Siebel Systems, Inc. ("Siebel" or the "Company") is a leading provider of multichannel eBusiness applications software. Siebel eBusiness Applications are a family of leading Web applications software that enables an organization to better manage its most important relationships: its customer, partner and employee relationships. Embedding industry-specific business processes based on best practices, 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, including the Web, call centers, field, resellers, and retail and dealer networks. 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, many of the Company's customers have achieved high levels of satisfaction from these constituencies and continue to be competitive in their markets.

The accompanying unaudited consolidated financial statements have been prepared on substantially the same basis as the audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2001, and in the opinion of management include all adjustments, consisting only of normal recurring adjustments, necessary for their fair presentation. All amounts included herein related to the financial statements as of September 30, 2002, and the three and nine months ended September 30, 2001 and 2002, are unaudited. The interim results presented are not necessarily indicative of results for any subsequent quarter or for the year ending December 31, 2002.

The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated.

The Company's unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires that the Company make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to revenue recognition, provision for doubtful accounts and 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. Actual results could differ significantly from the estimates made by management with respect to these items and other items that require management's estimates.

The Company considers the functional currency of its foreign subsidiaries to be the local currency, and accordingly, the foreign currency is translated into U.S. dollars using exchange rates in effect at period end for assets and liabilities and average exchange rates during each reporting period for the results of operations. Adjustments resulting from translation of foreign subsidiary financial statements are reported in accumulated other comprehensive income (loss). Gains or losses on foreign currency transactions are recognized in current operations and have not been significant to the Company's operating results in any period presented.

The fair value of the Company's cash, cash equivalents, short-term investments, accounts receivable and accounts payable approximate their respective carrying amounts. Based on the quoted market price of the convertible subordinated debentures, the fair value of the convertible subordinated debentures was $274,080,000 as of September 30, 2002. The fair value of the Company's derivative financial instruments (i.e., foreign exchange contracts) was $3,230,000 as of September 30, 2002.

The Company considers all highly liquid investments with an original maturity of 90 days or less at the date of purchase to be cash equivalents. Short-term investments generally consist of highly liquid securities with original maturities in excess of 90 days. Marketable equity securities include the Company's investment in publicly traded companies in the high technology industry. The Company has classified its short-term investments and marketable equity securities as "available-for-sale." Such investments are carried at fair value with unrealized gains and losses, net of related tax effects, reported within accumulated other comprehensive income (loss). Realized gains and losses on available-for-sale securities are computed using the specific identification method.

The Company reviews the carrying value of its short-term investments and marketable equity securities, along with investments accounted for under the cost method, at the end of each reporting period to determine if any investments are impaired. This review includes an evaluation of historical and projected financial performance, expected cash needs and recent funding events. Other-than-temporary impairments are recognized in earnings if: (i) the market value of the investment is below its current carrying value for an extended period, which the Company generally defines as six to nine months; (ii) the issuer has experienced significant financial declines; or (iii) the issuer has experienced difficulties in raising capital to continue operations, among other factors. Other-than-temporary impairments recognized in other income totaled $663,000 and $3,073,000 for the three and nine months ended September 30, 2001, respectively. Other-than-temporary impairments recognized in other income totaled $4,624,000 and $7,774,000 for the three and nine months ended September 30, 2002, respectively.

Financial instruments that potentially subject the Company to a concentration of credit risk principally consist of short-term investments, trade accounts receivable and financial instruments used in foreign currency hedging activities. The Company primarily invests its excess cash in money market instruments, government securities, corporate bonds and asset-backed securities. The Company is exposed to credit risks related to the Company's short-term investments in the event of default or decrease in credit worthiness of one of the issuers of the investments. The Company performs ongoing credit evaluations of its customers and generally does not require collateral on accounts receivable, as the majority of the Company's customers are large, well-established companies. The Company maintains reserves for potential credit losses, but historically has not experienced any significant losses related to any particular industry or geographic area since the Company's business is not concentrated on any one particular customer or customer base. No single customer accounts for more than 10% of revenues for any period presented, and the Company's customers, which are primarily in the high technology, telecommunications, financial services (including insurance), pharmaceutical, utilities and consumer packaged goods industries, are sufficiently diverse that the Company does not consider itself significantly exposed to concentrations of credit risk. The counterparties to agreements relating to the Company's foreign currency contracts are large, multinational financial institutions. The amounts subject to credit risk arising from the possible inability of counterparties to meet the terms of their contracts are generally limited to the amounts, if any, by which the counterparty's obligations exceed the obligations of the Company to that counterparty.

Property and equipment are stated at cost less accumulated depreciation and amortization. Capital lease amortization is included with depreciation expense and the associated accumulated amortization is included with accumulated depreciation in the accompanying financial statements. Depreciation and amortization are calculated using the straight-line method over the shorter of the estimated useful lives of the respective assets, generally two to five years, or the lease term, if applicable. Leasehold improvements are amortized over the lesser of the lease term or the estimated useful lives of the improvements, generally seven years. Expenditures for maintenance and repairs are charged to expense as incurred. Cost and accumulated depreciation of assets sold or retired are removed from the respective property accounts, and the gain or loss is reflected in the statement of operations.

The Financial Accounting Standards Board ("FASB") issued SFAS No. 141 "Business Combinations" ("SFAS 141") and SFAS No. 142 "Goodwill and Other Intangible Assets" ("SFAS 142") in July 2001. SFAS 141 requires that all business combinations be accounted for using the purchase method, thereby prohibiting the pooling-of-interests method. SFAS 141 also specifies criteria for recognizing and reporting intangible assets apart from goodwill; however, assembled workforce must be recognized and reported in goodwill. SFAS 142 requires that intangible assets with an indefinite life should not be amortized until their life is determined to be finite, and all other intangible assets must be amortized over their useful life. SFAS 142 also requires that goodwill not be amortized but instead tested for impairment in accordance with the provisions of SFAS 142 at least annually and more frequently upon the occurrence of certain events (see "Impairment of Long-Lived Assets" below).

The Company adopted certain provisions of these pronouncements effective July 1, 2001, as required for goodwill and intangible assets acquired in purchase business combinations consummated after June 30, 2001. The Company adopted the remaining provisions of SFAS 141 and SFAS 142 effective January 1, 2002. There was not a cumulative transition adjustment upon adoption as of July 1, 2001 or January 1, 2002. SFAS 141 and SFAS 142 required the Company to perform the following as of January 1, 2002: (i) review goodwill and intangible assets for possible reclasses; (ii) reassess the lives of intangible assets; and (iii) perform a transitional goodwill impairment test. The Company has reviewed the balances of goodwill and identifiable intangibles and determined that the Company does not have any amounts that are required to be reclassed from goodwill to identifiable intangibles, or vice versa. The Company has also reviewed the useful lives of its identifiable intangible assets and determined that the original estimated lives remain appropriate. The Company has completed the transitional goodwill impairment test and has determined that the Company did not have a transitional impairment of goodwill.

As required by SFAS 142, the Company has not amortized goodwill associated with acquisitions completed after June 30, 2001, for any period presented, and ceased amortization of goodwill associated with acquisitions completed prior to July 1, 2001, effective January 1, 2002. Prior to January 1, 2002, the Company amortized goodwill associated with the pre-July 1, 2001 acquisitions over three to five years using the straight-line method. Identifiable intangibles (acquired technology) are currently amortized over three years using the straight-line method. Refer to Note 3 for further discussion of the Company's intangible assets and goodwill.

The Company tests goodwill for impairment in accordance with SFAS 142. SFAS 142 requires that goodwill be tested for impairment at the "reporting unit level" ("Reporting Unit") at least annually and more frequently upon the occurrence of certain events, as defined by SFAS 142. Consistent with the Company's determination that it has only one reporting segment, the Company has determined that it has only one Reporting Unit, specifically the license, implementation and support of its software applications. Goodwill is tested for impairment annually on July 1 in a two-step process. First, the Company determines if the carrying amount of its Reporting Unit exceeds the "fair value" of the Reporting Unit, which would indicate that goodwill may be impaired. If the Company determines that goodwill may be impaired, the Company compares the "implied fair value" of the goodwill, as defined by SFAS 142, to its carrying amount to determine if there is an impairment loss. The Company does not have any goodwill that it considers to be impaired.

On January 1, 2002, the Company adopted SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), which supersedes certain provisions of APB Opinion No. 30 "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" and supersedes SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." There was not a cumulative transition adjustment upon adoption. In accordance with SFAS 144, the Company evaluates long-lived assets, including intangible assets other than goodwill, for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable based on expected undiscounted cash flows attributable to that asset. The amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset.

In connection with the Company's restructuring of its operations and associated workforce reduction initiated during the third quarter of 2002, the Company abandoned certain long-lived assets, consisting primarily of furniture, fixtures and leasehold improvements. Refer to Note 2 for further discussion of the impairment charge recorded in the third quarter of 2002. The Company expects to complete the restructuring in the fourth quarter of 2002 and may abandon additional furniture, fixtures and leasehold improvements, resulting in an additional impairment charge during the fourth quarter of 2002.

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 recorded on the date of grant if the current market price of the underlying stock exceeds the exercise price. 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 three to five years.

On January 1, 2001, the Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). There was not a cumulative transition adjustment upon adoption on January 1, 2001. SFAS 133 establishes accounting and reporting standards for derivative instruments and hedging activities and requires that all derivatives be recognized as either assets or liabilities at fair value. If certain conditions are met, a derivative may be specifically designated and accounted for as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment; (b) a hedge of the exposure to variable cash flows of a forecasted transaction; or (c) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security, or a foreign-currency-denominated forecasted transaction. Derivatives or portions of derivatives that are not designated as hedging instruments are adjusted to fair value through earnings in the period of change in their fair value.

The Company operates internationally and thus is exposed to potential adverse changes in currency exchange rates. The Company has entered into foreign exchange contracts to reduce its exposure to foreign currency rate changes on receivables, payables and intercompany balances denominated in a non-functional currency. The objective of these contracts is to neutralize the impact of currency exchange rate movements on the Company's operating results. These contracts require the Company to exchange currencies at rates agreed upon at the contract's inception. These contracts reduce the exposure to fluctuations in exchange rate movements because the gains and losses associated with foreign currency balances and transactions are generally offset with the gains and losses of the foreign exchange contracts. Because the impact of movements in currency exchange rates on forward contracts generally offsets the related impact on the underlying items being hedged, these financial instruments help alleviate the risk that might otherwise result from certain changes in currency exchange rates. The Company does not designate its foreign exchange forward contracts as hedges and, accordingly, the Company adjusts these instruments to fair value through earnings. The Company does not hold or issue financial instruments for speculative or trading purposes.

Substantially all of the Company's revenues are derived from the license of the Company's software products and the related professional services and customer support (maintenance) services. The Company's standard end user license agreement provides for an initial fee for use of the Company's products in perpetuity based on the number of named users. 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.).

The Company recognizes revenue using the residual method pursuant to the requirements of Statement of Position No. 97-2 "Software Revenue Recognition" ("SOP 97-2"), as amended by Statement of Position No. 98-9, "Software Revenue Recognition with Respect to Certain Arrangements." Under the residual method, revenue is recognized in a multiple element arrangement when Company-specific objective evidence of fair value exists for all of the undelivered elements in the arrangement, but does not exist for one of the delivered elements in the arrangement. The Company allocates revenue to each element in a multiple element arrangement based on its respective fair value, with the fair value determined by the price charged when that element is sold separately. The Company defers revenue for the fair value of its undelivered elements (e.g., professional services and maintenance) and recognizes revenue for the remainder of the arrangement fee attributable to the delivered elements (i.e., software product) when the basic criteria in SOP 97-2 have been met.

Under SOP 97-2, revenue attributable to an element in a customer arrangement is recognized when persuasive evidence of an arrangement exists and delivery has occurred, provided the fee is fixed or determinable, collectibility is probable and the arrangement does not require significant customization of the software. If at the outset of the customer arrangement, the Company determines that the arrangement fee is not fixed or determinable, the Company defers the revenue and recognizes the revenue when the arrangement fee becomes due and payable. If at the outset of the customer arrangement, the Company determines that collectibility is not probable, the Company defers the revenue and recognizes the revenue when payment is received. The Company recognizes revenue from resellers upon sell-through to the end customer.

Professional services, maintenance and other revenues relate primarily to consulting services, maintenance and training. Maintenance revenues are recognized ratably over the term of the maintenance contract, typically 12 months. Consulting and training revenues are recognized as the services are performed and are typically on a time and materials basis. Such services primarily consist of implementation services related to the installation of the Company's products and do not include significant customization to or development of the underlying software code.

The Company's customers include several of its suppliers and on occasion, the Company has purchased goods or services for the Company's operations from these vendors at or about the same time the Company has licensed its software to these same organizations (a "Concurrent Transaction"). The Company generally defines "at or about the same time" as "within six months." Concurrent Transactions are separately negotiated, settled in cash, and recorded at terms the Company considers to be arm's length. During the three and nine months ended September 30, 2001, the Company recognized $11,678,000 and $62,077,000, respectively, of software license revenues from Concurrent Transactions. The Company did not recognize any revenue from Concurrent Transactions during the three months ended September 30, 2002. For the nine months ended September 30, 2002, the Company recognized software license revenues of $50,571,000 from Concurrent Transactions.

On January 1, 2002, the Company adopted EITF No. 01-14 "Income Statement Characterization of Reimbursements Received for 'Out-of-Pocket' Expenses Incurred" ("EITF 01-14"). EITF 01-14 requires that certain out-of-pocket expenses rebilled to customers be recorded as revenue versus an offset to the related expense. The Company has reflected the out-of-pocket expenses rebilled to customers in professional services, maintenance and other revenues. Prior to the adoption of EITF 01-14, the Company recorded rebilled out-of-pocket expenses as an offset to the related expense. Comparative financial statements for prior periods have been conformed to the current year presentation.

Cost of software consists primarily of amortization of acquired technology, media, product packaging and shipping, documentation and other production costs, and third-party royalties. Cost of professional services, maintenance and other consists primarily of salaries, benefits, and allocated overhead costs related to consulting, training and other global services personnel, including cost of services provided by third-party consultants engaged by the Company.

Software development costs associated with new products and enhancements to existing software products are expensed as incurred until technological feasibility in the form of a working model has been established. To date, the time period between the establishment of technological feasibility and completion of software development has been short, and no significant development costs have been incurred during that period. Accordingly, the Company has not capitalized any software development costs to date.

Advertising costs are expensed as incurred. Advertising expense is included in sales and marketing expense and amounted to $6,487,000 and $21,356,000 for the three and nine months ended September 30, 2001, respectively, and $2,140,000 and $11,799,000 for the three and nine months ended September 30, 2002, respectively.

The Company initially records its provision for doubtful accounts based on its historical experience and then adjusts this provision at the end of each reporting period based on a detailed assessment of its accounts receivable and allowance for doubtful accounts. In estimating the provision for doubtful accounts, management considers: (i) the age of the accounts receivable; (ii) trends within and ratios involving the age of the accounts receivable, (iii) the customer mix in each of the aging categories; (iv) the Company's historical provision for doubtful accounts; (v) the credit-worthiness of the customer; (vi) the economic conditions of the customer's industry; and (vii) general economic conditions, among other factors. Should any of these factors change, the estimates made by management will also change, which could impact the level of the Company's future provision for doubtful accounts. Specifically, if the financial condition of the Company's customers were to deteriorate, affecting their ability to make payments, additional provision for doubtful accounts may be required.

The Company's restructuring charges are comprised primarily of: (i) severance and associated employee termination costs related to the reduction of the Company's workforce; (ii) lease termination costs and/or costs associated with permanently vacating its facilities ("abandonment"); and (iii) impairment costs related to certain long-lived assets abandoned. The Company accounts for the costs associated with exiting an activity, including costs associated with the reduction of the Company's workforce, in accordance with Emerging Issues Task Force ("EITF") Issue No. 94-3 "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)" ("EITF 94-3"). Accordingly, the Company records the liability related to these termination costs when the following conditions have been met: (i) management with the appropriate level of authority approves a termination plan that commits the Company to such plan and establishes the benefits the employees will receive upon termination; (ii) the benefit arrangement is communicated to the employees in sufficient detail to enable the employees to determine the termination benefits; (iii) the plan specifically identifies the number of employees to be terminated, their locations, and their job classifications; and (iv) the period of time to implement the plan does not indicate changes to the plan are likely. The termination costs recorded by the Company are not associated with nor do they benefit continuing activities.

When the costs associated with lease termination and/or abandonment are not associated with exiting an activity as defined by EITF 94-3, the Company accounts for these costs in accordance with EITF Issue No. 88-10 "Costs Associated with Lease Modification or Termination" ("EITF 88-10"). Accordingly, the Company records the costs associated with lease termination and/or abandonment when the leased property has no substantive future use or benefit to the Company. Under EITF 88-10, the Company records the liability associated with lease termination and/or abandonment as the sum of the total remaining lease costs and related exit costs, less probable sublease income. The Company accounts for costs related to long-lived assets abandoned in accordance with SFAS 144 and, accordingly, charges to expense the net carrying value of the long-lived assets when the Company ceases to use the assets.

Inherent in the estimation of the costs related to the Company's restructuring efforts are assessments related to the most likely expected outcome of the significant actions to accomplish the restructuring. Changing business conditions may affect the assumptions related to the timing and extent of the Company's restructuring activities. The Company will review the status of restructuring activities on a quarterly basis and, if appropriate, record changes to its restructuring obligations in operations based on management's most current estimates.

The Company uses the asset and liability method of accounting for income taxes. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets are recognized for deductible temporary differences, along with net operating loss carryforwards and credit carryforwards, if it is more likely than not that the tax benefits will be realized. To the extent a deferred tax asset cannot be recognized under the preceding criteria, allowances are established. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled.

Basic net income (loss) per share is computed using the weighted average number of shares of common stock outstanding. Diluted net income (loss) per share is computed using the weighted average number of shares of common stock and, when dilutive, potential common shares from stock options to purchase common stock, restricted common stock subject to repurchase by the Company, and warrants outstanding, using the treasury stock method. Dilutive net income (loss) per share also gives effect, when dilutive, to the conversion of the convertible subordinated debentures, using the if-converted method.

Certain prior year amounts have been reclassified to conform to the current year presentation.

In June 2001, the FASB issued SFAS No. 143 "Accounting for Asset Retirement Obligations" ("SFAS 143"). SFAS 143 addresses the financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS 143 applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or normal use of the assets. SFAS 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The fair value of the liability is added to the carrying amount of the associated asset, and this additional carrying amount is expensed over the life of the asset. The Company is required to adopt SFAS 143 effective January 1, 2003, and early application is permitted. The Company does not expect the adoption of SFAS 143 to have a material effect on its consolidated financial position, results of operations or cash flows.

In July 2002, the FASB issued SFAS No. 146 "Accounting for Exit or Disposal Activities" ("SFAS 146"). SFAS 146 addresses the recognition, measurement and reporting of costs associated with exit and disposal activities (i.e., restructuring activities), including costs related to terminating a contract that is not a capital lease and termination benefits due to employees who are involuntarily terminated under the terms of a one-time benefit arrangement.

SFAS 146 supersedes EITF 94-3 and EITF 88-10 and therefore prohibits recognition of a liability based solely on an entity's commitment to a plan to exit an activity. SFAS 146 requires that: (i) liabilities associated with exit and disposal activities be measured at fair value and changes in the fair value of the liability at each reporting period be measured using an interest allocation approach; (ii) one-time termination benefits be expensed at the date the entity notifies the employee, unless the employee must provide future service, in which case the benefits are expensed ratably over the future service period; (iii) liabilities to terminate a contract be recorded at fair value when the contract is terminated; (iv) liabilities related to an existing operating lease/contract, unless terminated, be recorded at fair value, less estimated sublease income, and measured when the contract does not have any future economic benefit to the entity (i.e., the entity ceases to utilize the rights conveyed by the contract); and (v) all other costs related to an exit or disposal activity be expensed as incurred.

SFAS 146 is effective for exit or disposal activities initiated after December 31, 2002. Retroactive application of SFAS 146 is prohibited and, accordingly, liabilities recognized prior to the initial application of SFAS 146 must continue to be accounted for in accordance with EITF 94-3, EITF 88-10 or other applicable preexisting guidance. Accordingly, the Company will continue to account for its restructuring obligations recorded during the third quarter of 2002 and the obligations anticipated to be recorded in the fourth quarter of 2002 in accordance with EITF 94-3, EITF 88-10 or other applicable preexisting guidance. The Company does not expect the adoption of SFAS 146 to have a material effect on its consolidated financial position, results of operations or cash flows.

Throughout 2001 and 2002 the Company reduced the discretionary portion of its operating costs to near minimal levels. As a result of the continued downturn in the information technology industry, certain of the Company's key operating metrics, such as total revenue, operating margin and revenue per employee, continued to decline from the Company's historical levels. In response to this decline, during the third quarter of 2002, the Company initiated a restructuring of its operations and associated workforce reduction (collectively, the "Restructuring") intended to strengthen the Company's competitive position and future operating performance. The Company anticipates completing the Restructuring during the fourth quarter of 2002. The Company expects to recognize a total charge related to this Restructuring of up to approximately $275,000,000, of which the Company recognized a charge of $109,383,000 in the third quarter of 2002 and expects to recognize up to an additional $165,000,000 in the fourth quarter of 2002. Total cash outlays under the Restructuring are expected to range from $200,000,000 to $225,000,000, with the majority of the outlays due in 2004 and thereafter as described further below.

The Restructuring charge recognized in the third quarter of 2002 is comprised primarily of: (i) severance and associated employee termination costs related to the reduction of the Company's workforce; (ii) lease termination costs and/or costs associated with permanently vacating certain facilities; and (iii) impairment costs related to certain long-lived assets that were abandoned in connection with the Company's consolidation of its facilities. The Company had substantially completed its workforce reduction as of September 30, 2002; therefore, the majority of the restructuring-related expenses to be incurred during the fourth quarter of 2002 will relate to costs associated with permanently vacating facilities and asset impairment charges. The following table summarizes the Company's Restructuring-related expenses incurred during the third quarter of 2002 and related liabilities as of September 30, 2002 (in thousands):

                                                    Employee      Facility-        Asset
                                                   Termination     Related      Abandonment
                                                      Costs         Costs          Costs         Total
                                                   -----------  -------------  --------------  ----------
Restructuring-related expenses................... $    22,301  $      68,120  $       18,962  $  109,383
Cash payments....................................     (13,659)           (62)             --     (13,721)
Non-cash charges.................................          --             --         (18,962)    (18,962)
                                                   -----------  -------------  --------------  ----------
   Restructuring obligations, September 30, 2002. $     8,642  $      68,058  $           --  $   76,700
                                                   ===========  =============  ==============
   Less: Restructuring obligations, short-term...                                                 26,529
                                                                                               ----------
   Restructuring obligations, long-term..........                                             $   50,171
                                                                                               ==========

The costs associated with permanently vacating facilities will generally be paid over the remaining lease terms, ending at various dates through December 2023 or over a shorter period as the Company may negotiate with its lessors. See Note 5 for a summary of future lease commitments related to facilities that are part of the Company's Restructuring completed in the third quarter of 2002. The lease commitments presented in Note 5 have not been reduced by estimated sublease income. The remaining costs associated with the reduction of the Company's workforce will be paid during the fourth quarter of 2002. The total Restructuring charge and related cash outlay are based on management's current estimates, which may change if further consolidations are required or if actual lease commitments or sublease income differ from amounts currently expected.

As discussed above, as part of the Restructuring, the Company has reduced or expects to reduce its workforce by a total of approximately 1,100 employees, or 15% of its workforce. As of September 30, 2002, the Company had reduced its workforce by more than 1,000 employees and expects to complete the reduction of the remaining employees in the fourth quarter of 2002. The Company has communicated the termination benefits to the remaining employees it intends to terminate. However, as a result of regulatory requirements in the countries where these employees are located, the Company had not completed the separation of employment in certain countries as of September 30, 2002. This workforce reduction affected substantially all of the Company's organizations and geographical regions. The costs associated with the Company's workforce reduction recognized during the third quarter of 2002 consist primarily of severance, COBRA benefits, payroll taxes and other associated employment termination costs. The Company does not expect to recognize any significant charges in the fourth quarter of 2002 related to its workforce reduction.

As a result of the workforce reduction and previous employee attrition, certain of the Company's facilities were under-utilized and certain facilities that were scheduled to be occupied in early 2003 are expected to be under-utilized. Accordingly, during the third quarter of 2002, the Company began consolidating its workforce into existing facilities, thereby permanently removing from its operations certain facilities currently occupied and facilities that the Company does not plan to occupy. During the third quarter, the Company permanently removed from its operations certain facilities located in Emeryville and San Mateo, California; Egham, England; and several smaller offices in North America and Europe. During the fourth quarter of 2002, the Company expects to permanently remove from its operations additional facilities, which are primarily located in San Mateo, California. The costs incurred and to be incurred associated with the Company's facilities consolidation primarily relate to lease termination costs, costs associated with satisfying remaining lease commitments, and expected brokerage and other re-letting costs, partially offset by estimated sublease income. The Company is in the process of negotiating with its lessors appropriate lease termination fees and/or seeking suitable subtenants of these facilities. The Company's estimates of the excess facility charge may vary significantly depending, in part, on factors which may be beyond the Company's control, such as the Company's success in negotiating with lessors, the time periods required to locate and contract suitable subleases and the market rates at the time of such subleases. Adjustments to the facilities reserve will be made if further consolidations are required or if actual lease exit costs or sublease income differ from amounts currently expected.

As part of the consolidation of the Company's facilities, certain leasehold improvements, furniture and fixtures were abandoned in the third quarter of 2002. As a result, the Company recorded a non-cash charge equal to the net book value of these abandoned assets in Restructuring-related expenses during the three months ended September 30, 2002. The Company expects to complete the Restructuring in the fourth quarter of 2002 and may abandon additional furniture, fixtures and leasehold improvements, resulting in an additional impairment charge during the fourth quarter of 2002.

Intangible assets, net consisted of the following (in thousands):

                                                   December 31, September 30,
                                                      2001          2002
                                                   -----------  ------------- 
   Acquired technology........................... $    26,747  $      26,747
   Less: accumulated amortization................       7,747         14,434
                                                   -----------  -------------
        Intangible assets, net................... $    19,000  $      12,313
                                                   ===========  =============

Expected future amortization expense related to the acquired technology for the three-month period from October 1, 2002 to December 31, 2002, and each of the fiscal years thereafter is as follows (in thousands):

  Period Ending December 31,
  -------------------------------                             
   2002.......................................... $     1,959
   2003..........................................       7,837
   2004..........................................       2,517
                                                   -----------
       Total..................................... $    12,313
                                                   ===========

The changes in the carrying amount of goodwill during the nine months ended September 30, 2002, were as follows:

   Balance as of December 31, 2001............... $    72,869
   Earnout payments to the stockholders of
      acquired companies.........................       5,978
   Foreign currency fluctuation..................         (23)
                                                   -----------
   Balance as of September 30, 2002.............. $    78,824
                                                   ===========

Summarized below are the effects on net income (loss) and net income (loss) per share data, if the Company had followed the amortization provisions of SFAS 142 for all periods presented (in thousands, except per share amounts):

                                                        Three Months Ended     Nine Months Ended
                                                           September 30,          September 30,
                                                       ---------------------  ---------------------
                                                          2001       2002        2001       2002
                                                       ----------  ---------  ----------  ---------
Net income (loss):
   As reported....................................... $   35,197  $ (92,078) $  188,675  $   2,318
   Add: goodwill amortization, net of taxes..........      3,069         --       9,518         --
                                                       ----------  ---------  ----------  ---------
     Adjusted net income (loss)...................... $   38,266  $ (92,078) $  198,193  $   2,318
                                                       ==========  =========  ==========  =========

Diluted net income (loss) per share:
   As reported....................................... $     0.07  $   (0.19) $     0.36  $    0.00
   Add: goodwill amortization, net of taxes..........         --         --        0.02         --
                                                       ----------  ---------  ----------  ---------
     Adjusted diluted net income (loss) per share.... $     0.07  $   (0.19) $     0.38  $    0.00
                                                       ==========  =========  ==========  =========

Basic net income (loss) per share:
   As reported....................................... $     0.08  $   (0.19) $     0.41  $    0.00
   Add: goodwill amortization, net of taxes..........         --         --        0.03         --
                                                       ----------  ---------  ----------  ---------
      Adjusted basic net income (loss) per share..... $     0.08  $   (0.19) $     0.44  $    0.00
                                                       ==========  =========  ==========  =========

As of December 31, 2001 and September 30, 2002, the Company had $300,000,000 of convertible subordinated debentures outstanding. The seven-year-term convertible subordinated debentures mature September 15, 2006; bear interest at a rate of 5.50% per annum; and are convertible at the option of the holder into an aggregate of approximately 12,867,000 shares of the Company's common stock at any time prior to maturity, at a conversion price of approximately $23.32 per share, subject to adjustment under certain conditions. As of September 15, 2002, the Company has the right to redeem the notes, in whole or in part. The redemption amount will range from $309,420,000 to $302,370,000, if the notes are redeemed between September 15, 2002, and September 14, 2006. Redemptions after September 14, 2006, will be at $300,000,000. The Company will pay accrued interest through the redemption date. The Company is not subject to any restrictive covenants related to the convertible subordinated debentures.

As of September 30, 2002, the Company had secured letters of credit with banks totaling approximately $10,260,000. These letters of credit, which expire between October 2002 and November 2015, collateralize the Company's lease obligations to various third parties.

The Company is subject to legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business. While the outcome of these proceedings and claims cannot be predicted with certainty, management does not believe that the outcome of any of these legal matters will have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows.

The Company's U.S. Federal income tax returns and payroll tax returns for 1998, 1999 and 2000 are currently under examination by the Internal Revenue Service ("IRS"). To date, the IRS has not proposed any adjustments to or assessments related to these returns. Should the IRS propose adjustments to the Company's U.S. Federal income tax returns as a result of its examination, the Company believes that it has made adequate provision in the financial statements for such adjustments, if any. The Company has not made any provision for potential assessments by the IRS related to its payroll tax returns in the accompanying financial statements, as the amount, if any, that the Company may have to pay is not currently estimable.

During the nine months ended September 30, 2002, the Company entered into an equipment financing arrangement related to certain of the Company's computer equipment, whereby the Company received proceeds of $24,873,000. The Company has recorded this arrangement as a capital lease. The lease requires monthly payments of $589,000, which includes both principal and interest, through December 31, 2005.

As of September 30, 2002, the Company leased facilities and certain equipment under noncancelable operating leases expiring between 2002 and 2022. The Company also leases certain assets, primarily computer equipment, under capital leases expiring between 2004 and 2005. Rent expense under operating leases for the three and nine months ended September 30, 2001, was $30,749,000 and $87,308,000, respectively. Rent expense under operating leases for the three and nine months ended September 30, 2002, was $29,275,000 and $91,460,000, respectively.

Future minimum lease payments under both operating and capital leases are as follows (in thousands):

                                                                                  Operating Leases
                                                                    -----------------------------------------
                                                                       Leases
                                                         Capital       in the        All Other       Total
                                                         Leases     Restructuring      Leases      Operating
                                                       -----------  -------------  --------------  ----------
  Three months ending December 31, 2002.............. $     3,214  $       3,549  $       20,857  $   24,406
  Year ending December 31, 2003......................      11,664         16,649         104,393     121,042
  Year ending December 31, 2004......................      10,014         16,693         105,139     121,832
  Year ending December 31, 2005......................       6,479         14,135         102,479     116,614
  Year ending December 31, 2006......................          --         11,974          96,946     108,920
  Year ending December 31, 2007......................          --         11,200          91,886     103,086
  Year ending December 31, 2008, and thereafter......          --         84,198         569,748     653,946
                                                       -----------  -------------  --------------  ----------
       Total minimum lease payments..................      31,371  $     158,398  $    1,091,448  $1,249,846
                                                                    =============  ==============  ==========
       Amounts representing interest.................      (2,645)
                                                       -----------
       Present value of minimum lease payments.......      28,726
       Less: capital lease obligations, short-term
          portion (included in accrued liabilities)..      10,374
                                                       -----------
       Capital lease obligations, long-term portion.. $    18,352
                                                       ===========

The lease commitments in the above table designated as "Leases in the Restructuring" only include the noncancelable portion of operating leases related to the portion of the Restructuring that was complete as of September 30, 2002. Because the Company has not entered into definitive sublease agreements related to its facilities designated as "Leases in the Restructuring" in the above table, these lease commitments have not been reduced by estimated sublease income. In addition, the Company has not completed the consolidation of its facilities as of September 30, 2002, and, accordingly, "Leases in the Restructuring" in the above table do not reflect any lease commitments related to facilities that may be part of the Company's Restructuring during the fourth quarter of 2002.

In connection with the acquisition of Janna Systems Inc. ("Janna") in November 2000, the Company issued certain Janna stockholders that were resident in Canada newly issued exchangeable shares (the "Exchangeable Shares") of a Canadian subsidiary of the Company that are currently exchangeable for the Company's common stock. Until November 30, 2005 (or earlier under certain circumstances), the Exchangeable Shares are exchangeable for the Company's common stock on a one-for-one basis at any time at the option of the holder. On November 30, 2005, any remaining outstanding Exchangeable Shares must convert on a one-for-one basis into the Company's common stock.

In connection with the acquisition of Janna, the Company issued one share of Series A1 Preferred Stock to Montreal Trust Company of Canada (the "Trustee"), as trustee on behalf of the holders of the Exchangeable Shares. The Series A1 Preferred Stock gives the holders of Exchangeable Shares the ability to vote on the same basis as the holders of the Company's common stock. The Trustee, as the holder of the Series A1 Preferred Stock, is entitled to a number of votes equal to the number of Exchangeable Shares outstanding.

The 1996 Equity Incentive Plan, which amended and restated the Company's 1994 Stock Option Plan, the 1996 Supplemental Stock Option Plan and the 1998 Equity Incentive Plan (collectively, the "Plans"), provide for the issuance of up to an aggregate of 460,000,000 shares of common stock to employees, directors and consultants. The Plans provide for the issuance of incentive and nonstatutory stock options, restricted stock purchase awards, stock bonuses and stock appreciation rights.

Under the Plans, the exercise price for incentive stock options must be at least 100% of the fair market value on the date of the grant. Stock options generally expire in ten years; however, incentive stock options expire in five years if the optionee owns stock representing more than 10% of the voting power of all classes of stock. Vesting periods are determined by the Board of Directors and generally provide for shares to vest ratably over five years.

The Company has assumed certain stock options granted to former employees of acquired companies (the "Acquired Options"). The Acquired Options were assumed by the Company outside of the Plans, but all are administered as if issued under the Plans. 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. No additional stock options will be granted under any of the acquired companies' plans.

The Plans and certain acquired companies' plans allow for the exercise of unvested stock options and the issuance of restricted stock. Shares of common stock issued to employees upon exercise of unvested stock options or grants of restricted stock are subject to repurchase by the Company at the lower of the original purchase price of the restricted stock or the fair value of the Company's common stock on the date of repurchase. The Company's ability to repurchase these shares expires at a rate equivalent to the vesting schedule of each stock option or share of restricted stock. As of December 31, 2001 and September 30, 2002, a total of 271,000 and 101,000 outstanding shares of common stock, respectively, were subject to repurchase by the Company. No compensation expense has resulted from repurchases of restricted shares since the consideration paid by the Company equaled the lower of: (i) the original purchase price of the restricted stock; or (ii) the fair value of the Company's common stock.

Option Settlement

On August 29, 2002, the Company commenced an offer (the "Option Settlement") to its employees to settle outstanding stock options with exercise prices equal to or greater than $40.00 per share ("Eligible Options"). Stock options to purchase an aggregate of 31,950,000 shares were eligible for tender at the commencement of the Option Settlement, representing approximately 14% of the Company's outstanding stock options as of the commencement date. Members of the Company's Board of Directors were excluded from the Option Settlement and, accordingly two individuals, the Company's Chairman and CEO, along with the Vice Chairman, Co-Founder and Vice President, Strategic Planning, did not participate. The Company also excluded employees on a leave of absence (other than for medical, maternity, military, workers' compensation or other statutorily protected reasons) and employees who resigned or received notice of termination prior to the termination of the offer period.

Eligible employees who participated in the Option Settlement received, in exchange for the settlement of tendered stock options, a fixed amount of consideration equal to the number of shares underlying such tendered stock options, multiplied by $1.85. In accordance with terms of the Option Settlement, employees who were due total consideration of $5,000 or less received the consideration (less applicable tax withholdings) in cash, and employees who were due more than $5,000 received the consideration (less applicable tax withholdings) in fully vested, non-forfeitable shares of the Company's common stock. The Company concluded that the consideration paid for the Eligible Options represented "substantial consideration" as required by Issue 39(f) of EITF Issue No. 00-23 "Issues Relating to Accounting for Stock Compensation Under APB Opinion No. 25 and FASB Interpretation No. 44," as the $1.85 per Eligible Option was at least the fair value for each Eligible Option, as determined using the Black-Scholes option-pricing model. In determining the fair value of the Eligible Options using the Black-Scholes option-pricing model, the Company used the following assumptions: (i) the expected remaining life was deemed to be the remaining term of the options, which ranged from approximately 7 years to 8 years; (ii) a volatility of 45.0% during the expected life; (iii) a risk-free interest rate of 4.0%; and (iv) no dividends. The settlement amount of $1.85 per Eligible Option was established at the commencement of the offer period and remained unchanged throughout the offer period.

Because the Option Settlement involved substantial consideration, as described in Issue 39(f) of EITF Issue No. 00-23, the Company concluded that variable accounting would not be required for stock options granted to participants more than six months prior to the date of the offer. Further, variable accounting is not required under Issue 39(a) of EITF Issue No. 00-23 for Eligible Options subject to the offer that were not surrendered for settlement, because: (i) the stock offered was fully vested and non-forfeitable; and (ii) the number of shares to be received by an employee who accepts the offer is based on the number of surrendered stock options multiplied by $1.85, divided by the fair value of the stock at the date of settlement. The Company further concluded that the "look back" and "look forward" provisions of FASB Interpretation No. 44, paragraph 45 apply to the stock options surrendered for settlement. Because the Company had granted no stock options to the holders of the Eligible Options in the six months preceding the commencement of the tender offer period, variable accounting is not required for any of the Company's outstanding stock options not subject to the Option Settlement. The Company does not intend to grant stock options to any participants in the Option Settlement for at least six months following the conclusion of the tender offer period. If any stock options are granted to participants in the Option Settlement within the six months following the end of the tender offer period, those stock options will receive variable accounting.

On September 30, 2002, the offer period ended and the Company was obligated to settle 28,057,000 Eligible Options for total consideration of $51,905,000, consisting of $31,471,000 of fully vested, non-forfeitable shares of the Company's common stock (5,473,000 shares) and $20,434,000 in cash. The number of fully vested, non-forfeitable shares of the Company's common stock to be issued was determined by dividing the total consideration due (less the amount of applicable tax withholdings) by the closing price of the Company's common stock on September 30, 2002, of $5.75 per share. The Company recorded a compensation charge of $54,879,000 related to the Option Settlement, consisting of $51,905,000 related to the consideration paid and $2,974,000 of associated employer payroll taxes and other costs. The Company has allocated this expense to the respective categories within the accompanying statement of operations based on the individual employee's functional responsibility.

As of September 30, 2002, the Company had not settled its obligations under the Option Settlement. Accordingly, the Company has recorded $23,408,000, representing the cash portion of the Option Settlement, in current liabilities, and $31,471,000, representing the stock portion of the Option Settlement, in stockholders' equity under the heading "Option settlement shares issuable."

While the shares of common stock issued under the Option Settlement are fully vested and non-forfeitable, a total of 4,114,000 shares of common stock are subject to a "holding period" of one to four years, depending on the number of Eligible Options available to be tendered. Holders of these 4,114,000 fully vested, non-forfeitable shares issued in the Option Settlement are prohibited from selling, transferring, making a short sale, granting any option to purchase or entering into any hedging transaction with the same economic effect as the sale of such shares during the holding period. Accordingly, 1,947,000, 1,947,000, 142,000, and 78,000 fully vested, non-forfeitable shares of the Company's common stock will be released from the holding period on October 1, 2003, 2004, 2005, and 2006, respectively. The remaining 1,359,000 shares of common stock issued in the Option Settlement are freely tradable at issuance. Shares of common stock related to the Option Settlement will be issued in the fourth quarter of 2002.

Combined option plan activity for the nine months ended September 30, 2002, is summarized as follows:

                                                                             Weighted
                                             Shares                          Average
                                            Available     Number of          Exercise
                                            for Grant       Shares       Price per Share
                                           ------------ --------------   ----------------  
   Balances, December 31, 2001...........  117,178,547    247,203,762   $          23.81
     Additional shares authorized........           --             --
     Options granted.....................   (4,264,750)     4,264,750   $          25.73
     Options exercised...................           --     (9,586,186)  $           6.30
     Options canceled....................   19,407,795    (19,620,288)  $          33.83
     Options settled.....................   27,408,462    (28,056,712)  $          62.81
                                           ------------ --------------   ----------------
   Balances, September 30, 2002..........  159,730,054    194,205,326   $          18.06
                                           ============ ==============   ================

The following table summarizes information about the Company's stock options outstanding as of September 30, 2002 (including the impact of the cancellation of stock options in connection with the Option Settlement):

                         Options Outstanding              Options Exercisable
                 --------------------------------------  ---------------------
                                 Weighted     Weighted               Weighted
                                  Average      Average                Average
    Range of       Number        Remaining    Exercise     Number    Exercise
 Exercise Prices  of Shares   Life (in Years)   Price     of Shares    Price
- ---------------- ------------  -------------  ---------  ----------- ---------
 $0.01 -   0.78   16,755,122            3.5      $0.33   14,797,756     $0.33
 $1.05 -   4.91   30,866,892            5.2      $3.99   22,302,628     $3.87
 $5.04 -   9.96   27,289,654            5.8      $6.90   19,340,055     $6.57
$10.08 -  14.64    6,541,564            6.4     $12.30    3,519,742    $12.31
$15.06 -  19.93   57,687,781            8.8     $17.54    9,719,399    $17.40
$20.69 -  24.96   16,307,396            8.1     $23.50   12,797,225    $23.82
$25.02 -  39.16   16,452,175            8.1     $33.28    4,853,433    $33.96
$40.53 -  59.81   19,595,102            7.4     $48.82    8,510,180    $47.53
$62.50 -  76.88    1,941,299            6.1     $70.60      661,029    $69.04
$84.53 - 109.05      768,341            3.4     $95.79      534,673    $96.92
- ---------------- ------------  -------------  ---------  ----------- ---------
 $0.01 - 109.05  194,205,326            6.9     $18.06   97,036,120    $14.45
                 ============                            ===========

The Company has elected to continue to use the intrinsic value method prescribed by APB 25 to account for all of its employee stock-based compensation plans. The Company records deferred compensation costs related to employee stock options when the exercise price of the option is less than the fair value of the underlying common stock as of the grant date. Deferred compensation is expensed on a straight-line basis over the vesting period of the related stock option. 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 nine months ended September 30, 2001 and 2002.

As of December 31, 2001 and September 30, 2002, the Company's deferred compensation balances primarily relate to the unamortized portion of compensation expense associated with stock options granted by acquired companies and converted under the terms of the agreements between the Company and the companies acquired. The Company is amortizing the deferred compensation on a straight-line basis over the vesting period of the individual stock options, which range from three to five years. The Company has recorded stock-based compensation associated with these options of $1,244,000 and $4,047,000 during the three and nine months ended September 30, 2001, respectively, as compared to $682,000 and $3,620,000 during the three and nine months ended September 30, 2002, respectively.

The Company discloses the pro forma effect on its earnings, as if the Company had adopted SFAS 123, in the notes to the Company's annual financial statements. 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. As a result of the Company's Option Settlement, the Company must accelerate the amortization of the remaining deferred compensation associated with stock options settled. Accordingly, the Company's pro forma earnings disclosure for the year ended December 31, 2002, will include a pro forma charge of up to $650,000,000 related to the acceleration of deferred compensation associated with the unvested portion settled options (approximately 60% of options were not vested at settlement). This amount will be in addition to the normal recurring pro forma expense related to all of the Company's stock options.

The following is a reconciliation of the number of shares used in the basic and diluted net income (loss) per share computations for the periods presented (in thousands):

                                                        Three Months Ended     Nine Months Ended
                                                           September 30,          September 30,
                                                       ---------------------  ---------------------
                                                          2001       2002        2001       2002
                                                       ----------  ---------  ----------  ---------
Shares used in basic net income (loss) per
   share computation.................................    460,756    477,660     454,762    473,565
Effect of dilutive potential common shares
   resulting from stock options and common
   stock warrants....................................     55,323         --      65,371     49,893
Effect of dilutive potential common shares
   resulting from common stock subject
   to repurchase.....................................        203         --         269        122
                                                       ----------  ---------  ----------  ---------
Shares used in diluted net income (loss) per
   share computation.................................    516,282    477,660     520,402    523,580
                                                       ==========  =========  ==========  =========

Shares used in the diluted net income (loss) per share computation in the above table include the dilutive impact of the Company's in-the-money stock options. The impact of in-the-money stock options is calculated based on the average share price of the Company's common stock for each period using the treasury stock method. Under the treasury stock method, the tax-effected proceeds that would be hypothetically received from the exercise of all in-the-money stock options are assumed to be used to repurchase shares of the Company's common stock. The dilutive impact of in-the-money employee stock options was calculated using an average price of the Company's common stock of $28.74 per share and $41.46 per share for the three and nine months ended September 30, 2001, respectively, compared to $9.25 per share and $21.19 per share for the three and nine months ended September 30, 2002, respectively.

The Company excludes potentially dilutive securities from its diluted net income (loss) per share computation when their effect would be anti-dilutive. The following common stock equivalents were excluded from the earnings per share computation, as their inclusion would have been anti-dilutive (in thousands):

                                                        Three Months Ended     Nine Months Ended
                                                           September 30,          September 30,
                                                       ---------------------  ---------------------
                                                          2001       2002        2001       2002
                                                       ----------  ---------  ----------  ---------
Stock options excluded due to the exercise price
  exceeding the average fair value of the
  Company's common stock during the period...........     73,998    122,885      45,995     52,942
Weighted average stock options and restricted stock,
  calculated using the treasury stock method, that
  were excluded due to the Company reporting a net
  loss during the period.............................         --     27,847          --         --
Weighted average shares issuable upon
  conversion of the subordinated debentures..........     12,867     12,867      12,867     12,867
                                                       ----------  ---------  ----------  ---------
Total common stock equivalents excluded
  from diluted net income (loss) per share
  computation........................................     86,865    163,599      58,862     65,809
                                                       ==========  =========  ==========  =========

Under the treasury stock method, the Company has excluded certain stock options from the diluted earnings per share computation due to the exercise prices exceeding the average fair value of the Company's common stock during the period. The stock options in the above table had weighted average exercise prices of $54.00 and $64.47 per share during the three and nine months ended September 30, 2001, respectively, and $26.24 and $38.78 per share during the three and nine months ended September 30, 2002, respectively.

The Company and its subsidiaries are principally engaged in the design, development, marketing and support of Siebel eBusiness Applications, its family of industry-specific eBusiness software applications. Substantially all revenues result from the license of the Company's software products and related professional services and customer support (maintenance) services. The Company's chief operating decision maker (i.e., chief executive officer) reviews financial information presented on a consolidated basis, accompanied by disaggregated information about revenues by geographic region for purposes of making operating decisions and assessing financial performance. Accordingly, the Company considers itself to be in a single industry segment, specifically the license, implementation and support of its software.

The Company did not complete any acquisitions during the nine months ended September 30, 2002. During the year ended December 31, 2001, the Company completed the following transactions, each of which has been accounted for as a purchase:

On November 19, 2001, the Company acquired all of the outstanding securities of nQuire Software, Inc. ("nQuire"), a provider of Internet-based business analytics software. The Company acquired nQuire in order to capitalize on the expertise of the nQuire management team in the analytics market and their ability to develop new products using the Company's existing technology and technology acquired in the acquisition. As a result of this acquisition, the Company expects to become a leading provider of business intelligence and analytics application software.

The Company acquired nQuire for consideration of $59,722,000, consisting of 2,259,810 shares of the Company's common stock valued at $58,416,000 and stock options to existing employees of nQuire to purchase 56,108 shares of its common stock valued at $1,306,000. The number of shares to be issued was not determined until November 19, 2001, and, accordingly, the common stock was valued based on the closing market price of the Company's common stock on that date. The Company valued the stock options issued to the employees of nQuire based on the Black-Scholes valuation model, using a risk-free interest rate of 5.0%, the expected remaining life of the option, and a volatility factor of 90.0%. The purchase price was allocated to tangible net assets, including net deferred tax assets of $5,318,000, other current assets of $1,258,000, property and equipment of $105,000, assumed current liabilities of $2,872,000 and deferred compensation related to unvested stock options and restricted common stock of $1,397,000. Based in part on an independent valuation study of nQuire, the Company determined that there was no purchased in-process research and development and that the only identifiable intangible asset not subsumed into goodwill (i.e., assembled workforce) was "acquired technology" valued at $7,500,000. The acquired technology is currently being amortized over its useful life of three years using the straight-line method. The excess of the purchase price over the fair value of the identifiable tangible and intangible net assets acquired of $47,016,000 was recorded as goodwill. This amount is not expected to be deductible for tax purposes.

As a result of nQuire meeting certain revenue and product delivery targets for the fourth quarter of 2001, as defined in the merger agreement, the Company issued in January 2002 an additional 163,500 shares valued at $5,688,000. The Company recorded $5,478,000 of this additional consideration as goodwill and $210,000 as compensation expense. As a result of nQuire meeting certain product delivery targets during the third quarter of 2002, as defined in the merger agreement, the Company issued in October 2002 an additional 98,500 shares valued at $541,000. The Company will record $446,000 of this additional consideration as goodwill during the fourth quarter of 2002 and has accrued the remaining $95,000 as compensation expense during the third quarter of 2002. In the event that nQuire meets certain post-closing revenue and product delivery targets for the years ended December 31, 2002 and 2003, as defined in the merger agreement, the Company could issue the shareholders of nQuire an additional 1,053,000 shares of the Company's common stock (the "nQuire Earnout"). The ultimate value of the nQuire Earnout depends upon the market value of the Company's common stock when paid. The Company will record approximately 96.0% of the nQuire Earnout, if paid, as goodwill and the remaining 4.0% of the nQuire Earnout, if paid, as compensation expense. The Company will record the compensation portion of the payments when the Company determines that it is probable that the Company will be obligated to pay such amounts, and the goodwill portion will be recorded when actually paid.

In December 1999, the Company sold a controlling interest in the voting equity of Sales.com, Inc. ("Sales.com") to various outside investors. On January 12, 2001, the Company reacquired all of the outstanding securities of Sales.com for total consideration of $28,235,000, consisting of the issuance of 373,618 shares of the Company's common stock valued at $26,900,000 and the issuance of stock options to purchase 49,895 shares of its common stock to existing employees of Sales.com valued at $1,335,000. The Company valued the stock options issued to the employees of Sales.com based on the Black-Scholes valuation model, using a risk-free interest rate of 5.0%, the expected remaining life of the option, and a volatility factor of 77.0%. The purchase price was allocated to tangible net assets, including cash of $11,550,000, other current assets of $1,178,000, property and equipment of $385,000, and assumed current liabilities of $888,000. The excess of the purchase price over the fair value of the tangible net assets acquired of $16,010,000 was allocated to acquired technology. This amount is currently being amortized over three years using the straight-line method.

Each of the above transactions was accounted for by the purchase method of accounting and, accordingly, the operating results of the acquired companies have been included in the consolidated financial statements of the Company from the date of acquisition. Pro forma information giving effect to these acquisitions has not been presented since the pro forma information would not differ materially from the historical results of the Company.