003, was 494,058,642.







**SIEBEL SYSTEMS, INC.
                                    FORM 10-Q
                 For the Quarterly Period Ended June 30, 2003**

Table of Contents



|Part I.  Financial Information                                                                                                          | Page
|--------------------------------------------------------------------------------------------------------------------------------------- | ----
|                                                                                                                                        |     
|Item 1.   Financial Statements                                                                                                          |     
|                                                                                                                                        |     
|Consolidated Balance Sheets as of
          
December 31, 2002 and June 30, 2003                                                        | 3   
|                                                                                                                                        |     
|Consolidated Statements of Operations and Comprehensive Income
          
    for the three and six months ended June 30, 2002 and 2003 | 4   
|                                                                                                                                        |     
|Consolidated Statements of Cash Flows
          
    for the six months ended June 30, 2002 and 2003                                    | 5   
|                                                                                                                                        |     
|Notes to Consolidated Financial Statements                                                                                              | 6   
|                                                                                                                                        |     
|Item 2.   Management's Discussion and Analysis of Financial
                      Condition and Results of Operations                   | 17  
|                                                                                                                                        |     
|Item 3.   Quantitative and Qualitative Disclosures About Market Risk                                                                    | 37  
|                                                                                                                                        |     
|Item 4. Evaluation of Disclosure Controls and Procedures                                                                                | 38  
|                                                                                                                                        |     

**Part II.  Other Information**



|Item 1.   Legal Proceedings                                  | 39
|------------------------------------------------------------ | --
|                                                             |   
|Item 4.  Submission of Matters to a Vote of Security Holders | 40
|                                                             |   
|Item 6.   Exhibits and Reports on Form 8-K                   | 42
|                                                             |   
|**Signatures**                                               | 43

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**Part I.  Financial Information**

**Item 1.  Financial Statements.**

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

`December 31,    June 30,
                                                                               2002          2003
                                                                          ------------- -------------
Assets

Current assets:
   Cash and cash equivalents...........................................   $    667,511  $    643,416
   Short-term investments..............................................      1,494,093     1,658,335
                                                                          ------------- -------------
          Total cash, cash equivalents and short-term investments......      2,161,604     2,301,751

   Marketable equity securities........................................          4,613           349
   Accounts receivable, net............................................        275,764       214,640
   Deferred income taxes...............................................         96,518        95,120
   Prepaids and other..................................................         49,901        40,726
                                                                          ------------- -------------
          Total current assets.........................................      2,588,400     2,652,586

Property and equipment, net............................................        273,024       225,416
Goodwill...............................................................         80,949        81,968
Intangible assets, net.................................................         10,354         6,780
Other assets...........................................................         37,580        46,235
Deferred income taxes..................................................         42,711        42,711
                                                                          ------------- -------------
          Total assets.................................................   $  3,033,018  $  3,055,696
                                                                          ============= =============

Liabilities and Stockholders' Equity

Current liabilities:
   Accounts payable....................................................   $     15,239  $      8,249
   Accrued expenses....................................................        319,622       301,052
   Restructuring obligations...........................................         42,703        33,464
   Deferred revenue....................................................        270,575       289,366
                                                                          ------------- -------------
          Total current liabilities....................................        648,139       632,131

Restructuring obligations, less current portion........................        111,845        77,708
Other long-term liabilities, less current portion......................         15,574        13,298
Convertible subordinated debentures....................................        300,000       300,000
                                                                          ------------- -------------
          Total liabilities............................................      1,075,558     1,023,137
                                                                          ------------- -------------

Commitments and contingencies

Stockholders' equity:
  Common stock; $0.001 par value; 2,000,000 shares authorized;
     486,428 and 493,568 shares issued and outstanding, respectively...            486           494
  Additional paid-in capital...........................................      1,486,612     1,523,998
  Deferred compensation................................................         (3,438)       (2,310)
  Accumulated other comprehensive income...............................         28,681        50,872
  Retained earnings....................................................        445,119       459,505
                                                                          ------------- -------------
          Total stockholders' equity...................................      1,957,460     2,032,559
                                                                          ------------- -------------
          Total liabilities and stockholders' equity...................   $  3,033,018  $  3,055,696
                                                                          ============= =============`

See accompanying notes to consolidated financial statements.

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

`Three Months Ended       Six Months Ended
                                                                        June 30,                June 30,
                                                                 ---------------------- -----------------------
                                                                    2002        2003        2002        2003
                                                                 ---------- ----------- ----------- -----------
Revenues:
   Software....................................................  $ 170,109  $  109,894  $  416,156  $  221,986
   Professional services, maintenance and other................    235,453     223,405     467,253     444,068
                                                                 ---------- ----------- ----------- -----------
       Total revenues..........................................    405,562     333,299     883,409     666,054
                                                                 ---------- ----------- ----------- -----------
Cost of revenues:
   Software....................................................      5,282       4,268      10,577       8,989
   Professional services, maintenance and other................    125,061     126,141     256,194     251,653
                                                                 ---------- ----------- ----------- -----------
       Total cost of revenues..................................    130,343     130,409     266,771     260,642
                                                                 ---------- ----------- ----------- -----------
            Gross margin.......................................    275,219     202,890     616,638     405,412
                                                                 ---------- ----------- ----------- -----------
Operating expenses:
   Product development.........................................     85,200      75,474     168,919     154,745
   Sales and marketing.........................................    123,303      93,876     260,558     194,048
   General and administrative..................................     29,500      28,175      59,567      54,541
   Restructuring-related expenses..............................         --         274          --         274
                                                                 ---------- ----------- ----------- -----------
       Total operating expenses................................    238,003     197,799     489,044     403,608
                                                                 ---------- ----------- ----------- -----------
            Operating income...................................     37,216       5,091     127,594       1,804
                                                                 ---------- ----------- ----------- -----------
Other income, net:
   Interest and other income, net..............................     14,196      15,025      29,736      30,422
   Interest expense............................................     (4,889)     (4,854)     (9,836)     (9,748)
                                                                 ---------- ----------- ----------- -----------
       Total other income, net.................................      9,307      10,171      19,900      20,674
                                                                 ---------- ----------- ----------- -----------
            Income before income taxes.........................     46,523      15,262     147,494      22,478
Income taxes...................................................     16,748       5,494      53,098       8,092
                                                                 ---------- ----------- ----------- -----------
            Net income.........................................  $  29,775  $    9,768  $   94,396  $   14,386
                                                                 ========== =========== =========== ===========

Diluted net income per share...................................  $    0.06  $     0.02  $     0.18  $     0.03
                                                                 ========== =========== =========== ===========
Basic net income per share.....................................  $    0.06  $     0.02  $     0.20  $     0.03
                                                                 ========== =========== =========== ===========

Shares used in diluted share computation.......................    524,920     526,726     537,126     524,626
                                                                 ========== =========== =========== ===========
Shares used in basic share computation.........................    474,211     490,078     472,353     488,675
                                                                 ========== =========== =========== ===========
Comprehensive income:
Net income.....................................................  $  29,775  $    9,768  $   94,396  $   14,386
Other comprehensive income, net of taxes:
   Foreign currency translation adjustments....................     14,802      13,400      12,539      18,716
   Realized gain on marketable investments previously
      recognized in other comprehensive income.................     (2,478)     (2,158)     (4,730)     (3,705)
   Unrealized gain on investments..............................      6,744       4,759       3,576       7,181
                                                                 ---------- ----------- ----------- -----------
       Other comprehensive income..............................     19,068      16,001      11,385      22,192
                                                                 ---------- ----------- ----------- -----------
            Total comprehensive income.........................  $  48,843  $   25,769  $  105,781  $   36,578
                                                                 ========== =========== =========== ===========`

See accompanying notes to consolidated financial statements.

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

`Six Months Ended
                                                                                   June 30,
                                                                            -----------------------
                                                                               2002        2003
                                                                            ----------  -----------
Cash flows from operating activities:
   Net income.............................................................. $  94,396   $   14,386
   Adjustments to reconcile net income to net cash
    provided by operating activities:
      Write-off of property and equipment abandoned in restructuring.......        --        2,596
      Depreciation and other amortization..................................    66,997       78,825
      Amortization of identifiable intangible assets.......................     4,445        3,950
      Compensation related to stock options, net...........................     2,938          980
      Provision for doubtful accounts and sales returns....................    11,712        5,828
      Tax benefit from exercise of stock options...........................    10,000           --
      Deferred income taxes................................................       497          (46)
      Write-down of cost-method investments to fair value..................     2,508          406
      Net realized gains on marketable investments.........................    (4,730)      (3,705)
      Changes in operating assets and liabilities:
         Accounts receivable...............................................    25,653       55,369
         Prepaids and other................................................    18,679        9,175
         Accounts payable and accrued expenses.............................     9,546      (27,468)
         Restructuring obligations.........................................        --      (43,376)
         Deferred revenue..................................................    36,205       18,791
                                                                            ----------  -----------
           Net cash provided by operating activities.......................   278,846      115,711
                                                                            ----------  -----------
Cash flows from investing activities:
   Purchases of property and equipment.....................................   (49,158)     (10,514)
   Purchases of short-term investments.....................................  (886,484)  (1,118,484)
   Sales and maturities of short-term investments..........................   605,735      952,188
   Purchases of marketable equity securities...............................    (1,000)          --
   Proceeds from sale of marketable equity securities......................       853        5,338
   Purchase consideration for acquired businesses, net of cash received....      (500)      (1,500)
   Other non-operating assets and non-marketable securities................    11,364       (9,666)
                                                                            ----------  -----------
           Net cash used in investing activities...........................  (319,190)    (182,638)
                                                                            ----------  -----------
Cash flows from financing activities:
   Proceeds from issuance of common stock..................................    76,152       35,757
   Proceeds from equipment financing.......................................    24,873           --
   Repayments of capital lease obligations.................................    (4,457)      (6,380)
   Repayments of stockholder notes.........................................       422           --
                                                                            ----------  -----------
           Net cash provided by financing activities.......................    96,990       29,377
                                                                            ----------  -----------
Effect of exchange rate fluctuations.......................................    12,562       13,455
                                                                            ----------  -----------
Change in cash and cash equivalents........................................    69,208      (24,095)
Cash and cash equivalents, beginning of period.............................   799,090      667,511
                                                                            ----------  -----------
Cash and cash equivalents, end of period................................... $ 868,298   $  643,416
                                                                            ==========  ===========
Supplemental disclosures of non-cash activities:
   Common stock and stock options issued for acquisitions.................. $   5,478   $    1,670
                                                                            ========== ============`

See accompanying notes to consolidated financial statements.

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



1. Summary of Significant Accounting
Policies
2. Restructuring
3. The Company reduced the discretionary portion of its
operating costs through various cost control initiatives, including: (i)
reducing advertising expenditures, (ii) maintaining the CEO's salary at one
dollar per year, (iii) deferring merit increases, (iv) eliminating bonuses
(from July 2001 to June 2002) or paying bonuses based on
achievement of financial objectives (commencing in July 2002), (v) reducing
depreciation, primarily through reduced capital expenditures, and (vi) reducing
other discretionary expenditures, such as costs related to outside consultants,
travel and recruiting.
4. In order to further align the Company's operating
structure with anticipated revenue levels, the Company initiated a restructuring
of its operations and an associated workforce reduction in the third quarter of
2002 (the "2002 Restructuring"), which it completed in December 2002.
The 2002 Restructuring consisted primarily of the consolidation of excess
facilities, reductions in its workforce and the abandonment of certain assets in
connection with the consolidation of excess facilities.
5. During the first half of 2003, the Company continued to
evaluate the economic conditions in the information technology industry, along
with the Company's current organizational structure and its expectations
regarding revenue levels.  Based on this evaluation, in the second quarter of
2003 the Company determined that it would initiate a further restructuring of
its operations, including a reorganization of its operating structure (e.g.,
sales organization, geographic operations, management structure, etc.) (the
"2003 Restructuring" and collectively with the 2002 Restructuring, the
"Restructuring").  The Company anticipates the 2003 Restructuring will
be completed by the end of 2003.
6. The Company recognized a charge related to the 2002
Restructuring of $205,305,000, which was comprised of: (i) severance and
associated employee termination costs of $23,649,000 related to the reduction of
the Company's workforce, (ii) lease termination and other costs of $155,701,000
associated with permanently vacating certain facilities, and (iii) non-cash
impairment costs of $25,955,000 related to certain long-lived assets that were
abandoned in connection with the Company's consolidation of its facilities.  The
Company settled $24,802,000 of the 2002 Restructuring obligations during 2002.
7. During the second quarter of 2003, the Company revised
its estimates related to the 2002 Restructuring due primarily to: (i) the
Company terminating certain leases at more favorable terms than originally
anticipated, and (ii) entering into subleases sooner than previously expected
and/or at higher sublease rates than originally anticipated.  This resulted in a
net reversal of $9,972,000 of the 2002 Restructuring expenses during the three
months ended June 30, 2003.  The Company believes its estimates with respect to
the remaining 2002 Restructuring obligations are appropriate as of June 30,
2003.
8. The 2003 Restructuring charges incurred as of June 30,
2003, consist solely of charges associated with certain facilities that the
Company ceased use of as of that date.  As discussed further below, the Company
will incur additional charges in connection with the 2003 Restructuring during
the third and fourth quarters of 2003.
9. Total Restructuring obligations as of June 30, 2003,
primarily relate to costs associated with permanently vacated facilities.  These
costs are primarily comprised of the remaining lease obligations, net of
estimated sublease income, along with costs associated with demising and
subleasing the vacated facilities.  The obligations in the above table
associated with permanently vacating facilities will generally be paid over the
remaining lease terms, ending at various dates through March 2022, or over a
shorter period as the Company may negotiate with its lessors.  The obligations
in the above table associated with the Company's workforce reduction will be
paid during the second half of 2003.
10. Commitments and Contingencies
11. Employee Stock Purchase Plan
12. Stockholder Rights Plan and Preferred Stock
13. Stock Option Cancellation
14. Acquisitions, Intangible Assets and Goodwill
15. Net Income per Share
16. 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 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 and the risk
factors under Item 7 in our Annual Report on Form 10-K for the year ended
December 31, 2002.

The Company's 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 the Company's business, its performance during the three
and six months ended June 30, 2002 and 2003, key factors that impacted this
performance and risks that may impact the Company's on-going operations.

Overview of the Company's Business

Siebel Systems is a leading provider of eBusiness
applications software.  Siebel eBusiness Applications are a family of enterprise
applications software that enable an organization to better manage its most
important relationships: its customer, partner and employee relationships.
Siebel eBusiness Applications are designed to meet the information system
requirements needed to manage these relationships for organizations of all
sizes, from small businesses to the largest multinational organizations and
government agencies.  The Company's customer relationship management
applications enable an organization to sell to, market to, and serve its
customers across multiple channels and lines of business.  The Company's partner
relationship management applications unite the organization's partners,
resellers and customers in one global information system to facilitate greater
collaboration and increased revenues, productivity and customer satisfaction.
The Company's employee relationship management applications enable an
organization to drive employee and organizational performance and increase
employee satisfaction through the support of each stage of the employee life
cycle.  By deploying the comprehensive functionality of Siebel eBusiness
Applications to better manage their customer, partner and employee
relationships, the Company's customers achieve high levels of satisfaction from
these constituencies and improve their competitiveness in their markets.

Siebel Systems recognizes that each industry has
different business processes, competitive challenges and information systems
requirements, which cannot be addressed with a "one size fits all"
eBusiness approach.  Accordingly, Siebel eBusiness Applications are available in
21 industry applications designed for specific segments within multiple
industries, including financial services, communications, travel and
transportation, energy, the consumer sector, life sciences, the industrial
sector and the public sector.  Siebel eBusiness Applications enable
organizations to create a single source of customer information that sales,
service and marketing professionals can use to tailor product and service
offerings to meet each of their customers' needs.  By using Siebel eBusiness
Applications, organizations can develop new customer relationships, profitably
serve existing customers, and integrate their systems with those of their
partners, suppliers and customers, regardless of location.

The Company and its subsidiaries are principally engaged
in the design, development, marketing and support of Siebel eBusiness
Applications.  Substantially all of the Company's revenues are derived from the
sale of perpetual licenses of these software products and the related
professional services and customer support, otherwise known as maintenance.  The
Company licenses its software in multiple element arrangements in which the
customer purchases a combination of software, maintenance and/or professional
services, i.e., training, implementation services, etc.  First-year maintenance,
which includes technical support and product updates, is typically sold with the
related software license and is renewable at the option of the customer on an
annual basis after the first year.  The Company's Global Services Organization
provides professional services, which include a broad range of implementation
services, training and technical support, to the Company's customers and
implementation partners.  The Company's Global Services Organization has
significant product and implementation expertise and is committed to supporting
customers and partners through every phase of the eBusiness transformation
cycle.  Substantially all of the Company's professional service arrangements are
billed on a time and materials basis.  Payment terms for the above arrangements
are negotiated with the Company's customers and determined based on a variety of
factors, including the customer's credit standing and the Company's history with
the customer.

The Company plans to continue its efforts to develop
software applications that meet its customers' and potential customers' changing
business needs and to further reduce the total cost of ownership of its software
applications through its newest product, Universal Application Network, or UAN.
The Company regularly faces competition from new entrants to its product market.
The Company will continue to take various steps, including the introduction of
new products, reducing prices or other incentives, at such times as it deems
appropriate, in order to further increase the acceptance of its products.

Overview of the Results for the
Three and Six Months Ended June 30, 2003

To understand the Company's operating results during the
first half of 2003, the Company believes an understanding of the environment in
which the Company operated is required.  Specifically, the Company believes its
operating results during the first half of 2003 were impacted by several
factors, including macro-economic conditions, economic conditions in the
information technology industry and uncertainties within the application
software industry.  In addition, the Company is committed to improving its own
performance, even in the current difficult macro- and micro-economic
environment.  As discussed further below, the Company has initiated a further
restructuring of its operations that it believes will: (i) strengthen its
competitive position; (ii) reduce its cost structure thereby improving its
revenue per employee, operating margin and overall operating performance; and
(iii) better align its management and organizational structure in order to
return to sequential quarterly revenue growth.

During the first half of 2003, the Company believes the
primary factor impacting its operating performance was the weak global economic
conditions.  Simply stated, the Company's biggest challenge was the economy.
Throughout 2001 and continuing into the first half 2003, economic conditions in
many of the countries in which the Company operates either deteriorated or
stabilized at depressed levels.  For instance, during the first half of 2003
corporate and consumer confidence in the economy has remained very cautious;
unemployment in the United States reached a nine year high; and many of the
leading economic indicators declined during this period.  Further, geopolitical
uncertainties, including the on-going hostilities involving the United States,
have exacerbated corporations' general cautiousness in setting their capital
spending budgets.

In addition, the Company believes that these weak
economic conditions have disproportionately impacted the information technology
industry.  Many corporations have intensified their efforts to identify and
realize potential cost savings in these difficult economic circumstances and,
accordingly, capital spending by corporations, and more specifically information
technology spending, continues to decline or be delayed.  In addition, many
corporations made capital expenditures in previous years in anticipation of
future growth that did not materialize, thereby impacting their current capital
expenditures.

The application software segment of the information
technology industry was also affected by the uncertainty created by recently
announced mergers and takeover attempts within this segment.  Specifically,
several of the Company's direct and indirect competitors are in the process of
merger negotiations or taking steps to avoid takeover attempts.

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

The Company has taken and is in the process of taking
additional steps to improve its operating performance and execution, even in the
current difficult economic climate.  Despite the difficult economic climate, the
Company did not take any extraordinary actions, such as one time contingent
discounts related to its software licenses.  The following are the actions that
the Company has taken in order to better enable it to grow its revenues and
operating margins:

- The Company has continued to reduce the discretionary
portion of its operating costs through the implementation of various new cost
control initiatives, including: (i) tying bonuses more closely to achievement of
financial objectives, (ii) reducing depreciation, primarily through reduced
capital expenditures, and (iii) further reducing other discretionary
expenditures, such as costs related to outside consultants, travel and
recruiting.

- The Company completed a restructuring of its operations
and an associated workforce reduction in the fourth quarter of 2002 (the
"2002 Restructuring").  Primarily as the result of the 2002
Restructuring, the Company reduced total quarterly costs and expenses by
approximately $40 million on year-over-year basis during the quarter ended June
30, 2003.

- As a result of an evaluation of the current economic
conditions in the information technology industry, along with the Company's
current organizational structure and its expectations regarding revenue levels,
in the second quarter of 2003 the Company determined that it would initiate a
further restructuring of its operations, including a reorganization of its
operating structure (e.g., sales organization, geographic operations, management
structure, etc.) (the "2003 Restructuring" and collectively with the
2002 Restructuring, the "Restructuring").  The Company anticipates the
2003 Restructuring will be completed by the end of 2003.  Please refer to
"Restructuring-Related Expenses" below for a further discussion of the
2003 Restructuring.

In addition, the Company achieved several milestones in
the first half of 2003 that it believes will better enable the Company to grow
its business when information technology spending returns to normalized levels,
including:

- Industry analysts continued to acknowledge the Company's
product leadership.  For example, the Gartner Group, a prominent information
technology market research firm, designated Siebel Systems as
"leader"* in ten of its copyrighted Magic Quadrants** in 2003,
up from seven in 2002. In nine of the ten categories, Gartner cited Siebel
Systems as the only vendor that meets the leadership criteria for those CRM
categories.  There were a total of 18 Gartner Magic Quadrants covering CRM
Suites, Marketing, Sales and Service.

The Company believes that the Gartner Magic Quadrants provide
an objective and rigorous evaluation of technology suppliers' global
capabilities, breadth and depth of functionality, proven scalability, technology
innovation, company viability and vision, and successful installed customer
base. These quadrants assess a vendors' overall success in selling, deploying,
supporting, and extending their applications.

___________________________

*  Leaders are performing well today, have a clear vision
of market direction and are actively building competencies to sustain their
leadership position in the market.

**  The Magic Quadrant is copyrighted February and March
2003 by Gartner, Inc. and is reused with permission, which permission should not
be deemed to be an endorsement of any company or product depicted in the
quadrant.  The Magic Quadrant is Gartner, Inc.'s opinion and is an analytical
representation of a marketplace at and for a specific time period.  It measures
vendors against Gartner defined criteria for a marketplace.  The positioning of
vendors within a Magic Quadrant is based on the complex interplay of many
factors.  Gartner does not advise enterprises to select only those firms in the
"Leaders" quadrant.  In some situations, firms in the Visionary, Challenger,
or Niche Player quadrants may be the right matches for an enterprise's
requirements.  Well-informed vendor selection decisions should rely on more than
a Magic Quadrant.  Gartner research is intended to be one of many information
sources including other published information and direct analyst interaction.
Gartner, Inc. expressly disclaims all warranties, express or implied, of fitness
of this research for a particular purpose.

- The Company believes it was able to maintain its market
share in the majority of the product categories in which it operates and
continues as the technology leader in the CRM market.  In addition, information
technology surveys indicate CRM software is among the top spending priorities of
corporations.

- The Company's customer satisfaction levels continued at
already high levels, with an overall customer loyalty rating of 97%, based on a
December 31, 2002 survey.

- The Company continued its focus on customer satisfaction
through further development efforts of UAN, the Company's latest product
release.  The Company and leading systems integrators and software vendors
continue to work together to further develop UAN in order to address one of the
primary challenges currently facing the software applications industry: driving
down the cost of application ownership and maintenance.

In addition to the above accomplishments, the Company was
able to achieve improvement in several of its key financial metrics.
Specifically, despite the difficult economic challenges faced during the first
half of 2003, the Company was able to operate a cash-positive, profitable
business and achieved the following financial results:

- Total costs and expenses decreased by $40.1 million, or
11%, from $368.3 million in the three months ended June 30, 2002, to $328.2
million in the three months ended June 30, 2003, and decreased by $91.6 million,
or 12%, from $755.8 million in the six months ended June 30, 2002, to $664.2
million in the six months ended June 30, 2003.  The decrease in each of these
periods was primarily due to cost savings from the 2002 Restructuring and its
cost control initiatives.

- Cash and short-term investments increased by $140.2
million, or 6%, from $2,161.6 million as of December 31, 2002, to $2,301.8
million as of June 30, 2003, representing approximately 71% and 75% of total
assets, respectively.  During the periods of weak global economic conditions
from 2001 to 2003, the Company increased cash and short-term investments by
$1,149.2 million, or 100%, primarily through cash flows from
operations.

- Days sales outstanding was 63 days as of December 31,
2002, as compared to 58 days as of June 30, 2003.

- Cash flows from operations were
$278.8 million and $115.7 million during the six months ended June 30, 2002 and
2003, respectively.

- Working capital increased from $1,940.3 million as of
December 31, 2002, to $2,020.5 million as of June 30, 2003.

- Deferred revenue, which consists primarily of deferred
maintenance revenue, increased by 7%, from $270.6 million as of December 31,
2002, to $289.4 million as June 30, 2003.

- Stockholders' equity increased from $1,957.5 million as
of December 31, 2002, to $2,032.6 million as of June 30, 2003.

The Company intends to improve these financial metrics
and to return its software license and total revenues to sequential quarterly
growth.  The Company has set the following objectives that will guide
management's decisions throughout the remainder of 2003:

- Increase software license revenue from the Company's core
customer relationship management products and verticals;
- Continue to increase market share and software license
revenues in the Company's newest product lines: UAN, Siebel ERM, and Siebel
Analytics;
- Increase the Company's customer base in key vertical
markets, such as Life Sciences, Public Sector, Retail, and Travel and
Transportation;
- Increase customer satisfaction levels;
- Increase the return on investment to the Company's
customers from its products;
- Reduce the total cost of ownership related to the
Company's products;
- Identify opportunities to expand product lines, both
organically and through acquisition;
- Improve the execution within the Company's sales
organization;
- Grow professional services, maintenance and other
revenues;
- Commence new cost control initiatives to further reduce
total cost per employee; and
- Expand operating margins.

The Company will continue to follow high professional
standards in measuring and reporting its performance against the above
objectives.  Specifically, the Company believes that its accounting policies are
prudent and provide a clear view of its financial performance.  The Company
utilizes its internal audit function to help ensure that it follows these
accounting policies and maintains its internal controls.  The Company has formed
an Internal Controls Committee, comprised primarily of senior financial and
legal personnel, to help ensure its internal controls over financial reporting
are complete, accurate and appropriately documented.  The Company has formed a
Disclosure Committee, comprised primarily of senior financial and legal
personnel, to help ensure the completeness and accuracy of the Company's
financial results and disclosures.  In addition, prior to the release of the
Company's financial results, key members of the Company's management review the
Company's annual and quarterly results and key accounting policies and estimates
with its Audit Committee, which is comprised of independent members of the
Company's Board of Directors.

Discussion of the Results of
Operations for the Three and Six Months Ended June 30, 2002 and 2003

Revenues

The following table sets forth the Company's revenues,
both in absolute dollars and expressed as a percentage of total revenues, for
the three and six months ended June 30, 2002 and 2003 (in thousands, except
percentages):

`Three Months Ended June 30,             Six Months Ended June 30,
                                                     --------------------------------------  ------------------------------------
                                                            2002                2003                2002              2003
                                                     ------------------ -------------------  ----------------- ------------------
Revenues:                                                                                                                        
  Software.......................................... $170,109   41.9 %  $109,894     33.0 %  $416,156   47.1 %  $221,986   33.3 %
  Professional services, maintenance and other......  235,453   58.1     223,405     67.0     467,253   52.9     444,068   66.7
                                                     --------  -----    --------   ------    --------  -----    --------  -----
      Total revenues................................ $405,562  100.0 %  $333,299    100.0 %  $883,409  100.0 %  $666,054  100.0 %
                                                     ========  =====    ========   ======    ========  =====    ========  =====`

Software.  Software license revenues decreased by
35% from $170.1 million for the three months ended June 30, 2002, to $109.9
million for the three months ended June 30, 2003, and decreased by 47% from
$416.2 million for the six months ended June 30, 2002, to $222.0 million for the
six months ended June 30, 2003.  Software license revenues as a percentage of
total revenues decreased from 42% and 47% during the three and six months ended
June 30, 2002, respectively, to 33% during both the three and six months ended
June 30, 2003.

The Company markets its products through its direct sales
force and to a limited extent through distributors, primarily in Europe, Asia
Pacific, Japan and Latin America.  International software license revenues
accounted for 34% and 37% of software license revenues for the three and six
months ended June 30, 2002, respectively, as compared to 45% and 48% of software
license revenues for the three and six months ended June 30, 2003, respectively.
The Company expects international software license revenues will continue to
account for a significant portion of its overall software license revenues in
the foreseeable future.

During the three and six months ended June 30, 2002 and
2003, the Company's customers' purchasing decisions were impacted by, among many
other factors: (i) the overall weakness of the global economy, (ii) continued
reductions in corporate capital expenditures, (iii) geopolitical uncertainties,
and (iv) uncertainties in the application software industry as a result of
speculation of further consolidation within the industry.  Accordingly, many of
the Company's customers and potential customers have: (i) delayed the initiation
of the purchasing process, (ii) increased the evaluation time to complete a
software purchase, due in part to increased competition and the uncertainty in
the application software industry, and/or (iii) reduced their capital
expenditure budgets, thereby restricting their software procurement to well-defined
current needs.

As a result of these and other factors, both the number
of software license revenue transactions and average transaction size were
negatively impacted during the three and six months ended June 30, 2003, with
individual transactions generating software license revenues greater than or
equal to $5 million affected to the greatest extent.  Specifically, the number
of software license transactions decreased from 460 and 1,066 during the three
and six months ended June 30, 2002, respectively, to 319 and 716 during the
three and six months ended June 30, 2003, respectively.  The Company's average
transaction size decreased from $370,000 and $390,000 during the three and six
months ended June 30, 2002, respectively, to $344,000 and $310,000 during the
three and six months ended June 30, 2003, respectively.  In addition, the number
of transactions generating software license revenues greater than or equal to $5
million decreased from three and 15 transactions during the three and six months
ended June 30, 2002, respectively, to two and four transactions during the three
and six months ended June 30, 2003, respectively.  Consequently, the Company's
software license revenues decreased by 35% and 47% from the three and six months
ended June 30, 2002, to the three and six months ended June 30, 2003.  The
decline in software license revenues as a percentage of total revenues was
primarily due to the factors described above impacting software license revenues
to a greater extent than professional services, maintenance and other
revenues.

The Company and its management are committed to improving
the performance of the Company's sales operations and returning its software
license revenues to positive sequential quarterly growth.  Although the
Company's software license revenues decreased on a year-over-year basis, the
Company took several steps in the latter part of 2002 and is in the process of
taking additional steps in 2003 that it believes will better position it for
future growth.  Specifically, the Company has taken the following steps:

- The Company reorganized its sales management in the
fourth quarter of 2002, including the hiring of Richard P. Chiarello as Senior
Vice President, Worldwide Sales, in order to improve the sales organization's
performance.

- As discussed previously, the Company initiated a
restructuring of its operations in the second quarter of 2003 (the "2003
Restructuring" and collectively with the 2002 Restructuring, the
"Restructuring"), including a reorganization of its operating
structure (e.g., sales organization, geographic operations, management
structure, etc.).  The Company believes the 2003 Restructuring and the resulting
new organizational structure will improve cross-unit collaboration, better align
its organizational structure with the Company's go-to-market strategy, and
empower local managers with increased authority and accountability.  The Company
believes that the new organizational structure will allow greater responsiveness
to customers, faster decision making and an improved focus of the Company's
resources on key growth areas.

- The Company continued to increase its customer base with
59% and 57% of software license revenues coming from new customer projects
during the three and six months ended June 30, 2003.  The Company measures
revenues from new customer projects based on software license transactions from
new customers, new divisions of existing customers and/or new projects at
existing customers.  The Company believes that the continued growth of its
customer base will provide a competitive advantage through increased future
sales opportunities when corporate capital expenditures return to normalized
levels.

- Many smaller software providers that compete with the
Company fell into financial difficulties during 2002 and the first half of 2003
as a result of the reluctance of customers to procure their software needs from
a vendor lacking either a mature solution or secure financial outlook.
Accordingly, the Company believes that it is well positioned to offer the
customers and potential customers of these vendors the software solution they
need.

The Company anticipates that its software license
revenues will return to positive growth when the current geopolitical tensions
ease and the overall economic conditions strengthen and, more specifically, when
the overall demand for information technology increases.  The Company does not
expect a significant improvement in information technology spending in the
immediate future and, accordingly, during the third quarter of 2003 the Company
expects software license revenues, both in terms of absolute dollars and as a
percentage of total revenues, to remain comparable to levels in the second
quarter of 2003.

The Company's future software license revenues and
operating performance may be negatively impacted by: (i) the uncertainty in the
application software industry and resulting reductions in capital expenditures,
(ii) geopolitical uncertainties, including continued hostilities involving the
United States, (iii) additional terrorist attacks, (iv) a lack of confidence in
corporate governance and accounting practices, (v) the diversity in global
economic conditions, (vi) continued intense competition, (vii) corporate and
consumer confidence in the economy, (viii) operational execution related to and
the resulting uncertainty created by the 2003 Restructuring, and (ix) other
factors described under "Risk Factors" below.

Professional Services, Maintenance and Other.
Professional services, maintenance and other revenues are primarily
comprised of professional services (i.e., implementation services and training)
and maintenance (i.e., technical support and product updates).  Professional
services are typically provided over a period of three to six months subsequent
to the signing of a software license arrangement and depend in large part on the
Company's software license revenues.  The Company's maintenance revenues depend
on both the Company's software license revenues and renewals of maintenance
agreements by the Company's existing customer base.  Professional services,
maintenance and other revenues decreased by 5% from $235.5 million for the three
months ended June 30, 2002, to $223.4 million for the three months ended June
30, 2003, and also decreased by 5% from $467.3 million for the six months ended
June 30, 2002, to $444.1 million for the six months ended June 30, 2003.  As a
percentage of total revenues, professional services, maintenance and other
revenues were 58% and 53% during the three and six months ended June 30, 2002,
respectively, as compared to 67% during both the three and six months ended June
30, 2003.

The decrease in the absolute dollar amount of
professional services, maintenance and other revenues was due to a decline in
revenues derived from the Company's implementation and training services,
partially offset by an increase in the installed base of customers receiving
maintenance.   The Company's maintenance revenues have continued to increase on
a year-over-year basis, primarily due to the renewal of customer maintenance
agreements and the signing of maintenance agreements at the time of a new
software license.  However, due primarily to weak economic conditions, the
Company's efforts to renew existing customers' maintenance agreements have
become more challenging.  Specifically, several of the Company's customers have
reduced the size of their employee base, thereby impacting the number of users
of the Company's software.

While maintenance revenues have increased on a year-over-year
basis, professional services revenues decreased in both the three and six
months ended June 30, 2003, compared to the three and six months ended June 30,
2002.  Because the Company's professional services revenues generally lag
software license revenues by three to six months, the Company's implementation
and training services are largely dependent on the amount of software license
revenues generated in the preceding period.  The deteriorating economic
conditions and resulting decline in software license revenues throughout 2002
and the first half of 2003 have negatively impacted professional services
revenues.

Professional services, maintenance and other revenues
increased as a percentage of total revenues during the three and six months
ended June 30, 2003, due primarily to growth in the number of customers
receiving maintenance, coupled with a comparatively sharper decrease in the
Company's software license revenues.  The Company expects that professional
services, maintenance and other revenues will return to positive growth soon
after the Company's software license revenues return to positive growth.  The
Company currently anticipates that quarterly professional
services, maintenance and other revenues for the third quarter of 2003, both in
terms of absolute dollars and as a percentage of total revenues, will remain
comparable to the levels in the second quarter of 2003.

Cost of Revenues

The following table sets forth the Company's cost of
revenues, both in absolute dollars and expressed as a percentage of total
revenues, for the three and six months ended June 30, 2002 and 2003 (in
thousands, except percentages):

`Three Months Ended June 30,             Six Months Ended June 30,
                                                     --------------------------------------  ------------------------------------
                                                            2002                2003                2002              2003
                                                     ------------------ -------------------  ----------------- ------------------
Cost of revenues:                                                                                                                
  Software.......................................... $  5,282    1.3 %  $  4,268      1.3 %  $ 10,577    1.2 %  $  8,989    1.3 %
  Professional services, maintenance and other......  125,061   30.8     126,141     37.8     256,194   29.0     251,653   37.8
                                                     --------  -----    --------   ------    --------  -----    --------  -----
      Total cost of revenues........................ $130,343   32.1 %  $130,409     39.1 %  $266,771   30.2 %  $260,642   39.1 %
                                                     ========  =====    ========   ======    ========  =====    ========  =====`

Total cost of revenues was $130.3 million and $266.8
million during the three and six months ended June 30, 2002, respectively, as
compared to $130.4 million and $260.6 million during the three and six months
ended June 30, 2003, respectively.  As a percentage of total revenues, total
cost of revenues was 32% and 30% during the three and six months ended June 30,
2002, respectively, as compared to 39% during both the three and six months
ended June 30, 2003.  Total cost of revenues increased as a percentage of total
revenues during the 2003 periods compared to the 2002 periods, primarily due to
the Company deriving a higher percentage of its total revenues from professional
services, maintenance and other revenues, which are at lower margins than
software license revenues.

The following is a discussion of the year-over-year
changes within the individual components of 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.  Cost of software license revenues was
$5.3 million and $10.6 million for the three and six months ended June 30, 2002,
respectively, compared to $4.3 million and $9.0 million for the three and six
months ended June 30, 2003, respectively.  As a percentage of software license
revenues, cost of software license revenues was 3% during both the three and six
months ended June 30, 2002, compared to 4% during both the three and six months
ended June 30, 2003, respectively.  Cost of software license revenues decreased
in terms of absolute dollars primarily due to the decrease in software license
revenues.  As a percentage of software license revenues, these costs increased
in the three and six months ended June 30, 2003, compared to the three and six
months ended June 30, 2002, primarily due to a significant portion of these
costs relating to amortization of acquired technology, which is relatively fixed
in nature, and certain royalty arrangements which are fixed in nature (i.e.,
royalty rates that are time based and therefore do not vary with software
license revenues).  During the third quarter of 2003, cost of software license
revenues as a percentage of software license revenues is expected to remain
comparable to the percentage incurred during the second quarter of 2003.

Professional Services, Maintenance and Other.Cost of professional services, maintenance and other revenues consists
primarily of personnel, facilities and systems costs incurred to provide
training, consulting and other global services.  Cost of professional services,
maintenance and other revenues was $125.1 million and $256.2 million for the
three and six months ended June 30, 2002, respectively, compared to $126.1
million and $251.7 million for the three and six months ended June 30, 2003,
respectively.  These costs were approximately 53% and 55% of professional
services, maintenance and other revenues during the three and six months ended
June 30, 2002, respectively, compared to 56% and 57% during the three and six
months ended June 30, 2003, respectively.

Cost of professional services, maintenance and other
revenues in terms of absolute dollars were comparable during the three months
ended June 30, 2002 and 2003.  These costs decreased in terms of the absolute
dollar amount from the six months ended June 30, 2002, to the six months ended
June 30, 2003, primarily due to: (i) the partial realization of cost savings
from the 2002 Restructuring, as described more fully in Note 2 to the
accompanying unaudited consolidated financial statements, including savings from
the reduction of personnel, and (ii) the further realization of savings from the
Company's cost control initiatives.  Partially offsetting these cost savings was
an increase in compensation costs from the renewal of merit increases and other
incentive compensation in the second half of 2002.

Cost of professional services, maintenance and other
revenues as a percentage of the corresponding revenue amounts increased during
the three and six months ended June 30, 2003, from the three and six months
ended June 30, 2002, primarily due to: (i) the increase in compensation expense
as a result of a renewal of merit increases and other incentive compensation,
and (ii) a decrease in revenue from licenses of the Company's Multi-Channel
Services' products that is included in "other revenues," which is at
higher margins than maintenance and professional services.

In connection with the 2003 Restructuring, the Company
intends to reduce personnel in the Company's Global Services Organization,
including consolidating its management structure, in order to improve the
utilization of its professional services' staff and better align its cost
structure with expected revenues.  In addition, the Company expects to continue
to reduce the cost of professional services, maintenance and other revenues
through the continuation of its cost control initiatives and further aligning
its incentive compensation plans with gross margin attainment.  Accordingly, the
Company expects that professional services, maintenance and other costs, in
terms of both the absolute dollar amount and as a percentage of professional
services, maintenance and other revenues, will remain comparable to or decrease
in the third quarter of 2003 from the levels incurred during the second quarter
of 2003.

Operating Expenses

The following table sets forth the Company's operating
expenses, both in absolute dollars and expressed as a percentage of total
revenues, for the three and six months ended June 30, 2002 and 2003 (in
thousands, except percentages):

`Three Months Ended June 30,             Six Months Ended June 30,
                                                     --------------------------------------  ------------------------------------
                                                            2002                2003                2002              2003
                                                     ------------------ -------------------  ----------------- ------------------
Operating expenses:                                                                                                              
  Product development............................... $ 85,200   21.0 %  $ 75,474     22.7 %  $168,919   19.1 %  $154,745   23.2 %
  Sales and marketing...............................  123,303   30.4      93,876     28.2     260,558   29.5     194,048   29.2
  General and administrative........................   29,500    7.3      28,175      8.4      59,567    6.8      54,541    8.2
  Restructuring-related expenses....................       --     --         274      0.1          --     --         274     --
                                                     --------  -----    --------   ------    --------  -----    --------  -----
      Total operating expenses...................... $238,003   58.7 %  $197,799     59.4 %  $489,044   55.4 %  $403,608   60.6 %
                                                     ========  =====    ========   ======    ========  =====    ========  =====`

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, benefits, consulting costs and the
cost of software development tools and equipment.  The Company considers
technological feasibility of its software products to have been reached upon
completion of a working model that has met certain performance criteria.  The
period between achievement of technological feasibility and general release of a
software product is typically very short, and development costs incurred during
that period have not been material.  Accordingly, the Company has not
capitalized any software development costs to date.  Product development expense
decreased from $85.2 million for the three months ended June 30, 2002, to $75.5
million for the three months ended June 30, 2003, and decreased from $168.9
million for the six months ended June 30, 2002, to $154.7 million for the six
months ended June 30, 2003.  As a percentage of total revenues, product
development expense was 21% and 19% for the three and six months ended June 30,
2002, as compared to 23% for both the three and six months ended June 30,
2003.

The decrease in product development expense in terms of
absolute dollars from the three and six months ended June 30, 2002, to the three
and six months ended June 30, 2003, was primarily attributable to: (i) cost
savings from the reduction of product development personnel and consolidation of
the remaining personnel into more highly utilized facilities in connection with
the 2002 Restructuring, and (ii) further realization of cost savings from the
Company's cost control initiatives, including reductions of travel- and
entertainment-related expenditures.  Partially offsetting these cost savings
were: (i) increased compensation costs from the renewal of merit increases and
other incentive compensation, and (ii) increased costs from outside consultants
in connection with the further development of the Company's newest product, UAN.
Product development expense as a percentage of total revenues increased due to
the Company's continued investment in the research and development during a
period in which the Company's software license revenues decreased.

In connection with the 2003 Restructuring, the Company
intends to: (i) eliminate unprofitable products, which will result in the
reduction of personnel in its product development organization, (ii) move a
portion of its quality assurance and testing activities offshore, and (iii)
consolidate the Company's product development management structure in order to
better align its cost structure with the Company's expected revenues.  For the
Company's core product lines, the Company anticipates that it will continue to
devote substantial resources to develop new versions of its existing products,
new products and additional modules for its products.  As a result of the
anticipated actions related to the 2003 Restructuring, the Company expects
product development expenses, in terms of both absolute dollars and as a
percentage of total revenues, to decrease in the third quarter of 2003 from the
levels incurred during the second quarter of 2003.

Sales and Marketing.  The Company continues to place
significant emphasis, both domestically and internationally, on direct sales
through its own sales force.  Sales and marketing expense is comprised primarily
of costs associated with the Company's sales and marketing personnel and
consists primarily of: (i) salaries, commissions and bonuses; (ii) facility-related
(i.e., rent) and equipment-related (i.e., depreciation) expenses; (iii)
travel and entertainment expenses; and (iv) promotional and advertising
expenses.  Sales and marketing expense decreased from $123.3 million for the
three months ended June 30, 2002, to $93.9 million for the three months ended
June 30, 2003, and decreased from $260.6 million for the six months ended June
30, 2002, to $194.0 million for the six months ended June 30, 2003.  As a
percentage of total revenues, sales and marketing expense was 30% for both the
three and six months ended June 30, 2002, as compared to 28% and 29% for the
three and six months ended June 30, 2003, respectively.

Sales and marketing expense decreased in terms of
absolute dollars from the three and six months ended June 30, 2002, to the three
and six months ended June 30, 2003, due primarily to: (i) the continued close
monitoring of the Company's expenses and further implementation of the Company's
cost control initiatives, including reductions in travel and entertainment
expenditures and advertising expenditures; (ii) the decrease in sales
commissions and other incentive compensation that resulted from a decrease in
the Company's software license revenues; and (iii) the further reduction of
expenses as a result of the 2002 Restructuring, including the reduction of sales
and marketing personnel and consolidation of the remaining personnel into more
highly utilized facilities in the second half of 2002.  Partially offsetting
these costs savings were increases in compensation expense associated with the
renewal of merit compensation increases and incentive compensation plans.

In connection with the 2003 Restructuring, the Company
intends to: (i) consolidate the number of sales personnel serving an individual
customer, which the Company believes will allow greater responsiveness to
customers, faster decision making, and an improved focus of the Company's
resources on key growth areas; and (ii) consolidate the Company's sales and
marketing management structure in order to better align its cost structure with
the Company's expected revenues.  As a result of the anticipated actions related
to the 2003 Restructuring, the Company expects sales and marketing expense, in
terms of both absolute dollars and as a percentage of total revenues, to
decrease in the third quarter of 2003 from the levels incurred during the second
quarter of 2003.

General and Administrative.  General and
administrative expense consists primarily of salaries and occupancy costs for
administrative, executive and finance personnel, along with bad debt expense.
General and administrative expenses decreased from $29.5 million for the three
months ended June 30, 2002, to $28.2 million for the three months ended June 30,
2003, and decreased from $59.6 million for the six months ended June 30, 2002,
to $54.5 million for the six months ended June 30, 2003.  As a percentage of
total revenues, general and administrative expense was 7% for both the three and
six months ended June 30, 2002, compared to 8% for both the three and six months
ended June 30, 2003.  General and administrative expenses decreased from the
2002 periods to 2003 periods primarily due to: (i) further reduction of expenses
in the second half of 2002 as a result of the 2002 Restructuring, including the
reduction of general and administrative personnel and consolidation of the
remaining personnel into higher-utilized facilities, and (ii) a decrease in the
Company's provision for doubtful accounts associated with reduced receivable
levels.  Partially offsetting these cost savings were increases in legal
expenses and compensation expense associated with the renewal of merit
compensation increases and incentive compensation plans.

During the three and six months ended June 30, 2003, the
majority of general and administrative expenses were relatively fixed in nature.
Accordingly, due primarily to a decrease in total revenues, general and
administrative expense increased as a percentage of total revenues during the
three and six months ended June 30, 2003, from the respective periods in
2002.

In connection with the 2003 Restructuring, the Company
intends to consolidate the Company's general and administrative management
structure and to reduce the size of it general and administrative staff in order
to better align its cost structure with the Company's expected revenues.  In
addition, the Company expects to continue to closely monitor discretionary
expenditures and continue many of the cost control initiatives discussed above
throughout the remainder of 2003.  Accordingly, during the third quarter of
2003, the Company anticipates general and administrative expense, in terms of
both absolute dollars and as a percentage of total revenues, to decrease in the
third quarter of 2003 from the levels incurred during the second quarter of
2003.

Restructuring-Related Expenses.  	As previously
discussed, certain of the Company' key operating metrics have declined from
their historical levels.  In response to this decline, the Company initiated a
series of steps that it believes will: (i) strengthen the Company's competitive
position; (ii) reduce its cost structure thereby improving its revenue per
employee, operating margin and overall operating performance; and (iii) better
align its management structure in order to return to sequential quarterly
revenue growth.  Specifically, the Company has taken the following actions:

- The Company reduced the discretionary portion of its
operating costs through various cost control initiatives discussed
above.

- In order to further align the Company's operating
structure with anticipated revenue levels, the Company initiated the 2002
Restructuring, which it completed in December 2002.  The 2002 Restructuring
consisted primarily of the consolidation of excess facilities, reductions in its
workforce and the abandonment of certain assets in connection with the
consolidation of excess facilities.

- During the first half of 2003, the Company continued to
evaluate the economic conditions in the information technology industry, along
with the Company's current organizational structure and its expectations
regarding revenue levels.  Based on this evaluation, in the second quarter of
2003 the Company determined that it would initiate the 2003 Restructuring.  The
Company anticipates the 2003 Restructuring will be completed by the end of 2003.

The following table summarizes the Company's
Restructuring expenses during the six months ended June 30, 2003, and the
related Restructuring obligations as of June 30, 2003 (in thousands):

`Employee      Facility-      Asset
                                                           Termination     Related     Abandonment
                                                              Costs         Costs        Costs        Total
                                                          ------------ -------------- -----------  -----------
Restructuring obligations, December 31, 2002 (1)......... $     3,935  $     150,613  $       --   $  154,548
                                                          ------------ -------------- -----------  -----------
Restructuring-related expenses charged to operations:
  Changes in estimate related to 2002 Restructuring (2)..         (58)       (10,531)        617       (9,972)
  2003 Restructuring charges (3).........................          --          8,267       1,979       10,246
                                                          ------------ -------------- -----------  -----------
     Total Restructuring-related expenses................         (58)        (2,264)      2,596          274
Cash payments............................................      (2,800)       (38,254)         --      (41,054)
Non-cash charges.........................................          --             --      (2,596)      (2,596)
                                                          ------------ -------------- -----------  -----------
Restructuring obligations, June 30, 2003 (4)............. $     1,077  $     110,095  $       --   $  111,172
                                                          ============ ============== ===========
     Less: Restructuring obligations, short-term.........                                              33,464
                                                                                                   -----------
     Restructuring obligations, long-term................                                          $   77,708
                                                                                                   ===========`

1. The Company recognized a charge related to the 2002
Restructuring of $205.3 million, which was comprised of: (i) severance and
associated employee termination costs of $23.6 million related to the reduction
of the Company's workforce, (ii) lease termination and other costs of $155.7
million associated with permanently vacating certain facilities, and (iii) non-cash
impairment costs of $26.0 million related to certain long-lived assets that
were abandoned in connection with the Company's consolidation of its facilities.
The Company settled $24.8 million of the 2002 Restructuring obligations during
2002.
2. During the second quarter of 2003, the Company revised
its estimates related to the 2002 Restructuring due primarily to: (i) the
Company terminating certain leases at more favorable terms than originally
anticipated, and (ii) entering into subleases sooner than previously expected
and/or at higher sublease rates than originally anticipated.  This resulted in a
net reversal of $10.0 million of the 2002 Restructuring expenses during the
three months ended June 30, 2003.  The Company believes its estimates with
respect to the remaining 2002 Restructuring obligations are appropriate as of
June 30, 2003.
3. The 2003 Restructuring charges incurred as of June 30,
2003, consist solely of charges associated with certain facilities that the
Company ceased use of as of that date.  As discussed further below, the Company
will incur additional charges in connection with the 2003 Restructuring during
the third and fourth quarters of 2003.
4. Total Restructuring obligations as of June 30, 2003,
primarily relate to costs associated with permanently vacated facilities.  These
costs are primarily comprised of the remaining lease obligations, net of
estimated sublease income, along with costs associated with demising and
subleasing the vacated facilities.  The obligations in the above table
associated with permanently vacating facilities will generally be paid over the
remaining lease terms, ending at various dates through March 2022, or over a
shorter period as the Company may negotiate with its lessors.  The obligations
in the above table associated with the Company's workforce reduction will be
paid during the second half of 2003.

In the second quarter of 2003, the Company began
developing a plan to restructure its operations, including a reorganization of
its operating structure (e.g., sales organization, geographic operations,
management structure, etc.).  The Company anticipates the 2003 Restructuring
will be completed by the end of 2003.  The 2003 Restructuring charges incurred
as of June 30, 2003, consist solely of charges associated with certain
facilities that the Company ceased use of as of that date.  During the third and
fourth quarters of 2003, the Company anticipates that it will: (i) consolidate
additional facilities, including ceasing operations in certain geographic
locations; (ii) reduce its workforce, including reductions as the result of
reorganizing its operating and management structures; and (iii) abandon certain
long-lived assets, including leasehold improvements, furniture and fixtures, and
computer equipment.

The Company will record the costs associated with the
2003 Restructuring as follows: (i) costs associated with the Company's reduction
of its workforce and consolidation of its facilities will be recorded based on
their respective fair values (i.e., the present value of expected net cash flows
associated with these obligations), and (ii) the cost associated with the
abandonment of certain long-lived assets will be recorded based on the net
carrying value of the assets at the time of the abandonment.  The Company is
still in the process of finalizing its plans related to the 2003 Restructuring
and, accordingly, the total expenses and cash outlays related to the 2003
Restructuring are not currently estimable.

As part of the 2003 Restructuring, the Company intends to
reduce its workforce by approximately 10%.  This workforce reduction will affect
substantially all of the Company's organizations and geographical regions.
Expenses associated with the workforce reduction will be comprised primarily of
severance, COBRA benefits, payroll taxes and other associated employment
termination costs.  The Company expects that these costs will be expensed during
the third quarter of 2003.

As a result of the anticipated workforce reduction,
certain of the Company's facilities are projected to be under-utilized.
Accordingly, the Company intends to improve the utilization of its facilities by
consolidating its remaining workforce into certain existing facilities and
ceasing to utilize the then vacated facilities.  The Company expects that the
portion of the 2003 Restructuring charge related to facilities consolidation
will be expensed during the second half of 2003 as the Company ceases to utilize
the facilities.  The costs associated with the Company's facilities
consolidation will be recorded based on the present value of the sum of the
expected lease termination costs and/or costs associated with satisfying
remaining lease commitments, less estimated sublease income.

In accordance with SFAS 146, in periods subsequent to the
initial recording of the 2003 Restructuring obligations, the Company will
recognize accretion expense due solely to the passage of time.  The Company will
record this accretion as an additional Restructuring-related expense and as an
increase in the carrying amount of the 2003 Restructuring obligations.
Additionally, the Company will expense certain other costs, such as moving
costs, when incurred.

As part of the 2003 Restructuring, certain leasehold
improvements, furniture and fixtures, and computer equipment are expected to be
abandoned in the second half of 2003.  The Company expects the charge related to
asset impairments will be expensed in the second half of 2003.

Subject to the timely and successful implementation of
the 2003 Restructuring, the Company believes that the 2003 Restructuring will
further reduce the Company's expense levels and a portion of the related cash
requirements, resulting in a cost structure that is better aligned with the
Company's anticipated future revenues.  The Company is still in the process of
finalizing its plans related to the 2003 Restructuring. However, the Company
expects that once finalized, the 2003 Restructuring, along with its cost control
initiatives, may reduce the Company's quarterly operating expenses by up to $40
million from where operating expenses would have been absent the 2003
Restructuring.

The majority of the quarterly expense savings from the
2003 Restructuring are expected to be derived from: (i) the Company's workforce
reduction, including expense reductions related to employee compensation,
employee benefits and other direct costs of up to $20 million; (ii) the
Company's consolidation of its facilities, including reductions of rent and
other operating costs of up to $7 million; (iii) a decrease in depreciation
expense of up to $10 million, due primarily to reductions in capital
expenditures and the abandonment of certain leasehold improvements, computer
equipment, and furniture and fixtures; and (iv) a decrease in other operating
costs of up to $3 million, due primarily to the Company's cost control
initiatives, including savings from relocating a portion of the Company's
product development operations overseas.  The Company expects to achieve these
expense savings by end of the fourth quarter of 2004.

Because the benefits related to the 2003 Restructuring
are derived from management's estimates, which are based on currently available
information, the 2003 Restructuring may not achieve the benefits currently
anticipated or on the timetable or at the level currently contemplated.  Please
refer to "We may not be able to successfully implement our Restructuring
efforts, and such efforts may adversely impact our ability to retain and attract
future employees" under Risk Factors included in the Company's Annual
Report on Form 10-K for the year ended December 31, 2002, for further discussion
of risks associated with the Company's Restructuring efforts.

Operating Income and Operating Margin

Operating income decreased from $37.2 million during the
three months ended June 30, 2002, to $5.1 million during the three months ended
June 30, 2003, and decreased from $127.6 million during the six months ended
June 30, 2002, to $1.8 million during the six months ended June 30, 2003.
Operating margin was 9% and 14% during the three and six months ended June 30,
2002, respectively, as compared to 2% and 0.3% during the three and six months
ended June 30, 2003, respectively.  The Company's operating income and margins
decreased on a year over year basis during the three and six months ended June
30, 2003, primarily as a result of the decrease in the Company's software
license revenues for the reasons described above.  The decline in operating
income and operating margin was partially offset by the cost savings from the
2002 Restructuring and management's cost control initiatives.

Other Income, Net

For the three and six months ended June
30, 2002 and 2003, other income, net was comprised of the following (in
thousands):

`Three Months Ended     Six Months Ended
                                                      June 30,              June 30,
                                                --------------------- ---------------------
                                                   2002       2003       2002       2003
                                                ---------- ---------- ---------- ----------
Interest income................................ $  14,885  $  13,475  $  28,957  $  27,711
Interest expense...............................    (4,889)    (4,854)    (9,836)    (9,748)
Net gains on marketable investments............     2,478      2,158      4,730      3,705
Write-down of cost-method investments..........    (2,508)      (153)    (2,508)      (406)
Other, net.....................................      (659)      (455)    (1,443)      (588)
                                                ---------- ---------- ---------- ----------
                                                $   9,307  $  10,171  $  19,900  $  20,674
                                                ========== ========== ========== ==========`

Interest income represents earnings on the Company's cash
and short-term investments.  Interest income remained relatively flat in 2003
compared to 2002, primarily due to the Company's increased balances of cash and
short-term investments, which offset a decline in interest rates.  Interest
expense primarily represents interest on the Company's $300.0 million
convertible subordinated debentures (see Note 4 to the consolidated financial
statements included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2002, for a further description of the convertible
subordinated debentures).

During the three and six months ended June 30, 2002 and
2003, net gains on marketable investments were primarily the result of gains
from sales of certain of the Company's short-term investments.  The Company
holds several minority interests, included in other assets and accounted for
under the cost method, in companies having operations or technology in areas
within its strategic focus.  During the three and six months ended June 30, 2002
and 2003, the write-down of cost-method investments represents adjustments to
certain of these investments to the estimated fair value as the decline in the
value of 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

The Company's provision for income taxes
totaled $16.7 million and $53.1 million for the three and six months ended June
30, 2002, respectively, compared to $5.5 million and $8.1 million for the three
and six months ended June 30, 2003, respectively.  Income taxes as a percentage
of pretax income (i.e., the "Effective Rate") were 36% for all periods
presented.  The Company currently expects its Effective Rate for the third
quarter of 2003 to be approximately 36%; however, the Company may have to
increase its tax rate in future periods should the Company's actual geographical
mix or absolute levels of annual pretax income differ from amounts currently
expected.

Specifically, as part of the process
of preparing the Company's consolidated financial statements, the Company is
required to estimate its full-year income and the related income tax expense in
each jurisdiction in which the Company operates.  Changes in the geographical
mix or estimated level of annual pretax income can impact the Company's overall
effective tax rate.  This process involves estimating the Company's current tax
liabilities in each jurisdiction in which the Company operates, 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 the Company's
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 the Company has considered future taxable
income and the existence of prudent and feasible tax planning strategies in
assessing its valuation allowance, in the event the Company were to determine
that it would not be able to realize all or part of its net deferred tax assets
in the future, an adjustment to the valuation allowance would be charged to
income in the period such determination was made.

As discussed in Note 3 to the accompanying unaudited
consolidated financial statements, the Company's U.S. Federal income tax returns
for 1998, 1999 and 2000 are currently under examination by the Internal Revenue
Service ("IRS").  The Company believes it has made adequate provision
in the accompanying unaudited consolidated financial statements for any
adjustments the IRS has or may propose with respect to the U.S. Federal income
tax returns.

Net Income

During the three and six months ended June 30, 2002, the
Company earned net income of $29.8 million and $94.4 million, respectively,
compared to net income during the three and six months ended June 30, 2003, of
$9.8 million and $14.4 million, respectively.  Diluted net income per share was
$0.06 and $0.18 per share for the three and six months ended June 30, 2002,
respectively, compared to net income per share of $0.02 and $0.03 per share
during the three and six months ended June 30, 2003, respectively.

Liquidity and Capital Resources

Overview

The Company derives its liquidity and capital
resources primarily from its cash flows from operations and from working
capital.  The Company's working capital increased from $1,940.3 million as of
December 31, 2002, to $2,020.5 million as of June 30, 2003.   The significant
components of the Company's working capital are liquid assets such as cash,
short-term investments and trade accounts receivable, reduced by accounts
payable, accrued expenses and deferred revenue.  The Company continues to
operate a cash-positive business and, accordingly, the Company has continued to
increase its cash and short-term investment balances.  Specifically, the
Company's cash, cash equivalents and short-term investments increased from
$2,161.6 million as of December 31, 2002, to $2,301.8 million as of June 30,
2003, representing approximately 71% and 75% of total assets, respectively.  The
Company's days sales outstanding in accounts receivable was 63 days as of
December 31, 2002, compared to 58 days as of June 30, 2003.  In addition, the
Company's average payment terms on license revenue transactions were 28 days as
of December 31, 2002, compared to 34 days as of June 30, 2003.

The Company does not use off-balance-sheet arrangements
with unconsolidated entities or related parties, nor does it use other forms of
off-balance-sheet arrangements such as research and development arrangements.
Accordingly, the Company's liquidity and capital resources are not subject to
off-balance-sheet risks from unconsolidated entities.  The Company's liquidity
could be negatively impacted by a decrease in demand for the Company's products,
which are subject to rapid technological changes, or a reduction of capital
expenditures by the Company's customers as a result of a downturn in the global
economy, among other factors.

While the Company believes that its current working
capital and anticipated cash flows from operations will be adequate to meet its
cash needs for daily operations and capital expenditures for at least the next
12 months, the Company may elect to raise additional capital through a public
offering of securities or other means in the future, depending upon market
conditions.

Commitments

As of June 30, 2003, the
Company's future fixed commitments for cash payments primarily related to
obligations under non-cancelable operating and capital leases and the Company's
$300.0 million convertible subordinated debentures.  Please refer to
"Liquidity and Capital Resources" in Item 7 of the Company's Annual
Report on Form 10-K for the year ended December 31, 2002, for a further
discussion of the Company's future fixed commitments, including a five-year
schedule of future cash payments under these obligations.

Cash Flows

Cash provided by operating activities was $278.8 million
and $115.7 million for the six months ended June 30, 2002 and 2003,
respectively.  Despite the weak economic conditions, the Company has continued
to operate its business to produce positive cash flows from operations.  Cash
provided by operating activities decreased from 2002 to 2003 primarily as the
result of the decreases in revenues and earnings that occurred, in part, as a
result of the weak global economic conditions.  During the six months ended June
30, 2002 and 2003, the Company's cash flows from operations were primarily
derived from: (i) the Company's earnings from on-going operations prior to non-cash
expenses such as depreciation, amortization, and bad debt, and (ii) changes
in the Company's working capital, which is primarily comprised of collections of
accounts receivable and increases in deferred revenue, partially offset by
payments of accounts payable, accrued expenses (inclusive of bonuses and accrued
compensation) and Restructuring obligations.

The majority of the Company's Restructuring-related
expenses will be paid over time and, accordingly, as the Company settles its
remaining Restructuring obligations ($111.2 million as of June 30, 2003), the
Company's future cash flows from operations will be reduced in the period of
settlement.  The majority of the remaining Restructuring-related obligations
will be settled over the next three to five years.  The Company currently
estimates that it will settle $33.5 million of these obligations in the next 12
months.

Cash used in investing activities was $319.2 million and
$182.6 million for the six months ended June 30, 2002 and 2003, respectively.
During each of these periods, the Company's investment activities primarily
related to the purchase of additional property and equipment and the
reinvestment of the Company's cash into short-term investments.  For the six
months ended June 30, 2002 and 2003, the Company reinvested its cash flows from
operations into short-term investments in net amounts of $280.7 million and
$166.3 million, respectively, and purchased property and equipment totaling
$49.2 million and $10.5 million, respectively.  Other investing activities
resulted in an increase of $10.7 million during the six months ended June 30,
2002, compared to a decrease of $5.8 million during the six months ended June
30, 2003.

Capital expenditures have continued to decrease on a
year-over-year basis primarily due to the reduction in the size of the Company's
workforce and consolidation of its facilities.  The Company will continue to
closely monitor its capital expenditures and currently expects that total
capital expenditures for the year ended December 31, 2003, will be $30 million
or less.

Cash provided by financing activities was $97.0 million
and $29.4 million for the six months ended June 30, 2002 and 2003, respectively.
For the six months ended June 30, 2002 and 2003, the Company's financing
activities consisted primarily of net proceeds of $76.2 million and $35.8
million, respectively, from the issuance of common stock pursuant to the
exercise of stock options and the Company's employee stock purchase plan.
During the six months ended June 30, 2002, the Company also received proceeds of
$24.9 million from equipment financing.  The Company's cash inflows from
financing activities were partially offset during the six months ended June 30,
2002 and 2003, by the Company's repayment of capital lease obligations.

Adoption of Accounting Standards

During the six months ended June 30,
2003, the Company adopted new accounting standards related to the accounting for
and disclosure of restructuring obligations (i.e., costs associated with exit
and disposal activities), asset retirement obligations, and guarantees.  The
adoption of these accounting standards did not have a material impact on the
Company's consolidated financial position, results of operations or cash flows.
However, the adoption of SFAS 146 "Accounting for Exit or Disposal
Activities" may affect when future restructuring costs are recognized and
the amount of such costs.  Please refer to Note 1 to the accompanying unaudited
consolidated financial statements for further discussion of the accounting
standards adopted during 2003.

Application of Critical Accounting
Policies and Use of Estimates

Use of Estimates

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

On an on-going basis, the Company evaluates its
estimates, including those related to revenue recognition, provision for
doubtful accounts and sales returns, fair value of investments, fair value of
acquired intangible assets and goodwill, useful lives of intangible assets and
property and equipment, income taxes, Restructuring obligations, and
contingencies and litigation, among others.  The Company bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources.  The Company refers to accounting
estimates of this type as "critical accounting estimates," which are
discussed further below.

In addition to the estimates and assumptions that are
utilized in the preparation of financial statements, the inability to estimate
the timing and amount of future revenues could significantly impact the
Company's future operations.  The Company's sales personnel monitor the status
of all proposals, including the estimated closing date and potential dollar
amount of each transaction.  The Company aggregates these estimates periodically
to generate a sales pipeline and then evaluates the pipeline to identify trends
in the Company's business.  This pipeline analysis and related estimates of
revenue may differ significantly from actual revenues in a particular reporting
period as the estimates and assumptions were made using the best available data
at the time.  Specifically, the slowdown in the global economy and information
technology spending, along with hostilities involving the United States, has
caused and may continue to cause customer purchasing decisions to be delayed,
reduced in amount or canceled, all of which have reduced and could continue to
reduce the rate of conversion of the pipeline into contracts.  A variation in
the pipeline or in the conversion rate of the pipeline into contracts could
cause the Company to plan or budget inaccurately and thereby could adversely
affect the Company's business, financial condition or results of operations.  In
addition, because a substantial portion of the Company's software license
contracts close in the latter part of a quarter, management may not be able to
adjust the Company's cost structure to respond to a variation in the conversion
of the pipeline in a timely manner, which may adversely and materially affect
the Company's business, financial condition or results of operations.

Critical Accounting Policies

In addition to making critical accounting estimates, the
Company must ensure that its financial statements are properly stated in
accordance with GAAP.  In many cases, the accounting treatment of a particular
transaction is specifically dictated by GAAP and does not require management's
judgment in its application, while in other cases, management's judgment is
required in selecting among available alternative accounting standards that
allow different accounting treatment for similar transactions (e.g., stock-based
compensation, restructuring activities, depreciation methodology, etc.).  The
Company believes that the following accounting policies are critical to
understanding the Company's historical and future performance, as these policies
relate to the more significant areas involving management's judgments and
estimates:

- Revenue recognition;
- Restructuring-related expenses;
- Stock-based compensation;
- Option Repurchase;
- Provision for doubtful accounts;
- Acquired intangible assets;
- Impairment of long-lived assets;
- Other-than-temporary declines in the market value of
investments; and
- Income taxes.

The Company's management has reviewed its critical
accounting policies, critical accounting estimates, and the related disclosures
with the Disclosure and Audit Committees.  Additional information about these
critical accounting policies may by found in the Company's Annual Report on
Form 10-K for the year ended December 31, 2002, 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."

Employee Stock Options

Section I.  Description of Plans

The Company, since inception, has been an advocate of
broad-based employee stock ownership.  Accordingly, the Company's stock option
program has been instrumental in attracting and retaining talented employees and
aligning their interests with the interests of existing stockholders.  The
Company's stock option program consists primarily of two plans:  the Siebel
Systems, Inc. 1996 Stock Option Plan, which amended and restated the Company's
1994 Stock Option Plan and the 1996 Supplemental Stock Option Plan
(collectively, the "1996 Plan"); and the Siebel Systems, Inc. 1998
Equity Incentive Plan (the "1998 Plan").  Stock options granted to
executive officers, key employees and non-employee directors are made under the
1996 Plan and stock options granted to employees other than officers and
directors are made under the 1998 Plan.  The Company's Board of Directors and
stockholders have approved the 1996 Plan, and the Company's Board of Directors
has approved the 1998 Plan.

All stock option grants are made after a review by, and
with the approval of, the Compensation Committee of the Board of Directors.  All
members of the Compensation Committee are independent directors, as defined in
the applicable rules for issuers traded on The Nasdaq Stock Market.
Substantially all of the Company's employees participate in one of the above
plans, thereby providing the Company the ability to meet its goal of long-term
retention of its 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 the Company's Annual Report on Form 10-K for the year
ended December 31, 2002, further information concerning the policies and
procedures of the Company and the Compensation Committee regarding the use of
stock options.

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

Historically, stock options have been an important
component of total compensation for the Company's employees.  Accordingly,
substantially all employees are granted stock options upon commencement of
employment.  The Company has on occasion also assumed outstanding 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 scheduled to occur during the second quarter of each year).

Associated with the market downturn, during the first
half of 2003 the Company took several steps to reduce the number of stock
options outstanding, each of which is described further below.  These actions
resulted in stock options outstanding decreasing by 25.3 million, or 14%, from
the levels outstanding as of December 31, 2002, and stock options outstanding
relative to shares outstanding decreasing from 38% as of December 31, 2002, to
32% as of June 30, 2003.  The Company believes that its actions will continue to
align the interests of its employees and management with the interests of its
stockholders.

CEO Option Cancellation

As described more fully in Note 6 to the accompanying
unaudited consolidated financial statements, at the request of its CEO, the
Company cancelled approximately 26 million of its CEO's stock options in January
2003.  The stock options cancelled had exercise prices ranging from $4.91 to
$59.81 per share and a Black-Scholes calculated fair value of $56.1 million at
the time of cancellation (stock options that were "in-the-money" at
the time of cancellation represented $30.2 million, or 54%, of the total fair
value at cancellation).  This cancellation represented all stock options granted
to the Company's CEO since October 1998.  The Company's CEO requested the
cancellation of these stock options primarily to reduce the number of
outstanding stock options relative to the number of shares outstanding.  As a
result of this cancellation, outstanding stock options decreased by 14% from the
levels as of December 31, 2002, representing net potential dilution to existing
stockholders of 5%.  The potential dilution to stockholders is calculated as the
stock options canceled, divided by the number of shares of common stock
outstanding as of December 31, 2002.  The Company has provided no compensation
in exchange for the cancellation of the CEO's stock options, nor will it provide
any compensation in the future in exchange for such cancellation.

2003 Grants and Forfeitures

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

In accordance with these revised guidelines, the Company
evaluates whether to grant a merit award of stock options to employees and
officers during the second quarter of each year.  Accordingly, in addition to
grants made to newly hired employees, during the second quarter of 2003, the
Company granted an aggregate of 17.8 million stock options to its employees and
officers in recognition of their performance and future potential with the
Company.  The Company's Chairman and CEO did not receive any new stock options
during the six months ended June 30, 2003.  Stock option grants, net of
forfeitures by employees upon termination, resulted in a net increase in the
Company's outstanding stock options of 3% from the levels as of December 31,
2002, representing an increase in net potential dilution to existing
stockholders of 1%.  The potential dilution to stockholders from stock options
(the "Dilution Percentage") is calculated as new stock options granted
during the year, net of stock options forfeited by employees leaving the
Company, divided by the total outstanding shares of common stock at the
beginning of the year.  The Dilution Percentage for the six months ended June
30, 2003, does not reflect the voluntary cancellation of stock options by the
Company's CEO discussed above.  The increase in the net Dilution Percentage in
the first half of 2003 of 1% compares to a decrease of 5% during the year ended
December 31, 2002, and an increase of 21% during the year ended December 31,
2001.

2003 Anticipated Stock Option Grants

The Company intends to continue to manage the number of
stock options granted in the future, while still providing competitive
compensation packages to its employees.  The Company currently expects that the
incremental Dilution Percentage resulting from new stock option grants for the
remainder of 2003 will be less than the Dilution Percentage for the first six
months of 2003.  This estimate could differ from the actual percentage,
depending on various factors, including changes in estimated stock option grants
for planned hiring, potential acquisitions, merit and retention-based
programs.

Section III.  General Option Information

Combined plan activity for the six months ended June 30,
2003, is summarized as follows:

`Shares                       Wtd. Avg.
                                                      Available     Number of        Exercise
                                                      for Grant      Options      Price per Share
                                                     ------------ --------------  ---------------  
   Balances, December 31, 2002.....................  161,307,093    185,472,781    $       17.42
     Additional shares authorized..................           --             --
     Options granted to employees..................  (17,566,350)    17,566,350    $        8.65
     Options granted to officers and directors.....   (1,720,000)     1,720,000    $        8.61
     Options exercised.............................           --     (5,753,269)   $        4.95
     Options forfeited/canceled upon termination...   12,778,637    (12,833,426)   $       21.14
     Options cancelled by the Company's CEO........   25,950,000    (25,950,000)   $       34.63
                                                     ------------ --------------  ---------------
   Balances, June 30, 2003.........................  180,749,380    160,222,436    $       13.72
                                                     ============ ==============`

The Company continues to believe in broad-based
employee stock ownership.  As the table below indicates, the Company has
continued to allocate the vast majority of its stock options to employees who
are not officers and directors.  "Named Executive Officers" in the
below table and in the remainder of this quarterly report on Form 10-Q represent
the Company's CEO and four most highly compensated executive officers for the
year ended December 31, 2002, as disclosed in Item 11. "Executive
Compensation" of the Company's Annual Report on Form 10-K for the year
ended December 31, 2002.  Summarized below is the distribution of the Company's
stock options for the years ended December 31, 2001 and 2002, and the six months
ended June 30, 2003:

`Year Ended December 31,   Six Months
                                                                         ----------------------      Ended
                                                                            2001       2002       June 30, 2003
                                                                         ----------- ----------  --------------
Grants during the period as a percentage of total
  stock options granted:
      Named Executive Officers.........................................       12.4 %      3.4 %           4.1 %
      All other officers and directors as a group......................        2.4        0.3             4.8
                                                                         ----------- ----------  --------------
         Total for all officers and directors..........................       14.8        3.7             8.9
      All other employees as a group...................................       85.2       96.3            91.1
                                                                         ----------- ----------  --------------
         Total all grants..............................................      100.0 %    100.0 %         100.0 %
                                                                         =========== ==========  ==============`

The following table details the "in-the-money"
and "out-of-the-money" status of the Company's stock options
outstanding as of June 30, 2003:

`Options Outstanding              Options Exercisable
                 ---------------------------------------  -----------------------
                                 Wtd. Avg.     Wtd. Avg.                Wtd. Avg.
                    Number       Remaining     Exercise     Number      Exercise
    Options       of Shares    Life (Years)     Price      of Shares     Price
---------------- ------------  -------------  ----------  -----------  ----------
In-the-money      79,759,575            4.7    $   5.12   52,799,737    $   3.88
Out-of-the-money  80,462,861            7.6    $  22.25   36,063,549    $  22.46
                 ------------  -------------  ----------  -----------  ----------
                 160,222,436            6.1    $  13.72   88,863,286    $  11.42
                 ============                             ===========`

In-the-money stock options in the above table have
exercise prices below the closing price of the Company's common stock as of June
30, 2003, of $9.48 per share and out-of-the money stock options have exercise
prices equal to or greater than $9.48 per share.

Section IV.  Accounting for Stock-Based Compensation

The Company accounts for its employee stock-based
compensation plans using the intrinsic value method, as prescribed by APB No. 25
"Accounting for Stock Issued to Employees" and interpretations thereof
(collectively "APB 25").  Accordingly, deferred compensation is only
recorded if the current market price of the underlying stock exceeds the
exercise price of the stock option on the date of grant.  The Company records
and measures deferred compensation for stock options granted to non-employees at
their fair value.  Deferred compensation is expensed on a straight-line basis
over the vesting period of the related stock option, which is generally five
years.  There were no grants of stock options at exercise prices below the fair
market value of the Company's common stock on the date of grant during the three
and six months ended June 30, 2002 and 2003.

An alternative to the intrinsic value method of
accounting for stock options is the fair value approach allowed by SFAS No. 123
"Accounting for Stock-Based Compensation," as amended by SFAS No. 148
"Accounting for Stock-Based Compensation--Transition and Disclosure"
(hereinafter collectively referred to as "SFAS 123").  The Company has
continued to follow the intrinsic value method of APB 25, as the Company
believes the accounting for stock options under SFAS 123 is highly subjective
and does not necessarily reflect the economic substance of an employee stock
option.  Specifically, the compensation cost under SFAS 123 is recognized
ratably over the vesting period, regardless of whether the stock options'
exercise prices are below the fair value of the Company's common stock.  In
addition, compensation expense related to vested stock options that are
subsequently forfeited or canceled is reflected in operations, despite the fact
that the stock options did not provide any value to the employee or dilute
existing stockholders.  Subsequent to cancellation of a stock option, no
additional compensation expense for that cancelled stock option is reported in
the pro forma disclosure of stock-based compensation.

Further, under the fair value approach, employee stock
options are required to be valued at grant date using an option valuation model,
such as Black-Scholes.  The Company believes there are limitations to the
appropriateness of the Black-Scholes option valuation model, including the fact
that the Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions,
are fully transferable, and typically have shorter terms.  In addition, the
Black-Scholes option valuation model requires the use of subjective assumptions,
including expected stock price volatility and the expected remaining life.
Because the Company's stock-based awards have characteristics significantly
different from those of traded options and because changes in the subjective
input assumptions can materially affect the fair value estimate, in the
Company's opinion, the existing models that are available to value stock options
do not provide an appropriate measure of the fair value of stock-based awards to
its employees.

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

`Three Months Ended     Six Months Ended
                                                                                June 30,               June 30,
                                                                        ----------------------  -----------------------
                                                                            2002       2003        2002        2003
                                                                        ----------- ----------  -----------  ----------
Net income (loss):                                                                                                       
  As reported.......................................................... $   29,775  $   9,768   $   94,396   $  14,386
                                                                        ----------- ----------  -----------  ----------
  Compensation expense related to:
    Stock options accounted for in accordance with APB 25..............      1,331        475        2,938         980
    In-the-money stock options.........................................     (8,555)    (7,121)     (17,564)    (13,423)
    Stock purchase rights under the Purchase Plan......................     (8,234)    (1,206)     (16,468)     (2,069)
                                                                        ----------- ----------  -----------  ----------
       Total pro forma expense related to "in the money" stock
         options and Purchase Plan.....................................    (15,458)    (7,852)     (31,094)    (14,512)
    Out-of-the-money stock options.....................................    (50,956)   (46,715)    (127,124)    (95,291)
    Stock options cancelled for no consideration.......................    (25,012)        --      (61,608)   (251,821)
    Stock options forfeited/cancelled in connection with terminations..    (18,352)        (4)     (48,192)       (559)
    Stock options subsequently repurchased on September 30, 2002.......    (49,934)        --     (101,615)         --
                                                                        ----------- ----------  -----------  ----------
       Total pro forma expense giving effect to SFAS 123...............   (159,712)   (54,571)    (369,633)   (362,183)
                                                                        ----------- ----------  -----------  ----------
  Pro forma giving effect to SFAS 123.................................. $ (129,937) $ (44,803)  $ (275,237)  $(347,797)
                                                                        =========== ==========  ===========  ==========`

In-the-money stock options in
the above table have exercise prices below the closing price of the Company's
common stock on June 30, 2003, of $9.48, and out-of-the-money stock options have
exercise prices equal to or greater than $9.48.

As the table above illustrates, during the three and six
months ended June 30, 2003, $46.7 million and $347.7 million, respectively, of
the total pro forma expense for stock options relates to: (i) stock options that
were cancelled for no consideration, (ii) stock options forfeited by employees
upon termination for no consideration, or (iii) stock options that are
significantly out of the money (i.e., the weighted-average exercise price of the
out-of-the-money stock options is $22.25 per share compared to a closing price
of $9.48 per share as of June 30, 2003).  This represented 86% and 96% of the
pro forma expense for stock options during the three and six months ended June
30, 2003, respectively.

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

Section V.  Executive Stock-Based Compensation

The following table sets forth certain information
regarding stock options granted to the Named Executive Officers during the six
months ended June 30, 2003:

`Potential Realizable Value
                                 Number of      Percent of                                    at Assumed Annual Rates of
                                 Securities    Total Options                                    Stock Price Appreciation
                                 Underlying     Granted to       Exercise or                    for the Option Term (5)
                                  Options        Employees        Base Price    Expiration    ---------------------------
       Officer Name               Granted       in 2003 (3)     ($/Share) (4)      Date            5%            10%
-----------------------------   ------------   --------------   -------------  -------------  ------------  -------------
Thomas M. Siebel                         --              -- %   $         --             --   $        --   $         --
Paul Wahl (6)                            --              -- %   $         --             --   $        --   $         --
R. David Schmaier                   300,000 (1)         1.6 %   $       8.66     04/30/2009   $   883,568   $  2,004,515
Kenneth A. Goldman                  250,000 (1)         1.3 %   $       8.66     04/30/2009   $   736,307   $  1,670,430
Richard P. Chiarello                100,000 (1)         0.5 %   $       8.66     04/30/2009   $   294,523   $    668,172
Richard P. Chiarello                150,000 (2)         0.8 %   $       8.06     02/13/2009   $   411,176   $    932,817`

1. Options vest 20% on May 1, 2004, and at a rate of 5%
for each quarter of service thereafter, and have a term of six years.
2. Options vest 20% on February 14, 2004, and at a rate of
5% each quarter of service thereafter, and have a term of six years.
3. Based on an aggregate of 19.3 million shares subject to
options granted to employees pursuant to the Company's 1996 and 1998 Plans
during the six months ended June 30, 2003, including grants to the Named
Executive Officers.
4. Under all stock option plans, the stock option exercise
price is equal to the fair market value at the date of grant.
5. 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 the
Company's prediction of its stock price performance or the actual value of the
stock options.
6. Mr. Wahl resigned as President and
Chief Operating Officer effective March 31, 2003.

The following summarizes the distribution and dilutive
impact of the stock options held by the Company's Named Executive Officers as of
December 31, 2001 and 2002, and June 30, 2003:

`Year Ended December 31,  Six Months
                                                                         ----------------------     Ended
                                                                            2001       2002      June 30, 2003
                                                                         ----------- ----------  --------------
Stock options held by Named Executive Officers
   as a percentage of:                                                                                        
      Total options outstanding........................................       23.8 %     29.3 %         15.7 %
                                                                         =========== ==========  ==============
      Outstanding shares of common stock...............................       12.6 %     11.2 %          5.1 %
                                                                         =========== ==========  ==============`

The following table sets forth for each of the Named
Executive Officers the shares acquired and the value realized on each exercise
of stock options during the six months ended June 30, 2003, and the number and
value of securities underlying unexercised options held by the Named Executive
Officers as of June 30, 2003:

`Number of
                                                                    Securities Underlying       Value of Unexercised
                                                                    Unexercised Options at     In-the-Money Options at
                                   Shares                              June 30, 2003 (2)           June 30, 2003 (3)
                                 Acquired on        Value        ---------------------------  ----------------------------
       Officer Name               Exercise       Realized (1)    Exercisable   Unexercisable  Exercisable    Unexercisable
-----------------------------   ------------   ---------------   ------------  -------------  -------------  -------------
Thomas M. Siebel                         --     $          --     18,086,138        599,996   $120,551,968   $  3,944,224
Paul Wahl (4)                            --     $          --             --             --   $         --   $         --
R. David Schmaier                        --     $          --      1,469,289      1,710,714   $  3,801,606   $  2,562,612
Kenneth A. Goldman                       --     $          --      1,005,000      1,865,000   $         --   $    205,000
Richard P. Chiarello                     --     $          --          7,500        442,500   $     10,650   $    940,350`

1. Based on the fair market value of the Company's 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 the Company's
Common Stock subject to stock options held by the Named Executive Officers as of
June 30, 2003.
3. Based on the fair market value of the Company's Common
Stock as of June 30, 2003 ($9.48 per share), minus the exercise price,
multiplied by the number of shares underlying the stock options.
4. Mr. Wahl resigned as President and Chief Operating
Officer effective March 31, 2003.

Section VI.  Equity Compensation Plan Information

The number of shares issuable upon exercise of
outstanding stock options, the weighted-average exercise price of the
outstanding options, and the number of stock options remaining for future
issuance for each of the Company's plans as of June 30, 2003, is summarized as
follows:

`Number of Shares
                                        Number of      Weighted    Remaining Available
                                      Shares to Be     Average         for Future
                                       Issued Upon     Exercise      Issuance Under
                                       Exercise of     Price of    Equity Compensation
                                       Outstanding    Outstanding   Plans (Excluding
           Plan Category                 Options       Options     Options Outstanding)
------------------------------------  -------------  ------------  -------------------
 Equity compensation plans:
   Approved by shareholders (1).....    54,230,466    $     7.08           86,589,826
   Not approved by shareholders (2).   104,731,655    $    17.24          109,159,554
   Acquired companies' plans (3)....     1,260,315    $     8.42                   --
                                      -------------    ----------  -------------------
                                       160,222,436    $    13.72          195,749,380
                                      =============                ===================`

1. Represents shares available under the 1996 Plan,
which is used for grants to the Company's officers and directors.  The shares
remaining available for future issuance amount also includes 15.0 million shares
available under the Company's 2003 Employee Stock Purchase Plan.
2. Represents shares available under the 1998 Plan, which is
used for grants to the Company's employees other than officers and directors.
3. The Company has 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 the Company and the companies
acquired.  The Acquired Options generally become exercisable over a four-year
period and expire ten years from the date of grant.  Additional stock options
will not be granted under any of the acquired companies' plans, and these plans
have not been approved by the Company's 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.  Some of these factors are as
follows:

- Our total revenue and operating results may
fluctuate.
- Our quarterly operating results may fluctuate.
- Economic conditions could adversely affect our revenue
growth and ability to forecast revenue.
- Hostilities involving the United States and/or terrorist
attacks could harm our business.
- A variation in the conversion of our revenue pipeline to
contracts could adversely affect our revenues and ability to forecast
operations.
- We may not be able to successfully implement our
Restructuring efforts, and such efforts may adversely impact our ability to
retain and attract future employees.
- If we do not successfully manage the size of our
operations, our business may be negatively impacted.
- Rapid change will require us to manage the size of our
employee base, particularly our direct sales force and global support
staff.
- We rely on strategic relationships with systems
integrators, distributors, resellers and technology vendors.
- Our customers may not successfully implement our
products.
- A limited number of products provide
a substantial part of our license
revenues.
- The length of time required to engage a client and to
implement our products may be lengthy and unpredictable.
- Our software license revenue is dependent on our ability to enter into
significant software license transactions with new and existing customers.
- Our distribution channels may create additional
risks.
- Our continued success will require us to keep pace with
technological developments, evolving industry standards and changing customer
needs.
- We may not be able to compete effectively in the
Internet-related products and services market.
- We operate in a competitive and rapidly changing
market.
- To be successful, we must effectively compete in the
eBusiness systems market.
- If we do not maintain our relationships with third-party
vendors, interruptions in the supply of our products may result.
- Software errors or defects in our products could reduce
revenues.
- We need to successfully integrate acquisitions.
- Integration of personnel and operations relating to our
previous or future acquisitions may disrupt our business and
management.
- If we acquire additional companies, products or
technologies, we may face risks similar to those faced in our other
acquisitions.
- The loss of key personnel could negatively affect our
performance.
- Leverage and debt service obligations may adversely
affect our cash flow.
- We may not be able to protect our proprietary
information.
- Our international operations involve unique
risks.
- Our current officers, directors and entities affiliated
with us may be able to exercise control over matters requiring stockholder
approval.
- Our stock price may continue to be volatile.
- Provisions in our charter documents may prevent certain
corporate actions.

As discussed above and in Note 2 to the accompanying
unaudited consolidated financial statements, in the second quarter of 2003, the
Company initiated the 2003 Restructuring, including the reduction of
approximately 10% of its workforce.  The risks described in the above-mentioned
risk factor "We may not be able to successfully implement our Restructuring
efforts, and such efforts may adversely impact our ability to retain and attract
future employees" related to the 2002 Restructuring are also applicable to
the 2003 Restructuring.

If any of these risks occur, the value of our common stock
could decline.  Please refer to "Risk Factors" under Item 7 in our
Annual Report on Form 10-K for the year ended December 31, 2002, for a further
discussion of these risk factors.

Item 3.   Quantitative and Qualitative Disclosures about Market Risk.

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

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

The following table summarizes as of June 30, 2003, our
foreign currency forward contracts, by currency.  All of our foreign currency
forward contracts mature within a year.  Contract amounts are representative of
the expected payments to be made under these instruments (in thousands):

`Contract Amount  Contract        Fair
                                           (Local Currency)  Amount     Value (US$)
                                           ---------------  ---------  -------------
Australian dollars ("AUD") (contracts
  to pay AUD/receive US$).................    (AUD) 16,381  US$10,614  $       (252)

Brazilian real ("BRL") (contracts to
  pay BRL/receive US$)....................    (BRL) 18,594   US$6,085  $        110

British pounds ("GBP") (contracts to
  pay GBP/receive EUR)....................    (GBP) 13,869  EUR 19,523 $       (650)

Japanese yen ("YEN") (contracts to
  pay YEN/receive US$).................... (YEN) 4,936,609  US$42,195  $        338

Mexican peso ("MXN") (contracts
  to pay MXN/receive US$).................    (MXN) 31,661   US$3,048  $         73

Singapore dollars ("SGD") (contracts
  to pay SGD/receive US$).................     (SGD) 2,837   US$1,646  $         13

Canadian dollars ("CAD") (contracts
  to receive CAD/pay US$).................    (CAD) 12,702   US$8,992  $        379

Czech Republic koruna ("CZK") (contracts
  to receive CZK/pay EUR).................    (CZK) 40,292  EUR 1,279  $          3

Euro ("EUR") (contracts to receive
  EUR/pay US$)............................   (EUR) 170,272  US$194,936 $        682

Korea won ("KRW") (contracts to receive
  KRW/pay US$)............................   (KRW) 240,231     US$193  $          9

Swedish krona ("SEK") (contracts to
  receive SEK/pay EUR)....................    (SEK) 11,718  EUR 1,275  $          4

Swiss franc ("CHF") (contracts to
  receive CHF/pay EUR)....................     (CHF) 3,205  EUR 2,130  $        (28)`

The following table summarizes our short-term investments
and the weighted average yields, as of June 30, 2003 (in thousands):

`Expected Maturity Date
                            ----------------------------------------------------------------------
                              2003      2004      2005      2006      2007   Thereafter    Total
                            --------- --------- --------- --------- -------- ----------- --------- 
US Treasury and Agency
  securities...............  $32,329  $248,020  $245,025  $105,991   $7,463      $3,087  $641,915
Weighted average yield.....     1.20%     1.22%     1.36%     1.74%    2.17%       2.33%

Corporate bonds............ $145,066  $138,579  $174,455  $181,321  $80,650     $23,679  $743,750
Weighted average yield.....     1.30%     1.45%     1.74%     1.97%    2.53%       2.93%

Asset-backed securities....  $34,359   $98,861   $87,737   $51,713       --          --  $272,670
Weighted average yield.....     1.47%     1.65%     1.92%     2.48%`

As of June 30, 2003, we had an investment portfolio of fixed
income securities, excluding those classified as cash and cash equivalents, of
$1,658.3 million.  These securities, like all fixed income instruments, are
subject to interest rate risk and, accordingly, if market interest rates
increase, these investments will decline in value.  If market interest rates
were to increase immediately and uniformly by 100 basis points from levels as of
June 30, 2003, the fair value of the portfolio would decline by $25.1
million.

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

The fair value of our convertible subordinated debentures
fluctuates based upon changes in the price of our common stock, changes in
interest rates and changes in our credit-worthiness.  Based on the quoted market
price of the convertible subordinated debentures, the fair value of the
convertible subordinated debentures as of June 30, 2003, was $305.0 million.

Item 4.	  Evaluation of Disclosure Controls and
Procedures.

Evaluation of Our Disclosure Controls and Internal
Controls

As of June 30, 2003 (the "Evaluation Date"), we
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures (the "Disclosure Controls"), as such term is
defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act
of 1934, and our internal controls and procedures for financial reporting (the
"Internal Controls").  This evaluation (the "Controls
Evaluation") was done under the supervision and with the participation of
management, including our CEO and CFO.  Rules adopted by the SEC require that we
present the conclusions of the CEO and the CFO about the effectiveness of our
Disclosure Controls and Internal Controls based on and as of the date of the
Controls Evaluation.

CEO and CFO Certifications

Attached as Exhibits 31 and 32 are two separate forms of
certifications of the CEO and the CFO.  The certifications attached as Exhibits
31.1 and 31.2 are required in accordance with Section 302 of the Sarbanes-Oxley
Act of 2002 (the "Section 302 Certifications").  The information
contained in this Item 4 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.

Disclosure Controls and Internal Controls over
Financial Reporting

Our management, including the CEO and CFO, has a
responsibility for 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 Securities Exchange Act of 1934, such
as this Quarterly Report on Form 10-Q, is recorded, processed, summarized and
reported within the time periods specified in the SEC rules and forms.
Disclosure Controls are also designed with the objective of ensuring that such
information is accumulated and communicated to our management, including the CEO
and CFO, as appropriate to allow timely decisions regarding required disclosure.
Internal Controls are procedures that are designed with the objective of
providing reasonable assurance regarding the reliability of financial reporting
and include those policies and procedures that provide reasonable assurance that
our transactions are properly authorized, our assets are safeguarded against
unauthorized or improper use, and our transactions and dispositions of assets
are properly recorded and reported, all to permit the preparation of our
financial statements in conformity with GAAP.

Limitations on the Effectiveness of Controls

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

Scope of the Controls Evaluation

The CEO and CFO evaluation of our Disclosure Controls and
our Internal Controls included a review of the controls' objectives and design,
our controls' implementation and the effect of the controls on the information
generated for use in this Quarterly Report on Form 10-Q.  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 will perform this type of
evaluation on a quarterly basis so that the conclusions concerning controls
effectiveness can be reported in our Quarterly Reports on Form 10-Q and Annual
Report on Form 10-K.  Our Internal Controls are also evaluated on an on-going
basis by our internal audit department and by other personnel in our finance
organization.  The overall goals of these various evaluation activities are to
monitor our Disclosure Controls and our Internal Controls and to make
modifications as necessary.  Our intent in this regard is that the Disclosure
Controls and the Internal Controls will be maintained as dynamic systems that
change (including with improvements and corrections) as conditions warrant.

Among other matters, we sought in our evaluation to
determine whether there were any "significant deficiencies" or
"material weaknesses" in our Internal Controls, or whether we have
identified any acts of fraud involving personnel who have a significant role in
our Internal Controls.  This information was important both for the Controls
Evaluation generally and because item 5 in the Section 302 Certifications
require that the CEO and CFO disclose such information to our Audit Committee of
the Board of Directors and to our independent auditors and to report on related
matters in this section of the Quarterly Report on Form 10-Q.  In the
professional auditing literature, "significant deficiencies" are
referred to as "reportable conditions," which are control issues that
could have a significant adverse effect on the ability to record, process,
summarize and report financial data in the financial statements.  A
"material weakness" is defined in the auditing literature as a
particularly serious reportable condition where the internal control does not
reduce to a relatively low level the risk that misstatements caused by error or
fraud may occur in amounts that would be material in relation to the financial
statements and not be detected within a timely period by employees in the normal
course of performing their assigned functions.  We 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.

Conclusions

Based upon the Controls Evaluation, our CEO and CFO have
concluded that, subject to the limitations noted above, our Disclosure Controls
and procedures 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 Securities
and Exchange Act of 1934, as amended.

Changes in Internal Controls over Financial Reporting

Our CEO and CFO note that during the period covered by
this Quarterly Report on Form 10-Q, there have been no changes in Internal
Controls or in other factors that could materially affect or are reasonably
likely to affect such controls, including any corrective actions with regard to
significant deficiencies and material weaknesses.

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Part II.	Other Information

Item 1.	  Legal Proceedings.

On September 23, 2002, Teachers' Retirement System of
Louisiana, a Louisiana public trust fund, filed a derivative suit against our
Board of Directors, as well as against us as a nominal defendant, in the
Superior Court of the State of California for the County of San Mateo.  The
derivative suit alleges, among other things, that members of our Board of
Directors breached their fiduciary duties by authorizing excessive compensation
for our Chairman and CEO, Thomas M. Siebel.  The derivative plaintiffs seek
compensatory and other damages, rescission of certain stock options and other
relief.  The suit alleges that we incorrectly accounted for stock options that
were alleged to be granted below fair market value.  We believe we have
meritorious defenses to this suit, as the stock options in question were granted
at fair market value.  In addition, the stock options in question were cancelled
in January 2003 as a result of actions initiated by our CEO in June 2002, prior
to the filing of this suit by the Teachers' Retirement System of Louisiana.  We
cannot currently determine the ultimate outcome of this litigation and its
possible impact on us.

On May 6, 2003, the Securities & Exchange Commission
("SEC") contacted us and indicated that a May 1, 2003 article on CBS
MarketWatch had raised questions regarding our compliance with Regulation FD.
On May 9, 2003, we announced that, in response to the inquiry from the SEC, the
Audit Committee of our Board of Directors is conducting an internal review of
the circumstances involving recent statements that were reported by CBS
MarketWatch to have been made by our executives.  The Audit Committee has
engaged counsel in connection with such review.  Upon completion of that review,
we intend to take required and appropriate actions, if any, but we have not
concluded that any violation has occurred.  We are cooperating with the
SEC inquiry.

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

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

Our Annual Meeting of Stockholders (the "Annual
Meeting") was held on June 11, 2003.  At the Annual Meeting, our
stockholders: (i) elected each of the persons below to serve as a director until
the 2006 Annual Meeting of Stockholders or until their successor is elected;
(ii) approved the authorization of an aggregate of 15,000,000 shares of our
Common Stock for issuance under our 2003 Employee Stock Purchase Plan (the
"2003 Purchase Plan"); (iii) ratified the selection of KPMG LLP as our
independent auditors for the year ending December 31, 2003; (iv) rejected a
stockholder proposal to adopt and disclose an "equity policy"
designating the intended use of equity in management compensation programs and
requiring that a portion of stock option grants be performance-based (the
"Equity Policy Proposal"); and (v) rejected a stockholder proposal to
adopt a policy that the cost of employee and director stock options be
recognized in our income statement (the "Stock Option Expensing
Proposal").  The following sets forth a summary of each of the proposals
and the results of the voting at the Annual Meeting.

Proposal 1--Election of Board of Directors

Our Nominating and Corporate Governance Committee
reviewed the qualifications of Patricia A. House, Eric E. Schmidt, Ph.D., and A.
Michael Spence, Ph.D. to serve as members of our Board of Directors, and
unanimously recommended that each nominee be submitted to our stockholders for
re-election to the Board of Directors until the 2006 Annual Meeting of
Stockholders or until their successors are elected.  The other directors whose
terms of office continued after the meeting were Thomas M. Siebel, James C.
Gaither, Marc F. Racicot, Charles R. Schwab, and George T. Shaheen.  The votes
for and withheld for such nominees were as follows:

`Name                  For        Withheld
---------------------------  ------------ ------------
Patricia A. House            369,174,621   48,053,275
Eric E. Schmidt, Ph.D.       374,242,392   42,985,504
A. Michael Spence, Ph.D.     374,228,018   42,999,878`

Proposal 2--Approval of 2003 Purchase Plan

The 2003 Purchase Plan was designed to provide our
employees with the opportunity to purchase shares of our Common Stock.  There
are 15,000,000 shares of Common Stock reserved for issuance under the 2003
Purchase Plan.  We believe that the purchase of stock through the 2003 Purchase
Plan encourages employees to build long-term stockholder value, and helps better
align the interests of our employees with those of our stockholders.  Our
stockholders approved the 2003 Purchase Plan at the Annual Meeting, with
397,282,659 votes "For," 16,597,224 votes "Against," and
3,348,013 votes "Abstained."  There were no "Broker
Non-Votes."

Proposal 3--Ratification of Selection of Independent
Auditors

Our Audit Committee and Board of Directors selected KPMG
LLP as our independent auditors for the year ending December 31, 2003, and
directed that management submit the selection of independent auditors for
ratification by our stockholders at the Annual Meeting.  KPMG LLP has audited
our financial statements since our inception in 1993.  Our stockholders ratified
the selection of KPMG LLP as our independent auditors for the year ending
December 31, 2003, with 407,603,297 votes "For," 6,779,573 votes
"Against," and 2,845,026 votes "Abstained."  There were no
"Broker Non-Votes."

In addition to the above proposals submitted to our
stockholders by our Board of Directors, two stockholder proposals were also
submitted for our stockholders' consideration: the Equity Policy Proposal and
the Stock Option Expensing Proposal.  The following is a summary of these
stockholder proposals and the results of the voting at the Annual Meeting:

Proposal 4--Equity Policy Proposal

The College Retirement Equities Fund ("CREF"),
beneficial owner of approximately 2.4 million shares, or 0.5%, of our Common
Stock, submitted the Equity Policy Proposal to be voted on by our stockholders
at the Annual Meeting.  The Equity Policy Proposal would have required us to
adopt and disclose an "equity policy" designating the intended use of
equity in management compensation programs and required that a portion of our
stock option grants be performance-based.

Our stockholders rejected this proposal with
approximately 63% of the voted shares cast "Against" the Equity Policy
Proposal.  Specifically, the voting was as follows: 170,202,345 votes
"Against," 100,747,028 votes "For" and 5,604,116 votes
"Abstained."  There were 140,674,407 "Broker Non-Votes."

Proposal 5--Stock Option Expensing Proposal

The AFSCME Employees Pension Plan ("AFSCME"),
beneficial owner of 5,094 shares, or 0.001%, of our Common Stock, submitted the
Stock Option Expensing Proposal to be voted on by our stockholders at the Annual
Meeting.  The Stock Option Expensing Proposal would have required us to adopt a
policy that the cost of employee and director stock options be recognized in our
income statement.

Our stockholders rejected this proposal with
approximately 67% of the votes cast "Against" the Stock Option
Expensing Proposal.  Specifically, the voting was as follows: 180,518,782 votes
"Against," 87,733,395 votes "For" and 8,301,312 votes
"Abstained."  There were 140,674,407 "Broker Non-Votes."

Item 6.	  Exhibits and Reports on Form 8-K.

(a) Exhibits.

|Exhibit Number | Description of Document                                                                                                                                       
|-------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1            | Amended and Restated Certificate of Incorporation of Siebel Systems, Inc., as amended to date. (1)                                                            
|3.2            | Amended and Restated Bylaws of Siebel Systems, Inc. (2)                                                                                                       
|4.1            | Reference is made to Exhibit 3.1 and Exhibit 3.2.                                                                                                             
|4.2            | Specimen Stock Certificate. (3)                                                                                                                               
|4.4            | Certificate of Designation of Series A1 Preferred Stock of Siebel Systems, Inc. (4)                                                                           
|4.5            | Indenture between Siebel Systems, Inc., as Issuer, and Chase Manhattan Bank and Trust Company,
National Association, as Trustee, dated September 15, 1999. (5)
|4.6            | Certificate of Designation of Series A2 Junior Participating Preferred Stock. (6)                                                                             
|4.7            | Rights Agreement dated as of January 29, 2003, between Siebel Systems, Inc. and Mellon
Investors Services LLC, as Rights Agent. (6)                           
|4.8            | Form of Rights Certificate. (6)                                                                                                                               
|10.17.1        | First Amendment to Lease dated April 29, 2003 between Bay Meadows Park Place Investors, LLC,
as landlord, and Siebel Systems, Inc., as tenant. (7)            
|10.20          | Registrant's 2003 Employee Stock Purchase Plan. (8)                                                                                                           
|31.1           | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (7)                                                                                  
|31.2           | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (7)                                                                                  
|32.1           | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (7)                                                                                  

__________________

1. Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2001.
2. Incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended December 31, 2002.
3. Incorporated by reference to the Company's
Registration Statement on Form S-1 (No. 333-03751), as amended.
4. Incorporated by reference to the Company's Current
Report on Form 8-K filed on November 27, 2000.
5. Incorporated by reference to the Company's
Registration Statement on Form S-3 (No. 333-91777) filed on November 30,
1999.
6. Incorporated by reference to the Company's Current
Report on Form 8-K filed on January 29, 2003.
7. Filed herewith.
8. Incorporated by reference to the Company's
Registration Statement on Form S-8 (No. 333-106671) filed on June 30, 2003.

(b)	Reports on Form 8-K.

On April 4, 2003, the Company filed a current report on
Form 8-K reporting under Item 12 announcing preliminary results for the quarter
ended March 31, 2003.

On April 23, 2003, the Company filed a current report on
Form 8-K reporting under Item 12 announcing final results for the quarter ended
March 31, 2003.

Availability of this Report

The Company intends to make this Quarterly Report on Form
10-Q publicly available on its Web site (www.siebel.com) without charge
immediately following its filing with the Securities and Exchange Commission.
The Company assumes 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 it is required to do so by law.

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**SIGNATURES**

Pursuant to the requirement of the Security Exchange Act
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

SIEBEL SYSTEMS, INC.(Registrant)Dated: August 11, 2003By:
    /s/ Kenneth A. GoldmanKenneth A. GoldmanSenior Vice President, Finance and
                                    Administration and
                                    Chief Financial Officer(Principal Financial Officer)

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