The following discussion is provided to enable a better understanding of our operating results for 2003, including (i) a brief discussion of our business and products, (ii) key factors that impacted our performance during 2003, (iii) a summary of our operating results and certain key financial metrics for 2003, and (iv) our outlook for 2004, including certain risks that may impact our on-going operations. This executive summary should be read in connection with the more detailed discussion and analysis of our financial condition and results of operations in this Item 7, the section below in this Item 7 entitled "Risk Factors", and our consolidated financial statements, which are included following Item 15 of this annual report.

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

Our software applications enable an organization to better manage its relationships with its customers, partners and employees. A substantial portion of our software license revenue is derived from our customer relationship management, or CRM, solutions, which provide organizations with an integrated approach to identifying, acquiring and retaining customers. For example, our CRM applications: (i) provide sales organizations with a comprehensive view into the sales pipeline, enabling sales professionals to identify specific actions that will help them better manage opportunities to rapid closure, (ii) assist marketing organizations to increase campaign response rates and reduce customer-acquisition costs, and (iii) assist service organizations to reduce response times with customers, improving customer satisfaction.

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

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

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

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

We have historically considered our internal controls over financial reporting a high priority and will continue to do so through a continual review of and resulting improvement in our internal controls. For example, we have substantially completed the documentation and testing of our internal controls as required by Section 404 of the Sarbanes-Oxley Act, or SOX, as of December 31, 2003, a year prior to the date required for companies with a calendar year end. Based on the testing of our internal controls, we believe that our internal controls are functioning as designed and provide reasonable assurance that transactions are recorded as necessary to permit preparation of our financial statements in accordance with generally accepted accounting principles in the United States. With the work we have completed to date, we believe that we are well-positioned for our auditors to issue their attestation report on our internal controls in 2004. In addition, we have formed an Internal Controls Committee, comprised primarily of senior financial and legal personnel, which helps ensure our internal controls over financial reporting are complete, accurate and appropriately documented.

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

Our operating results for 2003 were impacted by several factors, including macro-economic conditions, economic conditions in the information technology industry and a general cautiousness and uncertainty within the application software industry. In addition, we have carefully reviewed our own performance and taken steps that we believe will improve our performance, even in difficult macro- and micro-economic environments. For example, as discussed further below, we completed a further restructuring of our operations during 2003 that we believe will: (i) strengthen our competitive position; (ii) reduce our cost structure, thereby improving our revenue per employee, operating margin and overall operating performance; and (iii) better align our management and organizational structure in order to return to sequential quarterly revenue growth.

Our operating results for 2003 were comprised of two distinct periods: (i) the first half of 2003, which was characterized by declining sequential quarterly software license revenues and declining operating margins; and (ii) the second half of 2003, which was characterized by stabilizing revenue in the third quarter and increasing sequential quarterly software license revenues in the fourth quarter, improvement in operating margin and many of our key financial metrics, and a general growth in our operations, as discussed further below. The following is a brief summary of some of the key factors impacting our operating performance during 2003:

Our operations and financial performance during the first half of 2003 were directly and negatively impacted by the factors discussed above. Specifically, many of our customers and potential customers: (i) delayed the initiation of the purchasing process; (ii) increased the evaluation time of a software purchase; 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 first half of 2003, with individual transactions generating license revenues greater than or equal to $5 million affected to the greatest extent.

In order to reverse the decline in many of our key financial metrics, such as software license revenue, revenue per employee, and operating income, we took several steps to improve our operating performance and sales execution, including the following:

• During 2002 and 2003, we maintained many of our previously implemented cost controls. Specifically, management continued to reduce advertising expenditures; maintained our Chief Executive Officer's salary at one dollar per year; deferred merit increases; and reduced discretionary expenditures, such as travel and recruiting.

• During 2003, we continued to reduce the discretionary portion of our operating costs through the implementation of various new cost control initiatives, including: (i) tying bonuses more closely to the achievement of financial objectives, (ii) reducing depreciation, primarily through reduced capital expenditures, and (iii) instituting additional procedures to further reduce other discretionary expenditures, such as costs related to outside consultants, travel and recruiting.

• Through our continued evaluation of economic conditions in the information technology industry and based upon our expectations regarding revenue levels, we initiated a further restructuring of our operations in the second quarter of 2003 (the "2003 Restructuring"). The 2003 Restructuring was in addition to the previously completed restructuring of our operations and an associated workforce reduction in 2002 (the "2002 Restructuring" and collectively with the 2003 Restructuring, the "2002 and 2003 Restructurings"). We completed the 2003 Restructuring in September 2003.

• In the second half of 2003, we began the process of realigning our worldwide sales organization into three geographic operating units-the Americas, Europe Middle East and Africa ("EMEA"), and Asia Pacific. We completed this realignment in early January 2004 and, accordingly, appointed one of our sales executives as the president of each of these geographical units. Each of these presidents report directly to our CEO.

Due primarily to these actions, we were able to improve several key operating metrics.

                                                              Year Ended December 31,            Year Ended December 31, 2003
                                                             ------------------------  -------------------------------------------------
                                                                 2002         2003         Q1          Q2           Q3           Q4
                                                             -----------  -----------  ----------- -----------  -----------  -----------
                                                                               (in thousands, except percentages and DSO)

  Revenues:                                                                                                                              
   Software license revenues...............................  $  700,344   $  482,274   $  112,092  $  109,894   $  110,003   $  150,285
   Maintenance revenues....................................     422,502      449,345      108,522     113,271      110,046      117,506
   Professional services and other revenues................     512,461      422,609      112,141     110,134      101,383       98,951
                                                             -----------  -----------  ----------- -----------  -----------  -----------
        Total revenues.....................................  $1,635,307   $1,354,228   $  332,755  $  333,299   $  321,432   $  366,742
                                                             ===========  ===========  =========== ===========  ===========  ===========
  Costs and expenses:                                      
   Restructuring and acquisition-related expenses (1)......  $  205,305   $  112,152   $       --  $      274   $  107,216   $    4,662
   All other costs and expenses (2)........................   1,524,264    1,275,815      336,042     327,934      305,521      306,318
                                                             -----------  -----------  ----------- -----------  -----------  -----------
        Total costs and expenses...........................  $1,729,569   $1,387,967   $  336,042  $  328,208   $  412,737   $  310,980
                                                             ===========  ===========  =========== ===========  ===========  ===========

  Other key financial statistics:                          
   Operating income (loss).................................  $  (94,262)  $  (33,739)  $   (3,287) $    5,091   $  (91,305)  $   55,762
   Operating margin........................................          (6)%         (2)%         (1)%         2 %        (28)%      15.20 %
   Cash and short-term investments.........................  $2,161,604   $2,023,206   $2,220,845  $2,301,751   $2,026,960   $2,023,206
   Days sales outstanding ("DSO")..........................          63           64           63          58           53           64
   Working capital.........................................  $1,940,261   $1,708,898   $1,966,169  $2,020,455   $1,756,169   $1,708,898
   Long-term debt..........................................  $  300,000   $       --   $  300,000  $  300,000   $       --   $       --
   Total stockholders' equity..............................  $1,957,460   $2,050,226   $1,975,710  $2,032,559   $1,972,664   $2,050,226
   Cash flows from operations..............................  $  433,203   $  188,034   $   62,811  $   52,900   $   37,473   $   34,850

1. Please refer to "Restructuring and Related Expenses" and "Purchased In-Process Product Development" in the following pages for a further discussion of these expenses.

2. Represents total cost of revenues, product development expense, sales and marketing, and general and administrative expenses. We believe these expenses are more representative of our on-going operations.

• Software license revenues decreased by 31% from $700.3 million in 2002 to $482.3 million in 2003, primarily due to the weakness in the global economy during the first half of 2003, as well as heightened competition. We have taken several steps to improve our ability to generate new software license revenues, including realigning our worldwide sales organization and implementing the 2003 Restructuring, which we believe resulted in a more responsive management structure and more focused sales organization.

Despite the decrease in software license revenues on a year-over-year basis in 2003, several key software license metrics began to show signs of improvement, particularly in the second half of 2003. The following table highlights some of the trends regarding certain key software license metrics during 2003 (in thousands, except number of transactions):

                                                                        Year Ended December 31, 2003
                                                             -------------------------------------------------
                                                                  Q1           Q2           Q3          Q4
                                                             -----------  -----------  ----------- -----------
  Software license summary:                                                                            (1)
   Software license revenues...............................  $  112,092   $  109,894   $  110,003  $  150,285
   Number of transactions greater than $5 million..........           2            2            3           5
   Number of transactions greater than $1 million..........          34           27           19          42
   Average transaction size................................  $      282   $      344   $      347  $      370
   Annualized total revenue per employee (2)...............  $      226   $      233   $      243  $      295

1. Our fourth quarter is impacted by seasonality because many of our customers utilize a significant portion of their capital budgets at the end of their fiscal year and the fourth quarter is the end of our sales quota year. We believe seasonality only accounts for a portion of the increase in our results, as our software license revenues for the fourth quarter exceeded our previous expectations and historical increases from the third quarter. For example, fourth quarter amounts exceeded third quarter amounts by 37% in 2003 versus growth of 24% in comparable periods in 2002.

2. Calculated as total revenue for the quarter divided by average employees for the quarter, the result of which is multiplied by four (i.e., four quarters) to arrive at an annualized amount.

• stabilize revenue in the third quarter and return our software license revenues to sequential quarterly growth in the fourth quarter of 2003;

• increase the number of our significant transactions. For example, the number of transactions generating software license revenue greater than $5 million increased from two in each of the first two quarters of 2003 to three in the third quarter of 2003 and five in the fourth quarter of 2003. Further, while the number of transactions generating software license revenue greater than $1 million was consistent in both the first half and second half of 2003 (61 transactions in each of these periods), a greater proportion of these transactions were in the $2 to $4 million range in the second half of 2003 compared to the first half of 2003;

• increase the average software license transaction size throughout 2003 from $282,000 in the first quarter of 2003 to $370,000 in the fourth quarter of 2003 (our best performance in over seven quarters); and

• increase our total revenue per employee throughout 2003 from $226,000 in the first quarter of 2003 to $295,000 in the fourth quarter of 2003.

• Maintenance revenues increased by 6% from $422.5 million in 2002 to $449.3 million in 2003, primarily due to stable renewal rates among our existing customer base and the new maintenance agreements entered into with new software licenses.

• Professional services and other revenues decreased by 18% from $512.5 million in 2002 to $422.6 million in 2003, primarily due to the previous declines in our software license revenues. The majority of our professional services and other revenues relate to implementation and training services that we perform in connection with new software license transactions. Because these services are performed over a period of three to six months subsequent to the signing of the software license, trends in our professional services and other revenues generally follow trends in our software license revenues. One of our primary goals for 2004 is to return our professional services organization to sequential quarterly growth as the year progresses (i.e., not in the first quarter of 2004).

• Total revenue per employee increased from $246,000 per employee during 2002 to $249,000 per employee during 2003 (calculated as total revenue for the year divided by average employees for the year). In addition, as indicated previously, total revenue per employee increased sequentially in each quarter of 2003. This increase was primarily due to reductions in our employee base and the progressive improvement of the performance of our worldwide sales organization.

• Total quarterly costs and expenses decreased by approximately $60 million, or 16%, on a year-over-year basis (based on a comparison of "all other costs and expenses" for the fourth quarter of 2002 to the fourth quarter of 2003). This decrease was primarily due to the 2002 and 2003 Restructurings. Specifically, we exceeded our goal of $30 million in expense savings from the 2003 Restructuring (compared to the second quarter of 2003) and achieved an additional approximately $30 million in expense savings from the 2002 Restructuring and other cost saving measures. Partially offsetting these cost savings were increases in compensation expense from merit increases and incentive compensation. Please refer to "Restructuring and Related Expenses" in the following pages for a further discussion of the 2002 and 2003 Restructurings.

• Targeted quarterly operating margin of 15%, or $55.8 million, was achieved in the fourth quarter of 2003 in advance of previous expectations. This was our best performance in the last seven quarters. We were able to achieve our midterm operating margin goal in advance of expectations due to improvement in our software license revenues and a significant reduction in quarterly expenses resulting from the 2002 and 2003 Restructuring.

• Elimination of substantially all of our long-term debt--We redeemed our $300.0 million convertible subordinated debentures (the "Debentures") on September 30, 2003 for $307.1 million, eliminating substantially all of our long-term debt and approximately $16.5 million of annual interest expense.

• Cash and short-term investments continued at over $2.0 billion, with $2,161.6 million as of December 31, 2002, and $2,023.2 million as of December 31, 2003, representing approximately 71% of total assets for each of these periods. Cash and short-term investments decreased by $138.4 million from 2002 to 2003, primarily due to our redemption of the Debentures for $307.1 million and acquisition-related expenditures of $62.6 million (primarily related to the acquisition of UpShot Corporation), which were partially offset by an increase of $188.0 million from cash flows from operations.

• Increase in overall liquidity--During the periods of weak global economic conditions from January 1, 2001 to December 31, 2003, in addition to paying off substantially all of our long-term debt, we increased cash and short-term investments by $870.6 million, primarily through operations. As the table of key financial metrics above illustrates, we generated positive cash flows from operations in every quarter during 2003 and a total of $188.0 million for the year.

• Credit and collections--Days sales outstanding was 63 days as of December 31, 2002 and 64 days as of December 31, 2003. Average payment terms on our software license revenue transactions decreased from 44 days for 2002 to 29 days for 2003.

• Working capital was $1,940.3 million as of December 31, 2002 and $1,708.9 million as of December 31, 2003. The decrease was due to the redemption of the Debentures and acquisition-related expenditures, partially offset by our cash flows from operations. With virtually no debt and a strong working capital position, we believe that we have the flexibility to continue to invest in further technology development and, when prudent, selectively acquire technologies or companies to strengthen our product portfolio.

• Stockholders' equity increased from $1,957.5 million as of December 31, 2002, to $2,050.2 million as of December 31, 2003, primarily due to proceeds from the exercise of stock options.

• Stock option overhang, which represents the number of stock options outstanding relative to shares of common stock outstanding, decreased from 53% as of December 31, 2001 to 29% as of December 31, 2003. The decrease was due to a combination of actions taken by our management, including the Option Repurchase, cancellation for no consideration of certain stock options held by our CEO, forfeitures of stock options by employees upon termination, and reduced levels of new stock option grants during 2002 and 2003.

• Industry analysts continued to acknowledge our product leadership. For example, Gartner, Inc., a prominent information technology research firm, listed us in the "leader" quadrant position in four of its 2004 CRM Magic Quadrant evaluations¹and rated us "Positive" or "Strong Positive" in six of its MarketScope research notes² for the first half of 2004. The Gartner Magic Quadrant and MarketScope evaluations provide an objective and rigorous analysis of technology suppliers' global capabilities, breadth and depth of functionality, proven scalability, technology innovation, company viability and vision, and their installed customer base. Overall, these reports assess a vendor's success in developing, selling, deploying, supporting and extending its applications. ³

• We believe that we were able to maintain our market share at comparable levels to those achieved in 2002 in the majority of the product categories in which we operate and to continue as the technology leader in the CRM market.

• In the fourth quarter of 2003, we introduced Siebel CRM OnDemand, a hosted CRM service designed to allow organizations to generate more sales leads, enhance lead qualification and management, improve sales forecasting, shorten sales cycles and provide improved customer service. To further complement our Siebel CRM OnDemand product offering, we acquired UpShot Corporation ("UpShot"), a leading provider of hosted sales automation software applications, in November 2003.

• We continued our commitment to innovative product development with the announcement of our new CRM for Everyone product strategy. CRM for Everyone encompasses new industry-specific CRM products, a new analytics platform and suite of analytics applications, new business integration solutions, and Siebel CRM OnDemand.

• In addition to our internal development efforts, we completed several key acquisitions during 2003, the most significant of which was the acquisition of UpShot. In addition, we improved our portfolio of technology, both developed and in the process of development, with the acquisitions of certain technology related to our incentive compensation solutions, business analytics solutions and outbound messaging solutions.

• Our customer satisfaction levels continued at high levels, with an overall customer loyalty rating of 98%, based on a survey conducted in the third quarter of 2003. Customer loyalty is defined as customers who indicate they intend to continue using, upgrade to, and/or purchase additional products from us.

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