Exhibit A

10kW I ZAR D

FORM S-1/ASALESFORCE COM INC - CRM

Filed : June 22 , 2004 (period : )

Amended Registration statement for face-amount certificate companies

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As filed with the Securities and Exchange Commission on June 22, 2004Registration No . 333-111289

SECURITIES AND EXCHANGE COMMISSIO NWashington , DC 20549

AMENDMENT NO. 8TO

FORM S-1REGISTRATION STATEMENT

UnderThe Securities Act of 1933

salesforce .com, inc .(Exact name of Registrant as specified in its charter )

Delaware 7372 94-3320693(State or other jurisdiction of (Primary Standard Industrial ( I.R.S . Employer

incorporation or organization) Classification Code number ) Identification No.)

The Landmark @ One Market , Suite 300San Francisco , California 94105

(415) 901-700 0(Address, including zip code, and telephone number , including area code, of Registrant's principal executive offices)

Marc BenioffChairman and Chief Executive Officer

salesforce.com, inc.The Landmark @ One Market , Suite 300

San Francisco, California 94105(415) 901-7000

(Name, address, including zip code, and telephone number, including area code , of agent for service)

Copies to :

Gregory M. Gallo, Esq. David Schellhase, Esq. Gordon K. Davidson, Esq .Peter M . Astiz, Esq. Vice President and General Counsel Jeffrey R . Vetter, Esq .

David A . Hubb , Esq. salesforce .com, inc. Fenwick & West LLPGray Cary Ware & Freidenrich LLP The Landmark @ One Market, Silicon Valley Center

2000 University Avenue Suite 300 801 California StreetEast Palo Alto , CA 94303-2248 San Francisco, CA 94105 Mountain View, CA 9404 1

(650) 833-2000 ( 415) 901-7000 (650) 988-8500

Approximate date of commencement of proposed sale to the public : As soon as practicable after the Registration Statement becomes effective .

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check thefollowing box . ❑

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Acr-t~, check the following box and list theSecurities Act registration statement number of the earlier effective registration statement for the same offering . tJIf this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registrationstatement number of the earlier effective registration statement number for the same offering . ❑If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registrationstatement number of the earlier effective registration statement for the same offering . ❑If delivery of the Prospectus is expected to be made pursuant to Rule 434, check the following box . ❑

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shallfile a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) ofthe Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Commission , acting pursuant tosaid Section 8(a), may determine .

Table of ContentsThe information in this prospectus is not complete and may be changed . We may not sell these securities until the registration statement filed with the Securitiesand Exchange Commission is effective . This prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in anyjurisdiction where the offer or sale is not permitted .

PROSPECTUS (Subject to Completion)Issued June 2?, 7004

10, 000, 000 Share s

forceexperience suc s

COMMON STOCK

Salesforce. com, inc. is offering shares of its common stock. This is our initial public offering and no public market currently exists for our shares . Weanticipate that the initial public offering price will be between $9 and $10 per share .

Our common stock has been approved for listing on the New York Stock Exchange under the symbol "CRM ."

Investing in our common stock involves risks . See " Risk Factors" beginning on page 5.

PRICE $ A SHARE

Per ShareTotal

UnderwritingPrice to Discounts and Proceeds toPublic Commissions salesforce .co m

$ $ $$ $ $

We have granted the underwriters the right to purchase up to an additional 1,500,000 shares of common stock to cover over -allotments.

The Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities , or determined if this prospectus istruthful or complete . Any representation to the contrary is a criminal offense.

Morgan Stanley & Co. Incorporated expects to deliver the shares to purchasers on , 2004 .

MORGAN STANLEYDEUTSCHE BANK SECURITIESUBS INVESTMENT BANKWACHOVIA SECURITIESWILLIAM BLAIR & COMPANY

, 2004

Table of ContentsSUMMARY CONSOLID ATED FINANCIAL DATA

The following tables provide summary consolidated financial data and should be read in conjunction with "Management's Discussion and Analysis of FinancialCondition and Results of Operations" and our consolidated financial statements and related notes appearing elsewhere in this prospectus .

Fiscal Year Ended January 31,

Three Months Ended

April 30,

2002 2003 2004 2003 2004

(unaudited)(in thousands, except per share data )

Consolidated Statement of Operations Data:Revenues $ 22,409 $ 50,991 $96,023 $18,913 $ 34,839(Loss) income from operations (1) (29,525) (10,500) 3,718 17 361Net (loss) income (1) (28,609) (9,716) 3,514 368 437

Net (loss) income per share:Basic $ (1 .36) $ (0.37) $ 0.12 $ 0.01 $ 0.0 1Diluted (1 .36) (0.37) 0.04 0.00 0.00

Weighted-average shares used in computing per share amounts :Basic (2) 21,039 26,375 29,605 28,660 31,68 8Diluted (2) 21,039 26,375 95,409 91,618 100,39 8

(1) Loss from operations and net loss for fiscal 2002 include a $7 .7 million non-cash charge for office space that we abandoned in fiscal 2002 . Income fro moperations and net income for fiscal 2004 include non-cash income of $3 .4 million associated with the net reduction in accruals associated with the offic espace that we abandoned .

(2) For information regarding the computation of per share amounts, refer to note I of the notes to our consolidated financial statements .

Consolidated Balance Sheet Data:Cash, cash equivalents and short-term marketable securitiesWorking capita lTotal assetsConvertible preferred stockAccumulated defici tTotal stockholders' (deficit) equity

As of April 30, 200 4

Pro Pro Forma

Actual Forma As Adjusted

(unaudited)(in thousands )

$ 43,733 $ 43,733 $ 128,08 37,342 7,342 91,69 2

92,977 92,977 177,32 761,137 - -(71,497) (71,497) (71,497 )(44,056) 17,081 101,43 1

The pro forma column of the consolidated balance sheet data table above reflects the automatic conversion of all outstanding shares of our convertible preferredstock into common stock upon the closing of this offering . The pro forma as adjusted column in the consolidated balance sheet data table above reflects the saleof 10,000,000 shares of our common stock in this offering at an assumed initial public offe ri ng price of $9 . 50 per share , resulting in estimated net proceeds of$84 .4 million after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us .

4

Table of ContentsRISK FACTOR S

Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors, as well as the other information in thisprospectus, before deciding whether to invest in shares of our common stock . ifany of the following risks actually occurs, our business, financial condition andresults of operations would suffer . In this case, the trading price of our common stock would likely decline and you might lose all or part of your investment inour common stock. The risks described below are not the only ones we face . Additional risks that we currently do not know about or that we currently believe tobe immaterial may also impair our business operations .

Risks Related to Our Business and Industry

We are an early-stage company in an emerging market with an unproven business model, a new and unproven enterprise technology model and a shortoperating history, which makes it difficult to evaluate our current business and future prospects and may increase the risk of your investment.

We have only a limited operating history and our current business and future prospects are difficult to evaluate . We were founded in February 1999 and beganoffering our on-demand CRM application service in February 2000 . You must consider our business and prospects in light of the risks and difficulties weencounter as an early-stage company in the new and rapidly evolving market of on-demand CRM application services . These risks and difficulties include thefollowing :

our new and unproven business and technology models ;

a limited number of service offerings and risks associated with developing new service offerings ; and

the difficulties we face in managing rapid growth in personnel and operations .

We may not be able to successfully address any of these risks or others, including the other risks related to our business and industry described below . Failure toadequately do so could seriously harm our business and cause our operating results to suffer .

We have incurred significant operating losses in the past and may incur significant operating losses in the future .

We incurred significant losses in each fiscal quarter from our inception in February 1999 through fiscal 2003 and we may incur significant operating losses in thefuture . Our business does not have an established record of profitability and we may not continue to be profitable . In addition, we expect our operating expensesto increase in the future as we expand our operations . If our revenue does not grow to offset these expected increased expenses, we will not continue to beprofitable . You should not consider recent quarterly revenue growth as indicative of our future performance . In fact, in future quarters we may not have anyrevenue growth, and our revenue could decline . Furthermore, if our operating expenses exceed our expectations, our financial performance will be adverselyaffected.

If we experience significant fluctuations in our operating results and rate of growth and fail to meet revenue and earnings expectations, our stock price mayfall rapidly and without advance notice.

Due to our limited operating history, our evolving business model and the unpredictability of our emerging industry, we may not be able to accurately forecastour rate of growth. For example, in the last two fiscal years, we have recorded quarterly operating income of as much as $4.3 million and quarterly operatinglosses of as much as $4 .9 million . We base our current and future expense levels and our investment plans on estimates of future revenue and future rate ofgrowth . Our expenses and investments are, to a large extent, fixed and we

Table of Contentsexpect that these expenses will increase in the future . We may not be able to adjust our spending quickly enough if our revenue falls short of our expectations .

As a result, we expect that our operating results may fluctuate significantly on a quarterly basis . Revenue growth may not be sustainable and may decrease in thefuture . We believe that period-to-period comparisons of our operating results may not be meaningful, and you should not rely upon them as an indication offuture performance.

Interruptions or delays in se rv ice from our third party Web hosting facility could impair the delivery of our service and harm our business .

We provide our service through computer hardware that is currently located in a third-party Web hosting facility in Sunnyvale, California operated by QwestCommunications International Inc. We do not control the operation of this facility, and it is subject to damage or interruption from earthquakes, floods, fires,power loss, telecommunications failures and similar events . It is also subject to break-ins, sabotage, intentional acts of vandalism and similar misconduct .Despite precautions taken at the facility, the occurrence of a natural disaster, a decision to close the facility without adequate notice or other unanticipatedproblems at the facility could result in lengthy interruptions in our service . In addition, the failure by the Qwest facility to provide our required datacommunications capacity could result in interruptions in our service . We have an agreement with SunGard Data Systems, a provider of availability services, toprovide access to a geographically remote disaster recovery facility that would provide us access to hardware, software and Internet connectivity in the event theQwest facility becomes unavailable . Even with this disaster recovery arrangement, however, our service would be interrupted during the transition. We are in theprocess of obtaining additional rapid recovery services . However, we do not expect to have these services in place before December 2004 at the earliest . Anydamage to, or failure of, our systems could result in interruptions in our service . Interruptions in our service may reduce our revenue, cause us to issue credits orpay penalties, cause customers to terminate their subscriptions and adversely affect our renewal rates . Our business will be harmed if our customers and potentialcustomers believe our service is unreliable .

If our security measures are breached and unauthorized access is obtained to a customer's data, our service may be perceived as not being secure andcustomers may curtail or stop using our service.

Our service involves the storage and transmission of customers' proprietary information, and security breaches could expose us to a risk of loss of thisinformation, litigation and possible liability . If our security measures are breached as a result of third-party action, employee error, malfeasance or otherwise,and, as a result, someone obtains unauthorized access to one of our customers' data, our reputation will be damaged, our business may suffer and we could incursignificant liability . Because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized untillaunched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures . If an actual or perceived breach ofour security occurs, the market perception of the effectiveness of our security measures could be harmed and we could lose sales and customers .

If ouron-demand application se rvice is not widely accepted, our operating results will be harmed .

Historically, we have derived substantially all of our revenue from subscriptions to our on-demand application service, and we expect this will continue for theforeseeable future. As a result, widespread acceptance of our service is critical to our future success . Factors that may affect market acceptance of our serviceinclude :

potential reluctance by enterprises to migrate to an on-demand application service ;

the price and performance of our service ;

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the level of customization we can offer ;

the availability, performance and price of competing products and services ; and

potential reluctance by enterprises to trust third parties to store and manage their internal data.

Many of these factors are beyond our control . The inability of our service to achieve widespread market acceptance would harm our busines s

The marketfor our technology delivery model and on-demand application se rvices is immature and volatile, and if it does not develop or develops moreslowly than we expect, our business will be harmed.

The market for on-demand application services is new and unproven, and it is uncertain whether these services will achieve and sustain high levels of demandand market acceptance . Our success will depend to a substantial extent on the willingness of enterprises, large and small, to increase their use of on-demandapplication services in general, and for CRM in particular . Many enterprises have invested substantial personnel and financial resources to integrate traditionalenterprise software into their businesses, and therefore may be reluctant or unwilling to migrate to on-demand application services . Furthermore, someenterprises may be reluctant or unwilling to use on-demand application services because they have concerns regarding the risks associated with securitycapabilities, among other things, of the technology delivery model associated with these services . If enterprises do not perceive the benefits of on-demandapplication services, then the market for these services may not develop at all, or it may develop more slowly than we expect, either of which would significantlyadversely affect our operating results . In addition, as a new company in this unproven market, we have limited insight into trends that may develop and affect ourbusiness . We may make errors in predicting and reacting to relevant business trends, which could harm our business .

Because we recognize revenue from subscriptions for our se rvice over the term of the subscription, downturns or upturns in sales may not be immediatelyreflected in our operating results.

We recognize revenue from customers monthly over the terms of their subscription agreements, which are typically 12 to 24 months, although terms can rangefrom one to 60 months . As a result, much of the revenue we report in each quarter is deferred revenue from subscription agreements entered into during previousquarters . Consequently, a decline in new or renewed subscriptions in any one quarter will not necessarily be fully reflected in the revenue in that quarter and willnegatively affect our revenue in future quarters . In addition, we may be unable to adjust our cost structure to reflect these reduced revenues . Accordingly, theeffect of significant downturns in sales and market acceptance of our service may not be fully reflected in our results of operations until future periods . Oursubscription model also makes it difficult for us to rapidly increase our revenue through additional sales in any period, as revenue from new customers must berecognized over the applicable subscription term .

We do not have an adequate history with our subscription model to predict the rate of customer subscription renewals and the impact these renewals willhave on our revenue or operating results.

Our customers have no obligation to renew their subscriptions for our service after the expiration of their initial subscription period and in fact, some customershave elected not to do so . In addition, our customers may renew for a lower priced edition of our service or for fewer users . We have limited historical data withrespect to rates of customer subscription renewals, so we cannot accurately predict customer renewal rates . Our customers' renewal rates may decline or fluctuateas a result of a number of factors, including their dissatisfaction with our service and their ability to continue their operations and spending levels . If ourcustomers do not renew their subscriptions for our service, our revenue may decline and our business will suffer .

Our future success also depends in part on our ability to sell additional features or enhanced editions of our service to our current customers . This may requireincreasingly sophisticated and costly sales efforts that are targeted at senior management. If these efforts are not successful, our business may suffer .

Table of ContentsThe number of shares to be outstanding immediately after the offering is based on 91,256,880 shares of common stock outstanding as of April 30, 2004, whichassumes the conversion of all of our outstanding shares of convertible preferred stock into 58,024,345 shares of common stock, and excludes :

• 16,422,047 shares of common stock issuable upon the exercise of options outstanding as of April 30, 2004, with exercise prices ranging from $0 .03to $8 .00 per share and a weighted average exercise price of $3 .22 per share ;

• 4,000,000 shares of common stock to be available for issuance under our 2004 Equity Incentive Plan, 1,000,000 shares of common stock to beavailable for issuance under our 2004 Outside Directors Stock Plan and 1,000,000 shares of common stock to be available for issuance under our2004 Employee Stock Purchase Plan ; however, the 2004 Employee Stock Purchase Plan will not be implemented unless and until our board ofdirectors authorizes the commencement of one or more offerings under this plan ;

• 1,299,496 shares of common stock issuable upon the exercise of warrants outstanding as of April 30, 2004, with exercise prices ranging from $1 .10to $3 .89 per share and a weighted average exercise price of $2 .43 per share ; an d

• 693,818 shares of common stock reserved for future grants under our 1999 Stock Option Plan as of April 30, 2004 .

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Table of ContentsSELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition andResults of Operations" following this section and our consolidated financial statements and related notes appearing elsewhere in this prospectus . The selectedconsolidated statement of operations data for the fiscal years ended January 31, 2002, 2003 and 2004, and the selected consolidated balance sheet data as ofJanuary 31, 2003 and 2004, are derived from our audited consolidated financial statements included in this prospectus . The consolidated statement of operationsdata for the period from inception (February 3, 1999) to January 31, 2000 and the fiscal year ended January 31, 2001, and the selected consolidated balance sheetdata as of January 31, 2000, 2001 and 2002, are derived from audited consolidated financial statements not included in this prospectus . The consolidatedstatement of operations data for the three months ended April 30, 2003 and 2004 and the consolidated balance sheet data as of April 30, 2004 are derived fromour unaudited consolidated financial statements included in this prospectus . The unaudited consolidated financial statements include, in the opinion ofmanagement, all adjustments that management considers necessary for the fair presentation of the financial information set forth in those statements . Thehistorical results are not necessarily indicative of results to be expected in any future period, and the results for the three months endedApril 30, 2004 should not be considered indicative of results expected for the full fiscal year .

Period frominception

(February 3,1999) toJanuary

31,

2000

Consolidated Statement of Operations :Revenues:Subscription and supportProfessional services and othe r

Total revenue sCost of revenues (1):Subscription and supportProfessional services and other

Total cost of revenuesGross profi tOperating expenses (1) :Research and developmentMarketing and salesGeneral and administrativeLease abandonment (recovery )

Total operating expenses(Loss) income from operationsInterest incomeInterest expens eOther income (expense)

Fiscal Year Ended January 31,Three Months

Ended April 30 ,

2001 2002 2003 2004 2003 2004

(unaudited)(in thousands, except per share data)

$ - $ 5,022 $ 21,513 $ 47,656 $ 85,796 $ 16,922 $ 31,116- 413 896 3,335 10,227 1,991 3,723

1,0892,4991,976

5,564(5,564)

121(3)

(6)

(Loss) income before provision for income taxes and minority interest (5,452)Provision for income taxes -

(Loss) income before minority interestMinority interest in consolidated joint ventur e

Net (loss) income

Net (loss) income per share:BasicDilutedWeighted-average shares used in computing per share amounts :Basic (2 )Diluted (2)

(5,452)

5,435 22,409 50,991 96,023

1,730 3,718 7,199 7,7821,692 2,329 3,164 9,49 1

3,422 6,047 10,363 17,2732,013 16,362 40,628 78,750

3,366 5,308 4,648 6,96225,392 24,605 33,522 54,6006,855 8,317 12,958 16,91 5

7,657 - (3,445)

18,913 34,83 9

28,115361

144

(1)20

52470

1,597 2,2821,758 4,081

3.355 6,36315,558 28,476

1,240 2,12710,656 20,4153,645 5,573

35,613 45,887 51,128 75,032 15,54 1(33,600) (29,525) (10,500) 3,718 1 7

1,715 755 471 379 7 8(42) (272) (77) (22) (9)63 8 98 164 31 5

(31,864 ) (29,034) ( 10,008) 4,239 40 1- - - 541 4 9

(31,864 ) (29,034) ( 10,008 ) 3,698 352193 425 292 (184) 16

$ (5.452) $ (31,671) $ (28.609) $ (9,716) $ 3,514 $ 368

$ (0.55) $ (2 .38) $ (1 .36) $ (0.37) $ 0.12 $ 0.0 1(0.55) (2 .38) (1.36) (0.37) 0.04 0.00

10,000 13,314 21,039 26,375 29,605 28,66010,000 13,314 21,039 26,375 95,409 91,618

454

(17)

$ 437

$ 0.010 .0 0

31,688100,39 8

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2000 2001

Consolidated Balance Sheet Data:Cash, cash equivalents and short-term marketabl esecurities $12,609 $ 22,200Working capital 12,053 20,163Total assets 14,196 37,047Convertible preferred stock 17,156 59,852Accumulated deficit (5,452) (37,123)Total stockholders' deficit (3,878) (29,329)

(1) Cost of revenues and operating expenses include stock-based expenses, consisting of:

Period frominception

(February 3 ,

1999) t oJanuary 31 ,

2000 200 1

Cost of revenues $ - $ 345Research and development 214 43 1Marketing and sales 386 1,35 0General and administrative 267 1,326

Total stock-based expenses $ 867 $ 3,452

As of January 31,As o f

April 30 ,2002 2003 2004 2004

(unaudited)

(in thousands)

$ 11,709 $ 16,009 $ 35,812 $ 43,73 36,497 1,172 4,140 7,342

29,713 39,673 87,511 92,97 761,137 61,137 61,137 61,13 7

(65,732) (75,448) (71,934) (71,497 )(51,348) (55,875) (46,237) (44,056)

Fiscal Year EndedJanuary 31,

Three Months

2002 2003 2004 2003 2004

(unaudited )(in thousands)

$ 369 $ 428 $ 655 $ 160 $170436 402 462 120 89

1,422 1,696 2,029 514 4142,224 2,241 1,213 290 204

$4,451 $ 4,767 $ 4,359 $1,084 $ 877

(2) For information regarding the computation of per share amounts, refer to note 1 of the notes to our consolidated financial statements .

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Table of ContentsMANAGEMENT'S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATION S

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financialstatements and related notes that appear in this prospectus . In addition to historical consolidated financial information, the following discussion containsforward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-lookingstatements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this prospectus, particularly in "RiskFactors. "

Overview

We are the leading provider, based on market share, of application services that allow organizations to easily share customer information on demand, accordingto a March 2004 report by Forrester Research, Inc . We provide a comprehensive CRM service to businesses of all sizes and industries worldwide .

We were founded in February 1999 and began offering our on-demand CRM application service in February 2000. Our revenues have grown from $5 .4 millionin fiscal 2001 to $96 .0 million in fiscal 2004 .

Our objective is to be the leading provider of on-demand application services for businesses worldwide . To address our market opportunity, our managementteam is focused on a number of short and long-term challenges, including strengthening and extending our service offerings, adding new customers andexpanding our sales efforts into new territories, deepening our relationships with our existing customers and encouraging the development of third-partyapplications on our platform .

In order to increase our revenues and take advantage of our market opportunity, we will need to add substantial numbers of paying subscriptions . We definepaying subscriptions as unique user accounts, purchased by customers for use by their employees and other customer-authorized users, that have not beensuspended for non-payment . The number of our paying subscribers increased from approximately 30,000 as of February 1, 2001 to over 147,000 as of April 30,2004 . We plan to re-invest our revenues for the foreseeable future in the following ways : hiring additional personnel, particularly in marketing and sales ;expanding our domestic and international selling and marketing activities ; increasing our research and development activities to upgrade and extend our serviceofferings and to develop new services and technologies ; expanding the number of locations around the world where we conduct business ; adding to ourinfrastructure to support our growth ; and expanding our operational and financial systems to manage a growing business .

We expect marketing and sales costs, which were 66 percent of our fiscal 2003 total revenues, 57 percent of our fiscal 2004 total revenues and 59 percent of ourtotal revenues for the three months ended April 30, 2004, to continue to represent a substantial portion of total revenues in the future as we seek to add andmanage more paying subscribers, build brand awareness and increase the number of marketing events that we sponsor .

Fiscal Year

Our fiscal year ends on January 31 . References to fiscal 2004, for example, refer to the fiscal year ended January 31, 2004 .

Sources of Revenues

We derive our revenues from two sources : (1) subscription revenues, which are comprised of subscription fees from customers accessing our on-demandapplication service, and from customers purchasing additional support beyond the standard support that is included in the basic subscription fee ; and (2) relatedprofessional

25

Table of Content sservices and other revenues, consisting primarily of training fees . Subscription and support revenues accounted for more than 90 percent of our total revenues infiscal 2002 and 2003, and 89 percent of our total revenues during fiscal 2004 and the three months ended April 30, 2004 . Subscription revenues are drivenprimarily by the number of paying subscribers of our service and the subscription price of our service . None of our customers accounted for more than 5 percentof our revenues in any fiscal year .

Subscription and support revenues are recognized on a monthly basis over the life of the contract. The typical subscription and support term is 12 to 24 months,although terms range from one to 60 months . Our subscription and support contracts are noncancelable, though customers typically have the right to terminatetheir contracts for cause if we fail to perform. We generally invoice our customers in annual or quarterly installments and typical payment terms provide that ourcustomers pay us within 30 days of invoice. Amounts that have been invoiced are recorded in accounts receivable and in deferred revenue, or in revenuedepending on whether the revenue recognition criteria have been met. In general, we collect our billings in advance of the subscription service period .

We market our on-demand application service primarily through direct sales efforts and also indirectly through partners . We offer our customers three principaleditions of our on-demand application service :

Enterprise Edition, which is our most fully-featured offering and which is targeted at large companies that have several different divisions ordepartments ;

Professional Edition, which is targeted at medium-sized and large businesses that need a robust CRM solution but do not need some of the moreadvanced features and integration capabilities of Enterprise Edition ; an d

Team Edition, which is targeted primarily at small businesses that seek a robust sales force automation solution without the more sophisticatedfeatures of our other editions .

Professional services and other revenues consist of fees associated with consulting and implementation services and training . Our consulting and implementationengagements are typically billed on a time and materials basis . We also offer a number of classes on implementing, using and administering our service that arebilled on a per person, per class basis . Our typical payment terms provide that our customers pay us within 30 days of invoice .

Cost of Revenues and Operating Expense s

Cost of Revenues . Cost of subscription and support revenues primarily consists of expenses related to hosting our service and providing support, depreciationexpense associated with computer equipment, costs associated with website development activities, allocated overhead and amortization expense associated withcapitalized software. To date, the expense associated with capitalized software has not been material to our cost of revenues . We allocate overhead such as rentand occupancy charges, employee benefit costs and depreciation expense to all departments based on headcount . As such, general overhead expenses arereflected in each cost of revenue and operating expense category . Cost of professional services and other revenues consists primarily of employee-related costsassociated with these services and allocated overhead . The cost associated with providing professional services is significantly higher as a percentage of revenuethan for our on-demand subscription service due to the labor costs associated with providing consulting services .

To the extent that our customer base grows, we intend to continue to invest additional resources in our on-demand application service and in our consultingservices . The timing of these additional expenses could affect our cost of revenues, both in terms of absolute dollars and as a percentage of revenues, in aparticular quarterly period . For example, we plan to increase the number of employees who are fully dedicated to consulting services . We also plan to enter intoan agreement with a third-party Web hosting provider during fiscal 2005 that will provide additional disaster recovery services in the event our primary datacenter becomes unavailable . We currently expect the annual cost of these services to be less than $2 .0 million .

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Table of ContentsResearch and Development . Research and development expenses consist primarily of salaries and related expenses, and allocated overhead . We havehistorically focused our research and development efforts on increasing the functionality and enhancing the ease of use of our on-demand application service .Because of our proprietary, scalable and secure multi-tenant architecture, we are able to provide all of our customers with a service based on a single version ofour application . As a result, we do not have to maintain multiple versions, which enables us to have relatively low research and development expenses ascompared to traditional enterprise software business models . We expect that in the future, research and development expenses will increase in absolute dollars aswe upgrade and extend our service offerings and develop new technologies .

Marketing and Sales . Marketing and sales expenses are our largest cost, accounting for 66 percent of our fiscal 2003 total revenues, 57 percent of our fiscal2004 total revenues and 59 percent of our total revenues for the three months ended April 30, 2004. Marketing and sales expenses consist primarily of salariesand related expenses for our sales and marketing staff, including commissions, payments to partners, marketing programs, which include advertising, events,corporate communications, and other brand building and product marketing expenses, and allocated overhead . As a result of the initial launch of our applicationservice in February 2000, marketing costs, particularly advertising, accounted for 62 percent of fiscal 2001 and 47 percent of fiscal 2002 total marketing andsales expenses . Since the beginning of fiscal 2003, our sales costs as a percentage of total marketing and sales expenses have increased as a result of loweradvertising expenditures .

As our revenues increase, we plan to continue to invest heavily in marketing and sales by increasing the number of direct sales personnel in order to add newcustomers and increase penetration within our existing customer base, expanding our domestic and international selling and marketing activities, building brandawareness and sponsoring additional marketing events . We expect that in the future, marketing and sales expenses will increase in absolute dollars and continue

to be our largest cost .

General and Administrative . General and administrative expenses consist of salaries and related expenses for executive, finance and accounting, andmanagement information systems personnel, professional fees, other corporate expenses and allocated overhead . We expect that in the future, general andadministrative expenses will increase in absolute dollars as we add personnel and incur additional professional fees and insurance costs related to the growth ofour business and to our operations as a public company .

We expect that general and administrative expenses associated with executive compensation will increase in the future . In February 2004, we added a Presidentof Technology, Marketing and Systems, Patricia Sueltz, to our executive team, and we may add other executives if our business continues to grow . Her annualbase salary is $400,000 and she is eligible to receive a quarterly bonus of up to $50,000, based upon achievement of a mix of company and individua lperformance objectives . During the first twelve months of her employment, her bonus is guaranteed . In addition, we have paid our Chief Executive Officer onedollar per year in annual compensation, rising to ten dollars in fiscal 2005 . At this time, it is not probable that there will be any increase in his compensation .However, if his compensation increases in the future or he leaves our employ and we need to recruit a new Chief Executive Officer, our executive compensationexpenses will increase .

Lease Abandonment and Recovery. In December 2001, we abandoned excess office space in San Francisco, California and recorded a $7 .7 million charge inthe fourth quarter of fiscal 2002 pertaining to the estimated future obligations under the non-cancelable lease . In August 2003, we entered into an agreementreleasing us from future obligations for some of the abandoned space in connection with the landlord's lease of this space to another tenant . Accordingly, werecorded a $4 .3 million credit in the third quarter of fiscal 2004 to reflect the reversal of the remaining accrued liability that was directly associated with thisspace . During the fourth quarter of fiscal 2004, we recorded an additional accrual of $900,000 related to the remaining 5,000 square feet of abandoned excessoffice space in San Francisco . This additional accrual resulted from a revision of our estimates of the timing and amount of projected subtenant income based ondifficulties in subleasing the remaining space .

27

Table of Content sStock-Based Expenses . Our cost of revenues and operating expenses include stock-based expenses related to options and warrants issued to non-employeesand option grants to employees in situations where the exercise price was less than the deemed fair value of our common stock at the date of grant . These chargeshave been significant and are reflected in the historical financial results .

Joint Venture

In December 2000, we established a Japanese joint venture, Kabushiki Kaisha salesforce.com, with SunBridge, Inc., a Japanese corporation, to assist us with oursales efforts in Japan . As of April 30, 2004, we owned a 64 percent interest in the joint venture. Because of this majority interest, we consolidate the venture'sfinancial results, which are reflected in each revenue, cost of revenues and expense category in our consolidated statement of operations . We then record minorityinterest, which reflects the minority investors' interest in the venture's results . Through April 30, 2004, the operating performance and liquidity requirements ofthe Japanese joint venture had not been significant. While we plan to expand our selling and marketing activities in Japan in order to add new customers, webelieve the future operating performance and liquidity requirements of the Japanese joint venture will not be significant .

Critical Accounting Policies

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States . The preparation of theseconsolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs andexpenses, and related disclosures . On an ongoing basis, we evaluate our estimates and assumptions . Our actual results may differ from these estimates underdifferent assumptions or conditions .

We believe that of our significant accounting policies, which are described in note 1 of the notes to our consolidated financial statements, the followingaccounting policies involve a greater degree of judgment and complexity . Accordingly, these are the policies we believe are the most critical to aid in fullyunderstanding and evaluating our consolidated financial condition and results of operations .

Revenue Recognition. We recognize revenue in accordance with SEC Staff Accounting Bulletin No . 101, "Revenue Recognition in Financial Statements," asamended by Staff Accounting Bulletin No . 104, "Revenue Recognition ." On August 1, 2003, we adopted Emerging Issues Task Force, or EITF, Issue No . 00-21,"Revenue Arrangements with Multiple Deliverables . "

We recognize revenue when all of the following conditions are satisfied : (1) there is persuasive evidence of an arrangement ; (2) the service has been provided tothe customer; (3) the collection of our fees is probable ; and (4) the amount of fees to be paid by the customer is fixed or determinable .

We recognize revenues from subscription contracts each month over the lives of the contracts . Support revenues from customers who purchase our premiumsupport offerings are recognized ratably over the term of the support contract. Consulting services and training revenues are accounted for separately fromsubscription and support revenues because these services have value to the customer on a standalone basis and there is objective and reliable evidence of theirfair value of the undelivered elements . Our arrangements do not contain general rights of return . Consulting revenues are recognized upon completion of thecontracts that are of short duration (generally less than 60 days) and as the services are rendered for contracts of longer duration . Training revenues arerecognized after the services are performed .

28

Table of ContentsAccounting for Deferred Commissions. We defer commission payments to our direct sales force . The commissions ar e deferred and amor ti zed to sales expenseover the noncancelable terms of the related subsc ri ption contracts with our customers , which are typically 12 to 24 months . The commission payments, which arepaid in full the month after the customer's service commences , are a direct and incremental cost of the revenue arrangements . The deferred commission amountsare recoverable through the future revenue s treams under the noncancelable customer contracts . We believe this is the preferable method of accounting as thecommission charges are so closely related to the revenue from the noncancelable customer con tr acts that they should be recorded as an asset and charged toexpense over the same period that the subscrip tion revenue is recognized .

Fiscal years 2002, 2003 and 2004 and the three months ended April 30, 2004, have been prepared using the same basis of accounting for sales commissions .During fiscal 2002, we deferred $870,000 of commission expenditures and we amortized $241,000 to sales expense . During fiscal 2003, we deferred $5 .7 millionof commission expenditures and we amortized $2 .9 million to sales expense. During fiscal 2004, we deferred $16 .3 million of commission expenditures and weamortized $8 .6 million to sales expense . During the three months ended April 30, 2004, we deferred $2 .3 million of commission expenditures and we amortized$3 .6 million to sales expense . Deferred commissions on our consolidated balance sheet totaled $11 .2 million at January 31, 2004 and $9 .9 million at April 30,2004 .

Accounting for Stock-Based Awards. We record deferred stock-based compensation charges in the amount by which the exercise price of an option is lessthan the deemed fair value of our common stock at the date of grant . Because there has been no public m ar ket for our stock, our board of directors hasdetermined the fair value of our common stock based upon several factors , including , but not limited to, our operating and financial performance , private sales ofour common and prefe rred stock between third part ies , issuances of convertible preferred stock and appraisals performed by an appraisal firm. We amo rtize thedeferred compensation ch ar ges ratably over the four-year ves ti ng period of the underlying option aw ards. As of January 31 , 2004, we had an aggregate of $8 .3million of deferred stock-based compensation remaining to be amor ti zed . We currently expect this deferred stock-based compensation balance to be amortizedas follows : $ 3 .2 million during fiscal 2005 ; $2.9 million duri ng fiscal 2006 ; $ 1 .9 million during fiscal 2007 ; and $300,000 du ri ng fiscal 2008 . We have electednot to record stock-based compensati on expense when employee stock options are awarded at exercise prices equal to the deemed fair value of our commonstock at the date of grant. The impact of expensing employee stock awards using the Black-Scholes option- p ri cing model is further described in note 1 of thenotes to our consolidated financial statements .

In the past, we have awarded a limited number of stock options and warrants to non-employees . For these options and warrants, we recognize the stock-basedcompensation expense over the vesting periods of the underlying awards, based on an estimate of their fair value on the vesting dates using the Black-Scholesoption-pricing model . As of April 30, 2004, we had recognized compensation expense on all options and warrants issued to non-employees except for optionsfor 55,000 shares of our common stock, substantially all of which will fully vest by July 2007 and which have a weighted average exercise price of $2 .50 pershare .

29

Tale of Contentssalesforce .com, inc.

Consolidated Balance Sheet s(in thousands, except share and per share data)

As of January 31,

2003 2004

(unaudited )

AssetsCurrent assets :

Cash and cash equivalents $ 8,709 $ 10,463 $ 5,560Short-term marketable securities 7,300 25,349 38,17 3Accounts receivable 9,581 26,536 24,490Deferred commissions 3,045 8,266 7,78 2Prepaid expenses and other current assets 1,332 3,532 4,687

Total current assets 29,967 74,146 80,69 2

Restricted cash 3,733 3,912 3,91 8Fixed assets, net 4,988 5,069 4,54 8Deferred commissions, noncurrent 390 2,890 2,12 9Other assets 595 1,494 1,69 0

Total assets $ 39,673 $ 87,511 $ 92,97 7

Liabilities, convertible preferred stock , and stockholders' (deficit ) equityCurrent liabilities:Accounts payable $ 606 $ 2,03 5Accrued expenses and other current liabilities 8,487 17,68 2Income taxes payable - 53 4Deferred revenue 19,171 49,67 7Current portion of capital lease obligations 531 7 8

Total current liabilities 28,795 70,00 6

Capital lease obligations, net of current portion 78 -Long-term lease abandonment liability and other 5,128 1,83 0Minority interest 410 77 5

Total liabilities 34,411 72,61 1

Commitments and contingencies (Note 7)

Convertible preferred stock, $0 .001 par value; 63,738,843 shares authorized, 58,024,345shares issued and outstanding at January 31, 2003 and 2004 and April 30, 2004, and zero proforma (aggregate liquidation preference of $64,376,033 at January 31 ; 2003 and 2004 andApril 30, 2004) (Note S)

Stockholders ' (deficit) equity :Common stock , $0 .001 par value ; 200,000,000 shares authorized, 30,480,962, 31,530,626 and33,232,535 issued and outstanding at January 31, 2003 and 2004 and April 30, 2004 and

61,137 61,137

Pro FormaAs of as of

April 30, April 30,2004 2004

$ 1,78218,648

56052,340

20

73,35 0

1,75479 2

75,89 6

61,137 $ -

32 33 9 135,580 36 ,624 97,70 3(8,251) (7,526) (7,526 )(1,674) (1,698) ( 1,698 )

10 8 8(71,934) (71,497) (71,497 )

(46,237 ) (44,056) $ 17,08 1

91,256, 880 pro forma, respectively 29Additional paid-in capital 30,700Deferred stock-bas ed compensation (9,588)Notes receivables from stockholders (1,574)Accumulated other comprehensive income 6Accumulated deficit (75,448)

Total stockholders' (deficit) equity (55,875 )

Total liabilities, convertible preferred stock and stockholders' deficit $ 39,673 $ 87,511 $ 92,97 7

See accompanying notes.

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Table of Contentssalesforce.com, inc .

Consolidated Statements of Operations(in thousands, except per share data)

Three Months Ended

Fiscal Year Ended January 31, April 30,

2002 2003 2004 2003 2004

Revenues:Subscription and supportProfessional services and other

Total revenues

Cost of revenues (1) :Subscription and supportProfessional services and other

Total cost of revenues

Gross profi t

Operating expenses (1) :Research and developmentMarketing and salesGeneral and administrativeLease abandonment (recovery)

Total operating expenses(Loss) income from operations

Interest incomeInterest expenseOther income

(Loss) income before provision for income taxes and minority interestProvision for income taxe s

(Loss) income before minority interest

Minority interest in consolidated joint venture

Net (loss) income

Net (loss) income per share :Basi cDiluted

Weighted-average number of shares used in per share amounts :Basi cDiluted

(1) Amounts include stock-based expenses, as follows :Cost of revenue sResearch and developmentMarketing and salesGeneral and administrative

Total stock-based expenses

(unaudited )

$ 21,513 $ 47,656 $85,796 $16,922 $ 31,11 6896 3,335 10,227 1,991 3,72 3

22,409 50,991 96,023 18,913 34,83 9

3,718 7,199 7,782 1,597 2,28 22,329 3,164 9,491 1,758 4,08 1

6,047 10,363 17,273 3,355 6,36 3

16,362 40,628 78,750 15,558 28,476

5,308 4,648 6,962 1,240 2,12724,605 33,522 54,600 10,656 20,41 5

8,317 12,958 16,915 3,645 5,5737,657 - (3,445) - -

45,887 51,128 75,032 15,541 28,11 5(29,525) (10,500) 3,718 17 36 1

755 471 379 78 144(272) (77) (22) (9) (1 )

8 98 164 315 20

(29,034) (10,008) 4,239 401 524- - 541 49 70

(29,034) (10,008) 3,698 352 454

425 292 (184) 16 (17 )

$ (28,609) $ (9,716) $ 3,514 $ 368 $ 437

$ (1 .36) $ (0 .37) $ 0.12 $ 0 .01 $ 0.0 1(1 .36) (0 .37) 0.04 0 .00 0.0 0

21,039 26,375 29,605 28,660 31,68 821,039 26,375 95,409 91,618 100,39 8

$ 369 $ 428 $ 655 $ 160 $ 170436 402 462 120 89

1,422 1,696 2,029 514 41 42,224 2,241 1,213 290 204

$ 4,451 $ 4,767 $ 4,359 $ 1,084 $ 877

See accompanying notes.

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Consolidated Statements of Convertible Preferred Stock and Stockholders ' Deficit(in thousands, except share and per share data )

ConvertiblePreferred Stock Common Stock Notes Accumulated

Additional Deferred Receivables Other Total Tota lPaid-in Stock-Based from Comprehensivalccumulated ComprehensiveStockholders'

Shares Amount Shares Amount Capital CompensationStockholders Loss Deficit Loss Deficit

Balances at January 31, 2001 57,275,943 $59,852 28,732,096 $ 29 $ 17,002 $ (7,682) $ (1,506) $ (49) $ (37,123) $ (37,172) $ (29,329)

Deferred compensation related to th eissuance of Company and subsidiarystock options - - - - (132) 144 - - 1 2

Amortization of Company andsubsidiary deferred stock-base dcompensation - - - - - 2,608 - - - - 2,608

Exercise of stock options - - 495,974 - 254 - - - - - 254

Accrued interest on stockholder notesreceivable - - - - - - (88) - (88 )

Repurchase of unvested shares - - (2,008,348) (2) (225) - - - - - (227)Fair value of stock options issued tononemployees for services - - - - 292 - - - - - 29 2

Accelerated vesting of employee stockoptions - - - - 1,298 - - - - - 1,29 8

Issuance of Series D preferred stock an dcommon stock, net of issuance costs of$15 748,402 1,285 2,000,000 2 1,630 - - - - -' 1,63 2Beneficial conversion feature on Serie sD preferred stock - (70) - - 70 - - - - - 70

Deemed dividend relating to beneficialconversion feature on Series D preferredstock - 70 - - (70) - - - - - (70)

Issuance of common stock to employeefor services - 35,100 - 130 - - - 13 0

Sale of subsidiary common stock - - - - 838 - - - - - 83 8

Translation adjustment - - - (159) - (159) (159)

Net loss - - - - - - - - (28,609) (28,609) (28,609)

Comprehensive loss, year ended January31 2002 - - - - - - - - - (28,768) -

Balances at January 31,2002 58,024,345 61,137 29,254,822 29 21,087 (4,930) (1,594) (208) (65,732) (65,940) (51,348)

Deferred compensation related to theissuance of Company and subsidiar ystock options - - - - 7,589 (7,793) - - - - (204 )

Amortization of Company andsubsidiary deferred stock-base dcompensation - - - - - 3,135 - - - - 3,135

Exercise of stock options - - 547,560 1 416 - - - - - 41 7

Stock options early exercised subject t orepurchase - - 1,132,562 - - - - - - - -Repurchase of unvested shares - - (646,982) (1) (341) - - - - - (342 )

Fair value of stock options issued tononemployees for services - - - - 310 - - - - - 310

Accelerated vesting of employee stoc koptions - - - - 178 - - - - - 178

Cancellation of stockholder notes

receivable for unvested common stockoptions - - - (87,500) - - - 109 - - - 109

Accrued interest on stockholder note sreceivable - (89) - - - (89)Issuance of common stock and warrant sto purchase common stock for services - - 280,500 - 1,106 - - - - - 1,10 6Sale of subsidiary common stock - - - - 355 - - - - - 35 5Translation adjustment - - - - - - - 214 - 214 21 4Net loss - - - - - - - - (9,716) (9,716) (9,716)

Comprehensive loss, year ended January31, 2003 - - - - - - - - - (9,502) -

Balances at January 31, 2003 58,024,345 61,137 30,480,962 29 30,700 (9,588) (1,574) 6 (75,448) (75,442) (55,875 )

See accompanying notes .

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Table of Contentssalesforce.com, inc.

Notes to Consolidated Financial Statements-(Continued)

Accounting for Stock-Based Compensation

The Company accounts for compensation expense for its stock-based employee compensation plan using the intrinsic value method prescribed in AccountingPrinciples Board Opinion ("APB") No . 25, Accounting for Stock Issued to Employees ("APB 25"), and complies with the disclosure provisions of SFAS No. 123,

Accounting for Stock-Based Compensation ("SFAS 123"), and SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure ("SFAS

148") . Under APB 25, compensation expense of fixed stock options is based on the difference, if any, on the date of the grant between the deemed fair value ofthe Company's stock and the exercise price of the option. Compensation expense is recognized on a straight-line basis over the option-vesting period of fouryears . The Company accounts for stock issued to nonemployees in accordance with the provisions of SFAS 123 and EITF Issue No . 96-18, Accounting for

Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services ("EITF 96-18") .

Pro forma information regarding the results of operations is determined as if the Company had accounted for its employee stock options using the fair-valuemethod . The fair value of each option grant is estimated on the date of grant using the Black-Scholes method with the following assumptions :

Fiscal Year EndedJanuary 31,

Three Months Ended

April 30,

2002 2003 2004 2003 2004

(unaudited)Volatility 100% 100% 100% 100% 100%Weighted-average estimated life 4 years 4 years 4 years 4 years 4 yearsWeighted-average risk-free interest rate 3 .81% 1 .67% 2.92% 2.29% 2.86%Dividend yield - - - - -

Had compensation cost for the Company's stock-based compensation plans been determined using the fair-value method at the grant date for awards underthose plans calculated using the Black-Scholes pricing model, the Company's net loss would have been increased to the pro forma amounts indicated below (inthousands, except per share data) :

Fiscal Year Ended Three Months Ended

January 31, April 30,

Net (loss) income, as reportedAdd : Total stock-based employee compensation expense included in thedetermination of net (loss) incom eDeduct: Total stock-based employee compensation expense determinedunder fair-value-based method for all award s

Net loss, pro forma

Net (loss) income, per share :Basic :As reportedPro formaDiluted :As reportedPro forma

2002 2003 2004 2003 2004

(unaudited)$(28,609) $ (9,716) $ 3,514 $ 368 $ 43 7

2,608 3,135 3,765 994 822

(4,025) (4,805) (7,884) (1,520) (2,847)

$(30,026) $(11,386) $ (605)

$ (1.36) $ (0.37) $ 0.12(1.43) (0.43) (0.02)

$ (1.36) $ (0.37) $ 0.04(1.43) (0.43) (0.02)

F-12

$ (158) $(1,588)

$ 0.01 $ 0.01$ (0.01) (0.05)

$ 0.00 $ 0.00(0.01) (0.05)

Table of Contentssalesforce . com, inc .

Notes to Consolidated Financial Statements -(Continued)

For the pro forma calculation, the per share weighted-average fair value of options granted are as follows :

Fiscal Year EndedJanuary 31,

Three Months Ended

April 30 ,

2002 2003 2004 2003 2004

(unaudited )Weighted-average fair value :Options granted below fair value $1 .21 $1.65 $ 2.69 $ 2.03 $ -Options granted above fair value 1 .31 -Options equal to fair value - - 3.65 1.73 5.6 0

Weighted-average exercise price:Options granted at or below fair value $ 0.51 $1.10 $ 3.74 $1 .22 $ 3.2 2Options granted above fair value 2.00 -

-

Net (Loss) Income Per Share

Basic net (loss) income per share is computed by dividing net (loss) income by weighted-average number of common shares outstanding for the fiscal period .Diluted net (loss) income per share is computed giving effect to all potential dilutive common stock, including options, warrants and convertible preferred stock .

A reconciliation of the numerator and denominator used in the calculation of basic and diluted net (loss) income per share is as follows (in thousands) :

Three Months Ended

Fiscal Year Ended January 31, April 30 ,

Numerator :Net (loss) income

Denominator:Weighted-average shares outstanding for basic (loss) earnings per share, netof weighted-average shares of common stock subject to repurchaseEffect of dilutive securities :Employee stock options and warrantsConvertible preferred stock

Adjusted weighted-average shares outstanding and assumed conversions fordiluted earnings per share

2002 2003 2004 2003 2004

$ (28,609) $ (9,716) $ 3,514

21,039 26,375 29,605

- 7,780- - 58,024

21,039 26,375 95,409

(unaudited)

$ 368 $ 437

28,660 31,688

4,934 10,68658,024 58,024

91,618 100,39 8

Outstanding unvested common stock purchased by employees is subject to repurchase by the Company and therefore is not included in the calculation of theweighted-average shares outstanding for basic (loss) earnings per share .

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Table of Contentssalesforce .com, inc.

Notes to Consolidated Financial Statements-(Continued )

Purchase Plan and the 2004 Outside Directors Stock Plan . These plans were approved by the Company's stockholders in February 2004 . The 2004 EmployeeStock Purchase Plan will not be implemented unless and until the Company's board of directors authorizes the commencement of one or more offerings underthis plan. The 2004 Employee Stock Purchase Plan will be available to all eligible employees, who will be able to individually purchase a maximum of 1,500shares annually at a price equal to 85 percent of the lower of the fair market value at the start date of the offering or fair market value on the semi-annualpurchase dates . The Company will initially reserve for issuance 1,000,000 shares of common stock . No offering periods have been authorized to date under the2004 Employee Stock Purchase Plan by the Company's board of directors . The 2004 Equity Incentive Plan will be the successor equity incentive program to the1999 Stock Option Plan and will increase the shares reserved for issuance by 4,000,000 shares . For the 2004 Outside Directors Stock Plan, the Company willreserve for issuance 1,000,000 shares of common stock . The 2004 Employee Stock Purchase Plan and 2004 Equity Incentive Plan have provisions for annualautomatic increases to the shares reserved for issuance based on a specific percentage of the total number of shares outstanding at each year-end .

7. Commitments and Contingencies

Letter of Credit

In fiscal year 2001, the Company established a $3,500,000 letter of credit in favor of its principal landlord . This letter of credit is collateralized by a certificate ofdeposit maintained at the granting financial institution . As of April 30, 2004, the letter of credit was outstanding ; however, no amounts had been drawn against it.The letter of credit renews annually through December 31, 2010 .

In addition, the Company had two letters of credit outstanding as of April 30, 2004, both of which were collateralized by certificates of deposit maintained at thegranting financial institution . Both letters of credit have renewal provisions and expire at various dates through June 2006 .

Lease s

The Company leases office space and equipment under noncancelable operating and capital leases with various expiration dates through 201 1

The Company has entered into various capital lease arrangements to obtain equipment for its operations . These agreements are typically for three years, withinterest rates ranging from 7 percent to 8 percent per year . The leases are secured by the underlying equipment .

The Company is a lessee to certain leased equipment acquired under a capital lease . In June 2002, the Company amended an existing capital lease agreement.The amended lease met the requirements for classification as an operating lease . As a result of this amendment, the Company reduced its capital lease liability by$569,000 in fiscal year 2003 .

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Table of Contentssalesforce.com, inc .

Notes to Consolidated Financial Statements-(Continued)

Future minimum lease payments under noncancelable operating and capital leases areas are as follows :

Fiscal Year Ended January 31 :2005

2006200720082009Thereafter

Total minimum lease payments

Less: amount representing interest

Present value of capital lease obligations-current portion

Capital OperatingLeases Lease s

$80,000 $ 8,192,000- 7,278,000- 4,892,000- 4,143,000- 4,200,000- 10,010,000

80,000 $ 38,715,000

(2,000)

$78,000

The terms of the lease agreements provide for rental payments on a graduated basis . The Company recognizes rent expense on the straight-line basis over thelease period and has accrued for rent expense incurred but not paid .

In fiscal year 2001, the Company issued a warrant to purchase 48,857 shares of Series C preferred stock to a leasing company in consideration for a capital lease .The fair value of the warrant of $73,000 was recorded as a discount to the capital lease obligation and is being amortized to interest expense over the lease term(see Note 5) . The effective interest rate on the capital lease when considering the value of the warrants issued is approximately 10.9 percent.

Rent expense for the years ended January 31, 2002, 2003 and 2004 and the three months ended April 30, 2004 was $3,962,000, $3,708,000, $4,686,000 and$1,485,000, respectively . Sublease income for the years ended January 31, 2002, 2003 and 2004 and the three months ended April 30, 2004, was $181,000, zero,zero and zero, respectively .

In December 2001, the Company abandoned 19,500 square feet of excess office space in San Francisco and recorded a lease abandonment charge of $7,657,000 .This amount consisted of the future rent obligations under the operating leases of $11,368,000, offset by projected subtenant income of $3,711,000 . Theoperating leases with the landlords expire on different dates through April 2011 .

Of the total space abandoned, the Company subleased 7,500 square feet through the remaining term of its operating lease at the original sublease assumptions .Additionally, in August 2003, the Company executed a Third Amendment to Office Lease with its landlord . This agreement modified the original lease such thatthe total leased space under the amended agreement excluded 7,200 square feet of the space that was abandoned . As a result of this amendment, the Companyrecorded a reduction in its lease liability of $4,342,000 during the third quarter of fiscal 2004 .

At January 31, 2004, approximately 5,000 square feet of the 19,500 square feet of office space abandoned in December 2001 remained available for sublease .The operating lease for this remaining space expires in April 2011 . Due to the difficulty in securing subtenants to occupy the remaining 5,000 square feet ofavailable office space, the Company lowered its subtenant income assumptions and recorded an additional $897,000 lease abandonment charge in its fourthquarter of fiscal 2004 operating results .

At January 31, 2004, the remaining liability associated with the abandoned office space was $1,971,000 and consisted of the future rental obligation offset by arevised estimate of projected subtenant income of $1,020,000 .

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Table of Contentssalesforce.com, inc .

Notes to Consolidated Financial Statements-(Continued)

The actual vacancy periods may differ from these estimates, and sublease income, if any, may not materialize . Accordingly, these estimates may be adjusted infuture periods . Of the remaining $1,971,000 liability at January 31, 2004, $477,000 was the current portion . Payments in future years, net of estimated subtenantincome, will be $240,000 in fiscal 2006, $228,000 in fiscal 2007, $238,000 in fiscal 2008, $243,000 in fiscal 2009, and $545,000 thereafter .

The following table sets forth the lease abandonment activities for each of the years ended January 31, 2002, 2003 and 2004 and the three months ended April 30,2004.

Liability balance at January 31, 2001AdditionsCharges utilized, net of subtenant income of $37,000

Liability balance at January 31, 2002Charges utilized, net of subtenant income of $219,000

Liability balance at January 31, 200 3AdditionsCharges utilized, net of subtenant income of $219,000Reversal s

Liability balance at January 31, 200 4Charges utilized, net of subtenant income of $36,000 (unaudited )

Liability bal ance at Apri l 30, 2004 ( unaudited)

$ -7,657,000(145,000 )

7,512,000(1,177,000)

6,335,00 0897,000

(919,000)(4,342,000)

1,971,000(149,000 )

$ 1,822,00 0

8. Employee Benefit Pla n

The Company has a 401(k) plan covering all eligible employees . The Company is not required to contribute to the plan and has made no contributions throughApril 30, 2004 .

9. Related-Party Transaction s

The Company paid its Chief Executive Officer one dollar in annual salary and no bonus during fiscal years 2002, 2003 and 2004 . His salary will increase to tendollars in fiscal year 2005 . At this time, it is not probable that there will be any increase in his compensation . If his compensation increases in the future, or heleaves the Company's employ and the Company needs to recruit a new Chief Executive Officer, the Company's executive compensation expenses will increase .

The Company subleases a portion of its San Francisco office facility to another party . One of the stockholders of the Company is also a majority shareholder ofthe sublease tenant. In October 2001, the sublease tenant paid the Company $110,000 for early termination of the sublease agreement with respect to a portion ofthe leased space .

In January 1999, the Foundation was chartered to build philanthropic programs that are particularly focused on youth and technology . The Company's chairmanis the chairman of the Foundation. He, one of the Company's executive officers and one of the Company's board members hold three of the Foundation's sevenboard seats . The Company is not the primary beneficiary of the Foundation's activities, and accordingly, the Company does not consolidate the Foundation'sstatement of activities with its financial results .

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Table of ContentsSIGNATURES

Pursuant to the requirements of the Securities Act, the registrant has duly caused this Amendment No . 8 to the Registration Statement to be signed on its behalfby the undersigned, thereunto duly authorized, in the City of San Francisco , State of Califo rnia, on the 22nd day of June 2004 .

salesforce .com,inc.

By: /S/ MARC BENIOFF*

Marc BenioffChairman and Chief Executive Officer

(Principal Executive Officer)

Pursuant to the requirements of the Securities Act, this Amendment No . 8 to the Registration Statement has been signed by the following persons in thecapacities and on the dates indicated :

Signature Title Date

/s/ MARC BENIOFF* Chairman of the Board of Directors and Chief Executive Officer June 22, 2004

Marc Benioff

/S/ STEVE CAKEBREAD*

Steve Cakebread

/s/ ALAN HASSENFELD *

Alan Hassenfeld

Is/ CRAIG RAMSEY*

Craig Ramsey

/s/ SANFORD R . ROBERTSON*

Sanford R. Robertson

/S/ STRATTON SCLAVOS *

Stratton Sclavos

/s/ LARRY TOMLINSON*

Larry Tomlinso n

lslMAGDALENA yESIL*

Magdalena Yesi l

*By: /S/ DAVID SCHELLHASE

David Schellhase , Attorney-in-FactJune 22, 2004

(Principal Executive Officer)

Chief Financial Officer (Principal Financial & AccountingOfficer )

Directo r

Directo r

Directo r

Directo r

Director

Director

June 22, 2004

June 22, 2004

June 22, 2004

June 22, 2004

June 22, 2004

June 22, 2004

June 22, 200 4

11-5

Exhibit B

10kW I ZAR D

FORM 8-KSALESFORCE COM INC - CRM

Filed : February 17, 2005 (period : February 17, 2005 )

Report of unscheduled material events or corporate changes . e.g acquisition bankruptcyresignation

Item 2 . 02 Results of Operations and Financial Condition

Item 9. 01 Financial Statements and Exhibits

intrExhibit Index

EX-99.1 (Exhibits not snecifically designated by another number and by investmentcompanies)

UNITED STATESSECURITIES AND EXCHANGE COMMISSION

Washington , D. C. 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

February 17, 2005Date of Report (date of earliest event reported)

SALESFORCE.COM, INC .(Exact name of Registrant as specified in charter)

Delaware 001-32224 94-3320693(State or other jurisdiction (Commission File Number) ( I. R . S. Employerof incorporation) Identification No.)

The Landmark @ One Market, Suite 300

San Francisco CA 94105(Address of principal executive offices )

Registrant' s telephone number , including area code : (415) 901-7000

N/A(Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the followingprovisions:

❑ Wri tten communica ti ons pursuant to Rule 425 under the Securi ties Act (17 CFR 230.425 )

❑ Soliciting material pursuant to Rule 14a- 12 under the Exchange Act (17 CFR 240 . 14a-12)

❑ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240 .14d-2(b) )

❑ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240 .13e-4(c))

Section 2 - Financial Informatio n

Item 2 .02 - Results of Operations and Financial Conditio n

On February 17, 2005, salesforce .com, inc . issued a press release announcing its results for the quarter ended January 31, 2005 . A copy of the press release isattached as Exhibit 99 .1 to this current report on Form 8-K and is incorporated by reference herein .

The press release attached to this current report on Form 8-K contains non-GAAP financial information . In addition to providing the regis trant's net income andearnings per diluted share financial measures on a GAAP basis for the periods discussed , the press release also provides non-GAAP net income and earnings perdiluted share figures . These non-GAAP financial measures are derived from the applicable GAAP figures by excluding a one-time , non-cash expense of$897,000 recorded by the regis trant in the fourth quarter of the prior fiscal year as a result of increasing its accrued liability associated with the remainingavailable office space that was abandoned in December 2001 . Management believes that by providing these non-GAAP financial measures investors will have amore complete understanding of salesforce .com's underlying operational results and trends in its performance .

The information in this current report on Form 8-K and the exhibits attached hereto shall not be deemed "filed" for purposes of Section 18 of the SecuritiesExchange Act of 1934, as amended (the "Exchange Act") or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference inany filing under the Securities Act of 1933, as amended, or the Exchange Act, regardless of any general incorporation language in such filing .

Section 9 - Financial Statements and Exhibits

Item 9.01 Financial Statements and Exhibit s

(c) Exhibits

99 .1 Press Release dated February 17, 2005

Signature

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended , the Registrant has duly caused this report to be signed on its behalf by theundersigned hereunto duly authori zed.

Dated: February 17, 2005 salesforce .com,inc .

/s/ David Schellhas e

David Schellhase, Senior Vice President andGeneral Counsel

Exhibit Index

Exhibit

Number Exhibit Titl e

99.1 Press Release dated February 17, 2005

Exhibit 99.1 A

FOR IMMEDIATE RELEASE

Salesforce.com Announces Record Fiscal Fourth Quarter Result s

• Q4 Revenue soars 82% to $54. 6 million year-over-yea r

• Q4 Paying Subscribers rise 32,000 to 227,000, up 79% year-over-year and up 16% sequentially

• Q4 Net Income rises to $3. 6 million, from a prior-year Q4 loss of $765,000

• Q4 Earnings per Share rise to $0.03, a significant increase from a loss of $0.02 in the prior year period

• Q4 Cash from Operations rises to $21 . 1 million, an increase of 244% compared to the prior year perio d

• Raising Fiscal 2006 revenue and earnings guidance range

Contacts :Joelle Fitzgerald

salesforce .comInvestor Relations

415-536-6250ifi tzeerald @ salesforce.com

Jane Hynessalesforce.com

Public Relations415-901-5079

i ho nes @ salesforce. com

SAN FRANCISCO, Calif. - February 17, 2005 - Salesforce .com (NYSE: CRM), the market and technology leader in on-demand customer relationshipmanagement, today announced results for its fiscal fourth quarter ended January 31, 2005 .

"The results indicate a breakout moment : salesforce .com has become the standard for delivering CRM on demand," said Marc Benioff, chairman and CEO ofsalesforce .com . "Gartner Group has predicted that salesforce.com will become the third largest provider of CRM by the end of 2005, surpassing Oracle andPeopleSoft combined . Customers ar e recognizing the benefits of on-demand success . The next stage of the on-demand revolution, which is the End of Software,is upon us . "

Salesforce .com delivered the following results for the fourth quarter of fiscal year 2005 :

Revenue : Total revenue was $54 .6 million, an increase of 82% on a year-over-year basis and an increase of 18% on a quarter-to-quarter basis .Subscription and support revenues were $49 .4 million, an increase of 84% on a year-over-year basis and an increase of 19% on a quarter-to-quarterbasis . Professional services and other revenues were $5 .2 million, an increase of 60% on a year-over-year basis and an increase of 7% on aquarter-to-quarter basis.

Customers and Paying Subscribers : During the fourth quarter, the company added approximately 1,400 customers and approximately 32,000 payingsubscribers . As of the end of the fiscal fourth quarter, the company had approximately 13,900 customers and approximately 227,000 paying subscribers .

Net Income : Net income was $3 .6 million, a significant improvement from a loss of $765,000 in the ye ar ago period, which included a one-time non-cash$897,000 charge in the year ago period. Fiscal fourth quarter 2005 net income grew 67% on a quarter-to-quarter basis .

Earnings per Share : Earnings per diluted share were $0 .03, a significant increase from a loss of $0 .02 in the year ago period, which included theone-time charge described above . Excluding the one-time charge in the fourth quarter of fiscal 2004, earnings per diluted share in the year ago periodwere approximately break-even .

Cash : Cash from operations for the fiscal fourth quarter was $21 .1 million, an increase of 244% compared to the prior year period .

Deferred Revenue: Deferred revenue for the fiscal fourth quarter was $95 .9 million, an increase of 93% on a year-over-ye ar basis and 29% on aquarter-to-quarter basis .

Salesforce.com is raising guidance for the fiscal year 2006, ending January 31, 2006 and initiating guidance for its fiscal first quarter 2006 based on informationas of February 17, 2005 :

FY06 Revenue : Expected to be in the range of approximately $282 million to approximately $287 million, up from prior guidance of approximately $275million to approximately $285 million .

FY06 Diluted EPS : Expected to be in the range of approximately $0 .11 to approximately $0 .13 based on an estimated average of 123 million dilutedshares and an estimated effective tax rate of 25% . This represents an increase from prior guidance of approximately $0 .10 to approximately $0 .12 .

The full year earnings per share guidance does not include the incremental impact of the recently issued Financial Accounting Standards Board (FASB) stockoption expense requirement that will become effective in salesforce .com's fiscal third quarter 2006 .

Salesforce .com is providing, for the first time, first quarter fiscal year 2006 guidance based on information as of February 17, 2005 :

Q1 FY06 Revenue : Expected to be in the range of approximately $58 million to approximately $60 million .

Q1 FY06 Diluted EPS : Expected to be in the range of approximately $0 .01 to approximately $0 .03 based on an estimated average of 119 million dilutedshares and an estimated effective tax rate of 25% .

Quarterly Conference Call

Salesforce . com will host a conference call to discuss fourth quarter results at 2 :00 p. m . Pacific Standard Time today. A live audio webcast of the conference calltogether with detailed financial informati on , can be accessed through the compan y's Investor Relations Web site at http :// www .salesforce .com/investor . Inadditi on , an archive of the webcast can be accessed through the same link . Participants who choose to call in to the conference call can do so by dialing (719)457-2630 or (800) 967-7141 . A replay will be available until midnight on February 19, 2005 and can be accessed by dialing , (719) 457- 0820 or (888)203-1112, passcode : 8244550.

About salesforce .co m

Salesforce .com is the market and technology leader in on-demand customer relationship management (CRM) . Through its award-winning salesforce .com familyof products including

Salesforce.com (httn ://www .salesforce .com) and Supportforce .com (gyp ://www .sunnortforce.coml , the company provides a comprehensive suite of CRM

applications to help enterprises of all sizes, industries and geographies meet the complex challenge of sharing and managing information on-demand .

Salesforce.com and Supportforce.com are built on the sforce client/service integration platform and include the Customforce .com tool for complete on-demandcustomization . Sforce (httn ://www .sforce.coml and Customforce.com (httn ://www .customforce.com allow customers and independent software vendors to

customize and integrate salesforce .com's products, as well as build their own on-demand enterprise applications . As of January 31, 2005, salesforce .commanages customer information for approximately 13,900 customers and approximately 227,000 paying subscribers including Advanced Micro Devices (AMD),America Online (AOL), Automatic Data Processing (ADP), Avis/Budget Rent A Car (Cendant Rental Car Group), Dow Jones Newswires, Nokia, Polycom andSunTrust Banks. Salesforce .com has headquarters in San Francisco, with offices in Europe and Asia, and trades on the New York Stock Exchange under theticker symbol "CRM" . For more information please visit httn ://www .salesforce .com, or call 1-800-NO-SOFTWARE .

###

Salesforce .com is a registered trademark of salesforce .com, inc ., San Francisco, California . Other names used may be trademarks of their respective owners .

"Safe harbor" statement under the Private Securities Litigation Reform Act of 1995 : This press release contains forward-looking statements about expectedrevenue and earnings for the first fiscal quarter of 2006 and the full fiscal year 2006, the growing acceptance of the company's on-demand business model andpossible future market share for salesforce .com in the CRM market, that involve risks, uncertainties and assumptions . If any such risks or uncertaintiesmaterialize or if any of the assumptions proves incorrect, our results could differ materially from the results expressed or implied by the forward-looking

statements we make .

The risks and uncertainties referred to above include - but are not limited to - risks associated with our new business model, our history of operating losses, thepossibility that we will not remain profitable, possible fluctuations in our operating results and rate of growth, errors, interruptions or delays in our service or ourWeb hosting, breach of our security measures, the immature market in which we operate, our relatively limited operating history, our ability to hire, retain andmotivate our employees and manage our growth, competition, our ability to continue to release new and improved versions of our service, successful customerdeployment and utilization of our services, our ability to sell to larger enterprise customers, changes in our effective tax rate, fluctuations, in the number of sharesoutstanding, and the negative financial statement impact of new accounting rules such as the requirement to expense stock options . Further information on theseand other factors that could affect our financial results is included in the reports on Form 10-Q and 8-K and in other filings we make with the Securities andExchange Commission from time to time, including factors in our report on Form I0-Q for the period ended October 31, 2004 filed with the SEC on November22, 2004. These documents are available on the SEC Filings section of the Investor Information section of our website at www .salesforce .com/investor.

Salesforce .com, inc . assumes no obligation and does not intend to update these forward-looking statements, except as required by law

salesforce .com, inc.Condensed Consolidated Statements of Operations(in thousands, except per share data )

Revenues :Subscription and supportProfessional services and other

Total revenue s

Cost of revenues (1) :Subscription and supportProfessional services and other

Total cost of revenues

Gross profi t

Operating expenses (1) :

Research and developmentMarketing and salesGeneral and administrativeLease abandonment (recovery)

Total operating expenses

Income (loss) from operations

Interest, netOther income

Income (loss) before provision for income taxes and minority interest

Provision for income taxe s

Income (loss) before minority interest

Minority interest in consolidated joint venture

Net income (loss)

Basic net income (loss) per share

Diluted net income (loss) per share

Shares used in computing basic net (loss) income per share

Shares used in computing diluted net income (loss) per share

(1) Amounts include stock-based expenses, as follows :

Cost of revenue sResearch and developmentMarketing and salesGeneral and administrative

Total stock-based expenses

Three Months Ended January 31, Year Ended January 31 ,

2005 2004 2005 2004

(unaudited) (audited)

$ 49,379 $ 26,802 $157,977 $85,79 65,215 3,251 18,398 10,227

54,594 30,053 176,375 96,023

4,200 2,223 12,727 7,78 25,804 3,199 20,727 9,49 1

10,004 5,422 33,454 17,27 3

44,590 24,631 142,921 78,75 0

3,159 2,157 9,822 6,96228,431 17,142 96,311 54,600

9,779 5,179 30,268 16,91 5- 897 - (3,445)

41,369 25,375 136,401 75,03 2

3,221 (744) 6,520 3,71 8

1,155 119 2,621 357163 (43) 12 164

4,539 (668) 9,153 4,23 9

603 15 1,217 54 1

3,936 (683) 7,936 3,698

(350) (82) (590) (184)

$ 3,586 $ (765) $ 7,346 $ 3,51 4

$ 0.03 $ (0 .02) $ 0.10 $ 0.1 2

$ 0.03 $ (0 .02) $ 0.07 $ 0 .04

103,458 30,617 75,503 29,605

116,808 30,617 110,874 95,409

$ 105 $ 165 $ 634 $ 65536 109 282 46288 465 1,296 2,029

217 483 1,402 1,21 3

$ 446 $ 1,222 $ 3,614 $ 4,359

salesforce. com, inc .Condensed Consolidated Statements of Operations

As a percentage of total revenues :(Unaudited)

Three Months Ended January 31, Year Ended January 31 ,

2005 2004 2005 200 4

Revenues :Subscription and support 90% 89% 90% 89%Professional services and other 10 11 10 1 1

Total revenues 100 100 100 100

Cost of revenues :Subscription and support 7 7 7 8Professional services and other 11 11 12 1 0

Total cost of revenues 18 18 19 1 8

Gross profit 82 82 81 82

Operating expenses :Research and development 6 7 5 7Marketing and sales 52 57 55 57General and administrative 18 17 17 1 8Lease abandonment (recovery) - 3 - (4)

Total operating expenses 76 84 77 78

Income (loss) from operations 6 (2) 4 4

Interest, net 2 - 1 1Other income - - - -

Income (loss) before provision for income taxes and minority interest 8 (2) 5 5

Provision for income taxes (1) - (1) (1 )

Income (loss) before minority interest 7 (2) 4 4

Minority interest in consolidated joint venture - (1) - -

Net income (loss) 7% (3)% 4% 4%

Stock-based expenses as a percentage of total revenues, as follows :Cost of revenues - % - % - % 1 %Research and development - - - IMarketing and sales - 2 1 2General and administrative 1 2 1 1

Total stock-based expenses 1 % 4% 2% 5%

salesforce.com, inc .Condensed Consolidated Balance Sheets(in thousands)(audited )

AssetsCurrent assets :Cash and cash equivalentsShort-term marketable securitiesAccounts receivableDeferred commissionsPrepaid expenses and other current assets

Total current assets

Marketable securities, noncurrentRestricted cashFixed assets, ne tDeferred commissions, noncurrentOther assets

Total assets

Liabilities , convertible preferred stock and stockholders ' equity ( deficit)Current liabilities :Accounts payableAccrued expenses and other current liabilitiesIncome taxes payableDeferred revenueCurrent portion of capital lease obligations

Total current liabilitie s

Capital lease obligations, net of current portionLong-term lease abandonment liability and otherMinority interest

Total liabilities

Convertible preferred stock

Stockholders' equity (deficit) :Common stockAdditional paid-in capitalDeferred stock-based compensationNotes receivables from stockholdersAccumulated other comprehensive income (loss)Accumulated deficit

Total stockholders' equity (deficit )

Total liabilities, convertible preferred stock and stockholders' equity (deficit)

January 31, January 31 ,2005 2004

$ 35,731 $ 10,46 383,087 25,34 948,874 26,53 67,556 8,26 63,467 3,53 2

178,715 74,14 6

87,120 -3,191 3,91 27,637 5,0692,057 2,8901,779 1,494

$ 280,499 $ 87,51 1

$ 2,525 $ 2,03532,467 17,68 2

216 53495,900 49,67 7

563 78

131,671 70,006

721 -1,596 1,83 01,380 77 5

135,368 72,611

- 61,137

105 3 2217,248 35,58 0

(5,908) (8,251 )(727) (1,674)(999) 1 0

(64,588) (71,934)

145,131 (46,237)

$ 280,499 $ 87,511

salesforce . com,inc .Condensed Consolidated Statements of Cash Flows(in thousands )

Operating activities:Net income (loss )Adjustments to reconcile net income (loss) to cash provided by operating activitiesMinority interestDepreciation and amortizationAmortization of deferred commissionsLease abandonment (recovery)Expenses related to stock-based awardsTax benefits from employee stock plansChanges in assets and liabilities

Net cash provided by operating activities

Investing activities :Restricted cashChanges in marketable securitiesCapital expenditures

Net cash used in investing activities

Financing activities :Proceeds from the issuance of common stock, net of issuance costsProceeds from the exercise of stock optionsCollection of notes receivable sPrincipal payments on capital lease obligationsRepurchase of unvested sharesProceeds from subsidiary stock offering s

Net cash provided by financing activities

Effect of exchange rate changes

Net increase in cash and cash equivalents

Cash and cash equivalents , beginning of period

Cash and cash equivalents, end of period

Three Months Ended January 31, Year Ended January 31 ,

2005 2004 2005 2004

(unaudited ) ( audited)

$ 3,586 $ (765) $ 7,346 $ 3,514

350 82 590 184920 635 3,147 2,59 1

3,875 3,116 15,598 8,599- 897 - (3,445)446 1,222 3,614 4,35 9798 - 798 -

11,153 959 24,779 5,97 9

21,128 6,146 55,872 21,781

(264) - 721 (179)(8,703) (1,399) (145,612) (18,049)(2,265) (1,385) (4,308) (2,916 )

(11,232) (2,784) (149,199) (21,144 )

- 113,7682,553 665 4,746 1,4801,043 1,043 -(139) (85) (493) (531 )- (1) (254) (17)- - 40 167

3,457 579 118,850 1,099

(378) (14) (255) 1 8

12,975 3,927 25,268 1,754

22,756 6,536 10,463 8,709

$ 35,731 $ 10,463 $ 35,731 $ 10,463''

salesforce .com, inc.Additional Metrics

Customer and subscriber data :Approximate number of customer sApproximate number of paying subscriptions (1)

Full Time Equivalent Headcount

Financial data:Cash, cash equivalents and marketable securitiesDeferred revenue

Revenues by geography :AmericasEuropeAsia Pacifi c

As a percentage of total revenues:

Revenues by geography :AmericasEuropeAsia Pacific

January 31 , October 31, July 31 , April 30, January 31, October 31 ,2005 2004 2004 2004 2004 2003

13,900 12,500 11,100 9,800 8,700 7,70 0227,000 195,000 168,000 147,000 127,000 107,00 0

767 679 594 518 444 41 2

$ 205,938 $ 185,014 $172,627(2) $ 43,733 $ 35,812 $ 30,48 6$ 95,900 $ 74,240 $ 61,557 $ 52,340 $ 49,677 $ 34,40 8

Three Months Ended January 31 , Year Ended January 31 ,

2005 2004 2005 2004

(unaudited ) (audited)

$ 42,879 $ 24,357 $140,871 $78,95 88,175 3,857 25,201 11,7543,540 1,839 10,303 5,31 1

$ 54,594 $ 30,053 $176,375 $96,023

79% 81% 80% 82%15 13 14 1 26 6 6 6

100110 100% 100% 100%

(1) Paying subscriptions are defined as unique user accounts, purchased by customers for use by their employees and other customer-authorized users thathave not been suspended for non-payment and for which we are recognizing subscription revenue .

The October 31, 2004 and July 31, 2004 paying subscription metrics excluded approximately 2,500 and 2,000, respectively, paying subscriptions who wereusing the Company's service, but for which the Company delayed revenue recognition until specific new technlogy was completed .

(2) Includes net proceeds of $113 .8 million from the Company's sale of common stock during its initial public offering in June 2004 .

salesforce . com, inc .GAAP / Non-GAAP Reconciliation(unaudited )

(in thousands , except per share data)

Three months ended January 31, Year ended January 31 ,

2005 2004 2005 2004

A reconciliation between operating expenses on a GAAP basis and non-GAAP operating expenses is a sfo ll ows:GAAP operating expenses $ 41,369 $Lease abandonment (recovery) -Non-GAAP operating expenses 41,36 9A reconciliation between income (loss) from operations on a C:AAP basis and non-GAAP income fromopera ti ons is as follows:GAAP income ( loss) from operations $ 3,221 $Lease abandonment (recovery) -Non-GAAP income from operations 3,22 1A reconciliation between income (loss) before provision for income taxes and minority interest andnon-GAAP income before provision for income taxes an d minority interest is as follows :

25,375 $136,401 $75,032897 - (3,445)

24,478 136,401 78,477

(744) $ 6,520 $ 3,718897 - (3,445)153 6,520 273

GAAP income (loss) before provision for income taxes and minority interest $ 4,539 $ (668)Lease abandonment (recovery) - 897Non-GAAP income before provision for income taxes and minority interest 4 ,539 229A reconciliation between provision for income taxes on a GAAP basis and non-GAAP provision fo rincome taxes is as follows :

$ 9,153 $ 4,239(3,445)

9,153 794

1,217

1,217

7,936

7,93 6

GAAP provision for income taxes $ 603 $ 15 $Income tax effect of lease abandonment (recovery) - 11 4Non-GAAP provision for income taxes 603 129A reconciliation between income (loss) before minority interest on aGAAP basis an d non-GAA Pincome be fore minori ty interest is as follows :GAAP income ( loss) before minority interest $ 3,936 $ (683) $Lease abandonment (recovery) - 89 7Income tax effect (114)Non-GAAP income before minority interest 3,936 100A reconciliation between net income (loss) on a GAAP basis and non-GAAP net income is as follows

$ 541(438)103

$ 3,698(3,445 )

43869 1

GAAP net income (loss) $ 3,586 $ (765) $ 7,346 $ 3,514Lease abandonment (recovery) - 897 - (3,445 )Income tax effect - (114) - 43 8Non-GAAP net income 3,586 18 7,346 507A reconciliation between basic net income (loss) per share on a GAAPbasis and non-GAAP basic ne tincome per share is as follows :GAAP basic net income (loss) per share $ 00347 $ (0.025) $ 0 .097 $ 0.11 9Lease abandonment (recovery) - 0.029 - (0.116 )Income tax effect - (0.004) - 0.01 5Non-GAAP basic net income per share $ 0.0347 $ 0.001 $ 0 .097 $ 0.01 7A reconciliation between diluted net income (loss) per share on a GAAP basis and non-GAAP dilutednet income per share is as follows :GAAP diluted net income (loss) per share $ 0.031 $ (0.025) $ 0 .066 $ 0.03 7Lease abandonment (recovery) - 0.029 - (0 .036)Income tax effect - (0 .004) - 0.005Non-GAAP diluted net income per share $ 0.031 $ 0 .001 $ 0 .066 $ 0 .005

To supplement our consolidated financial statements presented on a GAAP basis, salesforce .com uses non-GAAP measures of income from operations, netincome and earnings per diluted share, which are adjusted to exclude certain costs and income that we believe are appropriate to enhance the overallunderstanding of our past financial performance and also our prospects for the future . These adjustments to our GAAP results are made with the intent ofproviding both management and investors a more complete understanding of salesforce .com's underlying operational results and trends and our performance .

We believe the lease abandonment (recovery) items recorded in the third and fourth quarters of fiscal 2004 to be outside of our core operating results and thusappropriate to exclude from our financial results .

The presentation of additional information is not meant to be considered in isolation or as a substitute for net income or diluted net income per share prepared inaccordance with generally accepted accounting principles in the United States .

Created by IOKWizard Technology www.IOKWizard .coni

Exhibit C

10kW I ZAR DSEC POWER SEARC H

FORM 10- KSALESFORCE COM INC - CR M

Filed : March 25, 2005 (period : January 31, 2005)

Annual report which provides a comprehensive overview of the company for the past year

Table of Contents

UNITED STATESSECURITIES AND EXCHANGE COMMISSIO N

Washington , D.C. 20549

FORM 10-K

(Mark One)

0 Annual Report pursuant to Section 13 or 15( d) of the Securities Exchange Act of 1934

For the fiscal year ended January 31, 2005

O R

© Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number : 001-32224

salesforce.com, inc.(Exact name of registrant as specified in its charter)

Delaware 94-3320693(State or other jurisdiction of (IRS Employerincorporation or organization) Identification No .)

The Landmark @ One Market, Suite 300

San Francisco, California 94105(Address of principal executive offices)

Telephone Number (415) 901-700 0(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act :

Title of each class Name of each exchange on which registeredCommon Stock, par value $0.001 per share New York Stock Exchange, Inc .

Securities registered pursuant to section 12(g) of the Act :

Not applicable

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements forthe past 90 days : Yes No 11

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229 .405 of this chapter) is not contained herein, andwill not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form IO-K .

EM

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934) . Yes 0 No

Based on the closing price of the Registrant's common stock on the last business day of the Registrant's most recently completed second fiscal quarter, whichwas July 31, 2004, the aggregate market value of its shares (based on a closing price of $13 .01 per share) held by non-affiliates was approximately $918 .8million . Shares of the Registrant's common stock held by each executive officer and director and by each entity or person that owned 5 percent or more of theRegistrant's outstanding common stock were excluded in that such persons may be deemed to be affiliates . This determination of affiliate status is not necessarilya conclusive determination for other purposes .

As of February 28, 2005, there were approximately 105 .5 million shares of the Registrant's Common Stock outstanding .

of Content scommon stock, $0 .001 par value, effective on June 22, 2004 . The underwriters were Morgan Stanley & Co . Incorporated, Deutsche Bank Securities Inc .,UBS Securities LLC, Wachovia Capital Markets, LLC and William Blair & Company, L .L .C .

Our initial public offering commenced on June 23, 2004 . All 11,500,000 shares of common stock registered under the Registration Statement, whichincluded 1,500,000 shares of common stock covered by an over-allotment option granted to the underwriters, were sold to the public at a price of $11 .00

per share . All of the shares of common stock were sold by us and there were no selling shareholders in the offering . The offering did not terminate untilafter the sale of all of the securities registered by the Registration Statement .

The aggregate gross proceeds from the shares of common stock sold were $126 .5 million. The aggregate net proceeds to us were $113 .8 million afterdeducting $8 .8 million in underwriting discounts and commissions and $3 .9 million in other costs incurred in connection with the offering .

We have not spent any of the net proceeds from our public offering .

ITEM 6 . SELECTED FINANCIAL DATA

The following selected consolidated financial data should be read in conjunction with our audited consolidated financial statements and related notes thereto andwith Management's Discussion and Analysis of Financial Condition and Results of Operations, which are included elsewhere in this Form 10-K . Theconsolidated statement of operations data for the years ended January 31, 2005, 2004 and 2003, and the selected consolidated balance sheet data as of January 31,2005 and 2004 are derived from, and are qualified by reference to, the audited consolidated financial statements and are included in this Form 10-K . Theconsolidated statement of operations data for the years ended January 31, 2002 and 2001 and the consolidated balance sheet data as of January 31, 2003, 2002and 2001 are derived from audited consolidated financial statements which are not included in this Form 10-K .

18

Table of ContentsThe customer and subscriber data are unaudited .

Fiscal Year Ended January 31 ,

(in thousands, except per share and customer and subscriber data)Consolidated Statement of Operations :Revenues :Subscription and supportProfessional services and other

Total revenue sCost of revenues (1) :Subscription and supportProfessional services and other

Total cost of revenuesGross profi t

Operating expenses (1) :Research and developmentMarketing and salesGeneral and administrativeLease abandonment (recovery)

Total operating expensesIncome (loss) from operationsInterest incomeInterest expenseOther income

Income (loss) before provision for income taxes and minority interestProvision for income taxe s

Income (loss) before minority interestMinority interest in consolidated joint ventur e

Net income (loss)

Net income (loss) per share:BasicDilutedWeighted-average shares used in computing per share amounts :Basic (2)Diluted (2)

2005 2004 2003 2002 2001

$157,977 $ 85,796 $ 47,656 $ 21,513 $ 5,02218,398 10,227 3,335 896 41 3

176,375 96,023 50,991 22,409 5,435

12,727 7,782 7,199 3,718 1,73 0

20,727 9,491 3,164 2,329 1,692

33,454 17,273 10,363 6,047 3,422142,921 78,750 40,628 16,362 2,01 3

9,822 6,962 4,648 5,308 3,36696,311 54,600 33,522 24,605 25,39230,268 16,915 12,958 8,317 6,855- (3,445) - 7,657 -

136,401 75,032 51,128 45,887 35,61 36,520 3,718 (10,500) (29,525) (33,600)2,658 379 471 755 1,71 5

(37) (22) (77) (272) (42 )12 164 98 8 63

9,153 4,239 (10,008) (29,034) (31,864)1,217 541 - - -

7,936 3,698 (10,008) (29,034) (31,864)(590) (184) 292 425 193

$ 7,346 $ 3,514 $ (9,716) $(28,609) $(31,671 )

$ 0.10 $ 0.12 $ (0.37) $ (1 .36) $ (2 .38)0 .07 0 .04 (0.37) (1 .36) (2 .38)

75,503 29,605 26,375 21,039 13,31 4110,874 95,409 26,375 21,039 13,31 4

As of January 31,

2005 2004 2003 2002 2001

Consolidated Balance Sheet Data:Cash, cash equivalents and marketable securities (3) $205,938 $ 35,812 $ 16,009 $ 11,709 $ 22,200Working capital 47,044 4,140 1,172 6,497 20,163Total assets 280,499 87,511 39,673 29,713 37,047Long-term obligations 2,317 1,830 5,206 7,291 1,425Convertible preferred stock - 61,137 61,137 61,137 59,852Accumulated deficit (64,588) (71,934) (75,448) (65,732) (37,123)Total stockholders' (deficit) equity 145,131 (46,237) (55,875) (51,348) (29,329)

Customer and Subscriber Data ( unaudited) :Approximate number of customers 13,900 8,700 5,700 3,500 1,500Approximate number of paying subscriptions 227,000 127,000 76,000 53,000 30,000

19

Table of Content s

(1) Cost of revenues and operating expenses include stock-based expenses, consisting of :

Fiscal Year Ended January 31 ,

2005 2004 2003 2002 200 1

Cost of revenues $ 634 $ 655 $ 428 $ 369 $ 34 5Research and development 282 462 402 436 43 1Marketing and sales 1,296 2,029 1,696 1,422 1,350General and administrative 1,402 1,213 2,241 2,224 1,32 6

Total stock- based expenses $3,614 $4,359 $4,767 $4,451 $3,45 2

(2) For information regarding the computation of per share amounts, refer to note I of the notes to our consolidated financial statements .

(3) Cash, cash equivalents and marketable securities includes net proceeds of $113 .8 million from our sale of 11,500,000 shares of common stock in June 2004

from our initial public offering .

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION S

The following discussion contains forward-looking statements, including, without limitation, our expectations regarding revenues, expenses and results ofoperations . Our actual results may differ significantly from those projected in the forward-looking statements . Factors that might cause future actual results todiffer materially from our recent results or those projected in the forward-looking statements include, but are not limited to, those discussed in the section titled

"Risk Factors Which May Impact Future Operating Results ." We assume no obligation to update the forward-looking statements or our risk factors .

Overview

We are the leading provider, based on market share, of application services that allow organizations to easily share customer information on demand, accordingto a March 2004 report by Forrester Research, Inc. We provide a comprehensive CRM service to businesses of all sizes and industries worldwide .

We were founded in February 1999 and began offering our on-demand CRM application service in February 2000

In order to increase our revenues and take advantage of our market opportunity, we will need to continue to add substantial numbers of paying subscriptions . Wedefine paying subscriptions as unique user accounts, purchased by customers for use by their employees and other customer-authorized users that have not beensuspended for non-payment and for which we are recognizing subscription revenue. The number of our paying subscribers increased from approximately 30,000as of February 1, 2001 to approximately 227,000 as of January 31, 2005 . We plan to re-invest our revenues for the foreseeable future by hiring additional

personnel, particularly in marketing and sales ; expanding our domestic and international selling and marketing activities; increasing our research anddevelopment activities to upgrade and extend our service offerings and to develop new services and technologies ; obtaining additional business continuityservices, additional data center capacity and a separate development and test data center ; expanding the number of locations around the world where we conductbusiness ; adding to our infrastructure to support our growth ; and expanding our operational systems to manage a growing business .

We expect marketing and sales costs, which were 55 percent of our total revenues for fiscal 2005 and 57 percent of our total revenues for the same period a yearago, to continue to represent a substantial portion of total revenues in the future as we seek to add and manage more paying subscribers, build brand awarenessand increase the number of marketing events that we sponsor.

Fiscal Year

Our fiscal year ends on January 31 . References to fiscal 2005, for example, refer to the fiscal year ended January 31, 2005 .

20

Table of ContentsSources of Revenues

We derive our revenues from two sources : (1) subscription revenues, which are comprised of subscription fees from customers accessing our on-demandapplication service, and from customers purchasing additional support beyond the standard support that is included in the basic subscription fee ; and (2) relatedprofessional services and other revenues . Other revenues consist primarily of training fees . Subscription and support revenues accounted for 90 percent of ourtotal revenues during fiscal 2005 and 89 percent during fiscal 2004 . Subscription revenues are driven primarily by the number of paying subscribers of ourservice and the subscription price of our service . None of our customers accounted for more than 5 percent of our revenues in fiscal 2005, 2004 and 2003 .

Subscription and support revenues are recognized ratably over the contract terms beginning on the commencement dates of each contract . The typicalsubscription and support term is 12 to 24 months, although terms range from one to 60 months . Our subscription and support contracts are noncancelable, thoughcustomers typically have the right to terminate their contracts for cause if we materially fail to perform . We generally invoice our customers in advance , in annualor quarterly installments, and typical payment terms provide that our customers pay us within 30 days of invoice . Amounts that have been invoiced are recorded

in accounts receivable and in deferred revenue, or in revenue depending on whether the revenue recognition criteria have been met. In general, we collect our

billings in advance of the subscription service period .

Professional services and other revenues consist of fees associated with consulting and implementation services and training . Our consulting and implementationengagements are typically billed on a time and materials basis . We also offer a number of classes on implementing, using and administering our service that arebilled on a per person, per class basis . Our typical payment terms provide that our customers pay us within 30 days of invoice .

Cost of Revenues and Operating Expenses

Cost q/Revenues . Cost of subscription and support revenues primarily consists of expenses related to hosting our service and providing support, depreciation oroperating lease expense associated with computer equipment, costs associated with website development activities, allocated overhead and amortization expenseassociated with capitalized software . To date, the expense associated with capitalized software has not been material to our cost of revenues . We allocateoverhead such as rent and occupancy charges, employee benefit costs and taxes to all departments based on headcount . As such, general overhead expenses arereflected in each cost of revenue and operating expense category . Cost of professional services and other revenues consists primarily of employee-related costsassociated with these services, the cost of subcontractors and allocated overhead . The cost associated with providing professional services is significantly higheras a percentage of revenue than for our on-demand subscription service due to the labor costs associated with providing consulting services .

To the extent that our customer base grows, we intend to continue to invest additional resources in our on-demand application service and in our consultingservices . The timing of these additional expenses will affect our cost of revenues, both in terms of absolute dollars and as a percentage of revenues, in a particularquarterly period . For example, we plan to increase the number of employees who are fully dedicated to consulting services . Additionally, we are currently in theprocess of obtaining additional business continuity services and additional data center capacity . We currently expect these resources to be in place at variousdates during fiscal 2006. We currently expect the annual cost of these services to be approximately $7 .0 million .

Research and Development . Research and development expenses consist primarily of salaries and related expenses and allocated overhead . We have historicallyfocused our research and development efforts on increasing the functionality and enhancing the ease of use of our on-demand application service . Ourproprietary, scalable and secure multi-tenant architecture enables us to provide all of our customers with a service based on a single version of our application .As a result, we do not have to maintain multiple versions, which enables us to

21

Table of Contentssalesforce . com, inc.

Consolidated Statements of Operations(in thousands, except per share data)

Fiscal Year Ended January 31,

2005 2004 2003

Revenues:Subscription and support $157,977 $85,796 $ 47,65 6Professional services and other 18,398 10,227 3,335

Total revenues 176,375 96,023 50,99 1

Cost of revenues (1) :Subscription and support 12,727 7,782 7,199Professional services and other 20,727 9,491 3,164

Total cost of revenues 33,454 17,273 10,363

Gross profit 142,921 78,750 40,628Operating expenses (1):Research and development 9,822 6,962 4,648Marketing and sales 96,311 54,600 33,522General and administrative 30,268 16,915 12,95 8Lease abandonment (recovery) - (3,445) -

Total operating expenses 136,401 75,032 51,12 8Income (loss) from operations 6,520 3,718 (10,500)Interest income 2,658 379 47 1Interest expense (37) (22) (77)Other income 12 164' 98

Income (loss) before provision for income taxes and minority interest 9,153 4,239 (10,008 )Provision for income taxes 1,217 541 -

Income (loss) before minority interest 7,936 3,698 (10,008 )Minority interest in consolidated joint venture (590) (184) 29 2

Net income (loss) $ 7,346 $ 3,514 $ (9,716 )

Basic net income (loss) per share $ 0.10 $ 0.12 $ (0.37 )Diluted net income (loss) per share 0 .07 0.04 (0.37 )Weighted-average number of shares used in per share amounts :Basic 75,503 29,605 26,37 5Diluted 110,874 95,409 26,37 5

(I) Amounts include stock-based expenses, as follows :

Fiscal Year Ended January 31,

2005 2004 2003

Cost of revenues $ 634 $ 655 $ 428Research and development 282 462 402Marketing and sales 1,296 2,029 1,696General and administrative 1,402 1,213 2,24 1

$3,614 $ 4,359 $ 4,767

See accompanying Notes to Consolidated Financial Statements .

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Table of Contentssalesforce .com inc .

Consolidated Statements of Convertible Preferred Stock and Stockholders' Equity ( Deficit)(in thousands, except share and per share data)

ConvertibleNotes Accumulated Total

Preferred Stock Common Stock Additional Deferred Receivables Other Total Stockholders'

Paid-in Stock-Based from Comprehensive Accumulated Comprehensive Equity

Shares Amount Shares Amount Capital Compensation Stockholders Loss Deficit Loss (Deficit)

Balances at January 31 ,2002 58,024,345 61,137 29,254,822 29 21,087 (4,930) (1,594) (208) (65,732) (65,940) (51,348)

Deferred compensatio nrelated to the issuance o fCompany and subsidiar ystock options - - - - 7,589 (7,793) - - - - (204 )

Amortization of Compan yand subsidiary deferredstock-based compensation - - - - - 3,135 - - - - 3,135

Exercise of stock options - - 547,560 1 416 - - - - - 41 7Stock options earlyexercised subject torepurchase - - 1,132,562 - - - - - - - -Repurchase of unvestedshares - - (646,982) (1) (341) - - - - - (342 )

Fair value of stock optionsissued to nonemployeesfor services - - - - 310 - - - - 31 0Accelerated vesting o femployee stock options - - - - 178 - - - - - 17 8Cancellation o fstockholder uotesreceivable for unvestedcommon stock options - - (87,500) - - 109 - - - 109

Accrued interest onstockholder note sreceivable - - (89) - - - (89)Issuance of common stockand warrants to purchasecommon stock for services - - 280,500 - 1,106 - - - - - 1,106Sale of subsidiar ycommon stock 355 - - 35 5

Translation adjustment - - - - - - - 214 - 214 214Net loss - - - - - - - - (9,716) (9,716) (9,716)

Comprehensive loss, yearended January 31, 2003 - - - - - - - - - (9,502) -

Balances at January 31 ,2003 58,024,345 61,137 30,480,962 29 30,700 (9,588) (1,574) 6 (75,448) (75,442) (55,875)Deferred compensationrelated to the issuance ofCompany and subsidiarystock options -

- - -2,339 (2.428)

-- - - (89)

Amortization of Compan yand subsidiary deferredstock-based compensation - - - - - 3,765 - - - - 3,765Exercise of stock options 1,041,131 3 1,891 - - - - - 1,894Repurchase of unvestedshares - - (23,967) - (17) - - - - - (17)

Fair value of stock awardsissued to nonemployee sfor services - - 32,500 - 422 -

--

-422

Accelerated vesting ofemployee stock options - - - - 146 - - - - - 146Accrued interest onstockholder notesreceivable (100) - - (100)

Sale of subsidiarycommon stock - - - - 99 - - - - - 99Translation adjustment - - - - - - - 4 - 4 4Net income - - - - - - - - 3,514 3,514 3,51 4

Comprehensive income,year ended January 31 ,2004 - - - - - - 3.518 -

Balances at January 31 ,2004 58,024,345 61,137 31,530,626 32 35,580 (8,251) (1,674) 10 (71,934) (71,924) (46,237)

See accompanying Notes to Consolidated Financial Statements .

52

salesforce .com inc.

Consolidated Statements of Convertible Preferred Stock and Stockholders ' Equity (Deficit) - (Continued)(in thousands, except share and per share data)

Convertible AccumulatedPreferred Stock Common Stock Notes Other Tota

lAddi ti onal Deferred ReceivableComprehensive Total Stockholders'

Paid-in Stock-Based from Income AccumulatedComprehensive EquityShares Amount Shares Amount Capital CompensatimStockholders (Loss) De ficit Loss ( Deficit)

Balances at January 31, 2004 58,024,345 $ 61,137 31,530,626 $ 32$ 35,580 $ (8,251) $ (1,674) $ 10 $ (71,934) $ (71,924) $ (46,237)Issuance of common stock inconnection with initial publicoffering, net of issuance costsincurred 11,500,000 12 113,756 - - - - - 113 .768Conversion of preferred stockinto common (58,024,345) (61,137) 58,024,345 58 61,079 - - - 61,13 7Deferred compensation relatedto the issuance of Company an dsubsidiary stock options - - - - 624 (955) - - - - (331 )Amortization of Company andsubsidiary deferred stock-basedcompensation - - - - - 3,298 - - - - 3,298Exercise of stock options an dwarrants and stock grants toboard members for boardservices - - 4,126.845 3 5,473 - - - - - 5,47 6Tax benefits from employeestock plans - -' - - 798 - - - - - 798Repurchase of unvested shares - - (191,000) - (254) - - - - - (254)Fair value of stock awards issuedto nonemployees for services - - - - 167 - - - - - 167Accrued interest on stockholdernotes receivable - - - - - - (96) - - - (96)Collection of outstanding notereceivable balances - - - - - - 1,043 - - - 1,043Sale of subsidiary common stock - - - 25 - - - - 2 5Translation adjustment - - - -: - - - (260) - (260) (260)Unrealized loss on marketabl esecurities - - - - - - - (749) - (749) (749 )Net income " - - - - - - - - 7,346 7,346 7,346Comprehensive income, yearended January 31, 2005 - - - - - - - - - 6,337 -

Balances at January 31, 2005 - $ - 104,990,816 $ 105 $217,248 $ (5,908) $ (727) $ (999) $ (64,588) $ (65,587) $ 145,131

See accompanying Notes to Consolidated Financial Statements .

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Table of Contentssalesforce.com . inc .

Consolidated Statements of Cash Flow s(in thousands)

Fiscal Year Ended January 31 ,

2005 2004 2003

Operating activitiesNet income (loss)Adjustments to reconcile net income (loss) to net cash provided by operating activities :Minority interest in consolidated joint ventur eDepreciation and amortizationLoss on retirement of fixed assetsAmortization of deferred commissionsLease abandonment (recovery)Accrued interest on stockholder notes receivableExpense related to stock-based awardsTax benefits from employee stock plansChanges in assets and liabilities :Accounts receivableDeferred commission sPrepaid expenses and other current assetsOther asset sAccounts payableAccrued expenses and other current liabilitiesIncome taxesDeferred revenueLease abandonment and other liabilit y

Net cash provided by operating activitie s

Investing activities

798

(22,338) (16,955) (3,872)(14,055) (16,320) (5,691 )

65 (2,216) (579)(216) (723) 1 6490 1,429 (199)

14,801 10,339 3,864(318) 534 -

46,223 30,506 12,043- (583) (1,177)

55,872 21,781 5,21 3

Restricted cash 721 (179) (233)Purchases of marketable securities (282,220) (39,900) (27,977)Sales and maturities of marketable securities 136,608 21,851 20,677Capital expenditures (4,308) (2,916) (2,022)

Net cash used in investing activities (149,199) (21,144) (9,555)

Financing activitiesProceeds from the issuan ce of common stock , net of issuance costs incurred 113,768 - -Proceeds from the exercise of stock op tions 4,746 1,480 1,580Collection of notes receivables from stockholders 1,043Principal payments on capital lease obligations (493) (531) (757 )Repurchase of unvested shares (254) (17) (342)Proceeds from subsidiary stock offerings 40 167 551

Net cash provided by fi nancing activities 118,850 1,099 1,03 2

Effect of exch ange rate changes on cash and cash equivalents (255) 18 310

Net increase (decrease) in cash and cash equivalents 25,268 1,754Cash an d cash equivalents at beginningof year 10,463 8,709

Cash and cash equivalents at endof year $ 35,731 $ 10,463

Supplemental cash flow disclosure :Cash paid during the period for :

(3,000)11,70 9

$ 8,709

Interest $ 37 $ 22 $ 77Income taxes $ 730 $ 7 $ -Noncash financing and investing activitie sFixed assets acquired under capital lease $ 1,699 $ - $ -Conversion of preferred stock into common $ 61 ,137 $ - $ -Net exercise of warrants $ 15 $ $Transfer of capital lease to operating $ - $ - $ 56 9Cancellation of stockholder notes receivable for unvested common stock options $ - $ - $ 109

$ 7,346 $ 3,514 $ (9,716)

590 184 (292)3,147 2,591 2,664223 68 589

15,598 8,599 2,885- (3,445) -(96) (100) (89)

3 .614 4.359 4.767

See accompanying Notes to Consolidated Financial Statements .

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Table of Contentssalesforce.com, inc .

Notes to Consolidated Financial Statement s

1 . Summary of Business and Significant Accounting Policies

Description of Business

Salesforce.com, inc . (the "Company") is the leading provider, based on market share, of application services that allow organizations to easily share customer

information on demand . It provides a comprehensive customer relationship management ("CRM") service to businesses of all sizes and industries worldwide.

The Company began to offer its on-demand application service on a subscription basis in February 2000 . The Company conducts its business worldwide .

Fiscal Year

The Company's fiscal year ends on January 31 . References to fiscal 2005, for example, refer to the fiscal year ending January 31, 2005 .

Use of Estimate s

The preparation of financial statements in conformity with U .S . generally accepted accounting principles ("GAAP") requires management to make estimates and

assumptions in the Company's consolidated financial statements and notes thereto .

Significant estimates and assumptions made by management include the determination of the provision for income taxes, the fair value of stock awards issuedand the adequacy of the lease abandonment accrual . Actual results could differ from those estimates .

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries . All significant intercompany balances and

transactions have been eliminated in consolidation .

Additionally, the Company holds a majority interest in Kabushiki Kaisha salesforce .com ("Salesforce Japan"), a Japanese joint venture . As of January 31, 2005,

the Company owned a 63 percent interest in the joint venture. Given the Company's majority ownership interest in the joint venture, the accounts of the jointventure have been consolidated with the accounts of the Company, and a minority interest has been recorded for the minority investors' interests in the net assetsand operations of the joint venture to the extent of the minority investors' individual investments . Additionally, the Company records gains and losses resulting

from the change of interest in Salesforce Japan directly to stockholders' equity as additional paid-in capital .

Segments

The Company operates in one segment .

Foreign Currency Translatio n

The functional currency of the Company's major foreign subsidiaries is generally the local currency . Adjustments resulting from translating foreign functional

currency financial statements into U .S . dollars are recorded as a separate component of stockholders' equity . Foreign currency transaction gains and losses areincluded in net income (loss) for the period and have not been material during fiscal 2005, 2004 and 2003 . All assets and liabilities denominated in a foreigncurrency are translated into U .S . dollars at the exchange rate on the balance sheet date as quoted on the Pacific Stock Exchange . Revenues and expenses aretranslated at the average exchange rate during the period . Equity transactions are translated using historical exchange rates .

55

Table of Contentssalesforce .com, inc .

Notes to Consolidated Financial Statements-(Continued)

Concentrations of Credit Risk and Significant Customers and Suppliers

The Company's financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents, marketable securities,restricted cash, and trade accounts receivable. Although the Company deposits its cash with multiple financial institutions, its deposits, at times, may exceed

federally insured limits . Collateral is not required for accounts receivable .

The Company's accounts receivable and net revenues are derived from a large number of direct customers . No customer accounted for more than 5 percent ofaccounts receivable at January 31, 2005 and 2004, other than a single customer who accounted for 7 percent of the accounts receivable balance at January 31,

2004. No single customer accounted for 5 percent or more of total revenue during fiscal 2005, 2004 and 2003 .

As of January 31, 2005 and 2004, assets located outside the Americas were 8 percent and 12 percent of total assets, respectively. Revenues by geographicalregion are as follows (in thousands) :

Revenues by geography :America sEuropeAsia Pacific

Fiscal Year Ended January 31,

2005 2004 2003

$140,87125,20110,303

$78,958 $43,85511,754 5,3455,311 1,791

$176,375 $96 ,023 $50,99 1

The income (loss) from operations outside the Americas totaled $2,681,000, $(1,098,000) and $(3,791,000) during fiscal 2005, 2004 and 2003, respectively .

The Company serves all of its customers and users from a single, third-party Web hosting facility located in Sunnyvale, California . The Company does notcontrol the operation of this facility, and it is vulnerable to damage or interruption . The Company has an agreement with SunGard Data Systems, a provider ofavailability services, to provide access to a geographically remote disaster recovery facility that would provide the Company with access to hardware, softwareand Internet connectivity in the event the Web hosting facility in Sunnyvale becomes unavailable . Even with this disaster recovery arrangement, the Company'sservice would be interrupted during the transition .

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents . Cash and cashequivalents, which primarily consist of cash on deposit with banks and money market funds, are stated at cost, which approximates fair value .

Restricted Cash

The Company's restricted cash balance of $3,191,000 at January 31, 2005 consisted primarily of a certificate of deposit in the amount of $2,800,000, plusinterest, that serves as collateral to a letter of credit that was issued to the Company's principal landlord as a security deposit . The certificate of deposit bearsannual interest at 1 percent and the letter of credit renews annually through December 31, 2010 . The remaining restricted cash balance at January 31, 2005 of$391,000 consisted of collateral for two additional letters of credit related to office leases and mature at various dates through December 2008 .

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Table of ContentsSIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by

the undersigned, thereunto duly authorized .

Dated : March 25, 2005

salesforce . com, inc .

/S/ MARC BENIOFF

Marc BeniotTChairman of the Board of Director s

And Chief Executive Officer

POWER OF ATTORNEY AND SIGNATURE S

KNOW ALL PERSONS BY THESE PRESENT, that each person whose signature appears below constitutes and appoints Marc Benioff, Steve Cakebread andDavid Schellhase, his attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to sign any amendments to this annual report onForm 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, herebyratifying and confirming all that said attorney-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof .

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and inthe capacities and on the dates indicated .

Signature Title Dat e

/s/ MARC BENIOFF Chairman of the Board of Directors and Chief Executive March 25, 2005Officer (Principal Executive Officer )

Marc Benioff

/s/ STEVE CAKEBREAD Chief Financial Officer (Principal Financial & March 25, 200 5

Accounting Officer)

Steve Cakebrea d

/s/ ALAN HASSENFELD Director March 25, 200 5

Alan Hassenfeld

/s/ CRAIG RAMSEY Director March 25, 2005

Craig Ramse y

/s/ SANFORD R. ROBERTSON Director March 25, 2005

Sanford R. Robertson

/S/ STRATTON SCLAVOS Director March 25, 200 5

Stratton Sclavo s

/S/ LARRY TOMLINSON Director March 25, 200 5

Larry Tomlinson

79

Exhibit D

f t1 w.7/21/04 RTRENGNS 17 :44 :4 7

7/21/04 Reuters Eng . News Serv . 17 :44 :4 7

Reuters News

(c) 2004 Reuters Limited

Wednesday, July 21, 200 4

Salesforce sees lower-than-expected 2005 results .

factivaPage 1

NEW YORK, July 21 (Reuters) - Salesforce .com , which provides Internet-based sales

management software, said on Wednesday it expects its full-year revenue and profit

to be lower than current Wall Street estimates . Salesforce Chief Financial Officer

Steve Cakebread said at the company's first analysts day that he expects fiscal

2005 net income of breakeven to 3 cents a share and revenue of $160 million to $165

million .

Three analysts polled by Reuters Estimates on average expected Salesforce to earn 6

cents a share before items and revenue of $175 million . One analyst pinned hisexpectation for full-year net income at 5 cents a share .

"We have been using this guidance internally since Feb . 1 but this is the first

time that we are giving it out," Cakebread told Reuters .

Salesforce, which surged 56 percent a month ago on its first day as a public

company, fell 43 cents, or more than 2 percent, to $15 .63 in afternoon trading on

the New York Stock Exchange on Wednesday .

---- INDEX REFERENCES ----

COMPANY : Salesforce .com Inc (SALESF )

NEWS SUBJECT: (Earnings (C151) ; Earnings Projections (C152) ; Performance(C15) ; Corporate/Industrial News (CCAT) )

INDUSTRY : (Computers/Electronics (I3302) ; Software (I330202) ; ApplicationsSoftware (13302021) ; Computing (ICOMP) ; Knowledge Management Software (IKNOWMS))

REGION: (United States (USA) ; North American Countries (NAMZ) )

Language : EN

OTHER INDEXING : N2K :BUS ; N2K :DNP ; N2K :E ; N2K :PCO ; N2K :PCU ; N2K :RES ; N2K :RESF ;N2K :RICCODE :CRM .N ; N2K :RNP ; N2K :U; N2K :US

Word Count : 17 7

7/21/04 RTRENGNS 17 :44 :4 7

END OF DOCUMENT

Copr . © 2004 West . No Claim to Orig . U .S . Govt . Works .

Exhibit E

V stla7/21/04 RTRENGNS 21 :40 :5 0

7/21/04 Reuters Eng . News Serv . 21 :40 :5 0

Reuters News

(c) 2004 Reuters Limited

Wednesday, July 21, 2004

factivaPage 1

UPDATE 1- Salesforce forecast disappoints, shares tumble .

NEW YORK, July 21 (Reuters) - Salesforce .com on Wednesday forecast a smaller profit

than Wall Street expected, sending the software company's shares tumbling 27

percent a month after it launched the best performing initial public offering of

the year . The company told analysts it has been expecting fiscal 2005 net income

of break-even to 3 cents a share and revenue of $160 million to $165 million since

Feb .l and will update the guidance when it reports earnings in August .

Three analysts polled by Reuters Estimates on average expected Salesforce to earn 6

cents a share before items and revenue of $175 million .

Salesforce said it was the first time it gave out its outlook for the year .

"You have to understand that those three analysts have never talked to us," Chief

Executive Marc Benioff told Reuters, saying the company has refrained from talking

about its business during a mandated quiet period . "I don't know what they arebasing their numbers upon . "

Nevertheless, analysts are questioning how high the stock can fly after surging 56

percent a month ago on its first day of trading .

Salesforce said it has trumped a sudden slowdown in spending on software by adding900 customers in the first two months of the current quarter .

Salesforce, which allows companies to use Internet-based sales management software

for a modest monthly fee, said it has added 900 customers and 14,000 paying

subscribers in the first 60 days of its fiscal second quarter ending July .

The strength is in contrast with a spate of warnings from software companies and

results from its arch rival Siebel Systems (SEBL .O), which posted lower revenue due

to customers delaying buying at the end of the quarter . Siebel managed to increase

its profits by cutting costs .

"What's going on in the market may be helping Salesforce because they've got such alow point of entry," said Denis Pombriant, an analyst of Beagle Research Group .

Salesforce is facing challenges from a slew of new startups such as Salesnet,RightNow Technologies, and NetSuite . The company said it competes with Microsoft(MSFT .O) and Siebel a lot in deals .

Salesforce fell $4 .36 to $11 .70 in afternoon trading on the New York Stock Exchange

on Wednesday .

---- INDEX REFERENCES ----

Copr . © 2004 West . No Claim to Orig . U .S . Govt . Works .

7/21/04 RTRENGNS 21 :40:50 Page 2

COMPANY : Salesforce . com Inc (SALESF )

NEWS SUBJECT : (Earnings (C151) ; Earnings Projections (C152) ; Performance

(C15) ; Corporate/Industrial News (CCAT) )

INDUSTRY : (Computers/Electronics (I3302) ; Software (I330202) ; Applications

Software (13302021) ; Computing (ICOMP) ; Knowledge Management Software (IKNOWMS))

REGION : (United States (USA) ; North American Countries (NAMZ) )

Language : EN

OTHER INDEXING : N2K :BUS ; N2K :DNP ; N2K :E ; N2K :FUN ; N2K :HOT ; N2K :PCO ; N2K :PCU ;

N2K :RES ; N2K :RESF ; N2K :RICCODE :CRM .N; N2K :RNP ; N2K :U ; N2K :US

Word Count : 38 6

7/21/04 RTRENGNS 21 :40 :5 0

END OF DOCUMENT

Copr . © 2004 West . No Claim to Orig . U .S . Govt . Works .

Exhibit F

Vkalaw.7/22/04 RTRENGNS 00 :05 :1 9

7/22/04 Reuters Eng . News Serv . 00 :05 :1 9

Reuters News

(c) 2004 Reuters Limited

Thursday, July 22, 2004

fact va,. air , .rtrn y yr kf R .ts

Page 1

UPDATE 2-Salesforce forecast disappoints, shares tumble .

By Wei Gu

NEW YORK, July 21 (Reuters) - Salesforce .com on Wednesday forecast a smaller profit

than Wall Street expected, sending the software company's shares tumbling 27

percent a month after it launched the best-performing initial public offering of

the year . The company told analysts it has been expecting net income of break-even

to 3 cents a share and revenue of $160 million to $165 million for the year ending

in January 2005 . Executives said they knew this was the outlook for more than five

months, but had not publicly disclosed it until now .

Three analysts polled by Reuters Estimates on average expected Salesforce to earn 6cents a share before items and revenue of $175 million .

"You have to understand that those three analysts have never talked to us," Chief

Executive Marc Benioff told Reuters, saying the company has refrained from talkingabout its business during a mandated quiet period . "I don't know what they arebasing their numbers upon . "

Salesforce .com, which allows companies to use Internet-based sales management

software for a monthly fee, ran into problems with securities regulators during itsIPO process, which was delayed for a month-long mandated cooling-off period afterBenioff gave an interview to The New York Times .

The interview raised concerns in light of securities rules intended to keepcompanies from hyping their stocks ahead of a market debut . But it was unclear

whether the forced cooling-off period made executives more conservative abouttelegraphing results targets to analysts .

One of the three analysts, Peter Coleman of Schwab SoundView Capital Markets, said

he had not been given any outlook from the company .

"A few of us did our best job in giving a wild assumption," Coleman said . "I don't

think the momentum has slowed down and it is not likely for you to see me lower mynumbers . "

On a day when Benioff rang the closing bell on the New York Stock Exchange,investors pushed Salesforce $4 .36 lower to close at $11 .70 on concerns of slower-than-expected growth .

The stock had a 56 percent jump just a month ago on its first day of trading .

Jay Ritter, a finance professor at the University of Florida, said companies

refrain from making profit forecasts in their IPO prospectuses because they areafraid of shareholder lawsuits later .

Copr . © 2004 West . No Claim to Orig . U .S . Govt . Works .

7/22/04 RTRENGNS 00 :05 :19 Page 2

"The norm is that partly because of fear of plaintiffs' lawyers, companies rarely

put forward statements about revenue and certainly not EPS projections," in their

prospectuses, Ritter said . "Companies are just so afraid of putting it in writing -

that it would come back to haunt them . "

Under U .S . securities law, companies are not required to provide earnings forecaststo investors and must only take care that they haven't presented any misleading

facts, said Brian Lane, a securities lawyer with Gibson, Dunn & Crutcher and former

director of corporate finance at the SEC .

"Whether a company should comment on analyst expectations is more an investor

relations issue," Lane said .

Salesforce said it has added 900 customers and 14,000 paying subscribers in the

first 60 days of its fiscal second quarter, which runs through July .

The strength is in contrast with a spate of warnings from software companies .

But Salesforce is facing challenges from a slew of new start-ups such as Salesnet,RightNow Technologies, and NetSuite . The company said it competes with Microsoftand Siebel Systems . (Additional reporting by Nicole Maestri) .

---- INDEX REFERENCES ----

COMPANY : Salesforce .com Inc (SALESF )

NEWS SUBJECT: ( Earnings (C151) ; Earnings Projections (C152) ; Performance

(C15) ; Corporate/Industrial News (CCAT) )

INDUSTRY : (Computers/Electronics (I3302) ; Software (I330202) ; ApplicationsSoftware (13302021) ; Computing (ICOMP) ; Knowledge Management Software (IKNOWMS))

REGION : (United States (USA) ; North American Countries (NAMZ) )

Language : EN

OTHER INDEXING : N2K :ABR ; N2K :ABX ; N2K :BUS ; N2K :DNP ; N2K :E ; N2K :EBX ; N2K :FUN ;

N2K :HOT ; N2K :PCO ; N2K :PCU ; N2K :RES ; N2K :RESF ; N2K :RICCODE :CRM .N; N2K :RNP ; N2K :U ;N2K :US ; N2K :XX

Word Count : 58 3

7/22/04 RTRENGNS 00 :05 :19

END OF DOCUMENT

Copr . © 2004 West . No Claim to Orig . U .S . Govt . Works .

Exhibit G

V est1a w factiva7/22/04 RTRENGNS 02 :15:26 Page 1

7/22/04 Reuters Eng . News Serv . 02 :15 :2 6

Reuters New s

(c) 2004 Reuters Limited

Thursday, July 22, 200 4

UPDATE 3-Salesforce shares tumble on forecast .

By Wei Gu

NEW YORK, July 21 (Reuters ) - Salesforce .com on Wednesday forecast a smaller profit

than Wall Street expected, sending the software company's shares tumbling 27

percent a month after it launched the best-performing initial public offering of

the year . The company told analysts it has been expecting net income of break-

even to 3 cents a share and revenue of $160 million to $165 million for the year

ending in January 2005 . Executives said they had been using this as an internal

estimate for five months, but had not publicly disclosed it until now as it came

out of a mandated quiet period .

Three analysts polled by Reuters Estimates on average expected Salesforce to earn 6cents a share before items and revenue of $175 million .

"You have to understand that those three analysts have never talked to us," ChiefExecutive Marc Benioff told Reuters, saying the company has refrained from talkingabout its business during the quiet period . "I don't know what they are basingtheir numbers upon . "

Salesforce .com, which allows companies to use Internet-based sales managementsoftware for a monthly fee, ran into problems with securities regulators during its

IPO process, which was delayed for a month-long mandated cooling-off period afterBenioff gave a lengthy interview to The New York Times .

The interview raised concerns in light of securities rules intended to keep

companies from hyping their stocks ahead of a market debut . But it was unclear

whether the forced cooling-off period made executives more conservative abouttelegraphing results targets to analysts .

One of the three analysts, Peter Coleman of Schwab SoundView Capital Markets, saidhe had not been given any outlook from the company .

"A few of us did our .best job in giving a wild assumption," Coleman said . "I don'tthink the momentum has slowed down and it is not likely for you to see me lower mynumbers . "

On a day when Benioff rang the closing bell on the New York Stock Exchange,investors pushed Salesforce $4 .36 lower to close at $11 .70 on concerns of slower-than-expected growth .

The stock had a 56 percent jump just a month ago on its first day of trading .

Jay Ritter, a finance professor at the University of Florida, said companies

refrain from making profit forecasts in their IPO prospectuses because they areafraid of shareholder lawsuits later .

Copr . © 2004 West . No Claim to Orig . U .S . Govt . Works .

7/22/04 RTRENGNS 02 :15:26 Page 2

"The norm is that partly because of fear of plaintiffs' lawyers, companies rarelyput forward statements about revenue and certainly not EPS projections," in their

prospectuses, Ritter said . "Companies are just so afraid of putting it in writing -

that it would come back to haunt them . "

Under U .S . securities law, companies are not required to provide earnings forecasts

to investors and must only take care that they haven't presented any misleading

facts, said Brian Lane, a securities lawyer with Gibson, Dunn & Crutcher and former

director of corporate finance at the SEC .

"Whether a company should comment on analyst expectations is more an investor

relations issue," Lane said .

In contrast with a spate of warnings from software companies, Salesforce said ithas added 900 customers and 14,000 paying subscribers in the first 60 days of its

fiscal second quarter, which runs through July .

New customers include big companies such as Cisco Systems Inc ., indicating that thestartup company is increasingly competing with the likes of Microsoft Corp . andSiebel Systems Inc . .

(Additional reporting by Nicole Maestri) .

---- INDEX REFERENCES ----

COMPANY : Salesforce .com Inc (SALESF )

NEWS SUBJECT : (Share Price Movement/Disruptions (C1522) ; Earnings Projections(C152) ; Performance (C15) ; Corporate/Industrial News (CCAT) )

INDUSTRY : (Computers/Electronics (I3302) ; Software (I330202) ; Applications

Software (13302021) ; Computing (ICOMP) ; Knowledge Management Software (IKNOWMS))

REGION: (United States (USA) ; North American Countries (NAMZ) )

Language : EN

OTHER INDEXING: N2K:ABR ; N2K :ABX ; N2K :EBX ; N2K :XX

Word Count : 58 9

7/22/04 RTRENGNS 02 :15 :26

END OF DOCUMENT

Copr . c 2004 West . No Claim to Orig . U .S . Govt . Works .

Exhibit H

Initiation of Coverag e

Donovan Gow203-532-7338dgow @ amtechresearch .com

Sales and Trading877-978-9657sales@amtechresearch .co m

Ticker: CR MRating Sel lPrice $16 .40Price Target: $12 .00

52-wk High/Low: $17 .69-$11 .0 0Shares Out .(000) : 100398 .0 0Market Cap (M) : $1,646 .5

Company Description :Salesforce .com, Inc . is engaged inthe provision of on-demandcustomer relationship management(CRM) solutions . The Companydelivers integrated and scalableenterprise applications forcompanies of all sizes .

i n

r<

Enterprise Software

salesforce . com, inc. ($16.40, Sell)(CRM: Initiating Coverage with a SELL)

Investment Opinion : Initiating Coverage with a Sell as we have long-termconcerns about the health of the CRM market overall, enterprise adoption,increasing competitive pressures from a variety of applications juggernauts andsalesforce .com's ability to generate meaningful margins .

Fiscal Year Jan Fiscal Year Calendar Year Last Qtr. Curr . Qtr. Next Qtr .

F03E F04A F05E C03A C04E C05E 4Q03A 1Q04E 2Q04E

Revenue (Current $) 51 .1 75.0 137.7 75.0 137 .7 200 .0 - 15.5 17 . 7Revenue (Previous $) - - - - - - - - -

EPS (Current $) (0.37) 0.04 0 .04 0 .04 0.04 0.20 - 0.00 0.00EPS (Previous $) - - - - - - - - -

Pis 32 .2 22.0 12.0 22.0 12.0 8.2 - - -PIE NM 410 .0 410.0 410 .0 410.0 82 .0 - - -

We are initiating coverage of salesforce .com (SF) with a sell rating . SF has beenone of the top-performing vendors in all software over the last two years,successfully riding the growing interest in on-demand, hosted CRM solutions,particularly in the small and mid (SMB) market . While the company's revenuegrowth outlook remains strong over the next two years, we have long-termconcerns about the health of the CRM market overall, enterprise adoption,increasing competitive pressures from a variety of applications juggernauts andSF's ability to generate meaningful margins . While its outlook merits somepremium, the current 5.5x EV/rev multiple is unwarranted in our view. Given theaforementioned risks and significant overhang, we believe a 4.Ox multiple is morereasonable, giving us a target price of $12 or 25% downside .

Please see important disclosure information on page 12 of this report .

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July 13, 2004;.

AMERICAN July 13 , 2004

TECHNOLOGY RESEARCH (CRM: Initiating Coverage with a SELL )

The Bulls Will Point to :1 . Excellent track record in a tough environment with 88% revenue growth and

101% billings growth in FY04, among the best in all software . SF is wellpositioned to capitalize on resurgent demand for on-demand, hosted offerings,particularly among small and mid-market customers .

2 . Brand recognition and credibility will increase following significant IPO publicityand strong market open, aiding revenue growth .

3. Strong revenue growth will likely continue through 2005 with high visibility froma subscription model .

The Bears Will Point to :1 . The overall CRM market is well established and fairly saturated with leading

vendors showing much lower license revenue than peak levels and recentpre-announcements signally a very modest uptick at best .

2 . There is some resurgent interest in hosted "on-demand" CRM, but we believethe hype is greater than the reality . Furthermore, initial traction has primarilyoccurred in the small and medium enterprise (SME) market while enterpriseadoption has been limited . Without significant enterprise adoption, which wedoubt will occur, growth will be limited in the long-term .

3 . Competition is fierce and intensifying . Enterprise application gorillas Siebel,SAP, Peoplesoft and Oracle are all pushing into the space. Microsoft is pouringresources into the lower-end of the market and several pure-play competitorsare nipping at SF's heels . Pricing pressure is a real possibility in this segment .

4. SF gets solid marks on product capabilities and ease of use but we see littlesustainable product differentiation in the long-term, particularly given extremelylow R&D spending . With limited technical barriers to entry, we believe SF'sposition is not defensible in the long-term .

5. Can SF make money? The company's revenue growth is excellent buteventually earnings are what matter, and the company has a very limited trackrecord of profitability. We particularly question whether SF will be able to 1)maintain prices and 2) trim very high sales and marketing expenses in the faceof growing competition and point to the relatively high number of sharesoutstanding as an earnings inhibitor .

6. Valuation and overhang : At 5 .5x EV/revenue with thin earnings, SF is amongthe richest stocks in all software, well above all CRM comparables as well asnearly above all other high-growth vendors, many of which are in better sectors,have lower competition and are generating substantially stronger earnings .Furthermore, there is substantial overhang with a 10MM share float and 91 MMshares hitting lock-up expiration in December. While its performance meritssome premium, we believe 4 .Ox is more reasonable given the aforementionedfundamental risks and overhang, giving us a target price of $12, or 25%downside .

10 Glenville St. Greenwich, CT, 06831 Phone : (203) 532 7300 sales@amtechresearch .com 2

Greenwich, Denver, San Francisco

AMER ICAN July 13,2004

TECHNOLOGY RESEARCH (CRM: Initiating Coverage with a SELL)

COMPANY SNAPSHOT

SF is a vendor of on-demand (i .e ., hosted) customer relationship management(CRM) solutions, primarily comprising sales, marketing and service automation aswell as related analytics . The company was founded in 1999 and released its firstoffering in 2000 . To date, the vast majority of the company's customers are in thesmall and medium enterprise (SME) market, with an average deal size ofapproximately 15 users, though SF has landed some enterprise customers . SFcurrently has over 9,800 customers and 147,000 subscriptions. The company hasposted exceptional growth rates over the last two years, with revenue growing88% in 2003, which is all the more remarkable given its subscription revenuemodel . However, SF has spent heavily to achieve this growth and has yet to postmeaningful earnings, though it has generated positive cash flow since 2002 . Majorcompetitors include enterprise CRM vendors such as Siebel and SAP which aremoving downstream, as well as MSFT, which is increasing its focus on thebusiness applications space, and a variety of mid-market and hosted CRM pureplays.

Well Regarded Product but Little Sustainable Functional Differentiatio nSF's product is generally regarded as a solid but fairly standard offering of sales,marketing and service automation capabilities with some related analytics . Theseinclude, but are not limited to, capabilities such as lead/opportunity managementand forecasting in sales, event escalation and notification in service and campaignmanagement in marketing . While industry contacts note SF's product is wellregarded for ease of use and performance, they also note it is fairly simple andstraight-forward with little in the way of sustainable differentiation versuscompetitive offerings .

This is not surprising given the maturity of the CRM sector, which has now beenaround for over a decade . For example, every sales automation product now haslead and opportunity management, sales pipeline and forecasting and some levelof analytics built in . In fact, like Excel, we believe most CRM products offerconsiderably more functionality than its users regularly employ. There are somedifferences in ease of use, performance and integration - all areas where SFscores well - but investors should not view SF's offering as some kind of killerapplication that offers substantially different functionality than competitiveofferings . What differentiates the offering is its hosted delivery model andpricing rather than any inherent product functionality . As such, we are notparticularly confident that SF will be able to fend off competitive inroads in thelong-term .

Light R&D Spendin gOur view is further supported by the company's abnormally low R&D spending,which was only 6% of revenue in FY04, well below levels of every competitor wetrack. SF claims this is due to the fact that they only have to work on a singleversion of the product due to their hosted model and architecture, allowing lowerR&D spending . While there may be some truth to this, we are skeptical that thecost savings are that significant. The fact that the company spent nearly 8x moreon sales and marketing raises concerns about the relative mix of sizzle tosubstance . We discuss R&D spending in more detail in the Financial Overviewsection of this report.

10 Glenville St . Greenwich, CT, 06831 . Phone: (203) 532 7300 sales @amtechresearch .com

Greenwich , Denver, San Francisco

ME RICAN, July 13, 2004A TECHNOLOGY RESEARCH (CRM : Initiating Coverage with a SELL)

CRM MARKET OVERVIEW

Well Established and Fairly Mature , No HotbedCRM was one of the hottest software market segments from the late '90's through2001, growing over 30% annually by most estimates and spawning dozens ofstart-ups, most of which were driven out of business by SEBL and a handful ofothers . The trend started with sales automation (automating sales management,contact databases and pipeline reports) and quickly led to other areas that wereostensibly customer facing (e .g ., marketing, customer service and support) . Manylarger organizations bought aggressively, purchasing seat volumes well in excessof actual need at that time in order to get volume discounts . But, as the macropicture soured, many customers were left with substantial "shelfware" (seatspurchased but not deployed) as heads were cut and deployment schedules weredelayed or scrapped altogether. At the same time, heavy hitters such as PSFT,SAP and ORCL - all of which began to target the segment aggressively in the late'90's - began to really hit their stride with competitive products and aggressivesales and marketing efforts . CRM was hit triple hard as purchasing slowed ingeneral, customers already had considerable "inventory" to burn down, andseveral gorillas entered the market .

CRM Outlook : Anticipated Bounce is ElusiveWhile our checks continue to indicate a very modest turn in spending, recentpre-announcements from PSFT and SEBL give us pause. SEBL's Q2 licenserevenue is the lowest it has been since 1Q99 and approximately 25% of peakspending levels at the end of 2000 . PSFT also posted a significant license miss,though it is impossible to ascertain how much is due to the ORCL overhang andwhich sectors (HR, finance, CRM, etc) were most heavily hit . We could be seeingsome share shift toward SAP but the magnitude of the misses indicates investorsshould not anticipate any significant rebound in enterprise CRM spending . Somemay argue that these data points are more indicative of the enterprise market,which is true, but we would point out that results for mid-market vendors such asONXS have also flagged . While part of the reason is weakness in overallspending, another factor is simple saturation and continued pricing pressure fromcustomers and prospects that know they hold all the cards in a market wherevendors are desperate for sales . This was clearly shown in the ORCL/DOJ trialwhere several customers testified to the extreme discounting they were receiving .

On-Demand : the Pitch is Better but We Have Heard this Tune Befor eDriven by IBM's ubiquitous and seemingly bottomless marketing reach, "OnDemand" has become the latest buzzword in tech, from infrastructure toapplications. In the CRM applications context, it is simply another name for hostedsoftware offerings paid for on a subscription basis (i .e., $X/month/user) . Under thismodel, the customer simply uses a browser to access the functionality of thesoftware, which is "hosted" off-premises by the vendor or a third party.

While the term "On Demand" is fairly new, the concept is not . Hosted offeringswere "the next big thing" back in the mid-to-late '90s with various luminaries suchas Larry Ellison proclaiming they were the future of applications . Nearly all majorenterprise applications vendors launched hosted offerings to great marketinghype. Application service providers (ASPS) such as Uslnternetworking and Coriowent public to lofty valuations. But the ensuing traction was much less thananticipated . USI was taken private and Corio has been flat lining for several years .More importantly, major applications vendors quietly backed away from the hypeand, though many continue to have offerings, have only recently begun to mak e

10 Glenville St . Greenwich, CT, 06831 Phone : (203) 532 7300 sales@amtechresearch .com 4

Greenwich, Denver, San Francisco

E R I CAN r July 13, 2004MECHNOLOGY RESEARCH (CRM : Initiating Coverage with a SELL)

noise in the space again .

Part of the problem was that many applications at that time were not fullybrowser-based. Furthermore, broadband access for traveling users was muchmore difficult to find . Both of these caused significant performance bottlenecks.Thirdly, many initial enterprise offerings were much too cumbersome and complexfor a hosted , browser-based offering . Now, however, there appears to be renewedinterest as evidenced by SF's numbers as well as renewed focus from Siebel, IBMand others . What has driven this? Some of the renewed interest can be attributedto product and communications improvements , which make it more feasible towork off a browser-based application . However, we believe the bigger driver hasbeen the economy. As budgets have been slashed and internal resources cut,users are increasingly interested in simple solutions that minimize risk , up-frontexpenses and ongoing IT hassle .

Pros Outweigh Cons for SMB's , not necessarily for Larger OnesPurchasing a hosted solution can be advantageous to the customer for a variety ofreasons, including :1 . Lower up-front costs : License fees are spread out over the term of the

contract rather than concentrated up front as with a typical perpetual licensemodel . While there are some initial service costs, they tend to be lower thanunder a standard model as no software is being installed on premises .

2 . Greater flexibility for deployment size: Seats can generally be added asneeded with contracts typically purchased for a year. In this way, customers canavoid the costly "shelfware" that plagued many buyers when they overboughtseats which were never deployed .

3 . Lower requirements for internal resources : Simply put, hosted offerings areoften viewed as less hassle . If there is a maintenance issue, upgrade orperformance problem, it is the vendor's responsibility to fix it, not thecustomer's .

However, there are also drawbacks :1 . Greater long-term costs?: While up-front costs may be lower, customers pay

for the software ad infinitum. We are not aware of any definitive studies on thesubject, but at some point there is likely an inflection point where owning thesoftware outright is more cost effective .

2 . Less customization : While OnDemand vendors offer some level ofcustomization, it is limited . For customers wanting to customize the software totheir particular needs, On Demand offerings are less appealing .

3 . Less control : IT departments are powerful entities within corporations and likemost departments, try to maximize their responsibilities as a means tomaximizing their power. Hosted offerings by definition require the customer togive up much f the responsibility and control over their applications and aretherefore frequently viewed with hostility by the IT department . Furthermore,some organizations are reluctant to have mission critical data such as salesforecasts hosted in a remote location, even though that location may well bemore secure than their own .

We Remain Skeptical About Enterprise TractionThough a generalization, the pros tend to outweigh the cons when an organizationis smaller, has fewer internal IT resources and fairly simple procedures that areamenable to "plain vanilla" offerings that don't require huge amounts ofcustomization . However, the pendulum swings toward the cons as organizationsgrow in size, have more complex needs requiring customization and have moreadvanced internal IT resources . For this reason, we are skeptical that On Demandofferings will gain significant traction at the enterprise level and may well remai n

10 Glenville St . Greenwich, CT, 06831 Phone : (203) 532 7300 sales@amtechresearch .com

Greenwich, Denver, San Francisco

ME RICAN.- July 13, 2004A TECHNOLOGY RESEARCH (CRM: Initiating Coverage with a SELL )

constrained to the mid-market .

SF's statistics largely bear this out . With 9,800 customers and 147,000subscriptions, the average deployment size is 15 seats . This is not to say SF hashad no success in larger deals . In fact, it has landed several sizeable dealsincluding a 2,000 seat deployment at Sun Trust Banks, an 800 seat win atAdvanced Micro Devices, and a 750 seat win at Analog Devices . However, by andlarge, the company's sweet spot remains in much smaller deployments and weremain skeptical that enterprise traction will increase markedly .

COMPETITIVE LANDSCAPE

Extremely Crowded ; Gorillas Moving in from Several Direction sSF plays in one of the most daunting competitive landscapes in all of software .The fact that it has been able to post such exemplary performance over the lasttwo years is a testament to the company's focus and execution . However, we viewgrowing competitive pressure as a key concern for the company .

SF faces competitive pressures from several sides, including enterpriseapplication vendors trying to move downstream (Siebel, SAP Oracle, PeopleSoft),established small and mid-market CRM vendors (Microsoft in particular as well asSage/Best and Frontrange) and smaller, private pure plays also with hosteddelivery models (Rightnow, Netsuite, Salesnet ) .

The two most imminent threats in our view are Siebel and Microsoft . Siebel hasmade the most noise in the sector recently with Siebel On Demand, a hostedsolution being offered through a partnership with IBM, as well as the acquisitionsof two private vendors of hosted CRM solutions, Upshot and Ineto . In Q1, thecompany announced it had signed 229 new On Demand deals, though revenuewas not disclosed . Overall, our contacts within Siebel indicate On Demand tractionhas so far been mediocre though Chairman Tom Siebel has stated in the past thatit could generate 15% of revenue in the long-term . Note that SEBL has tried thisbefore . In 1999, the company spun out Sales .com as a separate entity targetingthe mid-market via a hosted model, but results were anemic and it was foldedback into Siebel . Nevertheless, SEBL's continued push into this arena is a realconcern for SF and should not be underestimated .

Microsoft has been in the CRM market for some time now and our contactsindicate it is dedicating increasing resources to the space . It's CRM 1 .0 productwas released in January 03 and targets essentially the same SMB market as SF.MSFT does not currently have a hosted offering though some of its partners makeit available in that form (i .e . ., customers can purchase it on a hosted basis throughpartners but not from MSFT directly) . We don't have precise timing but our MSFTcontacts indicate version 2 .0 - which will likely be out in the first half of 05 - will bemuch improved in terms of functionality . Furthermore, we believe it is quitepossible MSFT could offer a hosted product directly in the future .

Other major vendors are also in the space . SAP has a tiered CRM offering tailoredto customers' size. Our contacts indicate SAP has generally been making stronginroads throughout the CRM space, though most of its efforts to date have beendirected toward its MySAP enterprise offering . Peoplesoft has had a significantmid-market CRM presence for several years, though we believe its traction inhosted offerings is considerably lower than in standard license sales . However,

10 Glenville St . Greenwich, CT, 06831 Phone : (203) 532 7300 sales@amtechresearch.com 6

Greenwich, Denver, San Francisco

ME R I C A N_,,~ July 13, 2004TECHNOLOGY RESEARCH (CRM : Initiating Coverage with a SELL)

PSFT/JDEC has traditionally focused on different verticals than SF and hasenough other problems to deal with that we don't consider it a major threat . Oraclehas also been in the CRM market for several years, though primarily in theenterprise space and with less success than the other major vendors mentioned . Ithad partnered with private NetSuite for several years where it rebrandedNetSuite's hosted offering as Oracle Small Business Suite . However, the twocompanies recently parted ways, perhaps indicating Oracle is intensifying itsinternal efforts in the space .

There are also a slew of CRM offerings focused on smaller customers fromindividual users to the upper end of the mid-market with several hundred users .The list is long, but major vendors include Onyx (which also has a hostingrelationship with IBM), Pivotal (part of CDC), Accpac, Frontrange (Goldmine) andSage/Best Software (Salelogix, Act!) . Furthermore, there are several smaller,private vendors with models similar to SF, most notably Rightnow (which did$36MM in 03), Netsuite and Salesnet . The acquisition of any of these,pa rt icularly Rightnow , by a larger enterprise vendor could be a significantnegative catalyst for SF . The important point to note here is that all of theaforementioned public vendors have been around for many years and none hasachieved significant growth due to the limited size of their target market as well asheavy competition, both among themselves and with MSFT and the lower-endoffering of enterprise vendors. Not a single stand-alone mid-market CRMvendor has ever done well in the long-term .

FINANCIAL OVERVIEW

Recent PerformanceSF has performed exceptionally well over the last two years, placing it among thetop tier of software vendors . Total revenues grew 88% in FY04 to $96 .0 .Subscription and support revenues were $85 .8 million, or 89% of total revenue,and grew 80% Y/Y. Professional services and other revenue were $10 .2 million,up 207% Y/Y. or 11 % of total revenues, for FY04, compared to $3 .3 million, or 7%of total revenues, for FY03 . Billings growth (revenue +/- change in deferred) waseven stronger, up 101% Y/Y, and is a better gauge of business given thecompany's subscription model .

Gross margins were strong at 82% with subscription margins at 91% butprofessional services margins lagged at 7% . FY04 was the first year in which thecompany has generated an operating profit . Operating margins were 4% including$3.4MM in lease recovery ; excluding this, operating margins were essentially zero.

Following the IPO, the company has over 101 MM shares outstanding, which isquite large for a company of this size and makes it harder than normal for SF tomove the earnings needl e

After netting approximately $98MM from the IPO, SF has approximately $142MMin cash and equivalents ($1 .40/share) with no debt. Deferred revenue was up169% and 159% in FY03 and FY04 respectively, indicating underlying strength insubscriptions (see revenue model discussion below for more detail) . However, wenote that deferred revenue was only up 5% sequentially in 1QFY05 , laggingrecognized subscription revenue growth of 16%. This could be due toseasonal renewal patterns but if deferred revenue continues to lagrecognized revenue growth , it will likely be a negative catalyst for the stock .

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MERICA NI CAN July 13, 2004A

RGY RESEARCH (CRM: Initiating Coverage with a SELL )

SF has been cash flow positive since FY03, generating $5.2MM in cash flow fromoperations that year and $21 .8MM in FY04 .

Revenue Model : Subscription Model Provides VisibilitySF derives revenue from two sources . Nearly 90% of its revenue comes fromproduct subscriptions and related support . Contracts typically range from 12-24months though they can range up to five years . SF invoices the customer on aquarterly or annual basis and typically collects billings in advance of thesubscription period . Upon invoice (net 30), the amount is recorded in A/R (or cashupon collection) and deferred . Revenue is then drawn down from deferred andrecognized on a monthly basis over the term of the subscription or supportcontract . The advantage of this model is clearly greater visibility than under astandard perpetual license. In turn, renewal rates are disproportionately important .We do not have renewal rates as yet, but look for numbers in the 90% range .

The remainder of revenue comes from professional services, primarily producttraining and implementation . This portion is typically recognized upon completionfor shorter projects and as delivered for longer ones .

Solid Customer/Subscription Growth Lag Recognized Revenue Growt hAs shown in the table below, SF has shown strong growth in both customeracquisition and subscriber acquisition . As of the end of 1 QFY05, the company had9,800 customers and 147,000 paying subscribers with an average of 15 .0subscribers per customers . However, while growth rates were strong -- +55% forcustomer growth, 73% for subscribers - both lag current recognized revenuegrowth (+84%) and may indicate a future slowdown, price increasesnotwithstanding . Furthermore, we note the average number of subscribers percustomer has improved only slightly over the last two years and is in fact near thesame level as it was in F02 .

Customer & Subscriber Metric s

FY02 FY03 FY04

Customers 3,500 5,700 8,70 0

Paying Subscribers 53,000 76,000 127,000

Subscriptions per customer 15 .1 13 .3 14 . 6

Recognized revenue per customer 6 ,403 8,946 11,037Recognized revenue per subscriber 423 671 75 6

Expense Overvie wOne of our key concerns with SF is its ability to generate meaningful earnings . Weare particularly concerned with exceptionally high sales and marketing expense,which have been tracking at 57% of revenue for several quarters now. Thecompany has generated its exceptional top line growth in large part due to thishigh spending and we question whether SF will be able to bring it down to morereasonable levels in the face of increasing competition from many establishedapplications giants .

Subscription Margins Strong , Professional Se rv ices Margins Wea kSF's subscription margins are quite strong, tracking up from 85% in FY03 to 91 %in FY04. Professional services margins, however, remain anemic at 5% in FY03and only 7% in FY04 . The professional services organization will likely beexpanded as the company attempts to make inroads at the enterprise level, whichtypically requires higher levels of implementation, customization and training .Given the heavy mix toward subscription revenue, gross margin has been stron g

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ME R I CA N .. July 13, 2004A TECHNOLOGY RESEARCH (CRM: Initiating Coverage with a SELL)

and stable at 82% for the last several quarters .

S&M Expense Very High, R&D Expense Abnormally LowWhile many young software vendors spend heavily on operating expenses, we aresomewhat concerned by the relative amounts allocated to S&M and G&A vs . R&D .S&M expense remains on the extremely high side at 57% of revenue in FY04 .Furthermore, the percent has not trended downward in several quarters andactually ticked up in Q1 .

It is also important to note that SF defers direct sales commissions over the termof the subscription period, so while recognized revenue is understated for anygiven quarter so too is sales expense . The amounts deferred are listed below :

Deferred Sales Commissions (MM )F2002 0 . 9

F2003 5 . 7F2004 16 . 3Deferred on BS 4/30/04 9 . 9

Looking forward , we expect SF will need to continue to spend heavily in this areaas it grabs for market share and attempts to build its brand . If anything,competitive pressure will increase in the future , making it very difficult to SF tomake substantial cuts to this expense line and, therefore , very difficult to generatestrong operating margins . G&A spending is also on the high side at 18% ofrevenue in FY04 , though this expense has been trending down in percentageterms .

Conversely, R&D spending has been abnormally low. In the 5+ years since thecompany was founded , it has spent only $23 .5MM in total on R&D . This compareswith $1 .0B in R&D spending from Siebel over the same time period and is about1/3 of Siebel's spending per quarter. Of course, no one would expect the numbersmatch up in absolute terms but even on a percentage basis the numbers areexceptionally low with R&D spending at 6% of revenue in 1 QFY05 and only 7% forFY04 . This is well below both established competitors and even other young,high-growth companies with significant mid-market exposure as shown in the tablebelow. Perhaps SF is running a very tight ship on R&D but even if this is the case,its low R&D spending does not give us confidence that product differentiation is areal competitive barrier. Add to this a relatively high spending on sales andmarketing (59% in FQ1) and it raises concerns about the relative mix of sizzle tosubstance.

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Greenwich, Denver, San Francisco

MERICAN July 13,2004A TECHNOLOGY RESEARCH (CRM: Initiating Coverage with a SELL )

R&D Spend as Percent of Revenu e

CRM Incumbents

Siebel 22%

Peoplesoft 19%

Onyx 18%Microsoft 17 %SAP 15%

Smaller mid-market software vendor s

Altiris 21 %Watchguard 21 %Sonicwall 19 %

Websense 15 %

Salesforce .com 6%

Strong Near-Term Revenue Growth Outlook but Earnings Will be Elusiv eWe offer our estimates with a significant caveat in that we have had no opportunityto speak with management and gain insight into the company's operating model,do not have access to underlying subscription billings numbers (which may or maynot be provided in the future) and have a limited operating history from which toproject estimates. As such, our estimates may change significantly once we havethe opportunity to gain more insight following the quiet period .

That said, we believe revenue growth will continue to be strong through 2005 withour estimates calling for 77% growth in FY05 (vs. 88% in FY03) and 59% growthin FY06. We are less optimistic on the margin expansion front . Our model calls foroperating margins to hit 1% in FY05 and 7% in FY06 as we believe it will bechallenging for SF to trim expenses in the face of such heavy competition . ForFY05 our estimates call for revenue of $170MM and EPS of $0 .04 and for FY06our estimates are $270MM and $0 .20 .

One additional detail of note is shares outstanding which now sit at approximately101 MM, a relatively high number for a company this size and a definite drag topotential EPS upside . Compare this to other similar sized companies such asAltiris (ATRS , Buy), 28MM shares out, and Websense (WBSN, Hold), 23MM shareout .

VALUATIO N

Solid Outlook but Risks Do Not Justify Premium Valuatio nAs anticipated in our June note, salesforce .com shares opened up strongly on itsIPO, even after the offering price was raised to $11 from an original level of $7 .50- $8.50. The stock now trades at $5 .5x EV/revenue, which is one of the richestvaluations in all of software . This is by far the richest revenue multiple in CRMrelative to pure-plays such as SEBL, CHRD, KANA, EPNY, and ONXS which areall trading under 2x with some under 1x . Admittedly, SF is growing much fasterthan any of these and therefore does deserve somewhat of a premium .Nevertheless, the reason we use industry grouping is to normalize to some extentfor demand outlook and with other CRM stocks reflecting a weak outlook, SF'smultiple should not be more than double .

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M E R I CAN.- July 13, 2004A TECHNOLOGY RESEARCH (CRM: Initiating Coverage with a SELL )

Alternatively, we have looked at smaller , higher growth names in other sectors asan indicator of appropriate multiples . WBSN appears to us to be a reasonablecomparable in this format as it is a similar size and has a subscription model . Ithas generated high growth rates , though not as high as SF, but also plays in astronger sector (Web filtering ), has generated excellent margins (30%+) and hasno dominant competitors directly in its space . Yet WBSN trades at only 4 .5x.Netscreen (NSCN), which was one of the fastest growing vendors in software overthe last two years , was only trading at 4x revenue prior to its acquisition by JNPR.It had the benefit of a) selling into the red -hot VPN appliance space ; b) a superiorproduct and c) strong margins. Turning to another sector- client and servermanagement - ATRS (one of our favorite picks) - is trading at only 2 .6x despiteposting 56 % organic growth last year and generating strong margins .

In sum, SF appears richly valued when compared to sector comparables or toother high growth comparables, all of which have other superior attributes vis-a-visSF such as superior sector growth, product differentiation, lower competition andhigher margins .

We do believe SF's outlook merits a premium but given the CRM sector outlookand our long list of concerns, we believe a 4 .0 multiple is more reasonable, givingus a $12 price target.

CATALYSTS

We see several potential negative catalysts over the next few quarters .1 . Significant overhang : SF has a fairly small float of 10MM shares relative to

share out of 101 MM, with a significant 91 MM share hitting lock-up expiration inlate December. As we have seen with other richly-valued IPO's such as IPASlast year, even the potential for new sellers can have a significant negativeimpact on the stock price .

2. Deferred growth deceleration : On the financials, deferred growth will be key.So far deferred has been excellent, up 159% Y/Y at the end of FY04, but onlyup 5% sequentially in FQ1 vs . 16% growth in recognized subscription revenue .This may well be due to seasonal patterns (we don't have all of the historicalnumbers to compare), but if deferred continues to lag recognized by a widemargin, it will likely put pressure on the stock .

3 . Gross margin contraction ; lack of operating margin expansion : Similarly,margins will also be important. Subscription margins have been steady in the91-93% range for several quarters. Any slip below 90% will likely be seen asindicative of pricing pressure . Services margins have been much more lumpy,bouncing around considerably in the last few quarters and hitting 15% in FQ1 .The company will need to show steady improvement on this front if it wants togenerate meaningful earnings in the long-term . Finally, operating marginexpansion will be key. We remain doubtful that the company will be able toreduce its S&M expense in the face of intense competitions . If the percent ofrevenue spent on S&M does not come down markedly in the next few quarters,it will bring profitability concerns to the fore and may cause some other analyststo cut earnings numbers.

4. Competitive moves , price cuts or acquisitions : If a major competitor such asSAP ORCL, PSFT or MSFT were to announce a significant new hostedinitiative and/or price cuts, it could have significant negative impact. Similarly, ifany of these were to acquire one of the pure-play competitors in the space,particularly right now, it would have a negative impact .

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M E R I C A N~ July 13, 2004TECHNOLOGY RESEARCH ( CRM: Initiating Coverage with a SELL)

Public Companies Mentioned in This R epo rt :Advanced Micro Devices Inc (AMD, $14 .43, NR)Altiris Inc (ATRS, $23 .00, NR )Analog Devices Inc (ADI, $42 .63, Buy - D . Freedman)International Business Machines Corp (IBM, $84 .95, NR)Juniper Networks (JNPR, $22 .28, Buy)Microsoft Corp (MSFT, $27 .89, NR)ONYX Software Corp (ONXS, $3 .61, NR)Oracle Corp (ORCL, $11 .09, NR)Peoplesoft Inc (PSFT, $17 .18, Buy )SAP AG (SAP $39 .44, NR)Siebel Systems, Inc . (SEBL, $8 .13, Hold)SonicWall (SNWL, $7 .94, NR )SunTrust Banks, Inc. (STI, $66 .00, NR)WatchGaurd (WGRD, $6 .16, NR)Websense (WBSN, $32 .23, NR )

Lh

18

17

16

15

14

Q2 13

Created by BlueMatrix

Distribution of Ratings/LB Services by Universe and Firmwide

lB Serv iPast 12 Mos .

Rating Count Percent Count Percent

BUY [BUY] 63 56.25 0 0.0 0

HOLD [HOLD] 44 39.29 0 0.0 0

SELL [SELL] 5 4.46 0 0.0 0

I, Donovan Gow, as the analyst responsible for this report, certify that :1) All Views expressed in this research Reportaccurately reflect my personal views about any and all of the subject securities or issuers discussed ; and 2) No part of mycompensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by me i n

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AP4-n~CAN July 13, 2004GY RE SEARCH (CRM: Initiating Coverage with a SELL )

this research report .

American Technology Research employs the following rating system :Buy: At the time that this rating is instituted, the totalreturn of this stock is anticipated to be + 20% or more over the ensuing 18 months .Hold : At the time that this rating isinstituted, the total return of this stock is anticipated to be 0% over the ensuing 18 months .Sell : At the time that this rating isinstituted, the total return of this stock is anticipated to be - 20% or more over the ensuing 18 months .Price charts withratings changes and price target changes for companies we have covered for more than year can be found athttp ://www.amtechresearch .com/charts .The author of this report (or household member) does not maintain a position in thesecurities mentioned in this report .The firm has not provided any investment banking services for the companies in thisreport.The research analyst and/or research associate have or will receive compensation based on various factorsincluding quality of research, investor client feedback, and the Firm's overall revenues, and does not include investmentbanking revenue.American Technology Research, Inc is a member of the NASD and a member of SIPC . AmericanTechnology Research, Inc . has prepared this document . Information contained herein has been obtained from sourcesbelieved to be reliable, but the accuracy and completeness of the information, and that of the opinions based thereon, arenot guaranteed . This report is not an offer to buy or sell or a solicitation of an offer to buy or sell the securities mentioned orrelated securities. American Technology Research, Inc . is a registered broker-dealer. American Technology Research ,Inc., and its entities and persons associated with it, may have long or short positions in or effect transactions in thesecurities of companies mentioned in this report . Do not change or reproduce any of this report without the express .

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American Technology Research

Salesforce .com P&L (FY JAN, $000)

FY 04 Apr-04 Jul-04 Oct-04 Jan -0 5 FY 05 Apr-05 Jul- 05 Oct-05 Jan -0 6 FY 06Revenue :

Subscription 85,796 31,116 35,472 39,729 45,291 151,608 50,726 56,306 61,936 69,369 238,337Professional services and other 10,227 3,723 4,281 4,924 5,810 18,738 6,507 7,353 8,309 9,638 31,807

Total Revenue 96,023 34, 839 39 ,754 44 ,653 51,101 170, 346 57, 233 63,659 70, 245 79 ,007 270,144

Cost of Revenue: - - -Subscription and support 7,782 2,282 2,838 3,178 4,076 12,374 5,073 5,631 6,194 6,937 23,834Professional Services 9,491 4,081 4,067 4,579 5,345 18,073 5,987 6,618 7,395 8,385 28,385

Total Cost of revenues 17,273 6,363 6,905 7,757 9,421 30,447 11,059 12,248 13,589 15,322 52,21 8

Gross Profit 78,750 28,476 32,849 36,895 41,680 139,899 46,174 51,410 56,657 63,685 217,926

Operating Expenses - - -R&D 6,962 2,127 2,385 3,126 3,577 11,215 4,006 4,456 4,917 5,530 18,91 0Marketing and Sales 54,600 20,415 23,455 25,898 28,616 98,385 30,906 33,103 35,825 39,504 139,337G & A 16,915 5,573 6,758 7,591 8,176 28,098 9,157 10,185 10,537 11,851 41,73 1Lease Abandonment (recovery) (3,445) - - -

Total Operating Expenses 75,032 28,115 32,598 36,615 40,370 137,698 44,069 47,744 51,279 56,885 199,978

(Loss) Income from operations 3,718 361 251 280 1,310 2,202 2,104 3,666 5,378 6,800 17,9484% 1% 7%

Interest income 379 144 600 625 650 2,019 675 700 750 800 2,925Interest expense (22) (1) - - - (1) - - - - -Other income (expense) 164 20 - - - 20 - - - - -

(Loss) income before inc . taxes and min 4,239 524 851 905 1,960 4,240 2,779 4,366 6,128 7,600 20,873Provision for Income Taxes 541 70 - - - 70 - - - -

(Loss) income before minority interest 3,698 454 851 905 1,960 4,170 2,779 4,366 6,128 7,600 20,873Minority Interest in consolidated joint ve (184) (17) - - (17) - - - - -

Net (loss) income 3,514 437 851 905 1,960 4,153 2,779 4,366 6,128 7,600 20,873

Net (Loss) income per share:Basic $ 0 .12 $ 0 .01 5 0 03 $ 0.03 $ 0 .06 $ 0.13 $ 0.08 $ 0.12 $ 0.16 $ 0 .20 $ 0 .56Diluted $ 0 .04 $ 0 .00 S 0.01 $ 0. 01 $ 0 . 02 $ 0.04 $ 0.03 $ 0. 04 $ 0.06 $ 0 .07 $ 0.20

Weighted Average Share used :Basic 29,605 31,688 32,688 33,688 34,688 33,188 35,688 36,688 37,688 38,688 37,188Diluted 95,409 100,398 ###### 102,398 ###### 101,898 ###### ###### ###### ###### 105,898

Y/Y GrowthSubscription 80% 84% 81% 77% 69% 77% 63% 59% 56% 53% 57%Professional services 207% 87% 111% 67% 79% 83% 75% 72% 69% 66% 70%Total revenue 88% 84% 84% 76% 70% 77% 64% 60% 57% 55% 59%Operating exp enses 47% 81% 85% 123% 59% 84% 57% 46% 40% 41% 45%

Q/Q GrowthSubscription 16% 14 % 12% 14 % 12% 11% 10% 12 %Professional services 15% 15% 15 % 18% 12% 13% 13% 16 %Total revenue 16% 14% 12% 14% 12 % 11% 10% 12%Operating exp enses -63% 16% 12% 10% -68% 8% 7 %

MarginsSubscription 91% 93% 92% 92% 91% 92% 90% 90% 90% 90% 90 %Professional services 7% -10% 5% 7% 8% 4% 8% 10% 11% 13% 1 1Gross 82 % 82% 83 % 83% 82% 82% 81% 81 % 81% 81% 81 %Operating 4% 1% 1% 1% 3% 1% 4% 6% 8% 9% 7 %

Percent of revenu eR&D 7% 6% 6% 7% 7% 7% 7% 7% 7%S&M 57 % 59% 59 % 58% 56 % 54% 52 % 51% 50 %G&A 18 % 16% 17% 17% 16% 16% 16% 15% 15%

Donovan Gow

203-532-7338

Exhibit I

July 1 , 2004 Prudential Equity Group, LLCInformation TechnologyApplications & Enterprise SoftwareCRM: INITIATING COVERAGE WITH A NEUTRAL WEIGHT RATING AND $18 PRICETARGET - PICKING FRUIT WITH NO LADDER

salesforce .com, inc . i • +Brent Thill • 415.395.2622 • brent thill@prusec.com Current : Neutral WeightJohn S. Byun • 650 .320 .1640 • john_byun@prusec . com Prior : NoneReid Menge • 415.395 .2614 • reid menge@prusec.com Risk : Hig h

Target : $18.00Industry : Favorabl e

All impo rtant disclosures can be found at the end of this report , starting at page 14, under th esection entkled Important Disclosures .

FY EPS P IE 1 Q 2Q 3Q 4QActual 1/04 $0.05A NM $0.01A $0.01A $0.01A $0.01A

Current 1/05 $0.08E NM $0 . 01A $0.02E $0 .02E $0.03ECurrent 1 /06 $0.22E 72.9XCurrent 1/07 $0 .37E 43.3X

Avg . Volume: NA Div/Yield: NA EPS Growth : 80.00%Market Cap : $1,647 m 52w Range : 14 .75-17.69 P/E / Growth : 2 .5x

Shares : 102 .76 m

HIGHLIGHTS

• We are initiating coverage of salesforce.com (ticker : CRM) with a Neutral Weight rating and $18price target .

• Salesforce .com is the leading provider of hosted CRM (customer relationship management)application software that is delivered through a Web browser .

• Given the company's early success (9,800 customers, 147,000 paying subscribers, and FY04revenues up 88% y/y to $96M), we believe salesforce .com's simplified delivery model of software asa utility will force the entire software industry to rethink the traditional client server architecture .

• While enthusiasm for salesforce .com's IPO shares (priced at $11 on 6/22/04) has been high, webelieve investors should tread with caution for a number of reasons, including : intensifyingcompetition which could dampen subscriber growth and restrain pricing, potential difficulties inpenetrating large enterprise customers from a mostly SMB (small/medium size businesses) base, andfull valuation embedding fairly aggressive growth expectations .

• CRM shares appear fully valued at CY05 multiples of 24x operating cash flow, 73x P/E, and 5 .8x EV

to sales . Our DCF-based $18 price target implies CY05 multiples of 28x OCF, 82x P/E and 6.6x EVto sales .

DISCUSSIO N

Salesforce .com is fundamentally changing the software industry, in our opinion . Traditional softwarebusiness models are being reexamined as the company has shown enormous success pioneering a hostedapplication software model, growing its installed base in 4 years to 9,800 customers . Salesforce .commarkets a CRM application sold on a subscription basis delivered through a Web browser . Given thecompany's early success, we believe their simplified delivery model of software as a utility will force theentire software industry to rethink the traditional client server architecture .

Prudential Financial

July 1 , 2004 Prudential Equity Group, LLCInformation TechnologyApplications & Enterprise SoftwareDuring the last 12 months, we have spent considerable time speaking with users, attending user

conferences (including salesforce .com's winter 2003 event in San Francisco), test-driving salesforce .com

versus its competitors, and conducting industry due diligence . We have heard customer case studies from

users as diverse as Nokia and Segway, and spoken with customers in various verticals includin g

technology and hospitality consulting . Our due diligence also included an extensive review of the IPOprospectus . However, without detailed discussions with salesforce .com's senior management and the

lack of guidance, our financial forecast could change materially in the future . We expect additionaldetails to be unveiled as the company exits their IPO quiet period .

COMPANY BACKGROUND - PIONEER IN HOSTED CRM APPLICATION AND

SUBSCRIPTION-BASED BUSINESS MODE L

Pioneering CRM Offering is now on its 15th Generatio nSalesforce .com is the leading provider of hosted, outsourced CRM (customer relationship management)application software that is delivered through a Web browser on a subscription basis (rather than theperpetual license model of most software vendors) . The company participates in the fast growing market

for hosted applications services, which is expected to increase at a CAGR of 44% from $425M in 2002 to$2.6 Bn in 2007 according to IDC .

Salesforce .com was founded in 1999 by Marc Benioff, an Oracle employee with a vision that the future ofsoftware lay in web services . The company launched its first product in February 2000 - a sales force

automation (SFA) offering delivered as a utility . By 2001, the company had become cash flow positive,and in 2002 salesforce .com launched an Enterprise Edition to try and get larger companies more excitedabout the ASP model . Enhancements in the 2002 Enterprise Edition included offline data access,

application and integration support, additional wireless capabilities, and multi-currency functionality .

In general, the company releases new versions of its software every 4 months, incorporating new featuresbased on user feedback . The S3 edition released in 2003 included interoperability with MicrosoftOutlook. The current version, the 15`h generation Spring '04 release, is a full-featured suite whichincludes major functionality such as SFA, customer service & support, marketing automation, analytics ,document management, and expanded support for custom applications .

Salesforce .com currently offers three major flavors of its hosted CRM product :• Enterprise Edition - With a list price of $125 per user per month, this version has the most

functionality and is targeted at large companies (annual revenues greater than $500M) .• Professional Edition - List price of $65 per user per month . Targeted at medium-size and large

businesses with 200+ employees and up to $500M in annual revenues . Lacks some of theadvanced functionality in the Enterprise Edition, such as integration with third party applications,offline/wireless access, self-service customer portals (some features are available as a premiumoption) .

• Team Edition - List price of $995 per year for 5 users . Targeted at small businesses .

Functionality is focused on core SFA features and includes integration with Microsoft Outlookand Office .

In addition, the company recently released a free Personal edition targeted at a single user needing basiccontact management functionality over the web .

Advantages of Next-Generation ASP Mode lThe first generation ASP offerings of the late 1990s failed because of a flawed business model, in ourview. To customers, these were essentially lease financing arrangements with a minimal amount of

Prudential C Financial

July 1 , 2004 Prudential Equity Group, LLCInformation TechnologyApplications & Enterprise Softwareoutsourced IT support. Customers still had to expend significant resources on customizing the hostedapps and on integrating with existing non-hosted applications . To ASP vendors, the model was notleverageable as each hosting customer required separate instances (read : license) of a busines s

application, database, etc . The hosted application itself was still a standard application such as PeopleSoftHR or SAP ERP .

Salesforce .com's next-generation ASP offering has been successful because of the following advantages :

• Ease of use. Salesforce .com's product was custom-built and architected specifically for hostin g

over the Web . Data can be accessed through a simple web browser whether online or offline .The browser-based user interface has been fine-tuned through extensive customer feedback and issimple enough to navigate by sales reps with little patience or time for training .

• Ease of deployment. Saleforce.com's product strikes a chord with both end-users and the ITdepartment . There is no code to install, no large upfront license expense, no hardware tomaintain, and no database administrators or application engineers to employ .

• Seamless upgrades . Even when customers have built custom modifications (essentially

configuration changes rather than custom code), version upgrades are handled seamlessly in thebackground by salesforce .com. Users are not disrupted, and product enhancements can be rolledout frequently.

• Centralized applications and databases , with logical separations betweencustomers/subscribers . Results in a leverageable model with attractive economics for thevendor (in turn allowing lower pricing for customers) .

• Dynamic support for multiple languages and currencies . On-the-fly translation of currenciesand presentation languages for different users around the globe enable multinationalorganizations to cooperate based on a single shared application and database .

• Pay-as-you -go subscription pricing. Makes customers feel at ease with the initial commitment

by reducing the large upfront capital investment, gives the perceived flexibility to switch vendorsif desired, and provides reassurance that vendors must earn their periodic payment by keeping

customer satisfaction high (through continuous improvement and responsive service) . In contrastto salesforce.com's $65-$125 per user per month pricing, a traditional packaged CRM softwarefrom Siebel can require upfront investments of $1,500-2,500 per user for a basic license, plushardware and implementation services, as well as ongoing outlays for software maintenance fees,networking expenses, and IT support .

Enthusiastic User Responses and Positive Case Studie sThe typical user profile for salesforce .com is a sales representative out in the field . User response hasbeen extremely positive . Traditional packaged CRM applications often require extensive user trainingand maintenance to keep the application running. In this regard, sales reps appreciate the intuitive web-based design. Others like the online training sessions with flexibility to fit their own schedule . Remotesalespeople appreciate that they don't need to mail their notebook PCs to IT departments for softwareinstallations and upgrades, which can mean lost sales time . Another plus for sales reps is the ability toaccess their files and information from any web-based terminal . Overall, the benefits lead to broader useradoption .

Customer case studies have been generally positive as well . We highlight some below :• Advanced Micro Devices - After trying out salesforce .com's Winter '04 Edition, this leading

semiconductor manufacturer with $4 Bn in annual sales committed to running their entireworldwide customer organization on salesforce .com in a deal worth $2M . AMD deployed theirfirst 800 users in 45 days .

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Applications & Enterprise Software• Nokia, Internet Communications Division - As Nokia considered SEBL's packaged software

as an alternative, the division's management saw it as too costly to purchase and maintain whileits users perceived overly complex functionality and a steep learning curve. The division hasbeen a customer of salesforce .com for 1 '/2 years, initially rolling out the service to 350 users -not just to sales reps, but also in the finance, marketing, and other departments . The roll-out wasa global success : the IT department liked the painless, simple implementation ; sales reps likedthe simple user interface ; other users appreciated salesforce .com's off-line capability, dynamicmulti-language/currency support, easy personalization for each user, Microsoft Office integration,

and scalability .

• Eagle Global Logistics - This global transportation provider with $2 .3Bn in annual sales and9,000+ employees achieved complete implementation and customization of salesforce .com in 6weeks. Within 90 days of the rollout, Eagle had 850 users across 60 countries . The actual TCO

(total cost of ownership) was within 1% of budget, with no hidden costs or surprises . Most likedfeatures were off-line capabilities and multi-language/currency support .

• Segway - A smaller company with 120 employees, Segway was drawn to the ASP model and

was most happy with the ability to manage leads coming in through its website and at tradeshows. Segway uses salesforce .com to manage all marketing campaigns and to feed leads to itstelemarketing reps .

• TIBCO Software - TIBCO Software has 70 direct sales reps running salesforce .com. TIBCO isa customer of Siebel's customer support software, but found Siebel's Sales Force Automationsoftware too cumbersome .

First Mover Advantage Translated into Early Sales Momentu mSalesforce .com's first mover status in the hosted CRM space has provided clear sales momentum . It tooksalesforce .com only 4 years to amass 9,800 customers ; by comparison it has taken a decade for Siebel toreach the 3,000-customer mark . While their customer profiles are drastically different, salesforce .com'sability to grow its customer base so rapidly is testament to the strength of its product .

Clearly there was a greenfield opportunity for an ASP-based CRM solution at the start of the decade . Themorose economic environment of 2001-2003 forced many CIOs to search for a more cost-effective CRM

solution than the traditional, high-priced packaged software . While Siebel's sales opportunities weredeclining as evidenced by their plummeting license revenues (from $1 .1 Bn in CY01 to $482M in CY03),salesforce .com was doubling revenues annually as they were in the market with a better mousetrap . SinceCYOO, salesforce .com's customer base has risen rapidly, with 85% of all leads coming through positivecustomer referrals by the end of 2003 .

Salesforce .com has grown impressively since the initial product launch in February 2000 . The number oftotal customers has grown rapidly from 3,500 at the end of FY02 (ending January '02) to 5,700 in FY03,8,700 in FY04, and 9,800 in the most recent F 1 Q05 (April '04) quarter . The number of payingsubscribers rose just as quickly from 53,000 in FY02, to 76,000 in FY03 (+23,000 y/y), 127,000 in FY04(+51,000 y/y), and 147,000 in the most recent quarter . During F1Q05, salesforce .com added 20,000 newpaying subscribers, or 8x the 2,500 CRM OnDemand subscribers (some on free trial) added by SEBLduring its Q1 (ending March '04). These metrics imply an average of 15 paying subscribers per customerfor salesforce.com; the company clarifies that the subscriber count ranges from 1 to more than 2,000 percustomer . Revenues also increased dramatically from $5M in FY01 to $22M in FY02 (+312% y/y),$51M in FY03 (+128% y/y), and $96M in FY04 (+88% y/y) .

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July 1 , 2004 Prudential Equity Group, LL CInformation Technology

Applications & Enterprise SoftwareSOME ISSUES TO CONSIDER BEFORE INVESTORS JUMP INWhile enthusiasm for salesforce.com's IPO shares (priced at $11 on 6/22/04) has been high, we believe

investors should tread with caution for a number of reasons, including : intensifying competition which

could dampen subscriber growth and pressure pricing, potential difficulties in further penetrating largeenterprise customers from a mostly SMB (small/medium size businesses) base, and full valuationembedding fairly aggressive growth expectations .

Competition Intensifying around salesforce .com; Siebel and Microsoft are Circling ; Low Barriersto Entry and Low Switching CostsSalesforce .com built a stable of 9,800 customers with little to no competition from CY2000 to 2004 .However, the competitive landscape is getting more crowded and intense, not the least of which becauseof the added attention created by its own IPO . We are concerned that companies wishing to enter the

hosted CRM space have few barriers to entry .

From the high end, CRM powerhouse Siebel entered the field by hunching Siebel CRM OnDemand inpartnership with IBM in the last few days of C4Q03, while larger apps software vendors have beenhungrily looking for growth in the mid-market as they face a saturated business applications market at thehigh-end. Siebel's brand recognition and installed base of enterprise customers provide a convincingplatform for early traction; pricing of $70 per user per month is roughly similar to salesforce .com'sProfessional Edition .

From the low-end, NetSuite (in close association with ORCL) offers an integrated business suite thatextends beyond CRM, while Microsoft CRM is now on version 1 .2 and can claim the tightest integrationwith the Microsoft Outlook email client .

In addition, while the flexibility of a hosted, subscription model is pitched as a positive versus massive

packaged apps that promote lock-in, the flipside of the argument is that switching costs are lower,potentially creating opportunities for new entrants . For example, Autodesk is listed as a reference onsalesforce .com's website, yet is in the process of switching to Siebel . Competitors looking to buildmarket share will be pointing their guns at the most visible target in salesforce .com, which may dampensubscriber growth and restrain price increases .

Other potential competitors to watch include :• RightNow Technologies - focused more on the customer service segment of the hosted CRM

market; should garner more buzz and funds from its recently filed IPO .• Salesnet -usually mentioned in the same breath as salesforce .com when discussing hosted SFA

offerings. Competing enterprise product's (Salesnet Extended Edition) list price is cheaper thansalesforce .com ($99/user/month versus $125/user/month) .

• Several more salesforce .com clones are expected by year-end 2004 according to industryanalysts .

SMB-Centric Customer Base , Yet Looking for Upside in Larger Enterprise sSalesforce . com notes that it generated 30% of FY04 revenues from large businesses ( over $500M inannual revenues ), 30% from medium-sized businesses (200+ employees and up to $500M in revenues),and 40% from small businesses (fewer than 200 employees ) . Using the company's segment definitions, itgenerated 70% of FY04 revenues from SMBs . Keeping in mind that many software vendors define thelarge enterprise customer category as companies with revenues greater than $1Bn, and the fact thatsalesforce .com's presence at large businesses is often limited to a single division or a small number ofusers, salesforce . com's customer concentration with SMBs is even more pronounced .

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In order to sustain/increase average monthly revenue per subscriber and meet aggressive expectations forsubscriber growth, we believe salesforce .com is stepping up efforts to pursue larger enterprise customers .

However, we believe to climb upward will be challenging for a number of reasons, including :

• Functional gap compared to high-end CRM applications such as SEBL's on-premise (i .e ., not

hosted), full-featured product.

• Lack of vertical depth compared to SEBL's extensive portfolio of 20 industry-specific versions,

including 5 vertical editions of Siebel CRM OnDemand expected this summer .

• Large enterprises may prefer to own and customize packaged software for their larger

offices/departments while opting for hosted solutions only in smaller departments or remotelocations .

• Continued perception over data security risks in a hosted environment .

Full Valuation Reflects Potentially Aggressive Growth Expectation sSalesforce .com shares currently trade at CY05 multiples of 24x operating cash flow, 73x P/E, and 5 .8xenterprise value to sales . Our forecast assumes that cumulative subscriber count will more than triple in 3years from 127,000 in FY04 to 445,000 in FY07 . We assume that the company will be able to increasepricing slightly throughout FY05 (from $76 in FIQ to $76 in F2Q, $78 in F3Q, and $80 in F4Q), thensettle at the $80 level throughout FY06 and FY07 . Our monthly per subscriber ASP estimate assumes

that salesforce .com will be able to offset competitive pricing pressures by increasing functionality and

adding new products . We estimate overall revenues will grow at a 10-year CAGR of 24% from FY04's$96M to $892M in FY15 .

FINANCIAL ANALYSIS AND OUTLOOKBest Efforts Forecast Subject to Significant Future Revision . Based on limited data in

salesforce .com's IPO prospectus and our own industry knowledge, i .e ., without access to management

guidance or more detailed company data, we have built what we believe is a reasonable model - albeitwith what appears to be fairly aggressive expectations for subscriber growth and slightly higher ASPassumptions, yet reflecting deceleration from recent growth rates . During the last 12 months, we have

spent considerable time speaking with users, attending user conferences, test-driving salesforce .comversus its competitors, and conducting industry due diligence . Investors should keep in mind that therecould potentially be significant changes to our model as the company provides additional details after theIPO quiet period and on the F2Q (July) earnings release .

Estimates Overview : Modeling 3-Year Revenue CAGR of 61 % to $404M in FY07 and EPS CAGRof 100% to $0.37. In the 4 years since the first product's launch in February 2000, salesforce .com'srevenues have grown to $96M in FY04 and $35M in the most recent quarter ended April 2004 . For the

next 3 years, we are modeling a revenue CAGR of 61% to $404M in FY07 (ending Jan-07 and roughlyequivalent to CY06) . As for EPS, we are modeling a 3-year CAGR of 100% from $0 .05 in FY04 to$0.37 in FY07 . This implies operating margin expansion from 4.8% in FY04 to 14 .0% in FY07. Notethat we have adjusted EPS figures to exclude amortization of stock-based compensation expenses andlease abandonment charges (& related recovery/reversal of accruals) . Due to limited visibility on thecompany's operating expense spending intentions, we believe our EPS estimates may be materially moreconservative than our top-line assumptions .

Revenue Build-Up is Driven by Subscriber Metrics - Assuming Subscriber Count will Triple from147,000 in April '04 to about 445,000 in January `07

• Subscription-based revenue model . Salesforce .com offers hosted, outsourced CRM (customerrelationship management) applications on a subscription basis (rather than the perpetual licens e

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July 1, 2004 Prudential Equity Group, LLCInformation TechnologyApplications & Enterprise Softwar e

model of most software vendors) . Typical list prices range from $65-$125 per month per

employee/user/subscriber. Typical contract terms are 12-24 month in length, non-cancelable,

billed annually or quarterly . Subscription revenues are recognized monthly, with matching

deferral and amo rt ization of sales commissions (which are paid out upfront) . In addition,salesforce . com generates Professional Se rv ices & Other (primarily training) revenues , which arerecognized on a time & materials ( for consulting/implementation ) or per person per class basis(for training ) . During FY04 (ending January `04), the revenue mix was 89 % subscription to 11%serv ices .

Net new, paying subscriber additions as a primary driver. Salesforce .com's pace of addingpaying subscribers has been accelerating from 23,000 new subscribers in FY03 to 51,000 in FY04

and 20,000 in the most recent F1Q05 (April `04) . We are modeling modest sequential growth(mostly in single digit percentages) in the number of new quarterly subscribers (net of chum inexisting customer base), increasing from 21,315 in F2Q05 (July `04) to 31,436 at the end of ourforecast period in F4Q07 (January `07) . This results in a total cumulative subscriber count of

127,000 in FY04 increasing to roughly 216,000 in FY05 (+70% y/y), 324,000 in FY06 (+50%y/y), and 445,000 in FY07 (+37% y/y) .445,000 subscribers at the end of FY07 represents less than 1 % of the addressable market

opportunity . On December 1, 2003, we published a note titled "SEBL : Sizing Up the HostedCRM Opportunity" where we attempted to quantify the market opportunity . Our chosen metricfor the addressable market was 100 million Microsoft Outlook users who are engaged in contact

management activities for sales or customer service . Our 445,000 subscriber forecast fo rsalesforce .com by FY07, though it may initially appear to be very aggressive as a near-tripling ofthe actual F 1 Q05 (April `04) figure, represents less than 1% of addressable market of 100 million

Outlook users .Average monthly subscription revenue per subscriber as a complementary driver . In order

to calculate Subscription & Support revenues in a quarter, we multiply the average cumulativesubscriber count for the period by the average monthly subscription revenue per subscriber (we'llcall it ASPs for "average selling price") . Note that the latter metric is essentially a blended

figure, which absorbs complexities such as timing of new subscriber additions within a quarter,discounts off list prices, and mix of various software editions . In the past, monthly ASPs haveincreased from $34 in FY02 to $62 in FY03, $74 in FY04, and $76 in the most recent F1Q05 .Going forward, we assume ASPs will increase slightly throughout FY05 ($76 in F2Q, $78 inF3Q, $80 in F4Q), then settle at the $80 level throughout FY06 and FY07 . Our ASP estimateassumes that salesforce .com will be able to offset competitive pricing pressures by increasingfunctionality and adding new products .Sensitivity analysis on ASP assumptions leads to a wide range of DCF values . In light of theuncertainty surrounding the future direction of ASP trends, we performed a sensitivity analysisusing different ASP assumptions . Our base case scenario, which assumes a 10-year revenueCAGR of 24% and terminal year operating margin of 23%, leads to our DCF-based price targetof $18 . If ASPs stayed higher at $100 through FY07, the DCF value would reach $25, driven bya 10-yr revenue CAGR of 27% and terminal operating margin of 26%. If ASPs dropped lower at$60 through FY07, the DCF value would fall to $11, given a 10-year revenue CAGR of 21% andterminal operating margin of 18% . Clearly, one's viewpoint on salesforce .com's growthprospects will give widely divergent outcomes on the stock's fair value .

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July 1, 2004 Prudential Equity Group, LLCInformation TechnologyApplications & Enterprise Softwar e

Exhibit 1 . Valuation Sensitivity to Changes in Monthly Subscription Revenues per Use rASPs * Terminal 10-year Terminal DC F

(future qtrs ) Revenue Rev CAGR Oper Mgn

$100 $1, 114M 27% 26% $25

$90 $1,003M 26% 25% $21

$85 $947M 25% 24% $20

base case $ 892M 24% 23% $18

$75 $836M 24% 22% $16

$70 $780M 23% 21% $15

$60 $669M 21% 18% $11

Notes : ASPs = subscription revenues per user per month based on average subscriber count . Basecase assumes ASP of $76 in 7/04 qtr, $78 in 10/04 qtr, and $80 thereafter . Terminal year =FY2015, equivalent to CY2014 .Source: Prudential Equity Group, LLC .

Professional Services (PS) & Other revenue driven by current and prior quarter

Subscription & Support revenues . We examined the trend in PS & Other revenues forcorrelation with metrics such as customers, subscribers, and related subscription revenues . Noneof the factors showed a strong correlation, as growth in PS & Other revenue appears to have beendriven by the ad-hoc addition of consultants and trainers to satisfy unmet customer demands .Therefore, we have defaulted to the trailing 2-quarter Subscription & Support revenue as a driverand reasonable proxy for services demand going forward . We expect the PS & Other servicesmix as a percentage of total revenues to decline slightly from 10 .7% in FY04 (or $10 .2M) to8 .8% in FY07 (or $35.4M) .

Brief Discussion of Expense Items - Cloudy Forecast ; High Gross Margin ; Low R&D Investments ;High Marketing & Sales Expenses . As discussed earlier, due to limited visibility on the company'soperating expense spending intentions, we believe our EPS estimates may be materially moreconservative than our top-line assumptions . Salesforce .com's expense line items have fluctuatedsignificantly from quarter to quarter, rendering the task of producing reliable projections difficult . In SECfilings, the company notes that expense items, including cost of revenues, are primarily driven by

headcount and related allocations .• Projecting overall gross margin in the 82%-84% range from FY05 to FY07. Gross margins

have been on a generally upward trend from FY02's 74 .7% to FY04's 82 .7%. We assume

continued improvement to 84 .0% in FY07 . Breaking down overall gross margin :• Subscription & Support gross margin have stayed in the low-90% range (90 .8%-92 .9%) for the

last 5 quarters . Cost of revenues includes support staff for the subscription service. Goingforward, we are modeling quarterly gross margins of 90 .5%, 90 .8%, and 91 .0% in FY05, FY06,and FY07, respectively .

• Professional Services & Other revenue gross margin have been more volatile in the past,ranging between -44 .3% (F4Q03) to 52 .1% (F1Q03) and -6 .7% most recently in F1Q05 . Fullyear margins have appeared steadier at 9 .1% in FY03 and 10 .7% in FY04 . Going forward, weare assuming a normalized quarterly gross margin of 10%-11% .

• R&D Investments appear low, having come down from 22% of revenues in FY02 to 8% inFY03 and 6.8% in FY04 . Part of this is due to better leverage on past R&D investments asrevenues grow y/y at a double-digit rate, but may also reflect an inordinate focus on a sales push .

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July 1, 2004 Prudential Equity Group, LLCInformation TechnologyApplications & Enterprise Softwar e

Going forward, we are modeling R&D expenses to increase from FY04's base of $6 .5M to

$23 .0M in FY07, representing 6%-7% of total revenues .• Marketing & Sales Expenses appear very high, having accounted for 62% of total revenues in

FY03, 55% in FY04, and a step up to 57 .4% in the most recent F1Q05 (April '04 quarter) . Wecontinue to model heavy spending on M&S expenses as salesforce .com and SEBL (and others)battle it out in the emerging hosted CRM market . Our estimates are 57 .4% of revenues in FY05,56.4% in FY06, and 55 .0% in FY07 .

• G&A expenses exceed spending on R&D . Despite CEO Benioff receiving only token

compensation ($1 salary, no bonus, no options in FY04 ; with expectations of no more than $10annual compensation going forward), general & administrative expenses were $10 .7M in FY03(vs . $4.2M in R&D) and $15 .7M in FY04 (vs . $6.5M in R&D) . Going forward, we assume

continued G&A expense growth in absolute dollars as salesforce .com fills in management slotsand adds the cost burden of being a public company. As a percentage of total revenues, we aremodeling 13 .6% in FY05 (vs . 16.4% in FY04), dropping to 9 .3% by FY07 - reflecting somepositive leverage .

• Forecasting operating margin expansion from 4 . 8% in FY04 to 14.0% in FY07. On anadjusted operating income basis, we estimate that salesforce .com was profitable for all 4 quartersin FY04, although on a slightly declining trend in the last 5 quarters (from 5 .8% in F1Q04 to3 .6% in F1Q05) . We are modeling 5 .3% in FY05, rising to 10 .2% in FY06 and 14 .0% in FY07 .If the company can get much more efficient on marketing & sales expenses, then there could beadditional operating leverage .

• Tax rate held low by NOLs. At year-end FY04 (January '04), Salesforce .com had tax-

deductible net operating loss carryforwards of $35M at the federal level and $45M at the statelevel . We estimate salesforce .com had an effective tax rate of 0% in FY03 and 11% in FY04 .We are modeling 15 .0% for the quarters beginning in F2Q05 (July '04) to F4Q06 (January '06),increasing to 25 .0% in FY07 .

• EPS forecast - $0.22 in FY06/CY05. We estimate that salesforce .com posted adjusted EPS of$0.01 in each of the last 5 quarters . Going forward, we are modeling $0 .02 in F2Q05 (July '04),$0.08 in FY05, $0 .22 in FY06, and $0 .37 in FY07 .

• Share count assumes 11.5M IPO shares. We have included the 11 .5M IPO shares (including1 .5M shares from the greenshoe) on a pro-rata basis in F2Q05 (July '04) and fully reflected inF3Q05 (October '04) .

Balance Sheet Strengthened by IPO Proceeds . We estimate a post-IPO cash & securities balance ofapproximately $161M, which includes net IPO proceeds of $118M . Salesforce .com has no debt. DSOsappear healthy at 63 days in F1Q05 (April '04), 79 days in F4Q04 (January '04), and 55 days in F4Q03(January '03) .

VALUATION AND RECOMMENDATION : $18 PRICE TARGET AND NEUTRAL WEIGHTRATING

We are initiating coverage of CRM shares with a Neutral Weight rating and an 18-month price target of$18. Our $18 price target is based on a 10-year DCF model which assumes a 10-year revenue CAGR of24%, terminal year operating margin of 23%, a discount rate of 11 .5°/x, and a terminal multiple of 20x .Our price target implies a CY05 operating cash flow multiple of 28x, a P/E of 82x, and an enterprisevalue to sales multiple of 6 .6x .

Our valuation methodology shares similarities with our view on RHAT, as both companies follow asubscription-based model which can significantly understate reported income relative to operating cashinflows . The subscription model defers a significant portion of booked revenue to the balance sheet to b e

FinancialPrudential 4W

July 1 , 2004 Prudential Equity Group, LLCInformation TechnologyApplications & Enterprise Softwareamortized over future quarters . We consider cash flow from operations as an admittedly aggressive proxyfor EPS, yet not unreasonable and likely more relevant in the context of a subscription-based revenue

model .

Our forecast includes some fairly aggressive growth expectations, and we believe CRM stock is already

pricing in a lot of the good news . CRM shares currently appear fully valued at CY05 multiples of 24x

operating cash flow, 73x P/E, and 5 .8x enterprise value to sales. We are therefore initiating coverage of

CRM shares with a Neutral weight rating .

RISKS TO OUR INVESTMENT THESIS :• The number of subscribers and/or average revenue per subscriber do not grow as expected .

We are assuming significant growth in total paying subscribers and a slight increase in averagemonthly subscription revenue per subscriber . A slowdown in either metric, whether as a result ofcompany missteps or intensified competition, could result in a shortfall to revenues .

• Salesforce . com is unable to penetrate the larger enterprise customer segment . We believe a

significant portion of the company's future growth will come from larger companies as opposedto its current strength with SMBs . Failure to penetrate the higher-end segment could limit thecompany's growth potential .

• Competition forces salesforce .com to significantly increase R&D investments . We areassuming modest growth in R&D dollars, especially relative to Marketing & Sales and G&Aexpenses, as the company leverages its proprietary web-based architecture . Competitive

pressures to expand functionality beyond sales force functionality or CRM or to deepen industry-specific functionality could restrain operating margin improvements .

• Significant increase in investors ' required rates of return. Should investors' required rates ofreturn increase above our 11 .5% discount rate, then our discounted cash flow (DCF) assumptionmay need to be revised. With a higher discount rate, our target price may decrease .

Other companies mentioned :Siebel Systems (SEBL , $ 10.14, Neutral Weight)Oracle (ORCL, $ 11 .81, Neutral Weight)Microsoft (MSFT, $28 .63, Overweight)Red Hat (RHAT, $22 .74 , Neutral Weight)

BUSINESS

Salesforce . com, inc ., headquartered in San Francisco , CA, is the leading provider of hosted CRM (customer relationshipmanagement) application software that is delivered through a Web browser .

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CHARTS/MODELS

FOR INTERNAL USE ONLY

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July 1 , 2004 Prudential Equity Group, LLCInformation TechnologyApplications & Enterprise Software

salesforce. com, inc.- Consoli dated Income Statement(Thousands of dollars, except per-share data)Fiscal year endinu January 31 Est Est Es t

2001 2002 2003 1QA 2QA 3QA 4QA 2004 1 0 A 2QE 3QE 4QE 2005 2006 2007

Year Year Year 4103 7103 10/03 1/04 Year 4104 7104 10104 1/05 Year Year YearRevenue :

Subscription & Support $5,022 $21,513 $47,656 $16,922 $19,592 $22,480 $26,802 $85,796 $31,116 $35,946 $42,044 $48,829 $157,935 $258,052 $368,34 0Professional Services & Other 413 896 3,335 1,991 2,031 2,954 3,251 10,227 3,723 4,024 4,679 5,452 17,879 26,986 35,396Total revenues $5,435 $ 22,409 $50,991 $18,913 $21,623 $25, 434 $30,053 $96 ,023 $34 ,839 $39,970 $46 ,724 $54 ,282 $175,814 $285,038 $403,736

Cost of subscription &supportrevenues 1,556 3,491 6,902 1,521 1,746 2,070 2,150 7,487 2,221 3,419 3,998 4,649 14,287 23,791 33,22 2Cost of p1011 services & other revenues 1,521 2,187 3,033 1,674 1,917 2,433 3,107 9,131 3,972 3,621 4,275 4,906 16,774 24,200 31,56 5

Total cost of revenues $3,077 $5,678 $9,935 $3,195 $3,663 $4,503 $5,257 $16,618 $6,193 $7,040 $8,273 $9,555 $31,061 $47,990 $64,787

Gross profit $2,358 $16,731 $41,056 $15,718 $17,960 $20,931 $24,796 $79,405 $28,646 $32,930 $38,451 $44,727 $144,753 $237,048 $338,949subscription & support gross margin 690% 83.8% 85.5% 91 .0% 91 .1% 90.8% 92 .0% 91 .3% 92 .9% 90.5% 90 .5% 90 .5% 91 .0% 90.8% 91 .0%prof) service & other gross margin -268.3% -144 .1% 9.1% 15 .9% 5 .6% 17.6% 4 .4% 10 .7% -6 .7% 10.0% 8.6% 10 .0% 6 .2% 10.3% 10.8%

Gross margin 43 .4% 74. 7% 80.5% 83. 1% 83.1% 82.3% 82 .5% 82.7% 82.2% 82.4% 82 .3% 82.4% 82 .3% 83.2% 84.0%

Operating expenses :Research and development $2,935 $4,872 $4,246 $1,120 $1,571 $1,766 $2,043 $6,500 $2,038 $2,438 $2,838 $3,288 $10,602 $16,702 $23,002Marketing and sales 24,042 23,183 31,826 10,142 11,700 14,092 16,637 52,571 20,001 22,946 26,822 31,135 100,905 160,744 222,03 2General and administrative 5,529 6,093 10,717 3,355 3,463 4,012 4,871 15,702 5,369 5,769 6,169 6,619 23,926 30,576 37,376

Operating Income ($30,148) ($17,417) ($5,733) $1,101 $1,226 $1,061 $1,245 $4,632 $1,238 $1,777 $2,622 $3,684 $9,320 $29,025 $56,539Operating margin -554 .7% .77 .7% -11 .2% 5.8% 5 .7% 4.2% 4 .1% 4 .8% 3.6% 4.4% 5 .6% 6.8% 5 .3% 10.2% 14.0%

Interest and other income 1,736 491 492 384 15 46 76 521 163 169 178 191 701 1,028 1,80 6

Income before taxes ($28,412) ($16,926) ($5,241) $1,485 $1,241 $1,107 $1,321 $5,153 $1,401 $1,946 $2,800 $3,875 $10,022 $30,054 $58,34 5

Taxes 0 0 0 181 184 116 87 568 188 292 420 581 1,481 4,508 14,58 6Tax rate 0 .0% 0 .0% 0.0% 12.2% 14.8% 10.5% 6 .6% 11 .0% 13 .4% 15.0% 15 .0% 15 .0% 14 .8% 15.0% 25.0%

Minority interest in consolidated joint venture 193 425 292 16 (( 1( 13) (82) (184) (17) (L (67) (55) (193) 2( 1(( 2( 18)

Net income (loss) ($28,219) ($16,501) ($4,949) $1,320 $1,052 $878 $1,152 $4,401 $1,196 $1,600 $2,313 $3,239 $8,348 $25,331 $43,54 1Net margin -519 .2% -73 .6% -9 .7% 7 .0% 4.9% 3.5% 3 .8% 4.6% 3 .4% 4 .0% 5 .0% 6 .0% 4 .7% 8 .9% 10.8%

Diluted EPS ex . amort ($2. 12) ($0 .78) ($ 0 .19) $0. 01 $0 .01 $ 0 .01 $0.01 $0 .05 $0.01 $0.02 $0 .02 $0.03 $0.08 $0 .22 $0.3 7

Shares used in diluted net income 13,314 21,039 26,375 91,618 94,145 96,672 99,199 95,409 100,398 104,733 112,962 113,527 107,905 114,953 117,26 9

Source : saiesforce.com, inc. financial statements; Prudential Equity Group, LLC estimates.

% of Revenue

Subscription & Support revenue 92 .4% 96.0% 93 .5% 89.5% 90.6% 88.4% 89 .2% 89.3% 89 .3% 89.9% 90 .0% 90 .0% 89.8% 90 .5% 91 .2 %Professional Services & Other revenue 7 .6% 4.0% 6.5% 10.5% 9.4% 11 .6% 10 .8% 10 .7% 10 .7% 10.1% 10 .0% 10 .0% 10.2% 9 .5% 8 .8 %

Research and development 54 .0% 21 .7% 8.3% 5.9% 7 .3% 6.9% 6 .8% 6.8% 5 .8% 6.1% 6.1% 6 .1% 6.0% 5 .9% 5 .7 %Marketinoand sates 442 .4% 103.5% 62 .4% 53.6% 54 .1% 55.4% 55 .4% 54.7% 57 .4% 57 .4% 57 .4% 57.4% 57 .4% 56,4% 55 .0 %General and administrative 101 .7% 27 .2% 21 .0% 17 .7% 16.0% 15.8% 16 .2% 16.4% 15 .4% 14 .4% 13 .2% 12 2% 13 .6% 10 .7% 9 .3 %

Yr-Yr Changes

Subscription & Support revenue 328.4% 121 .5% 92 .1% 73.8% 73.8% 83 .1% 80.0% 83 .9% 83 .5% 87 .0% 82 .2% 84 .1% 63 .4% 42 .7 %Professional Services & Other revenue 116.9% 272 .2% 268 .0 % 234 .0% 135.6% 248 .8 % 206.7% 87 .0 % 98.1% 58 .4% 67.7% 74 .8% 50 .9 % 31 .2 %

Total revenues 312 .3% 127 .5 % 102.3% 82.0% 79.2% 93 .1% 88.3% 84.2% 84.8% 83 .7% 80.6% 83.1% 62. 1% 41 .6 %

Gross marnin (basis points) 3,128 by 585 an ' 60 be 27 by 417 by 274 by 218 be -88 by -67 by 0 by -11 lop -36 by 83 by 79 b yOperating margin (basis points) 47,698 by 6,648 by 1,055 by 730 bp 3,011 by 1,323 bp 1,607 bp -227 bp -122 bp 144 by 265 by 48 by 488 by 382 b y

Qtr-to-Qtr Changes

Subscription & Support revenue 15 .6% 15 .8% 14 .7% 19 .2% 16 .1% 15 .5% 17 .0% 16.1 %Professional Services & Other revenue 113 .6% 2.0% 45.4% 10 .1 % 14 .5 % 8.1 % 16 .3% 16.5%Total revenues 21 .5% 14.3% 17.6% 18 .2% 15.9% 14.7% 16 .9% 16.2%

Gross margin (basis points) 334 be -5 to -76 to 21 be -28 to 16 bar -9 be 10 anOperating margin (basis points) 1,491 by -15 by -150 by -3 by -59 by 89 by 117 by 118 hp

Source: salesforcecom, inc . financial statements ; Prudential Equity Group, LLC estimates .

July 1, 2004 Prudential Equity Group, LLCInformation TechnologyApplications & Enterprise Softwar e

salesforce. com, inc . - Miscellaneous Metr ics(revenues in thousands) 2004 2005 Est Est Est

2001 2002 2003 1QA 20A 3QA 4QA 2004 1 0A 2QE 30E 4QE 2005 2006 2007Year Year Year 4103 7103 10103 1/04 Year 4104 7104 10104 1105 Year Year Year

Revenues by Geograph y

Americas $20,305 $43,855 $16,046 $78,958 $28,336 $32,020 $36,502 $41,248 $138,106 $214,064 $278,28 3Europe 1,680 5,345 2,038 11,754 4,632 5,558 6,392 7,990 24,573 43,002 73,104Asia/Pacific 424 1,791 829 5,311 1,871 2,392 3,829 5,044 13,135 27,972 52,349Total $22,409 $50,991 $18,913 $96,023 $34,839 $39,970 $46,724 $54,282 $175,814 $285,038 $403,736

% of Revenue

Americas 91% 86% 85% 82% 81% 80% 78% 76% 79% 75% 69%Europe 7% 10% 11% 12% 13% 14% 14% 15% 14% 15% 18%Asia/Pacific 2% 4% 4% 6 % 5 % 6% 8% 9 % 7 % 10 % 13%

Customer Statistics

New customers, net 2,200 600 3,000 1,100 1,421 1,515 1,656 5,691 7,198 8,08 1qlq % growth of new customers (yly for Fl) 36% 29% 7% 9% 90% 26% 12%

Total customers 3,500 5,700 6,300 8,700 8,700 9,800 11 .221 12.7-3C 11,301 14,391 21,590 29,671Subscription & Support rev per customer $6.147 $8 .361 $2.686 $3 .081 $9 .862 $3.175 $3 .203 $3.301 $3 .393 $10 .974 $11 .953 $12 .41 4

New paying subscriptions, net 23,000 9,000 51,000 20,000 21,315 22,723 24,835 88,872 107,973 121,22 2q/q % growth of new subscriptions (y/y for FY) 122% 7% 7% 9% 74% 21% 12%

Total paying subs criptions 53,000 76,000 85 ,000 127 ,000 127, 000 147,000 168,315 191,038 215, 872 215,872 323,845 445,067Subscription & Support rev per subscription $0.406 $0.739 $0.210 $0 .211 $0 .894 $0,227 $0 .228 $0.234 $0.240 $0 .930 $0.959 $0 .960

Subscription rev per month (avg .) $0.034 $0.062 $0 .070 50 .070 $0. 074 $0.076 $0.076 $0.078 $0.080 $0.077 $0 .080 $0 .080

Paying subscriptions per customer 15 13 13 15 15 15 15 15 15 15 15 1 5

Balance Sheet & Cash Flow

Cash, cash egurvs., an/marketable sets. $22,200 $11,709 $16,009 $20,335 $35,812 $35,812 $43,73 3q/q change $ 4,326 7,92 1

Deferred revenue $7,128 $19,171 $24,310 $49,677 $49,677 $52,34 0gIq change $ 5,139 2,66 3

DSO - all receivables 79 63

Sour ce: salesforce.com, inc . financial statements; Prudential Equity Group, LLC estimates .

July 1, 2004 Prudential Equity Group, LLCInformation TechnologyApplications & Enterprise Software1/i1 tY 11 tY 11nfili 1111 ~l Il I~~i Y~11i1lif . . . .I . . . . . . . . . . . . . . . . . . . . . . .i fiilti X111 iti11t lti~It Yi 1{IIi . ...Yfii~ri f tliltlii~~if YYilf iYltfif ~i3i Ylil Ylii ~f1if11rll1illil (➢t li ➢ i lif 111 iYli lYnnil

To view charts associated with those stocks mentioned in this report, please visit http ://cmI .prusec .com .

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Any analyst principally responsible for the analysis of any security or issuer included in this report certifies that the views expressed accuratelyreflect such research analyst's personal views about subject securities or issuers and certifies that no part of his or her compensation was, is, or

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When we assign an Overweight rating, we mean that we expect that the stock's total return will exceed the average total return of all of the stockscovered by the analyst (or analyst team) . Our investment time frame is 12-18 months except as otherwise specified by the analyst in the report .

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The methods used to determine the price target generally are based on future earning estimates, product performance expectations, cash flowmethodology, historical and/or relative valuation multiples . The risks associated with achieving the price target generally include customerspending, industry competition and overall market conditions .

Additional risk factors as they pertain to the analyst's specific investment thesis can be found within the report .

ANALYST UNIVERSE COVERAGE :Brent Thill : Oracle Corp ., SAP AG, PeopleSoft Corp ., Siebel Systems , Microsoft Corp., Red Hat, Adobe Systems , BEA Systems, Novell Inc .,Autodesk, Inc ., Manhattan Associates .

Rating Distributio n

06/28/04 Firm's

Banking Clients

Overweight(Buy)* 34% 0%Neutral Weight(Hold)* 43% 1%Underweight(Sell)* 22% 1 %

Excludes Closed End Fund s

03/31/04

Firm Investmen t

Firm

Secto r

Firm'sInvestment Sector

Banking Clients

Sector'sInvestment

Banking Clients

Sector's

InvestmentBanking Client s

Overweight(Buy)* 36% 2%Neutral Weight(Hold)* 43% 3%

July 1, 2004 Prudential Equity Group, LLCInformation TechnologyApplications & Enterprise Software

Underweight(Sell)* 1 21% 1 1%

Excludes Closed End Fund s

12/31/03Firm

Firm's Sector'sInvestment Sector InvestmentBankine Clients Banking Clients

Overweight(Buy)* 34%Neutral Weight(Hold)* 42%Underweight(Sell)* 24%

Excludes Closed End Fund s

09/30/03Firm

2%

4%

1%

Firm's Sector'sInvestment Sector InvestmentBanking Clients Banking Clients

Overweight(Buy)* 34%Neutral Weight(Hold)* 41%Underweight(Sell)* 26%

Excludes Closed End Funds

2%

3%

1%

* In accordance with applicable rules and regulations, we note above parenthetically that our stock ratings of "Overweight," "Neutral Weight,"

and "Underweight" most closely correspond with the more traditional ratings of"Buy," "Hold," and "Sell," respectively ; however, please notethat their meanings are not the same. (See the definitions above.) We believe that an investor's decision to buy or sell a security should always

take into account, among other things, that the investor's particular investment objectives and experience, risk tolerance, and financia lcircumstances . Rather than being based on an expected deviation from a given benchmark (as buy, hold and sell recommendations often are), ourstock ratings are determined on a relative basis (see the foregoing definitions) .

Prior to September 8, 2003 our rating definitions were Buy, Hold, Sell . They are defined as follow s

When we assign a Buy rating, we mean that we believe that a stock of average or below-average risk offers the potential for total return of 15%or more over the next 12 to 18 months. For higher-risk stocks, we may require a higher potential return to assign a Buy rating . When wereiterate a Buy rating, we are stating our belief that our price target is achievable over the next 12 to 18 months .

When we assign a Sell rating, we mean that we believe that a stock of average or above-average risk has the potential to decline 15% or moreover the next 12 to 18 months . For lower-risk stocks, a lower potential decline may be sufficient to warrant a Sell rating . When we reiterate aSell rating, we are stating our belief that our price target is achievable over the next 12 to 18 months .

A Holdrating signifies our belief that a stock does not present sufficient upside or downside potential to warrant a Buy or Sell rating, eitherbecause we view the stock as fairly valued or because we believe that there is too much uncertainty with regard to key variables for us to rate thestock a Buy or Sell .

When we assign an industry rating of Favorable, we mean that generally industry fundamentals/stock prospects are improving .

When we assign an industry rating of Neutral, we mean that generally industry fundamentals/stock prospects are stable .

When we assign an industry rating of Unfavorable, we mean that generally industry fundamentals/stock prospects are deteriorating

July 1 , 2004 Prudential Equity Group, LLCInformation Technology

Applications & Enterprise Softwar eWhen recommending the purchase or sale of a security, Prudential Equity Group, LLC is subject to a conflict of interest because should such advice befollowed, and result in a transaction being executed through the firm, Prudential Equity Group, LLC may earn brokerage compensation on thetransaction . In addition, any order placed with Prudential Equity Group, LLC may be executed on either an agency basis resulting in a commissionpayment to Prudential Equity Group, LLC or on a principal basis, versus Prudential Equity Group, LLC's proprietary account, resulting in a mark-up ormark-down by Prudential Equity Group, LLC .

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Exhibit J

SCHWAB SOUNDVIEW CAPITAL MARKETS June 30, 2004

Initiation of Coverage salesforce .com (Outperform)CRM: Blazing the On-Demand Trail : Initiating on CRM

With Outperform

Peter Coleman415-667-5873pcoleman@soundview .com

Michael Huang415-667-6638mhuang@soundview.com

Sales and Trading1800-243-4443www.soundview .com

Ticker: CRMPrice (06/29/2004) : $16.4052-Wk . Range: $17.69-$11 .00Market Cap (B): $1.7Shares Out. (M): 101.3Rating: OutperformPrice Target: $20.00

f-wrtiN rr - waves

'wt . -' . .~ .~----_

I- UP ft,

Industry Opinion : We estimate that on-demand CRM

could outpace traditional applications spending by 4x--5xover the next several years . We believe acceleratingadoption is being fueled by several key drivers includingat least a partial backlash to traditional software .

Company Description: Salesforcc .com, headquartered inSan Francisco, Calif., and founded in February 1999, hasbecome the leader in the hosted CRM (on-demand CRM)market. Currently the company has over 400 employeesand offers its solution on a subscri ption basis only overthe Internet .

Charles Schwab & Co., Inc.Member NYSE/SIPCSoundView Technology Corporation MemberNASD/SIPC

Stock Net : We are initiating coverage on Salesforce .com, the on-demand CRM

leader, with an Outperform rating and $20 price target . We are estimating in

excess of 50% market growth as customers gravitate toward the lower risk, more

flexible alternative to traditional software . This positive secular trend combined

with significant operating leverage drives our better than market growth estimate

for Salesforce .com.

Fiscal Year Jan

F03A F04A FO5E C03A C04A COSE 1Q0SA 2Q05E 3QOSE

Revenue (Current $) 178 .5 - - 34.8 45 .5 48 . 9Revcnuc (Prcvious $) - - - - - -Revenue(Consensus $ )

EPS (Current $) 0 .05 0 .00 0.01 0.0 2EPS (Previous $) -

j

- - -

EPS (Consensus $) -

P/S (Current $) 9.3 NM NM

P/E (Current$) 328 .0 NM NM

P/E (Consensus $) NaN NaN - - - - -

• Initiating Coverage on Salesforce.com, the Leading Provider of On-Demand

CRM Solutions, With an Outperform : Salesforce .com continues to build its

leading market share in what should be one of the fastest-growing segments of

software . We forecast total revenues for the company to grow 86% in F05 and

62% in F06 .

• A Viable Alternative to Costly, Traditional Software Deployments :

Accelerating customer interest in on-demand CRM is fueling a growth in what

we see as a $1 .5 billion market segment over the next three years (CAGR 48%) .• Significant Leverage in Financial Model : Salesforce's subscription-based

model drives a powerful compounding of revenues with better predictability

than traditional software . Furthermore, given significant operating leverage, we

should expect notable earnings expansion in excess of the top-line growth rate .

• Premium to Peers Justified : We view CRM as the best near-term way to play

the rapid growth in on-demand computing. Our 12-month price target of $20

represents an 8 .2x F06 revenue multiple, which is a similar premium to other

highly leverageable reoccurring revenue models .

PLEASE REFER TO PAGE 33 OF THIS REPORT FOR ANALYST CERTIFICATION AND OTHER IMPORTANT DISCLOSURESAdditionally, Important disclosure information can also be accessed at www .soundyiew . com/Research/ConMctDIsclosure

charlesscxwAB

SCHWAB SOUNDVIEW CAPITAL MARKETS salesforce.com (Outperform) CRM: Blazing the On -Demand Trail : Initiating onCRM With Outperform

June 30, 2004Page 2

TABLE OF CONTENT S

• Summary Investment Themes . .. . . . . . .. .. .. . . . . . .. .. .. .. .. .2

• On-Demand Market Analysis. .. .. ..... .. .. .. .. .. .. .. . . . . . .. .. 3

• Financial Analysis . . .. .. . . . .. .. . . . .. .. .. .. ....... .. .. .. . . . . . .. .. .10

• Product Overview ... .. .. .. . . . . . .. .. . . . .. .. .. . . . .... .. .. .. .. . . . . ..14

• Key Strategic Growth Drivers .. .. .. .. .. . . . . . .. .. .. . . . . . .. ..19

• Competition . . . . . .. .. .. . .. .. .. .. .. ..... .. .. .. . . . . . .. .. .. . . . . . .. .. .. ..21

• Company Background . . . . .. .. .. . . . .. .. .. .. .. .. . . . . . .. .. .. . . . . .24• Price Target Valuation and Risks... .. .. .. .. .. . .. .. .. .. .. . 27

SUMMARY INVESTMENT THEMESWe Estimate That On-Demand CRM Could Outpace Traditional Applications Spending by 4x--5x Over the Next

Several Years : We believe the accelerating adoptions of hosted or no-demand CRM solutions are being fueled by several

key drivers : 1) rapid deployment that reduces the time-to-benefit ; 2) ease of use, which can result in greater end-user

adoption ; 3) less up-front capital commitment ; 4) great flexibility with regular contract renewals ; and 5) at least a partial

backlash to traditional providers . Based on these positive secular trends, Schwab SoundView estimates that the hosted

CRM could reach almost $1 .5 billion by 2007 (CAGR 48%) and become approximately 25% of the total Customer

Relationship Management market .

Substantial Unrealized Operating Leverage : We see significant financial benefits of Salesforce .com's stand-outsubscription-based software-as-a-services model . The inherent compounding effect of the subscriptions should provide formore sustainable revenue growth and better predictability vs . traditional lumpy license models . In addition, deal linearity

and typical quarter-end price pressure are improved as revenues are ratably recognized, which diminished the importance

of any one deal . Furthermore, the operational advantages of hosting and online delivery should drive margins in excess oftraditional applications vendors . Based on our longer-term operating margin assumptions, we believe Salesforce .comcould see $0 .40--$0.50 of additional EPS leverage .

Numerous Growth Opportunities : Benefiting from the improving macro economic trends and accelerating industry

growth, we believe that Salesforce can realistically drive more than 50% top-line growth for the foreseeable future . Inaddition, we . see several key company-specific growth drivers that could generate additional upside . These strategiesinclude: 1) move up-market ; 2) increase international traction, which remains a nascent contributor ; 3) leverage growinginterest from channel partners and systems integrator; and 4) increase installed base penetration .

A Window of Opportunity on the Competition: According to our analysis, Salesforce .com appears to have a

12-to-18-month advantage over close competitor Siebel . While we anticipate growing competition from larger vendors,

their near-term challenge is likely cultural . In our view, traditional vendors struggle to support hosted subscription-based

products given the legacy of up-front license-based, perpetual models . Microsoft will also become a factor, but we see its

competitive advantage more centered in leveraging Outlook, which still does not appear to be a priority for the Offic e

PLEASE REFER TO PAGE 33 OF THIS REPORT FOR ANALYST CERTIFICATION AND OTHER IMPORTANT DISCLOSURES .

SCHWAB SOUNDVIEW CAPITAL MARKETS salesforce . com (Outperform) CRM: Blazing the On-Demand Trail : Initiating onCRM With Outperform

June 30, 2004Page 3

Product Group. However, it is clear that longer term for Salesforce .com to maintain its market position it will need to

continue to add CRM functionality, and ultimately may need to expand into other on-demand products .

Where We Could Be Wrong : Our fundamental premise is that adoption of on-demand computing is accelerating and that

this trend is a permanent shift in applications spending. As IT spending continues to improve, there is increased risk that

some customers could return to more traditional systems . Furthermore, over time depending on certain cost assumptions,

the subscription model can become more expensive over the life of the relationship, which could also drive customer

churn higher . We believe that for Salesforce .com to remain the leader and continue its growth trajectory, customer service

and product innovation are critical, as the inherent customer stickiness with on-demand solutions is less than traditional

software . However, it is our view that customers require this flexibility, so virtually all software companies' business

models will be affected over time, and currently Salesforce .com has a first-mover advantage .

The Valuation Challenges in Subscription Models : Near-term valuation is likely to continue to be driven by post-deal

positioning and relatively low liquidity with only 10% of the company available to trade . We see CRM as one of the best

ways to play the developing trend of on-demand computing and one of the only high-growth stories in applications, which

should support a premium over CRM's peers .

At its current price, CRM is trading at 6.8x F05 revenues and 36 .8x on an EV/CFO basis . While this does represent an

approximate 100% premium to the applications sector, our analysis shows that subscription-based models typically can

trade at an 80% to 100% premium to the underlying universe . Furthermore, we do not believe this takes into account the

significantly greater growth of CRM. Consequently, we are using a blend of the traditional premium paid for subscription

models and the highest growth software name, Redhat . Our $20 12-month price target represents a 100% premium on a

revenue multiple basis to the average software universe, but a 50% discount to Redhat, which could narrow if CRM is

recognized as a broader on-demand play .

ON-DEMAND MARKET ANALYSI S

The March to On-Demand Computing Is Picking Up: Customer dissatisfaction with traditional CRM systems is

driving at least some of the early momentum for Salesforce .com. Packaged CRM suites have been around since the

mid-1990s, championed largely by CRM gorilla Siebel Systems (founded in 1993) . While Siebel and others have been

successful at highlighting the potential leverage technology can provide when focused on the customer, early

implementations struggled to reach initial goals .

PLEASE REFER TO PAGE 33 OF THIS REPORT FOR ANALYST CERTIFICATION AND OTHER IMPORTANT DISCLOSURES .

SCHWAB SOUNDVIEW CAPITAL MARKETS salesforce .com (Outperform) CRM: Blazing the On-Demand Trail : Initiating onCRM With Outperform

June 30, 2004Page 4

Figure 1.

CRM Life Cycle

Phase I Phase !fI

Initial Rapid Growth Re-accelerating

Re-entrenchment

1990 2000 2004 2007

Source : Schwab SoundYie w

Early adopters too often faced the realization that changing complex customer processes did not easily yield anticipatedbenefits . In some instances, implementations gave way to some never-ending nightmares, requiring three years of

heavy-duty consulting manpower and tens-of-millions of dollars in costs, only to be shelved because of poor usability. Ithas been estimated that potentially 30%--40% of CRM deployments were rolled out with only a fraction of the expectedfunctionality running . In our view, the evolution of CRM has been similar to that of ERP whereby initial acceleration in

demand was met by a retrenchment period while customer expectations and technology capabilities better aligned . Thisperiod is then typically followed by a reacceleration as the value proposition is better understood . However, thisretrenchment period was compounded by a weak economic cycle, which has opened the door for a less complex,easy -to-deploy alternative such as on -demand CRM .

rL AS REFER TO PAGE 33 OF THIS REPORT FOR ANALYST CERTIFICATION AND OTHER IMPORTANT DISCLOSURES.

SCHWAB SOUNDVIEW CAPITAL MARKETS salesforce.com (Outperform) CRM: Blazing the On-Demand Trail: Initiating onCRM With Outperform

June 30, 2004Page 5

Figure 2.

Source : AMR Research

Exploiting runaway cost concerns and "ease-of-use" questions , on-demand CRM, led by Salesforce .com, appears

poised to spark the next leg of CRM growth . While on-demand CRM certainly has not yet garnered a mainstream

following (hosted CRM represents an estimated 5% of total CRM implementations), we do believe that hosted CRM

offering is emerging as a viable alternative to monolithic CRM implementations . In fact, we are aware of several large

organizations that are seriously considering or piloting on-demand offerings . On-demand CRM could be near a tipping

point, as improved referenceability based on some large company adoption, and the continued evangelization of the merits

of on-demand computing by more and more vendors, should accelerate adoption rates .

PLEASE REFER TO PAGE 33 OF THIS REPORT FOR ANALYST CERTIFICATION AND OTHER IMPORTANT DISCLOSURES .

SCHWAB SOUNDVIEW CAPITAL MARKETS salesforce.com (Outperform) CRM: Blazing the On-Demand Trail: Initiating onCRM With Outperform

June 30, 2004Page 6

Figure 3.

Traditional GRIM vs . Hosted CR M

Large Upfront Investment

Need for On-hand TechResource s

Complexity/cost of Upgrad e

e F 1C)P-11, ",Not always on currentrelease

Source : Schwab Sound View

in r~lTi : aJr

=777E~> C4

<~~=I Limited Customizatio n

Limited Integratio n

Early Customers Have Cited a Number of Reasons for Adoptio n

• Better Capital Flexibility : While total cost of ownership may not favor on-demand over time (our estimates suggestfive years for breakeven vs . purchasing the software outright), customers appear to value reduced initial capital outlays,

which gives them the flexibility to seek alternative investments .

• Quicker Time to Install : On-demand installs could be up and running 3x--4x faster than software deployed in-house,

which arguably gets customers to business benefit sooner .• Outsource Non-Core: Customers increasingly are opting to outsource non-strategic business activities, such as systems

implementation and maintenance .

• Incentives A ligned : Vendors appear to be more incentivized to keep customers satisfied over the life of a relationship,

when customers can abandon the service after contract expiration .

PLEASE REFER TO PAGE 33 OF THIS REPORT FOR ANALYST CERTIFICATION AND OTHER IMPORTANT DISCLOSURES .

SCHWAB SOUNDVIEW CAPITAL MARKETS salesforce.com (Outperform) CRM : Blazing the On -Demand Trail: Initiating onCRM With Outperform

June 30, 2004Page 7

• Increased User Adoption : The lighter, more user-friendly footprints offered by on-demand services appear to be

driving more rapid end-user adoption .

Will Larger Enterprises Adopt? We believe that larger enterprises are moving some portion of their CRM business to an

on-demand format as evidenced by 30% of Salesforce .com's F04 revenues coming from businesses over $500 million . We

continue to believe that the broad CRM market remains relatively immature and underpenetrated (we estimate it is less

than 25% penetrated), which provides the opportunity for more than one type of applications strategy. Especially in larger

organizations where one-size-fits-all software strategies have been met will low user adoption . In addition, anecdotally we

have heard that some large Fortune 500 customers are looking at the possibility of using Salesforce .com as the front-end

application and using more traditional applications for the backend, heavy lifting . We estimate that over the next three to

four years on-demand CRM will represent 20% of total CRM package application market, which is fueled by a

combination of mid-to-large customer growth .

Lease vs. Buy -- The TCO May Not Be What You Think

One potential risk we see longer term for the on-demand market is that over time the subscription model can be more

expensive . We have leveraged a recent RFP to analyze the cost differences of on-demand vs . traditional CRM software.

Clearly the analysis is dependent on the costs that are included. Simply comparing licenses and maintenance with

subscriptions, the breakeven point is only three years . However, when hardware and certain services are included, the

breakeven moves out to five years . Our analysis does not include other internal operational savings , which may also

extend the cross-over point further . Our informal survey of customers indicated that their internal analysis showed

breakeven between four and six years on average. Perhaps more importantly, the overall hard dollar cost was a relatively

low priority, in our poll . Flexibility remains the leading factor of most of the customers we have spoken to that move to

on-demand.

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Figure 4 .

Breakeven Analysis -- Breakeven After Five Years Hosted vs . Traditiona l

Total Cost of Ownership Per # of Years of Ownersh i1 2 3 4

TRADITIONALSoftware/Seat 1300 1300 1300 1300

Software 130000 130000 130000 130000Hardware 65000 65009 65000 65000Service 234000 234070 234000 234000Maintenance 90200 180400 270600 360800TOTAL 389,200 479,400 569,600 659,800

HOSTEDSubscription/Seat/Month 125 125 125 125Cost//year 12500 12500 12500 12500Software 150000 300000 450000 600000Service 12500 12507 12500 12500TOTAL 162,500 312 ,500 462 , 500 612,500

PRICE DIFFERENTIAL 226,700 166 ,900 107 ,100 47,300

'Number of seats used in scenario - 10 0

Source : Schwab SoundView

Market May Be at Tipping Point in Acceptance : Our recent checks have revealed what appears to be an inflection point

in broader market acceptance of on-demand solutions .

• On-demand is not just for the small and medium business (SMB) market . We are witnessing an increasing number of

larger customers viewing on-demand as an attractive alternative in certain areas vs . traditional solutions .

• Independent research supports the move to on-demand . Aberdeen has indicated that 85% of organizations surveyed in

mid-2003 would consider hosted CRM vs . only half in early 2003 .

• Other large vendors, such as market leader Siebel, have entered the fray with their own on-demand offering, which only

serves to further validate the market segment .

• Systems integrators are beginning to build practices around on-demand applications . We have heard that at least one

very large SI has even utilized Salesforce .com internally in specific instances .

On-Demand Should Outpace Traditional CRM and General Application Spending by 4x--5x

We believe that traditional CRM applications in general should outpace the broader apps space over the next two years,

with an estimated CAGR of 10% . On-demand CRM, however, given accelerated customer interest, could g row

4x--5x faster. We estimate that the hosted CRM market size was $297 million in 2003 and could reach $1.43 billion

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by 2007 (CAGR 48%) . In addition to the customer growth drivers referenced on page 6 and the broadly recognized

economic recovery, we see several other broader trends driving the growth for hosted CRM which include:

1) Positive references with large accounts .

2) Comfort with certain infrastructure issues such as security of data .

3) Product track record and growing functionality .

Figure 5.

CRM Market Growth

1 61412

•_°- 10■ Hosted CRMg

-raft 0 ■ Traditional CRM

420

2003 2004 2005 2006 2007

Source: Schwab SoundView, IDC and Hewson Grou p

We Estimate That Positive On-Demand Trends Will Spread More Broadly : We do not believe that on-demand is

relegated to just CRM, as many of the growth drivers and customer motivations are applicable to other verticals withinapplications . Based on our informal survey of customers and partners, we believe that other enterprise applications such as

HR and certain aspects of supply chain management could also begin to see similar expansion opportunities . We estimatethat over the next three to four years more than 20% of enterprise applications could be purchased in an on-demandformat .

Customer Churn Remains a Key Risk Factor: While Salesforce .com has not provided any customer turnover numbers,we understand that the company has been successful at reducing its chum over the last 12 months . Early indications werethat churn may have been close to 2% a month of its subscriber base ; however, a number of new initiatives appear to havecurved this number . Furthermore, earlier in the company's model, Salesforce .com had provided the solutions for free andwere predominantly focused on smaller businesses . As the company began to raise pricing, a larger percentage of thoseearly customers turned over, which we think distorted the numbers . Furthermore, like many software companies,Salesforce .com had its share of com that went out of business, which also contributed to the numbers .

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New Initiatives Should Reduce the Turnover: Currently the company has been moving toward one-to-two-year

contracts and has been focused on moving up-market where the churn appears less volatile . We estimate that its enterprise

product experiences at least half the churn of the lower end product . Given the longer contracts and a mix of larger

customers, we believe that overall churn is likely closer to 1% monthly and still heading lower .

FINANCIAL ANALYSIS -- Significant Advantages to On-Demand Model

Figure 6 .

Key Financial Metrics Scorecard

Criteria $E,Q= Traditiona lRev Variability ,Q,p

EPS Variabilit y

Rev Growth a 4

CFO Variability = o 0

Gross Margins 4 a 4 ,,.

R&D Expense Q 4 : Q

Total Revs a o o'`o

Source: Schwab Sound View

The Positive Impact of the Compounding Subscription Revenues Model : The company has unparalleled predictabilityin its revenue streams vs . traditional vendors with lumpy perpetual licenses . The company's subscription business was89% of total revenue in F04 vs . 90% in F03. We would expect visibility to improve over time, especially as the base ofexisting subscription business compounds and as the contract terms lengthen . While customer renewals and general chum

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Page 1 1

is a concern, the company's move up-market and longer contract terms should improve this relationship . On average,

subscription contract terms have been lengthening, from one month to one to two years just a few years ago .

Figure 7 .

Subscriber and Subscription Revenue Trends

it of PayIng Subscribers

140,00 0

120,000

100,000

80 .000

60,000

40,000

20,000

2001 2002 2003 200 4

Source : Schwab SoundView and Salesforce .com

The trade-off for better revenue visibility and predictability is that Salesforce's revenue growth as stated on the income

statement does not accurately depict its real growth rate ; recognized revenue is somewhat understated vs . bookings during

early years while the subscription business is just getting going, and then is slightly overstated vs. bookings as the

subscription business establishes some scale . Given that a large portion of bookings are recognized over the duration of

the subscriptions terms, the change in deferred revenues can be one of the gauges of real growth, and likely will be a focus

item of investors . Additionally, the growth in operating cash flow could also provide insight into bookings, as customers

usually pay up-front within 30 days. Note that in 1Q05, new customers contributed an estimated 12% of revenue,representing an estimated 50% of revenues had new customer bookings been recognized up-front .

We have taken a stab at grossing up revenue to account for new bookings (which can be used to facilitate more of an

apples-to-apples valuation comparison with peers) . However, there is still a large portion of customers that pay monthly,

therefore their contract is not represented in deferred revenues .

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Figure 8.

Estimated Revenue Gross Up

FY2004

FYE2005E

FYE2006E

Total Rev Pre Adj 96023 178 ,465 288,896

Beginning Deferred Rev 19 ,171 49,677 68,943End Deferred Rev 49577 68,943 129,663Change in Deferred Rev 30506 19,266 60 .720

• Maintenance 20% 20% 20 %Hosting 10% 10% 10 %

• Commissions/Other 5% 5% 5 %Deferred Rev - Subscription Portion 10 ,677 .10 6,743.00 21,262 .09

Ad' Rev including Deferred Rev 106,700 185,208 , 310,148

Source: Schwab SoundView

We See Significant Operating Leverage in the Salesforce.com Business Model : The hosted on-demand model provides

for a more attractive mix of license and services as well as several operating efficiencies that cannot be duplicated in a

traditional model . For example, product mix typically favors license revenues 90%-plus given the ease of deployment,

which drives higher blended gross margin . Salesforce .com's blended gross margin was 82% in C03 (vs . 63 .9% for SAP

and 62.8% for Siebel) . Margin expansion should continue to climb as the company achieves larger scale .

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Figure 9 .

On-Demand Has the Potential for Better Margins

Gross MarginsLess distribution costs, when software

Margin on Software Better Good purchased online _Software needs to be installed, regardless o fenvironment, but likely less service to be

Margin on Service Same Same Same performedSupporting only 1 version, common platfor m

Margin on Support Better GoodI

' environmen tCould be nearer to- 80% trs Traditiona lsoftware company of 60% given more

Total Gross Ma ins Better Good favorable product mix

Operating Margins ___Initally higher S&M as on-demand get saccepted, but easier sell when smaller upfront

S&M Good Better purchase_ Also only selling 1 version .Only adding features/functionality to 1 cod ebase. The less number of versions, the les s

R&D Good Better costly the development cycle .G&A Same (Same Same Don't expect much differenc eTotal Operating Could be closer to 30% vs tladitional of

ins Good Better '20% eclally given much reduced R&D.

Source: Schwab Sound View

Two Major Cost Levers : SG&A and R& D

• Salesforce.com has understandably masked its potential profitability by heavily investing in S&M (57% in F04 vs .26% for SEBL and 20% for SAP). As a relatively niche company, we understand that the company needs to invest in its

business (build brand recognition, target larger enterprise customers, generate macro on-demand computing interest) ;however, if S&M were to fall in-line with industry standards in F06 the company could drive an additional $0 .40-plus inEPS.

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Figure 10.

Reductions in Sales and Marketing Over Time Provides Substantial Leverage

2005FY 1QA 2QE WE 4QE FYE FYE

2004 Apr-04 Jul-04 Oct 434 Jan -05 2005E 2006ETotal Revenue 96,023 34,839 45,456 48,925 49,245 178,465 260,55 7

Current S&M InvestmentS&M % 56 .9% 58.6% 54 .0% 54.0% 54 .0% 54 .9% 51 .3%op EPS $ 0.01 $ 0.00 $ 0.01 $ 0 .02 $ 0.02 $ 0.05 $ 0.18

Reduced SAN InvestmentS&M % 56 . 9% 58.6 % 30.0% 30 .0% 30 .0% 35.6% 30.0 %o EPS $ 0A1 $ 0.00 $ 0 . 10 $ 0 . 10 $ 0.10 $ 0 .32 $ 0.60

Source : Schwab Sound Vie w

• R&D expense (7% in C03 vs . 22% for SEBL and 14% for SAP) is another big cost differential for

Salesforce.com, as the company is achieving high productivity by only building features and functionality for a single

version of the application . Traditional software providers on the other hand need to support multiple versions and

acquired functionality. We would expect R&D as a percentage of revenue should decline further from its industry-lowlevels as the company achieves scale .

The company's core subscription business is high margin (92 .7% in 1Q05 and 91 .7% in 4Q04) and should continue toexpand as the company achieves greater scale . The greater productivity is achieved by leveraging its single code basewithin a hosted environment . We estimate that there are likely continued price/performance improvements as thesubscribers grow .

PRODUCT OVERVIE W

Building a Full On-Demand Enterprise CRM Suite : Salesforce .com's CRM functionality now spans several key

functional areas including Sales Force Automation, Customer Service/Support, Marketing Automation, DocumentManagement, and Analytics . We are anticipating solutions around order management are likely to be rolled out by the endof 2004. The company's solutions are exclusively offered as a subscription and delivered through a hosted model .Customer infrastructure requirement are limited primarily to bandwidth, as there is no need for server hardware, in-house

technical programmers, consultants, and data back-up facilities, etc., but instead only a Web browser is needed .

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Figure 11 .

Three Primary CRM Products

The company's three primary CRM products are more representative of degrees of functionality because they all still run

against the same code base . Most customers (approximately 50% of revenues) opt for the Enterprise Edition instead of the

less feature-rich Professional and Team Editions, which likely partially stems from greater partner support for the

Enterprise Edition. Although Salesforce's sweet likely is to be the SMB market for the near term, we believe that the

company could really drive upside by increasing traction with large enterprises that require thousands of seats (not 10s or

hundreds) .

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• Enterprise Edition : Fully featured, targeted at large companies ; $125 per seat

• Professional Edition : Less feature-rich (lacks advanced integration and administration capabilities, lacks workflow, and

wireless), targeted at medium-sized organizations ; $65 per seat

• Team Edition : Includes watered-down sales force automation, targeted at small organizations ; $83 per seat

Figure 12 .

Product Footprint Diagram

`fil ► k '' f3 fil'# 4r

3

u.-y r

Java

Source : Schwab SoundView

Products Are Upgraded Every Four Months : The company's rapid roll-out cycle has been key in closing many of the

functional and technical gaps vis-a-vis on-premise competitive offerings over the past year . Today, we have heard of no

meaningful disruptions to service, and upgrades have generally gone without difficulty . Sales Force Aautomation is the

most mature product and has gained considerable acceptance with a number of key partners . Our early read on certain

Service and Support installations has been positive, however, lack of customization capabilities may be a limiting factor .We believe that movement of current customers toward broader functionality deployments is a key growth driver andshould drive seat expansion . In addition, new product rollouts should also contribute to broader adoption . Contract,analytics, and document management was rolled out April 2004 . We would not be surprised if Salesforce .com has its eyeon broadening outside of CRM, and perhaps taking on back-office functions such as manufacturing .

New sforce Platform May Be Key to Winning Larger Enterprise Deals : The February release of sforce 3 .0 seems tobe a major step forward toward addressing the customizability shortcoming of on-demand applications . sforce is a Webservices API platform, which was first introduced in June 2003 . It enables third-party developers (customers or ISVs) touse their own development tools to extend Salesforce .com functionality to support their customer-specific requirements, tointegrate legacy apps to Salesforce.com and to build stand-alone apps that operate within the Salesforce.com platform. Webelieve that sforce 3 .0 is the cornerstone to Salesforce .com's strategy to increase credibility with the large enterpriseorganizations, which require more custom capabilities . It allows users and third parties to design applications to fit specificindustry verticals or business structures . The partners that we have surveyed have been generally enthusiastic on thistoolkit and many have staffed teams and already begun development of bolt-on applications for customers .

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Figure 13 .

Customer used s rce to integrate Salesforce.com servicewith multiple ERP systems, including Oracle financialsoftware and Siebel customer support softwareISV has used sforce to integrate a customer's SFA andcontent management data to enhance the usefulness of theprofessional services management system the ISV has builtCustomer has used sforce to integrate CRM functionality intoa custom application for the consumer mortgage industry thatthe customer intends to market independentl y

Source : Salestorce .com

sforce Appears to Be Driving Increased SI Support of On-Demand Solutions : Early indications are that systems

integrators have been interested in sforce capabilities as a way of extending the hosted offering into a larger services

engagement . In April, the company extended its customizations capabilities with a rolled out Studio, which is a tool

designed for business users to customize without programming knowledge. They can change field and tab names and they

also can design new tabs within the meta data layer so as not to compromise the single instance code base, which delivers

much of the leverage in the on-demand model .

The On-Demand Delivery Model -- Not All Hosting Is Equal : The term "hosting" is widely used by virtually all

software vendors ; however, there are key differences in the salesforce .com model, which we refer to as "single instance

hosting" and "multiple instance hosting ." Virtually any application can be hosted, however, the underlying applications are

distinct and separate by customer . While upgrades and maintenance can be more efficient, they still occur one customer at

a time . However, single instance provides the next level of outsourcing automation . Each customer, regardless of vertical

or size, always runs against the same release of the application (currently version 15) and code base (single instance) . This

can dramatically reduce support and R&D costs and time between upgrades . In addition, there is virtually no version

control, as all customers upgrade at the same time .

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Figure 14.

With Sforce, applications are now easy to alter . Customizations and add-on modules won'trequire rework/retesting after an upgrade .Upcoming lotus notes integration over the next 3-6 mths is strong competitive differentiation andshould help salesforce sell effectively into the IBM installed based . CRM integration to email iskey for CRM adoption .Doesnl expect that custom apps built wl Sforce .com, will require recoding after an upgrade .Upgrades have gone smoothly in the past and have not required changes to data or to the usemodels .Implementations are not very technical and take up to 6 months for the most sophisticatedenvironments. Implementations consist of - process definition (showing clients the SF processes),system administrator, configuration/screen flow changes, data migration (most effort) . Could take6 months for large implementation .Applications are very intuitive and require little training to get up and running . Training may berequired when new functionality is rolled out (such as contract mgmt), but training is offered onlineto partners and customers online for free .Workflow capabilities are much improved, and 3 recent large implementations for complex salesenvironments have gone very well .

Source: Schwab SoundView

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KEY STRATEGIC GROWTH DRIVERS

Figure 15 .

Source : Sdiwab SoundVie w

Key to Driving Top-Line Growth Includes the Following :

• Moving Up-Market: We believe that the company is currently dominating the small/midmarket segment (+70%revenue in October 2003) . However, we are seeing Salesforce .com showing up more frequently in large deal sale cycles,and it has won a few 2,000-seaters (ADP and SunTrust) . We believe the company is positioning itself to make a pus h

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upstream leveraging its new larger account sales reps . Additionally, the recent release of sforce, which supports

customizations and integration, should bolster the company's proposition to large enterprises as well . We estimate that

enterprise deals could represent 60%-plus by end of F05 .

• Increase Traction Internationa lly : Although the company still has significant opportunity domestically, we believe

that international markets also could drive additional growth . The company has ramped up international efforts over the

past few years (sales in Europe and Asia-Pacific represented approximately 18% in F04 vs . 14% in F03, and 7% in F02),but still is U.S .-centric . The product supports 11 different languages, but the company is yet to get fully committedinternationally . This makes sense, as we believe that Europe and Asia may be a bit slower to adopt/accept hostedofferings . We estimate that international could represent 17%--20% by F05 .

• Leverage Channel Partners : Historically Salesforce.com has provided little opportunity for partners to participate .However, recently the company has outlined a new partner reseller relationship with key participants . In addition, therelease of sforce is also providing renewed opportunity for third parties to add value . Early feedback has been positive,and we have even heard from a number of larger SIs that have begun dialogues with the companies . Current partnersindicated they are ramping up sforce development teams and gearing up to be more active as resellers . We estimate thatchannel partner revenue could represent 20%--30% by 2005 .

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EXHIBIT 3 -2

Documentl (10)

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Figure 16 .

Arasys InsideScoop Acetta RedskyAspire Technologies Juice Software BenNevis SalesAwareBANCOTEC GmbH LinkPoint360 Braun Consulting SalesProces sBlue Martini ModernMind BridgeBuilder Synerge xBusiness Objects Nextel BridgeBuilder TheikosCape Clear Software EnterpriseCRM CoreMatrix Trexi sComergent Pinpoint Selling Customer For Life VentusData Junction Quelsys GrowthCircl eDejima QuickArrow GSA AppsDigital Impact Sendia Infort eeBRIDGE Software Sun LoudthotEchopass Synergex MWAdvisor sEloqua TenDigits opscentricExactTarget TIBCO plante mora nGoodContacts Unwired Express redcote consultingGotMarketing VerticalRespons eGrand Central Webcom SolutionsiAnywhere Solutions WebE xIBM WebSideStoryIhance WidgetyInfon eInformatica

Source: Salesforce.com

• New Products : We see significant upside potential with increasing the penetration of the current insta lled base

with new products . A majority of Salesforce .com's customers are utilizing fewer than two modules of the suite with

SFAs being the most used. In addition, we estimate that salesforce has less than 20% penetration within its customers'

CRM footprint. We believe the company's recent move toward deploying an enterprise sales force with certain vertical

expertise should begin to unlock this nascent opportunity for growth .

COMPETITION

Competitive Window of Opportunity : Competition in the broad CRM market has become increasingly fierce over the

last several years with virtually all the large suite vendors releasing new or improved product offerings . On the low end of

the market, there remain several highly competitive offerings including the most recent addition of Microsoft's CR M

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June 30, 2004Page 22

solution . However, the high end continues to be affected by high levels of shelfware and a general hangover from past

large implantations, and many of the low-end players including Microsoft lack the credibility . This has a created an

opportunity for Salesforce to gain market share, which has been a principal reason for its unmatched growth rates.

Larger Suite Vendors Will Catch Up Over Time : The greatest validation to Salesforce .com's market has been the move

by Siebel to deploy its own offering . In addition, we have heard that other vendors including Oracle and SAP are also

looking into similar moves . Clearly these companies will offer increased competition over time especially given their

brand recognition and resources ; however, the issue that may prevent them in the near term may just be as simple as

culture . In the case of Siebel, it is struggling to break a culture of large up-front license deals . We have spoken to several

sales reps that have indicated no interest in their hosted offering and said there was no internal mandate for them to sell .

"It's a telesales product ." In addition, there is the concern over cannibalization . While the product is primary a midmarket

product, we know of at least a few Fortune 500 accounts that selected Salesforce .com over a more traditional large-scale

CRM system such as Siebel .

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Figure 17.

Salesforce .com announced in February 2004 that SunTrustBanks Inc . is scrapping 9 disparate CRIV1 systems (includingSiebel, Pivotal, Onyx, and SAP) in order to standardize onSalesforce . com .

Additionally outsourcing firm ADP Inc . indicated that it will rollSalesforce . com out to 2,000 employees three months, andwill consider increasing its deployment to cover all 5,000employees in its worldwide sales force .

Source : Salesforce.com

Siebel 's CRM On-Demand Offering With Partner IBM, Announced in October 2003, Likely Will Become More of

a Competitive Threat to Salesforce.com: Siebel's hosted offering only comprises an estimated 30% of its full-blown

functionality and currently still is one-plus year behind Salesforce .com in product functionality . Although Siebel acquired

Upshot's assets and 1,000 customers and likely 30,000--50,000 subscribers, Siebel appears to have rewritten the acquired

Upshot product in its entirety : The challenge for Siebel will be to service both its traditional CRM customers and its

on-demand customers .

Other On-Demand Competition Growing : Other vendors offering on-demand CRM, such as NetSuite, Inc ., RightNow

Technologies, Inc. and Salesnet, Inc ., appear to also be gaining considerable traction . Recently RightNow has filed its Si

and appears to be set to go public in late summer or early fall . In addition, we believe that ERP-focused NetSuite, which

has 7,000 customers and 50,000 subscribers, is likely to pursue its own IPO in late 2004 . In our view, both NetSuite and

RightNow are less direct competitors to Salesforce .com as they are approaching the CRMfEnterprise apps market withtheir own unique positioning. RightNow is principal on the service and support side while NetSuite offers a complete

integrated ERP solution .

Salesforce .com Momentum: In the SMB market, we be lieve that Salesforce.com has the greatest momentum and

appears to be pulling away from traditional small-cap vendors such AS Goldmine, Onyx, Kana, Epiphany, Amdocs and

Pivotal . We believe the company has achieved functional parity with these traditional CRM providers, but has a more

compelling TCO story . Microsoft, another traditional software vendor, has been pushing its CRM entree aggressively,

offering it at one-half the cost of Salesforce .com's . Microsoft is likely to emerge as a more formidable competitor over thenext couple years, but currently is still hindered by its early product maturity (partners indicate that the productfunctionality is still at least two years behind) .

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Page 24

COMPANY BACKGROUND

Salesforce .com, headquartered in San Francisco, Calif., and founded in February 1999 , has defied critics and

brought legitimacy to the hosted CRM (on-demand CRM) market . Currently the company has more than 400 employees

and sells its solution through its telesales and growing direct sales force . The company offers its solution on a subscription

basis only and delivers it over the Internet . Salesforce .com has signed up more than 9,800 customers and over 147,000

subscribers, fueling an impressive annuity stream despite the recent period of constrained IT spending . The company's

leading market position, broadening product functionality, and compelling value proposition should help the company

capitalize on the shift toward on-demand computing and increase market share.

Diverse Customer Base With Leverage to Move Up-Market

Salesforce.com's principal focus has been on small- to medium-sized business especially given the attractive

total-cost-of-ownership (TCO) of its hosted model for this segment. However, as the product has matured, the company

has found increasingly that certain Fortune-1000-sized customers have also found benefits with the TCO and general

flexibility of the on-demand offering . While we estimate that SMB still represents the vast majority (70%) of the almost

10,000 customers, there is a growing influence from Fortune 1000 customers . Not only do these customers provide greater

scale with adding between 100 and 2,000 seats, they also provide additional validations to the company solutions .

Currently the company is targeting nine key verticals and has recently begun adding three vertical-specific sales reps in

healthcare, telco, and high tech with an emphasis on moving toward larger-enterprise-sized deals .

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Figure 18 .

Top Customers by Industry

Automatic Data Processing, Inc .Chartr Business NetworksPaymentech, L.P .Scottish Development InternationalSpherion Pacific Enterprises LL C

American Medical Response, Inc .athenahealth, Inc .CIGNA Health CorporationInnovex UK Ltd .Medlmpact Healthcare Systems, In c

Electronics for Imaging, Inc .Magma Design Automation, Inc .NetScreen Technologies, Inc .Polycom, Inc .SunGard Data Systems Inc .

Cendant Car Rental Group, Inc . Fidelity National Financial, Inc .Homestore .com, Inc. Guaranty Residential Lending, Inc .Kinko's, Inc. Harland Financial Solutions, Inc.Le Meridien Hotels & Resorts Limited Mellon Financial Corporatio nOlan Mills, Inc. Sun Trust Bank

Advanced Micro Devices, Inc .Analog Devices, Inc.Honeywell International Inc .Invensys Systems, Inc .Panduit Corporation

AOL Interactive MarketingDoubleClick Inc .Harris Interactive Inc .Lightpath TechnologiesLycos Europe Gmb H

Cox Business Se rvices, LLC Eagle Global LogisticsEnterasys Networks , Inc. Garrett AviationGenesys S .A. Intermec Technologies CorporationGenesys Teleco Laboratories , Inc. Neff CorporationInter-Tel , Incorporated SIRVA, Inc .

Source : Company reports

Strong Management Team

We have had the opportunity to meet with virtually all of senior management . We believe the team brings an exceptionaltrack record of strong background of execution . While we anticipate some transitional risk from a private company to apublic player, we would note that virtually all of the senior management team has had public company experience .

PLEASE REFER TO PAGE 33 OF THIS REPORT FOR ANALYST CERTIFICATION AND OTHER IMPORTANT DISCLOSURES.

SCHWAB SOUNDVIEW CAPITAL MARKETS salesforce.com (Outperform) CRM : Blazing the On - Demand Trail: Initiating onCRM With Outperform

June 30, 2004Page 2 6

Figure 19 .

Chairman ,CEO since Nov 01, former SV PMarc Benioff 39' Sales Oracl e

President, Worldwide Operations since OctJim Steele X8'01, former E VP Sales Arib a

=President of Technology , Marketing an dSystems since Feb 04 , former EVP Su n

Patricia Sueltz 51 Microsystems (Sun S ervicesCFO since April 02, former SVP and CF O

Steve Cakebread 52 AutodeskJim Cavallerl 34 1, CIO since Nov 01 former Oracl e

CTO, cofounder , former Pres of Left CoastDavid Moellenhoff 34+Softwar e

SIP, Research and Development, c oP arker H arris 37 founder, former VP at Left Coast SoftwareDavid Schellhase 40!Vice President and General Counse l

Source: Salesforce .com

Recent April Quarter Performance Was Impressiv e

Total revenue was $34 .8 million, up 132% year over year and 41% quarter over quarter, which was impressive but

somewhat understated given the company's extended revenue recognition timeline . Subscription and support revenue was

$31 .1 million, up 84% year over year and 16% quarter over quarter, and represented 89% of revenue (flat vs . 4Q04) .Gross margins improved to 92 .7% from 91 .7% in 4Q04, up 200 basis points year over year, and should continue to

improve with increased scale . Operating EPS was breakeven, flat year over year and quarter over quarter .

The company's balance sheet is healthy . At the end of April, the company had $47 .6 million in cash, up $39 .7 million

from the January quarter. After the TO, the company will have nearly $118 million ($1 .00 per share) on its books .

PLEASE REFER TO PAGE 33 OF THIS REPORT FOR ANALYST CERTIFICATION AND OTHER IMPORTANT DISCLOSURES .

SCHWAB SOUNDVIEW CAPITAL MARKETS salesforce.com (Outperform) CRM: Blazing the On- Demand Trail : Initiating onCRM With Outperform

June 30, 2004Page 27

Deferred revenue was $52.3 million, up $2 .6 million from 4Q04 . DSO was 63 days, down 16 days from 4Q04 .

Estimates Conservative and Beatabl e

The company has provided no guidance at this point ; therefore, we are initiating with what we believe to be conservative

initial expectations. The important metrics to understand will be the expected rate of net sub adds and the mix of enterprise

vs . basic business . In addition, the company's intentions with regard to operating margins are a critical input as significant

leverage exists depending on the rate of expense controls . Our sources indicate that the company remains on course to

double revenues and that meaningful operating margin improvement is not likely until later in F06 . The company

intends to continue spending on sales/marketing while it is in a critical market penetration phase . Consequently, for 2Q05,

we have projected total revenue of $45 .5 million, license revenue of $40.6 million, and operating EPS of $0.01 . For F05,

we have projected total revenue of $178 .5 million, subscription revenue of $159 .4 million and operating EPS of $0 .05 . For

F06, we have projected total revenue of $288 .9 million, subscription revenue of $257 .9 million, and operating EPS of

$0.25 .

Price Target Valuation and Risk s

Valuation

Near-term valuation is likely to continue to be driven by post-deal positioning and relatively low liquidity with only

10% of the company available to trade . We see CRM as one of the best ways to play the developing trend of on-demand

computing and one of the only high-growth stories in applications, which should support a premium over CRM's peers .

Finding a perfect valuation comparable for Salesforce .com has been challenging given that the company is pioneering a

new business model laden with profitability and growth potential, unlike any of our other software companies that we

cover. At first glance, though, one might compare Salesforce to a broad universe of enterprise application vendors.

However, prospects of 50% better operating margins and 3x--4x higher growth over the intermediate term suggest that

Salesforce .com deserves a valuation premium .

Other software companies such as a Mercury Interactive or Symantec or a Computer Associates, which also have

established subscription-based offerings (but not 100% subscription like Software .com), also could be used as a basis of

comparison. Although they are not particularly relevant as a direct comparison (infrastructure software vs . apps), we

believe they have given us a sense for how these subscription-based companies are valued relative to their peers . Our

analysis suggests that subscription-based companies trade at least at an 80% premium to their non-subscription peers .

Another interesting comparable is Redhat . Although the company targets a different market, there are a couple of similarcharacteristics : subscription-based licensing model and high-growth characteristics (year-over-year growth north of 30%) .Redhat is trading at 15x EV to 2005 revenue, 52x price to 2005 earnings, 1 .5x PE/growth, and 32x EV to 2005 CFO .

PLEASE REFER TO PAGE 33 OF THIS REPORT FOR ANALYST CERTIFICATION AND OTHER IMPORTANT DISCLOSURES.

SCHWAB SOUNDVIEW CAPITAL MARKETS salesforce.com (Outperform) CRM : Blazing the On-Demand Trail: Initiating onCRM With Outperform

June 30, 2004Page 2 8

Figure 20 .

Source . Schwab SoundView

PLEASE REFER TO PAGE 33 OF THIS REPORT FOR ANALYST CERTIFICATION AND OTHER IMPORTANT DISCLOSURES .

SCHWAB SOUNDVIEW CAPITAL MARKETS salesforce .com (Outperform) CRM: Blazing the On- Demand Trail : Initiating onCRM With Outperform

June 30, 2004Page 29

Figure 21 .

Relevance of Different Valuation Methodologies

Doesn 't take into accounthigh growth ; Is artificiall ylow when revenues are

Simple to use ; Quick proxy deferred instead of We don 't use until there is aPIE of expected growth rate recognized upfront more mature compariso n

Doesn 't account fo rmargins , revenues no trecognized similarly acros scompanies . Doesn 't account

EV/Revs _------.,_--! Simple to use for rowth ' We us eGrowth rates are ke yassumption , Earning sreflect previous quarte r

Simple to use, Accounts for deferred subscriptio nPEG both rrofitability and growth revenue Me use.

CFO is understated whe ncompanies are in hig h

Accounts for profitability growth mode . DoesntEV}CFO !uses unbiased metric cash account for growth We us e

Driven by man yassumptions which may no tbe valid for high growth , I We don ' t use during hig h

!Based on unbiased metric early companies . Bases growth years , b/c too man y!cash . Reflects growth and huge % of valuation on assumptions and termina l

DCF "risk assumptions . terminal value . ; value to large .

Source : Schwab SoundView

PLEASE REFER TO PAGE 33 OF THIS REPORT FOR ANALYST CERTIFICATION AND OTHER IMPORTANT DISCLOSURES .

SCHWAB SOUNDVIEW CAPITAL MARKETS salesforce.com (Outperform) CRM: Blazing the On-Demand Trail : Initiating onCRM With Outperform

June 30, 2004Page 30

Figure 22.

Price/Sales PIE Enter p . Value / Sales PE / LT Growth2004 2005 2004 2005 2004 2005 2004 2005

Our Coverage 3.3x 3 .0x 33 6x 260x 3 0x 2.6x 23x 1 .7x_ _CRM -------- 3.7x- --------

_IN 110 7x 45.7x! 2 .9x 2 3x 4 .Ox 2.4x

ERP 4.7x 4 .3x 29 3x1 23.5x 3 .8x 3.5x 2 .5x 2.OxSCMBI

_2.1x '3 2x

8x-1-8-x-2 9x

91 9x 270x '3D 7x 23 6x,

1 .9x2 5x

1 6x2 2x

f 4.3x 1 3xl 7x 1 3x. . . . . .

Infrastructure 5 .5x 4 .9x 31 8x 32.8x 5 .2x 4 .6x E _ 1 .9x 2 .1 x

Average 3 .8x 3.3x 54 .7x1 29 .8x ; 3 .2xj 2 .8x 2.8x 1 .8x

Salesforce . com 10 .9x 6.8x 328 .0xtttt.. 65.6x 10.3x 6.4x, 1 6.6x 1 .3x

Source ; Schwab SoundView and company reports

In our opinion, a couple metrics that are better-suited to value CRM shares include EV/sales, EV/CFO and PEG . PEG

incorporates growth rates and EV/CFO is less affected by the timing of revenue recognition . However, given the relative

level of maturity of Salesforce and the lack of pure comps, we are putting great emphasis on EV/sales, as we think

relative simplicity may be close to what the market will gravitate to in the early months of trading. For a comp

group we are using the blended average of the subscription premium (80% vs . traditional models) and Redhat, which

represents similar growth rates and emerging market potential . While this does represent a seemingly dramatic premium

over the sector leader Siebel, when accounting for the growth differences, valuation does converge over a reasonable

period of time .

PLEASE REFER TO PAGE 33 OF THIS REPORT FOR ANALYST CERTIFICATION AND OTHER IMPORTANT DISCLOSURES.

SCHWAB SOUNDVIEW CAPITAL MARKETS salesforce.com (Outperform) CRM: Blazing the On-Demand Trail: Initiating onCRM With Outperform

June 30, 2004Page 3 1

Figure 23 .

Source: Schwab SoundView

At $16 .40, Salesforce.com trades at a discount to software peers when factoring growth (PEG of 1 .3x vs . 1 .8x) . On an

EV/CFO basis, CRM shares trade at a premium to our universe of software companies, likely given that the company is

still early in transitioning customers to one-to-two-year subscription contracts .

Our 12-month price target for CRM shares is $20, which is based on a PEG of 1 .7x C05 earnings of $0 .25, and growth of50%. Our PEG ratio is based on averaging the PEG ratios for the software universe and Redhat . Note that we would have

arrived at a $27 price target, had we applied a lOx EV/revenue multiple (average of software universe and Redhat) . Inaddition, when comparing Salesforce .com on a revenues multiple to Redhat or the Internet universe the multiple would

almost double. While we do not think the Internet would be a fair comparable given Salesforce's less mature business

model, it does indicate investor sentiment for high-growth, high-opportunity stocks .

Risk Factors

Low Switching Costs : We believe that customer switching costs are much lower when customers are paying monthlysubscription fees as opposing to purchasing software outright and installing/customizing it . Given lower switching costs,Salesforce.com could lose subscribers who are not satisfied or choose alternative investments . Additionally, the

company will likely be more challenged retaining early customers, who tended to be smaller and were o n

PLEASE REFER TO PAGE 33 OF THIS REPORT FOR ANALYST CERTIFICATION AND OTHER IMPORTANT DISCLOSURES .

SCHWAB SOUNDVIEW CAPITAL MARKETS salesforce.com (Outperform) CRM: Blazing the On-Demand Trail : Initiating onCRM With Outperform

June 30, 2004Page 3 2

month-to-month contracts .

• Pricing Pressure : ASP is an important revenue lever for the company, and we already have heard anecdotal evidence

that large, more capitalized competition is pricing near 50% of Saleforce .com's pricing . Salesforce pricing has been

stable, but we would expect that as competitive offerings improve, pricing pressure could become more of a factor .

• Competition: Other larger and more capitalized vendors have broader offerings , large and loyal installed bases, and

larger R&D budgets, and could afford to give away their software to protect their market share . We would expect that

competition will pick up and sales cycles will extend when Salesforce moves upstream .

• IPO Lock-up : Currently valuation is being positively impacted by the low liquidity . There is only 10% of the total

shares outstanding available to trade . As future lock-up becomes available, a substantially larger number of shares could

hit the market, creating a valuations overhang. After 180 days, 90% (approximately 90 million shares) will be available

to trade .

• Valuation : Software organizations who predominantly sell perpetual licenses have much different business models than

Salesforce.com's . Consequently, we believe that some valuation methodologies used for traditional software companies

may need to be updated, which suggests some volatility in the near term .• Macro Spending : Our recent checks suggest that IT spending has been picking up and that CRM should benefit

disproportionally. However, economic weakness could negatively impact buying behavior and extend sales cycles .

PLEASE REFER TO PAGE 33 OF THIS REPORT FOR ANALYST CERTIFICATION AND OTHER IMPORTANT DISCLOSURES.

SCHWAB SOUNDVIEW CAPITAL MARKETS salesforce .com (Outperform ) CRM : Blazing the On -Demand Trail : Initiating onCRM With Outperform

June 30, 2004Page 33

Analyst Certification

I, Peter Coleman, hereby certify that all of the views expressed in the research report accurately reflect my personal views about any

and all of the subject securities or issuers . I also certify that no part of my compensation was, is, or will be, directly or indirectly,

related to the specific recommendations or views expressed in this research report .

1970

Important Disclosures

- CRM ( salesforce.com) : Schwab Capital Markets L.P . ("SCMLP") an affiliate of the Firm makes a market in this company'ssecurities. SCMLP, in its market making capacity, sells to or buys from customers the securities of this company on a principal basis .

Varying Viewpoints and Opinions :

- The information contained in these materials reflects viewpoints and opinions on the economy, the markets generally and particular

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opinions, trading strategies or ratings that may differ from the viewpoints and opinions included in these materials . Please also note

that the Firm and/or its affiliates and the investment funds and/or separate accounts they manage may take positions that may be

contrary to the included information .

- The Firm's employees, including research analysts, receive compensation that is based in part upon the overall performance of The

Charles Schwab Corporation ("Schwab Corporation") . One component of the Schwab Corporation's performance is investment

banking services revenues, which currently account for approximately 1 % of the Schwab Corporation's overall revenues .

Schwab Soundvicw Capital Markets - Description of Fundamental Equity Research Rating System :

- Our rating system is based on a stock's forward 12-month expected total return (price appreciation plus dividend yield) . It is expected

that the total return of stocks rated Outperform will exceed those that are rated Neutral, which will exceed those that are rate d

PLEASE REFER TO PAGE 33 OF THIS REPORT FOR ANALYST CERTIFICATION AND OTHER IMPORTANT DISCLOSURES .

SCHWAB SOUNDVIEW CAPITAL MARKETS salesforce.com (Outperform) CRM : Blazing the On-Demand Trail : Initiating onCRM With Outperform

June 30, 2004Page 34

Underperform .

- OUTPERFORM (OP) : Projected to have a total return of 20% or more on initiation of the rating and a total return of at least 10% on

the continuance of a rating .

- NEUTRAL (N) : Projected to have a total return of +/-20% .

- UNDERPERFORM (UN) : Projected to have a total return of -20% or less on initiation of the rating and a total return of at most

-10% on the continuance of a rating .

- Please note that within the historical rating and price target charts, SoundView implemented its current rating system (Outperform -

OP, Neutral - N, Underperform - UN) in June of 2002 . Prior to this time SoundView's rating system utilized Strong Buy (SB), Buy

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Sal.dorc .com, Inc.Otcona 569.99659(0%45 en40h Jwwxy; 0IntlauwrE5936 pn Mre dW)

2004 =5

2001 2002 2807 APr43 Jul-0 3 0.402 J•404 2004 7.04 Oct- 04 Jan-46 2006E 2080E

OM/.1 Sub• i MO 1 0700 12.364 1041 46,762 1! 5 27,721 29,612 29 200 238 173.467VW %pr„p~ n~ 1ga0% f1I.4% 21x2% 711.1% 3 029% 131 .7% 1130% 130.5% 80.2% 127.8% 613%

QO%0% . 92.1% 150 % 715% 30.1% 21.9% 41.4% a0% -1.1%

%G•r}lw ftwiwr a0% 00% 21 .7% xi0% 6a0% 510% am 64.% 010% 01.3% 07.0% e9 0% 997% 973%

Sm.1 9 u•in••• Subs S 5,022 8 21.513 6 37,336 $ 8,461 6 0.796 8 10,116 6 10,721 $ 39 .094 5 11,513 $ 12,865 8 14,072 S 14,668 6 53,118 $ 84,476YN%C3r,r 73.4% 1.f% u% 43% a7% a7% 391% 31.3% Ja1% 39 9% 306% 0•.0%0lo c;- . -17.1% 131% 13% 94% 7.1% 1f.7% a1% 4.7%

ToW 1950• cdpt)onA Support 5,022 21, 513 47,650 1 9,922 10 ,602 22,490 26,602 10,766 31,110 40,014 43 ,493 43,080 169,304 257,143777%03e . 121 .5% 62.1% 736% 739% 93.1% 400% 030% 107.0{ 043% 80.0% 00.7 4 91 .0%00%CIIM00 fa!% 356% 1t .1% 70.2% 181% 10.1% 7.•% 0.7%

%TeMlbv 92.1 % 000% 375% 93.0% 90!% 00m% !i1% U.3% 05.3% 9J% 00,3% an 9.]% 0•.f%

Services Revenue 413 896 3 .335 1 .991 2,031 2,051 3,261 10 .227 3,723 4,070 6 ,242 5, 276 10 ,112 30,963TM%C33%150 272.0% 2910% 734 0% 1 .11.6% 2490% 203.7% 41.0% 180,4% 74 511 02.3% mm 62.0%OQ% 1130% 2.0% 061% tat% Its% 309% 7.9% o..NM

VM 8005%. 127.6% 102.3% 020% 162% 031% 093% 002% 1102 14 614{ 116% 416 % 600%0.0%6." 21 .6% 14.3% 11.0% 181% 119% 305% 7.0% 07%

wt of Rmnu•aCosto1 Subsc ri ption 1,730 3.718 7 .199 1 .597 1,819 2.143 2,223 7 .782 2,282 3 ,247 3 ,495 3,517 12,541 19.746bn0lY,yn fae% 027% 44.0% 90.8% 607% 905% 01.716 400% 377% 93,0% 900% 92 0% 02.1% 027 %

COW of Services 1,692 2,329 3 ,164 1 .766 2 ,009 2,626 3, 199 9,191 4,081 4,773 5,137 5. 171 19 ,162 30,3340-I 450541 -300.3% -156.9% 11% 11.7% 1.1% 14.3% 1.0% 7.2% 4.1% :0% 2.0% 0.3% 7 .0%

ToW Cost Of Revenues 3,422 6,047 10,383 3,356 3 ,828 4,666 6,422 17, 273 6.383 8 ,020 8,632 5,900 31,703 40.100

Guests Prafit 362 1 500 17795 2000

24,531

7! 50 20,474 37,430 44,204 40867 180 7p 280 780losfYw N.V. 02..1% 813% 01. 6 % 020% 020% 41. 7% 02.4% 014% 021% 82.2% 41.011

Operating PJtpsn s5a69,,it M00k50i55 25 ,392 24,505 33,522 10,856 12,205 14,597 17,142 54 ,800 20,416 24 .546 26 ,420 26,592 97 ,973 146,11 7

%alt ,.a 007.7% 100.6% 6.1% aam OOA% 31.4% 57.0% 04•% as" 140% 5410% 164.0% 009% 406%Ra•oroh .WOavebpment 3,366 5,308 4 .646 1 ,240 1,585 1,850 2,157 6 ,962 2 , 127 3 .409 3.969 3,693 12,599 19,109%_ll-l 01.0% 217% 11% 10% 7.0 % 7 1 % 7.2% 7.3% 6.1% 13% 7A% 11% 7.2% 6.0%

Go." end Ad"li,31ft.5v 6,856 8,317 12,968 3.646 3,771 4,320 5,179 16,915 5,673 7,726 8, 317 8,372 29 ,809 41,268%E/IYIMW~ 126.1% 37.1% 254% 15..3% 170% 11. 0% 113% 17.6% la0% I1 0A1 170 % 1).0% lam it$ %

Toti Opsrothq Expenses 35,613 38.230 51 .128 15.541 17 ,681 20,797 24,178 79,477 29,116 36.683 36,406 36,667 140 .862 206,874

Operating Otwme 3000 1 1 17 134 31 183 213 380 1.753 1007 1,0109 111,901 32MI•ao Y/pb NN NM MIN 0. 1% 0.1% %N 0.6% 0.3% 7D% 19% 39% 1D% 12% ff.6%74305396 Nw w 000 %9 NM 446 809 NY 000 %4 809 w

Non-Cash Items; 1 Other 0 7,657 a 0 0 (4 ,342) 897 (3,445 0 0 0 0 0 0Regional! Opantiq Inc.(Loss ) (33,600 (29,525 ( 10,500 17 134 4 ,311 (744 3,718 361 1 ,753 1, 807 1 .899 5,901 33 .222

Other Income (Expels )I~ ExpenlsPOt er (42 (272 (77 (9) (78) (43) (45 (22 (1) (1) (t) (1 (4) (4IMBrSNhoo" 1,778 763 569 393 91 89 121 543 164 164 164 164 666 65 6

101e1 Otter Incase 1 ,738 491 492 364 15 46 78 521 163 183 183 163 652 65 2

( . Income 8a34n Taxes (31,864 (21,377 (10,008 401 149 15 229 794 524 1 ,9 16 2,050 2 ,062 8,553 33,874All PrevIslon for Taxes - - 70 192 205 208 873 3.38 7

1 a x- o% 0% 0% 0% 0% 0% 0% 0% 13% 10% 10% IOU 00% f0%

Reported Income Before Taxes (31,881) (29,034 (10,006) 401 149 4 ,357 (668 4.239 524 1,916 2,060 2 ,062 6,553 33,874Rep Provision tar Taxes - - 49 22 456 15 541 70 192 205 206 073 3,3677v M• 0% 0 % o% 17% 1m l0% .2% 0 7% 73% 10% 10% 111 % 10% 10%

M' InN10M 193 425 292 16 (5) (113) 82 (159 171 10 (10) 10 (47 40uN•d %M Meem• (31 .871 120 .9521 417 1 44 147 NO 437 1715 1,935 IMII 5,833 7

AMYr01, .043% .02% -f0% 2% I% 0% 0% is 111 4% 4% 011 3% IIINTa-Ift .34% .14% .127 % .113% -N% - 107% .100% s% 1043% •1073% nw% 141% ut%

Reported Nei Income (31,871 (28,609 ) (9,716) 368 122 3,789 (765 3.514 437 1 ,715 1,835 1 , 846 5,033 30,447

ReporW EPS - Basic $ (2.38 8 (I .30 8 (0.37 6 1.01 $ 0.00 0 0 .13 $ (0 .03 $ 0.12 8 CAI 5 0 .02 6 0.02 $ 0.12 8 0.07 6 0.21Reported EPS - Diluted 6 (2.30 S (1 .36 5 (0.37 0 0 .08 $ 0.00 S 0.04 8 10 .01 It 0.04 S 0 .00 $ 0 .01 $ 0.02 $ 6.02 8 0.05 6 0.25

sie Bhau OWStanOing 13.314 21 .039 26.376 28. 86 7,4.26 29-36 30 .36 29, 605 31 .7 1D101,3 102.3 103. 61, 106 .0(adSh85 s Outstanding 13.314 21 . 26.375 91418 03.618 95. 618 97.610 96.409 100 .4 11910 120.0 121 . 116.1 123 .

1a.- (33 ,660 (21A(TFj (7 1,404 1,521 1,366 1,540 S 3,159000 NA NA NA NA NA NA 79 NA 63000. 12. 609 22.200 19, 742 MA NA 30,486 39,724 39,724 47,6610.wma R., NA NA 19.171 NA NA 34 .408 40,677 49.877 52 .3 40Tom 6w9eens 76,000 127,000 147 .000r%1A m NA NA NA 51,000, 20000

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