Filed Pursuant to Rule 424(b)(1)

Registration Number 333-111289 and 333-116750

PROSPECTUS

10,000,000 Shares

COMMON STOCK

Salesforce.com, inc. is offering 10,000,000 shares of its common stock. This is our initial public offering and no public market currently exists for our shares.

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 $11 A SHARE

	Price to Public	Underwriting Discounts and Commissions	Proceeds to salesforce.com
Per Share	$11.00	$.77	$10.23
Total	$110,000,000	$7,700,000	$102,300,000

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 is truthful or complete. Any representation to the contrary is a criminal offense.

Morgan Stanley & Co. Incorporated expects to deliver the shares to purchasers on June 28, 2004.

MORGAN STANLEY

DEUTSCHE BANK SECURITIES

UBS INVESTMENT BANK

WACHOVIA SECURITIES

WILLIAM BLAIR & COMPANY

June 22, 2004

TABLE OF CONTENTS

	Page
Prospectus Summary	1
Risk Factors	5
Special Note Regarding Forward-Looking Statements	18
Use of Proceeds	19
Dividend Policy	19
Capitalization	20
Dilution	21
Selected Consolidated Financial Data	23
Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Business	43

	Page
Management	57
Certain Relationships and Related Party Transactions	72
Principal Stockholders	76
Description of Capital Stock	78
Shares Eligible for Future Sale	82
Underwriters	84
Legal Matters	87
Experts	87
Change in Independent Accountants	87
Where You Can Find Additional Information	88
Index to Consolidated Financial Statements	F-1

You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of our common stock.

Until July 18, 2004 (25 days after the commencement of this offering), all dealers that buy, sell or trade shares of our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

PROSPECTUS SUMMARY

You should read the following summary together with the entire prospectus, including the more detailed information in our consolidated financial statements and related notes appearing elsewhere in this prospectus. You should carefully consider, among other things, the matters discussed in “Risk Factors.”

SALESFORCE.COM, INC.

Salesforce.com is the leading provider, based on market share, of application services that allow organizations to easily share customer information on demand, according to a March 2004 report by Forrester Research, Inc. We provide a comprehensive customer relationship management, or CRM, service to businesses of all sizes and industries worldwide. By designing and developing our service to be a low-cost, easy-to-use application that is delivered through a standard Web browser, we substantially reduce many of the traditional expenses and complexities of enterprise software implementations. As a result, our customers incur less risk and lower upfront costs. Our service helps customers more effectively manage critical operations including: sales force automation; customer service and support; marketing automation; document management; analytics; and custom application development. We market our service on a subscription basis, primarily through our direct sales efforts and also indirectly through partners. From the introduction of our service in February 2000 through April 30, 2004, our customer base had grown to approximately 9,800, and these customers had purchased an aggregate of over 147,000 paying subscriptions for use by their employees and other customer-authorized users in approximately 65 countries.

The pervasiveness of the Internet, along with the dramatic declines in the pricing of computing technology and network bandwidth, have enabled a new generation of enterprise computing in which substantial components of information technology, or IT, infrastructure can be provisioned and delivered dynamically on an outsourced basis. This new computing paradigm is sometimes referred to as utility computing, while the outsourced software applications are referred to as on-demand application services. On-demand application services enable businesses to subscribe to a wide variety of application services that are developed specifically for, and delivered over, the Internet on an as-needed basis with little or no implementation services required and without the need to install and manage third-party software in-house. The market for on-demand application services is projected to grow from $425 million in 2002 to $2.6 billion in 2007, which represents a compounded annual growth rate of 44 percent, according to a May 2003 report by International Data Corporation, or IDC, an independent market research firm.

We believe that the CRM applications market, which was approximately $7.1 billion in 2002 according to a July 2003 report by IDC, is one of the first to benefit from on-demand application services. CRM applications are intended to enable businesses to automate sales, customer service and support, and marketing. Despite the significant potential benefits that can be attained from CRM, many enterprises have failed to successfully deploy the CRM applications that they have purchased for a variety of reasons including the difficulty and relatively high cost of implementing and maintaining enterprise applications, as well as the historically low rates of user adoption and lack of ubiquitous access that have contributed to lower returns on investment in CRM deployments.

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From inception, our service has been specifically designed to provide customers with robust CRM solutions on an outsourced basis through our proprietary, scalable and secure multi-tenant application architecture. Key benefits of our solution include:

· Rapid deployment.    Our service can be deployed rapidly and provisioned easily, since our customers do not have to spend time installing or maintaining the servers, networking equipment, security products or other infrastructure hardware and software necessary to ensure a scalable and reliable service.

· Enable high levels of user adoption.    We have designed our service to be easy-to-use and intuitive. Since our service contains many tools and features recognizable to users of popular websites such as those of Amazon.com, eBay and Yahoo!, it has a more familiar interface than typical CRM applications. As a result, our users do not require substantial training on how to use and benefit from our service.

· Lower total cost of ownership.    We enable customers to achieve significant savings relative to the traditional enterprise software model. Our service enables customers to automate sales, customer service and support, and marketing processes without having to make large and risky upfront investments in software, hardware, implementation services and additional IT staff.

· Extensive features, functionality and configurability.    We offer a comprehensive array of CRM capabilities across sales, customer service and support, and marketing that meet the needs of businesses of any size. We also enable customers to tailor important characteristics of our service to meet their unique requirements without the use of significant IT resources.

· Secure, scalable and reliable delivery platform.    We built and maintain a multi-tenant application architecture that has been designed to enable our service to scale securely, reliably and cost-effectively to tens of thousands of customers and millions of users.

· Ease of integration.    We have developed a set of application programming interfaces, or APIs, which we provide on a platform we call sforce, that enable customers and independent developers to integrate our service with existing third-party, custom and legacy applications, and write their own application services that integrate with our service.

Our objective is to be the leading provider of application services for businesses worldwide. To achieve this objective we intend to:

· continue to lead the industry transformation to on-demand application services;

· strengthen and extend our service offering;

· pursue new customers and new territories aggressively;

· deepen relationships with our existing customer base; and

· encourage the development of third-party applications on our sforce platform.

We were incorporated in Delaware in February 1999. During our limited history of operations, we have incurred significant losses and had negative cash flow from operations in fiscal quarters from our inception through fiscal 2003. As of April 30, 2004, we had an accumulated deficit of $71.5 million. The address of our principal executive office is The Landmark @ One Market, Suite 300, San Francisco, California 94105 and our telephone number is (415) 901-7000. Our website address is www.salesforce.com. The information on, or that can be accessed through, our website is not part of this prospectus.

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THE OFFERING

Common stock offered	10,000,000 shares
Common stock to be outstanding after this offering	101,256,880 shares
Use of proceeds	We expect to use the net proceeds for general corporate purposes, including working capital and capital expenditures. We may also use a portion of the net proceeds to fund possible investments in, or acquisitions of, complementary businesses, services or technologies. See “Use of Proceeds.”
NYSE symbol	CRM

The 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, which assumes the conversion of all of our outstanding shares of our 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 $0.03 to $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 be available for issuance under our 2004 Outside Directors Stock Plan and 1,000,000 shares of common stock to be available for issuance under our 2004 Employee Stock Purchase Plan; however, the 2004 Employee Stock Purchase Plan will not be implemented unless and until our board of directors 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 $1.10 to $3.89 per share and a weighted average exercise price of $2.43 per share; and

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

Except as otherwise indicated, all information contained in this prospectus assumes:

· the automatic conversion of all outstanding shares of our convertible preferred stock into 58,024,345 shares of common stock upon the closing of this offering;

· that the underwriters do not exercise their over-allotment option; and

· the filing of our amended and restated certificate of incorporation following the conversion of our convertible preferred stock.

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SUMMARY CONSOLIDATED FINANCIAL DATA

The following tables provide summary consolidated financial data and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition 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		361
Net (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	$	0.01
Diluted		(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		31,688
Diluted (2)		21,039			26,375			95,409		91,618		100,398

(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 from operations and net income for fiscal 2004 include non-cash income of $3.4 million associated with the net reduction in accruals associated with the office space that we abandoned.

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

	As of April 30, 2004
	Actual			Pro Forma			Pro Forma As Adjusted
	(unaudited)
	(in thousands)
Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term marketable securities	$	43,733		$	43,733		$	142,033
Working capital		7,342			7,342			105,642
Total assets		92,977			92,977			191,277
Convertible preferred stock		61,137			—			—
Accumulated deficit		(71,497	)		(71,497	)		(71,497	)
Total stockholders’ (deficit) equity		(44,056	)		17,081			115,381

The pro forma column of the consolidated balance sheet data table above reflects the automatic conversion of all outstanding shares of our convertible preferred stock 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 sale of 10,000,000 shares of our common stock in this offering at the initial public offering price of $11.00 per share, resulting in estimated net proceeds of $98.3 million after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

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RISK FACTORS

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 this prospectus, before deciding whether to invest in shares of our common stock. If any of the following risks actually occurs, our business, financial condition and results 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 in our 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 to be 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 short operating 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 began offering our on-demand CRM application service in February 2000. You must consider our business and prospects in light of the risks and difficulties we encounter as an early-stage company in the new and rapidly evolving market of on-demand CRM application services. These risks and difficulties include the following:

· 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 to adequately 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 the future. Our business does not have an established record of profitability and we may not continue to be profitable. In addition, we expect our operating expenses to 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 be profitable. You should not consider recent quarterly revenue growth as indicative of our future performance. In fact, in future quarters we may not have any revenue growth, and our revenue could decline. Furthermore, if our operating expenses exceed our expectations, our financial performance will be adversely affected.

If we experience significant fluctuations in our operating results and rate of growth and fail to meet revenue and earnings expectations, our stock price may fall 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 forecast our 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 operating losses 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 of growth. Our expenses and investments are, to a large extent, fixed and we

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expect 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 the future. 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 of future performance.

Interruptions or delays in service 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 Qwest Communications 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 unanticipated problems at the facility could result in lengthy interruptions in our service. In addition, the failure by the Qwest facility to provide our required data communications capacity could result in interruptions in our service. We have an agreement with SunGard Data Systems, a provider of availability services, to provide access to a geographically remote disaster recovery facility that would provide us access to hardware, software and Internet connectivity in the event the Qwest facility becomes unavailable. Even with this disaster recovery arrangement, however, our service would be interrupted during the transition. We are in the process of obtaining additional rapid recovery services. However, we do not expect to have these services in place before December 2004 at the earliest. Any damage 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 or pay penalties, cause customers to terminate their subscriptions and adversely affect our renewal rates. Our business will be harmed if our customers and potential customers 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 and customers 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 this information, 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 incur significant liability. Because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. If an actual or perceived breach of our security occurs, the market perception of the effectiveness of our security measures could be harmed and we could lose sales and customers.

If our on-demand application service 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 the foreseeable future. As a result, widespread acceptance of our service is critical to our future success. Factors that may affect market acceptance of our service include:

· 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 business.

The market for our technology delivery model and on-demand application services is immature and volatile, and if it does not develop or develops more slowly 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 demand and market acceptance. Our success will depend to a substantial extent on the willingness of enterprises, large and small, to increase their use of on-demand application services in general, and for CRM in particular. Many enterprises have invested substantial personnel and financial resources to integrate traditional enterprise software into their businesses, and therefore may be reluctant or unwilling to migrate to on-demand application services. Furthermore, some enterprises may be reluctant or unwilling to use on-demand application services because they have concerns regarding the risks associated with security capabilities, among other things, of the technology delivery model associated with these services. If enterprises do not perceive the benefits of on-demand application services, then the market for these services may not develop at all, or it may develop more slowly than we expect, either of which would significantly adversely 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 our business. 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 service over the term of the subscription, downturns or upturns in sales may not be immediately reflected 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 range from 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 previous quarters. 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 will negatively affect our revenue in future quarters. In addition, we may be unable to adjust our cost structure to reflect these reduced revenues. Accordingly, the effect of significant downturns in sales and market acceptance of our service may not be fully reflected in our results of operations until future periods. Our subscription model also makes it difficult for us to rapidly increase our revenue through additional sales in any period, as revenue from new customers must be recognized 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 will have 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 customers have 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 with respect to rates of customer subscription renewals, so we cannot accurately predict customer renewal rates. Our customers’ renewal rates may decline or fluctuate as a result of a number of factors, including their dissatisfaction with our service and their ability to continue their operations and spending levels. If our customers 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 require increasingly sophisticated and costly sales efforts that are targeted at senior management. If these efforts are not successful, our business may suffer.

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We derive a significant portion of our revenue from small businesses, which have a greater rate of attrition and non-renewal than medium-sized and large enterprise customers.

Our small business customers, which we consider to be companies with fewer than 200 employees, typically have shorter initial subscription periods and, based on our limited experience to date, have had a higher rate of attrition and non-renewal as compared to our medium-sized and large enterprise customers. We estimate that sales to small businesses were approximately 40 percent of our total revenues during fiscal 2004. If we cannot replace our small business customers that do not renew their subscriptions for our service with new customers quickly enough, our revenue could decline.

Our limited operating history may impede acceptance of our service by medium-sized and large customers.

Our ability to increase revenue and maintain profitability depends, in large part, on widespread acceptance of our service by medium-sized and large businesses. Our efforts to sell to these customers may not continue to be successful. In particular, because we are a relatively new company with a limited operating history, these target customers may have concerns regarding our viability and may prefer to purchase critical CRM applications from one of our larger, more established competitors. Even if we are able to sell our service to these types of customers, they may insist on additional assurances from us that we will be able to provide adequate levels of service, which could harm our business.

The market for our service may be limited if prospective customers, particularly large customers, require customized features or functions that we do not currently intend to provide in our service or that would be difficult for individual customers to customize within our service.

Prospective customers, especially large enterprise customers, may require heavily customized features and functions unique to their business processes. If prospective customers require customized features or functions that we do not offer, and that would be difficult for them to implement themselves, then the market for our service will be more limited and our business could suffer.

As more of our sales efforts are targeted at larger enterprise customers, our sales cycle may become more time-consuming and expensive, potentially diverting resources and harming our business.

As we target more of our sales efforts at larger enterprise customers, we will face greater costs, longer sales cycles and less predictability in completing some of our sales. In this market segment, the customer’s decision to use our service may be an enterprise-wide decision and, if so, these types of sales would require us to provide greater levels of education to prospective customers regarding the use and benefits of our service. In addition, larger customers may demand more customization, integration services and features. As a result of these factors, these sales opportunities may require us to devote greater sales support and professional services resources to individual sales, driving up costs and time required to complete sales and diverting sales and professional services resources to a smaller number of larger transactions.

The market in which we participate is intensely competitive, and if we do not compete effectively, our operating results could be harmed.

The market for CRM applications is intensely competitive and rapidly changing, barriers to entry are relatively low, many of our competitors are larger and have more resources than we do, and with the introduction of new technologies and market entrants, we expect competition to intensify in the future. If we fail to compete effectively, our operating results will be harmed. Some of our principal competitors offer their products at a lower price, which has resulted in pricing pressures. If we are unable to maintain our current pricing, our operating results could be negatively impacted. In addition, pricing pressures and increased competition generally could result in reduced sales, reduced margins or the failure of our service to achieve or maintain more widespread market acceptance, any of which could harm our business.

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Our current principal competitors include:

· enterprise software application vendors including Amdocs Limited, E.piphany, Inc., IBM Corporation, Microsoft Corporation, Oracle Corporation, PeopleSoft, Inc., SAP AG and Siebel Systems, Inc.;

· packaged CRM software vendors, some of whom offer hosted services, such as BMC Software Corporation, FrontRange Solutions, Inc., Onyx Software Corp., Pivotal Corporation, which has been acquired by CDC Software Corporation, a subsidiary of chinadotcom corporation, and Sage Group plc;

· on-demand CRM application service providers such as NetSuite, Inc., RightNow Technologies, Inc. and Salesnet, Inc.; and

· enterprise application service providers including British Telecom, Corio, Inc. and IBM.

In addition, we face competition from businesses that develop their own CRM applications internally, as well as from enterprise software vendors and online service providers who may develop and/or bundle CRM products with their products in the future. We also face competition from some of our larger and more established competitors who historically have been packaged CRM software vendors, but who are developing directly competitive on-demand CRM application services offerings, such as Siebel Systems through Siebel CRM OnDemand and through its acquisition of Upshot Corporation. Our professional services organization competes with a broad range of large systems integrators, including Accenture Ltd., BearingPoint, Inc. and IBM, as well as smaller independent consulting firms specializing in CRM implementations. We have relationships with many of these consulting companies and frequently work cooperatively on projects with them, even as we compete for business in other customer engagements.

Many of our potential competitors enjoy substantial competitive advantages, such as greater name recognition, longer operating histories and larger marketing budgets, as well as substantially greater financial, technical and other resources. In addition, many of our potential competitors have established marketing relationships and access to larger customer bases, and have major distribution agreements with consultants, system integrators and resellers.

As a result, our competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customer requirements. Furthermore, because of these advantages, even if our service is more effective than the products that our competitors offer, potential customers might accept competitive products and services in lieu of purchasing our service. For all of these reasons, we may not be able to compete successfully against our current and future competitors.

We may not be able to develop enhancements and new features to our existing service or acceptable new services that keep pace with technological developments.

If we are unable to develop enhancements to and new features for our existing service or acceptable new services that keep pace with rapid technological developments, our business will be harmed. The success of enhancements, new features and services depends on several factors, including the timely completion, introduction and market acceptance of the feature or edition. Failure in this regard may significantly impair our revenue growth. In addition, because our service is designed to operate on a variety of network hardware and software platforms using a standard browser, we will need to continuously modify and enhance our service to keep pace with changes in Internet-related hardware, software, communication, browser and database technologies. We may not be successful in either developing these modifications and enhancements or in timely bringing them to market. Furthermore, uncertainties about the timing and nature of new network platforms or technologies, or modifications to existing platforms or technologies, could increase our research and development expenses. Any failure of our service to operate effectively with future network platforms and technologies could reduce the demand for our service, result in customer dissatisfaction and harm our business.

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Any efforts we may make in the future to expand our service beyond the CRM market may not succeed.

To date, we have focused our business on providing on-demand application services for the CRM market, but we may in the future seek to expand into other markets. However, any efforts to expand beyond the CRM market may never result in significant revenue growth for us. In addition, efforts to expand our on-demand application service beyond the CRM market may divert management resources from existing operations and require us to commit significant financial resources to an unproven business, which may harm our business.

If we fail to develop our brand cost-effectively, our business may suffer.

We believe that developing and maintaining awareness of the salesforce.com brand in a cost-effective manner is critical to achieving widespread acceptance of our existing and future services and is an important element in attracting new customers. Furthermore, we believe that the importance of brand recognition will increase as competition in our market develops. Successful promotion of our brand will depend largely on the effectiveness of our marketing efforts and on our ability to provide reliable and useful services at competitive prices. In the past, our efforts to build our brand have involved significant expense. Brand promotion activities may not yield increased revenue, and even if they do, any increased revenue may not offset the expenses we incurred in building our brand. If we fail to successfully promote and maintain our brand, or incur substantial expenses in an unsuccessful attempt to promote and maintain our brand, we may fail to attract enough new customers or retain our existing customers to the extent necessary to realize a sufficient return on our brand-building efforts, and our business could suffer.

Any failure to adequately expand our direct sales force will impede our growth.

We expect to be substantially dependent on our direct sales force to obtain new customers, particularly large enterprise customers, and to manage our customer base. We believe that there is significant competition for direct sales personnel with the advanced sales skills and technical knowledge we need. Our ability to achieve significant growth in revenue in the future will depend, in large part, on our success in recruiting, training and retaining sufficient direct sales personnel. New hires require significant training and may, in some cases, take more than a year before they achieve full productivity. Our recent hires and planned hires may not become as productive as we would like, and we may be unable to hire sufficient numbers of qualified individuals in the future in the markets where we do business. If we are unable to hire and develop sufficient numbers of productive sales personnel, sales of our service will suffer.

Sales to customers outside the United States expose us to risks inherent in international sales.

Because we sell our service throughout the world, we are subject to risks and challenges that we would otherwise not face if we conducted our business only in the United States. For example, sales in Europe and Asia Pacific represented approximately 14 percent and 18 percent of our total revenues in fiscal 2003 and fiscal 2004, respectively, and 19 percent of our total revenues for the three months ended April 30, 2004, and we intend to expand our international sales efforts. The risks and challenges associated with sales to customers outside the United States include:

· localization of our service, including translation into foreign languages and associated expenses;

· laws and business practices favoring local competitors;

· compliance with multiple, conflicting and changing governmental laws and regulations, including employment, tax, privacy and data protection laws and regulations;

· foreign currency fluctuations;

· different pricing environments;

· difficulties in staffing and managing foreign operations;

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· longer accounts receivable payment cycles and other collection difficulties; and

· regional economic and political conditions.

Some of our international subscription fees are currently denominated in U.S. dollars and paid in local currency. As a result, fluctuations in the value of the U.S. dollar and foreign currencies may make the service more expensive for international customers, which could harm our business. We do not currently engage in currency hedging activities to limit the risk of exchange rate fluctuation.

Defects in our service could diminish demand for our service and subject us to substantial liability.

Because our service is complex, it may have errors or defects that users identify after they begin using it, which could harm our reputation and our business. Internet-based services frequently contain undetected errors when first introduced or when new versions or enhancements are released. We have from time to time found defects in our service and new errors in our existing service may be detected in the future. Since our customers use our service for important aspects of their business, any errors, defects or other performance problems with our service could hurt our reputation and may damage our customers’ businesses. If that occurs, customers could elect not to renew, or delay or withhold payment to us, we could lose future sales or customers may make warranty claims against us, which could result in an increase in our provision for doubtful accounts, an increase in collection cycles for accounts receivable or the expense and risk of litigation.

Any failure to protect our intellectual property rights could impair our ability to protect our proprietary technology and our brand.

If we fail to protect our intellectual property rights adequately, our competitors might gain access to our technology, and our business might be harmed. In addition, defending our intellectual property rights might entail significant expense. Any of our trademarks or other intellectual property rights may be challenged by others or invalidated through administrative process or litigation. We currently have no issued patents and may be unable to obtain patent protection in the future. In addition, if any patents are issued in the future, they may not provide us with any competitive advantages, or may be challenged by third parties. Furthermore, legal standards relating to the validity, enforceability and scope of protection of intellectual property rights are uncertain. Effective patent, trademark, copyright and trade secret protection may not be available to us in every country in which our service is available. The laws of some foreign countries may not be as protective of intellectual property rights as those in the United States, and mechanisms for enforcement of intellectual property rights may be inadequate. Accordingly, despite our efforts, we may be unable to prevent third parties from infringing upon or misappropriating our intellectual property.

We might be required to spend significant resources to monitor and protect our intellectual property rights. We may initiate claims or litigation against third parties for infringement of our proprietary rights or to establish the validity of our proprietary rights. Any litigation, whether or not it is resolved in our favor, could result in significant expense to us and divert the efforts of our technical and management personnel.

We may be sued by third parties for alleged infringement of their proprietary rights.

The software and Internet industries are characterized by the existence of a large number of patents, trademarks and copyrights and by frequent litigation based on allegations of infringement or other violations of intellectual property rights. As the number of entrants into our market increases, the possibility of an intellectual property claim against us grows. Our technologies may not be able to withstand any third-party claims or rights against their use. Any intellectual property claims, with or without merit, could be time-consuming and expensive to litigate or settle, and could divert management attention from executing our business plan. In addition, many of our subscription agreements require us to indemnify our customers for third-party intellectual property infringement claims, which would increase the cost to us of an adverse ruling in such a claim. An adverse determination could also prevent us from offering our service to others.

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We rely on third-party hardware and software that may be difficult to replace or which could cause errors or failures of our service.

We rely on hardware purchased or leased and software licensed from third parties in order to offer our service, including database software from Oracle Corporation. This hardware and software may not continue to be available on commercially reasonable terms, or at all. Any loss of the right to use any of this hardware or software could result in delays in the provisioning of our service until equivalent technology is either developed by us, or, if available, is identified, obtained and integrated, which could harm our business. Any errors or defects in third-party hardware or software could result in errors or a failure of our service which could harm our business.

We may be required to purchase the interest in our Japanese joint venture held by our joint venture partner, under certain circumstances, on terms that may not be favorable to us.

In some circumstances, we may be required to purchase the interest of our Japanese joint venture partner. If we default under the terms of our joint venture agreement with our joint venture partner, or if we and our partner disagree over a course of action proposed for the joint venture entity and the disagreement continues, then our partner may require that we purchase its interest in the joint venture. In the event we are required to purchase our partner’s interest in the joint venture, we could be forced to make an unanticipated outlay of a significant amount of capital, which could harm our operating results. Although the timing and circumstances of any such purchase, were it to be required, are not predictable, if the joint venture were valued based on its most recent financing, which occurred in September 2003, the buyout price could be as much as approximately $13.0 million.

If we acquire any companies or technologies in the future, they could prove difficult to integrate, disrupt our business, dilute stockholder value and adversely affect our operating results.

We may acquire or make investments in complementary companies, services and technologies in the future. We have not made any acquisitions or investments to date, and therefore our ability as an organization to make acquisitions or investments is unproven. Acquisitions and investments involve numerous risks, including:

· difficulties in integrating operations, technologies, services and personnel;

· diversion of financial and managerial resources from existing operations;

· risk of entering new markets;

· potential write-offs of acquired assets;

· potential loss of key employees;

· inability to generate sufficient revenue to offset acquisition or investment costs; and

· delays in customer purchases due to uncertainty.

In addition, if we finance acquisitions by issuing convertible debt or equity securities, our existing stockholders may be diluted which could affect the market price of our stock. As a result, if we fail to properly evaluate and execute acquisitions or investments, our business and prospects may be seriously harmed.

Evolving regulation of the Internet may affect us adversely.

As Internet commerce continues to evolve, increasing regulation by federal, state or foreign agencies becomes more likely. For example, we believe increased regulation is likely in the area of data privacy, and laws and regulations applying to the solicitation, collection, processing or use of personal or consumer information could affect our customers’ ability to use and share data, potentially reducing demand for CRM solutions and

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restricting our ability to store, process and share data with our customers. In addition, taxation of services provided over the Internet or other charges imposed by government agencies or by private organizations for accessing the Internet may also be imposed. Any regulation imposing greater fees for Internet use or restricting information exchange over the Internet could result in a decline in the use of the Internet and the viability of Internet-based services, which could harm our business.

The success of our business depends on the continued growth and acceptance of the Internet as a business tool.

Expansion in the sales of our service depends on the continued acceptance of the Internet as a communications and commerce platform for enterprises. The Internet could lose its viability as a business tool due to delays in the development or adoption of new standards and protocols to handle increased demands of Internet activity, security, reliability, cost, ease-of-use, accessibility and quality-of-service. The performance of the Internet and its acceptance as a business tool has been harmed by “viruses,” “worms” and similar malicious programs, and the Internet has experienced a variety of outages and other delays as a result of damage to portions of its infrastructure. If for any reason the Internet does not remain a widespread communications medium and commercial platform, the demand for our service would be significantly reduced, which would harm our business.

Our growth could strain our personnel and infrastructure resources, and if we are unable to implement appropriate controls and procedures to manage our growth, we may not be able to successfully implement our business plan.

We are currently experiencing a period of rapid growth in our headcount and operations, which has placed, and will continue to place, a significant strain on our management, administrative, operational and financial infrastructure. We anticipate that further growth will be required to address increases in our customer base, as well as our expansion into new geographic areas.

Our success will depend in part upon the ability of our senior management to manage this growth effectively. To do so, we must continue to hire, train and manage new employees as needed. If our new hires perform poorly, or if we are unsuccessful in hiring, training, managing and integrating these new employees, or if we are not successful in retaining our existing employees, our business may be harmed. To manage the expected growth of our operations and personnel, we will need to continue to improve our operational, financial and management controls and our reporting systems and procedures. The additional headcount and capital investments we are adding will increase our cost base, which will make it more difficult for us to offset any future revenue shortfalls by offsetting expense reductions in the short term. If we fail to successfully manage our growth, we will be unable to execute our business plan.

We are dependent on our management team, and the loss of any key member of this team may prevent us from implementing our business plan in a timely manner.

Our success depends largely upon the continued services of our executive officers and other key personnel, particularly Marc Benioff, our Chief Executive Officer and Chairman of the Board. We are also substantially dependent on the continued service of our existing development personnel because of the complexity of our service and technologies. We do not have employment agreements with any of our executive officers, key management or development personnel that require them to remain our employees and, therefore, they could terminate their employment with us at any time without penalty. We do not maintain key person life insurance policies on any of our employees. The loss of one or more of our key employees could seriously harm our business.

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Because competition for our target employees is intense, we may not be able to attract and retain the highly skilled employees we need to support our planned growth.

To execute our growth plan, we must attract and retain highly qualified personnel. Competition for these personnel is intense, especially for engineers with high levels of experience in designing and developing software and Internet-related services and senior sales executives. We may not be successful in attracting and retaining qualified personnel. We have from time to time in the past experienced, and we expect to continue to experience in the future, difficulty in hiring and retaining highly skilled employees with appropriate qualifications. Many of the companies with which we compete for experienced personnel have greater resources than we have. In addition, in making employment decisions, particularly in the Internet and high-technology industries, job candidates often consider the value of the stock options they are to receive in connection with their employment. Significant volatility in the price of our stock after this offering may, therefore, adversely affect our ability to attract or retain key employees. Furthermore, proposed changes to accounting principles generally accepted in the United States relating to the expensing of stock options may discourage us from granting the size or type of stock options awards that job candidates require to join our company. If we fail to attract new personnel or fail to retain and motivate our current personnel, our business and future growth prospects could be severely harmed.

We might require additional capital to support business growth, and this capital might not be available.

We intend to continue to make investments to support our business growth and may require additional funds to respond to business challenges, including the need to develop new services or enhance our existing service, enhance our operating infrastructure and acquire complementary businesses and technologies. Accordingly, we may need to engage in equity or debt financings to secure additional funds. If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock, including shares of common stock sold in this offering. Any debt financing secured by us in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. In addition, we may not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly limited.

Our reported financial results may be adversely affected by changes in accounting principles generally accepted in the United States.

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

For example, we currently are not required to record stock-based compensation charges if the employee’s stock option exercise price is equal to or exceeds the deemed fair value of our common stock at the date of grant. However, several companies have recently elected to change their accounting policies and begun to record the fair value of stock options as an expense. Although the standards have not been finalized and the timing of a final statement has not been established, FASB has announced its support for recording expense for the fair value of stock options granted. If we were required to change our accounting policy in accordance with Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation and SFAS No. 148. Accounting for Stock-Based Compensation—Transition and Disclosure, and retroactively restate prior periods as if we had adopted these standards for all periods presented, then our cost of revenues and operating expenses would have increased by approximately $1.7 million for fiscal 2003, $4.1 million for fiscal 2004 and $2.0 million for the three months ended April 30, 2004.

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Risks Related to this Offering

If our involvement in a lengthy May 9th New York Times article about salesforce.com or any other publicity regarding salesforce.com or the offering during the waiting period were held to be “gun jumping” in violation of the Securities Act of 1933, we could be required to repurchase securities sold in this offering. You should only rely on statements made in this prospectus in determining whether to purchase our shares.

In a New York Times article dated May 9, 2004 and entitled “It’s Not Google. It’s That Other Big I.P.O.,” information regarding this offering and salesforce.com was published. The New York Times article included quotes from Marc Benioff, our Chairman of the Board and Chief Executive Officer, regarding the development of salesforce.com and its business strategy. In preparation of the article, the reporter was allowed to spend most of a full day with Mr. Benioff. As a result, it could have been expected that a lengthy article would be published. Portions of this New York Times article were subsequently reprinted by a number of news outlets. While some of the factual statements about salesforce.com in the article are disclosed in this prospectus, the article presented statements about our company in isolation and did not disclose many of the related risks and uncertainties described in this prospectus.

In addition to the New York Times article, there has been substantial additional press coverage regarding us and this offering during the offering process. These articles also presented statements about our company in isolation and did not disclose many of the related risks and uncertainties described in this prospectus.

You should carefully evaluate all the information in this prospectus, including the risks described in this section and throughout the prospectus. We have in the past received, and may continue to receive, a high degree of media coverage, including coverage that is not directly attributable to statements made by our officers and employees. You should only rely on the information contained in this prospectus in making your investment decision.

In order to reduce the risk of investors’ possible reliance on the New York Times article and other news reports and articles, we stopped our offering on May 13, 2004. We then allowed a “cooling off” period to pass so that the effect of this article and other reports, articles and information would be dissipated.

It is uncertain whether our involvement in the May 9th New York Times article or any of our other publicity related activities could be held to be a violation of Section 5 of the Securities Act of 1933. If our involvement or such activities were held by a court to be in violation of the Securities Act, we could be required to repurchase the shares sold to purchasers in this offering at the original purchase price for a period of one year following the date of the violation. We would contest vigorously any claim that a violation of the Securities Act occurred.

The trading price of our common stock is likely to be volatile, and you might not be able to sell your shares at or above the initial public offering price.

The trading prices of the securities of technology companies have been highly volatile. Accordingly, the trading price of our common stock is likely to be subject to wide fluctuations. Further, our common stock has no prior trading history. Factors affecting the trading price of our common stock will include:

· variations in our operating results;

· announcements of technological innovations, new services or service enhancements, strategic alliances or significant agreements by us or by our competitors;

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· recruitment or departure of key personnel;

· changes in the estimates of our operating results or changes in recommendations by any securities analysts that elect to follow our common stock; and

· market conditions in our industry, the industries of our customers and the economy as a whole.

In addition, if the market for technology stocks or the stock market in general experiences continued or greater loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, operating results or financial condition. The trading price of our common stock might also decline in reaction to events that affect other companies in our industry even if these events do not directly affect us.

If securities analysts do not publish research or reports about our business or if they downgrade our stock, the price of our stock could decline.

The trading market for our common stock will rely in part on the research and reports that industry or financial analysts publish about us or our business. We do not control these analysts. There are many large, well- established publicly traded companies active in our industry and market, which may mean it will be less likely that we receive widespread analyst coverage. Furthermore, if one or more of the analysts who do cover us downgrade our stock, our stock price would likely decline rapidly. If one or more of these analysts cease coverage of our company, we could lose visibility in the market, which in turn could cause our stock price to decline.

Future sales of shares by existing stockholders could cause our stock price to decline.

If our existing stockholders sell, or indicate an intention to sell, substantial amounts of our common stock in the public market after the 180-day contractual lock-up and other legal restrictions on resale discussed in this prospectus lapse, the trading price of our common stock could decline below the initial public offering price. Based on shares outstanding as of April 30, 2004, upon completion of this offering, we will have outstanding 101,256,880 shares of common stock, assuming no exercise of the underwriters’ over-allotment option. Of these shares, only the 10,000,000 shares of common stock sold in this offering will be freely tradable, without restriction, in the public market. Morgan Stanley & Co. Incorporated may, in its sole discretion, permit our officers, directors, employees and current stockholders who are subject to the 180-day contractual lock-up to sell shares prior to the expiration of the lock-up agreements.

After the lock-up agreements pertaining to this offering expire 180 days from the date of this prospectus, up to an additional 91,256,880 shares will be eligible for sale in the public market, 55,516,612 of which are held by directors, executive officers and other affiliates and will be subject to volume limitations under Rule 144 under the Securities Act and various vesting agreements. In addition, the 1,299,496 shares subject to outstanding warrants and the 23,115,865 shares that are either subject to outstanding options or reserved for future issuance under our 1999 Stock Option Plan, 2004 Equity Incentive Plan, 2004 Outside Directors Stock Plan and 2004 Employee Stock Purchase Plan will become eligible for sale in the public market to the extent permitted by the provisions of various vesting agreements, the lock-up agreements and Rules 144 and 701 under the Securities Act of 1933, as amended, or the Securities Act. If these additional shares are sold, or if it is perceived that they will be sold, in the public market, the trading price of our common stock could decline.

The concentration of our capital stock ownership with insiders upon the completion of this offering will likely limit your ability to influence corporate matters.

We anticipate that our executive officers, directors, current 5 percent or greater stockholders and affiliated entities will together beneficially own approximately 54.8 percent of our common stock outstanding after this offering. As a result, these stockholders, acting together, will have control over most matters that require approval by our stockholders, including the election of directors and approval of significant corporate

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transactions. Corporate action might be taken even if other stockholders, including those who purchase shares in this offering, oppose them. This concentration of ownership might also have the effect of delaying or preventing a change of control of our company that other stockholders may view as beneficial.

Our management will have broad discretion over the use of the proceeds to us from this offering and might not apply the proceeds of this offering in ways that increase the value of your investment.

Our management will have broad discretion to use the net proceeds from this offering, and you will be relying on the judgment of our management regarding the application of these proceeds. They might not apply the net proceeds of this offering in ways that increase the value of your investment. We expect to use the net proceeds from this offering for general corporate purposes, including working capital and capital expenditures, and for possible investments in, or acquisitions of, complementary services or technologies. We have not allocated these net proceeds for any specific purposes. Our management might not be able to yield a significant return, if any, on any investment of these net proceeds.

You will experience immediate and substantial dilution in the net tangible book value of the shares you purchase in this offering.

The initial public offering price of our common stock is substantially higher than the book value per share of the outstanding common stock after this offering. Therefore, if you purchase our common stock in this offering, you will suffer immediate and substantial dilution of approximately $9.87 per share. If the underwriters exercise their over-allotment option, or if outstanding options and warrants to purchase our common stock are exercised, you will experience additional dilution.

Provisions in our amended and restated certificate of incorporation and bylaws or Delaware law might discourage, delay or prevent a change of control of our company or changes in our management and, therefore, depress the trading price of our common stock.

Our amended and restated certificate of incorporation and bylaws contain provisions that could depress the trading price of our common stock by acting to discourage, delay or prevent a change in control of our company or changes in our management that the stockholders of our company may deem advantageous. These provisions:

· establish a classified board of directors so that not all members of our board are elected at one time;

· provide that directors may only be removed “for cause” and only with the approval of 66 ²/3 percent of our stockholders;

· require super-majority voting to amend some provisions in our amended and restated certificate of incorporation and bylaws;

· authorize the issuance of “blank check” preferred stock that our board could issue to increase the number of outstanding shares and to discourage a takeover attempt;

· limit the ability of our stockholders to call special meetings of stockholders;

· prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders;

· provide that the board of directors is expressly authorized to make, alter or repeal our bylaws; and

· establish advance notice requirements for nominations for election to our board or for proposing matters that can be acted upon by stockholders at stockholder meetings.

In addition, Section 203 of the Delaware General Corporation Law may discourage, delay or prevent a change in control of our company.

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus, including particularly in the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” contains forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue” or the negative of these terms or other comparable terminology. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ materially from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. These risks and other factors include those listed under “Risk Factors” and elsewhere in this prospectus. You should specifically consider the numerous risks discussed under “Risk Factors.” These statements are only predictions based on our current expectations and projections about future events and we cannot guarantee future results, levels of activity, performance or achievements.

You should read this prospectus and the documents that we reference in this prospectus and that are filed as exhibits to the registration statement on Form S-1, of which this prospectus is a part, that we have filed with the SEC, completely and with the understanding that our actual future results, levels of activity, performance and achievements may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.

For investors outside the United States: Neither we nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus.

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USE OF PROCEEDS

We estimate that our net proceeds from the sale of the shares in this offering will be approximately $98.3 million, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters exercise their over-allotment option in full, we estimate that our net proceeds will be approximately $113.6 million.

The principal purposes of this offering are to obtain additional capital, to create a public market for our common stock and to facilitate our future access to the public equity markets.

We anticipate that we will use the net proceeds for general corporate purposes, including working capital and capital expenditures, but we have not designated any specific uses. We may also use a portion of the net proceeds to fund possible investments in, or acquisitions of, complementary businesses, services or technologies. We have no current agreements or commitments with respect to any investment or acquisition, and we currently are not engaged in negotiations with respect to any investment or acquisition. In addition, the amount and timing of what we actually spend for these purposes may vary significantly and will depend on a number of factors, including our future revenue and cash generated by operations and the other factors described in “Risk Factors.” Accordingly, our management will have broad discretion in applying the net proceeds of this offering. Pending these uses, we intend to invest the net proceeds in high quality, investment grade, short-term fixed income instruments which include corporate, financial institution, federal agency or U.S. government obligations.

DIVIDEND POLICY

We have never paid any cash dividends on our common stock. Our board of directors currently intends to retain any future earnings to support operations and to finance the growth and development of our business and does not intend to pay cash dividends on our common stock for the foreseeable future. Any future determination related to our dividend policy will be made at the discretion of the board.

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CAPITALIZATION

The following table summarizes our cash, cash equivalents and short-term marketable securities, and capitalization as of April 30, 2004:

· on an actual basis;

· on a pro forma basis assuming the conversion of all outstanding shares of our convertible preferred stock into 58,024,345 shares of our common stock upon the closing of this offering; and

· on a pro forma as adjusted basis to give effect to receipt of the net proceeds from the sale by us in this offering of 10,000,000 shares of common stock after deducting the underwriting discounts and commissions and the estimated offering expenses payable by us.

You should read this table in conjunction with “Selected Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

	As of April 30, 2004
	Actual			Pro Forma			Pro Forma As Adjusted
	(unaudited)
	(in thousands)
Cash, cash equivalents and short-term marketable securities	$	43,733		$	43,733			$142,033
Convertible preferred stock, $0.001 par value; 63,738,843 shares authorized, 58,024,345 shares issued and outstanding, actual; 5,000,000 shares authorized, none issued and outstanding, pro forma and pro forma as adjusted	$	61,137		$	—		$	—
Stockholders’ equity (deficit):
Common stock, $0.001 par value; 200,000,000 shares authorized, 33,232,535 shares issued and outstanding, actual; 400,000,000 shares authorized, 91,256,880 issued and outstanding, pro forma; and 400,000,000 shares authorized, 101,256,880 shares issued and outstanding, pro forma as adjusted		33			91			101
Additional paid-in capital		36,624			97,703			195,993
Deferred stock-based compensation		(7,526	)		(7,526	)		(7,526	)
Notes receivables from stockholders		(1,698	)		(1,698	)		(1,698	)
Accumulated other comprehensive income		8			8			8
Accumulated deficit		(71,497	)		(71,497	)		(71,497	)
Total stockholders’ equity (deficit)		(44,056	)		17,081			115,381
Total capitalization	$	17,081		$	17,081		$	115,381

The number of shares shown as issued and outstanding in the table above 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 $0.03 to $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 be available for issuance under our 2004 Outside Directors Stock Plan and 1,000,000 shares of common stock to be available for issuance under our 2004 Employee Stock Purchase Plan; however, the 2004 Employee Stock Purchase Plan will not be implemented unless and until our board of directors 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 $1.10 to $3.89 per share and a weighted average exercise price of $2.43 per share; and

· 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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DILUTION

If you invest in our common stock in this offering, your ownership interest in salesforce.com will be diluted to the extent of the difference between the initial public offering price per share and the net tangible book value per share after this offering. Our net tangible book value as of April 30, 2004 was $16.5 million, or $0.18 per share of our common stock. We calculate net tangible book value per share by taking the amount of our total tangible assets, reduced by the amount of our total liabilities, and then dividing that amount by the total number of shares of common stock outstanding, after giving effect to the automatic conversion of all shares of our outstanding preferred stock.

After giving effect to our sale of the shares in this offering and deducting underwriting discounts and commissions and estimated offering expenses payable by us, our net tangible book value on April 30, 2004 would have been $114.8 million, or $1.13 per share of our common stock. This amount represents an immediate increase in net tangible book value of $0.95 per share to existing stockholders and an immediate and substantial dilution in net tangible book value of $9.87 per share to new investors purchasing shares in this offering.

The following table illustrates this per share dilution:

Initial public offering price per share			$	11.00
Net tangible book value per share before offering	$	0.18
Increase per share attributable to new investors (1)		0.95
As adjusted net tangible book value per share after offering				1.13
Dilution per share to new investors			$	9.87

(1) Does not give effect to the underwriters’ exercise of their over-allotment option. Also, to the extent any outstanding options or warrants are exercised, you will experience further dilution.

In addition, we may choose to raise additional capital due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of these securities could result in further dilution to our stockholders.

The following table summarizes, as of April 30, 2004, the differences between the number of shares purchased from us, the total consideration paid, or to be paid, and the average price per share paid to us by existing stockholders and to be paid by new investors purchasing shares of our common stock in this offering, before underwriting discounts and commissions and estimated offering expenses payable by us. As the table shows, new investors purchasing shares in this offering will pay an average price per share substantially higher than our existing stockholders paid.

	Shares Purchased			Total Consideration				Average Price Per Share
	Number	Percent		Amount		Percent
Existing stockholders	91,256,880	90	%	$	68,942,000	39	%	$	0.76
New investors	10,000,000	10			110,000,000	61			11.00
Total	101,256,880	100	%	$	178,942,000	100	%

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The 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, which assumes 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 $0.03 to $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 be available for issuance under our 2004 Outside Directors Stock Plan and 1,000,000 shares of common stock to be available for issuance under our 2004 Employee Stock Purchase Plan; however, the 2004 Employee Stock Purchase Plan will not be implemented unless and until our board of directors 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 $1.10 to $3.89 per share and a weighted average exercise price of $2.43 per share; and

· 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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SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” following this section and our consolidated financial statements and related notes appearing elsewhere in this prospectus. The selected consolidated statement of operations data for the fiscal years ended January 31, 2002, 2003 and 2004, and the selected consolidated balance sheet data as of January 31, 2003 and 2004, are derived from our audited consolidated financial statements included in this prospectus. The consolidated statement of operations data 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 sheet data as of January 31, 2000, 2001 and 2002, are derived from audited consolidated financial statements not included in this prospectus. The consolidated statement 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 from our unaudited consolidated financial statements included in this prospectus. The unaudited consolidated financial statements include, in the opinion of management, all adjustments that management considers necessary for the fair presentation of the financial information set forth in those statements. The historical results are not necessarily indicative of results to be expected in any future period, and the results for the three months ended

April 30, 2004 should not be considered indicative of results expected for the full fiscal year.

	Period from inception (February 3, 1999) to January 31, 2000			Fiscal Year Ended January 31,												Three Months Ended April 30,
				2001			2002			2003			2004			2003			2004
																(unaudited)
	(in thousands, except per share data)
Consolidated Statement of Operations:
Revenues:
Subscription and support	$	—		$	5,022		$	21,513		$	47,656		$	85,796		$	16,922		$	31,116
Professional services and other		—			413			896			3,335			10,227			1,991			3,723
Total revenues		—			5,435			22,409			50,991			96,023			18,913			34,839
Cost of revenues (1):
Subscription and support		—			1,730			3,718			7,199			7,782			1,597			2,282
Professional services and other		—			1,692			2,329			3,164			9,491			1,758			4,081
Total cost of revenues		—			3,422			6,047			10,363			17,273			3,355			6,363
Gross profit		—			2,013			16,362			40,628			78,750			15,558			28,476
Operating expenses (1):
Research and development		1,089			3,366			5,308			4,648			6,962			1,240			2,127
Marketing and sales		2,499			25,392			24,605			33,522			54,600			10,656			20,415
General and administrative		1,976			6,855			8,317			12,958			16,915			3,645			5,573
Lease abandonment (recovery)		—			—			7,657			—			(3,445	)		—			—
Total operating expenses		5,564			35,613			45,887			51,128			75,032			15,541			28,115
(Loss) income from operations		(5,564	)		(33,600	)		(29,525	)		(10,500	)		3,718			17			361
Interest income		121			1,715			755			471			379			78			144
Interest expense		(3	)		(42	)		(272	)		(77	)		(22	)		(9	)		(1	)
Other income (expense)		(6	)		63			8			98			164			315			20
(Loss) income before provision for income taxes and minority interest		(5,452	)		(31,864	)		(29,034	)		(10,008	)		4,239			401			524
Provision for income taxes		—			—			—			—			541			49			70
(Loss) income before minority interest		(5,452	)		(31,864	)		(29,034	)		(10,008	)		3,698			352			454
Minority interest in consolidated joint venture		—			193			425			292			(184	)		16			(17	)
Net (loss) income	$	(5,452	)	$	(31,671	)	$	(28,609	)	$	(9,716	)	$	3,514		$	368		$	437
Net (loss) income per share:
Basic	$	(0.55	)	$	(2.38	)	$	(1.36	)	$	(0.37	)	$	0.12		$	0.01		$	0.01
Diluted		(0.55	)		(2.38	)		(1.36	)		(0.37	)		0.04			0.00			0.00
Weighted-average shares used in computing per share amounts:
Basic (2)		10,000			13,314			21,039			26,375			29,605			28,660			31,688
Diluted (2)		10,000			13,314			21,039			26,375			95,409			91,618			100,398

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	As of January 31,															As of April 30, 2004
	2000			2001			2002			2003			2004
																(unaudited)
	(in thousands)
Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term marketable securities	$	12,609		$	22,200		$	11,709		$	16,009		$	35,812		$	43,733
Working capital		12,053			20,163			6,497			1,172			4,140			7,342
Total assets		14,196			37,047			29,713			39,673			87,511			92,977
Convertible preferred stock		17,156			59,852			61,137			61,137			61,137			61,137
Accumulated deficit		(5,452	)		(37,123	)		(65,732	)		(75,448	)		(71,934	)		(71,497	)
Total stockholders’ deficit		(3,878	)		(29,329	)		(51,348	)		(55,875	)		(46,237	)		(44,056	)

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

	Period from inception (February 3, 1999) to January 31, 2000		Fiscal Year Ended January 31,								Three Months Ended April 30,
			2001		2002		2003		2004		2003		2004
											(unaudited)
	(in thousands)
Cost of revenues	$	—	$	345	$	369	$	428	$	655	$	160	$	170
Research and development		214		431		436		402		462		120		89
Marketing and sales		386		1,350		1,422		1,696		2,029		514		414
General and administrative		267		1,326		2,224		2,241		1,213		290		204
Total stock-based expenses	$	867	$	3,452	$	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.

24

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes that appear in this prospectus. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this prospectus, particularly in “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, according to 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 million in 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 management team is focused on a number of short and long-term challenges, including strengthening and extending our service offerings, adding new customers and expanding our sales efforts into new territories, deepening our relationships with our existing customers and encouraging the development of third-party applications 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 define paying subscriptions as unique user accounts, purchased by customers for use by their employees and other customer-authorized users, that have not been suspended 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 service offerings and to develop new services and technologies; expanding the number of locations around the world where we conduct business; adding to our infrastructure 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 our total 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 and manage 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-demand application service, and from customers purchasing additional support beyond the standard support that is included in the basic subscription fee; and (2) related professional

25

services and other revenues, consisting primarily of training fees. Subscription and support revenues accounted for more than 90 percent of our total revenues in fiscal 2002 and 2003, and 89 percent of our total revenues during fiscal 2004 and the three months ended April 30, 2004. Subscription revenues are driven primarily 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 percent of 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 terminate their contracts for cause if we fail to perform. We generally invoice our customers in annual or 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.

We market our on-demand application service primarily through direct sales efforts and also indirectly through partners. We offer our customers three principal editions 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 or departments;

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

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

Professional services and other revenues consist of fees associated with consulting and implementation services and training. Our consulting and implementation engagements are typically billed on a time and materials basis. We also offer a number of classes on implementing, using and administering our service that are billed 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 of Revenues.    Cost of subscription and support revenues primarily consists of expenses related to hosting our service and providing support, depreciation expense associated with computer equipment, costs associated with website development activities, allocated overhead and amortization expense associated with capitalized software. To date, the expense associated with capitalized software has not been material to our cost of revenues. We allocate overhead such as rent and occupancy charges, employee benefit costs and depreciation expense to all departments based on headcount. As such, general overhead expenses are reflected in each cost of revenue and operating expense category. Cost of professional services and other revenues consists primarily of employee-related costs associated with these services and allocated overhead. The cost associated with providing professional services is significantly higher as 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 consulting services. 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 a particular quarterly period. For example, we plan to increase the number of employees who are fully dedicated to consulting services. We also plan to enter into an agreement with a third-party Web hosting provider during fiscal 2005 that will provide additional disaster recovery services in the event our primary data center becomes unavailable. We currently expect the annual cost of these services to be less than $2.0 million.

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Research and Development.    Research and development expenses consist primarily of salaries and related expenses, and allocated overhead. We have historically 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 of our application. As a result, we do not have to maintain multiple versions, which enables us to have relatively low research and development expenses as compared to traditional enterprise software business models. We expect that in the future, research and development expenses will increase in absolute dollars as we 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 fiscal 2004 total revenues and 59 percent of our total revenues for the three months ended April 30, 2004. Marketing and sales expenses consist primarily of salaries and 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 application service in February 2000, marketing costs, particularly advertising, accounted for 62 percent of fiscal 2001 and 47 percent of fiscal 2002 total marketing and sales 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 lower advertising 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 new customers and increase penetration within our existing customer base, expanding our domestic and international selling and marketing activities, building brand awareness 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, and management information systems personnel, professional fees, other corporate expenses and allocated overhead. We expect that in the future, general and administrative expenses will increase in absolute dollars as we add personnel and incur additional professional fees and insurance costs related to the growth of our 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 President of Technology, Marketing and Systems, Patricia Sueltz, to our executive team, and we may add other executives if our business continues to grow. Her annual base 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 individual performance objectives. During the first twelve months of her employment, her bonus is guaranteed. In addition, we have paid our Chief Executive Officer one dollar 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 compensation expenses 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 in the fourth quarter of fiscal 2002 pertaining to the estimated future obligations under the non-cancelable lease. In August 2003, we entered into an agreement releasing us from future obligations for some of the abandoned space in connection with the landlord’s lease of this space to another tenant. Accordingly, we recorded 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 this space. 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 excess office space in San Francisco. This additional accrual resulted from a revision of our estimates of the timing and amount of projected subtenant income based on difficulties in subleasing the remaining space.

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Stock-Based Expenses.    Our cost of revenues and operating expenses include stock-based expenses related to options and warrants issued to non-employees and 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 charges have 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 our sales 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’s financial results, which are reflected in each revenue, cost of revenues and expense category in our consolidated statement of operations. We then record minority interest, which reflects the minority investors’ interest in the venture’s results. Through April 30, 2004, the operating performance and liquidity requirements of the 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, we believe 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 these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses, and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results may differ from these estimates under different 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 following accounting policies involve a greater degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding 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,” as amended 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 to the 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 premium support offerings are recognized ratably over the term of the support contract. Consulting services and training revenues are accounted for separately from subscription and support revenues because these services have value to the customer on a standalone basis and there is objective and reliable evidence of their fair value of the undelivered elements. Our arrangements do not contain general rights of return. Consulting revenues are recognized upon completion of the contracts that are of short duration (generally less than 60 days) and as the services are rendered for contracts of longer duration. Training revenues are recognized after the services are performed.

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Accounting for Deferred Commissions. We defer commission payments to our direct sales force. The commissions are deferred and amortized to sales expense over the noncancelable terms of the related subscription contracts with our customers, which are typically 12 to 24 months. The commission payments, which are paid in full the month after the customer’s service commences, are a direct and incremental cost of the revenue arrangements. The deferred commission amounts are recoverable through the future revenue streams under the noncancelable customer contracts. We believe this is the preferable method of accounting as the commission charges are so closely related to the revenue from the noncancelable customer contracts that they should be recorded as an asset and charged to expense over the same period that the subscription 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 million of commission expenditures and we amortized $2.9 million to sales expense. During fiscal 2004, we deferred $16.3 million of commission expenditures and we amortized $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 less than the deemed fair value of our common stock at the date of grant. Because there has been no public market for our stock, our board of directors has determined the fair value of our common stock based upon several factors, including, but not limited to, our operating and financial performance, private sales of our common and preferred stock between third parties, issuances of convertible preferred stock and appraisals performed by an appraisal firm. We amortize the deferred compensation charges ratably over the four-year vesting period of the underlying option awards. As of January 31, 2004, we had an aggregate of $8.3 million of deferred stock-based compensation remaining to be amortized. We currently expect this deferred stock-based compensation balance to be amortized as follows: $3.2 million during fiscal 2005; $2.9 million during fiscal 2006; $1.9 million during fiscal 2007; and $300,000 during fiscal 2008. We have elected not to record stock-based compensation expense when employee stock options are awarded at exercise prices equal to the deemed fair value of our common stock at the date of grant. The impact of expensing employee stock awards using the Black-Scholes option-pricing model is further described in note 1 of the notes 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-based compensation expense over the vesting periods of the underlying awards, based on an estimate of their fair value on the vesting dates using the Black-Scholes option-pricing model. As of April 30, 2004, we had recognized compensation expense on all options and warrants issued to non-employees except for options for 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 per share.

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Results of Operations

The following tables set forth selected consolidated statements of operations data for each of the periods indicated.

	Fiscal Year Ended January 31,									Three Months Ended April 30,
	2002			2003			2004			2003			2004
										(unaudited)
	(in thousands)
Revenues:
Subscription and support	$	21,513		$	47,656		$	85,796		$	16,922		$	31,116
Professional services and other		896			3,335			10,227			1,991			3,723
Total revenues		22,409			50,991			96,023			18,913			34,839
Cost of revenues:
Subscription and support		3,718			7,199			7,782			1,597			2,282
Professional services and other		2,329			3,164			9,491			1,758			4,081
Total cost of revenues		6,047			10,363			17,273			3,355			6,363
Gross profit		16,362			40,628			78,750			15,558			28,476
Operating expenses:
Research and development		5,308			4,648			6,962			1,240			2,127
Marketing and sales		24,605			33,522			54,600			10,656			20,415
General and administrative		8,317			12,958			16,915			3,645			5,573
Lease abandonment (recovery)		7,657			—			(3,445	)		—			—
Total operating expenses		45,887			51,128			75,032			15,541			28,115
(Loss) income from operations		(29,525	)		(10,500	)		3,718			17			361
Interest income		755			471			379			78			144
Interest expense		(272	)		(77	)		(22	)		(9	)		(1	)
Other income		8			98			164			315			20
(Loss) income before provision for income taxes and minority interest		(29,034	)		(10,008	)		4,239			401			524
Provision for income taxes		—			—			541			49			70
(Loss) income before minority interest		(29,034	)		(10,008	)		3,698			352			454
Minority interest in consolidated joint venture		425			292			(184	)		16			(17	)
Net (loss) income	$	(28,609	)	$	(9,716	)	$	3,514		$	368		$	437
	As of January 31,									As of April 30,
	2002			2003			2004			2003			2004
										(unaudited)
	(in thousands, except customer and subscriber data)
Balance sheet data:
Cash, cash equivalents and short-term marketable securities	$	11,709		$	16,009		$	35,812		$	20,335		$	43,733
Deferred revenue		7,128			19,171			49,677			24,310			52,340
Customer and subscriber data (unaudited):
Approximate number of customers		3,500			5,700			8,700			6,300			9,800
Approximate number of paying subscriptions		53,000			76,000			127,000			85,000			147,000
	Fiscal Year Ended January 31,									Three Months Ended April 30,
	2002			2003			2004			2003			2004
										(unaudited)
	(in thousands)
Cash flow provided by (used in) operating activities	$	(13,166	)	$	5,213		$	21,781		$	4,761		$	6,659

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	Fiscal Year Ended January 31,						Three Months Ended April 30,
	2002		2003		2004		2003		2004
							(unaudited)
	(in thousands)
Revenues by geography:
Americas	$	20,305	$	43,855	$	78,958	$	16,046	$	28,336
Europe		1,680		5,345		11,754		2,038		4,632
Asia Pacific		424		1,791		5,311		829		1,871
	$	22,409	$	50,991	$	96,023	$	18,913	$	34,839
Cost of revenues and operating expenses include the following amounts related to stock-based awards:
	Fiscal Year Ended January 31,						Three Months Ended April 30,
	2002		2003		2004		2003		2004
							(unaudited)
	(in thousands)
Stock-based expenses:
Cost of revenues	$	369	$	428	$	655	$	160	$	170
Research and development		436		402		462		120		89
Marketing and sales		1,422		1,696		2,029		514		414
General and administrative		2,224		2,241		1,213		290		204
Total stock-based expenses	$	4,451	$	4,767	$	4,359	$	1,084	$	877

The following tables set forth selected consolidated statements of operations data for each of the periods indicated as a percentage of total revenues.

	Fiscal Year Ended January 31,						Three Months Ended April 30,
	2002		2003		2004		2003		2004
Revenues:
Subscription and support	96	%	93	%	89	%	89	%	89	%
Professional services and other	4		7		11		11		11
Total revenues	100		100		100		100		100
Cost of revenues:
Subscription and support	17		14		8		8		6
Professional services and other	10		6		10		10		12
Total cost of revenues	27		20		18		18		18
Gross profit	73		80		82		82		82
Operating expenses:
Research and development	24		9		7		7		6
Marketing and sales	110		66		57		56		59
General and administrative	37		26		18		19		16
Lease abandonment (recovery)	34		—		(4	)	—		—
Total operating expenses	205		101		78		82		81
(Loss) income from operations	(132	)	(21	)	4		—		1
Interest income	3		1		1		1		—
Interest expense	(1	)	—		—		—		—
Other income	—		—		—		1		—
(Loss) income before provision for income taxes and minority interest	(130	)	(20	)	5		2		1
Provision for income taxes	—		—		(1	)	—		—
(Loss) income before minority interest	(130	)	(20	)	4		2		1
Minority interest in consolidated joint venture	2		1		—		—		—
Net (loss) income	(128	)%	(19	)%	4	%	2	%	1	%

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	Fiscal Year Ended January 31,						Three Months Ended April 30,
	2002		2003		2004		2003		2004
Revenues by geography:
Americas	91	%	86	%	82	%	85	%	81	%
Europe	7		10		12		11		13
Asia Pacific	2		4		6		4		6
	100	%	100	%	100	%	100	%	100	%
	Fiscal Year Ended January 31,						Three Months Ended April 30,
	2002		2003		2004		2003		2004
Stock-based expenses:
Cost of revenues	2	%	1	%	1	%	1	%	1	%
Research and development	2		1		1		1		—
Marketing and sales	6		3		2		3		1
General and administrative	10		4		1		1		1
Total stock-based expenses	20	%	9	%	5	%	6	%	3	%

Overview of Results of Operations for the Three Months Ended April 30, 2004

Revenues during the three months ended April 30, 2004 were $34.8 million, an increase of 84 percent over the comparable period a year ago. The total number of paying subscribers increased to approximately 147,000 as of April 30, 2004 from approximately 85,000 as of April 30, 2003.

Our gross profit during the three months ended April 30, 2004 was $28.5 million, or 82 percent of revenues, and operating income was $400,000. Operating income included non-cash stock-based expense of $900,000. During the comparable period a year ago, we generated a gross profit of $15.6 million, or 82 percent of revenues, and operating income was $17,000. Operating income during the three months ended April 30, 2003 included $1.1 million of non-cash stock-based expense.

During the three months ended April 30, 2004, we continued to incur substantial costs and operating expenses related to the expansion of our business. We added sales personnel to focus on adding new customers and increasing penetration within our existing customer base, professional services personnel to support our consulting services, and developers to broaden and enhance our on-demand service.

During the three months ended April 30, 2004, we generated $6.7 million of cash from operating activities, as compared to $4.8 million during the comparable period a year ago. At April 30, 2004, we had cash, cash equivalents and short-term marketable securities of $43.7 million, as compared to $20.3 million at April 30, 2003, accounts receivable of $24.5 million, as compared to $12.1 million at April 30, 2003, and deferred revenue of $52.3 million, as compared to $24.3 million at April 30, 2003.

Three Months Ended April 30, 2004 and 2003

Revenues.    Total revenues were $34.8 million for the three months ended April 30, 2004, compared to $18.9 million during the same period a year ago, an increase of $15.9 million, or 84 percent. Subscription and support revenues were $31.1 million, or 89 percent of total revenues, for the three months ended April 30, 2004, compared to $16.9 million, or 89 percent of total revenues, during the same period a year ago. The increase in subscription and support revenues was due primarily to the increase in the number of paying subscribers to approximately 147,000 as of April 30, 2004 from approximately 85,000 as of April 30, 2003. Professional services and other revenues were $3.7 million, or 11 percent of total revenues, for the three months ended April 30, 2004, compared to $2.0 million, or 11 percent of total revenues, for the same period a year ago. The increase in professional services and other revenues was due primarily to the higher demand for services from an increased number of paying subscribers and customers.

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Revenues in Europe and Asia Pacific accounted for $6.5 million, or 19 percent of total revenues, during the three months ended April 30, 2004, compared to $2.9 million, or 15 percent of total revenues, during the same period a year ago, an increase of $3.6 million, or 124 percent. The increase in revenues outside of the Americas was the result of our efforts to expand the number of locations around the world where we conduct business and our international selling and marketing activities.

Cost of Revenues.    Cost of revenues was $6.4 million, or 18 percent of total revenues, during the three months ended April 30, 2004, compared to $3.4 million, or 18 percent of total revenues, during the same period a year ago, an increase of $3.0 million. The increase was primarily comprised of an increase of $2.3 million in employee-related costs, substantially all of which was due to the 66 percent increase in the headcount of our professional services organization, an increase of $300,000 in service delivery costs and an increase of $300,000 in allocated expenses. The cost of the additional professional services headcount resulted in cost of professional services and other revenues to be in excess of the related revenue during the three months ended April 30, 2004. We increased the professional services headcount in order to meet the anticipated demand for our consulting and training services as our customer base has expanded.

Research and Development.    Research and development expenses were $2.1 million, or 6 percent of total revenues, during the three months ended April 30, 2004, compared to $1.2 million, or 7 percent of total revenues, during the same period a year ago, an increase of $900,000. The increase was primarily comprised of an increase of $600,000 in employee-related costs. Our research and development headcount increased by 55 percent from the same period a year ago as we added personnel to upgrade and extend our service offerings.

Marketing and Sales.    Marketing and sales expenses were $20.4 million, or 59 percent of total revenues, during the three months ended April 30, 2004, compared to $10.7 million, or 56 percent of total revenues, during the same period a year ago, an increase of $9.7 million. The increase was primarily due to an increase of $8.1 million in employee-related costs, an increase of $600,000 in marketing spending related to new service offerings and an increase of $700,000 in allocated overhead. Of the $8.1 million increase in employee-related costs, $2.1 million was related to the increased amortization expense of deferred commissions. Our marketing and sales headcount increased by 65 percent from the same period a year ago as we hired additional sales personnel to focus on adding new customers and increasing penetration within our existing customer base.

General and Administrative.    General and administrative expenses were $5.6 million, or 16 percent of total revenues, during the three months ended April 30, 2004, compared to $3.6 million, or 19 percent of total revenues, during the same period a year ago, an increase of $2.0 million. The increase was primarily due to an increase of $700,000 in employee-related costs and an increase of $1.3 million in professional and outside service costs. Our general and administrative headcount increased by 31 percent from the same period a year ago as we added personnel to support our growth.

Operating Income.    Operating income during the three months ended April 30, 2004 was $400,000. During the same period a year ago, it was $17,000. The increase was primarily due to the increase in revenues, most of which was re-invested in an effort to expand our business.

Loss from operations outside of the Americas was $100,000 during the three months ended April 30, 2004 and was $700,000 during the same period a year ago. The continued losses outside of the Americas were due to our efforts in expanding the number of locations where we conduct business and expanding our international selling and marketing activities.

Interest Income.    Interest income was $100,000 during the three months ended April 30, 2004 and 2003.

Interest Expense.    Interest expense consists of interest on our capital lease obligations.

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Other Income (Expense).    Other income was $20,000 during the three months ended April 30, 2004, compared to other income of $300,000 during the same period a year ago. The decrease was due to the reduction in realized gains on foreign currency transactions.

Provision for Income Taxes.    We recorded a provision for income tax expense of $100,000 for the three months ended April 30, 2004. This provision for income taxes consists of amounts accrued for our estimated fiscal 2005 domestic federal and state income tax liability as well as an estimate of our foreign income tax expense. This provision is based upon our estimated fiscal 2005 income before the provision for income taxes and takes into consideration the utilization of our net operating loss carryforwards. To the extent our estimate of fiscal 2005 income before the provision for income taxes changes, our provision for income taxes will change as well and may take into consideration the utilization of our valuation allowance recorded against our deferred tax assets.

With the exception of fiscal 2004, we have not recorded a provision for income tax expense because we had been generating net losses. Furthermore, we have not recorded an income tax benefit for fiscal 2002 and 2003 primarily due to continued substantial uncertainty regarding our ability to realize our deferred tax assets. Based upon available objective evidence, there has been sufficient uncertainty regarding the ability to realize our deferred tax assets, which warrants a full valuation allowance in our financial statements. Based on our estimates for fiscal 2005 and beyond, we believe the uncertainty regarding the ability to realize our deferred tax assets may diminish to the point where deferred tax assets may be realized. If we were to determine that we would be able to realize our deferred tax assets in the future in excess of our net recorded amount, an adjustment to the deferred tax asset would increase our income or reduce our loss and increase stockholders’ equity in the quarter when such determination is made.

Minority Interest in Consolidated Joint Venture.    The minority interest expense was $17,000 during the three months ended April 30, 2004 compared to minority interest income of $16,000 during the same period a year ago.

Overview of Results of Operations for the Fiscal Year Ended January 31, 2004

Revenues during fiscal 2004 were $96.0 million, an increase of 88 percent over fiscal 2003. Gross profit during this period was $78.8 million, or 82 percent of total revenues, and operating income was $3.7 million. Operating income included non-cash income of $3.4 million related to the net reduction in accruals associated with office space that we had abandoned in fiscal 2002. Operating income also included non-cash stock-based expense of $4.4 million. During fiscal 2003, we generated gross profit of $40.6 million, or 80 percent of revenues, and incurred an operating loss of $10.5 million. The operating loss during fiscal 2003 included $4.8 million of non-cash stock-based expense.

The increase in revenues was primarily due to increases in the number of subscription customers, international expansion and expansion of our consulting services and training offerings. During fiscal 2004, we continued to invest in our operations and increase revenues. We added sales personnel to focus on adding new customers and increasing penetration within our existing customer base, professional services personnel to support our consulting services and developers to broaden and enhance our on-demand service. With the increase in personnel and international expansion efforts, we also added office space under various operating leases. In addition, we incurred costs associated with corporate governance and regulatory compliance, such as required by the Sarbanes-Oxley Act of 2002. We intend to continue to invest heavily in marketing and sales in order to pursue new customers and expand relationships with existing customers. We also plan to expand our infrastructure, including additional geographically remote disaster recovery services provided by a third-party Web hosting service provider in fiscal 2005, and to continue to invest in research and development activities to upgrade and extend our service offerings.

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During fiscal 2004, we generated $21.8 million of cash from operating activities, as compared to $5.2 million of cash from operating activities during fiscal 2003. At January 31, 2004, we had cash, cash equivalents and short-term marketable securities of $35.8 million, accounts receivable of $26.5 million and deferred revenue of $49.7 million.

Fiscal Years Ended January 31, 2004 and 2003

Revenues.    Total revenues were $96.0 million for fiscal 2004, compared to $51.0 million during fiscal 2003, an increase of $45.0 million, or 88 percent. Subscription and support revenues were $85.8 million, or 89 percent of total revenues, for fiscal 2004, compared to $47.7 million, or 93 percent of total revenues, for fiscal 2003. The increase in subscription and support revenues was due primarily to the increase in the number of paying subscribers to approximately 127,000 as of January 31, 2004 from approximately 76,000 as of January 31, 2003. Professional services and other revenues were $10.2 million, or 11 percent of total revenues, for fiscal 2004, compared to $3.3 million, or 7 percent of total revenues, for fiscal 2003. The increase in professional service and other revenues was due primarily to the higher demand for services from an increasing number of paying subscribers and customers.

Revenues in Europe and Asia Pacific accounted for $17.1 million, or 18 percent of total revenues, during fiscal 2004, compared to $7.1 million, or 14 percent of total revenues, during fiscal 2003, an increase of $10.0 million, or 141 percent. The increase in revenues outside of the Americas was the result of our efforts to expand the number of locations around the world where we conduct business and the expansion of our international selling and marketing activities.

Cost of Revenues.    Cost of revenues was $17.3 million, or 18 percent of total revenues, during fiscal 2004, compared to $10.4 million, or 20 percent of total revenues, during fiscal 2003, an increase of $6.9 million. The increase was primarily due to an increase of $5.4 million in employee-related costs, substantially all of which was due to the 53 percent increase in the headcount of our professional services organization, and an increase of $700,000 in service delivery costs. We increased the professional services headcount in order to meet the higher demand for our consulting and training services as our customer base has expanded.

The increase in our gross margin was the result of our ability to leverage our existing infrastructure to serve new customers and paying subscribers.

Research and Development.    Research and development expenses were $7.0 million, or 7 percent of total revenues, during fiscal 2004, compared to $4.6 million, or 9 percent of total revenues, during fiscal 2003, an increase of $2.4 million. The increase was primarily due to an increase of $1.8 million in employee-related costs. Our research and development headcount increased by 57 percent from fiscal 2003 as we added personnel to upgrade and extend our service offerings.

Marketing and Sales.    Marketing and sales expenses were $54.6 million, or 57 percent of total revenues, during fiscal 2004, compared to $33.5 million, or 66 percent of total revenues, during fiscal 2003, an increase of $21.1 million. The increase was primarily due to an increase of $18.0 million in employee-related costs, $1.0 million in increased marketing event costs, $800,000 in payments to partners, and $700,000 in allocated overhead. Of the $18.0 million in increased employee-related costs, $6.6 million was related to sales commissions. Our marketing and sales headcount increased by 42 percent from fiscal 2003 as we hired additional sales personnel to focus on adding new customers and increasing penetration within our existing customer base.

General and Administrative.    General and administrative expenses were $16.9 million, or 18 percent of total revenues, during fiscal 2004, compared to $13.0 million, or 26 percent of total revenues, during fiscal 2003, an increase of $3.9 million. The increase was primarily due to an increase of $3.0 million in employee-related costs and an increase of $900,000 in professional and outside service costs. Our general and administrative headcount increased by 29 percent from fiscal 2003 as we added personnel to support our growth.

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Lease Recovery.    In December 2001, we abandoned excess office space in San Francisco, California and recorded a $7.7 million charge in the fourth quarter of fiscal 2002 pertaining to the estimated future net obligations under the non-cancelable lease. Since the space was not leased to a subtenant, there were no immediate cash savings from the abandonment.

In August 2003, we entered into an agreement, releasing us from future obligations for some of the space abandoned, in connection with the landlord’s lease of this space to another tenant. Accordingly, we recorded a $4.3 million credit to reflect the reversal of the remaining accrued liability that was directly associated with this space. 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 office space in San Francisco. This additional accrual resulted from a revision of our estimates of the timing and amount of projected subtenant income based on difficulties in subleasing the remaining space.

Operating Income (Loss).    Operating income during fiscal 2004 was $3.7 million and included the $3.4 million lease recovery described above. The operating loss during fiscal 2003 was $10.5 million. The increase in operating income was primarily due to a $45.0 million increase in revenues, most of which was re-invested in an effort to expand our business.

Loss from operations outside of the Americas was $1.1 million during fiscal 2004 and was $3.8 million during fiscal 2003. The continued losses outside of the Americas were due to our efforts in expanding the number of locations where we conduct business and expanding our international selling and marketing activities.

Interest Income.    Interest income consists of investment income on cash and marketable securities balances and interest income on outstanding loans made to individuals who early exercised their stock options. Interest income was $400,000 during fiscal 2004, compared to $500,000 during fiscal 2003, a decrease of $100,000. The decrease was primarily due to declining interest rates and the mix of marketable securities investments, substantially offset by higher cash and marketable securities balances.

Interest Expense.    Interest expense consists of interest on our capital lease obligations.

Other Income.    Other income was $200,000 during fiscal 2004, compared to other income of $100,000 during fiscal 2003. The increase of $100,000 was due to realized gains on foreign currency transactions.

Provision for Income Taxes.    The provision for income taxes of $500,000 during fiscal 2004 represented federal alternative minimum taxes of $200,000, and various state income taxes and foreign withholding taxes of $300,000.

Our deferred tax asset balance at January 31, 2004 was $19.7 million and was fully offset by a valuation allowance of the same amount due to uncertainties regarding realization of the deferred tax asset balance. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event we were to determine that we would be able to realize our deferred tax assets in the future in excess of our net recorded amount, an adjustment to the deferred tax asset would increase our net income or reduce our net loss and increase stockholders’ equity in the quarter when such determination is made.

Minority Interest in Consolidated Joint Venture.    The minority interest expense was $200,000 during fiscal 2004 compared to minority interest income of $300,000 during fiscal 2003.

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Fiscal Years Ended January 31, 2003 and 2002

Revenues.    Total revenues were $51.0 million in fiscal 2003 compared to $22.4 million in fiscal 2002, an increase of $28.6 million, or 128 percent. Subscription and support revenues were $47.7 million, or 93 percent of total revenues, in fiscal 2003, compared to $21.5 million, or 96 percent of total revenues, during fiscal 2002. The increase in subscription and support revenues was due primarily to the increase in the number of paying subscribers to approximately 76,000 as of January 31, 2003 from approximately 53,000 as of January 31, 2002. During fiscal 2003, we began offering consulting services. The growth in the number of paying subscribers and customers increased demand for our consulting, support and training services. Professional services and other revenues were $3.3 million, or 7 percent of total revenues in fiscal 2003, compared to $900,000, or 4 percent of total revenues, in fiscal 2002.

Revenues in Europe and Asia Pacific accounted for $7.1 million, or 14 percent of total revenues, in fiscal 2003, compared to $2.1 million, or 9 percent of total revenues, in fiscal 2002, an increase of $5.0 million, or 238 percent. The increase in revenues outside of the Americas was the result of our efforts to expand the number of locations around the world where we conduct business and the expansion of our international selling and marketing activities.

Cost of Revenues.    Cost of revenues was $10.4 million, or 20 percent of total revenues, in fiscal 2003, compared to $6.0 million, or 27 percent of total revenues, in fiscal 2002, an increase of $4.4 million. The increase was primarily due to an increase of $2.2 million in employee-related costs, $1.9 million of which resulted from the hiring of employees for our consulting services, and increases of $1.2 million in service delivery costs, $400,000 in allocated overhead and $300,000 in depreciation and amortization expense. We increased the professional services headcount in order to provide the increased number of customers with consulting services and training that were complementary to their subscription service.

Research and Development.    Research and development expenses were $4.6 million, or 9 percent of total revenues, in fiscal 2003, compared to $5.3 million, or 24 percent of total revenues, in fiscal 2002, a decrease of $700,000. The decrease was primarily due to reductions of $200,000 in employee-related costs and $200,000 in allocated overhead because of a lower proportion of research and development headcount to our total headcount and an increase of $200,000 in the capitalization of development costs.

Marketing and Sales.    Marketing and sales expenses were $33.5 million, or 66 percent of total revenues, in fiscal 2003, compared to $24.6 million, or 110 percent of total revenues, in fiscal 2002, an increase of $8.9 million. The increase was primarily due to an increase of $10.3 million in employee-related costs and commission expense and an increase of $200,000 in allocated overhead, offset in part by $2.4 million of lower advertising spending. Our marketing and sales headcount increased by 160 percent from the same period a year ago as we hired additional sales personnel to focus on adding new customers and increasing the number of paying subscribers within our existing customer base.

General and Administrative.    General and administrative expenses were $13.0 million, or 26 percent of total revenues, in fiscal 2003, compared to $8.3 million, or 37 percent of total revenues, in fiscal 2002, an increase of $4.7 million. The increase was due primarily to an increase of $1.9 million in employee-related costs, $1.2 million in increased professional and outside service costs and $400,000 in depreciation expense. Our general and administrative headcount increased by 158 percent from the same period a year ago as we added personnel to support our growth.

Operating Loss.    The operating loss during fiscal 2003 was $10.5 million and the operating loss during fiscal 2002 was $29.5 million, of which $7.7 million was attributable to the abandonment of leased office space. The smaller operating loss during fiscal 2003 was primarily due to a $28.6 million increase in revenues, most of which was re-invested in an effort to expand our business.

Loss from operations outside of the Americas was $3.8 million during fiscal 2003 and was $3.3 million during fiscal 2002. The continued losses outside of the Americas were due to expanding the number of locations where we conduct business and expanding our international selling and marketing activities.

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Interest Income.    Interest income was $500,000 in fiscal 2003 compared to $800,000 in fiscal 2002, a decrease of $300,000. The decrease was primarily due to declining interest rates, partially offset by higher cash and marketable securities balances.

Interest Expense.    Interest expense associated with our capital lease obligations was $100,000 in fiscal 2003 compared to $300,000 in fiscal 2002.

Other Income (Expense).    Other income was $100,000 in fiscal 2003 and consisted primarily of realized gains on foreign currency transactions.

Minority Interest in Consolidated Joint Venture.    The minority interest income was $300,000 in fiscal 2003 compared to $400,000 in fiscal 2002.

Quarterly Results of Operations

The following tables set forth selected unaudited quarterly consolidated statement of operations data for the nine most recent quarters, as well as the percentage of total revenues for each line item shown. The information for each of these quarters has been prepared on the same basis as the audited consolidated financial statements included in this prospectus and, in the opinion of management, includes all adjustments necessary for the fair presentation of the results of operations for such periods. This data should be read in conjunction with the audited consolidated financial statements and the related notes included in this prospectus. These quarterly operating results are not necessarily indicative of our operating results for any future period.

	Quarter Ended
	Apr. 30, 2002			Jul. 31, 2002			Oct. 31, 2002			Jan. 31, 2003			Apr. 30, 2003			Jul. 31, 2003			Oct. 31, 2003			Jan. 31, 2004			Apr. 30, 2004
	(unaudited)
	(in thousands)
Revenues:
Subscription and support	$	8,810		$	11,275		$	12,937		$	14,634		$	16,922		$	19,592		$	22,480		$	26,802		$	31,116
Professional services and other		541			608			1,254			932			1,991			2,031			2,954			3,251			3,723
Total revenues		9,351			11,883			14,191			15,566			18,913			21,623			25,434			30,053			34,839
Cost of revenues:
Subscription and support		1,451			1,517			2,352			1,879			1,597			1,819			2,143			2,223			2,282
Professional services and other		292			635			859			1,378			1,758			2,009			2,525			3,199			4,081
Total cost of revenues		1,743			2,152			3,211			3,257			3,355			3,828			4,668			5,422			6,363
Gross profit		7,608			9,731			10,980			12,309			15,558			17,795			20,766			24,631			28,476
Operating expenses:
Research and development		1,075			1,173			1,105			1,295			1,240			1,685			1,880			2,157			2,127
Marketing and sales		5,975			7,413			10,039			10,095			10,656			12,205			14,597			17,142			20,415
General and administrative		2,192			2,531			4,709			3,526			3,645			3,771			4,320			5,179			5,573
Lease abandonment (recovery)		—			—			—			—			—			—			(4,342	)		897			—
Total operating expenses		9,242			11,117			15,853			14,916			15,541			17,661			16,455			25,375			28,115
(Loss) income from operations		(1,634	)		(1,386	)		(4,873	)		(2,607	)		17			134			4,311			(744	)		361
Interest income		114			142			129			86			78			91			89			121			144
Interest expense		(25	)		(26	)		(15	)		(11	)		(9	)		(6	)		(5	)		(2	)		(1	)
Other income (expense)		(60	)		67			(137	)		228			315			(70	)		(38	)		(43	)		20
(Loss) income before provision for income taxes and minority interest		(1,605	)		(1,203	)		(4,896	)		(2,304	)		401			149			4,357			(668	)		524
Provision for income taxes		—			—			—			—			49			22			455			15			70
(Loss) income before minority interest		(1,605	)		(1,203	)		(4,896	)		(2,304	)		352			127			3,902			(683	)		454
Minority interest in consolidated joint venture		43			77			55			117			16			(5	)		(113	)		(82	)		(17	)
Net (loss) income	$	(1,562	)	$	(1,126	)	$	(4,841	)	$	(2,187	)	$	368		$	122		$	3,789		$	(765	)	$	437

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As a percentage of total revenues:

	Quarter Ended
	Apr. 30, 2002		Jul. 31, 2002		Oct. 31, 2002		Jan. 31, 2003		Apr. 30, 2003		Jul. 31, 2003		Oct. 31, 2003		Jan. 31, 2004		Apr. 30, 2004
	(unaudited)
Revenues:
Subscription and support	94	%	95	%	91	%	94	%	89	%	91	%	88	%	89	%	89	%
Professional services and other	6		5		9		6		11		9		12		11		11
Total revenues	100		100		100		100		100		100		100		100		100
Cost of revenues:
Subscription and support	16		12		17		12		8		8		8		7		6
Professional services and other	3		6		6		9		10		10		10		11		12
Total cost of revenues	19		18		23		21		18		18		18		18		18
Gross profit	81		82		77		79		82		82		82		82		82
Operating expenses:
Research and development	11		10		8		8		7		8		8		7		6
Marketing and sales	64		62		70		65		56		56		57		57		59
General and administrative	24		21		33		23		19		17		17		17		16
Lease abandonment (recovery)	—		—		—		—		—		—		(17	)	3		—
Total operating expenses	99		93		111		96		82		81		65		84		81
(Loss) income from operations	(18	)	(11	)	(34	)	(17	)	—		1		17		(2	)	1
Interest income	1		1		1		1		1		—		—		—		—
Interest expense	—		—		—		—		—		—		—		—		—
Other income (expense)	—		—		(1	)	1		1		—		—		—		—
(Loss) income before provision for income taxes and minority interest	(17	)	(10	)	(34	)	(15	)	2		1		17		(2	)	1
Provision for income taxes	—		—		—		—		—		—		(2	)	—		—
(Loss) income before minority interest	(17	)	(10	)	(34	)	(15	)	2		1		15		(2	)	1
Minority interest in consolidated joint venture	—		1		—		1		—		—		—		(1	)	—
Net (loss) income	(17	)%	(9	)%	(34	)%	(14	)%	2	%	1	%	15	%	(3	)%	1	%

Revenues increased sequentially in each of the quarters presented, due to increases in the number of subscription customers, international expansion and the expansion of our consulting services and training offerings. The 106 percent increase in professional services and other revenues for the quarter ended October 31, 2002 over the preceding quarter reflected the formal introduction of our consulting services operation over the second and third quarters of fiscal 2003 and continued growth in the size of our customer base.

Gross profit in absolute dollars also generally increased sequentially for the quarters presented due primarily to revenue growth. As a percentage of total revenues, gross profits remained constant at 82 percent during the five most recent quarters presented. The $800,000 increase in cost of subscription and support revenues for the quarter ended October 31, 2002 over the preceding quarter was primarily due to investments made to improve the delivery of our on-demand service. The $300,000 decrease in cost of subscription and support revenues for the quarter ended April 30, 2003 over the preceding quarter was primarily the result of our ability to leverage our infrastructure to serve new customers and paying subscribers. The $900,000 increase in cost of professional services and other for the quarter ended April 30, 2004 over the preceding quarter was primarily the result of hiring additional professional services personnel to support the anticipated demand for consulting services.

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Operating expenses in total have fluctuated between quarters due to the timing of employee-related spending, new on-demand application service offerings and marketing events. For example, marketing and sales expenses for the quarter ended October 31, 2002 increased by $2.6 million over the preceding quarter, primarily due to the hiring of additional sales personnel. General and administrative expenses for the quarter ended October 31, 2002 increased by $2.2 million over the preceding quarter primarily due to stock compensation expenses associated with warrants that we issued and the costs associated with hiring additional staff. Additionally, operating income for the quarter ended October 31, 2003 included non-cash income of $4.3 million related to the release of future obligations associated with office space that we abandoned in fiscal 2002.

Our quarterly operating results are likely to fluctuate, and if we fail to meet or exceed the expectations of securities analysts or investors, the trading price of our common stock could decline. Some of the important factors that could cause our revenues and operating results to fluctuate from quarter to quarter include:

· our ability to retain and increase sales to existing customers, attract new customers and satisfy our customers’ requirements;

· the renewal rates for our service;

· changes in our pricing policies;

· the introduction of new features to our service;

· the rate of expansion and effectiveness of our sales force;

· the length of the sales cycle for our service;

· new product and service introductions by our competitors;

· seasonality in our markets;

· our success in selling our service to large enterprises;

· variations in the mix of editions of our service;

· technical difficulties or interruptions in our service;

· general economic conditions in our geographic markets;

· additional investment in our service or operations; and

· regulatory compliance costs.

The occurrence of one or more of these factors might cause our operating results to vary widely. As such, we believe that quarter-to-quarter comparisons of our revenues and operating results may not be meaningful and should not be relied upon as an indication of future performance.

Liquidity and Capital Resources

At April 30, 2004, our principal sources of liquidity were cash, cash equivalents and short-term marketable securities totaling $43.7 million and accounts receivable of $24.5 million.

From our inception in February 1999 through the end of fiscal 2002, we funded our operations primarily through issuances of convertible preferred stock, which provided us with aggregate net proceeds of $61.1 million. For the past several quarters, we have funded our operations through cash flow generated by the operating activities of our business.

Net cash provided by operating activities was $5.2 million during fiscal 2003, $21.8 million during fiscal 2004 and $6.7 million during the three months ended April 30, 2004. These amounts compare favorably to the operating cash deficit of $13.2 million during fiscal 2002. The improvement in cash flow was due primarily to

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the increased number of paying subscribers to our service. Cash provided by or used in operating activities has historically been affected by sales of subscriptions, support and professional services, changes in working capital accounts, particularly increases in deferred revenue, and add-backs of non-cash expense items such as depreciation and amortization and the expense associated with stock-based awards.

Net cash used in investing activities was $700,000 during fiscal 2002, $9.6 million during fiscal 2003, $21.1 million during fiscal 2004 and $13.1 million during the three months ended April 30, 2004. These amounts primarily related to the investment of excess cash in high quality, investment grade fixed income securities and capital expenditures associated with computer equipment and furniture and fixtures in support of expanding our infrastructure and work force.

Net cash provided by financing activities was $1.1 million during fiscal 2004 and $1.5 million during the three months ended April 30, 2004, primarily consisting of proceeds from employee stock option exercises. Net cash provided by financing activities was $3.5 million during fiscal 2002 and $1.0 million during fiscal 2003. The proceeds from stock option exercises and from the sale of stock by our Japanese joint venture in these years were offset by principal payments on capital lease obligations and the repurchase of unvested shares of common stock from terminated employees.

During fiscal 2001, we established a $3.5 million letter of credit in favor of our principal office landlord. This letter of credit is collateralized by a certificate of deposit, which is maintained at the granting financial institution, for the same amount. We have reflected this certificate of deposit as restricted cash on our consolidated balance sheet. As of April 30, 2004, the letter of credit was outstanding and, to date, no amounts have been drawn against it. The letter of credit renews annually through December 31, 2010.

In addition, we had two letters of credit outstanding as of April 30, 2004, both of which are collateralized by certificates of deposit totaling $400,000 at the granting financial institution, for the same amount. Both letters of credit have renewal provisions and expire at various dates through June 2006.

We do not have any special purpose entities, and other than operating leases for office space and computer equipment, which are described below, we do not engage in off-balance sheet financing arrangements. Additionally, we currently do not have a bank line of credit.

Our principal commitments consist of obligations under leases for office space, computer equipment and furniture and fixtures. We also have long-term liabilities related primarily to lease abandonments. At January 31, 2004, the future minimum payments under these commitments as well as our long-term liability were as follows:

	Payments Due by Period
Contractual Obligations	Total		Less than 1 Year		1-3 Years		3-5 Years		More than 5 Years
	(in thousands)
Capital lease obligations	$	80	$	80	$	—	$	—	$	—
Operating lease obligations		38,715		8,192		12,170		8,343		10,010
Contractual commitments		1,450		1,450		—		—		—
Lease abandonment liabilities and other		2,307		477		804		481		545

Purchase orders are not included in the table above. Our purchase orders represent authorizations to purchase rather than binding agreements. The contractual commitment amounts in the table above are associated with agreements that are enforceable and legally binding and that specify all significant terms, including: fixed or minimum services to be used; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Obligations under contracts that we can cancel without a significant penalty are not included in the table above.

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We believe our existing cash, cash equivalents and short-term marketable securities and cash provided by operating activities will be sufficient to meet our working capital and capital expenditure needs over the next 12 months. Our future capital requirements will depend on many factors, including our rate of revenue growth, the expansion of our marketing and sales activities, the timing and extent of spending to support product development efforts and expansion into new territories, the timing of introductions of new services and enhancements to existing services, and the continuing market acceptance of our services. To the extent that funds generated by this public offering, together with existing cash and securities and cash from operations, are insufficient to fund our future activities, we may need to raise additional funds through public or private equity or debt financing. Although we are currently not a party to any agreement or letter of intent with respect to potential investments in, or acquisitions of, complementary businesses, services or technologies, we may enter into these types of arrangements in the future, which could also require us to seek additional equity or debt financing. Additional funds may not be available on terms favorable to us or at all.

Quantitative and Qualitative Disclosures about Market Risk

Foreign currency exchange risk

Our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the Euro, British pound, Canadian dollar and Japanese yen. We have a risk management policy that allows us to utilize foreign currency forward and option contracts to manage currency exposures that exist as part of our ongoing business operations. To date, we have not entered into any hedging contracts since exchange rate fluctuations have had little impact on our operating results and cash flows.

If we were to enter into hedging contracts, the contracts by policy would have maturities of less than three months and settle before the end of each quarterly period. Additionally, by policy we would not enter into any hedging contracts for trading or speculative purposes.

Interest rate sensitivity

We had unrestricted cash, cash equivalents and short-term marketable securities totaling $16.0 million at January 31, 2003, $35.8 million at January 31, 2004 and $43.7 million at April 30, 2004. These amounts were invested primarily in money market funds and high quality, investment grade, variable-rate municipal bonds. The unrestricted cash, cash equivalents and short-term marketable securities are held for working capital purposes. We do not enter into investments for trading or speculative purposes. Due to the short-term nature of these investments, we believe that we do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates. Declines in interest rates, however, will reduce future investment income.

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BUSINESS

Overview

Salesforce.com is the leading provider, based on market share, of application services that allow organizations to easily share customer information on demand, according to a March 2004 report by Forrester Research, Inc. We provide a comprehensive customer relationship management, or CRM, service to businesses of all sizes and industries worldwide. By designing and developing our service to be a low-cost, easy-to-use application that is delivered through a standard Web browser, we substantially reduce many of the traditional expenses and complexities of enterprise software implementations. As a result, our customers incur less risk and lower upfront costs. Our service helps customers more effectively manage critical operations including: sales force automation; customer service and support; marketing automation; document management; analytics; and custom application development. We market our service to businesses on a subscription basis, primarily through our direct sales efforts and also indirectly through partners. From the introduction of our service in February 2000 through April 30, 2004, our customer base had grown to approximately 9,800, and these customers had purchased an aggregate of over 147,000 paying subscriptions in approximately 65 countries. We define paying subscriptions as unique user accounts, purchased by customers for use by their employees and other customer-authorized users, that have not been suspended for non-payment.

Industry Background

The Enterprise Application Software Market

Advances in computing and communications technology have enabled businesses to automate and improve their basic business processes. Many businesses have purchased, built and deployed a wide range of enterprise software applications in such areas as enterprise resource planning, or ERP, and CRM. While technology improvements have brought increased processing power and functionality to enterprise software applications, businesses have been challenged to realize the benefits of these applications for a variety of reasons, including the following:

· Difficulty of deployment.    The increasing number and complexity of applications, operating systems, networks and computer systems have made it difficult and time consuming for businesses to implement and use enterprise software applications.

· High cost of ownership.    Enterprise software applications carry a high total cost of ownership. Customers must make significant investments, both initially and on an ongoing basis, in applications and IT infrastructure, including computer systems, networks, software licenses and maintenance. Additionally, customers typically must employ costly IT staff and consultants to deploy, integrate, customize, support, administer and upgrade these applications.

In an attempt to address these challenges, many enterprise software application vendors have adapted their products to be accessible over the Internet. However, as these products were not originally designed to be delivered over the Internet as a service, they have failed to address these challenges. In addition, because they are not easy-to-use, users have been hesitant to adopt these complex, non-intuitive applications.

Emergence of On-Demand Application Services

The pervasiveness of the Internet, along with the dramatic declines in the pricing of computing technology and network bandwidth, have enabled a new generation of enterprise computing in which substantial components of IT infrastructure can be provisioned and delivered dynamically on an outsourced basis. This new computing paradigm is sometimes referred to as utility computing, while the outsourced software applications are referred to as on-demand application services. On-demand application services enable businesses to subscribe to a wide variety of application services that are developed specifically for, and delivered over, the Internet on an as-needed basis with little or no implementation services required and without the need to install and manage third-party software in-house.

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Key attributes of successful on-demand application services include:

· a fully outsourced service accessible over the Internet;

· rapid and simple deployment, configuration and training;

· a comprehensive set of application features;

· a scalable, secure and reliable application architecture that can economically support tens of thousands of customers simultaneously;

· the ability to integrate with businesses’ existing third-party and internally developed enterprise applications and databases; and

· the ability to tailor the appearance, policy settings, workflow and other characteristics of the service to meet the needs of a diverse customer base.

On-demand application services contrast with the traditional enterprise software model, which requires each customer to install, configure, manage and maintain the hardware, software and network services to implement the software application in-house. Enterprise software vendors must maintain support for numerous legacy versions of their software and compatibility with a wide array of hardware devices and operating environments. These services also contrast with solutions offered by first-generation application service providers, commonly referred to as ASPs, which host third-party enterprise applications on behalf of their customers. Since these ASPs are deploying traditional third-party software applications with each customer typically running on a separate instance, or copy, of the software, ASPs remain challenged by the time and expense problems associated with purchasing, implementing, integrating, maintaining and supporting these applications. Additionally, because ASP hosting typically involves the installation of one dedicated server or set of servers to support a small number of customers, ASPs are challenged to cost-effectively scale to support a larger customer base.

We believe the shift to on-demand application services will provide significant benefits by reducing the risks and lowering the costs of purchasing and deploying information technology resources, managing software and hardware upgrades, and hiring expensive IT personnel to maintain applications. As a result, we believe the emergence of on-demand application services will bring about a fundamental transformation in the enterprise software industry as businesses will be able to replace their purchased software with subscriptions to a wide range of application services. The market for on-demand application services is projected to grow from $425 million in 2002 to $2.6 billion in 2007, which represents a compounded annual growth rate of 44 percent, according to a May 2003 IDC report.

The Opportunity for On-Demand CRM Application Services

One category of enterprise software applications in which businesses have made significant investments is CRM. CRM software is intended to enable businesses to automate three key functional areas: sales, customer service and support, and marketing. The objective of CRM is to improve interactions with customers by providing a means for managing, accessing and analyzing information regarding all aspects of a company’s interactions with its customers. In 2002, the market for CRM software was approximately $7.1 billion, according to a July 2003 IDC report.

The difficulties that companies have faced in deploying and maintaining enterprise software applications in general are particularly relevant to CRM. Despite the significant potential benefits that can be attained from CRM, many enterprises have failed to successfully deploy the CRM software they have purchased.

In a December 2002 study by AMR Research, an independent market research firm, AMR Research interviewed 80 of the top 12 CRM vendors’ premier reference accounts as identified by AMR Research. According to a June 2003 report by AMR Research referencing this study, 12 percent of CRM projects failed to ever be implemented, usually for technical reasons. An additional 47 percent of projects had significant end-user

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adoption problems even though the projects were successful from a technical implementation standpoint. Finally, another 25 percent of projects met technical and user standards but did not provide value because they were either only as good as the replaced systems or the benefits were difficult to define.

We believe that traditional CRM applications have generally suffered from the following challenges:

· Low deployment rates and low user adoption.    Customers have been reluctant to deploy traditional CRM applications because of the complexity involved in implementing them and because end users have not been willing to invest the considerable time and effort required to learn to use traditional CRM applications.

· Lack of ubiquitous access.    Given the mobility and geographic diversity of most enterprise sales organizations, ubiquitous access to customer information and application functionality is critical to the effectiveness of CRM applications. As enterprise CRM software application functionality has not been available or has been difficult to access over the Internet and through laptops, PDAs and wireless devices, full realization of the benefits of sharing access to information and resources has been hindered.

· Low return on investment.    The cost, time and effort required to implement an enterprise CRM application, combined with low user adoption, have made it difficult for companies to quickly, or ever, realize the benefits of their investment.

· Inability to serve all businesses.    Many small and medium-sized businesses seeking the benefits of CRM have been unable to afford the costs associated with traditional enterprise software applications.

We believe that the CRM market is one of the first markets to benefit from the new on-demand application services delivery model. As a result of the high total cost of ownership, low deployment and usage rates, and poor return on investment of traditional CRM software, we believe that businesses are especially open to a new delivery model for CRM. The emergence of on-demand application services, combined with the deficiencies associated with traditional CRM software applications, have created an opportunity for a vendor that can provide on-demand CRM application services that have been specifically designed and built to be delivered over the Internet.

Our Solution

We are the leading provider of on-demand CRM delivered over the Internet as an application service, helping companies better track and manage their sales, customer service and support, and marketing operations. We provide our service to businesses through our proprietary, scalable and secure multi-tenant application architecture, which allows us to serve large numbers of customers cost-effectively by leveraging a single instance of our application for multiple customers. By subscribing to our service, our customers do not have to make large and risky upfront investments in software, additional hardware, extensive implementation services, and additional IT staff. As a result, our service enables businesses to achieve higher productivity from, and a lower total cost of ownership for, their CRM solutions.

Key advantages of our solution include:

· Rapid deployment.    Our service can be deployed rapidly and provisioned easily, since our customers do not have to spend time installing or maintaining the servers, networking equipment, security products or other infrastructure hardware and software necessary to ensure a scalable and reliable service. We believe the average time that a customer requires to deploy our service is significantly shorter than typical traditional CRM software deployments. We also offer complementary consulting and training services to assist customers in rapidly deploying and optimizing their use of our service.

· Enable high levels of user adoption.    We have designed our service to be easy-to-use and intuitive. Since our service contains many tools and features recognizable to users of popular websites such as

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those of Amazon.com, eBay and Yahoo!, it has a more familiar interface than typical CRM enterprise applications. As a result, our users do not require substantial training on how to use and benefit from our service. We conduct extensive surveys of our users to gauge their experiences with our service so that we may determine potential areas of improvement. In addition, because of the nature of our service, we receive automatic feedback as to which features customers use.

· Lower total cost of ownership.    We enable customers to achieve significant savings relative to the traditional enterprise software model. Our service enables customers to automate sales, customer service and support and marketing processes without having to make large and risky upfront investments in software, hardware, implementation services and additional IT staff. In addition, because all upgrades are implemented by us on our servers they automatically become part of our service and therefore benefit all of our customers immediately.

· Extensive features, functionality and configurability.    We offer a comprehensive array of CRM features that meet the needs of businesses of any size. Our service supports the three key functional areas within CRM—sales, customer service and support and marketing automation. We also offer additional functionality such as file and document management capabilities, which enable businesses to centralize the storage and retrieval of customer-related documents. Furthermore, most features of our service can be accessed through a variety of devices, including laptop computers, PDAs and wireless devices. For example, we offer an offline version of our service that can be used on any PC or laptop and a wireless version for mobile access via wireless devices. Finally, our service is highly configurable, enabling our customers to tailor its appearance, policy settings, language, workflow and other characteristics without the use of significant IT resources or consultants.

· Secure, scalable and reliable delivery platform.    The delivery platform for our service has been designed to provide our customers with high levels of reliability, performance and security. The IT systems within our data center have fail-over redundancy. We have built a comprehensive security infrastructure, including firewalls, intrusion detection systems and encryption for transmissions over the Internet, which we monitor and test on a regular basis. We built and maintain a multi-tenant application architecture that has been designed to enable our service to scale securely, reliably and cost-effectively to tens of thousands of customers and millions of users. Our multi-tenant application architecture maintains the integrity and separation of customer data while still permitting all customers to use the same application functionality simultaneously. Our architecture also enables us to segment access privileges across our user base.

· Ease of integration.    Our platform is designed to enable IT professionals to integrate our service with existing applications quickly and seamlessly. Our sforce platform provides a set of APIs that enable customers and independent developers to integrate our service with existing third-party, custom and legacy applications and write their own application services that integrate with our service. For example, many of our customers use the sforce APIs to move customer-related data from custom-developed and legacy applications into our service on a periodic basis to provide greater visibility into their activities. In addition, through our relationship with TIBCO Software, our salesforce.com Integration Server enables our customers to quickly integrate their existing software applications with our service using custom-built connectors.

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Our Strategy

Our objective is to be the leading provider of on-demand application services for businesses worldwide. Key elements of our strategy include:

· Continue to lead the industry transformation to on-demand application services.    We believe that the market transformation to on-demand application services enabled by utility computing is an emerging trend in the technology industry. We believe we have established a leadership position in this new industry both as a successful vendor of on-demand application services and also as a key thought leader helping to define the architecture and vision of utility computing. We seek to extend our leadership position in this industry by continuing to innovate and bring new on-demand application services and value-added technologies to market.

· Strengthen and extend our service offering.    We designed our service to easily accommodate new features and functions as well as the release of entirely new application services. For example, while our service in 2000 offered only sales force automation functionality, by 2002 we had added marketing automation and customer support functionality. More recently, we added file and document management capabilities and enhanced analytics tools to enable businesses to track and analyze data to better understand the health of their customer relationships. We intend to continue to add CRM features and functionality to our service that we will make available to customers at no additional charge. For example, in our most recent release, we added contract management, dashboards and workflow automation. We may also offer advanced modules for an additional subscription fee to customers that require enhanced CRM capabilities. In addition to accommodating new CRM features, we believe that our technology infrastructure is able to support entirely different, non-CRM application capabilities.

· Pursue new customers and new territories aggressively.    We believe that our on-demand CRM application service provides significant value for businesses of any size, from small businesses to the largest Fortune 500 corporations. As a result, we will continue to aggressively target businesses of all sizes, primarily through our direct sales force. We have steadily increased and plan to continue to increase the number of direct sales professionals we employ, and we intend to develop additional distribution channels for our service. We have created several editions of our service to address the distinct requirements of businesses of different sizes. We also believe that there is a substantial market opportunity for our service outside of North America. We plan to continue to aggressively market to customers outside of North America by recruiting local sales and support professionals, building partnerships that help us add customers in these regions and increasing the number of languages we support. As of April 30, 2004, we offered our service in 11 languages and had paying subscriptions in approximately 65 countries.

· Deepen relationships with our existing customer base.    We believe there is significant opportunity to leverage our relationships with existing customers. We seek to attract more users from existing customers by targeting additional functional areas and business units within the customer organization, pursuing enterprise-wide deployments and providing consulting offerings that are complementary to our service. In addition, by continuously enhancing the functionality of our service, we believe that customers will find more uses for our service and therefore purchase additional subscriptions, continue to renew their existing subscriptions and upgrade to more fully featured versions such as our Enterprise Edition.

· Encourage the development of third-party applications on our sforce platform.     Our sforce platform enables existing customers and third-party developers to develop and deliver applications complementary to our core service offering. Sforce enhances the attractiveness of our service, particularly to enterprise customers, by enabling them to accelerate the integration of our service with their existing applications. We plan to continue to augment the sforce tools and services we provide to developers and foster their development of new applications.

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The salesforce.com Service

We provide a comprehensive array of on-demand CRM application services for businesses of all sizes and industries worldwide. These services enable companies and individuals to systematically record, store and act upon customer data, helping businesses manage their customer accounts, track sales leads, evaluate marketing campaigns and provide post-sales service. We also enable companies to generate reports and summaries of this data and share them with authorized employees across functional areas. CRM includes sales, customer service and support and marketing automation:

· Sales force automation enables salespeople to be more productive by automating manual and repetitive tasks and providing them with better, more organized data about their current and prospective customers. It permits companies to establish a system and a process for recording, tracking and sharing information about sales opportunities, sales leads, sales forecasts, the sales process and closed business.

· Customer service and support automation allows companies to interact better, more efficiently and professionally with their existing customers in a variety of areas, such as requests for repairs, advice about products and services, complaints about faulty goods, warranty management and the need for additional goods and services.

· Marketing automation enables companies to manage marketing campaigns from initiation through the development of leads that are passed to the sales team and enables them to determine the effectiveness of each campaign by quantifying the revenue generated as a result of specific marketing activities.

We offer three principal editions of our service: Enterprise Edition, Professional Edition and Team Edition.

Enterprise Edition.    Enterprise Edition is our most fully featured service offering and is targeted primarily at large companies that have several different divisions or departments. It includes many administrative features that are particularly useful to large companies, such as workflow, the ability to customize views for different departments and a set of controls that allows a system administrator to designate which users have access and modification rights to the different types of information within the system. It also includes a Web services-standard XML API that enables companies to readily integrate our CRM service with ERP applications, Web services and other data sources and a weekly export service that permits a customer to download all data input by users into the service in a machine-readable format. It also includes our offline and wireless features that permit users to access information through laptops, PDAs and wireless devices.

Professional Edition.    Professional Edition is targeted primarily at medium-sized and large businesses that need a robust CRM solution but do not need some of the more advanced administrative features and integration capabilities of Enterprise Edition. The offline and selected other features of Enterprise Edition that are not included in Professional Edition are available to Professional Edition customers for an additional charge.

Team Edition.    Team Edition is targeted primarily at small businesses that seek a robust sales force automation solution without the more sophisticated features that are required by larger companies, such as integration, analytics and workflow. Team Edition includes sales force automation and case management but does not include customer service and support or marketing automation features.

Enterprise Edition, Professional Edition and Team Edition offer customizable fields and pick lists, customizable reports and customizable list views. Enterprise Edition and Professional Edition also offer multi-language support and multi-currency support. The amount of storage offered for each edition also varies. We derived more than 90 percent of our revenues in fiscal 2002 and 2003 and 89 percent of our revenues in fiscal 2004 and the three months ended April 30, 2004 from subscriptions to and support for our service.

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The following table summarizes the functionality provided in each of our three principal editions.

Feature	Enterprise Edition	Professional Edition	Team Edition
Account Management	ü	ü	ü
Contact Management	ü	ü	ü
Opportunity Management	ü	ü	ü
Case Management	ü	ü	ü
Activity Management	ü	ü	ü
Email Templates	ü	ü	ü
MS Office Integration	ü	ü	ü
MS Outlook Integration	ü	ü	ü
Palm Synchronization	ü	ü	ü
Reports	ü	ü	ü
Analytics	ü	ü
Forecasting	ü	ü
Lead Management	ü	ü
Mass Email	ü	ü
Advanced Case Management	ü	ü
Solution Management	ü	ü
Record-based Security	ü	ü
Multi-currency Support	ü	ü
Documents and Attachments	ü	ü
Campaigns	ü	Available
Offline	ü	Available
Wireless	ü	Available
Weekly Data Export	ü	Available
Product and Annuity Forecasting	ü	Available
Sforce (Web services API)	ü
Multiple Business Processes	ü
Self-service Customer Portal	ü
Multi-department Customization	ü

“Available” means available for an additional charge.

Our offline functionality enables users to readily access and use key account, contact, opportunity and other information when traveling or otherwise when an Internet connection is not readily accessible. Users access the offline functionality using a browser and the same user interface as our online editions.

We also offer wireless functionality that enables access to a subset of a user’s data through a variety of devices, including the RIM BlackBerry, Pocket PC and Palm operating system-based wireless devices and WAP-enabled mobile phones. Our wireless functionality permits interaction with our service both through free-form text queries and through a graphical user interface.

As part of our marketing programs, we recently released our Personal Edition service which includes a contact management database and several other features that are useful to individual sales representatives and others who need a centralized way to organize contact data and access that data over the Internet. It is intended for use by a single user and is currently available at no charge. In addition, we offer a service called Developer Edition, currently at no charge, to developers and others interested in building applications on our sforce platform.

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Professional Services

We offer a range of professional services, principally consulting and implementation services and training, that complement our on-demand application service.

Consulting and Implementation Services

We offer consulting and implementation services to our customers to facilitate the adoption of our on-demand CRM application service. Consulting services consist of services such as business process mapping, project management services and guidance on best practices in using our service. Implementation services include systems integration, configuration and data conversion. Our typical consulting and implementation engagements are generally billed on a time and materials basis.

Training

We offer a number of in-person and online educational classes that address topics such as implementing, using and administering our service. We also offer classes for administrators, users and partners who implement our service on behalf of our customers. Our typical in-person training courses are billed on a per person, per class basis.

Sforce

In June 2003, we introduced sforce, a Web services-based API platform that enables third parties, including customers and independent software vendors, or ISVs, to customize tables and page views within our service, more fully integrate a customer’s data in our service with other software applications, extend our service’s CRM functionality with customer-specific business functionality, and permit development of standalone applications that interoperate with our service. Examples of use of the sforce platform include: a customer has used sforce to integrate our service with multiple ERP systems including Oracle financial software and Siebel customer support software; an ISV has used sforce to integrate a customer’s sales force automation and content management data to enhance the usefulness of the professional services management system the ISV has built; and a customer has used sforce to integrate CRM functionality into a custom application for the consumer mortgage industry that the customer intends to market independently. As part of our sforce offering, we have collaborated with IBM, Microsoft, Sun Microsystems, Borland and BEA to make available to the sforce developer community a variety of development tools for building applications upon our platform. We currently do not charge users of our Enterprise Edition a license fee or royalty on sforce or applications developed with sforce.

Technology, Development and Operations

Technology

We believe that our on-demand application service enables us to develop functionality and deliver it to customers more efficiently than traditional enterprise software vendors. We do not provide software that must be written to different hardware, operating system and database platforms, or that depends upon a customer’s unique systems environment. Rather, we have optimized our service to run on a specific database and operating system using the tools and platforms best suited to serve our customers. Performance, functional depth and usability of our service drive our technology decisions and product direction.

We built our service as a highly scalable, multi-tenant application written in Java and Oracle PL/SQL. We use commercially available hardware and a combination of proprietary and commercially available software, including database software from Oracle Corporation, to provide our service. The application server is custom-built and runs on a lightweight Java Servlet and Java Server Pages engine. We have custom-built core services such as database connection pooling and user session management tuned to our specific architecture and environment, allowing us to continue to scale our service. We have combined a stateless environment, in which a

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user is not bound to a single server but can be routed in the most optimal way to any number of servers, with an advanced data caching layer. Our customers can access the service through any Web browser without installing any software or downloading Java applets or Microsoft ActiveX or .NET controls.

Our service treats all customers as logically separate tenants in central applications and databases. As a result, we are able to spread the cost of delivering our service across our user base. In addition, because we do not have to manage thousands of distinct applications with their own business logic and database schemas, we believe that we can scale our business faster than traditional software vendors, even those that have modified their products to be accessible over the Internet. Moreover, we can focus our resources on building new functionality to deliver to our customer base as a whole rather than on maintaining an infrastructure to support each of their distinct applications.

Our service is also flexible. Every page is dynamically rendered for each specific user, including a choice of 11 languages and a number of currencies with dynamic currency conversion support. In addition, our service can display different views of the data based upon a number of factors, including user, department and area of responsibility in the company. Our service also allows customers to create multiple subtypes or subclasses of our business objects and tie views to each record type. This customization extends to the data model of our service, as our service allows customers to extend existing tables in our database as well as create new tables without actually modifying the underlying physical database schema.

We have also developed extensive reporting and analytics functionality in our service that operates on the OLTP database system to provide real-time analysis of the user’s data. While users can customize any report or dashboard in the service, we dynamically tune the database based upon specific attributes of the user, the data model, the data security layer and the specific customizations to each report or dashboard.

Our service is addressable by other applications on the Internet and applications behind our firewall. Through our sforce platform, we allow customers and partners to insert, update, delete and query any information in our service. Our full text search engine, which allows users to perform natural language queries on all the data through a browser, is also exposed as a Web service. We also have mechanisms to protect our service not only from malicious abuse, but also from poorly written applications that put undue strain on the service. Each user session is encrypted and we actively monitor our system to detect intrusion by unauthorized users.

Development

Our research and development efforts are focused on improving and enhancing our existing service offerings as well as developing new proprietary services. In addition, from time to time we supplement our internal research and development activities with outside development resources. Because of our common, multi-tenant application architecture, we are able 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 of our application and are able to maintain relatively low research and development expenses. Our research and development expenses were $5.3 million in fiscal 2002, $4.6 million in fiscal 2003, $7.0 million in fiscal 2004 and $2.1 million during the three months ended April 30, 2004.

Operations

We serve all of our customers and users from a single, third-party Web hosting facility located in Sunnyvale, California, operated by Qwest Communications International Inc. The facility is designed to withstand an earthquake of magnitude 8.0 on the Richter scale, is secured by around-the-clock guards, biometric access screening and escort-controlled access, and is supported by on-site backup generators in the event of a power failure. Our agreement with Qwest provides for Qwest to supply space in its secure facility as well as high bandwidth Internet access, and runs through January 2005. We regularly rotate tapes of customer data out of the facility and store them in a secure location in the event of data loss at the facility.

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We continuously monitor the performance of our service. The monitoring features we have built or licensed include centralized performance consoles, automated load distribution and various self-diagnostic tools and programs. We have entered into service level agreements with a small number of our customers warranting certain levels of uptime reliability and permitting those customers to receive credits or terminate their agreements in the event that we fail to meet those levels. Through April 30, 2004, we have recorded a provision of $100,000 for potential credits and no customer has terminated its agreement pursuant to any service level agreement provisions.

Currently, we have an agreement with SunGard Data Systems, a provider of availability services, to provide access to a geographically remote disaster recovery facility that would provide access to hardware, software and Internet connectivity in the event the Qwest facility becomes unavailable. Even with this disaster recovery arrangement, however, our service would be interrupted during the transition. The arrangement with SunGard serves as our primary backup facility and is designed to support our service for all customers. We are in the process of obtaining additional rapid recovery services from a third-party vendor. These services would be designed to minimize the interruption during any transition to a remote disaster recovery facility.

Customers

As of April 30, 2004, our customer base had grown to approximately 9,800, and these customers had purchased an aggregate of over 147,000 paying subscriptions for use by their employees and other customer-authorized users in approximately 65 countries.

We believe that during fiscal 2004, we generated approximately 40 percent of our revenues from small businesses (companies with fewer than 200 employees), 30 percent of our revenues from medium-size businesses (200 or more employees and up to $500 million in annual revenues), and 30 percent of our revenues from large businesses (over $500 million in annual revenues). The number of paying subscribers at each of our customers ranges from one to more than 2,000.

Representative Customers

The following table lists our five largest customers by revenue for fiscal 2004 in a variety of different industries:

Business Services	Consumer Services	Financial
Automatic Data Processing, Inc. Charter Business Networks Paymentech, L.P. Scottish Development International Spherion Pacific Enterprises LLC	Cendant Car Rental Group, Inc. Homestore.com, Inc. Kinko’s, Inc. Le Meridien Hotels & Resorts Limited Olan Mills, Inc.	Fidelity National Financial, Inc. Guaranty Residential Lending, Inc. Harland Financial Solutions, Inc. Mellon Financial Corporation Sun Trust Bank
Healthcare/Pharmaceuticals	Manufacturing	Media/Internet
American Medical Response, Inc. athenahealth, Inc. CIGNA Health Corporation Innovex UK Ltd. MedImpact Healthcare Systems, Inc.	Advanced Micro Devices, Inc. Analog Devices, Inc. Honeywell International Inc. Invensys Systems, Inc. Panduit Corporation	AOL Interactive Marketing DoubleClick Inc. Harris Interactive Inc. Lightpath Technologies Lycos Europe GmbH
Technology	Telecom	Transportation/Logistics
Electronics for Imaging, Inc. Magma Design Automation, Inc. NetScreen Technologies, Inc. Polycom, Inc. SunGard Data Systems Inc.	Cox Business Services, LLC Enterasys Networks, Inc. Genesys S.A. Genesys Telecommunications Laboratories, Inc. Inter-Tel, Incorporated	Eagle Global Logistics Garrett Aviation Intermec Technologies Corporation Neff Corporation SIRVA, Inc.

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None of our customers accounted for more than 5 percent of our revenues in fiscal 2002, 2003 or 2004, or in the three months ended April 30, 2004.

Sales, Marketing and Customer Support

We organize our sales and marketing programs by geographic regions, including North America, Europe, Japan, and the Asia Pacific region other than Japan.

Direct Sales

We sell subscriptions to our service primarily through our direct sales force comprised of inside sales, telesales and field sales personnel. Our small business, general business and enterprise account executives and account managers focus their efforts on small, medium-size and large enterprises, respectively. Our account executives are responsible for initial sales to new prospects, while our account managers concentrate on growing pre-existing relationships. Sales representatives in our small business group sell to smaller companies, primarily over the phone. We also have a group that is responsible for generating leads and assisting in sales to large enterprises. We have field sales offices in more than 20 major cities worldwide.

Referral Sales

We have a network of partners who refer customer prospects to us and assist us in selling to them. These include consulting firms, other technology vendors and systems integrators. In return, we typically pay these partners a percentage of the first-year subscription revenue generated by the customers they refer.

Marketing

Our marketing strategy is to generate qualified sales leads, build our brand and raise awareness of salesforce.com as a leading provider of on-demand CRM application services. Our marketing programs include a variety of advertising, events, public relations activities and Web-based seminar campaigns targeted at key executives and decision makers within businesses.

Our principal marketing initiatives include:

· launch events to publicize our service to existing customers and prospects;

· direct mail and email campaigns;

· participation in, and sponsorship of, user conferences, trade shows and industry events;

· cooperative marketing efforts with partners, including Web link exchanges, joint press announcements, joint trade show activities, channel marketing campaigns and joint seminars;

· using our website to offer free trials of our service and to provide product and company information; and

· advertising in newspapers, CRM trade magazines, management journals and other business-related periodicals.

Customer Service and Support

We believe that superior customer support is critical to retaining and expanding our customer base. Our customer support group handles both general customer inquiries, such as questions about the ordering process or the status of an order or payment, technical questions or questions relating to how to use our service, and is available to customers by telephone or email or over the Web. We offer basic and more advanced classes on how to use, administer and customize our service over the Web free of charge to our customers on a weekly or monthly basis, depending on the class.

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We have a comprehensive technical support program to assist our customers in the use of our service and to identify, analyze and solve any problems or issues with our service. The support program includes email support, an online repository of helpful information about our service and shared best practices for implementation and use and telephone support. Telephone support is provided by technical support specialists on our staff, who are extensively trained in the use of our service and who are located at our three global support centers in San Francisco, Dublin and Tokyo. Basic customer support during business hours is available at no charge to customers that purchase our Team Edition, Professional Edition or Enterprise Edition.

International Sales

In fiscal 2003 and 2004, and the three months ended April 30, 2004, we generated approximately 14 percent, 18 percent and 19 percent of our total revenues, respectively, from customers in Europe and Asia Pacific. We expect international markets to provide increased opportunities for our applications and services in the future. Our current international efforts are focused on strengthening our direct sales and marketing presence in Europe and Asia Pacific, and generating more revenues from these regions. We maintain sales offices in 11 countries outside of North America.

Competition

The market for CRM applications, and enterprise business applications generally, is highly competitive, rapidly evolving and fragmented, and subject to changing technology, shifting customer needs and frequent introductions of new products and services. We compete primarily with vendors of packaged CRM software, whose software is installed by the customer directly or hosted by a first generation ASP on the customer’s behalf, and companies offering on-demand CRM applications. We also compete with internally developed applications and face, or expect to face, competition from enterprise software vendors and online service providers who may develop and/or bundle CRM products with their products in the future. Our current principal competitors include:

· enterprise software application vendors including Amdocs Limited, E.piphany, Inc., IBM Corporation, Microsoft Corporation, Oracle Corporation, PeopleSoft, Inc., SAP AG and Siebel Systems, Inc.;

· packaged CRM software vendors, some of whom offer hosted services, such as BMC Software Corporation, FrontRange Solutions, Inc., Onyx Software Corp., Pivotal Corporation, which has been acquired by CDC Software Corporation, a subsidiary of chinadotcom corporation, and Sage Group plc;

· on-demand CRM application service providers such as NetSuite, Inc., RightNow Technologies, Inc. and Salesnet, Inc.; and

· enterprise application service providers including British Telecom, Corio, Inc. and IBM.

We believe the principal competitive factors in our market include the following:

· speed and ease of implementation;

· ease of use and rates of user adoption;

· low total cost of ownership and demonstrable cost-effective benefits for customers;

· product functionality;

· performance, security, scalability, flexibility and reliability of the service;

· ease of integration with existing applications;

· quality of customer support;

· availability and quality of implementation, consulting and training services;

· vendor reputation;

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· sales and marketing capabilities of the vendor; and

· financial stability of the vendor.

While some of our competitors offer CRM applications with greater complexity than our service, we believe none of them addresses all of the limitations of traditional CRM applications adequately. In many cases, we believe CRM applications with greater complexity have a higher total cost of ownership, take significantly more time to implement and are harder to use than our service. However, many of our competitors and potential competitors have greater name recognition, longer operating histories and significantly greater resources. They may be able to devote greater resources to the development, promotion and sale of their products than we can to ours, which could allow them to respond more quickly than we can to new technologies and changes in customer needs. We cannot assure you that our competitors will not offer or develop products or services that are superior to ours or that achieve greater market acceptance.

Our professional services organization competes with a broad range of large systems integrators, including Accenture Ltd., BearingPoint, Inc. and IBM as well as smaller independent consulting firms specializing in CRM implementations. We have relationships with many of these consulting companies and frequently work cooperatively on projects with them, even as we compete for business in other customer engagements.

Intellectual Property

We rely on a combination of trademark, copyright, trade secret laws in the United States and other jurisdictions as well as confidentiality procedures and contractual provisions to protect our proprietary technology and our brand. We have U.S. patent applications pending and no issued patents. We also enter into confidentiality and proprietary rights agreements with our employees, consultants and other third parties and control access to software, documentation and other proprietary information.

The following are our U.S. registered trademarks:

salesforce.com

“No Software” logo

The End of Software

SFDC Asia Pacific

The following are unregistered trademarks that we use:

Team Edition

Success. Not Software.

Success. On Demand.

sforce

experience success.

If a claim is asserted that we have infringed the intellectual property of a third party, we may be required to seek licenses to that technology. In addition, we license third-party technologies that are incorporated into some elements of our services. Licenses from third-party technologies may not continue to be available to us at a reasonable cost, or at all. Additionally, the steps we have taken to protect our intellectual property rights may not be adequate. Third parties may infringe or misappropriate our proprietary rights. Competitors may also independently develop technologies that are substantially equivalent or superior to the technologies we employ in our services. If we fail to protect our proprietary rights adequately, our competitors could offer similar services, potentially significantly harming our competitive position and decreasing our revenues.

Employees

As of April 30, 2004, we had 518 full-time equivalent employees. None of our employees is represented by a labor union. We consider our relationship with our employees to be good.

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Legal Proceedings

Generally, we are involved in various legal proceedings arising from the normal course of business activities. In our opinion, resolution of these matters is not expected to have a material adverse impact on our consolidated results of operations, cash flows or our financial position. However, depending on the amount and timing, an unfavorable resolution of a matter could materially affect our future results of operations, cash flows or financial position in a particular period.

Facilities

Our executive offices and principal office for domestic marketing, sales and development occupies approximately 84,000 square feet in San Francisco, California under leases that expire in 2006 and 2011. We also lease space in various locations throughout the United States for local sales and professional services personnel. Our foreign subsidiaries lease office space for their operations including local sales and professional services personnel. If we require additional space, we believe that we will be able to obtain such space on acceptable, commercially reasonable terms.

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MANAGEMENT

Executive Officers and Directors

Our executive officers and directors, and their ages and positions as of April 30, 2004 are as follows:

Name	Age	Position
Marc Benioff	39	Chairman of the Board of Directors and Chief Executive Officer
Jim Steele	48	President, Worldwide Operations
Patricia Sueltz	51	President of Technology, Marketing and Systems
Steve Cakebread	52	Chief Financial Officer
Jim Cavalieri	34	Chief Information Officer
David Moellenhoff	34	Chief Technology Officer
Parker Harris	37	Senior Vice President, Research and Development
David Schellhase	40	Vice President and General Counsel
Alan Hassenfeld (1)(3)	55	Director
Craig Ramsey (2)	57	Director
Sanford R. Robertson (1)(3)	72	Director
Stratton Sclavos	42	Director
Larry Tomlinson (1)(3)	63	Director
Magdalena Yesil (2)	45	Director

(1) Member of the Audit Committee

(2) Member of the Compensation Committee

(3) Member of the Nominating and Corporate Governance Committee

Marc Benioff co-founded salesforce.com in February 1999 and has served as Chairman of the Board of Directors since inception. He has served as Chief Executive Officer since November 2001. From 1986 to 1999, Mr. Benioff was employed at Oracle Corporation where he held a number of positions in sales, marketing and product development, most recently as a Senior Vice President. Mr. Benioff is Co-Chairman of The President of the United States’ Information Technology Advisory Committee (PITAC). Mr. Benioff also serves as Chairman of the Board of Directors of the salesforce.com/foundation. Mr. Benioff received a Bachelor of Science in Business Administration (B.S.B.A.) from the University of Southern California.

Jim Steele has served as our President, Worldwide Operations since joining salesforce.com in October 2002. From February 2001 to September 2002, Mr. Steele served as Executive Vice President, Worldwide Sales and Operations for Ariba, Inc., a software company. From February 1978 to January 2001, Mr. Steele served in a variety of globally focused executive roles at IBM Corporation. Mr. Steele received a B.S. from Bucknell University.

Patricia Sueltz has served as our President of Technology, Marketing and Systems since February 2004. She previously held a number of executive positions at Sun Microsystems, Inc., a provider of information technology products and services, including Executive Vice President, Sun Services, from July 2002 to February 2004, Executive Vice President, Software Systems Group from July 2000 to June 2002 and President, Software Products & Platforms from September 1999 to June 2000. Ms. Sueltz served in various management capacities at IBM Corporation, a diversified computer and information technology company, from 1979 to 1999. Ms. Sueltz received a B.A. from Occidental College.

Steve Cakebread has served as our Chief Financial Officer since April 2002. From April 1997 to April 2002, Mr. Cakebread served as Senior Vice President and Chief Financial Officer for Autodesk, Inc., a software company. From 1992 to 1997, Mr. Cakebread served as Vice President of Finance for Silicon Graphics, Inc., a computer workstation company. Mr. Cakebread received a B.S. from the University of California at Berkeley and an M.B.A. from Indiana University.

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Jim Cavalieri has served as our Chief Information Officer since November 2001. From July 1999 to November 2001, Mr. Cavalieri served as our Vice President, Systems Engineering. From January 1995 to July 1999, Mr. Cavalieri was employed at Oracle Corporation where he held several technical and management positions, most recently as Senior Technical Program Manager. From June 1991 to December 1994, Mr. Cavalieri worked as a consultant and systems engineer for EDS. Mr. Cavalieri received a B.S. from Cornell University.

David Moellenhoff co-founded salesforce.com in February 1999 and served in senior technical positions since inception, most recently as our Chief Technology Officer. Mr. Moellenhoff also serves on the Board of Directors of the salesforce.com/foundation. From October 1996 to February 1999, Mr. Moellenhoff was President of Left Coast Software, a Java consulting firm he co-founded. Mr. Moellenhoff received two B.S. degrees and an M.B.A. from Washington University in St. Louis.

Parker Harris co-founded salesforce.com in February 1999 and served in senior technical positions since inception, most recently as our Senior Vice President, Research and Development. From October 1996 to February 1999, Mr. Harris was a Vice President at Left Coast Software, a Java consulting firm he co-founded. Mr. Harris received a B.A. from Middlebury College.

David Schellhase has served as our Vice President and General Counsel since July 2002. From December 2000 to June 2002, Mr. Schellhase was an independent legal consultant and authored a treatise entitled Corporate Law Department Handbook. From February 2000 to November 2000, Mr. Schellhase was Vice President and General Counsel of Linuxcare, Inc., an IT services and consulting company. From August 1997 to January 2000, Mr. Schellhase was Vice President and General Counsel of The Vantive Corporation, a software company. Mr. Schellhase received a B.A. from Columbia University and a J.D. from Cornell University.

Alan Hassenfeld has served as a Director since December 2003. From 1989 until May 2003, Mr. Hassenfeld was Chairman and Chief Executive Officer of Hasbro, Inc., a provider of children’s and family entertainment products, and has been Chairman of Hasbro since May 2003. Mr. Hassenfeld is a trustee of the Hasbro Charitable Trust and Hasbro Children’s Foundation. Mr. Hassenfeld also serves as a member of the Board of Directors of the salesforce.com/foundation. Mr. Hassenfeld received a B.A. from the University of Pennsylvania.

Craig Ramsey has served as a Director since April 2003. From July 2003, Mr. Ramsey has been CEO of Pay By Touch, a biometrics payments company. From March 1996 to April 2000, Mr. Ramsey served as Senior Vice President, Worldwide Sales, of Siebel Systems, Inc., a provider of eBusiness applications. From March 1994 to March 1996, Mr. Ramsey served as Senior Vice President, Worldwide Sales, Marketing and Support for nCube, a maker of massively parallel computers. From 1968 to 1994, Mr. Ramsey held various positions with Oracle Corporation, Amdahl and IBM. Mr. Ramsey currently serves on the Board of Directors of Pay By Touch and Arcsight. He received a B.A. in Economics from Denison University.

Sanford R. Robertson has served as a Director since October 2003. He is a principal of Francisco Partners, a technology buyout fund. Prior to founding Francisco Partners in January 2000, Mr. Robertson was the founder and chairman of Robertson, Stephens & Company, a technology investment bank. Mr. Robertson has been an active technology investor and advisor to several technology companies. Mr. Robertson was also the founder of Robertson, Colman, Siebel & Weisel, later renamed Montgomery Securities, another prominent technology investment bank. Mr. Robertson is a director of Pain Therapeutics, Inc. and the Schwab Fund for Charitable Giving. Mr. Robertson received a B.B.A. and M.B.A. from the University of Michigan.

Stratton Sclavos has served as a Director since February 2000. Since July 1995, Mr. Sclavos has served as President, Chief Executive Officer and Chairman of VeriSign, Inc., a provider of trusted infrastructure services to websites, enterprises, electronic service providers and individuals. In December 2001, Mr. Sclavos was named Chairman of the Board of Directors of Verisign. From July 1993 to June 1995, Mr. Sclavos served as Vice President, Worldwide Marketing and Sales of Taligent, Inc., a software development company that was a joint

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venture among Apple Computer, IBM and Hewlett-Packard. From May 1992 to September 1993, Mr. Sclavos was Vice President of Worldwide Sales and Business Development of GO Corporation, a pen-based computer company. Prior to that time, he served in various sales and marketing capacities for MIPS Computer Systems, Inc. and Megatest Corporation. Mr. Sclavos serves as a director of VeriSign, Inc., Intuit, Inc. and Juniper Networks, Inc. Mr. Sclavos received a B.S. from the University of California at Davis.

Larry Tomlinson has served as a Director since May 2003. From 1965 to 2003, Mr. Tomlinson was employed at Hewlett-Packard, an information technology company, holding various management and executive positions. From 1993 to June 2003, Mr. Tomlinson was Hewlett-Packard Treasurer and also a Senior Vice President. Mr. Tomlinson serves as a director of Coherent, Inc. and Therma-Wave, Inc. Mr. Tomlinson received a B.S. from Rutgers University and an M.B.A. from Santa Clara University.

Magdalena Yesil has served as a Director since March 1999. Ms. Yesil has been a venture capitalist at Presidio Management/US Venture Partners since February 1998. From August 1996 to December 1997, Ms. Yesil founded MarketPay, a software company, and served as its CEO and President. From 1994 to August 1996, Ms. Yesil co-founded Cybercash, a secure electronic payment company, and served as Vice President of Marketing and Technology. She currently serves on the boards of Channelwave, Inc., Claria Corporation, Dotomi, Inc. and Klocwork, Inc. Ms. Yesil received a B.S. and an M.S. from Stanford University.

Board Composition

Our board of directors currently consists of seven members. Effective upon the closing of this offering, our board of directors will be divided into three classes of directors who will serve in staggered three-year terms, as follows:

· The Class I directors will be Messrs. Benioff and Hassenfeld, and their terms will expire at the annual meeting of stockholders to be held in 2005;

· The Class II directors will be Ms. Yesil and Mr. Robertson, and their terms will expire at the annual meeting of stockholders to be held in 2006; and

· The Class III directors will be Messrs. Tomlinson, Sclavos and Ramsey, and their terms will expire at the annual meeting of stockholders to be held in 2007.

Effective upon the closing of this offering, our amended and restated certificate of incorporation will provide that the authorized number of directors may be changed only by resolution of the board of directors. Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes with three-year terms so that, as nearly as possible, each class will consist of one-third of the directors. At each annual meeting of stockholders, the successors to directors whose terms then expire will be elected to serve from the time of election and qualification until the third annual meeting following election. The division of our board of directors into these three classes may delay or prevent a change of our management or a change in control.

Board Committees

Our board of directors has, among others, the following committees: an audit committee; a compensation committee; and a nominating and corporate governance committee. The composition and responsibilities of each committee are described below.

Audit Committee

Our audit committee oversees our corporate accounting and financial reporting process. Among other matters, the audit committee evaluates the independent auditors’ qualifications, independence and performance; determines the engagement of the independent auditors; approves the retention of the independent auditors to

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perform any proposed permissible non-audit services; monitors the rotation of partners of the independent auditors on the salesforce.com engagement team as required by law; reviews our financial statements; reviews our critical accounting policies and estimates; oversees our internal audit function; annually reviews the audit committee charter and the committee’s performance; reviews and approves the scope of the annual audit and the audit fee; and discusses with management and the independent auditors the results of the annual audit and the review of our quarterly financial statements. The current members of our audit committee are Messrs. Tomlinson, who is the committee chair, Hassenfeld and Robertson. Our board of directors has determined that all members of our audit committee meet the applicable tests for independence and the requirements for financial literacy under applicable rules and regulations of the SEC and the New York Stock Exchange, or the NYSE. Our board has determined that Mr. Tomlinson is an audit committee financial expert, as defined under the SEC rules implementing Section 407 of the Sarbanes-Oxley Act of 2002, and has the requisite “accounting or related financial expertise,” as defined by applicable rules and regulations of the NYSE.

Our board of directors has approved an audit committee charter that meets the applicable standards of the SEC and NYSE.

Compensation Committee

Our compensation committee reviews and recommends policy relating to compensation and benefits of our officers and employees, including reviewing and approving corporate goals and objectives relevant to compensation of the Chief Executive Officer and other senior officers, evaluating the performance of these officers in light of those goals and objectives, and setting compensation of these officers based on such evaluations. The compensation committee also will administer the issuance of stock options and other awards under our stock plans. The compensation committee will review and evaluate, at least annually, the performance of the compensation committee and its members, including compliance of the compensation committee with its charter. The current members of our compensation committee members are Ms. Yesil, who is the committee chair, and Mr. Ramsey. Our board of directors has determined that all members of our compensation committee meet the applicable tests for independence under the applicable rules and regulations of the SEC, the NYSE and the Internal Revenue Service.

Our board of directors has approved a compensation committee charter that meets the applicable standards of the SEC and NYSE.

Nominating and Corporate Governance Committee

Our nominating and corporate governance committee identifies individuals qualified to become directors; selects, or recommends to our board of directors, director nominees for each election of directors; develops and recommends to our board of directors criteria for selecting qualified director candidates; considers committee member qualifications, appointment and removal; recommends corporate governance guidelines applicable to us; and provides oversight in the evaluation of our board of directors and each committee. The current members of the nominating and corporate governance committee are Messrs. Robertson, who is the committee chair, Hassenfeld and Tomlinson. Our board of directors has determined that all members of our nominating and corporate governance committee meet the applicable tests for independence under the applicable rules and regulations of the SEC and NYSE.

Our board of directors has approved a nominating and corporate governance committee charter that meets the applicable standards of the SEC and NYSE.

Director Compensation

The members of our board of directors who are not our employees are reimbursed for travel, lodging and other reasonable expenses incurred in attending board and committee meetings. Members do not receive cash compensation for attending board and committee meetings.

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The members of our board of directors received the following stock option grants as compensation for their attendance at our board and committee meetings. These options vest over four years, with 25 percent vesting after one year and the balance vesting monthly over the remaining period.

Director	Number of Shares Subject to Options	Date of Grant	Exercise Price
Alan Hassenfeld	200,000	12/16/03	$	8.00
Craig Ramsey	300,000	3/5/03		2.50
Sanford R. Robertson	300,000	10/7/03		4.00
Stratton Sclavos	250,000	2/11/00		0.55
Larry Tomlinson	300,000	5/2/03		2.50
Magdalena Yesil	500,000	6/24/99		0.02

In addition, in January 2004, our board of directors authorized the issuance of 22,500 shares of our common stock to Ms. Yesil in exchange for her past services on the board of directors. Under our 2004 Outside Directors Stock Plan which will be implemented upon completion of the offering, our non-employee directors who have fully vested in their initial option grants will receive quarterly stock awards of 3,750 shares of common stock for service during the preceding quarter. See “Employee Benefit Plans” for a description of our 2004 Outside Directors Stock Plan.

Compensation Committee Interlocks and Insider Participation

None of our executive officers serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers who serve on our board of directors or compensation committee.

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Executive Compensation

The following table provides information for fiscal 2004 and fiscal 2003 regarding the compensation awarded or paid to, or earned by, our chief executive officer and each of our five other most highly compensated executive officers. We refer to these individuals elsewhere in this prospectus as “named executive officers.” We do not compensate our named executive officers with perquisites or other personal benefits.

Summary Compensation Table

Name and Principal Position	Fiscal Year	Salary		Bonus		Securities Underlying Options	All Other Compensation
Marc Benioff, Chairman of the Board and Chief Executive Officer (1)	2004 2003	$	1 1	$	— —	— —	$	— —
Steve Cakebread, Chief Financial Officer (2)	2004 2003		250,000 177,244		99,875 —	— 1,000,000		— —
Jim Steele, President, Worldwide Operations (3)	2004 2003		300,000 95,577		299,500 75,000	— 1,350,000		— —
Jim Cavalieri, Chief Information Officer	2004 2003		212,500 168,333		29,788 —	— 200,000		— —
David Moellenhoff, Chief Technology Officer	2004 2003		205,000 160,000		28,295 —	— —		— —
Parker Harris, Senior Vice President, Research and Development	2004 2003		205,000 160,000		28,295 —	— —		— —

(1) Mr. Benioff receives minor compensation for his position: nominal salary; no bonus; and no options. At this time, it is not probable that Mr. Benioff’s compensation will increase above $10 per year.

(2) Mr. Cakebread joined us in April 2002. The fiscal 2003 amounts above reflect his compensation from April 2002 to January 31, 2003.

(3) Mr. Steele joined us in October 2002. The fiscal 2003 amounts above reflect his compensation from October 2002 to January 31, 2003.

Option Grants in Fiscal 2004

No options to purchase shares of our common stock were granted to any of our named executive officers in fiscal 2004.

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Aggregated Option Exercises in Fiscal 2004 and Year-End Option Values

The following table provides information concerning unexercised options held as of January 31, 2004, by each of our named executive officers:

Name	Number of Securities Underlying Unexercised Options at Fiscal Year-End		Value of Unexercised In-the-Money Options at Fiscal Year-End (1)
	Exercisable	Unexercisable	Exercisable		Unexercisable
Marc Benioff	—	—	$	—	$	—
Steve Cakebread	750,000	—		7,425,000		—
Jim Steele	1,012,500	—		10,023,750		—
Jim Cavalieri	425,000	—		4,448,250		—
David Moellenhoff	—	—		—		—
Parker Harris	—	—		—		—

(1)