SPSS INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003

COMMISSION FILE NUMBER: 33-64732

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SPSS INC.
(Exact name of registrant as specified in its charter)

DELAWARE 36-2815480
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)

233 S. WACKER DRIVE, CHICAGO, ILLINOIS 60606
(Address of principal executive offices and zip code)

REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE:
(312) 651-3000

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE

(Title of Class)

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

Indicate by check mark if disclosure of delinquent filers pursuant to item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [X] No [ ]

The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant (based upon the per share closing sale price of
$16.59 on June 30, 2003, and for the purpose of this calculation only, the
assumption that all registrant's directors and executive officers as of June 30,
2003 are deemed to be the affiliates) was approximately $252.7 million.

The number of shares outstanding of the registrant's Common Stock, par
value $0.01, as of July 1, 2004, was 17,571,517.
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SPSS INC.

TABLE OF CONTENTS

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SPSS INC.

FORM 10-K ANNUAL REPORT
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003

PART I

EXPLANATORY NOTE

On March 15, 2004, SPSS announced that in connection with its October 2003
amended agreement with America Online, Inc. (AOL), the Company changed the
accounting for its original October 2001 transaction with AOL by expensing
substantially all AOL payments as incurred. As a result, the original
transaction would be accounted for on a basis consistent with the amended AOL
agreement and the Company would restate its financial results for fiscal years
2001, 2002 and the first three quarters of 2003.

On March 30, 2004, SPSS announced that while completing the AOL restatement
it discovered errors in its deferred revenue accounts in the 2001 and 2002
fiscal years. The Company subsequently identified other errors in its deferred
revenue accounts in the fourth quarter of 2000 and the first three quarters of
2003. In addition, SPSS announced that it would record income tax expense
associated with deemed dividend income relating to certain cash transfers from
its international subsidiaries during the fourth quarter of 2002.

SPSS went on to conduct additional examinations that resulted in various
adjustments between 1999 and 2003 including, among other items, adjustments to
the Company's income tax provisions and a change in the recognition of license
fee revenues from transactions completed by the Company's distribution partners
to account for its implied post contract support (PCS) obligations in such
transactions.

AMERICA ONLINE (AOL) TRANSACTION

In its original October 2001 agreement with America Online (AOL), SPSS
acquired certain operating assets and exclusive rights to provide researchers
with survey respondents drawn from Opinionplace.com visitors throughout AOL's
interactive properties. In October 2003, SPSS entered into an amended agreement
with AOL. In connection with this amended agreement, the Company reviewed its
accounting for the original agreement and restated its consolidated financial
statements for the fiscal years ended December 31, 2001 and 2002 as well as the
first three quarters of 2003 in this Form 10-K. This restatement reflects a
change in the original purchase accounting for the transaction as the Company's
reassessment determined that the forfeiture provisions of the original agreement
were substantive and linked to services provided by AOL over the term of the
agreement. It was therefore determined that certain future payments beyond the
initial transaction date totaling $38.0 million represented payments for the
survey sample and other services that were not fixed and should not have been
allocated to goodwill and intangible assets as treated in the original
accounting. In its restated financial statements, the Company assigned only the
nonforfeitable cash and equity consideration at October 2001 totaling $4.0
million to the purchase consideration and expensed, as incurred, the remaining
consideration as costs associated with AOL's provision of survey sample and
other services. The purchase price allocation was restated to assign value of
$2.0 million to the purchased software and the remaining $2.0 million to
goodwill. The effect of this restatement increased expense by $2,179,000,
$5,349,000, and $3,586,000 in 2001, 2002, and 2003, respectively.

INCOME TAX EXPENSE

SPSS recorded income tax expense of $1,369,000 related to obligations
associated with deemed dividend income caused by certain cash transfers from its
international subsidiaries to the United States during the fourth quarter of
2002. Such amounts were not previously recorded in 2002. After further review of
its provisions for income tax, the Company increased income tax expense in 2001
and 2002 by $1,888,000 and $3,358,000, respectively. This additional income tax
expense related to the identification of additional non-deductible expenses in
2001 and 2002 as well as losses in foreign offices for which a previously
recorded income tax benefit should not have been recorded in 2002. Adjustments
were also made to the provisions for income tax to account for the effects of
the restatements at the applicable statutory tax rates.

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ERRORS IN DEFERRED REVENUE RECOGNITION

During the 2001 and 2002 fiscal years as well as the first three quarters
of 2003, SPSS made errors in calculating its deferred revenue accounts. SPSS
overstated revenues in fiscal years 2001, 2002, and the first three quarters of
2003 by $3,010,000, $818,000, and $1,881,000, respectively, by incorrectly
adjusting its deferred revenue liability on a quarterly basis from the fourth
quarter of 2000 through the third quarter of 2003.

LICENSE FEE REVENUES FROM DISTRIBUTION PARTNERS

The Company licenses third-parties to distribute SPSS products in certain
territories internationally or as value-added resellers worldwide. License fees
received by SPSS from transactions made by such distribution partners had
previously been recognized when these transactions were reported, as the
partners are responsible for providing related maintenance services, including
end-user support and software updates. During the restatement process it was
determined that SPSS had implied post contract support (PCS) obligations to the
customers of its distribution partners because by practice SPSS provided these
partners with updates of SPSS products when and if developed. Because the
Company cannot establish vendor specific objective evidence (VSOE) of fair value
of these implied maintenance arrangements, the Company recognized the related
license fees ratably over the term of the arrangements beginning when
transactions are reported to the Company by its distribution partners and when
all revenue recognition criteria are met. The effect of this restatement reduced
total revenues by $2,000 and $967,000 in 2002 and 2003, respectively, and
increased total revenues in 2001 by $509,000.

OTHER ADJUSTMENTS

Following the review and the determination to restate its financial
statements, SPSS performed additional procedures to ensure the accuracy of its
financial information. These additional procedures included a further review of
internal documents, tests of certain system controls, cut-off procedures and a
review of revenue transactions and other cost and expense accounts. As a result,
the Company made various adjustments in 2003 and prior periods, including the
correction of errors that were previously not recorded because in each case and
in aggregate it was believed the amount of any such error was not material to
the Company's consolidated financial statements. These adjustments included
modifications to the purchase accounting for the Company's acquisition of
NetGenesis Corporation in December 2001, a change in the accounting associated
with the purchase by SPSS of certain publication rights in September 2001,
accounting for stock options given to a consultant, and corrections of certain
out-of-period expenses and reclassifications of other expenses. The effect of
these adjustments increased expense by $675,000 and $586,000 in 2001 and 2002,
respectively, and reduced operating expense by $37,000 in 2003. SPSS also made
certain revenue, expense and balance sheet reclassifications.

SPSS has restated its financial statements to account for and correct the
foregoing adjustments. Therefore, with this Annual Report on Form 10-K, the
Company is filing its restated audited financial statements for fiscal years
2001 and 2002, its restated unaudited interim financial statements for each of
the quarterly periods in fiscal years 2001 and 2002, its restated unaudited
interim financial statements for the quarters ended March 31, 2003, June 30,
2003 and September 30, 2003 and its audited financial results for fiscal year
2003. This filing also includes revised financial data for fiscal years 1999 and
2000. The Company's

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previously released financial data for each of these periods should not be
relied upon. This restatement revised the net income (loss) for fiscal years
2001, 2002 and the first three quarters of 2003 as follows:

Except as otherwise stated, all financial information contained in this filing
gives effect to the restatement and revision. See Item 6, "Selected Financial
Data," Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and Note 22 of the "Notes to Consolidated Financial
Statements" for additional information on the effect of this restatement.

FORWARD-LOOKING STATEMENTS

THIS DOCUMENT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, INCLUDING, WITHOUT LIMITATION, STATEMENTS REGARDING THE
COMPANY'S EXPECTATIONS, BELIEFS, INTENTIONS OR FUTURE STRATEGIES THAT ARE
SIGNIFIED BY THE WORDS "EXPECTS," "ANTICIPATES," "INTENDS," "BELIEVES,"
"ESTIMATES" OR SIMILAR LANGUAGE. ALL FORWARD-LOOKING STATEMENTS INCLUDED IN THIS
DOCUMENT ARE BASED ON INFORMATION AVAILABLE TO SPSS ON THE DATE HEREOF. SPSS
CAUTIONS INVESTORS THAT ITS BUSINESS AND FINANCIAL PERFORMANCE AND THE MATTERS
DESCRIBED IN THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO SUBSTANTIAL RISKS
AND UNCERTAINTIES. BECAUSE OF THESE RISKS AND UNCERTAINTIES, SOME OF WHICH MAY
NOT BE CURRENTLY ASCERTAINABLE AND MANY OF WHICH ARE BEYOND THE COMPANY'S
CONTROL, ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE
FORWARD-LOOKING STATEMENTS. DEVIATIONS BETWEEN ACTUAL FUTURE EVENTS AND THE
COMPANY'S ESTIMATES AND ASSUMPTIONS COULD LEAD TO RESULTS THAT ARE MATERIALLY
DIFFERENT FROM THOSE EXPRESSED IN OR IMPLIED BY THE FORWARD LOOKING STATEMENTS.
SPSS DOES NOT INTEND TO UPDATE THESE FORWARD LOOKING STATEMENTS TO REFLECT
ACTUAL FUTURE EVENTS.

ITEM 1. BUSINESS

SPSS Inc., a Delaware corporation ("SPSS" or the "Company"), was
incorporated in Illinois in 1975 under the name SPSS, Inc. and was
reincorporated in Delaware in May 1993 under the name "SPSS Inc." SPSS is a
global provider of predictive analytics technology and services.

The Company's offerings use predictive analytics to connect data to
effective action by drawing reliable conclusions about current conditions and
future events. Predictive analytics leverages an organization's business
knowledge by applying sophisticated analytic techniques to enterprise data. The
insights gained through the use of these techniques can lead to improved
business processes that increase revenues, reduce costs, and prevent fraudulent
activities.

Many organizations focus on developing and retaining relationships with
people, particularly in their roles as customers, employees, patients, students,
or citizens. To accomplish these goals, organizations collect and analyze data
related to people's characteristics, opinions, and behavior. Since its
inception, SPSS has specialized in the analysis of information about people,
developing technology and services that incorporate decades of related "best
practice" predictive analytic processes and techniques.

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SPSS provides two classes of software and service offerings to two distinct
audiences. For researchers proficient in the use of analytical methods, the
Company offers statistical and data mining software tools to examine and predict
from a broad range of enterprise data. For business users acquainted with but
not expert in data analysis techniques, SPSS delivers easy to use applications
that bring the power of predictive analytics to address particular business
problems.

To bring these tools and applications to market worldwide, SPSS sells its
lower-priced offerings through telesales and higher-priced offerings through
field sales organizations configured geographically and by vertical industries.
The Company's primary targeted vertical industries include financial services,
telecommunications, market research, government, and education.

Approximately two-thirds of the Company's revenues come from commercial
firms, many of which use SPSS technology to improve the profitability and
effectiveness of their organization by:

- Attracting new customers more efficiently;

- Increasing the value of existing customers by improving cross-selling and
retention; and

- Detecting and preventing fraud.

Among its government customers SPSS offerings are primarily used to improve
interactions between public sector agencies and their constituents or detect
forms of non-compliance. At colleges and universities SPSS statistical and data
mining tools are often standards for academic research and the teaching of data
analysis techniques.

In August 1993, SPSS completed an initial public offering (IPO) of common
stock at $0.01 par value. The common stock is listed on the NASDAQ National
Market under the symbol "SPSS." In early 1995, SPSS and some stockholders sold
1,865,203 shares of common stock in a secondary public offering.

In addition to the information contained in this report, further
information regarding SPSS can be found on the Company's website at
www.spss.com. The Company's Annual Reports on Form 10-K, Quarterly Reports on
Form 10-Q, Current Reports on Form 8-K and all amendments to those reports filed
or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act
of 1934 are made available, free of charge, on the Company's website,
www.spss.com, as soon as reasonably practical after the reports have been filed
with or furnished to the Securities and Exchange Commission. SPSS will furnish a
copy of these reports to any person, without charge, upon written request
directed to the Secretary of the Company at the Company's principal executive
offices at 233 South Wacker Drive, 11th Floor, Chicago, Illinois 60606. The
documents that SPSS files with or furnishes to the SEC are also available on the
SEC website at www.sec.gov. The information on the Company's website is not
incorporated into this annual report.

INDUSTRY BACKGROUND

The predictive analytics market developed as organizations across the
commercial, academic, and government sectors discovered and experienced the
benefits of using applied analytics. This market emerged from the convergence of
three different segments of the software industry: statistical tools, data
mining, and business intelligence.

In the 1970's, demand for statistical software increased as tools created
by academics were used to examine general business data. These early tools
evolved to provide access to data with extensive file and data management
facilities, build predictive models using techniques such as correlation and
regression, and display analytic results through reports and graphs. Because of
the widespread adoption of its products by survey analysts and market
researchers, particularly during the 1980's among those working on desktop
computers, SPSS became a leading provider of statistical software tools. This
segment remains an integral and profitable part of the Company's overall
business.

In the 1990's, demand for data mining software developed as neural network
and other artificial intelligence techniques built in university research labs
were applied to general business data. Data mining tools extended predictive
analytics by introducing an array of algorithms that could, under certain
conditions,

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predict outcomes more effectively than traditional statistical techniques. Since
its 1998 acquisition of Integral Solutions Limited, providers of the innovative
Clementine data mining workbench, SPSS has emerged as a leading provider of data
mining tools and sees this segment as a long-term growth opportunity for the
Company.

Also during the 1990's, extensive demand developed for business
intelligence products. Yet unlike the academic roots from which the statistics
and data mining sectors grew, business intelligence stemmed from the widespread
adoption of database technology by commercial firms. Facilities to extract,
transform, and load data (ETL) were created, as were techniques for data
warehousing that organized transaction data into more usable structured forms.
As organizations better understood the value inherent in the vast amounts of
data at their disposal, new reporting approaches also emerged to measure
results, such as software tools for on-line analytical processing (OLAP) that
offered intuitive ways for business users to explore data. Business intelligence
products effectively broadened the use of analytic decision-making in many
organizations. This increased usage in turn led to a greater appreciation for
the additional benefits provided by more sophisticated predictive analytical
techniques in maintaining the pace of innovation, growth, and competitive
differentiation.

Predictive analytics, like enterprise resource planning (ERP) and customer
relationship management (CRM), is both a business process and a set of related
technologies. The predictive analytics process begins by exploring how specific
business issues relate to data describing people's characteristics, attitudes,
and behavior. These numeric and text data sets, which originate from both
internal systems and third-party providers, are cleansed, transformed, and
evaluated using statistical, mathematical, and other algorithmic techniques.
These techniques generate models for classification, segmentation, forecasting,
pattern recognition, sequence and association detection, anomaly identification,
profiling, propensity scoring, rule induction, text mining, and advanced
visualization.

Predictive analytics carries strategic and tactical ramifications for
organizations that recognize the inherent value locked within their existing
enterprise data. Strategically, predictive analytics provides a quantitative
foundation for rapidly identifying, objectively evaluating, and confidently
pursuing new market opportunities. Tactically, predictive analytics identifies
precisely whom to target, how to reach them, when to make contact, and what
messages should be communicated.

Combining predictive analytic models with organizational business knowledge
provides insight into such critical issues as customer acquisition and
retention, up-selling and cross-selling, fraud detection, and outcome
improvement. Through measuring uncertainty surrounding these issues, predictive
analytics enables proactive risk management, refining key decision-making
processes through controlled, iterative testing of potential actions and their
likely intended -- and unintended -- consequences. These findings and their
corresponding business rules can then be deployed within front-line operational
systems to identify new revenue opportunities, measurable cost savings,
repeatable process improvements, and sustainable competitive advantages.

STRATEGY

The following principles are at the foundation of the Company's strategy:

- Drive greater awareness of the value of predictive analytics. Although
countless organizations have experienced the benefits of predictive
analytics, the market for such technology and services is at an early
developmental stage. Commercial firms in particular have demonstrated a
growing appreciation for the relevance of predictive analytics to a broad
range of critical business problems. Moreover, many organizations are
still unaware of the considerable return on investment that can and has
been achieved from implementations of predictive analytic technology. As
a leading vendor in this emergent market, SPSS benefits from activities
that heighten general awareness of the value of predictive analytics.
SPSS will continue playing an instrumental role in these activities, as
it believes that thought leadership is critical to sustaining market
leadership.

- Deliver the right analytical functionality to the right professionals
throughout an organization. SPSS provides two classes of software and
service offerings to two distinct audiences. For researchers proficient
in the use of analytical methods, the Company offers statistical and data
mining software

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tools to examine a broad range of enterprise data. For general business
users acquainted with but not expert in data analysis techniques, SPSS
delivers easy to use applications that bring the power of predictive
analytics to address particular business issues. Essential to these
efforts is the Company's ability to support enterprise environments with
technology that is highly scalable and adaptable to multiple platforms,
as well as its ability to develop plug-and-play components for building
future applications.

- Leverage the Company's expertise in analyzing information about
people. SPSS software was first used in the examination of survey data
and expanded over time to the analysis of other forms of information
about people's characteristics, attitudes, and behavior. SPSS began as
the "Statistical Package for the Social Sciences;" this legacy of
providing technology and services to organizations examining people
remains at the core of the Company's expertise and further differentiates
SPSS from other players in the predictive analytics market. For example,
SPSS is further developing capabilities that integrate data about
people's attitudes with information about their behavior to build more
powerful predictive models.

- Focus on primary vertical industries. While SPSS software and services
are marketed across a wide range of industries and organizations, the
Company targets the worldwide commercial industries for financial
services, telecommunications, and market research, as well as the
international markets for government and education. This vertical
orientation is most important in its delivery of predictive analytic
applications that address particular business problems.

- Accelerate growth through partnership and acquisition. Since 1994,
approximately half of the Company's revenue growth has come through the
acquisition of other software firms. These acquisitions have expanded the
technology and expertise of the Company into new areas of predictive
analytics, and most recently into the development of predictive analytic
applications.

MARKETS

SPSS targets the following markets defined by International Data
Corporation (IDC) in its research reports entitled Worldwide Business
Intelligence Forecast and Analysis, 2003-2007 and Worldwide Customer
Relationship Management Analytic Applications Software Forecast and Analysis,
2003-2007:

- The global market for statistical and technical analysis software, which
was approximately $468 million in size in 2002 and in which SPSS held a
market share of approximately 20%. IDC estimates that this market will
increase by approximately 3.5% a year and reach approximately $556
million in size by 2007.

- The global market for data mining tools, which was approximately $486
million in size in 2002 and in which SPSS held a market share of
approximately 5%. IDC estimates that this market will increase by
approximately 7.5% a year and reach approximately $697 million in size by
2007.

- The global market for analytical customer relationship management (aCRM)
applications, which was approximately $794 million in size in 2002 and in
which SPSS held a market share of approximately 4%. IDC estimates that
this market will increase by approximately 12.9% a year and reach
approximately $1.5 billion in size by 2007.

These target markets combined to total approximately $1.7 billion in
revenues in 2002 with SPSS holding a share of approximately 9%. IDC estimates
that these SPSS target markets will combine to total approximately $3.0 billion
in revenues by 2007. To more effectively increase its overall market share, SPSS
plans to leverage its strong position in the statistical and technical analysis
software market to increase its presence in the related larger and higher-growth
market sectors.

OFFERINGS

SPSS provides its predictive analytical technology as tools for research
analysts and applications for business users.

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TOOLS

SPSS software tools enable customers to access and prepare data for
analysis, develop and deploy predictive models, and generate reports and graphs
to present the results. In general, the Company's software tools are:

- Comprehensive in function, spanning the entire process of data analysis;

- Modular, allowing customers to purchase only the functionality they need;

- Integrated, enabling the use of various parts of the SPSS technology in
combination to tackle particularly complex problems;

- Tailored to desktop operating environments for greater ease-of-use,
including browser-based environments for the delivery of results;

- Available on most popular computing platforms; and

- For some products, translated and localized for use in France, Germany,
Italy, Poland, Japan, Taiwan, Korea, China, and Spanish-speaking
countries.

Statistics Family. The Company's primary statistical tools are part of its
flagship SPSS product line. These tools are modular in nature and designed for
use by research analysts working in a wide variety of commercial, governmental,
and academic organizations. While varying by version and computing platform, a
typical purchase from the SPSS product line includes an SPSS Base product and
related optional add-on modules. The SPSS Base includes the user interface, data
connectivity, data editing, reporting, graphing, and general statistical
capabilities. Add-on modules require the SPSS Base to operate and become
seamlessly integrated with SPSS Base upon installation. These optional offerings
usually provide additional statistical functionality specific to particular
types of analysis.

Data Mining Family. The Data Mining Family consists of the Clementine data
mining workbench, LexiQuest analysis tools for text mining, and AnswerTree for
decision tree analysis. These products are differentiated from the Statistics
Family primarily by their process-oriented visual user interfaces and their
inclusion of artificial intelligence-based algorithms.

The Clementine product line offers advanced analytical capabilities
for a variety of data mining applications in desktop and distributed
computing environments. The user interface of Clementine provides a visual
view of the entire analysis process, enabling the user to easily
incorporate their business knowledge with data to develop predictive models
and capture all of the steps in one picture. This picture can then be used
as a template to build specific business applications (Clementine
Application Template) and predictive models to apply to operational systems
with the Clementine Solution Publisher. The SPSS and Clementine product
lines can be used together to gain additional data transformation and
statistical functionality.

The LexiQuest product line is designed to organize and mine
unstructured text data. The LexiQuest product line consists of LexiQuest
Categorize and LexiQuest Mine. LexiQuest Categorize automates the process
of organizing documents into logical categories and is currently used to
quickly organize information delivered through web portals. LexiQuest Mine
is a linguistics-based text mining tool that creates new insights by
rapidly identifying key concepts and the relationships between them across
thousands of sources, such as documents, news feeds, and the Internet. The
LexiQuest Mine technology is now integrated with the Clementine product
line to provide the combination of data and text mining capabilities.

The AnswerTree product line reveals distinctive segments in data using
decision tree algorithms. AnswerTree is available in both a single-user
desktop version as well as the highly scalable client-server
implementation.

Business Intelligence Family. The Business Intelligence Family consists of
the Strategy product line and OLAP Hub offering. Strategy products support
information access, data warehousing, data management, on-

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line analytical processing (OLAP), and other analytical applications for the IBM
eServer iSeries (AS/400) computer market. OLAP Hub is a zero-client on-line
analytical processing (OLAP) product technology for viewing data stored in the
Microsoft Analysis Services within the SQL Server database.

APPLICATIONS

Analytical applications provide pre-defined access to the data required for
particular business problems and interfaces that guide users through the related
analysis processes. SPSS analytical applications include:

PredictiveMarketing, which seamlessly integrates with marketing automation
software from other vendors to provide predictive capability to business users
in their management of marketing campaigns. PredictiveMarketing has pre-packaged
data mining models designed for specific tasks, such as customer acquisition or
retention, and allows the user to modify these models and then insert the
calculated predictive scores into the customer's data warehouse. The recently
acquired DataDistilleries application software will be integrated into the
PredictiveMarketing offering to advance its capabilities, particularly in
real-time scoring and prediction.

NetGenesis is an analytical application that describes visitor behavior on
Web sites. By processing on-line information through its rule-based importer to
create a customer behavioral data mart, NetGenesis identifies content that
brings visitors the most value and measures site overall effectiveness. This
application has also been integrated with Clementine to create the SPSS
Predictive Web Analytics offering.

Dimensions is a robust technology platform that supports the complete
end-to-end survey process for firms in the market research industry. Dimensions
provides seamless and efficient work processes around surveys, easier analysis
of data, and more dynamic means of delivering results to clients. Dimensions
combines the strengths of the Quantime, In2itive, and Surveycraft product lines
and will gradually replace these offerings.

SALES AND MARKETING

The Company has a long-established worldwide telesales organization that
primarily sells its tools to research analysts. Sales made by the telesales
organization are typically driven by direct mail campaigns and customer
references, completed within 30 days, and average about $2,000. The database of
existing SPSS customers provides an efficient source for selling add-on
products, upgrades and training. The Company also has an e-commerce
infrastructure through which it sells its lower-priced products and maintains a
network of over forty distributors around the world to increase its penetration
into smaller international markets.

SPSS has built a field sales force to sell its tools and applications to
enterprise customers. This field sales force is organized by the Company's
primary targeted vertical industries, including financial services,
telecommunications, market research, government, and education. SPSS field sales
personnel engage with line-of-business executives to identify organizational
problems that SPSS offerings can address. In many situations, SPSS professional
services personnel are involved to consult with information technology
executives to complete procurements and plan implementations. The field sales
force also has partner relationships with other leading companies to participate
in mutually beneficial joint sales opportunities or provide additional
application implementation capabilities. Transactions completed by the field
organization typically take from six to nine months and range in value from
$50,000 to $500,000.

SPSS maintains a worldwide infrastructure to support these sales
organizations. In addition to its headquarters in Chicago, SPSS has offices in
the United States in the following metropolitan areas: New York City, Boston,
Washington D.C., Cincinnati, Dallas, Rochester (MN), and San Francisco. The SPSS
international sales operation consists of fourteen sales offices in Europe and
the Pacific Rim. Transactions are customarily made in local currencies.

The SPSS field marketing organization is charged with generating qualified
leads for the Company's tools and applications through direct mail, e-mail,
prospect seminars, advertising in trade and market-specific publications,
exhibiting at trade shows, and conducting user group meetings. This organization
also continually analyzes the SPSS customer database to identify likely
prospects for the Company's new offerings.
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The SPSS product management organization consists of three business
centers, one devoted to tools and components, another to predictive analytic
applications, and a third to survey and market research. Each business center is
charged with understanding the current and future needs of customers,
translating these needs into clear directives for specific product development
projects, and working with the research and development organization to develop
"roadmaps" that chart the future direction of each tool and application
offering.

SPSS also has a corporate marketing group responsible for the broad
visibility of the Company. This group works with the trade and financial press,
industry analysts and financial analysts to establish the identity and presence
of the Company as an industry leader. SPSS corporate marketing also supports
other important areas of company visibility, including the development of expert
reviews of SPSS tools and applications which appear in trade and market-specific
publications, and participation in professional association meetings.

SERVICES

To support its analytical applications, SPSS offers consulting and
customization services to assist in new implementations or configure existing
applications to vertical industry and customer requirements. SPSS consultants
also help organizations to develop plans that align analytical efforts with
organizational goals, assist with the collection and structuring of data for
analysis, and facilitate the building of predictive analytical models.

To support its statistical and data mining tools, SPSS offers a
comprehensive training program with courses covering product operations, general
data analytical concepts and processes, as well as how statistical and data
mining techniques can be applied to address particular business problems. These
courses are regularly scheduled in cities around the world or organizations can
contract with the Company for on-site training tailored to their specific
requirements. Courseware will also be made available to SPSS Partners and
integrators, which will increase potential capacity for delivering customer
solutions.

SPSS has a worldwide customer service and technical support infrastructure
that engages with customers on-site or by telephone, fax, mail, e-mail and the
Web. Technical support is provided to all licensees and includes assistance in
software installation and operations as well as limited guidance in the
selection of analytical methods and the interpretation of results. Additional
technical support services are available on a time-and-materials basis.

RESEARCH AND DEVELOPMENT

SPSS plans to develop new software technologies and products, enhance
existing software technologies and products, acquire complementary technologies,
and form partnerships with third parties providing particular software
functionality or with domain expertise essential to serving selected vertical
industries. SPSS research and development initiatives are Company sponsored
initiatives that will primarily focus on:

- Extending the capabilities of its primary statistical and data mining
tools;

- Enhancing existing and developing new predictive analytic applications;

- Improving the interoperability of various SPSS tools and applications;

- Continuing to build reusable components for use in developing new
analytical tools;

- Establishing directions concerning future platforms and deployment,
including J2EE and .NET, data visualization, in-database modeling and
scoring, and the adoption of emergent standards; and

- Demonstrating industry leadership through active participation in
standards organizations for predictive analytics, such as XML/A, PMML and
CRISP.

SPSS specialists in user interface design, software engineering,
performance engineering, quality assurance, product documentation, and the
development of analytical algorithms are responsible for maintaining and
enhancing the quality, usability, and statistical accuracy of all SPSS software.
The research and development organization is also responsible for authoring and
updating all user documentation and other

9

publications. In addition, SPSS maintains ongoing relationships with third-party
software developers for the development of specialized software products and the
acquisition of technology that can be embedded in SPSS software.

Most of the statistical algorithms used by SPSS in its software are
published for the convenience of its customers. SPSS employs full-time
statisticians who regularly research and evaluate new algorithms and statistical
techniques for inclusion in its software. SPSS also employs professionals
trained in the use of predictive analytics in its documentation, quality
assurance, software design and software engineering groups.

In the past, SPSS has experienced delays in the introduction and
enhancement of products and technologies primarily due to difficulties with
particular operating environments and problems with technology provided by third
parties. These delays have varied depending upon the size and scope of the
project and the nature of the problems encountered. From time to time, SPSS
discovers bugs in its products, which are resolved through maintenance releases
or periodic updates, depending on the seriousness of the defect.

The SPSS research and development staff currently includes 285
professionals organized into groups for software design, algorithm development,
software engineering, documentation, quality assurance, and product
localization. SPSS also uses independent contractors in its research and
development efforts. On occasion, SPSS uses these contractors to obtain
technical knowledge and capability that it lacks internally. SPSS has also
outsourced maintenance, conversion, and new programming for some products to
enable its internal development staff to focus on products that are of greater
strategic significance. Expenditures by SPSS for research and development,
including capitalized software, were approximately $50.9 million in 2001, $52.7
million in 2002, and $53.8 million in 2003.

COMPETITION

In selling its predictive analytic tools or applications, SPSS competes
primarily on the basis of the usability, functionality, performance,
reliability, and connectivity of its software. The significance of each of these
factors varies depending upon the anticipated use of the software and the
analytical training and expertise of the customer. To a lesser extent, SPSS
competes on the basis of price and thus maintains pricing policies to meet
market demand. The Company also offers flexible licensing arrangements to
satisfy customer requirements.

Historically, the Company's success has been driven by highly usable
interfaces, comprehensive analytical capabilities, efficient performance
characteristics, local language versions, consistent quality, connectivity
capabilities, worldwide distribution, and widely recognized brand names. SPSS
considers its primary worldwide competitor in each of its targeted markets to be
the larger and better-financed SAS Institute, although SPSS believes that
approximately seventy-five percent of the revenue of SAS is derived from
offerings in areas other than predictive analytics.

In the market for statistical tools, the Company also competes with
StatSoft Inc., Minitab, Inc., Insightful and Stata, although their annual
revenues from statistical products are believed to be considerably less than the
revenues of SPSS. The Company also faces competition from providers of software
for specific statistical applications.

In the market for data mining tools, the Company also competes with
offerings from IBM, Oracle, NCR, Angoss, and Quadstone.

In the market for predictive analytic applications, SPSS also faces
competition from well-financed companies such as Siebel Systems, PeopleSoft,
Fair Isaac, and E.piphany.

With the exception of SAS, none of the Company's competitors are believed
to currently offer the range of analytical capability provided by SPSS.

SPSS holds a dominant position in the market for analytic applications to
the market research industry. SPSS believes no competitors in this market are
larger and better financed. The annual revenues of competitors such as Pulse
Train Technology, The Firm, Sawtooth Software, and Computers for Marketing
Corporation are thought to be considerably less than the market research
revenues of SPSS.
10

In the future, SPSS may face competition from other new entrants into its
markets. SPSS could also experience competition from companies in other sectors
of the broader market for business intelligence software, like providers of OLAP
and analytical application software, as well as from companies in other sectors
of the broader market for enterprise applications, who could add enhanced
analytical functionality to their existing products. Some of these potential
competitors have significant capital resources, marketing experience, and
research and development capabilities. New competitive offerings by these
companies or other companies could have a material adverse effect on SPSS.

INTELLECTUAL PROPERTY

SPSS attempts to protect its proprietary software with trade secret laws
and internal nondisclosure safeguards, as well as copyrights and contractual
restrictions on copying, disclosure and transferability that are incorporated
into its software license agreements. SPSS licenses its software only in the
form of executable code, with contractual restrictions on copying, disclosures
and transferability. Except for licenses of its products to users of large
system products and annual licenses of its desktop products, SPSS licenses its
products to end-users by use of a "shrink-wrap" license, as is customary in the
industry. It is uncertain whether these license agreements are legally
enforceable. The source code for all SPSS products is protected as a trade
secret. In addition, SPSS has common law copyright protection for its source
code and has filed for copyright protection under federal law with respect to
certain source code. SPSS has also entered into confidentiality and
nondisclosure agreements with its key employees. Despite these restrictions, the
possibility exists for competitors or users to copy aspects of SPSS products or
to obtain information which SPSS regards as a trade secret. Although SPSS holds
four patents and has one patent in registration, judicial enforcement of
copyright laws and trade secrets may be uncertain, particularly outside of North
America. Preventing unauthorized use of computer software is difficult, and
software piracy is expected to be a persistent problem for the packaged software
industry. These problems may be particularly acute in international markets.

SPSS uses a variety of trademarks with its products. Management believes
the following are material to its business:

- SPSS is a trademark used in connection with virtually all of the
technology, solutions, and products of the Company;

- Clementine is a registered trademark and is used in connection with the
product line that SPSS acquired from Integral Solutions Limited;

- PredictiveMarketing is a trademark, pending registration, used in
connection with the SPSS analytical application for customer relationship
management;

- NetGenesis is a registered trademark used in connection with the SPSS Web
analysis application;

- AnswerTree is a registered trademark and is an add-on product to the SPSS
product family;

- Quantime is an unregistered trademark used in connection with the
Company's market research products on all platforms;

- LexiQuest is a trademark used in connection with the Company's text
mining tools; and,

- Strategy is an unregistered trademark used with products licensed by SPSS
in its Business Intelligence Family of products;

Some of these trademarks comprise portions of other SPSS trademarks. SPSS
has registered some of its trademarks in the United States and some of its
trademarks in a number of other countries, including the Benelux countries,
France, Germany, the United Kingdom, Japan, Singapore and Spain.

Due to the rapid pace of technological change in the software industry,
SPSS believes that patent, trade secret, and copyright protection are less
significant to its competitive position than factors such as the knowledge,
ability, and experience of the Company's personnel, new research and
development, frequent technology and product enhancements, name recognition and
ongoing reliable technology maintenance and support.

11

SPSS believes that its solutions, products, and trademarks and other
proprietary rights do not infringe the proprietary rights of third parties.
There can be no assurance, however, that third parties will not assert
infringement claims in the future or that the claim will not have a material
adverse affect on SPSS if it is decided adversely to SPSS.

RELIANCE ON THIRD PARTIES

SPSS licenses various software programs from third-party developers and
incorporates them into SPSS products. Many of these are exclusive worldwide
licenses that terminate on various dates. SPSS believes that it will be able to
renew non-perpetual licenses or obtain substitute products if needed.

DATA DIRECT

To provide data connectivity between SPSS products and various databases,
SPSS has an agreement expiring in May of 2006 with Data Direct. This agreement
enables SPSS to embed and distribute, as an integral part of its offerings, an
unlimited number of copies of the Data Direct products for a fixed annual
license and maintenance fee.

BANTA GLOBAL TURNKEY SOFTWARE DISTRIBUTION AGREEMENT

To assure speed and efficiency in the manufacturing, order fulfillment, and
delivery of its products, SPSS entered into an agreement with Banta Global
Turnkey in January 1997. Under this agreement, Banta performs all diskette and
CD-ROM duplication, documentation printing, packaging, warehousing, fulfillment,
and shipping of SPSS products worldwide. SPSS believes that, because of the
capacity of these third-party distribution centers and their around-the-clock
operation, SPSS can easily adapt to peak period demand, quickly manufacture new
products for distribution, and effectively respond to anticipated sales volumes.
The Banta agreement automatically renews thereafter on an annual basis unless
either party terminates the agreement with 180 days written notice. If Banta
terminates the agreement for convenience or for any reason other than for cause,
then during the 180-day notice period Banta will assist SPSS in finding a new
vendor. If either party materially breaches its obligations, the other party may
terminate the Banta agreement for cause by written notice. This termination
notice for cause must specifically identify the breach or breaches, upon which
the termination is based and will be effective 180 days after the notice is
received by the other party, unless the breach(es) is (are) corrected during the
180 day period.

PRENTICE HALL AGREEMENT

SPSS authors and regularly updates a number of publications that include
user manuals and instructional texts. SPSS also develops student versions of its
SPSS Base product, which is designed for classroom use with SPSS textbooks or
other instructional materials. To facilitate more efficient printing and
distribution of these publications, SPSS entered into a five-year agreement with
Prentice Hall in February 1993. SPSS then entered into a new five-year contract
with Prentice Hall in April 1998. The 1998 contract limits Prentice Hall to
publishing and distributing SPSS publications to specific geographic territories
and enables SPSS to, within specified guidelines, license other publishers to
bundle versions of the SPSS Student Version with their textbooks. In April 2003,
SPSS and Prentice Hall entered into an amendment to extend the April 1998
contract through 2007.

IBM

Prior to its merger with SPSS in February 2001, ShowCase had a strategic
relationship with IBM that enabled ShowCase customers to quickly leverage new
capabilities developed for the IBM iSeries (AS/400) computer system. This
relationship helped to make ShowCase products a standard business intelligence
technology on iSeries systems. ShowCase entered into an expanded agreement with
IBM in December 1998, which was amended in February 2000, under which certain
products are marketed and sold as OEM products by IBM. ShowCase agreed to
produce certain enhancements to the Essbase/400 software; SPSS delivered several
versions of these enhancements and continues to provide updates on an ongoing
basis.

12

HYPERION SOLUTIONS

Through its strategic relationship with Hyperion Solutions, SPSS has rights
to distribute the Essbase/400 software while Hyperion Solutions maintains
limited distribution rights. Essbase/400 enables SPSS to reach a broader
customer base, including users of multidimensional analyses, and offers the
Company new partnering opportunities. Hyperion Solutions has the right to
buy-back the distribution rights if it gives SPSS twelve months prior written
notice of its intent to exercise this right.

SEASONALITY

SPSS quarterly operating results fluctuate due to several factors,
including:

- The seasonal nature of the core business, where the first quarter of the
year tends to have the lowest revenue with a gradual increase through the
year to the fourth quarter, which tends to have the largest revenue;

- The number and timing of product updates and new product introductions;

- Delays in product development and introduction of new technologies;

- Purchasing schedules of its customers;

- Changes in foreign currency exchange rates;

- Research and development as well as market development expenditures;

- The timing of product shipments and solution implementations;

- Changes in mix of product and solutions revenues; and

- Timing and cost of acquisitions and general economic conditions.

If forecasts of future revenues fall below expectations, operating results
may be adversely affected because the Company's expense levels are to a large
extent based on these forecasts. Accordingly, SPSS believes that
quarter-to-quarter comparisons of its results of operations may not be
meaningful and should not be relied upon as an indication of future performance.
SPSS has historically operated with very little backlog because its products are
generally shipped as orders are received. As a result, revenues in any quarter
are dependent on orders received and licenses renewed in that quarter. In
addition, the timing and amount of the Company's revenues are affected by a
number of factors that make estimation of operating results before the end of a
quarter uncertain. A significant portion of the Company's operating expenses is
relatively fixed, and planned expenditures are based primarily on revenue
forecasts. If SPSS fails to achieve these revenue forecasts, then a material
reduction in net income for the given quarter and fiscal year could result. SPSS
cannot provide assurance that profitability will be achieved on a quarterly or
annual basis in the future.

EMPLOYEES

As of December 31, 2003, SPSS had 1,252 full-time employees, 726
domestically and 526 internationally. Of the 1,252 employees, there were 766 in
sales, marketing and professional services, 293 in research and development, and
193 in general and administrative. SPSS believes it has generally good
relationships with its employees. None of the Company's employees are members of
labor unions. The Company also had 84 part-time employees employed as of
December 31, 2003.

13

FINANCIAL INFORMATION ABOUT THE COMPANY'S FOREIGN AND DOMESTIC OPERATIONS AND
EXPORT SALES

The following table sets forth financial information about foreign and
domestic operations. This information may not necessarily be indicative of
trends for future periods.

SPSS revenues from operations outside of North America accounted for
approximately 51% in 2001, 49% in 2002 and 51% in 2003. Net revenues per
geographic region are attributed to countries based upon point of sale. SPSS
expects that revenues from international operations will continue to represent a
large percentage of its net revenues and that this percentage may increase,
particularly as the Company further localizes its offerings by translating them
into additional languages. Various risks impact international operations. Those
risks include greater difficulties in accounts receivable collection, longer
payment cycles, exposure to currency fluctuations, political and economic
instability and the burdens of complying with a wide variety of foreign laws and
regulatory requirements. SPSS also believes that it is exposed to greater levels
of software piracy in international markets because of the weaker protection
afforded intellectual property in some foreign jurisdictions. As SPSS expands
its international operations, the risks described above could increase and could
have a material adverse effect on SPSS. See Item 1 "Business -- Sales and
Marketing," Item 7 "Management's Discussion and Analysis of Financial Condition
and Results of Operations," and Note 2, "Domestic and Foreign Operations", of
the Notes to Consolidated Financial Statements.

RECENT DEVELOPMENTS AND BUSINESS COMBINATIONS

On November 29, 1999, SPSS acquired all of the outstanding shares of Vento
Software, Inc. in exchange for 546,060 shares of common stock of SPSS. Vento's
assets include the VentoMap product line, a series of

14

industry-specific software products for business performance measurement, and a
proprietary methodology for the delivery of related professional services.

On December 24, 1999, SPSS acquired the VerbaStat software program from
DataStat, S.A., a corporation organized under the laws of Belgium, for
approximately $1.0 million. VerbaStat is a software tool for computer-aided
coding of open-ended survey questions. SPSS is further developing this product
and integrating its capabilities into the Company's Dimensions product line for
professional market research firms.

On November 6, 2000, SPSS Inc. and SPSS Acquisition Sub Corp., each
Delaware corporations, and ShowCase Corporation, a Minnesota corporation,
entered into an Agreement and Plan of Merger under which ShowCase shareholders
would receive 0.333 shares of SPSS common stock for each share of ShowCase
common stock after the closing of the transaction. This share exchange ratio for
the merger was established through negotiations between SPSS and ShowCase. The
closing of the merger occurred on February 26, 2001 with SPSS issuing
approximately 3,725,000 shares of common stock for substantially all the
outstanding shares of ShowCase. The merger was accounted for as a pooling of
interests. ShowCase was a leading provider of business intelligence software and
services, and was the dominant supplier of these capabilities for IBM iSeries
(AS/400) computing systems. SPSS is further developing the ShowCase technology,
integrating aspects of this technology into its other offerings, and continuing
to license ShowCase business intelligence software to organizations with IBM
iSeries (AS/400) computing systems.

On September 28, 2001, Siebel Systems, Inc. made a $5.0 million equity
investment in SPSS under the terms of a Stock Purchase Agreement, dated as of
September 28, 2001, by and between the parties. Before Siebel's investment in
SPSS, SPSS joined the Siebel Alliance Program as a Strategic Software Partner in
July 2001. SPSS ended its participation in this partnership program in October
2003.

On October 22, 2001, SPSS entered into a strategic alliance with America
Online, Inc. ("AOL") through its Digital Marketing Services ("DMS") subsidiary.
In connection with this strategic alliance, SPSS and AOL entered into a stock
purchase agreement and a strategic online research services agreement. Pursuant
to these agreements, SPSS acquired certain operating assets and exclusive rights
to distribute survey sample data drawn from AOL members and users of AOL's other
interactive properties. The terms of the agreements between SPSS and AOL called
for SPSS to pay AOL up to $42.0 million in consideration over four years and to
assume primary responsibility for servicing the former group of AOL market
research partners. The consideration was comprised of cash in the amount of
$30.0 million and SPSS common stock with a fair market value of $12.0 million.
Through DMS, AOL provides SPSS with on-line survey respondents who have been
provided incentives to participate in on-line studies. In addition, SPSS
received software and other assets essential to operating the business.

Effective October 1, 2003, SPSS entered into an amended and restated stock
purchase agreement and an amended and restated strategic online research
services agreement with AOL. Under the amended research services agreement, SPSS
retained the exclusive right to provide researchers with survey respondents
drawn from Opinionplace.com visitors throughout AOL's interactive properties.
The primary amendments reduced the remaining term of the original agreements
from two years to one year and make the following adjustments to the
consideration to be paid to AOL:

Other provisions specify conditions for subsequent extensions of the research
services agreement, enable stronger joint management oversight, strengthen SPSS
marketing efforts, and improve the experience of survey participants. For
information on the Company's accounting treatment for the original and amended
AOL transactions, see "Restatement of Financial Statements" below and Note 22 of
the Notes to Consolidated Financial Statements.

15

On October 26, 2001, SPSS and Red Sox Acquisition Corp., each Delaware
corporations, and NetGenesis Corp., a Delaware corporation, entered into an
Agreement and Plan of Merger under which NetGenesis shareholders would receive
0.097 shares of SPSS common stock for each share of NetGenesis common stock upon
the closing of the transaction. This share exchange ratio for the merger was
established through negotiations between SPSS and NetGenesis. The closing of the
merger occurred on December 21, 2001 with SPSS issuing approximately 2,294,065
shares of common stock for substantially all the outstanding shares of
NetGenesis. The merger was accounted for as a purchase. Prior to the merger with
SPSS, NetGenesis was the leading provider of E-Metrics solutions for Global 2000
companies. SPSS and NetGenesis technologies and expertise combine on-line and
off-line data analysis capabilities in one comprehensive offering from one
organization. SPSS is furthering developing this technology as part of a
platform for predictive analytic applications.

On January 31, 2002, SPSS acquired all of the outstanding shares of
LexiQuest, S.A., a corporation organized under the laws of France, for a
guaranteed purchase price of $2.5 million under the terms of a Stock Purchase
Agreement between SPSS, LexiQuest and the shareholders of LexiQuest. Although
the Stock Purchase Agreement provided for potential contingent payments, SPSS
was not required to make any contingent payments to the former owners of
LexiQuest because the contribution generated by the LexiQuest assets did not
meet the targeted levels during 2002 or 2003. LexiQuest was a developer of
technology for the categorization and mining of unstructured text data. SPSS is
further developing the LexiQuest technology, integrating it into the Company's
Clementine data mining workbench, and incorporating the technology into certain
analytical applications.

On June 20, 2002, SPSS acquired all of the assets of netExs, LLC, a
Wisconsin limited liability company, for a guaranteed purchase price of $1.0
million under the terms of an Asset Purchase Agreement between SPSS, netExs and
the members of netExs. Under the terms of the Asset Purchase Agreement,
contingent payments, if any, were capped at a total of $1.45 million if fully
earned during fiscal years 2003, 2004 and 2005. In June 2004, SPSS and netExs
agreed that SPSS would pay to netExs the sum of $400,000 in full satisfaction of
all obligations under the Asset Purchase Agreement, including without
limitations, the contingent payment, and in full settlement of certain claims
asserted by netExs. netExs was a developer of technology for viewing data stored
in the Microsoft Analysis Services within its SQL Server database. SPSS is
further developing the netExs technology for continued distribution under the
name SPSS OLAP Hub, integrating it into the Company's analytical applications
and solutions, and using the technology internally for budgeting and management
reporting.

Beginning in August 2002, the Company reorganized its field operations to
achieve greater productivity and cost effectiveness. Three corporate divisions
were merged and realigned into a telesales force focused on selling lower-priced
software tools and field sales organizations selling higher-priced tools,
applications, and components. In addition, the Company closed its offices in
Miami, Florida, reduced its facilities in Chicago, London, Cambridge,
Massachusetts, and Point Richmond, California, and terminated its investment in
Illumitek Corporation. The Company recorded a restructuring charge of $4.67
million in the third quarter of 2002 and $1.18 million in the fourth quarter of
2002 for expenses related to this reorganization.

On October 14, 2003, the Company entered into an Amended and Restated Stock
Purchase Agreement and an Amended and Restated Strategic Online Research
Services Agreement with AOL as described above.

On November 4, 2003, SPSS, through SPSS International B.V., its wholly
owned subsidiary, acquired Data Distilleries B.V., a Netherlands-based developer
of analytic applications. The terms and conditions of the acquisition are
specified in a Stock Purchase Agreement, dated as of November 4, 2003, by and
among SPSS, SPSS International B.V. and the owners of all of the issued and
outstanding shares of the capital stock of Data Distilleries. The aggregate
purchase price for all of the issued and outstanding capital stock of Data
Distilleries consists of guaranteed and contingent payments. The guaranteed
portion of the purchase price was paid at closing and consisted of $1.0 million
in cash and 281,830 shares of SPSS common stock valued at $5.31 million for
purposes of this transaction. The contingent portion of the purchase price will
be paid, if at all, at the end of the first and second years following the
closing and may total up to $4.4 million at current approximate exchange rates.
The Company's obligation to make the contingent payments will depend on the

16

achievement of certain growth targets for license and maintenance revenues from
the Data Distilleries applications. Under the terms of the Stock Purchase
Agreement, SPSS was obligated to file a Registration Statement on Form S-3 to
register the potential resale of the 281,830 shares issued in this transaction.
Because this Annual Report was not timely filed and, therefore, SPSS is not
currently eligible to use Form S-3, SPSS has fulfilled its obligations under the
Stock Purchase Agreement by repurchasing from each former Data Distilleries
shareholder that number of shares of SPSS common stock received by such
shareholder in connection with this transaction. During April 2004, SPSS
notified the former shareholders of its inability to properly register these
shares and through June 30, 2004 has repurchased all 281,830 shares at a cost of
$5.4 million. During the second quarter of 2004, the Company will record the
$5.4 million cash payout of these shares as a reduction to common stock subject
to repurchase, which is recorded as mezzanine shareholders' equity in the
Company's consolidated balance sheet. SPSS has withdrawn the registration
statement on Form S-3.

On December 29, 2003, the Company received its first payment in a
transaction with Systat Software, Inc., a subsidiary of Cranes Software
International Ltd. ("Systat"), pursuant to which Systat acquired from SPSS an
exclusive worldwide license to distribute the Sigma-series line of products for
a three-year period and purchased certain related assets. Pursuant to the
agreement, Systat assumed all responsibilities for the marketing and sales of
the products as well as their ongoing development and technical support. SPSS
also transferred to Systat all rights and obligations with respect to customers
and personnel and all fixed assets related to the Sigma-series products (the
"Related Assets"). In exchange for the exclusive worldwide license and Related
Assets, Systat is obligated to make cash payments to SPSS in the aggregate
amount of $13.0 million. During the first six months of 2004, SPSS received two
additional payments totaling $3.0 million in connection with this transaction.
The agreement between SPSS and Systat also grants to Systat an option to
purchase the licensed property. Systat may exercise this purchase option for
$1.0 million within 180 days prior to the end of the three-year license period.

Restatement of Financial Statements. On March 15, 2004, SPSS announced
that in connection with its October 2003 amended agreement with America Online,
Inc. (AOL), the Company changed the accounting for its original October 2001
transaction with AOL by expensing substantially all AOL payments as incurred. As
a result, the original transaction would be accounted for on a basis consistent
with the amended AOL agreement and the Company would restate its financial
results for fiscal years 2001, 2002 and the first three quarters of 2003.

On March 30, 2004, SPSS announced that while completing the AOL restatement
it discovered errors in its deferred revenue accounts in the 2001 and 2002
fiscal years. The Company subsequently identified other errors in its deferred
revenue accounts in the fourth quarter of 2000 and the first three quarters of
2003. In addition, SPSS announced that it would record income tax expense
associated with deemed dividend income relating to certain cash transfers from
its international subsidiaries during the fourth quarter of 2002.

SPSS went on to conduct additional examinations that resulted in various
adjustments between 1999 and 2003 including, among other items, adjustments to
the Company's income tax provisions and a change in the recognition of license
fee revenues from transactions completed by the Company's distribution partners
to account for its implied post contract support (PCS) obligations in such
transactions.

In accordance with its management oversight functions, the Audit Committee
of the SPSS Board of Directors assumed a supervisory role with respect to the
Company's review of its deferred revenue accounts. The Audit Committee also
conducted an independent review of the Company's deferred revenue accounts as
well as certain internal controls and related matters. The Audit Committee
retained independent counsel for this review, and the independent counsel
retained a forensic accounting firm to assist in the effort. The independent
review included the performance of a number of forensic accounting procedures, a
review of internal documents and communications, as well as interviews with both
current and former employees and consultants.

The Audit Committee, with the assistance of its counsel and forensic
accounting firm, completed its independent review of the Company's deferred
revenue accounts, internal controls and related matters on or about June 1,
2004. On June 15, 2004, the Audit Committee received a report from its counsel
and forensic

17

accounting firm that they did not find any evidence of intentional misconduct,
concealment or fraud relating to the errors made in the calculation of the
deferred revenue accounts. Following the completion of the Audit Committee's
investigation and report, KPMG requested that additional search terms be used to
review the Company's email correspondence. Following KPMG's request, the Audit
Committee directed its investigation team to conduct the additional email
review. The Audit Committee's investigative team has completed its review and
found (i) no reason to change its original conclusion that its investigation did
not reveal any evidence of fraud, intentional misconduct or concealment in
connection with the errors involving deferred revenue accounts and (ii) no
evidence that SPSS did not fully provide relevant information to KPMG during the
audit process.

SPSS filed by means of this annual report its restated audited financial
statements for fiscal years 2001 and 2002, its restated unaudited interim
financial statements for each of the quarterly periods in fiscal years 2001 and
2002, its restated unaudited interim financial statements for the quarters ended
March 31, 2003, June 30, 2003 and September 30, 2003, and its audited financial
results for fiscal year 2003. This filing also includes revised financial data
for fiscal years 1999 and 2000 on an unaudited basis. The Company's previously
released financial data for each of these periods should not be relied upon.

On April 1, 2004, SPSS received a Nasdaq Staff Determination relating to
the Company's failure to file its Annual Report on Form 10-K for fiscal year
2003 with the SEC on or before the March 30, 2004 filing deadline. On June 7,
2004, SPSS received an additional notice from the Nasdaq indicating its failure
to file its Quarterly Report on Form 10-Q for the fiscal quarter ended March 31,
2004 with the SEC on or before the May 10, 2004 filing deadline. These notices
informed the Company that it had failed to comply with the filing requirements
for continued listing set forth in Marketplace Rule 4310(c)(14), and that its
common stock is, therefore, subject to delisting from the Nasdaq National
Market. Since the date of these notices, the Company has received correspondence
from the Nasdaq granting SPSS extensions of time to file its periodic reports.
On July 28, 2004, the Company was informed by Nasdaq that its securities will be
delisted effective at the open of business on August 2, 2004. Because SPSS has
filed its required financial statements prior to that date, SPSS has asked
Nasdaq to reconsider and rescind the order directing the delisting of the
Company's common stock.

Litigation. On or about May 14, 2004, a potential class action titled Fred
Davis, Individually and On Behalf of All Others Similarly Situated v. SPSS Inc.,
Jack Noonan and Edward Hamburg was filed in the United States District Court for
the Northern District of Illinois. For further information about this
litigation, see Item 3 "Legal Proceedings" below.

Amended and Restated Rights Agreement. On June 16, 2004, the SPSS Board of
Directors voted to amend the Company's Rights Agreement, dated as of June 18,
1998, by and between SPSS and Harris Trust and Savings Bank ("Harris Bank"), as
rights agent. These amendments modify the Company's right to rescind the common
stock purchase rights after they detach and become exercisable in order to
insure that the Rights Agreement complies with applicable Delaware law. These
amendments will not affect the circumstances in which the common share purchase
rights issued under the Rights Agreement detach from the currently outstanding
common stock and become exercisable nor do they materially modify the terms of
the common stock purchase rights. In connection with these amendments, the
Company also approved the appointment of Computershare Investor Services, LLC
("Computershare"), the Company's current transfer agent, to replace Harris Bank
as rights agent.

The amendments approved by the SPSS Board on June 16, 2004 will not become
effective, and the Amended and Restated Rights Agreement will not be executed by
SPSS and Computershare, until SPSS files a Registration Statement on Form 8-A/A
with the Securities and Exchange Commission. The Registration Statement on Form
8-A/A will include a description of the amendments and will attach as an exhibit
a fully executed copy of the Amended and Restated Rights Agreement.

Resignation of Brian Zanghi. As reported by SPSS on a Form 8-K filed with
the SEC on July 2, 2004, Brian Zanghi resigned from his position as Executive
Vice President and Chief Operating Officer of SPSS effective July 1, 2004.

18

ITEM 2. PROPERTIES

The Company's principal administrative, marketing, training and product
development and support facilities are located at 233 S. Wacker Drive, the Sears
Tower, Chicago, Illinois. In April 1997, SPSS entered into a 15-year sublease
agreement to sublease approximately 100,000 square feet of office space in the
Sears Tower in Chicago, Illinois. This space became the principal Chicago
offices of SPSS in 1998. In April 2000, SPSS entered into a 6-year sublease for
an additional 41,577 square feet of office space in the Sears Tower in Chicago,
Illinois. The aggregate annual gross rental payments on these leases were
approximately $3.39 million for the year 2003. SPSS believes that these office
spaces are adequate to fulfill the Company's needs for the foreseeable future.

In addition, SPSS leases office space in California, Virginia, New York,
Ohio, Massachusetts, Florida, Texas, Wisconsin, and Minnesota in the United
States, and internationally in the Netherlands, the United Kingdom, Germany,
Sweden, France, Singapore, Australia, Japan, Malaysia, Denmark, China, Belgium
and Spain.

SPSS plans to expand its facilities on an as-needed basis. The Company does
not expect this expansion to materially affect its real estate holdings. Other
than this expansion, SPSS believes its facilities are suitable and adequate for
its present needs.

ITEM 3. LEGAL PROCEEDINGS

SPSS Inc. has been named as a defendant in a lawsuit filed on December 6,
2002 in the United States District Court for the Southern District of New York,
under the caption Basu v. SPSS Inc., et al., Case No. 02CV9694. The complaint
alleges that, in connection with the issuance and initial public offering of
shares of common stock of NetGenesis Corp., the registration statement and
prospectus filed with the Securities and Exchange Commission in connection with
the IPO contained material misrepresentations and/or omissions. The alleged
violations of the federal securities laws took place prior to the effective date
of the merger in which the Company's acquisition subsidiary merged with and into
NetGenesis Corp. NetGenesis Corp. is now a wholly owned subsidiary of SPSS.
Other defendants to this action include the former officers and directors of
NetGenesis Corp. and the investment banking firms that acted as underwriters in
connection with the IPO. The plaintiff is seeking unspecified compensatory
damages, prejudgment and post-judgment interest, reasonable attorney fees,
experts' witness fees and other costs and any other relief deemed proper by the
Court. The Company is aggressively defending itself and plans to continue to
aggressively defend itself against the claims set forth in the complaint. The
Company and the named officers and directors filed an answer to the complaint on
July 14, 2003. At this time, the Company believes the lawsuit will be settled
with no material adverse effect on its results of operations, financial
condition, or cash flows.

SPSS has been named as a defendant in a lawsuit filed on or about May 14,
2004 in the United States District Court for the Northern District of Illinois,
under the caption Fred Davis, Individually and On Behalf of All Others Similarly
Situated v. SPSS Inc., Jack Noonan and Edward Hamburg, Case No. 04C3427. The
complaint alleges that the defendants violated Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder. The
complaint alleges that the defendants failed to disclose and misrepresented a
series of material adverse facts regarding the Company's revenues. The complaint
seeks to recover unspecified compensatory damages, reasonable attorney fees,
experts' witness fees and other costs and any other relief deemed proper by the
court on behalf of all purchasers of the Company's securities between May 2,
2001 and March 30, 2004, although no court has determined that such persons
constitute a proper class. Neither SPSS nor the individual defendants have
responded to the complaint as of the date of this filing. SPSS and the other
defendants believe that the suit is without merit and intend to defend
vigorously against the allegations contained in the complaint.

SPSS may also become party to various claims and legal actions arising in
the ordinary course of business.

19

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders in the fourth
quarter of 2003.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Historically, the Company's common stock has been traded on the
over-the-counter market on the NASDAQ National Market under the symbol "SPSS ."
At the present time, the Company's common stock is trading under the symbol
"SPSSE."

On April 1, 2004, SPSS received a Nasdaq Staff Determination relating to
the Company's failure to file its Annual Report on Form 10-K for fiscal year
2003 with the SEC on or before the March 30, 2004 filing deadline. On June 7,
2004, SPSS received an additional notice from the Nasdaq indicating its failure
to file its Quarterly Report on Form 10-Q for the fiscal quarter ended March 31,
2004 with the SEC on or before the May 10, 2004 filing deadline. These notices
informed the Company that it had failed to comply with the filing requirements
for continued listing set forth in Marketplace Rule 4310(c)(14), and that its
common stock is, therefore, subject to delisting from the Nasdaq National
Market. Since the date of these notices, the Company has received correspondence
from the Nasdaq granting SPSS extensions of time to file its periodic reports.
On July 28, 2004, the Company was informed by Nasdaq that its securities will be
delisted effective at the open of business on August 2, 2004. Because SPSS has
filed its required financial statements prior to that date, SPSS has asked
Nasdaq to reconsider and rescind the order directing the delisting of the
Company's common stock.

The following table shows, for the periods indicated, the high and low
closing sale price of the Company's common stock:

As of July 1, 2004, there were 689 holders of record of the Company's
common stock. This number includes all holders of record by the SPSS transfer
agent, Computershare Investor Services, and does not include an estimate of the
number of stockholders whose shares are held in the name of brokerage firms or
other financial institutions.

SPSS has never declared a cash dividend or paid any cash dividends on its
capital stock. SPSS does not anticipate paying any cash dividends on SPSS common
stock in the foreseeable future because SPSS expects to retain future earnings
for use in the operation and expansion of its business. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."

20

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

SPSS has one equity based compensation plan, the SPSS Inc. 2002 Equity
Incentive Plan (the "2002 Plan"). The following table sets forth information as
of December 31, 2003 concerning the 2002 Plan, which initially was approved at
the 2002 Annual Meeting of Stockholders and was subsequently amended at the 2003
Annual Meeting of Stockholders. SPSS does not have any equity compensation plans
under which shares of its common stock are authorized for issuance that were not
approved by stockholders.

RECENT SALES OF UNREGISTERED SECURITIES

On September 28, 2001, SPSS issued 300,300 shares of its common stock to
Siebel Systems, Inc. under the terms of a Stock Purchase Agreement. The
aggregate purchase price for the 300,300 shares of SPSS common stock was $5.0
million. The purchase and sale of shares of SPSS common stock was exempt from
securities registration under Rule 506 of Regulation D as promulgated by the SEC
under the Securities Act of 1933, as amended, and/or Section 4(2) of the 1933
Act. SPSS subsequently filed a registration statement on Form S-3 registering
Siebel's potential resale of the shares of SPSS common stock issued to it.

On October 22, 2001, SPSS entered into a Strategic Online Research Services
Agreement with AOL (see Item 1, "Business -- Recent Developments"). As part of
the consideration to be paid by SPSS to AOL in exchange for the Company's
acquisition of certain operating assets and exclusive rights to distribute
survey sample data drawn from AOL members under the research services agreement,
SPSS issued to AOL 173,724 shares of SPSS common stock in October 2001 (the
"First Issuance") and 291,828 shares of SPSS common stock in October 2002 (the
"Second Issuance"). Both the First Issuance and the Second Issuance were made
pursuant to a Stock Purchase Agreement between SPSS and AOL, dated October 22,
2001. Both purchases and sales of shares of SPSS common stock were exempt from
securities registration under Rule 506 of Regulation D as promulgated by the SEC
under the 1933 Act. As required by the original Stock Purchase Agreement, SPSS
filed a registration statement on Form S-3 to register AOL's potential resale of
158,228 shares issued pursuant to the First Issuance (the "Registration
Statement"). Under the terms of the original Stock Purchase Agreement, the
number of shares of SPSS common stock included in the First Issuance was reduced
from 173,724 to 158,228 to account for the then current market price of SPSS
common stock at the time of the effectiveness of the Registration Statement.
Following the amendments made to the strategic alliance between SPSS and AOL in
October 2003, SPSS is no longer required to register AOL's resale of the SPSS
common stock included in the Second Issuance, SPSS and AOL have agreed that SPSS
should withdraw the Registration Statement for the First Issuance, and SPSS is
no longer obligated to make future payments to AOL in the form of SPSS common
stock. SPSS remains obligated to assist AOL in selling the SPSS common stock
pursuant to Rule 144. In the event that AOL is unable to rely on Rule 144 as a
result of the Company's action or failure to act and it has not cured this
action or failure to action within 60 days, AOL may demand that SPSS repurchase
shares with a value of up to $3.2 million. As of the date of this filing, AOL
has made no such repurchase demand.

On November 4, 2003, SPSS, through SPSS International B.V., its
wholly-owned subsidiary, issued 281,830 shares of SPSS common stock to the
former shareholders of Data Distilleries B.V., a company organized under the
laws of the Netherlands, pursuant to a Stock Purchase Agreement, dated as of

21

November 4, 2003, by and among SPSS, SPSS International B.V. and the owners of
all of the issued and outstanding shares of Data Distilleries capital stock. In
consideration of the 281,830 shares of its common stock, plus $1.0 million in
cash, SPSS acquired all of the issued and outstanding shares of Data
Distilleries capital stock. The purchase and sale of shares of SPSS common stock
was exempt from securities registration under Section 4(2) of the 1933 Act.
Under the terms of the Stock Purchase Agreement, SPSS had an obligation to
register the former Data Distilleries shareholders' potential resale of the
shares of SPSS common stock issued to them on a Registration Statement on Form
S-3. Because this Annual Report was not timely filed and SPSS was not eligible
to use Form S-3, SPSS has fulfilled its obligations under the Stock Purchase
Agreement by repurchasing from each former Data Distilleries shareholder that
number of shares of SPSS common stock received in connection with this
transaction. SPSS repurchased all of the shares previously issued in this
transaction at a total cost of $5.4 million. SPSS has withdrawn the registration
statement on Form S-3.

10B5-1 STOCK TRADING PLANS

Dr. Norman Nie, Chairman of the SPSS Board of Directors, Kenneth Holec, a
member of the SPSS Board of Directors, and Dr. Edward Hamburg, the Company's
Executive Vice President, Corporate Operations, Chief Financial Officer and
Secretary, entered into and engaged in transactions pursuant to a 10b5-1 Stock
Trading Plan during 2003. Each of these trading plans was adopted pursuant to
Rule 10b5-1 promulgated under the Securities Exchange Act of 1934. In accordance
with Rule 10b5-1, Dr. Nie, Mr. Holec and Dr. Hamburg entered into their
respective plans prior to becoming aware of any material nonpublic information
about SPSS. An authorized independent broker effected the periodic sales of a
pre-determined number of shares of SPSS common stock on behalf of each of Dr.
Nie, Mr. Holec and Dr. Hamburg solely in accordance with the terms of their
respective plans. As of the date of this filing, the 10b5-1 plans of Dr. Nie and
Dr. Hamburg have terminated, and Mr. Holec has suspended his 10b5-1 plan to
comply with the rules and regulations of the SEC.

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data has been derived from
our consolidated financial statements. All data has been restated to include the
financial position and results of operations of ShowCase as a result of the
consummation of the pooling-of-interest business combination with SPSS in 2001.
All financial information set forth below reflects the restatement of the
Company's financial statements for fiscal years 2001 and 2002, and the first
three quarters of 2003 as discussed below under "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Note 22 of the
Notes to Consolidated Financial Statements. The restatement also affects periods
prior to 2001 and, accordingly, SPSS revised its selected consolidated financial
data for fiscal years 1999 and 2000. This data should be read in conjunction
with the consolidated financial statements and notes thereto, and Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

SPSS has not amended its annual reports on Form 10-K or quarterly reports
on Form 10-Q for the quarterly periods affected by the restatement. The
information that has been previously filed or otherwise

22

reported for these periods is superseded by the information in this annual
report, and the financial statements and related financial information contained
in such reports should no longer be relied upon.

- ---------------

(1) License revenues include sales of the Company's tools, applications, and
components on a perpetual, annual, or ASP (applications service provider)
basis.

(2) Maintenance revenues include recurring revenues recognized by the Company
from renewals of maintenance agreements associated with perpetual licenses
or renewals of annual licenses.

23

(3) Services include revenues recognized from professional services
engagements, training and other activities such as publication sales and
providing respondents to online surveys.

(4) Beginning in the quarter ended December 31, 2000, results reflect the
effects of deferring revenues in accordance with the American Institute of
Certified Public Accountants ("AICPA") Technical Practice Aids regarding
software revenue recognition. This application resulted in adjustment in
certain revenue categories, and a corresponding adjustment in deferred
revenues.

(5) Includes provision for doubtful accounts.

(6) Includes costs associated with acquisitions, as well as costs associated
with severance and the write-down of obsolete internal use software.

(7) Includes costs directly related to acquisitions, such as investment banking
and other professional fees, employee severance, merger-related bonuses,
and costs associated with closing excess office space and write-off of
redundant assets.

(8) Includes costs related to acquired in-process technology in conjunction
with business combinations accounted for as purchases.

(9) During 2003 the Company entered into an agreement to license the
distribution of its Sigma-series line of products and sell certain related
assets. This transaction was accounted for as a divestiture of a business.

(10) The selected consolidated financial data for 1999 and 2000 have been
revised to reflect adjustments related to the restatement described below
under "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Note 22 of the Notes to Consolidated Financial
Statements. The adjustments decreased revenue and net income for 1999 by
$3,106 and $1,978, respectively, and increased revenue and decreased net
income for 2000 by $83 and $30, respectively. In the accompanying audited
financial statements for the year ended December 31, 2001, these net income
adjustments are reflected as opening adjustments to the Consolidated
Statement of Stockholders' Equity.

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

REFERENCES TO "NOTES" WITHIN THIS ITEM 7 REFER TO THE FOOTNOTES TO THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS IN ITEM 8.

RESTATEMENT OF FINANCIAL STATEMENTS

On March 15, 2004, SPSS announced that in connection with its October 2003
amended agreement with America Online, Inc. (AOL), the Company changed the
accounting for its original October 2001 transaction with AOL by expensing
substantially all AOL payments as incurred. As a result, the original
transaction would be accounted for on a basis consistent with the amended AOL
agreement and the Company would restate its financial results for fiscal years
2001, 2002 and the first three quarters of 2003.

On March 30, 2004, SPSS announced that while completing the AOL restatement
it discovered errors in its deferred revenue accounts in the 2001 and 2002
fiscal years. The Company subsequently identified other errors in its deferred
revenue accounts in the fourth quarter of 2000 and the first three quarters of
2003. In addition, SPSS announced that it would record income tax expense
associated with deemed dividend income relating to certain cash transfers from
its international subsidiaries during the fourth quarter of 2002.

SPSS went on to conduct additional examinations that resulted in various
adjustments between 1999 and 2003 including, among other items, a change in the
recognition of license fee revenues from transactions completed by the Company's
distribution partners to account for its implied post contract support (PCS)
obligations in such transactions.

In accordance with its management oversight functions, the Audit Committee
of the SPSS Board of Directors assumed a supervisory role with respect to the
Company's review of its deferred revenue accounts. The Audit Committee also
conducted an independent review of the Company's deferred revenue accounts as
well as certain internal controls and related matters. The Audit Committee
retained independent counsel for

24

this review, and the independent counsel retained a forensic accounting firm to
assist in the effort. The independent review included the performance of a
number of forensic accounting procedures, a review of internal documents and
communications, as well as interviews with both current and former employees and
consultants.

The Audit Committee, with the assistance of its counsel and forensic
accounting firm, completed its independent review of the Company's deferred
revenue accounts, internal controls and related matters on or about June 1,
2004. On June 15, 2004, the Audit Committee received a report from its counsel
and forensic accounting firm that they did not find any evidence of intentional
misconduct, concealment or fraud relating to the errors made in the calculation
of the deferred revenue accounts. Following the completion of the Audit
Committee's investigation and report, KPMG requested that additional search
terms be used to review the Company's email correspondence. Following KPMG's
request, the Audit Committee directed its investigation team to conduct the
additional email review. The Audit Committee's investigative team has completed
its review and found (i) no reason to change its original conclusion that its
investigation did not reveal any evidence of fraud, intentional misconduct or
concealment in connection with the errors involving deferred revenue accounts
and (ii) no evidence that SPSS did not fully provide relevant information to
KPMG during the audit process.

Following the review and the determination to restate its financial
statements, SPSS performed additional procedures to ensure the accuracy of its
financial information. These additional procedures included a further review of
internal documents, tests of certain system controls, cut-off procedures and a
review of revenue transactions and other cost and expense accounts. As a result,
the Company corrected additional errors made in 2003 and prior periods,
including errors that were previously not recorded because in each case and in
aggregate it was believed the amount of any such error was not material to the
Company's consolidated financial statements. SPSS also made certain revenue,
expense and balance sheet reclassifications.

SPSS filed by means of this annual report its restated audited financial
statements for fiscal years 2001 and 2002, its restated unaudited interim
financial statements for each of the quarterly periods in fiscal years 2001 and
2002, its restated unaudited interim financial statements for the quarters ended
March 31, 2003, June 30, 2003 and September 30, 2003, and its audited financial
results for fiscal year 2003. This filing also includes revised financial data
for fiscal years 1999 and 2000 on an unaudited basis. The Company's previously
released financial data for each of these periods should not be relied upon.

On April 1, 2004, SPSS received a Nasdaq Staff Determination relating to
the Company's failure to file its Annual Report on Form 10-K for fiscal year
2003 with the SEC on or before the March 30, 2004 filing deadline. On June 7,
2004, SPSS received an additional notice from the Nasdaq indicating its failure
to file its Quarterly Report on Form 10-Q for the fiscal quarter ended March 31,
2004 with the SEC on or before the May 10, 2004 filing deadline. These notices
informed the Company that it had failed to comply with the filing requirements
for continued listing set forth in Marketplace Rule 4310(c)(14), and that its
common stock is, therefore, subject to delisting from the Nasdaq National
Market. Since the date of these notices, the Company has received correspondence
from the Nasdaq granting SPSS extensions of time to file its periodic reports.
On July 28, 2004, the Company was informed by Nasdaq that its securities will be
delisted effective at the open of business on August 2, 2004. Because SPSS has
filed its required financial statements prior to that date, SPSS has asked
Nasdaq to reconsider and rescind the order directing the delisting of the
Company's common stock.

OVERVIEW

SPSS is a global provider of predictive analytics technology and services.
The Company's offerings use predictive analytics to connect data to effective
action by drawing reliable conclusions about current conditions and future
events. Predictive analytics leverages an organization's business knowledge by
applying sophisticated analytic techniques to enterprise data. The insights
gained through the use of these techniques can lead to improved business
processes that increase revenues, reduce costs, and prevent fraudulent
activities.

SPSS has evolved through a combination of internal reorganization and
acquisitions (see Item 1 "Business -- Recent Developments and Business
Combinations" for a description of each of the Company's recent acquisitions).
Approximately 65% of 2003 revenues came from sales to customers in corporate
settings,
25

with another 16% in academic institutions, 12% in government agencies and 7%
from nonprofit and healthcare organizations.

Beginning in the quarter ended December 31, 2000, results reflect the
effects of deferring revenues in accordance with the American Institute of
Certified Public Accountants ("AICPA") Technical Practice Aids regarding
software revenue recognition. This application resulted in adjustments to
certain revenue categories and a corresponding adjustment in deferred revenues.
Also as a result of this application, SPSS reported a significant shift in the
sources of its revenues. Between 1999 and 2003, revenues from its license
revenue decreased from 54% to 44% of total net revenues, maintenance revenues
increased from 33% to 40% of total net revenues, and service revenue increased
from 13% to 16% of net revenues. Management expects this trend to change in 2004
as license revenue becomes a larger percentage of total net revenues with
increased focus on the Company's predictive analytics offerings.

The following information should be read in conjunction with the
consolidated historical financial information and the notes thereto included
elsewhere in this document.

RESULTS OF OPERATIONS

The following table shows select statements of operations data as a
percentage of net revenues for the years indicated.

26

COMPARISON OF THE YEARS ENDED DECEMBER 31, 2001, 2002, AND 2003

Net Revenues. Net revenues increased from $174,055,000 in 2001 to
$208,480,000 in 2002, an increase of 20% from 2001, and decreased to
$208,367,000 in 2003, a decrease of less than 1% from 2002.

Effective in the first quarter 2003, SPSS began reporting its revenues in
the following three categories used by most enterprise software companies:

- License fees, representing new sales of the Company's tools,
applications, and components on a perpetual, annual, or ASP (application
services provider) basis;

- Maintenance, representing recurring revenues recognized by the Company
from renewals of maintenance agreements associated with perpetual
licenses or renewals of annual licenses;

- Services, representing revenues recognized from professional services
engagements, training, and other activities such as publication sales and
providing respondents to online surveys.

SPSS has reclassified prior period revenues to conform to this new reporting
classification.

The 2003 decrease in revenues from 2002 was primarily due to lower revenues
from new licenses for SPSS market research applications and ShowCase business
intelligence tools, primarily due to a decrease in seven-figure transactions
compared to 2002. These decreases were partially offset by growth in maintenance
revenue of 3%, reflecting steady renewal rates for the Company's major
offerings, maintenance from Data Distilleries applications, and changes in
currency exchange rates. Also contributing were higher new sales of SPSS data
mining and desktop statistical analysis tools as well as new sales of predictive
analytic applications from the Data Distilleries acquisition. For the 2003
fiscal year, service revenues decreased by 2% from 2002 and were constant at 16%
of net revenues.

The 2002 increase in revenues from 2001 reflected the higher demand for
SPSS data mining and desktop statistical tools as well as the addition of
revenues from the NetGenesis, America Online (AOL) and LexiQuest transactions.
As a percentage of net revenues, maintenance revenues increased from 34% in 2001
to 39% in 2002, reflecting improved renewal rates for the Company's major
offerings as well as changes in currency exchange rates. Services revenues
increased by 37% primarily due to revenues related to the America Online (AOL)
transaction and an increase in implementation services.

Cost of License and Maintenance Revenues. Cost of license and maintenance
revenues consists of costs of goods sold, amortization of capitalized software
development costs, and license fees paid to third parties. Cost of revenues
increased from $17,155,000 in 2001 to $17,696,000 in 2002 and decreased from
2002 to $14,359,000 in 2003. The decrease in 2003 was primarily due to lower
Hyperion Solutions license fees and amortization of acquired technology assets.
The increase in 2002 from 2001 was due to increased Hyperion Solution license
fees as well as the amortization of acquired technology assets and license fees
associated with the NetGenesis product. As a percentage of net revenues, cost of
license and maintenance revenues were 10% in 2001, 9% in 2002, and 7% in 2003.

Cost of License and Maintenance Revenues -- Software Write-offs. The
Company had software write-offs charged to cost of license and maintenance
revenues of $3,637,000 in 2001, $5,928,000 in 2002, and $1,961,000 in 2003. In
2003, these write-offs included $1,961,000 for obsolete and redundant technology
resulting from the Data Distilleries acquisition. In 2002, these write-offs
included $4,328,000 for the write-down of the Illumitek technology as part of
the related shutdown of the entity (see Note 8) and a $1,600,000 write-off of
technology acquired in the AOL transaction due to its replacement with SPSS
technology. In 2001, SPSS wrote off $3,637,000 for obsolete and redundant
technology resulting from the ShowCase and NetGenesis mergers. As a percentage
of net revenues, cost of license and maintenance revenues -- software write-offs
was 2% in 2001, 3% in 2002 and 1% in 2003.

Sales, Marketing and Services. Sales, marketing and services expenses
increased from $114,402,000 in 2001 to $130,303,000 in 2002, and decreased to
$123,454,000 in 2003. The decrease in 2003 from 2002 was primarily due to the
reduction in the number of sales and professional services personnel as a result
of the field reorganization implemented in August 2002 and lower AOL service
costs as a result of the amended

27

agreement with AOL effective October 2003. These decreases were partially offset
by increases from changes in currency exchange rates and staff additions related
to the Data Distilleries acquisition. The increase in 2002 from 2001 primarily
reflected the addition of staff from the AOL, NetGenesis and LexiQuest
transactions and higher AOL service costs, partially offset by the August 2002
field restructuring. Included in sales, marketing and services were AOL service
cost payments of $2,375,000 in 2001, $9,500,000 in 2002 and $7,847,000 in 2003.
The increase in 2002 resulted from 3 months of payments to AOL in 2001 and 12
months of payments to AOL in 2002 reflecting initiation of the AOL agreement
effective October 2001. The decrease in 2003 from 2002 reflected lower survey
costs as a result of the amended agreement with AOL effective October 2003. As a
percentage of net revenues, sales, marketing and services expenses were 66% in
2001, 63% in 2002, and 59% in 2003.

Research and Development. Research and development expenses increased from
$32,305,000 in 2001 to $41,624,000 in 2002 and increased to $44,167,000 in 2003.
The increase in 2003 from 2002 was primarily due to the addition of employees
with the Data Distilleries acquisition and the effects of currency exchange
rates. The increase in 2002 from 2001 was primarily due to the addition of staff
from the NetGenesis, LexiQuest and netExs transactions. As a percentage of net
revenues, research and development expenses were 19% in 2001, 20% in 2002 and
21% in 2003.

General and Administrative. General and administrative expenses increased
from $11,684,000 in 2001 to $17,163,000 in 2002 and to $17,773,000 in 2003. The
increase in 2003 from 2002 was primarily due to the addition of accounting
professionals, costs associated with complying with the Sarbanes-Oxley Act of
2002, additional costs as a result of the Data Distilleries acquisition, higher
insurance and payroll related expenses, and the effects of currency exchange
rates. The increase in 2002 from 2001 was primarily due to the staff additions
from the NetGenesis acquisition and the expansion of the SPSS corporate
executive group, partially offset by the cost reductions implemented in August
2002 and the elimination of goodwill amortization of $1,462,000 following the
implementation of SFAS No. 142, "Goodwill and Other Intangible Assets," on
January 1, 2002. Expenses in this category as a percentage of net revenues
increased from 7% in 2001 to 8% in 2002 and 9% in 2003.

Provision for Doubtful Accounts. Provision for doubtful accounts was
$2,372,000 in 2001, $869,000 in 2002 and $421,000 in 2003. The decreases in 2003
and 2002 from the previous years represent the considerable efforts undertaken
to collect outstanding receivables.

Special General and Administrative Charges. During 2001, 2002 and 2003,
SPSS incurred certain unusual expenses including asset write-offs, restructuring
charges, and costs that did not meet the Company's definition of
"merger-related" expenses as described below. Such costs have been separately
reported as "Special general and administrative charges." Special general and
administrative charges were $14,739,000 in 2001, $9,037,000 in 2002, and
$6,104,000 in 2003, or 9%, 4%, and 3% of net revenues in 2001, 2002, 2003,
respectively. Special general and administrative charges in 2003 included a
write-off of $4,400,000 due to the termination of the Company's Siebel CRM
software implementation (See Note 3) and $1,700,000 of severance, bonus and
travel costs primarily related to the Data Distilleries acquisition. Special
general and administrative charges in 2002 included costs related to the
restructuring of the Company's field operations implemented in August 2002 and
costs related to the NetGenesis, LexiQuest and netExs transactions, such as
severance and retention payments of $4,030,000, lease cancellation payments of
$615,000, professional service fees of $2,300,000, and other costs. Special
general and administrative charges in 2001 included $4,200,000 of charges
relating to the write-down of internal-use software, $3,500,000 related to
reductions in workforce, and $2,000,000 for obsolete software write-offs.

Merger-related. SPSS incurred certain merger-related expenses subsequent
to the consummation of the acquisitions that were charged to current period
expenses. Certain other costs incurred prior to the consummation of the
transactions were capitalized as part of the purchases. These merger-related
expenses relate to the Company's acquisitions made during 2001 and 2002 (see
Note 7). SPSS incurred merger-related costs of $9,081,000 in 2001 and $2,260,000
in 2002. Expenses in 2001 included $2,500,000 paid for investment banking and
other professional fees, $2,700,000 for transaction-related bonuses paid to
employees, $2,000,000

28

for severance costs and costs of closing excess office facilities. Expenses in
2002 included professional fees of approximately $900,000, severance of $200,000
and other costs of $1,100,000.

Illumitek Shut-down Charges. In 2002, SPSS incurred shut-down costs of
$518,000 related to the termination of its investment in Illumitek.

Acquired In-Process Technology. Acquired in-process technology costs were
$150,000 in 2002 related to the LexiQuest transaction and $2,288,000 in 2001
related to the NetGenesis Corp. transaction as described below. These costs,
along with capitalized acquired technology, were determined from independent
third party valuations.

In December 2001, SPSS completed the acquisition of NetGenesis Corp. (See
Note 7). A portion of the purchase price was attributable to acquired in-process
technology, as the development work associated with NetGenesis version 6.0 had
not reached technological feasibility and was believed to have no alternative
future use. SPSS assessed the fair value of the acquired in-process technology
using an income approach. Future cash flows were projected over five years
discounted to present value using a discount rate of 19% based on the project
and the market risks associated with the research and development project and
resulting product. Specific consideration was given to the stage of development
of the research and development effort, which was 60% complete, both in terms of
costs invested as of the acquisition date relative to completion costs and
technical achievements. In projecting future revenue streams from the project,
SPSS considered many factors including competition, market growth estimates,
time to market and additional sales and marketing leverage that SPSS could
provide to the NetGenesis suite of products.

On February 6, 2002, SPSS acquired all of the issued and outstanding shares
of capital stock of LexiQuest, S.A., a corporation organized under the laws of
France. Approximately $150,000 of the purchase price was attributable to
acquired in-process technology that had not reached technological feasibility
and was believed to have no alternative future use.

Net Interest and Investment Expense. Net interest and investment expense
was $204,000 in 2001, $63,000 in 2002 and $42,000 in 2003. The change in net
interest and investment expense in 2003 was primarily due to the decrease in net
debt levels. The decrease in net interest and investment expense in 2002 from
2001 was also primarily due to lower debt levels.

Gain on Divestiture of Sigma-series Product Line. The gain on the
divestiture of the Sigma-series product line was $8,577,000 in 2003. In December
2003, SPSS entered into a distribution license and sale of assets agreement
related to its Sigma-series product line with Systat Software, a subsidiary of
Cranes Software International Ltd. This transaction was completed in December
2003. Under the terms of the agreement, Systat is required to make payments to
SPSS in the aggregate amount of $13,000,000, including $9,000,000 remitted in
December 2003. Systat Software also has the option to purchase all related
intellectual property, including brand names and trademarks, after three years
for an additional $1,000,000 (See Note 7). The gain represents the excess of the
purchase price over the book value of the assets sold and expenses directly
related to the sale.

Other Income (Expense). Other expense was ($1,121,000) in 2001, other
income was $752,000 in 2002 and $1,798,000 in 2003. The income in 2002 and 2003
was due to gains from foreign currency transactions of $752,000 and $1,770,000,
respectively, reflecting the weakening of the dollar against other major
currencies. The expense in 2001 was due primarily to losses from foreign
currency transactions, the write-off of a miscellaneous receivable from Q1, and
the write-down of the Company's e-Intelligence investment of $137,000, $300,000
and $782,000, respectively.

Provision (Benefit) for Income Taxes. The expense (benefit) for income
taxes was $(8,177,000) in 2001, $878,000 in 2002 and $1,147,000 in 2003. During
2003, the provision for income taxes represented a tax rate of approximately
11%. The Company's tax rate in 2003 was lower than the statutory rate primarily
as a result of the use of foreign tax credits, which were previously reduced by
a valuation allowance because their use was uncertain. The tax provision in 2002
was caused by obligations associated with dividend income caused by certain cash
transfers from its international subsidiaries during the fourth quarter of 2002
and by the write off of net operating loss carry forwards and by a nondeductible
capital loss arising from the Illumitek
29

investment. During 2001, the provision for income taxes represented a tax rate
of approximately 23%. The effective rate for the income tax benefit was lower
than the statutory rate primarily due to an increase in the valuation allowance
for deferred tax assets and nondeductible in-process research and development
charges. Generally, the Company expects its effective tax rate to be
approximately 35%.

LIQUIDITY AND CAPITAL RESOURCES

SPSS generated $13,695,000 in cash from operations in 2001, used cash of
$1,129,000 in operations in 2002, and generated $22,059,000 from operations in
2003. Cash from operations in 2003 came primarily from net income, a reduction
of accounts receivable of $3,396,000 and increased deferred revenue of
$5,872,000. These amounts were offset by a reduction of accrued expenses of
$7,484,000, and a decrease in accounts payable of $5,292,000. Cash used by
operations in 2002 resulted from the net loss, reduction in accrued expenses and
a reduction of deferred revenue. These requirements were partially offset by a
reduction of accounts receivable of $1,296,000, and increases in accounts
payable of $1,578,000, and income tax accruals of $5,717,000. Cash from
operations in 2001 came primarily from a reduction of accounts receivable
collections of $23,085,000, which was partially offset by a decrease in income
tax accruals and from the net loss. Average Days Sales Outstanding were 78 for
the year ended December 31, 2003, compared to 79 for the year ended December 31,
2002.

Investing activities resulted in cash used of $12,245,000 in 2001,
$17,138,000 in 2002 and $4,183,000 in 2003. During 2003, cash was primarily used
for the $1,000,000 cash portion of the consideration paid in connection with the
Data Distilleries acquisition, capital expenditures of $2,573,000, and
$9,610,000 for capitalized software development costs. Partially offsetting
these investing outflows in 2003 were cash proceeds of $9,000,000 from the
divestiture of the Sigma-series product line. In 2002, cash was primarily used
for capital expenditures of $12,859,000 and capitalized software development
costs of $11,069,000. SPSS also paid $2,500,000 to acquire LexiQuest and
$1,000,000 to acquire netExs. Partially offsetting these investing outflows in
2002 were proceeds of $9,792,000 from the maturities and sales of marketable
securities. In 2001, $14,743,000 in cash was used for net capital expenditures,
along with $18,592,000 for capitalized software development costs, $2,827,000 in
earn-out payments to the former shareholders of Integrated Solutions Limited
(ISL), and $1,000,000 related to the AOL transaction. Partially offsetting these
investing outflows in 2001 were $10,856,000 in net proceeds from marketable
securities and cash of $13,908,000 acquired with the Company's acquisition of
NetGenesis in December 2001.

Cash used in financing activities was $7,538,000 in 2001, while, in 2002
and 2003 cash was provided by financing activities of $9,007,000 and $2,308,000,
respectively. In 2003, net repayments under line-of-credit agreements totaled
$49,000 and proceeds from the issuance of common stock were $2,357,000,
primarily through the exercise of stock options and employee purchases through
the employee stock purchase plan. In 2002, net borrowings under line-of-credit
agreements totaled $7,325,000 and proceeds from the issuance of common stock
were $1,682,000, primarily through the exercise of stock options and employee
purchases through the employee stock purchase plan. During 2001, $14,825,000 in
cash was used to repay borrowings under line-of-credit agreements, partially
offset by $7,287,000 raised through the issuance of common stock to Siebel
Systems and through employee exercises of stock options.

In November 2002, SPSS revised its loan agreement with Bank One, NA (as
successor by merger to American National Bank and Trust Company of Chicago).
Under this loan agreement, as amended, SPSS had an available $8,500,000
unsecured line of credit with Bank One, under which borrowings bore interest at
either the prime interest rate or the Eurodollar Rate, depending on the
circumstances. As of December 31, 2002, SPSS had $8,500,000 outstanding under
this line of credit with Bank One.

Given the previously reported amendment to the Company's line of credit
with Bank One, the Company did not believe that the terms of the Bank One
lending arrangement would continue to be acceptable. The Company began to look
for a new lending arrangement with the goal of expanding the line of credit then
available to the Company. On March 31, 2003, SPSS entered into a four (4) year,
$25 million credit facility with Wells Fargo Foothill, Inc. (f/k/a Foothill
Capital Corporation) which replaced the Company's lending arrangement with Bank
One. The new agreement with Wells Fargo Foothill met the Company's goals by

30

providing the Company with greater credit capacity. The Wells Fargo Foothill
facility includes a four (4) year term loan in the amount of $10,000,000 and a
revolving line of credit. The maximum amount SPSS may borrow under the revolving
line of credit portion of the facility will depend upon the value of the
Company's eligible accounts receivable generated within the United States. On
April 1, 2003, SPSS paid all of its outstanding obligations to Bank One and
terminated the Bank One line of credit. As of December 31, 2003, the Company has
availability of $2,500,000 under the revolving line of credit.

The terms and conditions of the Wells Fargo Foothill credit facility are
specified in a Loan and Security Agreement, dated as of March 31, 2003, by and
between Wells Fargo Foothill and SPSS. The term loan portion of the facility
bears interest at a rate of 2.5% above prime, with potential future reductions
of up to 0.5% in the interest rate based upon the Company's achievement of
specified EBITDA targets. One component of the revolving line of credit will
bear interest at a rate of prime plus 3.0%. On the remainder of the revolving
line of credit, SPSS may select interest rates of either prime plus 0.25% or
LIBOR plus 2.5% with respect to each advance made by Wells Fargo Foothill. In
May 2003, The Company began paying down evenly the term loan of $10,000,000 over
the four (4) year period (i.e., $2,500,000 per year over the next four years).
As a result of the refinancing, $6,000,000 of the Company's line of credit
borrowings of $8,500,000 that existed as of December 31, 2002 were classified as
long-term.

At December 31, 2003, SPSS had $8,451,000 outstanding under its line of
credit with Wells Fargo Foothill, including $2,500,000 classified as current
notes payable.

The Wells Fargo Foothill facility requires SPSS to meet certain financial
covenants including minimum EBITDA targets and includes additional requirements
concerning, among other things, the Company's ability to incur additional
indebtedness, create liens on assets, make investments, engage in mergers,
acquisitions or consolidations where SPSS is not the surviving entity, sell
assets, engage in certain transactions with affiliates, and amend its
organizational documents or make changes in capital structure. Due to the
restatement, the Company is not in compliance with certain covenants related to
timely delivery of financial statements. In addition, the restatement may have
rendered some representations and warranties inaccurate and may have caused the
Company to fail to satisfy certain covenants. SPSS has obtained all appropriate
waivers from Wells Fargo Foothill. See Note 22 of the "Notes to Consolidated
Financial Statements" for additional information on the effect of this
restatement.

The Wells Fargo Foothill facility is secured by all of the Company's assets
located in the United States.

ShowCase Corporation, a Minnesota corporation and wholly owned subsidiary
of SPSS, and NetGenesis Corp., a Delaware corporation and wholly owned
subsidiary of SPSS, have guaranteed the obligations of SPSS under the Loan and
Security Agreement. This guaranty is secured by all of the assets of ShowCase
and NetGenesis.

On November 4, 2003, SPSS, through SPSS International B.V., its wholly
owned subsidiary, acquired Data Distilleries B.V., a Netherlands-based developer
of analytic applications. The terms and conditions of the acquisition are
specified in a Stock Purchase Agreement, dated as of November 4, 2003, by and
among SPSS, SPSS International B.V. and the owners of all of the issued and
outstanding shares of the capital stock of Data Distilleries. The aggregate
purchase price for all of the issued and outstanding capital stock of Data
Distilleries consists of guaranteed and contingent payments. The guaranteed
portion of the purchase price was paid at closing and consisted of $1.0 million
in cash and 281,830 shares of SPSS common stock valued at $5.31 million for
purposes of this transaction. The contingent portion of the purchase price will
be paid, if at all, at the end of the first and second years following the
closing and may total up to $4.4 million at current approximate exchange rates.
The Company's obligation to make the contingent payments will depend on the
achievement of certain growth targets for license and maintenance revenues from
the Data Distilleries applications. Under the terms of the Stock Purchase
Agreement, SPSS was obligated to file a Registration Statement on Form S-3 to
register the potential resale of the 281,830 shares issued in this transaction.
Because this Annual Report was not timely filed and, therefore, SPSS is not
currently eligible to use Form S-3, SPSS has fulfilled its obligations under the
Stock Purchase Agreement by repurchasing from each former Data Distilleries
shareholder that number of shares of SPSS common stock received by such
shareholder in

31

connection with this transaction. SPSS repurchased all of the previously issued
shares on this transaction at a total cost of $5.4 million.

SPSS intends to fund its future capital needs through operating cash flows
and borrowings on our new credit facility. SPSS anticipates that amounts
available from cash and cash equivalents on hand, under its line of credit, and
cash flows generated from operations, will be sufficient to fund the Company's
operations and capital requirements for the foreseeable future. However, no
assurance can be given that changing business circumstances will not require
additional capital for reasons that are not currently anticipated or that the
necessary additional capital will then be available to SPSS on favorable terms
or at all.

SUMMARY DISCLOSURES ABOUT CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

The following table reflects a summary of the Company's contractual
obligations to make cash payments in future years measured as of December 31,
2003 (in thousands):

INTERNATIONAL OPERATIONS

The Company's international operations remained relatively flat in growth
from 2001 to 2003. Revenues from international operations decreased from 51% to
49% of total net revenues between 2001 and 2002, and were approximately 51% of
total net revenues in 2003. Management believes that, excluding acquisition-
related expenses, the overall profitability of the Company's North American and
international operations are essentially the same.

As international revenues increase, SPSS may experience additional foreign
currency exchange risk. To mitigate these effects, SPSS from time-to-time hedges
its transaction exposure (i.e., the effect on earnings and cash flows of changes
in foreign exchange rates on receivables and payables denominated in foreign
currencies) through the use of foreign currency options. SPSS does not hedge its
foreign currency exposure in a manner that would entirely eliminate the effects
of changes in foreign exchange rates on the Company's consolidated net income.
Accordingly, the Company's reported revenues and net income have been, and in
the future may be affected by, the changes in foreign exchange rates, excluding
acquisition-related expenses. On December 31, 2003, SPSS did not have any option
contracts outstanding.

During 2003, SPSS generated operating income, on a consolidated basis of
$128,000. Of that amount, $1,079,000 of operating income was generated outside
of the United States. Of the non-U.S. income, an operating loss of $2,972,000
was generated in EURO nations and operating gain of $4,805,000 was generated in
GBP nations. The average exchange rate for the currencies of these countries
increased in value to the dollar from 2001 to 2002 by 5.61% and 4.37%, and from
2002 to 2003 by 19.57% and 10.36%, respectively. These increases in average
exchange rates affected the Company's operating income on a year-to-year rate
comparison by approximately $582,000 for EURO nations and $498,000 for GBP
nations.

32

SUMMARY DISCLOSURES REGARDING RELATED PARTIES

Through June 1, 2003, SPSS maintained a consulting agreement with Norman H.
Nie Consulting L.L.C. whereby SPSS received consulting services on various
business related matters. Annual compensation under the agreement was $81,000
plus expenses. Norman Nie is the Chairman of the Board of Directors of SPSS. The
agreement contained automatic one-year extensions unless terminated by either
party. This agreement was terminated during the second fiscal quarter of 2003.

On June 1, 2003, SPSS entered into a consulting agreement with Norman H.
Nie Consulting L.L.C. whereby SPSS receives consulting services on various
business-related matters. Compensation under the agreement is $15,000 per month,
plus expenses, for the period from September 2003 through January 2004. After
January 2004, annual compensation is $10,000 per month plus expenses. Norman Nie
is the Chairman of the Board of Directors of SPSS. The agreement shall continue
until one of the parties sends the other party fifteen day notice that it wishes
to terminate the agreement.

As described in Note 7, SPSS purchased LexiQuest in January 2002. Norman
Nie was the Chairman of the Board of Directors of LexiQuest and owned less than
1% of LexiQuest common stock at the date of the acquisition.

As described in Note 7, SPSS purchased netExs in June 2002. Jonathan
Otterstatter, the Executive Vice President and Chief Technology Officer of SPSS,
was a member of the Board of Managers of netExs. Mr. Otterstatter did not
receive and will not receive any remuneration in connection with this
transaction.

Other related party transactions are identified in Item 13, "Certain
Relationships and Related Transactions."

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The consolidated financial statements of SPSS have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period.

On an on-going basis, management evaluates its estimates and judgments,
including those related to revenue recognition, capitalized software development
costs, and the valuation of accounts receivable, long-lived assets and deferred
income taxes. Management bases its estimates and judgments on historical
experience and on various other factors that are believed to be reasonable under
the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities. Actual results may differ
from these estimates under different assumptions or conditions. Management
believes the following critical accounting policies, among others, affect its
more significant judgments and estimates used in the preparation of its
consolidated financial statements.

REVENUE RECOGNITION

SPSS makes significant judgments related to revenue recognition. For each
arrangement, the Company makes significant judgments regarding the fair value of
multiple elements contained in its arrangements, if its fees are fixed or
determinable, and whether or not the collection of payment is probable. SPSS
also makes significant judgments when accounting for concurrent transactions
with customers and in its accounting for potential product returns. These
judgments and their possible effects on revenue recognition are discussed below.

SPSS primarily recognizes revenue from the following:

- Product licenses. SPSS offers (a) annual licenses with maintenance
renewable annually, (b) perpetual licenses with both annual and
multi-year maintenance, and (c) multi-year licenses with multi-year
maintenance;

33

- Postcontract customer support ("PCS" or "maintenance") agreements which
consist primarily of fees for providing when-and-if-available unspecified
software upgrades and technical support over a specified term;

- Fixed-price service-related arrangements which are primarily comprised of
consulting, implementation services and training;

- Various combinations of the above elements.

- Distribution partners. The Company licenses third-parties to distribute
SPSS products in certain territories internationally or as value-added
resellers worldwide. SPSS records license fees from transactions made by
such distribution partners when these transactions are reported, and the
partners are responsible for providing related maintenance services,
including end-user support and software updates. However, SPSS has post
contract support (PCS) obligations to the customers of its distribution
partners that are implied by its responsibility to provide these partners
with updates of SPSS products when and if developed. Because the Company
cannot establish vendor specific objective evidence (VSOE) of fair value
of these implied maintenance arrangements, the Company recognizes the
related license fees ratably over the terms of the arrangements beginning
when transactions are reported to the Company by its distribution
partners and when all revenue recognition criteria are met. Specific
revenue recognition on distributor partner contracts will be defined by
the terms of the contract as follows:

- Where SPSS defines the price for renewal of maintenance and support in
the contract, such amount represents vendor specific objective evidence
(VSOE) of fair value of maintenance and such amount will be deferred and
recognized ratably over the life of the support contract.

- When SPSS provides direct maintenance and support to the end-user, SPSS
will defer the estimated fair value of the maintenance and support
consistent with direct sales to its customers.

- When neither of the above conditions exist and SPSS must provide free
updates or second tier support to the partner, the revenue from the
contract will be deferred and recognized ratably over the life of the
contract.

- Where no maintenance or support of any kind are required by the contract,
no revenue will be deferred.

- When a reseller has a right to return product stock for updated product
stock (stock swap), SPSS will account this as a right of return in
accordance with FASB Statement 48 and establish a reserve for the
estimated amount of the returns.

Multiple Element Arrangements

SPSS typically enters into arrangements with customers that include
perpetual software licenses, maintenance, and technical support. Some
arrangements may also include consulting and training services. Software
licenses are sold as site licenses or on a per copy basis. Site licenses give
customers the right to copy licensed software on either a limited or unlimited
basis during a specified term. Per copy licenses give customers the right to use
a single copy of licensed software. The Company makes judgments regarding the
fair value of each element in the arrangement and generally accounts for each
element separately.

The Fee is Fixed or Determinable

SPSS makes judgments at the beginning of an arrangement regarding whether
or not the fees are fixed or determinable. The Company's customary payment terms
are generally within 30 days after invoice date. Arrangements with payment terms
extending beyond 90 days after invoice date are not considered fixed or
determinable, in which case revenue is recognized as the fees become due and
payable.

34

Collection is Probable

The Company makes judgments at the beginning of an arrangement regarding
whether or not collection is probable. Probability of collection is assessed on
a case-by-case basis. SPSS typically sells to customer with whom it has a
history of successful collections. New customers may be subject to a credit
review process to assess their financial position and ability to pay. If it is
determined that collection is not probable, then revenue is recognized upon
receipt of payment.

Product Returns

SPSS estimates potential future product returns based on the analysis of
historical return rates and reduce current period revenue accordingly. Actual
returns may vary from estimates if a change from historical sales and returns
patterns occur or if there are unanticipated changes in competitive or economic
conditions that affect actual returns.

Delivery of Software Products

Delivery of the Company's products is a prerequisite to the recognition of
software license revenue. SPSS considers such delivery complete when the
software products have been shipped, the customer has access to license keys,
and shipment is confirmed by a third-party shipping agent. If arrangements
include an acceptance provision, then revenue is recognized upon the earlier of
the receipt of written customer acceptance or, if applicable, the expiration of
the acceptance period.

The Company applies AICPA Statement of Position ("SOP") 97-2 (SOP 97-2),
Software Revenue Recognition, and related interpretations and amendments which
specifies the criteria that must be met prior to SPSS recognizing revenues from
software sales.

SPSS reviews revenue recognition based upon the contract type or
combination of contract types and assesses individual events and changes in
circumstances that could modify recognition of revenue in accordance with SOP
97-2 and related interpretations and amendments. The Company's customary terms
are FOB shipping point. SPSS estimates and records provisions for revenue
returns and allowances in the period the related products are sold based upon
historical experience. To the extent actual results differ from the estimated
amounts, results could be adversely affected. See Note 1 for additional
information regarding Revenue Recognition.

CAPITALIZATION OF CERTAIN SOFTWARE DEVELOPMENT COSTS

Software development costs incurred by SPSS in connection with the
Company's long-term development projects are capitalized in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 86, Accounting for the
Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed. SPSS has
not capitalized software development costs relating to development projects
where the net realizable value is of short duration, as the effect would be
immaterial. SPSS reviews capitalized software development costs each period and,
if necessary, reduces the carrying value of each product to its net realizable
value.

SPSS applies SOP 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use. This standard requires that certain
costs related to the development or purchase of internal-use software be
capitalized and amortized over the estimated useful life of the software. SOP
98-1 also requires that costs related to the preliminary project stage and
post-implementation/operations stage of an internal-use computer software
development project be expensed as incurred. During 2001, 2002 and 2003, SPSS
capitalized $2,024,000, $5,541,000 and $1,109,000, respectively, and amortized
$438,000, $461,000 and $607,000, respectively, of internal-use computer
software.

ACCOUNTS RECEIVABLE

The management of SPSS must make estimates of accounts receivable that will
not be collected. SPSS performs ongoing credit evaluations of its customers and
adjusts credit limits based upon payment history and the customer's credit
worthiness, as determined by the Company's review of their current credit
information.
35

SPSS continuously monitors collections and payments from its customers and
maintains a provision for estimated credit losses based upon historical
experience and any specific customer collection issues that it has identified.
While such credit losses have historically been within management's expectations
and the provisions established, SPSS cannot guarantee that it will continue to
experience the same credit loss rates as in the past. If the financial condition
of SPSS customers were to deteriorate, resulting in an impairment of their
ability to make payments, additional allowances may be required.

IMPAIRMENT OF LONG-LIVED ASSETS

SPSS assesses the impairment of identifiable intangibles, long-lived assets
and goodwill whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. In addition, goodwill must be assessed on
at least an annual basis. Factors SPSS considers important which could trigger
an impairment review include significant underperformance relative to expected
historical or projected future operating results, significant changes in the
manner of use of the acquired assets or the strategy for the Company's overall
business and significant negative industry or economic trends.

When SPSS determines that the carrying value of amortizable intangibles and
long-lived assets may not be recoverable based upon the existence of one or more
of the above indicators of impairment, SPSS would use an estimate of
undiscounted future cash flows that the asset is expected to generate to measure
whether the asset is recoverable over its estimated useful life. If estimated
undiscounted future cash flows are less than the carrying amount of the asset,
the asset is considered impaired and an expense is recorded in an amount
required to reduce the carrying amount of the asset to its then fair value. To
the extent actual business values or cash flows differ from those estimated
amounts, the recoverability of those long-lived assets could be affected.

INCOME TAXES

SPSS recognizes deferred tax assets and liabilities based on the
differences between the financial statement carrying amounts and the tax bases
of assets and liabilities. The Company regularly reviews its deferred tax assets
for recoverability and establishes a valuation allowance based on historical
taxable income, projected future taxable income, and the expected timing of the
reversals of existing temporary differences to reduce its deferred tax assets to
the amount that it believes is more likely than not to be realized. While SPSS
has considered future taxable income and ongoing prudent and feasible tax
planning strategies in assessing the need for the valuation allowance, in the
event the Company were to determine that it would not be able to realize all or
part of its net deferred tax assets in the future, an adjustment to the net
deferred tax assets would be charged to income in the period such determination
was made. Likewise, should SPSS ascertain in the future that it is more likely
than not that deferred tax assets will be realized in excess of the net deferred
tax assets, all or a portion of the $1,814,000 valuation allowance as of
December 31, 2003 would be reversed as a benefit to the provision for income
taxes in the period such determination was made.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 requires the
Company to record the fair value of an asset retirement obligation as a
liability in the period in which it incurs a legal obligation associated with
the retirement of tangible long-lived assets that result from the acquisition,
construction, development, and/or normal use of the assets. The Company also
records a corresponding asset that is depreciated over the life of the asset.
Subsequent to the initial measurement of the asset retirement obligation, the
obligation will be adjusted at the end of each period to reflect the passage of
time and changes in the estimated future cash flows underlying the obligation.
The Company adopted SFAS No. 143 on January 1, 2003. The adoption of SFAS No.
143 did not have a material effect on the Company's consolidated financial
statements.

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4,44 and 64, Amendment to FASB Statement No. 13, and Technical
Corrections.SFAS No. 145 amends existing guidance on reporting gains and losses
on the extinguishments of debt to prohibit the classification of the gain or
loss as

36

extraordinary, as the use of such extinguishments have become part of the risk
management strategy of many companies. SFAS No. 145 also amends SFAS No. 13 to
require sale-leaseback accounting for certain lease modifications that have
economic effects similar to sale-leaseback transactions. The provisions of the
Statement related to the rescission of Statement No. 4 is applied in fiscal
years beginning after May 15, 2002. Earlier application of these provisions is
encouraged. The provisions of the Statement related to Statement No. 13 were
effective for transactions occurring after May 15, 2002, with early application
encouraged. The adoption of SFAS No. 145 did not have a material effect on the
Company's consolidated financial statements.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force Issue (EITF) No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity. The provisions of this Statement require that a liability for costs
associated with an exit or disposal activity be recognized when the liability is
incurred rather than when a company commits to such an activity and also
establishes fair value as the objective for initial measurement of the
liability. The provisions of this Statement are effective for exit or disposal
activities that are initiated after December 31, 2002, with early application
encouraged. The adoption of SFAS No. 146 did not have a material effect on the
Company's consolidated financial statements.

In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others, an interpretation of FASB Statements 5,57,
and 107 and a rescission of FASB Interpretation No. 34. The Interpretation
elaborates on the disclosure to be made by a guarantor in its interim and annual
financial statements about its obligation under guarantees issued. The
Interpretation also clarifies that a guarantor is required to recognize, at the
inception of a guarantee, a liability for the fair value of the obligation
undertaken. The initial recognition and measurement provisions of the
Interpretation are applicable to guarantees issued or modified after December
31, 2002 and did not have a material effect on the Company's consolidated
financial statements. The disclosure requirements are effective for financial
statements of interim and annual periods ending after December 15, 2002.

In November 2002, the FASB reached a consensus on EITF Issue 00-21,
"Accounting for Revenue Arrangements with Multiple Deliverables" (the Issue).
The guidance in this Issue is effective for revenue arrangements entered into
for fiscal periods beginning after June 15, 2003. The Issue addresses certain
aspects of the accounting by a vendor for arrangements under which it will
perform multiple revenue-generating activities. Specifically, the Issue
addresses how to determine whether an arrangement involving multiple
deliverables contains more than one earnings process and, if it does, how to
divide the arrangement into separate units of accounting consistent with the
identified earnings processes for revenue recognition purposes. The Issue also
addresses how arrangement consideration should be measured and allocated to the
separate units of accounting in the arrangement. The adoption of this Issue did
not have a material effect on the Company's consolidated financial statements.

In December 2002, the FASB issued SFAS No. 148 (SFAS 148), Accounting for
Stock-based Compensation -- Transition and Disclosure, an Amendment to FASB
Statement No. 123. This Statement amends FASB Statement No. 123, Accounting for
Stock-based Compensation, to provide alternative methods of transition for a
voluntary change to the fair value method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirements of
Statement No. 123 to require prominent disclosure in both annual and interim
financial statements. Certain of the disclosure modifications are required for
fiscal years ending after December 15, 2002 and are included in the notes to the
consolidated financial statements.

In December 2003, the FASB issued Interpretation No. 46R (revised December
2003), Consolidation of Variable Interest Entities (FIN 46R or the
Interpretation), which addresses how a business enterprise should evaluate
whether it has a controlling financial interest in an entity through means other
than voting rights and accordingly should consolidate the entity. The
Interpretation replaces FASB Interpretation No. 46, Consolidation of Variable
Interest Entities (FIN 46), which was issued in January 2003. The Interpretation
is an effort to expand upon and strengthen existing accounting guidance as to
when a company should consolidate

37

the financial results of another entity. Interpretation 46R requires "variable
interest entities" as defined to be consolidated by a company if that company is
subject to a majority of expected losses of the entity or is entitled to receive
a majority of expected residual returns of the entity, or both. The company that
is required to consolidate a variable interest entity is referred to as the
entity's primary beneficiary. The Interpretation also requires certain
disclosures about variable interest entities that a company is not required to
consolidate, but in which it has a significant variable interest. The
consolidation and disclosure requirements apply immediately to variable interest
entities created after January 31, 2003. For all variable interest entities
created prior to February 1, 2003, FIN 46R is effective for periods ending after
March 15, 2004, except for entities that are considered Special Purpose
Entities, to which the provisions apply as of December 31, 2003. The Company is
not the primary beneficiary of any variable interest entities created after
February 1, 2003, nor does the Company expect the final adoption of FIN 46R to
have a material impact on its financial position or results of operations.

In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS No. 149 amends and clarifies
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities under Statement 133. The
new Statement amends Statement 133 for decisions made: 1) as part of the
Derivatives Implementation Group process that effectively required amendments to
Statement 133; 2) in connection with other Board projects dealing with financial
instruments; and 3) regarding implementation issues raised in relation to the
application of the definition of a derivative, particularly regarding the
meaning of an "underlying" and the characteristics of a derivative that contain
financing components. The statement is generally effective for contracts entered
into or modified after June 30, 2003 and is to be applied prospectively. The
implementation of SFAS No. 149 did not have a material impact on the Company's
consolidated financial position and results of operations as of and for the year
ended December 31, 2003.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
No. 150 applies specifically to a number of financial instruments that companies
have historically presented within their financial statements either as equity
or between the liabilities section and the equity section, rather than as
liabilities. SFAS 150 is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective as of January 1, 2004,
except for mandatorily redeemable financial instruments. For certain mandatorily
redeemable financial instruments, SFAS 150 will be effective on January 1, 2005.
The effective date has been deferred indefinitely for certain other types of
mandatorily redeemable financial instruments. The implementation of SFAS No. 150
on July 1, 2003 resulted in the Company reclassifying certain common stock
subject to repurchase as permanent equity and certain liabilities related to put
obligations for the common stock to liabilities.

FACTORS THAT MAY AFFECT FUTURE RESULTS

SPSS has been named as a defendant in a lawsuit filed on or about May 14,
2004 in the United States District Court for the Northern District of Illinois,
under the caption Fred Davis, Individually and On Behalf of All Others Similarly
Situated v. SPSS Inc., Jack Noonan and Edward Hamburg, Case No. 04C3427. The
complaint alleges that the defendants violated Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder. The
complaint alleges that the defendants failed to disclose and misrepresented a
series of material adverse facts regarding the Company's revenues. The complaint
seeks to recover unspecified compensatory damages, reasonable attorney fees,
experts' witness fees and other costs and any other relief deemed proper by the
court on behalf of all purchasers of the Company's securities between May 2,
2001 and March 30, 2004, although no court has determined that such persons
constitute a proper class. Neither SPSS nor the individual defendants have
responded to the complaint as of the date of this filing. SPSS and the other
defendants believe that the suit is without merit and intend to defend
vigorously against the allegations contained in the complaint. Nevertheless, the
lawsuit could require significant management time and attention and could result
in significant legal expenses. An unfavorable outcome could have a material
effect on the Company's business, financial condition, results of operations and
cash flows.

38

SPSS received notification from The Nasdaq Stock market that our securities
may be delisted if it is unable to comply with certain filing deadlines, which
delisting could materially and adversely affect the liquidity and trading price
of its common stock.

On April 1, 2004, SPSS received a Nasdaq Staff Determination relating to
the Company's failure to file its Annual Report on Form 10-K for fiscal year
2003 with the SEC on or before the March 30, 2004 filing deadline. On June 7,
2004, SPSS received an additional notice from the Nasdaq indicating its failure
to file its Quarterly Report on Form 10-Q for the fiscal quarter ended March 31,
2004 with the SEC on or before the May 10, 2004 filing deadline. These notices
informed the Company that it had failed to comply with the filing requirements
for continued listing set forth in Marketplace Rule 4310(c)(14), and that its
common stock is, therefore, subject to delisting from the Nasdaq National
Market. Since the date of these notices, the Company has received correspondence
from the Nasdaq granting SPSS extensions of time to file its periodic reports.
On July 28, 2004, the Company was informed by Nasdaq that its securities will be
delisted effective at the open of business on August 2, 2004. Because SPSS has
filed its required financial statements prior to that date, SPSS has asked
Nasdaq to reconsider and rescind the order directing the delisting of the
Company's common stock.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is exposed to market risk from fluctuations in interest rates
on borrowings under its borrowing arrangement that bears interest at either the
prime rate or the Eurodollar rate. As of December 31, 2003, the Company had
$8,451,000 outstanding under this borrowing arrangement. A 100 basis point
increase in interest rates would result in an additional $85,000 of annual
interest expense, assuming the same level of borrowing.

The Company is exposed to market risk from fluctuations in foreign currency
exchange rates. Since a substantial portion of the Company's operations and
revenue occur outside the United States, and in currencies other than the U.S.
dollar, the Company's results can be significantly affected by changes in
foreign currency exchange rates. To manage its exposure to fluctuations to
currency exchange rates, the Company may enter into various financial
instruments, such as options. These instruments generally mature within 12
months. Gains and losses on these instruments are recognized in other income or
expense. Were the foreign currency exchange rates to depreciate immediately and
uniformly against the dollar by 10 percent from levels at December 31, 2003, the
reported cash balance would decrease $2.5 million, or 6.6 percent, and net
assets would decrease $1.7 million, or 1.2 percent The effect on revenues would
also be expected to have a material adverse effect on the Company's financial
results. On December 31, 2003, the Company did not have any option contracts
outstanding.

Historically, the Company's derivative instruments did not qualify for
hedge accounting treatment under FAS No. 133. Accordingly, gains and losses
related to changes in the fair value of these instruments were recognized in
income in each financial reporting period.

39

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

SPSS INC. AND SUBSIDIARIES

INDEX

Schedules not filed:

All schedules other than that indicated in the index have been omitted as the
required information is inapplicable or the information is presented in the
consolidated financial statements or related notes.

40

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders
SPSS Inc.:

We have audited the accompanying consolidated balance sheets of SPSS Inc.
and subsidiaries (the "Company") as of December 31, 2002 and 2003 and the
related consolidated statements of operations, comprehensive income (loss),
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 2003. In connection with our audits of the
consolidated financial statements, we also have audited the consolidated
financial statement schedule as listed in the accompanying index. These
consolidated financial statements and the consolidated financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial statements and
consolidated financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of SPSS Inc.
and subsidiaries as of December 31, 2002 and 2003, and the results of their
operations, and their cash flows for each of the years in the three-year period
ended December 31, 2003, in conformity with U.S. generally accepted accounting
principles. Also in our opinion, the related consolidated financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.

As discussed in Note 22 to the consolidated financial statements, the
Company has restated its financial statements as of and for each of the years in
the two-year period ended December 31, 2002. As discussed in Note 1 to the
consolidated financial statements, effective January 1, 2002, the Company
changed its method of accounting for goodwill and other intangible assets upon
adoption of Statement of Financial Accounting Standards (SFAS) No. 142,
"Goodwill and Other Intangible Assets" and, effective July 1, 2003, the Company
adopted SFAS No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity."

/s/ KPMG LLP

Chicago, Illinois
July 23, 2004

41

SPSS INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

The accompanying notes are an integral part of these consolidated financial
statements.
42

SPSS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

The accompanying notes are an integral part of these consolidated financial
statements.
43

SPSS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS)

The accompanying notes are an integral part of these consolidated financial
statements.
44

SPSS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)

The accompanying notes are an integral part of these consolidated financial
statements.
45

SPSS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

The accompanying notes are an integral part of these consolidated financial
statements.
46

SPSS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BUSINESS

SPSS Inc., a Delaware corporation ("SPSS" or the "Company"), was
incorporated in Illinois in 1975 under the name SPSS, Inc. and was
reincorporated in Delaware in May 1993 under the name "SPSS Inc." SPSS is a
global provider of predictive analytics technology and services.

The Company's offerings use predictive analytics to connect data to
effective action by drawing reliable conclusions about current conditions and
future events. Predictive analytics leverages an organization's business
knowledge by applying sophisticated analytic techniques to enterprise data. The
insights gained through the use of these techniques can lead to improved
business processes that increase revenues, reduce costs, and prevent fraudulent
activities.

Effective in the first quarter of 2003, SPSS began reporting revenues in
three categories used by most enterprise software companies:

- License fees, representing new sales of the Company's tools,
applications, and components on a perpetual, annual, or ASP (applications
services provider) basis;

- Maintenance, representing recurring revenues recognized by the Company
from renewals of maintenance agreements associated with perpetual
licenses or renewals of annual licenses; and

- Services, representing revenues recognized from professional services
engagements, training, and other activities such as publication sales and
providing respondents to online surveys.

SPSS has reclassified prior period revenue to conform to this new reporting
classification.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of SPSS Inc. and
its wholly owned subsidiaries. Significant intercompany accounts and
transactions have been eliminated. In addition, the consolidated financial
statements include the operating results of Illumitek, Inc., a 50% owned joint
venture, from October 1, 2001 through date of liquidation (see Note 8).

The translation of the applicable foreign currencies into U.S. dollars is
performed for balance sheet accounts using current exchange rates in effect at
the balance sheet date and for revenue and expense accounts using the weighted
average exchange rates during the period. The gains or losses resulting from
such translation are included in stockholders' equity. Gains or losses resulting
from foreign currency transactions are included in "other income and expense" in
the consolidated statements of operations.

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and judgments that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities, and
reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates. The principal areas of estimation in
the financial statements include revenue recognition, capitalization of software
development costs, impairment of long-lived assets, credit losses on accounts
receivable, income taxes, contingencies and litigation.

47

SPSS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

REVENUE RECOGNITION

The Company applies AICPA Statement of Position ("SOP") 97-2, Software
Revenue Recognition, which establishes the criteria that must be met prior to
SPSS recognizing revenues from software sales.

The Company's policy is to record revenue only when these criteria are met:

(1) Persuasive evidence of an arrangement exists -- SPSS and the
customer have executed a written agreement, contract or other evidence of
an arrangement.

(2) Delivery has occurred -- Product has been shipped or delivered to
customer, depending on the applicable terms. The Company's standard
contract does not contain acceptance clauses. In the event that SPSS
modifies the terms of its standard contract to provide that final delivery
is contingent upon the customer accepting the applicable product, SPSS does
not recognize revenue for that product until the customer has accepted the
product.

(3) The vendor's fee is fixed or determinable -- The arrangement
indicates the price of the license and the number of users, and the related
payment terms are within one year of delivery of the software.

(4) Collectibility is probable -- SPSS sells to customers it deems
creditworthy. Standard terms for payment are 30 days. SPSS periodically
extends payment terms to three to six months, but does not extend payment
terms past one year. Any terms beyond standard are generally still
collectible and are generally offered in larger transactions with more
creditworthy customers.

SPSS primarily recognizes revenue from product licenses, net of an
allowance for estimated returns and cancellations, at the time the software is
shipped. Revenue from certain product license agreements is recognized upon
contract execution, product delivery, and customer acceptance.

The Company's customary terms are FOB shipping point. SPSS estimates and
records provisions for revenue returns and allowances in the period the related
products are sold, based upon historical experience.

Revenue from postcontract customer support ("PCS" or "maintenance")
agreements, including PCS bundled with product licenses, is recognized ratably
over the term of the related PCS agreements. Maintenance revenues consist
primarily of fees for providing when-and-if-available unspecified software
upgrades and technical support over a specified term. Maintenance revenues are
recognized on a straight-line basis over the term of the contract. Some product
licenses include commitments for insignificant obligations, such as technical
and other support, for which an accrual is provided.

Distribution partners: The Company licenses third-parties to distribute
SPSS products in certain territories internationally or as value-added resellers
worldwide. SPSS records license fees from transactions made by such distribution
partners when these transactions are reported, and the partners are responsible
for providing related maintenance services, including end-user support and
software updates. However, SPSS has post contract support (PCS) obligations to
the customers of its distribution partners that are implied by its
responsibility to provide these partners with updates of SPSS products when and
if developed. Because the Company cannot establish vendor specific objective
evidence (VSOE) of fair value of these implied maintenance arrangements, the
Company recognizes the related license fees ratably over the terms of the
arrangements beginning when transactions are reported to the Company by its
distribution partners and when all revenue recognition criteria are met.
Specific revenue recognition on distributor partner contracts will be defined by
the terms of the contract as follows:

- Where SPSS defines the price for renewal of maintenance and support in
the contract, such amount represents vendor specific objective evidence
(VSOE) of fair value of maintenance and such amount will be deferred and
recognized ratably over the life of the support contract.

48

SPSS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

- When SPSS provides direct maintenance and support to the end-user, SPSS
will defer the estimated fair value of the maintenance and support
consistent with direct sales to its customers.

- When neither of the above conditions exist and SPSS must provide free
updates or second tier support to the partner, the revenue from the
contract will be deferred and recognized ratably over the life of the
contract.

- Where no maintenance or support of any kind are required by the contract,
no revenue will be deferred.

- When a reseller has a right to return product stock for updated product
stock (stock swap), SPSS will account this as a right of return in
accordance with FASB Statement 48 and establish a reserve for the
estimated amount of the returns.

Revenues from fixed-price contracts are recognized using the
percentage-of-completion method, under SOP 81-1, Accounting for Performance of
Construction-Type and Certain Production-Type Contracts, of contract accounting
as services are performed to develop, customize and install the Company's
software products. The percentage completed is measured by the percentage of
labor hours incurred to date in relation to estimated total labor hours for each
contract. Management considers labor hours to be the best available measure of
progress on these contracts.

SPSS enters into arrangements which may consist of the sale of: (a)
licenses of the Company's software, (b) professional services and maintenance or
(c) various combinations of each element. Revenues are recognized based on the
residual method under SOP 98-9, Modification of SOP 97-2 Software Revenue
Recognition, when an agreement has been signed by both parties, delivery of the
product has occurred, the fees are fixed or determinable, collection of the fees
is probable and no other significant obligations remain. Historically, the
Company has not experienced significant returns or offered exchanges of its
products.

For multiple element arrangements, each element of the arrangement is
analyzed and SPSS allocates a portion of the total fee under the arrangement to
the undelivered elements, such as professional services, training and
maintenance based on vendor-specific objective evidence of fair value. Revenues
allocated to the undelivered elements are deferred using vendor-specific
objective evidence of fair value of the elements and the remaining portion of
the fee is allocated to the delivered elements (generally the software license),
under the residual method. Vendor-specific objective evidence of fair value is
based on the price the customer is required to pay when the element is sold
separately (i.e., hourly time and material rates charged for consulting services
when sold separately from a software license and the optional renewal rates
charged by the Company for maintenance arrangements).

If an element of the license agreement has not been delivered, revenue for
the element is deferred based on its vendor-specific objective evidence of fair
value. If vendor-specific objective evidence of fair value does not exist, all
revenue is deferred until sufficient objective evidence exists or all elements
have been delivered. If the fee due from the customer is not fixed or
determinable, revenue is recognized as payments become due. If collectibility is
not considered probable, revenue is recognized when the fee is collected.

Amounts allocated to license revenues under the residual method are
recognized at the time of delivery of the software when vendor-specific
objective evidence of fair value exists for the undelivered elements, if any,
and all the other revenue recognition criteria discussed above have been met.

Revenues from professional services are comprised of consulting,
implementation services and training. Consulting services are generally sold on
a time-and-materials basis and include services to assist in new implementations
or configure existing applications to vertical industry and customer
requirements. SPSS consultants also help organizations to develop plans that
align analytical efforts with organizational goals, assist with the collection
and structuring of data for analysis, and facilitate the building of predictive
analytical models. Services are generally separable from the other elements
under the arrangement since the performance of the services is not essential to
the functionality (i.e., the services do not involve significant production,

49

SPSS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

modification or customization of the software or building complex interfaces) of
any other element of the transaction. Revenues for professional services and
training are recognized when the services are performed.

SPSS offers: (a) annual licenses with maintenance renewable annually, (b)
perpetual licenses with both annual and multi-year maintenance, and (c)
multi-year licenses with multi-year maintenance. Vendor-specific objective
evidence of fair value of maintenance does not exist for annual licenses with
one year of maintenance. For perpetual license arrangements with one year of
maintenance, vendor-specific objective evidence of fair value is established
based on the stated renewal rate of maintenance (which is a set percentage of
the total contract price, in accordance with AICPA Technical Practice Aid (TPA)
5100.55, Fair Value of PCS with a Consistent Renewal Percentage, But Varying
Dollar Amounts, and Software Revenue Recognition). Vendor-specific objective
evidence of fair value of maintenance is not determinable for perpetual and
multi-year arrangements with multi-year maintenance in certain countries where
SPSS operates.

SPSS licenses software, primarily to end users, on a perpetual basis and on
an annual and multi-year basis. Under a perpetual license, the customer is
granted an indefinite right to use the software. SPSS has a 60-day return policy
for these types of licenses and the Company calculates its return allowance
using a 12-month rolling average based on actual returns during the prior 12
months. Under an annual license, the customer is granted the right to use the
software for one year and may not return or cancel during the first year.

For each type of license, postcontract customer support (maintenance) is
offered. Under perpetual licenses, it is the customer's option to renew
maintenance each year. Under an annual license, the customer must renew the
license and maintenance to continue to use the software. In both cases, SPSS
contacts the customer two months before the scheduled renewal date to determine
the customer's renewal intentions. If the customer indicates that it intends to
renew the license, the Company will issue a new invoice. In some cases,
customers ultimately cancel a license even though they initially indicated a
willingness to renew. These cancellations are tracked in a 12-month rolling
average to determine the cancellation percentage that SPSS will accrue as its
cancellation allowance.

During 2001, the Company concurrently purchased software licenses from and
sold software licenses to several customers. SPSS uses the purchased technology
internally and had the ability to determine the fair value of the licenses sold.
The Company recorded revenues of $2,680 during 2001 related to these sales. In
2002, SPSS concurrently sold software to and purchased software from one
customer. The Company recorded revenues of $42 in 2002 related to this sale and
the purchased software was to be sold in the ordinary course of business and was
recorded at its carryover basis. SPSS did not enter into any concurrent
purchases of software licenses in 2003.

ADVERTISING EXPENSES

Advertising expenses are charged to operations during the year in which
they are incurred. The total amount of advertising expenses charged to
operations was $2,565, $2,605 and $2,575 for the years ended December 31, 2001,
2002 and 2003, respectively.

EARNINGS PER SHARE

Earnings per common share (EPS) are computed by dividing net income (loss)
by the weighted average number of shares of common stock (basic) plus common
stock equivalents outstanding (diluted) during the period. Common stock
equivalents consist of contingently issuable shares and stock options, which
have been

50

SPSS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

included in the calculation of weighted average shares outstanding using the
treasury stock method. Basic weighted average shares reconciles to diluted
weighted average shares as follows:

Had SPSS recorded net income during 2001 and 2002, 201 and 37 stock options
and contingently issuable shares would have been included in the calculation of
diluted weighted-average common shares outstanding, respectively. Anti-dilutive
shares not included in the diluted EPS calculation for 2001, 2002 and 2003 were
1,124, 1,751, and 1,411, respectively.

DEPRECIATION AND AMORTIZATION

Depreciation is recorded using the straight-line method. The estimated
useful lives used in the computation of depreciation of tangible assets are as
follows:

Buildings................................ 30 years
Furniture and office equipment........... 3-8 years
Computer equipment and software.......... 3-5 years
Leasehold improvements................... 3-15 years or lease term if shorter

Capitalized software costs are amortized on a straight-line method over
three to five years based upon the expected life of each product. The
straight-line method is utilized as it results in amortization expense of at
least the amount that would be provided by the ratio of annual product revenue
to total product revenue over the remaining useful life of the products.
Identifiable intangible assets are amortized over their estimated useful lives
using the straight-line method. Goodwill was previously amortized over a period
of 10 to 15 years for periods prior to 2002 (see Note 5).

SOFTWARE DEVELOPMENT COSTS

Software development costs incurred by SPSS in connection with the
Company's long-term development projects are capitalized in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 86, Accounting for the
Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed. SPSS has
not capitalized software development costs relating to development projects
where the net realizable value is of short duration, as the effect would be
immaterial. Product enhancement costs are capitalized when technological
feasibility has been established. SPSS reviews capitalized software development
costs each period and, if necessary, reduces the carrying value of each product
to its net realizable value. See additional discussion at Note 4.

SPSS applies Statement of Position ("SOP") 98-1, Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use. This standard
requires that certain costs related to the development or purchase of
internal-use software be capitalized and amortized over the estimated useful
life of the software. SOP 98-1 also requires that costs related to the
preliminary project stage and post-implementation/operations stage of an
internal-use computer software development project be expensed as incurred.

STOCK OPTION PLANS

The Company maintains one active stock incentive plan that is flexible and
allows various forms of equity incentives to be issued under it. See Note 17 for
additional information regarding this plan. The Company accounts for this plan
under the recognition and measurement principles of Accounting Principles Board

51

SPSS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Opinion ("APB") No. 25, Accounting for Stock Issued to Employees, and related
interpretations. In prior years, the Company has recognized compensation cost
for restricted stock and restricted stock units issued to employees. No
compensation is recognized for stock option grants to employees. All options
granted under the Company plan had an exercise price equal to the market value
of the underlying common stock on the date of grant. The following table
illustrates the effects on net income (loss) and income (loss) per share if the
Company had applied the fair value recognition provisions of Financial
Accounting Standards Board (FASB) Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for Stock-Based Compensation, to stock-based
compensation. The following table also provides the amount of stock-based
compensation cost included in net income (loss) as reported.

Under the stock option plans, the exercise price of each option equals the
market value of the Company's stock on the date of grant. For purposes of
calculating the compensation costs consistent with SFAS No. 123, the fair value
of each grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions used for
grants in fiscal 2001, 2002 and 2003, respectively: no expected dividend yield;
expected volatility of 37 percent in 2001, 37 percent in 2002 and 39 percent in
2003; risk-free interest rates ranging from 4.56%-5.27%, 3.72%-5.20% and
3.53%-4.49%, respectively, and expected lives of 4-8 years.

The weighted average fair value of options granted during 2001, 2002, and
2003 was $9.60, $8.10 and $7.67, respectively.

GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill represents the excess of the purchase price of net tangible and
identifiable intangible assets acquired in business combinations over their
estimated fair value. Other intangibles mainly represent customer relationships
and trademarks acquired in business combinations. In January 1, 2002, the
Company adopted SFAS No. 142, Goodwill and Other Intangible Assets, which
required that goodwill and intangible assets with indefinite useful lives no
longer be amortized but instead tested for impairment at least annually in
accordance with the provisions of SFAS No. 142. As result, the Company no longer
amortizes goodwill but will test it for impairment annually or whenever events
or changes in circumstances suggest that the carrying amount may

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SPSS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

not be recoverable. Identifiable intangibles are amortized over a seven to ten
year period using the straight-line method. See additional discussion at Note 5
and Note 7.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents are comprised of highly liquid investments with
original maturity dates of three months or less.

INVENTORIES

Inventories, consisting of finished goods, are stated at the lower of cost
or market. Cost is determined using the first-in, first-out method.

PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS

Property, equipment and leasehold improvements are stated at cost.

RESTRICTED CASH

Restricted cash consists of deposits held at major financial institutions
as collateral for letters of credit that secure the Company's office leases and
leases of certain of the Company's fixed assets.

IMPAIRMENT OF GOODWILL

SPSS reviews its goodwill and intangible assets with indefinite useful
lives for impairment at least annually in accordance with the provisions of SFAS
No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 requires the Company
the perform the goodwill impairment test annually or when a change in facts and
circumstances indicate that the fair value of an asset may be below its carrying
amount. SPSS completed this test in the fourth quarter of 2002 and 2003 and no
impairment loss was recognized upon completion of these tests.

LONG-LIVED ASSETS

Long-lived assets to be held and used are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount should be
evaluated. Factors leading to impairment include a combination of significant
underperformance relative to expected historical or projected future operating
results, significant changes in the manner of use of the acquired assets or the
strategy for the Company's overall business and significant negative industry or
economic trends. The assessment of recoverability is based on management's
estimate. Impairment is measured by comparing the carrying value to the
estimated and undiscounted future cash flows expected to result from the use of
the assets and their eventual disposition.

RECLASSIFICATIONS

Where appropriate, some items relating to the prior years have been
reclassified to conform to the presentation in the current year.

INCOME TAXES

SPSS applies the asset and liability method of accounting for income taxes
in which deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 requires the
Company to record the fair value of an asset retirement obligation as a
liability in the period in which it incurs a legal obligation associated with
the retirement of tangible long-lived assets that results from the acquisition,
construction, development, and/or normal use of the assets. The Company also
records a corresponding asset that is depreciated over the life of the asset.
Subsequent to the initial measurement of the asset retirement obligation, the
obligation will be adjusted at the end of each period to reflect the passage of
time and changes in the estimated future cash flows underlying the obligation.
The Company was required to adopt SFAS No. 143 on January 1, 2003. The adoption
of SFAS No. 143 did not have a material effect on the Company's financial
statements.

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44 and 64, Amendment to FASB Statement No. 13, and Technical
Corrections. SFAS No. 145 amends existing guidance on reporting gains and
losses on the extinguishments of debt to prohibit the classification of the gain
or loss as extraordinary, as the use of such extinguishments have become part of
the risk management strategy of many companies. SFAS No. 145 also amends SFAS
No. 13, Accounting for Leases, to require sale-leaseback accounting for certain
lease modifications that have economic effects similar to sale-leaseback
transactions. The provisions of the Statement related to the rescission of
Statement No. 4 was applicable beginning January 1, 2003. The provisions of the
Statement related to Statement No. 13 were effective for transactions occurring
after May 15, 2002, with early application encouraged. The adoption of SFAS No.
145 did not have a material effect on the Company's consolidated financial
statements.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force Issue (EITF) No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity. The provisions of this Statement require that a liability for costs
associated with an exit or disposal activity be recognized when the liability is
incurred rather than when a company commits to such an activity and also
establishes fair value as the objective for initial measurement of the
liability. The provisions of this Statement are effective for exit or disposal
activities that are initiated after December 31, 2002, with early application
encouraged. The adoption of SFAS No. 146 did not have a material effect on the
Company's consolidated financial statements.

In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others, an interpretation of FASB Statements 5,
57, and 107 and a rescission of FASB Interpretation No. 34. The Interpretation
elaborates on the disclosure to be made by a guarantor in its interim and annual
financial statements about its obligation under guarantees issued. The
Interpretation also clarifies that a guarantor is required to recognize, at the
inception of a guarantee, a liability for the fair value of the obligation
undertaken. The initial recognition and measurement provisions of the
Interpretation are applicable to guarantees issued or modified after December
31, 2002 and did not have a material effect on the Company's consolidated
financial statements. The disclosure requirements are effective for financial
statements of interim and annual periods ending after December 15, 2002.

In November 2002, the FASB reached a consensus on EITF Issue 00-21,
Accounting for Revenue Arrangements with Multiple Deliverables (the Issue). The
guidance in this Issue is effective for revenue arrangements entered into for
fiscal periods beginning after June 15, 2003. The Issue addresses certain
aspects of the accounting by a vendor for arrangements under which it will
perform multiple revenue-generating activities. Specifically, the Issue
addresses how to determine whether an arrangement involving multiple

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SPSS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

deliverables contains more than one earnings process and, if it does, how to
divide the arrangement into separate units of accounting consistent with the
identified earnings processes for revenue recognition purposes. The Issue also
addresses how arrangement consideration should be measured and allocated to the
separate units of accounting in the arrangement. The adoption of this Issue did
not have a material effect on the Company's consolidated financial statements.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-based
Compensation -- Transition and Disclosure, an Amendment to FASB Statement No.
123. This Statement amends SFAS No. 123, Accounting for Stock-based
Compensation, to provide alternative methods of transition for a voluntary
change to the fair value method of accounting for stock-based employee
compensation. The Company decided not to change to the fair value method of
accounting. In addition, this Statement amends the disclosure requirements of
SFAS No. 123 to require prominent disclosure in both annual and interim
financial statements. Certain of the disclosure modifications are required for
fiscal years ending after December 15, 2002 and are included in the notes to
these consolidated financial statements.

In December 2003, the FASB issued Interpretation No. 46R (revised December
2003), Consolidation of Variable Interest Entities (FIN 46R or the
Interpretation), which addresses how a business enterprise should evaluate
whether it has a controlling financial interest in an entity through means other
than voting rights and accordingly should consolidate the entity. The
Interpretation replaces FASB Interpretation No. 46, Consolidation of Variable
Interest Entities (FIN 46), which was issued in January 2003. The Interpretation
is an effort to expand upon and strengthen existing accounting guidance as to
when a company should consolidate the financial results of another entity.
Interpretation 46R requires "variable interest entities" as defined to be
consolidated by a company if that company is subject to a majority of expected
losses of the entity or is entitled to receive a majority of expected residual
returns of the entity, or both. The company that is required to consolidate a
variable interest entity is referred to as the entity's primary beneficiary. The
Interpretation also requires certain disclosures about variable interest
entities that a company is not required to consolidate, but in which it has a
significant variable interest. The consolidation and disclosure requirements
apply immediately to variable interest entities created after January 31, 2003.
For all variable interest entities created prior to February 1, 2003, FIN 46R is
effective for periods ending after March 15, 2004, except for entities that are
considered Special Purpose Entities, to which the provisions apply as of
December 31, 2003. The Company is not the primary beneficiary of any variable
interest entities created after February 1, 2003, nor does the Company expect
the final adoption of FIN 46R to have a material impact on its financial
position or results of operations.

In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS No. 149 amends and clarifies
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities under Statement 133. The
new Statement amends Statement 133 for decisions made: 1) as part of the
Derivatives Implementation Group process that effectively required amendments to
Statement 133; 2) in connection with other Board projects dealing with financial
instruments; and 3) regarding implementation issues raised in relation to the
application of the definition of a derivative, particularly regarding the
meaning of an "underlying" and the characteristics of a derivative that contain
financing components. The Statement is generally effective for contracts entered
into or modified after June 30, 2003 and is to be applied prospectively. The
implementation of SFAS No. 149 did not have a material impact on the Company's
consolidated financial position and results of operations as of and for the year
ended December 31, 2003.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
No. 150 applies specifically to a number of financial instruments that companies
have historically presented within their financial statements either as equity
or between the liabilities section and the equity section, rather than

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SPSS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

as liabilities. SFAS 150 is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective as of January 1, 2004,
except for mandatorily redeemable financial instruments. For certain mandatorily
redeemable financial instruments, SFAS 150 will be effective on January 1, 2005.
The effective date has been deferred indefinitely for certain other types of
mandatorily redeemable financial instruments. The implementation of SFAS No. 150
applies to the Company's October 22, 2001 agreement with America Online, Inc.,
and its November 4, 2003 agreement with Data Distilleries B.V. Both agreements
included clauses relating to puttable share options that have resulted in the
presentation of this "Common Stock Subject to Repurchase" as temporary
shareholders' equity on the consolidated balance sheet. See Note 7.

(2) DOMESTIC AND FOREIGN OPERATIONS

The net assets, net revenues and net income of international subsidiaries
as of and for the years ended December 31, 2001, 2002 and 2003 included in the
consolidated financial statements are summarized as follows:

Net revenues per geographic region, attributed to countries based upon
point of sale, are summarized as follows:

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SPSS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Long-lived assets, excluding restricted cash and long-term deferred tax
assets, per geographic region are summarized as follows:

(3) PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS

Property, equipment and leasehold improvements consist of the following at
December 31:

During 2001, 2002 and 2003, SPSS capitalized $2,024, $5,541 and $1,109,
respectively, and amortized $438, $461 and $607, respectively, of internal-use
computer software.

SPSS purchased Siebel technology in June 2001 as part of its effort to
replace current systems for sales force automation and technical support. An
important consideration in this purchase was the designation by Siebel of SPSS
as a Strategic Software Partner in the Siebel Alliance Program. During 2003,
SPSS terminated its Siebel CRM implementation due to difficulties with the
architecture of the Siebel technology, its high projected costs of
implementation and ownership, and the termination in October 2003 of the
strategic partnership. As a result, the Company in December 2003 wrote off
approximately $4,447 of internal use computer software related to the
termination of its Siebel CRM implementation. SPSS is currently implementing
sales force automation software provided by Salesforce.com.

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SPSS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(4) SOFTWARE DEVELOPMENT COSTS AND PURCHASED SOFTWARE

Activity in capitalized software is summarized as follows:

The components of net capitalized software are summarized as follows:

Total software development expenditures, including amounts expensed as
incurred, amounted to approximately $50,847, $52,693, and $53,777 for the years
ended December 31, 2001, 2002 and 2003, respectively.

Included in acquired software technology at December 31, 2002 and 2003 is
$1,916 and $1,368, respectively, of technology, net of accumulated amortization,
resulting from the merger with NetGenesis Corp. and the acquisition of AOL/DMS
technology (see Note 7) and the investment in Illumitek (see Note 8). The
AOL/DMS and Illumitek technologies, net of accumulated amortization, were
written off in 2002. The amounts written off were $1,600 and $784, respectively.
The technology acquired in the AOL transaction was written off as it was
replaced with SPSS software. Also included in acquired software technology at
December 31, 2002 and 2003 is $864 and $661, respectively, of technology
resulting from the purchase of LexiQuest and netExs, both of which occurred in
2002 (see Note 7).

During 2003, the Company wrote off $1,965 of net capitalized software
technology to net realizable value. Additionally, the Company wrote off $589 of
net capitalized software technology made redundant with the acquisition of Data
Distilleries, B.V.

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SPSS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(5) GOODWILL AND INTANGIBLE ASSETS

On January 1, 2002, the Company implemented SFAS No. 142, Goodwill and
Other Intangible Assets. Under the provisions of SFAS No. 142, goodwill is no
longer subject to amortization over its estimated useful life but instead is
subject to at least annual assessments for impairment by applying a fair-value
based test. SFAS No. 142 also requires that an acquired intangible asset be
separately recognized if the benefit of the intangible asset is obtained through
contractual or other legal rights, or if the asset can be sold, transferred,
licensed, rented or exchanged, regardless of the acquirer's intent to do so.
Based on an analysis of economic characteristics and how its is operated, SPSS
concluded it has a single reporting unit. The Company determined that no
transitional impairment loss was required at January 1, 2002. The Company's
policy is to conduct an impairment test under SFAS No. 142 at December 31 of
each year or when other impairment indicators are present. As of December 31,
2002 and 2003, SPSS determined that no impairment loss was required.

Intangible asset data are as follows:

The aggregate amortization expense for the years ended December 31, 2001,
2002 and 2003 was $1,822, $40, and $73, respectively.

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SPSS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following tables present the changes in the carrying amount of goodwill
and other intangibles as of December 31, 2002 and December 31, 2003:

The following table presents pro forma net income and net income (loss) per
share in all periods presented excluding goodwill amortization expense:

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SPSS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(6) INTANGIBLE ASSETS

Intangible assets consist of the following at December 31:

On January 1, 2002, workforce of $469 and customer base of $1,052
(intangible asset balance of $2,380 less accumulated amortization of $859) was
subsumed into goodwill in accordance with SFAS No. 142.

(7) ACQUISITIONS AND DIVESTITURES

ACQUISITIONS

ShowCase Corporation

On February 26, 2001, the Company acquired all of the outstanding shares of
capital stock of ShowCase Corporation (ShowCase), in exchange for approximately
3,725 shares of common stock, which had a market value of approximately $63,958
at the time of the acquisition. The transaction was accounted for as a pooling
of interests, and accordingly, the consolidated financial statements have been
restated as if the combining companies had been combined for all periods
presented. Merger costs relating to the acquisition amounted to approximately
$10.5 million. These costs included investment banking fees, legal and other
professional fees, employee severance payments and various other expenses.

The consolidated statement of income for the year ended December 31, 2000,
reflects the impact of ShowCase operating results for the three months ended
March 31, 2000, which are also included in the year ended December 31, 1999
consolidated statement of income due to differences in reporting periods
reflective to SPSS. The revenues and net loss of ShowCase included more than
once were $10,865 and ($1,209), respectively.

America Online Digital Marketing Services

On October 22, 2001, SPSS entered into a strategic alliance with America
Online, Inc. (AOL) through its Digital Marketing Services (DMS) subsidiary, in
which SPSS acquired certain operating assets and the exclusive rights to
distribute survey sample data drawn from AOL members and users of AOL's other
interactive properties. The agreement provided SPSS additional opportunities to
market its products to market research partners and provide revenues from
services provided to current and future customers. Under this agreement, SPSS
was to pay AOL $42 million in consideration over four years and assume primary
responsibility for servicing the current group of AOL market research partners.
Consideration due to AOL was in the form of $12,000 of SPSS common stock and
$30,000 in cash.

On October 14, 2003, the Company entered into an amended and restated Stock
Purchase Agreement and an amended and restated Strategic Online Research
Services Agreement with AOL, effective as of October 1, 2003. The amended and
restated agreements replaced the original agreements entered into between the
parties on October 22, 2001. Under these amended and restated agreements, SPSS
retains exclusive rights

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SPSS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

to provide researchers with survey respondents drawn from the millions of
Opinionplace.com visitors throughout AOL's interactive properties. The primary
amendments reduce the remaining term of the original agreement from two years to
one year and make the following adjustments to the financial obligations of SPSS
to AOL:

Other provisions specify conditions for subsequent extensions of the
Research Services Agreement, enable stronger joint management oversight,
strengthen SPSS marketing efforts, and improve the experience of survey
participants.

As discussed in Note 22, the Company restated its accounting for the 2001
agreement and, as a result, the restated purchase price, consisting of common
stock of $3,000 and $1,000 in cash, was allocated to the estimated fair value of
the assets received based upon a third party valuation and is summarized as
follows:

Payments made by SPSS for services received from AOL subsequent to the
acquisition are recorded as expense when the services are rendered. Payments
made by the Company included cash and common stock. The Stock Purchase Agreement
included provisions that required SPSS to purchase the stock back from AOL if
the Company was unable to maintain the effectiveness of a registration statement
for AOL to sell the stock. Accordingly, the common stock is classified as
temporary equity in the consolidated balance sheet as "Common Stock Subject to
Repurchase." Upon the adoption SFAS No. 150, the common stock is reclassified to
permanent equity. Also on July 1, 2003, the estimated fair value of the put
obligation of $150 was reclassified as a liability from permanent equity.

NetGenesis Corporation

On October 26, 2001, SPSS Inc., Red Sox Acquisition Corp., and NetGenesis
Corp., each Delaware corporations, entered into an Agreement and Plan of Merger
under which NetGenesis shareholders would receive 0.097 shares of SPSS common
stock for each share of NetGenesis common stock upon the closing of the
transaction. This share exchange ratio for the merger was established through
negotiations between SPSS and NetGenesis. The closing of the merger occurred on
December 21, 2001 with SPSS issuing approximately 2,294 shares of common stock
and replacement options for substantially all the outstanding shares of common
stock and options of NetGenesis. The merger was accounted for as a purchase.
Prior to the merger with SPSS, NetGenesis was the leading provider of E-Metrics
solutions for Global 2000 companies. The combination of SPSS Inc. and NetGenesis
technology and expertise expands the offerings of SPSS to include a new, more
powerful set of online analytical capabilities, combining online and offline
data analysis in one comprehensive offering, from one organization. SPSS
integrated NetGenesis into the Company's predictive analytic application
offerings. The purchase price was allocated to the estimated fair value of the
assets received and liabilities assumed based upon a third party valuation and
are summarized as follows:

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SPSS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

LexiQuest, S.A.

On January 31, 2002, SPSS acquired all of the issued and outstanding shares
of capital stock of LexiQuest, S.A., a corporation organized under the laws of
France. The terms and conditions of the acquisition are specified in a Stock
Purchase Agreement, dated as of January 31, 2002 and amended as of March 16,
2002, by and among SPSS, LexiQuest and the owners of all of the issued and
outstanding shares of capital stock of LexiQuest. Under French law, LexiQuest
employees retained options to purchase shares of LexiQuest capital stock, which
could be exercised in the future to acquire a de minimis percentage of
LexiQuest's issued and outstanding shares of capital stock.

The aggregate purchase price for all of the issued and outstanding shares
of capital stock of LexiQuest was determined by the parties in arms-length
negotiations and consisted of guaranteed and contingent components. The
guaranteed portion of the purchase price consisted of a payment of $2,500. SPSS
was not required to make any contingent payments to the former owners of
LexiQuest because the contribution generated by the LexiQuest assets did not
meet the targeted levels during 2002 and 2003.

Under the terms of the stock purchase agreement and a separate escrow
agreement, the guaranteed portion of the purchase price was deposited with Bank
One NA (as successor by merger to American National Bank and Trust Company of
Chicago) as escrow agent. The parties entered into the separate escrow agreement
to establish an escrow fund of $2,500 to compensate SPSS for any losses it might
incur by reason of any breach of: (a) the representations and warranties of
LexiQuest or (b) any covenant or obligation of LexiQuest or the former
shareholders of LexiQuest, identified in the stock purchase agreement. The
guaranteed portion of the purchase price was required to remain in escrow until
January 30, 2003, or until all of the conditions for its release have been
satisfied under the terms of the stock purchase agreement and the escrow
agreement. On January 31, 2003, SPSS made a claim against the escrow fund. SPSS
and the LexiQuest shareholder representative settled this claim in the second
fiscal quarter of 2004 and agreed that SPSS will receive approximately $670.

The purchase price was allocated to the estimated fair value of the assets
received and liabilities assumed based upon a third party valuation and are
summarized as follows:

netExs LLC

On June 20, 2002, SPSS acquired the assets described below which
constituted a business from netExs LLC, a Wisconsin limited liability company.
The terms and conditions of the asset purchase are specified in an Asset
Purchase Agreement, dated June 20, 2002, by and among SPSS, netExs and the
members of netExs listed as signatories thereto.

The assets purchased by SPSS include: (a) all ownership rights in netExs
software and related documentation, copyrights, trademarks, service marks, brand
names, trade names, trade dress, commercial symbols and other indications of
origin, patents and applications for patents, proprietary information and trade
secrets and other proprietary rights; (b) identified tangible personal property
of netExs; (c) identified accounts and accounts receivable; and (d) identified
contracts.

The technology acquired from netExs consists of zero-client Web-enabled
user interface technology for query and reporting functions that are tightly
integrated with Microsoft SQL Server 2000 Analysis Services. SPSS considers the
acquired technology important to serving the analytical reporting needs of the
sizeable number of its customers and prospects that it believes are adopting
Microsoft's platform.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The aggregate purchase price for the netExs assets was determined by the
parties in arms-length negotiations and consisted of guaranteed and contingent
payments. The guaranteed portion of the purchase price in the amount of $1,000
was delivered by SPSS to netExs.

Under the terms of the Asset Purchase Agreement, the contingent portion of
the purchase price, which was capped at a total of $1,450 if fully earned during
fiscal years 2003, 2004 and 2005, would be paid to netExs if the net revenues
generated by the assets acquired during the annual periods (as defined in the
Asset Purchase Agreement) equaled or exceeded certain targeted projections. In
June 2004, SPSS and netExs agreed that SPSS would pay to netExs the sum of $400
in full satisfaction of all obligations under the Asset Purchase Agreement,
including without limitation, the contingent payments, and in full settlement of
certain claims asserted by netExs.

The following summary presents information concerning the purchase price
allocation for the netExs acquisition accounted for under the purchase price
method.

Data Distilleries B.V.

On November 4, 2003, SPSS, through SPSS International B.V., its wholly
owned subsidiary, acquired Data Distilleries B.V., a Netherlands-based developer
of analytic applications. The terms and conditions of the acquisition are
specified in a Stock Purchase Agreement, by and among SPSS, SPSS International
B.V. and the owners of all of the issued and outstanding shares of the capital
stock of Data Distilleries. The aggregate purchase price for all of the issued
and outstanding capital stock of Data Distilleries consists of guaranteed and
contingent payments. The guaranteed portion of the purchase price was paid at
closing and consisted of a payment of $1,000 in cash and 282 shares of SPSS
common stock valued at $5,311 for purposes of this transaction. The contingent
portion of the purchase price will be paid, if at all, at the end of the first
and second years following the closing and may total up to $4,400 at current
estimated exchange rates. The Company's obligation to make the contingent
payments will depend on the achievement of certain growth targets for license
and maintenance revenues from the Data Distilleries applications.

In connection with the Data Distilleries transaction, SPSS incurred an
estimated $1,800 in transaction fees, including legal, valuation and accounting
fees. The purchase price of $6,311 has been allocated to the tangible and
identifiable intangible assets acquired and liabilities assumed on the basis of
their estimated fair values on the acquisition date. The results of operations
of Data Distilleries are included in the 2003 Consolidated Statement of
Operations from the date of the acquisition.

The shares issued in the acquisition of Data Distilleries have been valued
in accordance with EITF Issue No. 99-12, "Determination of the Measurement Date
for the Market Price of Acquirer Securities Issued in a Purchase Business
Combination." In accordance with EITF No. 99-12, the Company has established
that the first date on which the number of our shares and the amount of other
consideration became fixed was November 4, 2003. Accordingly, the Company valued
the shares issued in the transaction at $18.84 per share utilizing the average
closing price for a few days before and after November 4, 2003.

The acquisition of Data Distilleries was accounted for under SFAS No. 141
and certain specified provisions of SFAS No. 142. The following table summarizes
the estimated fair values of the tangible assets acquired and the liabilities
assumed at the date of acquisition:

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SPSS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Under the terms of the November 4, 2003 Stock Purchase Agreement with Data
Distilleries, the Company was obligated to file a Registration Statement on Form
S-3 to register the potential resale of the 281,830 shares issued to Data
Distilleries shareholders in the transaction. This contingent obligation
required the Company to classify the common stock as temporary equity labeled
"Common Stock Subject to Repurchase" at December 31, 2003. Because the Company's
2003 10-K was not timely filed, SPSS became ineligible to use Form S-3 and was
not able to register the shares by the required April 2004 filing date. The
Company fulfilled its obligation under the Stock Purchase Agreement by
repurchasing from each former Data Distilleries shareholder the number of shares
of SPSS common stock received by such shareholder in connection with this
transaction. During April 2004, SPSS notified the former shareholders of the
Company's inability to properly register these shares and through June 30, 2004,
the Company repurchased all 281,830 shares at a cost of $5.4 million. During the
second quarter of 2004, the Company will reflect the $5.4 million cash payout of
these shares as a reduction to common stock subject to repurchase, which is
recorded as temporary shareholders' equity in the consolidated balance sheet.

All acquisitions were accounted for as purchases, and operating results
include acquisitions from the date of purchase. If the Company had acquired Data
Distilleries at the beginning of each of the periods presented, unaudited pro
forma net revenues, net loss and net loss per share would have been as follows:

See additional disclosure regarding subsequent events in Footnote 23.

DIVESTITURES

On December 29, 2003, the Company received its first payment in a
transaction with Systat Software, Inc., a subsidiary of Cranes Software
International Ltd. ("Systat"), pursuant to which Systat acquired from SPSS an
exclusive worldwide license to distribute the Sigma-series line of products for
a three-year period and purchased certain related assets. Pursuant to the
agreement, Systat assumed all responsibilities for the marketing and sales of
the products as well as their ongoing development and technical support. SPSS
also transferred to Systat all rights and obligations with respect to customers
and personnel and all fixed assets related to the Sigma-series products (the
"Related Assets"). In exchange for the exclusive worldwide license and Related
Assets, Systat is obligated to make cash payments to SPSS in the aggregate
amount of $13,000. The agreement between SPSS and Systat also grants to Systat
an option to purchase the licensed property. Systat may exercise this purchase
option for $1,000 within 180 days prior to the end of the three-year license
period.

The $9,000 payment made by Systat to SPSS on December 29, 2003 includes the
initial $6,000 license fee and $3,000 in consideration of the related assets.
Systat is obligated to make additional license payments in the aggregate amount
of $3,000 in 2004, which is included in other current assets in the accompanying
Consolidated Balance Sheet at December 31, 2003, and a final license payment of
$1,000 in 2005. SPSS has received all of the license payments due in 2004 as of
June 30, 2004.

The distribution license and sale of the Related Assets of the Sigma-series
product line was accounted for as a divestiture of a business. The sale resulted
in a gain of $8,577 during 2003. In addition to the net book value of the assets
sold, goodwill was reduced by $1,000 to reflect the estimated goodwill allocated
to this business.

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The pro forma impact of this divestiture is not material to the results of
operations during the twelve months ended December 31, 2003.

(8) INVESTMENT IN CONSOLIDATED SUBSIDIARY

On March 30, 2001, SPSS purchased 50% of the then-issued and outstanding
shares of common stock of Illumitek Inc. for $2,000. Subsequent to its initial
investment, SPSS issued Illumitek a note receivable of $3,250 due on December
31, 2004. In the fourth quarter of 2001, SPSS began advancing Illumitek funds to
meet ongoing obligations. Jack Noonan, President and Chief Executive Officer of
SPSS, and Mark Battaglia, the former President, SPSS Business Intelligence,
served as directors of Illumitek until September 30, 2002, the date on which
they resigned as Illumitek directors. Mr. Noonan also served as a member of the
Compensation Committee of the Board of Directors of Illumitek until September
30, 2002. Following their resignation, Illumitek's shareholders agreed to
terminate the company's operations, wind up its affairs and liquidate. This
decision was finalized by October 28, 2002. As part of the liquidation,
Illumitek agreed to transfer to SPSS, Illumitek's nViZn platform, in which SPSS
had been granted a security interest. nViZn is a development platform for
creating or embedding interactive, visual analysis applications that combine the
power of predictive analytics, data visualization, and user interactivity. In
exchange for the assignment of this asset, SPSS released Illumitek of its
obligations under the note receivable, pursuant to an Assignment and Release
Agreement dated October 31, 2002. SPSS acquired the nViZn platform, but did not
record an asset, as its recoverability was uncertain.

Under the equity method of accounting, followed until September 30, 2001,
SPSS recorded a reduction in the value of its investment to reflect its portion
of Illumitek's net loss. Subsequent to September 30, 2001, the results and
accounts of Illumitek were consolidated with those of SPSS until its liquidation
in October 2002.

(9) COMMITMENTS AND CONTINGENCIES

OPERATING LEASES

SPSS leases its office facilities, storage space, and some data processing
equipment under lease agreements expiring through the year 2012. Minimum lease
payments indicated below do not include costs such as property taxes,
maintenance, and insurance.

The following is a schedule of future noncancellable minimum lease payments
required under operating leases as of December 31, 2003:

Rent expense related to operating leases was approximately $9,081, $12,821
and $13,392 during the years ended December 31, 2001, 2002 and 2003,
respectively.

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HYPERION SOLUTIONS

Through its strategic relationship with Hyperion Solutions, SPSS has rights
to distribute the Essbase/400 software while Hyperion Solutions maintains
limited distribution rights. Essbase/400 enables SPSS to reach a broader
customer base, including users of multidimensional analyses, and offers the
Company new partnering opportunities. Hyperion Solutions has the right to
buy-back the distribution rights if it gives SPSS twelve months prior written
notice of its intent to exercise this right.

LITIGATION

SPSS Inc. has been named as a defendant in a lawsuit filed on December 6,
2002 in the United States District Court for the Southern District of New York,
under the caption Basu v. SPSS Inc., et al., Case No. 02CV9694. The complaint
alleges that, in connection with the issuance and initial public offering
("IPO") of shares of common stock of NetGenesis Corp., the registration
statement and prospectus filed with the Securities and Exchange Commission in
connection with the IPO contained material misrepresentations and/or omissions.
The alleged violations of the federal securities laws took place prior to the
effective date of the merger in which the Company's acquisition subsidiary
merged with and into NetGenesis Corp. NetGenesis Corp. is now a wholly owned
subsidiary of SPSS. Other defendants to this action include the former officers
and directors of NetGenesis Corp. and the investment banking firms that acted as
underwriters in connection with the IPO. The plaintiff is seeking unspecified
compensatory damages, prejudgment and post-judgment interest, reasonable
attorney fees, experts' witness fees and other costs and any other relief deemed
proper by the Court. The Company is aggressively defending itself and plans to
continue to aggressively defend itself against the claims set forth in the
complaint. The Company and the named officers and directors filed an answer to
the complaint on July 14, 2003. At this time, the Company believes the lawsuit
will be settled with no material adverse effect on its results of operations,
financial condition, or cash flows.

See additional disclosure regarding subsequent events in Footnote 23.

SPSS may become a party to various claims and legal actions arising in the
ordinary course of business.

(10) OTHER NONCURRENT ASSETS

Other noncurrent assets consist of the following at December 31:

Future receipts, reflecting principal and interest under the note
receivable at December 31, 2003, are as follows: $240 in 2004; $360 in 2005 and
the balance in 2006. The note carries interest at a rate of 100 basis points
over the five-year U.S. swap rate, which was 3.14% and 3.65% at December 31,
2002 and December 31, 2003, respectively.

A deposit supporting a letter of credit of $1,760 was restricted as of
December 31, 2002 and no deposits were restricted as of December 31, 2003 in
connection with the Company's leased facilities in Cambridge, MA.

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(11) OTHER NONCURRENT LIABILITIES

SPSS has a mortgage on its freehold property, which houses the SPSS Limited
Quantime offices in London, England. The mortgage is held by Norwich Union
Investment Management of Norwich, England and is a fixed 12.04%, 18-year
mortgage expiring in January 2010. The annual principal and interest payments
total British Pounds Sterling (GBP) 110 (approximately $184). The current
portion of this debt is GBP 47 (approximately $76) and GBP 53 (approximately
$94) and is included in "Other Accrued Liabilities" as of December 31, 2002 and
2003, respectively. The noncurrent balance in "Other noncurrent liabilities" on
the Consolidated Balance Sheets as of December 31, 2002 and 2003 is GBP 485
(approximately $781) and GBP 432 (approximately $766), respectively.

(12) FINANCING ARRANGEMENTS

In November 2002, SPSS revised its loan agreement with Bank One, NA (as
successor by merger to American National Bank and Trust Company of Chicago).
Under this loan agreement, as amended, SPSS had an available $8,500 unsecured
line of credit with Bank One, under which borrowings bore interest at either the
prime interest rate or the Eurodollar Rate, depending on the circumstances. As
of December 31, 2002, SPSS had $8,500 outstanding under this line of credit with
Bank One.

Given the previously reported amendment to the Company's line of credit
with Bank One, the Company did not believe that the terms of the Bank One
lending arrangement would continue to be acceptable. The Company began to look
for a new lending arrangement with the goal of expanding the line of credit then
available to the Company. On March 31, 2003, SPSS entered into a four (4) year,
$25 million credit facility with Wells Fargo Foothill, Inc. (f/k/a Foothill
Capital Corporation) which replaced the Company's lending arrangement with Bank
One. The new agreement with Wells Fargo Foothill met the Company's goals by
providing the Company with greater credit capacity. The Wells Fargo Foothill
facility includes a four (4) year term loan in the amount of $10,000 and a
revolving line of credit. The maximum amount SPSS may borrow under the revolving
line of credit portion of the facility will depend upon the value of the
Company's eligible accounts receivable generated within the United States. On
April 1, 2003, SPSS paid all of its outstanding obligations to Bank One and
terminated the Bank One line of credit. As of December 31, 2003, the Company had
availability of $2,500 under the revolving line of credit.

The terms and conditions of the Wells Fargo Foothill credit facility are
specified in a Loan and Security Agreement, dated as of March 31, 2003, by and
between Foothill and SPSS. The term loan portion of the facility bears interest
at a rate of 2.5% above prime, with potential future interest rate reductions of
up to 0.5% in the interest rate based upon the Company's achievement of
specified EBITDA targets. One component of the revolving line of credit will
bear interest at a rate of prime plus 3.0%. On the remainder of the revolving
line of credit, SPSS may select interest rates of either prime plus 0.25% or
LIBOR plus 2.5% with respect to each advance made by Foothill. In May 2003, the
Company began paying down evenly the term loan of $10,000 over the four (4) year
period (i.e., $2,500 per year over the next four (4) years). As a result of the
refinancing, $6,000 of the Company's line of credit borrowings of $8,500 that
existed as of December 31, 2002 was classified as long-term.

At December 31, 2003, SPSS had $8,451 outstanding under its line of credit
with Foothill, including $2,500 classified as current notes payable.

The Wells Fargo Foothill facility requires SPSS to meet certain financial
covenants including minimum EBITDA targets and includes additional requirements
concerning, among other things, the Company's ability to incur additional
indebtedness, create liens on assets, make investments, engage in mergers,
acquisitions or consolidations where SPSS is not the surviving entity, sell
assets, engage in certain transactions with affiliates, and amend its
organizational documents or make changes in capital structure. Due to the
restatement, the Company is not in compliance with certain covenants related to
timely delivery of financial statements. In

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addition, the restatement may have rendered some representations and warranties
inaccurate and may have caused the Company to fail to satisfy certain covenants.
SPSS has obtained all appropriate waivers from Wells Fargo Foothill. See Note 22
of the "Notes to Consolidated Financial Statements" for additional information
on the effect of this restatement.

ShowCase Corporation, a Minnesota corporation and wholly owned subsidiary
of SPSS, and NetGenesis Corp., a Delaware corporation and wholly owned
subsidiary of SPSS, have guaranteed the obligations of SPSS under the Loan and
Security Agreement. This guaranty is secured by all of the assets of ShowCase
and NetGenesis.

(13) OTHER INCOME (EXPENSE)

Other income (expense) consists of the following:

As noted above, the Company recognized a gain of $8,577 on the divestiture
of the Sigma-series product line during the year ended December 31, 2003. See
additional discussion in Note 7.

(14) SPECIAL GENERAL AND ADMINISTRATIVE CHARGES, AND MERGER-RELATED COSTS

Special general and administrative charges were $14,739 in 2001, $9,037 in
2002, and $6,104 in 2003, or 8%, 4%, and 3% of net revenues in 2001, 2002, 2003,
respectively. Special general and administrative charges in 2001 included $4,200
of charges relating to the write-down of internal-use software, $3,500 related
to reductions in workforce, $2,000 for obsolete software write-offs, and other
costs that did not meet the Company's definition of "merger-related" costs as
described below. Special general and administrative charges in 2002 included
costs related to the restructuring of the Company's field operations implemented
in August 2002 and costs related to the NetGenesis, LexiQuest and netExs
transactions, such as severance and retention payments of $4,030, lease
cancellation payments of $615, professional service fees of $2,300, and other
costs. Special general and administrative charges in 2003 include a write-off of
$4,400 due to the termination of the Company's Siebel CRM software
implementation (see Note 3) and $1,700 of severance, bonus and travel costs
primarily related to the Data Distilleries acquisition.

SPSS incurred merger-related costs of $9,081 in 2001 and $2,260 in 2002.
Merger-related expenses relate to the Company's acquisitions made during 2001
and 2002 (see Note 7). Expenses in 2001 included $2,500 for investment banking
and other professional fees, $2,700 of transaction-related bonuses paid to
employees, severance costs and costs of closing excess office facilities.
Expenses in 2002 included professional fees of $900, severance of $200 and other
costs of $1,100. These expenses were incurred subsequent to the consummation of
the transactions. Certain other costs incurred prior to the consummation of the
transactions were capitalized as part of the purchases.

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As of December 31, 2003, the Company has approximately $1,006 in
liabilities remaining related to these charges and expects to pay them during
the year ended December 31, 2004.

(15) INCOME TAXES

Income (loss) before income taxes and minority interest consists of the
following:

Income tax expense (benefit) consists of the following:

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

For the years ended December 31, 2001, 2002 and 2003, the reconciliation of
the statutory Federal income tax rate of 34% to the Company's effective tax rate
is as follows:

The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets/(liabilities) at December 31, 2002 and 2003,
are presented below:

In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversals of deferred tax liabilities, projected future taxable
income, and tax planning strategies in making this assessment. Manage-

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ment believes it is more likely than not that the Company will realize the
benefits of these deductible differences, net of the existing valuation
allowances at December 31, 2003. The amount of the deferred tax asset considered
realizable, however, could be reduced in the near term if estimates of future
taxable income during the carryforward period are reduced.

As of December 31, 2003, SPSS had a U.S. net operating loss carryforward of
approximately $6,363, the majority of which begins to expire in 2022. In
addition, as of December 31, 2003, the Company has foreign net operating loss
carryforwards of approximately $21,965 against which the Company has provided a
full valuation allowance.

As of December 31, 2003, SPSS had a Federal research and experimentation
credit carryforward and a foreign tax credit carryforward of approximately
$2,604 and $4,930, respectively, which begin to expire in 2010 and 2005,
respectively.

Federal income and foreign withholding taxes have not been provided on
$70,517 of undistributed earnings of international subsidiaries of which $9,350
has been taxed in the United States. The Company has not recognized a deferred
tax liability for the undistributed earnings of its foreign operations that
arose in 2003 and prior years because the Company currently does not expect to
remit those earnings in the foreseeable future. Determination of the amount of
unrecognized deferred tax liability related to undistributed earnings of foreign
subsidiaries is not practicable.

(16) EMPLOYEE BENEFIT PLANS

Effective February 1, 1995, SPSS amended its 401(k) savings plan. Qualified
employees may participate in the savings plan by contributing up to the lesser
of 15% of eligible compensation or limits imposed by the U.S. Internal Revenue
Code in a calendar year. SPSS makes a matching contribution of $0.5 for
employees in the plan the entire year. In 1999, the plan year was changed to
begin on December 31 of each year and end on December 30. SPSS made
contributions of $312, $329, and $372 for 2001, 2002, and 2003, respectively.
These matching contributions were recorded as compensation expense.

In 1993, SPSS implemented an employee stock purchase plan. The SPSS
purchase plan provides that eligible employees may contribute up to 10% of their
base salary per quarter towards the quarterly purchase of SPSS common stock. The
employee's purchase price is 85% of the fair market value of the stock at the
close of the first business day after the quarterly offering period. The total
number of shares issuable under the purchase plan is 100. Effective October
2000, the plan was amended to calculate the share price as 85% of the lower of:
i) the closing market price of the stock on the first trading day of the
quarter, or ii) the closing market price for the stock on the last trading day
after the end of the quarter. During 2001, 29 shares were issued under the
purchase plan at market prices ranging from $15.56 to $22.06. During 2002, 34
shares were issued under the purchase plan at market prices ranging from $11.57
to $17.54. During 2003, 31 shares were issued under the purchase plan at market
prices ranging from $11.05 to $15.48.

(17) STOCK OPTIONS AND EQUITY TRANSACTIONS

On January 16, 1992, SPSS adopted a Stock Option Plan for some key
employees. Options vest either immediately or over a four-year period. In
September 1994, SPSS granted options to purchase 150 shares of common stock to
the principal owners of SYSTAT. In addition, in June 1995, the stockholders of
SPSS adopted the 1995 Equity Incentive Plan which authorizes the Board of
Directors, under some conditions, to grant stock options and shares of
restricted stock to directors, officers, other key executives, employees and
independent contractors.

At the 1996 meeting of SPSS shareholders, the shareholders ratified the
Second Amended and Restated 1995 Equity Incentive Plan, which was amended, among
other things, to increase the shares allowed to be granted under the Plan from
600 to 1,050. In May 1999, SPSS approved the Third Amended and Restated
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1995 Equity Incentive Plan, which was amended to clarify the rules governing the
treatment of attestation of shares given to SPSS for the exercise price of
options.

In May 1999, SPSS adopted the 1999 Employee Equity Incentive Plan, which
authorizes the Board, under some conditions, to grant stock options and shares
of restricted stock to non-executive officer employees and independent
contractors of SPSS.

In February 2001, the stockholders of SPSS adopted the 2000 Equity
Incentive Plan which authorizes the Board of Directors, under some conditions,
to grant stock options and shares of restricted stock to directors, officers,
other key executives, employees and independent contractors. There are 500
shares reserved for issuance under this plan.

In 2002, SPSS terminated each of its existing equity incentive plans and
the stockholders of SPSS adopted the 2002 Equity Incentive Plan. This plan
authorizes the Board of Directors to award stock options and variety of other
equity incentives to directors, executive officers, other key executives,
employees and independent contractors of SPSS and any of its subsidiaries. Under
this plan, there are 500 shares reserved for issuance upon the exercise of
option rights that qualify as incentive stock options and 1,000 shares reserved
for issuance upon the exercise of option rights that qualify as nonqualified
stock options, appreciation rights or as restricted shares.

The Company recognized expense of approximately $338, $207 and $240 for the
fiscal years ended December 31, 2001, 2002 and 2003, respectively, related to
stock option grants to non-employees and restricted stock and restricted stock
unit grants to employees.

Additional information regarding options is as follows:

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SPSS INC. AND SUBSIDIARIES

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The following table summarizes information about stock options outstanding
at December 31, 2003:

(18) RELATED PARTY TRANSACTIONS

Through June 1, 2003, SPSS maintained a consulting agreement with Norman H.
Nie Consulting L.L.C. whereby SPSS received consulting services on various
business-related matters. Annual compensation under the agreement was $81 plus
expenses. Norman Nie is the Chairman of the Board of Directors of SPSS. The
agreement contained automatic one-year extensions unless terminated by either
party. This agreement was terminated during the second fiscal quarter of 2003.

On June 1, 2003, SPSS entered into an amended consulting agreement with
Norman H. Nie Consulting L.L.C. whereby SPSS receives consulting services on
various business-related matters. Compensation under the agreement is $15 per
month, plus expenses, for the period from September 2003 through January 2004.
After January 2004, annual compensation is $10 per month, plus expenses. The
agreement shall continue until one of the parties sends the other party fifteen
day notice that it wishes to terminate the agreement.

As described in Note 7, SPSS purchased LexiQuest in January 2002. Norman
Nie was the Chairman of the Board of Directors of LexiQuest and owned less than
1% of LexiQuest common stock at the date of the acquisition.

As described in Note 7, SPSS purchased netExs in June 2002. Jonathan
Otterstatter, the Executive Vice President and Chief Technology Officer of SPSS,
was a member of the Board of Managers of netExs. Mr. Otterstatter did not
receive and will not receive any remuneration in connection with this
transaction.

(19) RESTRUCTURING

During the quarter ended September 30, 2002, the Company implemented a
restructuring plan to reduce the Company's cost structure. The restructuring
resulted in the Company recording $3,700 consisting primarily of the layoff of
approximately 145 employees in the sales, marketing and administrative
functions, and approximately $600 of lease terminations and other costs incurred
in closing the Miami office. As of December 31, 2002 and 2003, $227 and $0,
respectively of the restructuring charge remains in accrued liabilities.

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(20) UNAUDITED QUARTERLY FINANCIAL INFORMATION

The following selected quarterly data should be read in conjunction with
the Consolidated Financial Statements and Notes and "Management's discussion and
Analysis of Financial Condition and Results of Operations". This information has
been derived from unaudited consolidated financial statement of SPSS that, in
our opinion, reflect all recurring adjustments necessary to fairly present our
financial information when read in conjunction with our Consolidated Financial
Statements and Notes. This selected quarterly information has been restated for
the first fiscal quarters in 2003 from previously reported information filed on
Form 10-Q, and for all quarters of 2002 and 2001 from previously reported
information filed on Form 10-Q and Form 10-K, as a result of the restatement of
our financial results as discussed in Note 22. These restatement adjustments are
described in Note 22 for the respective annual periods. The results of
operations for any quarter are not necessarily indicative of the results to be
expected for any future period.

We have not amended our annual reports on Form 10-K or quarterly reports on
Form 10-Q for the quarterly periods affected by the restatement. The information
that has been previously filed or otherwise reported for these periods is
superseded by the information in this annual report, and the financial
statements and related financial information contained in such reports should no
longer be relied upon.

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SPSS INC. AND SUBSIDIARIES

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- ---------------

(a) Includes provision for estimated uncollectible accounts receivable.

(b) Includes costs primarily related to professional fees associated with the
ShowCase, NetGenesis and Data Distilleries acquisitions that did not meet
the definition of merger costs under established guidelines, costs
associated with the reduction in workforce and the write-down of obsolete
internal use software.

(c) Includes costs, related to a 2001 acquisition accounted for as a pooling of
interests, such as investment banking and other professional fees, employee
severance and costs of closing excess office facilities and certain
expenses associated with the closing of other acquisitions.

(d) Includes costs related to acquired in-process technology in conjunction
with business combinations accounted for as purchases.

(e) Includes gain of $8,577 on the divestiture of Sigma-series product line in
December 2003. See Note 7.

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(21) SALES, MARKETING AND SERVICES

The Company makes payments to AOL for sample surveys and services pursuant
to agreement with AOL effective October 2001 and as amended October 2003 (See
Note 7). Included in "Sales, marketing and services" were payments to AOL for
survey and services of $2,375 in 2001, $9,500 in 2002 and $7,847 in 2003. The
increase in 2002 from 2001 resulted from 12 months of costs in 2002 compared
with 3 months in 2001 due to initiation of the service agreement with AOL
effective October 2001. The decrease in 2003 from 2002 reflected the terms of
the amended agreement with AOL effective October 2003.

(22) RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS

On March 15, 2004, SPSS announced that in connection with its October 2003
amended agreement with America Online, Inc. (AOL), the Company changed the
accounting for its original October 2001 transaction with AOL by expensing
substantially all AOL payments as incurred. As a result, the original
transaction would be accounted for on a basis consistent with the amended AOL
agreement and the Company would restate its financial results for fiscal years
2001, 2002 and the first three quarters of 2003.

On March 30, 2004, SPSS announced that while completing the AOL restatement
it discovered errors in its deferred revenue accounts in the 2001 and 2002
fiscal years. The Company subsequently identified other errors in its deferred
revenue accounts in the fourth quarter of 2000 and the first three quarters of
2003. In addition, SPSS announced that it would record income tax expense
associated with deemed dividend income relating to certain cash transfers from
its international subsidiaries during the fourth quarter of 2002.

SPSS went on to conduct additional examinations that resulted in various
adjustments between 1999 and 2003 including, among other items, adjustments to
the Company's income tax provisions and a change in the recognition of license
fee revenues from transactions completed by the Company's distribution partners
to account for its implied post contract support (PCS) obligations in such
transactions.

AMERICA ONLINE (AOL) TRANSACTION

In its original October 2001 agreement with America Online (AOL), SPSS
acquired certain operating assets and exclusive rights to provide researchers
with survey respondents drawn from Opinionplace.com visitors throughout AOL's
interactive properties. In October 2003, SPSS entered into an amended agreement
with AOL. In connection with this amended agreement, the Company reviewed its
accounting for the original agreement and restated its consolidated financial
statements for the fiscal years ended December 31, 2001 and 2002 as well as the
first three quarters of 2003 in this Form 10-K. This restatement reflects a
change in the original purchase accounting for the transaction as the Company's
reassessment determined that the forfeiture provisions of the original agreement
were substantive and linked to services provided by AOL over the term of the
agreement. It was therefore determined that certain future payments beyond the
initial transaction date totaling $38.0 million represented payments for the
survey sample and other services that were not fixed and should not have been
allocated to goodwill and intangible assets as treated in the original
accounting. In its restated financial statements, the Company assigned only the
nonforfeitable cash and equity consideration at October 2001 totaling $4.0
million to the purchase consideration and expensed, as incurred, the remaining
consideration as costs associated with AOL's provision of survey sample and
other services. The purchase price allocation was restated to assign value of
$2.0 million to the purchased software and the remaining $2.0 million to
goodwill. The effect of this restatement increased expense by $2,179, $5,349,
and $3,586 in 2001, 2002, and 2003, respectively.

INCOME TAX EXPENSE

SPSS recorded income tax expense of $1,369 related to obligations
associated with deemed dividend income caused by certain cash transfers from its
international subsidiaries to the United States during the

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fourth quarter of 2002. Such amounts were not previously recorded in 2002. After
further review of its provisions for income tax, the Company increased income
tax expense in 2001 and 2002 by $1,888 and $3,358, respectively. This additional
income tax expense related to the identification of additional non-deductible
expenses in 2001 and 2002 as well as losses in foreign offices for which a
previously recorded income tax benefit should not have been recorded in 2002.
Adjustments were also made to the provisions for income tax to account for the
effects of the restatements at the applicable statutory tax rates.

ERRORS IN DEFERRED REVENUE RECOGNITION

During the 2001 and 2002 fiscal years as well as the first three quarters
of 2003, SPSS made errors in calculating its deferred revenue accounts. SPSS
overstated revenues in fiscal years 2001, 2002, and the first three quarters of
2003 by $3,010, $818, and $1,881, respectively, by incorrectly adjusting its
deferred revenue liability on a quarterly basis from the fourth quarter of 2000
through the third quarter of 2003.

LICENSE FEE REVENUES FROM DISTRIBUTION PARTNERS

The Company licenses third-parties to distribute SPSS products in certain
territories internationally or as value-added resellers worldwide. License fees
received by SPSS from transactions made by such distribution partners had
previously been recognized when these transactions were reported, as the
partners are responsible for providing related maintenance services, including
end-user support and software updates. During the restatement process it was
determined that SPSS had implied post contract support (PCS) obligations to the
customers of its distribution partners because by practice SPSS provided these
partners with updates of SPSS products when and if developed. Because the
Company cannot establish vendor specific objective evidence (VSOE) of fair value
of these implied maintenance arrangements, the Company recognized the related
license fee ratably over the term of the arrangements beginning when
transactions are reported to the Company by its distribution partners and when
all revenue recognition criteria are met. The effect of this restatement reduced
total revenues by $2 and $967 in 2002 and 2003, respectively, and increased
total revenues in 2001 by $509.

OTHER ADJUSTMENTS

Following the review and the determination to restate its financial
statements, SPSS performed additional procedures to ensure the accuracy of its
financial information. These additional procedures included a further review of
internal documents, tests of certain system controls, cut-off procedures and a
review of revenue transactions and other cost and expense accounts. As a result,
the Company made various adjustments in 2003 and prior periods, including the
correction of errors that were previously not recorded because in each case and
in aggregate it was believed the amount of any such error was not material to
the Company's consolidated financial statements. These adjustments included
modifications to the purchase accounting for the Company's acquisition of
NetGenesis Corporation in December 2001, a change in the accounting associated
with the purchase by SPSS of certain publication rights in September 2001,
accounting for stock options given to a consultant, and corrections of certain
out-of-period expenses and reclassifications of other expenses. The effect of
these adjustments increased expense by $675 and $586 in 2001 and 2002,
respectively, and reduced operating expense by $37 in 2003. SPSS also made
certain revenue, expense and balance sheet reclassifications.

The effect of these changes on the Consolidated Balance Sheets,
Consolidated Statements of Operations, and Consolidated Statements of Cash Flows
are set forth below.

81

SPSS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

SPSS INC.

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

- ---------------

(1) Restated to reduce goodwill related to the AOL transaction to $2 million
(2) Restated for elimination of AOL sample intangible
(3) Restated to eliminate future AOL survey sample consideration
(4) Restated to accrue for service payments due AOL
(5) Restated to reflect tax adjustments as a result of restatement
(6) Restated to reflect deferred revenue adjustments
(7) Restated to reflect write off of account receivable
(8) Restated to reflect write off of inventory

82

SPSS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

SPSS INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

- ---------------

(1) Restated to reflect expensing of AOL services costs

(2) Restated to reflect reduction of merger consideration and elimination of
imputed interest expense

(3) Restated to reflect tax adjustments as a result of restatement

(4) Restated to reflect deferred revenue adjustments

(5) Restated to adjust the accounting related to the Company's acquisition of
NetGenesis Corporation in December 2001, the purchase of certain publication
rights in September 2001, stock options granted to a consultant during 2001
and 2002 and certain expense accruals.

83

SPSS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

SPSS INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

- ---------------

(1) Restated to eliminate amortization of AOL sample intangible asset

(2) Restated to reflect expensing of AOL services costs

(3) Restated to reflect reduction of merger consideration and elimination of
imputed interest expense

(4) Restated to reflect tax adjustments as a result of restatement

(5) Restated to reflect deferred revenue adjustments

(6) Restated to adjust the accounting related to the Company's acquisition of
NetGenesis Corporation in December 2001, the purchase of certain publication
rights in September 2001, stock options granted to a consultant during 2001
and 2002 and certain expense accruals.

84

SPSS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

- ---------------

(1) Restated as discussed in consolidated statements of operations

(2) Restated for elimination of AOL sample intangible asset

(3) Restated to reflect income tax adjustments as a result of restatement

(4) Restated to reflect expensing of AOL survey costs

(5) Restated to eliminate future survey sample consideration due to AOL

85

SPSS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(6) Restated to reflect AOL payments as operating expenses

(7) Restated to reflect deferred revenue adjustments

(8) Certain amounts reclassified to conform to 2003 reporting

(23) SUBSEQUENT EVENTS

LEGAL MATTERS

SPSS has been named as a defendant in a lawsuit filed on or about May 14,
2004 in the United States District Court for the Northern District of Illinois,
under the caption Fred Davis, Individually and On Behalf of All Others Similarly
Situated v. SPSS Inc., Jack Noonan and Edward Hamburg, Case No. 04C3427. The
complaint alleges that the defendants violated Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder. The
complaint alleges that the defendants failed to disclose and misrepresented a
series of material adverse facts regarding the Company's revenues. The complaint
seeks to recover unspecified compensatory damages, reasonable attorney fees,
experts' witness fees and other costs and any other relief deemed proper by the
court on behalf of all purchasers of the Company's securities between May 2,
2001 and March 30, 2004, although no court has determined that such persons
constitute a proper class. Neither SPSS nor the individual defendants have
responded to the complaint as of the date of this filing. SPSS and the other
defendants believe that the suit is without merit and intend to defend
vigorously against the allegations contained in the complaint.

DATA DISTILLERIES

Under the terms of the November 4, 2003 Stock Purchase Agreement with Data
Distilleries, the Company was obligated to file a Registration Statement on Form
S-3 to register the potential resale of the 281,830 shares issued to Data
Distilleries shareholders in the transaction. Because the Company's 2003 10-K
was not timely filed, SPSS became ineligible to use Form S-3 and was not able to
register the shares by the required April 2004 filing date. The Company
fulfilled its obligation under the Stock Purchase Agreement by repurchasing from
each former Data Distilleries shareholder the number of shares of SPSS common
stock received by such shareholder in connection with this transaction. During
April 2004, SPSS notified the former shareholders of the Company's inability to
properly register these shares and through June 30, 2004, the Company
repurchased all 281,830 shares at a cost of $5.4 million. During the second
quarter of 2004, the Company will reflect the $5.4 million cash payout of these
shares as a reduction to common stock subject to repurchase, which is recorded
as temporary shareholders' equity in the SPSS consolidated balance sheet.

86

SCHEDULE II
SPSS INC.

VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003

See accompanying independent auditors' report.
87

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

There were no changes in or disagreements with accountants during fiscal
year 2003.

ITEM 9A. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures. SPSS maintains disclosure controls and
procedures that have been designed to ensure that information related to the
Company is recorded, processed, summarized and reported on a timely basis. SPSS
has reviewed its internal control structure and these disclosure controls and
procedures. In connection with this review, SPSS has established a compliance
committee that is responsible for accumulating potentially material information
regarding its activities and considering the materiality of this information.
The compliance committee (or a subcommittee) is also responsible for making
recommendations regarding disclosure and communicating this information to the
Company's chief executive officer and chief financial officer to allow timely
decisions regarding required disclosure. The SPSS compliance committee is
comprised of the Company's senior legal official, principal accounting officer,
chief investor relations officer, principal risk management officer, and certain
other members of the SPSS senior management.

The Company's disclosure controls and procedures are not capable of
preventing all instances of error or fraud. A control system, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system will be attained. The Company's
disclosure controls and procedures can be circumvented by the individual acts of
some persons, by collusion or two or more people or by management override of
the control. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected on a
timely basis.

CEO and CFO Certifications. Attached as Exhibit 31.1 and 31.2 to this
Annual Report on Form 10-K are certifications by the Company's CEO and CFO.
These certificates are required in accordance with Section 302 of the
Sarbanes-Oxley Act of 2002 (the "Section 302 Certifications"). This portion of
the Company's Annual Report on Form 10-K describes the results of the Company's
controls evaluation referred to in the Section 302 Certifications.

Evaluation of the Company's Disclosure Controls and Procedures. SPSS Chief
Executive Officer, Jack Noonan, and Chief Financial Officer, Edward Hamburg,
with the participation of the compliance committee, evaluated the effectiveness
of the design and operation of the Company's disclosure controls and procedures
as of the end of the period covered by this Annual Report on Form 10-K, as
required by Rule 13a-15 of the Securities Exchange Act of 1934. This evaluation
included a review of findings and advice from KPMG arising in conjunction with
their audits recently completed that included the restatement of previously
issued financial information (see Note 22 to the Company's Consolidated
Financial Statements), and an independent investigation initiated by the
Company's Audit Committee, each of which is described below.

In connection with its audits of the Company's financial statements for
2003, 2002 and 2001, KPMG assessed the internal controls of the Company and its
subsidiaries and advised the Company's Audit Committee that certain identified
deficiencies collectively constituted a material control weakness (as defined by
standards established by the Public Company Accounting Oversight Board (United
States)). In its communications with the SPSS Audit Committee, KPMG stated that
these deficiencies were related to:

- Certain account reconciliation and review procedures;

- Specific procedures in accounting for capitalized software development
costs;

- Revenue recognition policies and certain processes;

- Certain processes in and documentation of accounting for income taxes;

- The complex consolidation process and reconciliation of intercompany
accounts;

- Accounting and finance resources at two subsidiaries;

- Segregation of duties in certain cash application tasks;

- Timely completion of statutory filings in two foreign countries;
88

- Document retention policies and procedures; and

- Timely approval of stock option grants.

The Company's management and Audit Committee have assumed a leadership role
in assessing the underlying issues giving rise to the restatement and in
ensuring proper steps have been and are being taken to improve the Company's
control environment. The Company's management and Audit Committee took these
actions in consultation with KPMG. Independent legal counsel to the Audit
Committee and a forensic accounting firm performed an independent investigation
into accounting issues with regard to accounting for deferred revenue that arose
in connection with the restatement. That investigation found and concluded that
the Company's finance and accounting personnel had made a number of accounting
and arithmetic errors, and that there was no evidence of any fraud, intentional
misconduct or concealment on the part of SPSS, its officers or its employees.
That investigation also concluded that several of the accounting issues that
arose in connection with the restatement were exacerbated by a difficult,
three-year conversion of the Company's accounting and reporting software
(including the Company's legacy general ledger system) to an Oracle Financials
system, and several acquisition transactions accounted for using the purchase
method of accounting, that taxed the Company's finance and accounting resources
and personnel. The Audit Committee, however, also concluded that the Company's
accounting, financial reporting and internal control functions needed
improvement, including the Company's system of documenting transactions. The
Audit Committee found that the Company's management has proactively identified a
number of these issues during the past two years and has already addressed or is
appropriately taking steps to address them.

Actions Taken in Response to the Evaluation. As a result of the findings
described above, in 2003 and 2004 the Company began implementing and is
implementing the following actions to address the issues it identified in its
evaluation of controls and procedures.

- SPSS has sought to thoroughly understand the nature of the issues through
discussions with KPMG and the independent counsel and forensic
accountants engaged by the SPSS Audit Committee;

- The Company's Audit Committee has exercised increased oversight over
management's assessment of internal controls and response to control
weaknesses in the above assessments;

- SPSS has recruited and is recruiting new personnel to the finance
organization, including an internal audit manager, who have expertise in
financial controls, financial reporting and income tax to improve the
quality and level of experience of the Company's finance organization;

- SPSS is continuing to assess the adequacy of the accounting and financial
reporting competence and leadership capabilities of personnel who have
accounting and finance managerial responsibilities;

- SPSS has hired a tax manager with U.S. and international tax experience,
including eight years of service on the tax staff of a Big-Four
accounting firm, to strengthen the Company's accounting and documentation
for income taxes;

- SPSS has adopted and is implementing formal standard financial policies
and procedures and education and training of employees on policies and
procedures in an effort to constantly improve internal controls and the
control environment;

- SPSS is formalizing all review and reconciliation processes by having
reviewers timely sign their work as well as aggregate and file all
reconciliations in a central file repository;

- SPSS has established a committee to improve the Company's policies and
procedures related to the documentation of criteria to support the
technological feasibility of products.

- SPSS began monitoring net realizable value calculations of capitalized
software development costs on a quarterly basis (such monitoring had
previously been done on an annual basis) through reviews by a person with
knowledge of the Company's products and opportunities of product sales,
including secondary products, to evaluate the appropriateness of
capitalized software balances.

89

- SPSS is in the process of improving and standardizing policies and
procedures for revenue recognition across all Company locations.

- SPSS had enhanced internal control mechanisms related to accounting for
deferred revenue, which played a significant role in the discovery of the
errors related to the Company's accounting for deferred revenue.

- SPSS has adopted a formal process consisting of an in-depth review of the
tax provision, including deferred tax accounts, on a quarterly basis.

- SPSS has adopted a formal process to provide for a more controlled and
organized consolidation, including a review of adjustments to ensure that
prior period consolidating entries have been either properly carried
forward or eliminated in the consolidation for the current period.

- SPSS has implemented intercompany reconciliation procedures and is
working to further validate, support and document the effects of changes
in foreign currency on intercompany balances.

- SPSS has transferred accounting responsibilities for the Company's market
research business in the United States from the Company's Kilburn-United
Kingdom office to its Chicago office to improve controls and the
efficiency of monthly closings.

- SPSS has implemented the SPSS Inc. Code of Business Conduct & Ethics (the
"Code of Ethics") which is applicable to all of the SPSS directors,
officers and employees, including the Company's Chief Executive Officer,
Chief Financial Officer, Controller and other senior financial officers
performing similar functions. The Code of Ethics satisfies, and in many
respects exceeds, all of the requirements of the Sarbanes-Oxley Act of
2002 and the rules and regulations promulgated by the Securities and
Exchange Commission pursuant to the Sarbanes-Oxley Act. The Code of
Ethics also satisfies, and in many respects exceeds, the listing
standards established by the NASDAQ National Market, the exchange on
which the Company's stock is listed. The Company has posted the Code of
Ethics on its website at http://www.spss.com.

- SPSS has made changes to the Company's organizational structure to
provide a clearer segregation of responsibilities in connection with
account reconciliations, manual journal entries, and the preparation and
review of documentation to support the Company's quarterly and annual
statements.

- SPSS is implementing an account reconciliation policy, which requires the
monthly reconciliation of all balance sheet accounts and the use of
standard methodology and templates for account reconciliations.

SPSS believes that its disclosure controls and procedures have improved due
to the scrutiny of such matters by its management and Audit Committee, its
external auditors, and other persons the Company has engaged to assist it in
assessing and improving its system of internal controls. SPSS believes that its
controls and procedures will continue to improve as it completes the
implementation of the actions described above.

Based in part upon these changes, Mr. Noonan and Dr. Hamburg believe that
as of the filing date of this Annual Report on Form 10-K, the Company's
disclosure controls and procedures are reasonably designed to ensure that
information required to be disclosed by the Company in the reports it files or
submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized, and reported within the time periods specified in the rules and
forms of the SEC.

Other than as described above, there have been no changes in the Company's
internal control over financial reporting identified in the evaluation that
occurred during the Company's fourth quarter of fiscal 2003 that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.

90

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

BOARD OF DIRECTORS AND MANAGEMENT OF SPSS

OFFICES AND DIRECTORS

The following table shows information as of July 1, 2004 with respect to
each person who is an executive officer or director of SPSS.

- ---------------

(1) Member of the Compensation Committee

(2) Member of the Audit Committee

(3) Member of the Nominating Committee

(4) Mr. Zanghi resigned from his position as Executive Vice President and Chief
Operating Officer effective July 1, 2004

Norman Nie, Chairman of the Board and co-founder of SPSS, designed the
original SPSS statistical software beginning in 1967 and has been a Director and
Chairman of the Board since the Company's inception in 1975. He served as Chief
Executive Officer of SPSS from 1975 to 1991. In addition to his current
responsibilities as Chairman of the Board, Dr. Nie is a research professor in
Political Science at the Graduate School of Business at Stanford University and
a professor emeritus in the Political Science Department at the University of
Chicago. His research specialties include public opinion, voting behavior and
citizen participation. He has received three national awards for his books in
these areas. Dr. Nie received his Ph.D. from Stanford University.

Jack Noonan has served as Director as well as President and Chief Executive
Officer since joining SPSS in January 1992. Mr. Noonan was President and Chief
Executive Officer of Microrim Corp., a developer of database software products,
from 1990 until December 1991. He served as Vice President of the Product Group
of Candle Corporation, a developer of IBM mainframe system software, from 1985
to 1990. Mr. Noonan is a Director of Morningstar, Inc., Repository Technologies,
Inc. and Global View. He is a member of the advisory committee to Geneva
Technology Partners, Inc.

Edward Hamburg, Executive Vice President, Corporate Operations, Chief
Financial Officer and Secretary, was elected Senior Vice President, Corporate
Operations in July 1992, Chief Financial Officer in June 1993 and Secretary in
June 1994. Dr. Hamburg previously served as Senior Vice President, Business
Development, and was responsible for product and technology acquisitions as well
as joint venture opportunities. He first joined SPSS in 1978 and served in a
variety of marketing and product management capacities.

91

Dr. Hamburg joined the faculty at the University of Illinois at Chicago in 1982,
and returned to SPSS in 1986. He received his Ph.D. from the University of
Chicago.

Brian Zanghi, Executive Vice President and Chief Operating Officer, joined
SPSS following the merger with NetGenesis Corp. in December 2001. Mr. Zanghi was
the Executive Vice President and Chief Operating Officer of NetGenesis until the
merger with SPSS. Before joining NetGenesis, he served as Executive Vice
President at Instinctive Technologies and as the President of PC DOCS, Inc. He
received his B.A. in economics/business administration from Assumption College.

Jonathan Otterstatter, Executive Vice President and Chief Technology
Officer, joined SPSS following the merger with ShowCase Corporation in February
2001. Mr. Otterstatter was with ShowCase from 1994 until 2001 and, from 1999 to
2001 served as Senior Vice President, Technology and Services and a member of
its executive committee. Mr. Otterstatter was with IBM from 1983 to 1994 where
in his last position he was responsible for the AS/400 software platform,
including the system software plan and the system design control group. He holds
an M.S. degree in management of technology from the Massachusetts Institute of
Technology and a B.S. degree in computer science from the University of
Wisconsin at LaCrosse.

John Shap, Senior Vice President, World Wide Sales, joined SPSS in December
2003. From October 2001 through October 2003, Mr. Shap was the Senior Vice
President of Worldwide Sales and Marketing at DemandTec, Inc. He was previously
Vice President of North America Central Sales at Siebel from March 2001 to
October 2001 and, prior to its acquisition by Siebel, Vice President of
Worldwide Sales at OnLink Technologies from April 1999 to October 2000. Mr. Shap
served in various positions at Hyperion Solutions, Inc. from August 1992 to
April 1999. He holds a bachelors degree from Northern Illinois University.

Charles R. Whitchurch has been a director of SPSS Inc. since October 2003.
Since September 1991, Mr. Whitchurch has served as the Chief Financial Officer
and Treasurer of Zebra Technologies Corporation. From 1981 until September 1991,
he served as Vice President, Finance of Corcom, Inc., a technology company
specializing in the control of radio frequency interference. In addition, Mr.
Whitchurch previously held positions as Chief Financial Officer of Resinoid
Engineering Corporation and as a Corporate Services Officer with the Harris Bank
in Chicago. He holds a bachelors degree in economics (Phi Beta Kappa) from
Beloit College and an MBA from Stanford University.

Merritt Lutz has been a Director of SPSS since 1988. He is currently an
Advisory Director of Morgan Stanley, managing its strategic technology
investments and partnerships. Previously, he was President of Candle
Corporation, a worldwide supplier of systems software from 1989 to 1993. Mr.
Lutz is a Director of Interlink Electronics, Inc. (NASDAQ: LINK) and three
privately held software companies: Sendmail, Algorithmics and Business Engine
Software. He is a former Director of Information Technology Association of
America and the NASD Industry Advisory Committee. Mr. Lutz holds a bachelors and
masters degree from Michigan State University.

Michael Blair has been a Director of SPSS since July 1997. Currently, Mr.
Blair is a payroll business co-leader at Hewitt Associates, Inc., a global human
resources outsourcing and consulting firm. He joined Hewitt after Hewitt's 2003
acquisition of Cyborg Systems, Inc. Before assuming his current role, Mr. Blair
served as the Chairman, Chief Executive, and founder of Cyborg Systems, Inc., a
human resource management software company that he founded in 1974. Mr. Blair
currently is a director of Computer Corporation of America, Repository
Technologies, Inc., Showingtime.com and Delaware Place Bank. He is a board
member and past president of the Chicago Software Association and a board member
of Benefits & Compensation Magazine. Mr. Blair holds a bachelors degree in
mathematics with a minor in physics from the University of Missouri.

Promod Haque has been a Director of SPSS since the merger with ShowCase
Corporation in February 2001. Dr. Haque was a Director of ShowCase from March
1992 until the merger with SPSS. He joined Norwest Venture Partners, a venture
capital firm, in November 1990 and is currently Managing Partner of Norwest
Venture Partners VI, Norwest Venture Partners VII and Norwest Venture Partners
VIII, and General Partner of Norwest Venture Partners V and Norwest Equity
Partners IV. Dr. Haque is a Director of Extreme Networks, Inc., Primus Knowledge
Solutions and several privately held companies. He holds an

92

M.S. and a Ph.D. in electrical engineering from Northwestern University, an M.M.
from Northwestern University and a B.S. in electrical engineering from the
University of New Delhi, India.

William Binch has been a director of SPSS since the merger with ShowCase
Corporation in February 2001. Mr. Binch was a director of ShowCase from 1999
until the merger with SPSS. He is currently the Executive Chairman of
SeeCommerce. Mr. Binch was senior vice president of worldwide operations for
Hyperion Solutions from July 1997 to May 1999. Prior to Hyperion, he was a
senior executive for Business Objects and Prism, two business intelligence and
data warehousing companies. In addition, Mr. Binch served as vice president of
strategic accounts at Oracle Corporation. He has held sales and management
positions at IBM, iTel and Fortune. Mr. Binch also is a director of three other
technology companies: Ventaso, Inc., SeeCommerce, and Saama Technologies, Inc.

Kenneth Holec has been a director of SPSS since the merger with ShowCase
Corporation in February 2001. Mr. Holec was the president and chief executive
officer and a member of the board of directors of ShowCase from November 1993
until the merger with SPSS. From 1985 to 1993, he was President and Chief
Executive Officer of Lawson Software, a provider of high-end financial and human
resource management software solutions. Currently, Mr. Holec is a Partner at
TripleTree, a boutique investment bank, a Director of Stellent, Inc., a maker of
Web-based content management products, and a Director of one other private
company.

The SPSS Board of Directors is divided into three classes serving staggered
three-year terms. Mr. Lutz and Mr. Holec are each serving a three-year term
expiring at the 2004 annual meeting. Mr. Binch and Dr. Nie are each serving a
three-year term expiring at the 2005 annual meeting. Mr. Whitchurch is serving
the remainder of the three-year term held by Bernard Goldstein prior to Mr.
Goldstein's resignation on October 23, 2003. Mr. Whitchurch's term will expire
at the 2005 annual meeting. Mr. Noonan, Dr. Haque and Mr. Blair are each serving
a three-year term expiring at the 2006 annual meeting. The executive officers
named herein have terms expiring at the next annual meeting or when their
successors are duly elected and qualified.

AUDIT COMMITTEE

The SPSS Board of Directors has established an Audit Committee of the Board
for the purpose of overseeing the accounting and financial reporting process of
SPSS and the financial audits of SPSS. The functions of the Audit Committee
include (a) assisting the Board in its oversight of the quality and integrity of
the Company's internal controls over financial reporting and internal audit
function, (b) the appointment, replacement, compensation and oversight of the
Company's independent auditors, (c) approving services provided by the Company's
independent auditors before those services are rendered and evaluating the
possible effect the performance of such services will have on the auditors'
independence (d) reviewing the Company's financial disclosure documents and
discussing these documents with both management and the Company's independent
auditors prior to public release, (e) establishing procedures for the receipt,
retention and treatment of complaints received by the Company regarding
accounting, internal accounting controls or auditing matters, (f) discussing
with management the Company's process for managing business and financial risk
and (g) assisting the Company in complying with significant applicable legal,
ethical and regulatory requirements. A complete copy of the Audit Committee
Charter is attached as Exhibit 99.1 to this Form 10-K.

The three members of the Audit Committee are Charles R. Whitchurch, Michael
Blair and William Binch. The Board has determined that each of Mr. Whitchurch,
Mr. Blair and Mr. Binch has sufficient knowledge and literacy in financial and
accounting matters to serve on the Audit Committee. The Board has also
determined that Mr. Whitchurch, the chairman of the Audit Committee, qualifies
as an "audit committee financial expert." Each of Mr. Whitchurch, Mr. Blair and
Mr. Binch qualifies as an independent Board member under the applicable rules.
In connection with the passage of the Sarbanes-Oxley Act of 2002, the Securities
and Exchange Commission has amended the definition of audit committee
"independence" under the Securities Exchange Act of 1934 and the rules and
regulations promulgated thereunder. Further, the Nasdaq National Market has
amended the definition of "independence" set forth in its listing standards. The

93

Board has determined that each of Mr. Whitchurch, Mr. Blair and Mr. Binch
satisfies the new definition of independence under both the Exchange Act and the
Nasdaq listing standards. The Board made each of the above determinations based
on information that the Company requested from each member of the Audit
Committee regarding his experience with financial and accounting matters.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934 requires our
directors, executive officers and holders of more than 10% of our common stock
to file with the Securities and Exchange Commission reports regarding their
ownership and changes in ownership of our equity securities. SPSS believes,
during fiscal year 2003, that its directors, executive officers and 10%
stockholders complied with all Section 16(a) filing requirements, with the
following exceptions: (i) two late reports filed by Norman Nie, the first of
which is a late report on Form 4 regarding his acquisition of an option to
purchase shares of SPSS common stock on January 2, 2003, and the second of which
is a late report on Form 4 regarding sale by of shares of SPSS common stock on
April 1, 2003; (ii) two late reports filed by Jack Noonan, the first of which is
a late report on Form 4 regarding his disposition to SPSS of shares of SPSS
common stock on January 2, 2003, and the second of which is a late report on
Form 4 regarding his exercise of an option to purchase SPSS common stock and
sale by Mr. Noonan of shares of SPSS common stock on September 24, 2003; (iii)
one late report filed by Edward Hamburg regarding his disposition to SPSS of
shares of SPSS common stock on January 2, 2003; (iv) two late reports filed by
Kenneth Holec, the first of which is a late report on Form 4 regarding his
acquisition of an option to purchase shares of SPSS common stock on January 2,
2003, and the second of which is a late report on Form 4 regarding the
acquisition by Mr. Holec of an option to purchase shares of SPSS common stock on
February 24, 2003; (v) one late report filed by William Binch regarding his
acquisition of an option to purchase shares of SPSS common stock on January 2,
2003; (vi) one late report filed by Bernard Goldstein regarding his acquisition
of an option to purchase shares of SPSS common stock on January 2, 2003; (vii)
one late report filed by Michael Blair regarding his acquisition of an option to
purchase shares of SPSS common stock on January 2, 2003; (viii) one late report
filed by Promod Haque regarding his acquisition of an option to purchase shares
of SPSS common stock on January 2, 2003; and (ix) one late report filed by
Merritt Lutz regarding his acquisition of an option to purchase shares of SPSS
common stock on January 2, 2003. In addition to the foregoing, Mr. Noonan timely
filed a report on Form 4 regarding his exercise of two options to purchase SPSS
common stock and two sales of shares of SPSS common stock on September 17, 2003;
however, this report on Form 4 was not posted on the Company's website until
September 23, 2003, four (4) days after the September 19, 2003 filing date of
the report. In making this statement, SPSS has relied upon examination of the
copies of Forms 3, 4 and 5 provided to the Company and the written
representations of its directors, officers and 10% stockholders.

CODE OF ETHICS

On June 18, 2003, SPSS adopted the SPSS Inc. Code of Business Conduct &
Ethics (the "Code of Ethics") which is applicable to all of the SPSS directors,
officers and employees, including the Company's Chief Executive Officer, Chief
Financial Officer, Controller and other senior financial officers performing
similar functions. The Code of Ethics satisfies, and in many respects exceeds,
all of the requirements of the Sarbanes-Oxley Act of 2002 and the rules and
regulations promulgated by the Securities and Exchange Commission pursuant to
the Sarbanes-Oxley Act. The Code of Ethics also satisfies, and in many respects
exceeds, the listing standards established by the Nasdaq National Market, the
exchange on which the Company's stock is listed. The Company has posted the Code
of Ethics on its website at http://www.spss.com. The Company will furnish a copy
of the Code of Ethics to any person, without charge, upon written request
directed to the Secretary of the Company at the Company's principal executive
offices.

SPSS intends to satisfy its obligation to disclose any amendment to or
waiver of a provision of the Code of Ethics that applies to the Company's Chief
Executive Officer, Chief Financial Officer, Controller and other senior
financial officers performing similar functions by (a) disclosing such
information on a Form 8-K filed within five (5) days of the date of such
amendment or waiver and (b) posting such information on its website at
http://www.spss.com.

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ITEM 11. EXECUTIVE COMPENSATION

The following tables show (a) the compensation paid or accrued by SPSS to
the Chief Executive Officer, and each of the executive officers of SPSS, other
than the CEO, serving on December 31, 2003 (the "named executive officers") for
services rendered to SPSS in all capacities during 2001, 2002 and 2003, (b)
information relating to option grants made to the named executive officers in
2003 and (c) certain information relating to options held by the named executive
officers. SPSS made no grants of freestanding stock appreciation rights ("SARs")
in 2001, 2002 or 2003, nor did SPSS make any awards in 2001, 2002 or 2003 under
any long-term incentive plan.

SUMMARY COMPENSATION TABLE

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(1) Amounts reflected in this column are for grants of stock options for the
common stock of SPSS. No stock appreciation rights have been issued by
SPSS.

(2) $38,750 of the total bonus paid to Mr. Noonan during 2003 represents a
bonus earned in fiscal year 2002.

(3) Securities Underlying Options/SARs for Mr. Noonan in fiscal year 2003
include 3,144 "reload" options granted after he surrendered shares of SPSS
common stock to pay the exercise price of his options.

(4) On December 31, 2002, Mr. Noonan held 3,000 shares of restricted common
stock having a market value, based on the closing price of the common stock
on that date, of $41,970. The restriction on these shares of common stock
lapsed on January 1, 2003.

(5) Securities Underlying Options/SARs for Mr. Noonan in fiscal year 2001
include 41,077 "reload" options granted after he surrendered shares of SPSS
common stock to pay the exercise price of his options.

(6) $14,000 of the bonus paid to Dr. Hamburg during 2003 represents a bonus
earned in fiscal year 2002.

(7) Securities Underlying Options/SARs for Dr. Hamburg in fiscal year 2003
include 979 "reload" options granted to him after he surrendered shares of
SPSS common stock to pay the exercise price of his options.

(8) On December 31, 2002, Dr. Hamburg held 3,000 shares of restricted common
stock having a market value, based on the closing price of the common stock
on that date, of $41,970. The restriction on these shares of common stock
lapsed on January 1, 2003.

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(9) On December 31, 2001, Dr. Hamburg held 37,195 shares of restricted common
stock having a market value, based on the closing price of the common stock
on that date, of $397,258, which were granted to replace 30,700 of stock
options granted in 1991 and expired in 2001.

(10) $25,000 of the bonus paid to Mr. Zanghi during 2003 represents a bonus
earned in fiscal year 2002.

(11) During 2003, SPSS forgave Mr. Zanghi's obligation to make interest payments
in the aggregate amount of $6,190 owed with respect to his indebtedness to
NetGenesis Corp. and assumed by SPSS following the merger of the two
companies. See Item 12 under the section entitled "Transactions with Brian
Zanghi."

(12) During 2002, SPSS forgave Mr. Zanghi's obligation to make interest payments
in the aggregate amount of $7,000 owed with respect to his indebtedness to
NetGenesis Corp. and assumed by SPSS following the merger of the two
companies. See Item 12 under the section entitled "Transactions with Brian
Zanghi." He received a $65,000 sign-on bonus.

(13) Salary and bonus compensation for Mr. Zanghi in fiscal year 2001 reflect
amounts paid by NetGenesis Corp. before the effective date of the merger of
SPSS and NetGenesis in December 2001.

(14) During 2001, NetGenesis made a salary advance to Mr. Zanghi in the amount
of $38,531. This indebtedness was forgiven by NetGenesis.

(15) As of December 31, 2001, Mr. Zanghi held zero shares of restricted stock.
On June 25, 2001, prior to the close of the December 2001 merger of SPSS
and NetGenesis, NetGenesis granted to him 330,000 restricted shares of
NetGenesis common stock. Instead of using the closing price of NetGenesis
stock on July 25, 2001 to value Mr. Zanghi's restricted stock award, the
value set forth above was calculated using both the closing price of SPSS
stock on July 25, 2001 ($16.19) and the conversion ratio used in exchanging
NetGenesis shares for SPSS shares (0.097). Despite the value of this grant,
the aggregate value of his restricted share holdings was $0 on December 31,
2001 because all of his restricted shares vested immediately upon the
consummation of the merger.

(16) $13,125 of the bonus paid to Mr. Otterstatter during 2003 represents a
bonus earned in fiscal year 2002.

(17) Salary Compensation for Mr. Otterstatter in fiscal year 2001 reflects
$175,000 in base salary received from ShowCase Corporation from January to
March 2001 for services rendered prior to the merger of SPSS and ShowCase
and $177,500 in base salary received from SPSS from April to December 2001
for services rendered as an officer of SPSS following the merger. Bonus
Compensation for him reflects $73,000 in cash bonuses received from
ShowCase for services rendered prior to the merger of SPSS and ShowCase and
$15,303 in cash bonuses received from SPSS for services rendered as an
officer of SPSS following the merger.

(18) As of December 31, 2003, SPSS had only three (3) executive officers, other
than the Chief Executive Officer. Mr. Shap became an employee of SPSS on
December 15, 2003, but was not deemed an executive officer of SPSS until
2004. Because Mr. Shap's base salary is annualized at $240,000, SPSS is
including Mr. Shap as a "named executive officer" for whom disclosure would
have been required if he had served as an executive officer as of December
31, 2003.

(19) Mr. Zanghi resigned from his position as Executive Vice President and Chief
Operating Officer, effective July 1, 2004.

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The following table shows the number of options to purchase common stock
granted to each of the named executive officers during 2003.

2003 OPTION/STOCK APPRECIATION RIGHTS GRANTS(1)

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(1) The options that expire on January 2, 2013 were granted as of January 2,
2003, and had a four-year vesting schedule. The grant of an option to
purchase 3,144 shares of common stock of SPSS to Jack Noonan that expires on
August 18, 2013 was granted as of August 18, 2003 and vested immediately
upon the date of grant. The grant of an option to purchase 979 shares of
common stock of SPSS to Edward Hamburg that expires on August 18, 2013 was
granted as of August 18, 2003 and vested immediately upon the date of grant.
The grant of an option to purchase 85,000 shares of common stock of SPSS to
John Shap that expires on December 17, 2013 was granted as of December 17,
2003 and had a four-year vesting schedule. Pursuant to authority granted
under the Company's 2002 Equity Incentive Plan, the Board may grant
additional options to certain option holders in the event that such option
holders pay the exercise price of their options or any applicable
withholding taxes by surrendering shares of SPSS common stock. In these
cases, the Board has granted "reload" options at the then current market
price in an amount equal to the number of shares of SPSS common stock that
the option holder surrendered.

(2) In satisfaction of applicable SEC regulations, the table shows the potential
realizable values of these options, upon their latest possible expiration
date, at arbitrarily assumed annualized rates of stock price appreciation of
five and ten percent over the term of the options. The potential realizable
value columns of the table illustrate values that might be realized upon
exercise of the options at the end of the ten-year period starting with
their vesting commencement dates, based on the assumptions shown above.
Because actual gains will depend upon the actual dates of exercise of the
options and the future performance of the common stock in the market, the
amounts shown in this table may not reflect the values actually realized. No
gain to the named executive officers is possible without an increase in
stock price which will benefit all stockholders proportionately. Actual
gains, if any, on option exercises and common stock holdings are dependent
on the future performance of the common stock and general stock market
conditions. There can be no assurance that the potential realizable values
shown in this table will be achieved, or that the stock price will not be
lower or higher than projected at five and ten percent assumed annualized
rates of appreciation.

(3) Mr. Zanghi resigned from his position as Executive Vice President and Chief
Operating Officer effective July 1, 2004

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AGGREGATED OPTION/STOCK APPRECIATION RIGHT EXERCISES IN 2003 AND
YEAR-END OPTION/STOCK APPRECIATION RIGHT VALUES

- ---------------

(1) All information provided is with respect to stock options. No stock
appreciation rights have been issued by SPSS.

(2) These amounts have been determined by multiplying the aggregate number of
options by the difference between $17.88, the closing price of the common
stock on the Nasdaq National Market on December 31, 2003, and the exercise
price for that option.

(3) These amounts have been determined by multiplying the aggregate number of
options exercised by the difference between the closing price of the common
stock on the Nasdaq National Market on the date of exercise and the exercise
price for that option.

(4) Mr. Zanghi resigned from his position as Executive Vice President and Chief
Operating Officer, effective July 1, 2004.

COMPENSATION OF DIRECTORS

As of December 31, 2003, the non-employee directors serving on the Board
were entitled to receive cash compensation as described below. However, SPSS
only began to compensate its Board members in cash, effective as of the third
fiscal quarter of 2003. In addition, some of the directors changed duties during
the fiscal year. As such, we have listed below both the annual amount that a
director would be entitled to receive for a particular Board or committee
position and the amounts actually received by each director holding such
position during 2003.

- The Chairman of the Board was entitled to receive $80,000 annually for
services rendered in this capacity. All non-employee directors serving on
the Board, including the Chairman, were entitled to receive compensation
for board service in the amount of $30,000 annually. Norman Nie received
$40,000 for his service as Chairman of the Board during both the third
and fourth fiscal quarters of 2003. Dr. Nie, Michael Blair, William
Binch, Kenneth Holec, Merritt Lutz and Promod Haque, respectively,
received $15,000 for board service during both the third and fourth
fiscal quarters of 2003. Mr. Goldstein received $7,500 for board service
during the third fiscal quarter of 2003. Mr. Whitchurch received $7,500
for board services during the fourth quarter of 2003.

- The Chairman of the Audit Committee was entitled to receive $40,000
annually for services rendered in this capacity and the additional
members of the Audit Committee were entitled to receive $20,000 annually
for their service as Audit Committee members. Mr. Blair received $10,000
for his service as the Chairman of the Audit Committee during the third
fiscal quarter of 2003 and an additional $5,000 for his service a member
of the Audit Committee during the fourth fiscal quarter of 2003. Mr.
Whitchurch received $10,000 for his service as the Chairman of the Audit
Committee during the fourth fiscal quarter of 2003. Mr. Binch received
$10,000 for his service a member of the Audit Committee during both the
third and fourth fiscal quarters of 2003. Mr. Holec received $5,000 for
his service a member of the Audit Committee during the third fiscal
quarter of 2003.

- The Chairman of the Compensation Committee was entitled to receive
$10,000 annually for services rendered in this capacity and the
additional members of the Compensation Committee were entitled to

98

receive $5,000 annually for their service as Compensation Committee
members. Mr. Binch received $5,000 for service as the Chairman of the
Compensation Committee during both the third and fourth fiscal quarters
of 2003. Mr. Lutz and Mr. Blair, respectively, received $2,500 for
service as members of the Compensation Committee during both the third
and fourth fiscal quarters of 2003.

- The Chairman of the Nominating Committee was entitled to receive $10,000
annually for services rendered in this capacity and the additional
members of the Nominating Committee were entitled to receive $5,000
annually for their service as Audit Committee members. Dr. Nie received
$2,500 for his service as the Chairman of the Nominating Committee during
the third fiscal quarter of 2003. Dr. Haque replaced Dr. Nie as a member
of the Nominating Committee for the fourth fiscal quarter of 2003 and
received $1,250 for service as a member of the Nominating Committee
during the fourth fiscal quarter. Mr. Lutz received $2,500 for service as
a member of the Nominating Committee during both the third and fourth
fiscal quarters of 2003.

For the year ended December 31, 2003, the non-employee directors serving on
the Board were entitled to the following option grants:

- Non-Employee directors serving on the Board on January 2, 2003 were
entitled to receive an option to purchase 7,500 shares of SPSS common
stock.

- Non-Employee directors serving on the Board on July 1, 2003 were entitled
to receive an option to purchase 5,000 shares of SPSS common stock as a
formula grant under the Company's 2002 Equity Incentive Plan.

- Upon the initial election of Charles R. Whitchurch as a member of the
Board, Mr. Whitchurch was entitled to receive an option to purchase
10,000 shares of SPSS common stock as a formula grant under the Company's
2002 Equity Incentive Plan.

Each director was also reimbursed by SPSS for all reasonable expenses
incurred in connection with services provided as a director.

During 2003, three of the non-employee directors of SPSS received
additional compensation as follows: Norman Nie received compensation in the
amount of $135,600 for consultant work on a part-time basis. See the Section
titled "Consulting Agreements," below, for further information on compensation
paid to Dr. Nie. William Binch received a monthly consulting fee of $3,000 for
consulting work on a part-time basis from January 2003 through June 2003.
Kenneth Holec was entitled to receive a consulting fee in the amount of $1,000
from July 2002 to March 2003 as a retainer for consulting work on a part-time
basis. This $1,000 payment was made to Mr. Holec during 2002 and no additional
compensation for consulting work was paid to Mr. Holec during 2003. Mr. Holec
also received an additional grant of an option to purchase 46,000 shares of SPSS
common stock at an exercise price of $11.00 per share, which option grant was
approved by the Board on April 23, 2003 and granted in exchange for various
Board services provided by Mr. Holec.

EMPLOYMENT AGREEMENT WITH JACK NOONAN

SPSS entered into an employment agreement with Jack Noonan on January 14,
1992. This employment agreement provided for a one-year term with automatic
one-year extensions unless he or SPSS gives a written termination notice at
least 90 days before the expiration of the initial term or any extension. It
also provides for a base salary of $225,000 during the initial term, together
with the same benefits provided to other employees of SPSS. The Compensation
Committee of the Board of Directors annually reviews Mr. Noonan's base
compensation and increased it to $235,000 for 1993, 1994, 1995, 1996 and 1997
and to $242,500 in 1998, $256,500 in 1999, $275,000 in 2000, $310,000 in 2001,
$310,000 in 2002 and $320,000 in 2003. If SPSS terminates Mr. Noonan's
employment without cause, SPSS must pay him an amount equal to fifty percent of
his annual base salary in effect at the time of termination. This amount is
payable in twelve equal monthly installments. However, if Mr. Noonan finds other
employment at a comparable salary, the Company's obligation to make these
payments ceases. The employment agreement requires him to refrain from
disclosing confidential information of SPSS and to abstain from competing with
SPSS during his employment and for a period of one year after employment ceases.
Only Mr. Noonan is employed through an employment or similar
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agreement with SPSS. However, SPSS does have confidentiality and work-for-hire
agreements with many of its key management and technical personnel.

CONSULTING AGREEMENTS

SPSS entered into a consulting agreement (the "Initial Nie Consulting
Agreement"), dated as of January 1, 1997, with Norman H. Nie Consulting L.L.C.,
an Illinois Limited Liability Company ("Nie Consulting"). The Initial Nie
Consulting Agreement was effective until May 31, 2003. Pursuant to the Initial
Nie Consulting Agreement, Nie Consulting was to provide thirty (30) hours per
month of consulting services on various matters relating to the business of
SPSS. This consulting agreement provided for a one-year term with automatic
one-year extensions unless Nie Consulting or SPSS gave a written notice of
termination at least thirty (30) days prior to the expiration of the initial
term or any extension. SPSS could terminate this consulting agreement for cause,
in which event SPSS would be pay Nie Consulting all accrued but unpaid
compensation. The agreement also provided that Nie Consulting was to receive
annual compensation of $80,800 and reimbursement of reasonable out-of-pocket
expenses incurred in performing services under the consulting agreement. The
Initial Nie Consulting Agreement required that the Nie Consulting refrain from
disclosing confidential information about SPSS during the term of the consulting
agreement and for a period of five (5) years after its expiration. In addition,
the Initial Nie Consulting Agreement required that Nie Consulting abstain from
competing with SPSS during his consultancy and for a period of one-year after
the consultancy ceases. During fiscal year 2003, SPSS paid to Nie Consulting
compensation in the amount of $40,400 pursuant to the Initial Nie Consulting
Agreement.

During 2003, SPSS entered into a new consulting agreement, dated as of June
1, 2003, with Nie Consulting (the "Second Nie Consulting Agreement") to replace
the Initial Nie Consulting Agreement. Pursuant to the Second Nie Consulting
Agreement, Nie Consulting is to provide services to SPSS both to assist SPSS in
re-engineering certain of its business processes and to assist SPSS on various
matters relating to the Company's business. The Second Nie Consulting Agreement
provides that it shall continue in effect until either Nie Consulting or SPSS
gives a written notice of termination at least fifteen (15) days in advance of
such termination. The Second Nie Consulting Agreement also provides that Nie
Consulting is to receive monthly compensation in the amount of $10,000 per
month, provided that from September 2003 through and including January 2004, Nie
Consulting will instead receive monthly compensation in the amount of $15,000
per month. In addition, Nie Consulting shall be entitled to reimbursement of
reasonable out-of-pocket expenses incurred in performing the consulting
services. The Second Nie Consulting Agreement requires that Nie Consulting
refrain from disclosing confidential information about SPSS during the term of
the consulting agreement and for a period of five (5) years after its
expiration. In addition, the Second Nie Consulting Agreement requires that Nie
Consulting abstain from competing with SPSS during its consultancy and for a
period of one year after the consultancy ceases. During fiscal year 2003, SPSS
paid to Nie Consulting compensation in the amount of $95,200 pursuant to the
Second Nie Consulting Agreement.

SPSS entered into a consulting arrangement with William Binch whereby Mr.
Binch received a monthly consulting fee of $3,000 for consulting work performed
on a part-time basis. He received this consulting fee from January 2003 through
June 2003. After June 2003, the consulting arrangement was terminated.

SPSS entered into a consulting arrangement with Kenneth Holec whereby Mr.
Holec was entitled to receive a consulting fee in the amount of $1,000 from July
2002 to March 2003 as a retainer for consulting work on a part-time basis. This
$1,000 payment was made to him during 2002 and no additional compensation for
consulting work was paid to him during 2003.

CHANGE OF CONTROL AGREEMENTS

On November 27, 2000, SPSS entered into revised change of control
agreements with Jack Noonan and Edward Hamburg. SPSS entered into a new change
of control agreement with Jonathan Otterstatter on April 25, 2003 and a new
change of control agreement with John Shap effective as of December 15, 2003.
Each of these agreements provides certain benefits to the relevant executive
officer if the executive officer is terminated or constructively terminated
following a change of control. Each agreement provides that, if the

100

executive officer is terminated without cause or constructively terminated
within two years following a change of control, then the executive officer may
receive benefits including (a) a severance package equal to the greater of (i)
the aggregate cash compensation received in the immediately preceding fiscal
year, or (ii) the aggregate cash compensation scheduled to be received during
the current fiscal year; (b) the accelerated vesting of all previously unvested
options; and (c) participation in the same health and welfare benefits he or she
received at any time within 120 days of the change of control for eighteen (18)
months following that date of such termination.

As more fully described above under the section entitled "Employment
Agreement with Jack Noonan," if SPSS terminates Mr. Noonan's employment without
cause and he does not find other employment at a comparable salary, SPSS must
pay him an amount equal to fifty percent of his annual base salary in effect at
the time of termination.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

William Binch, Michael Blair and Merritt Lutz were directors and members of
the Compensation Committee during fiscal year 2003. None of the members of the
Compensation Committee has ever been an officer or employee of SPSS or any of
its subsidiaries. From January 2003 through June 2003, Mr. Binch performed
part-time consulting services for SPSS. William Binch received a monthly
consulting fee in the amount of $3,000 for this consulting work, as more
particularly described under the section entitled "Certain Relationships and
Related Transactions."

REPORT OF THE SPSS COMPENSATION COMMITTEE

To: The Board of Directors and Stockholders of SPSS Inc.:

During 2003, the NASDAQ National Market, on which our Common Stock trades,
amended its listing criteria to implement modified standards of independence for
its listed companies' Boards of Directors and Board committees. SPSS is proud to
report that it maintains a Compensation Committee that both satisfied the NASDAQ
standards prior to the implementation of the amended listing standards and
continues to satisfy the NASDAQ standards after the implementation of the
amended listing standards.

SPSS has been responsive to increased concerns regarding corporate
governance and, in particular, the role of the Compensation Committee in
establishing and monitoring the Company's compensation philosophy and programs
to enhance the link between pay and performance.

During 2003, the Compensation Committee pursued a number of projects
related to our compensation analysis. In order to maximize our effectiveness, we
retained Frederic W. Cook & Co., a nationally recognized compensation consulting
firm, to advise the Compensation Committee with respect to our compensation
analysis. The Compensation Committee's three most significant projects during
2003 were:

1. A general review and reconsideration of the Company's overall
compensation philosophy.

2. A specific and thorough review of the Company's compensation
programs for its directors and executive officers.

3. A specific and thorough review of the Company's equity-based
compensation plan to determine if the equity plan could be revised in a
manner that would reduce the effective cost to the Company's stockholders
of administering the plan, while at the same time maintaining or even
enhancing the plan's ability to motivate and reward performance that
enhances stockholder value.

COMPENSATION PHILOSOPHY

The Compensation Committee's general review of the Company's overall
compensation philosophy resulted in a decision by the Compensation Committee to
leave the Company's basic compensation philosophy unchanged, but, nevertheless,
adjust some of its details to better serve the interests of stockholders. The
general objective of the Company's executive compensation program is to help
SPSS attract and retain

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talented executives while at the same time promoting the interests of the
Company's stockholders. To meet this objective, the Compensation Committee has
endorsed compensation programs for executive officers that place a substantial
portion of each executive officer's potential compensation at risk and dependant
on a combination of performance criteria which are generally considered to
approximate increases in stockholder value over the performance of SPSS. Within
this philosophy, the Compensation Committee's key objectives are to:

1. Offer a total compensation package to the Company's directors and
executive officers that is market competitive, taking into account
comparable positions at various companies within the Company's "peer
group."

2. Motivate the Company's executive officers to achieve the Company's
business objectives by providing annual incentive compensation awards that
take into account the Company's overall performance against corporate
objectives.

3. Provide meaningful equity-based, long-term incentives.

COMPENSATION PROCESS AND COMPONENTS

The components of the Company's compensation program include base salary,
cash bonuses and other incentive compensation, stock options and other
equity-based compensation as well as other benefit programs. In fiscal year
2003, the Compensation Committee presented to the Board its recommendations and
conclusions regarding compensation for the executive officers, and the Board
approved the Compensation Committee's recommendations and conclusions in all
respects. With respect to both Company officers other than the executive
officers and other Company employees, the Compensation Committee has determined
the framework within which compensation decisions will be made and has delegated
to the Company's Chief Executive Officer the authority to make compensation
decisions regarding these officers and employees, subject to review and approval
by the Compensation Committee.

Base Salary

Base salary is intended to provide a fixed level of compensation reflecting
the scope and nature of basic job responsibilities. The Compensation Committee
grants salary increases, if appropriate, after a review of individual
performance and an assessment of the relative competitiveness of the current
salary. In keeping with the goal of unifying the interests of the Company's
executive officers and its stockholders, base salary is designed to represent a
relatively small portion of the total compensation that the senior executives
have the potential to earn each year. However, depending upon (i) success in
achieving the performance goals which govern the executive officers' right to
receive bonuses, and (ii) the extent to which enhanced performance has increased
the value of equity-based compensation, base salary could represent a majority
of the compensation actually received by an executive officer in any given year.

Bonus Awards

Bonus awards recognize an executive officer's contribution to each year's
actual operating results as measured against specified performance objectives.
For executive officers other than the Chief Executive Officer, the performance
objectives for each executive officer frequently have two components: (a)
objectives relating specifically to the individual's job performance; and (b)
objectives relating to the Company's overall performance. The relative weight
given to each component may vary. When establishing performance objectives
relating to the Company's overall performance, the Compensation Committee
focuses primarily on financial performance, specifically operating and net
income. The amount of bonus compensation paid to executive officers is
determined by comparing actual results to performance objectives established by
the Compensation Committee based upon the operating budget approved by the Board
of Directors of SPSS for that year. The potential bonus is generally established
as a percentage of an executive officer's base salary. The actual percentage of
base salary which executives are entitled to receive as bonus compensation will
increase or decrease depending on the extent to which the performance objective
is achieved. In addition to regular annual bonuses the amount of which are
determined in whole or in part by the Company's financial
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performance, the Compensation Committee from time to time makes special bonus
awards to individuals based upon exceptional performance. These special bonuses
are not intended to be recurring in nature, they were not taken into account in
the design of the Company's executive compensation plan and no specific
percentage of any employee's compensation has been allocated to this form of
bonus.

Stock Option Plan

Stock options are considered an important component of the Company's
incentive compensation. Stock options provide the right to purchase, at fair
market value on the date of grant, a fixed number of shares of SPSS common stock
during the term of the option, which is typically ten years from the date of
grant. Options are also typically subject to vesting provisions which require
the recipients continued employment by SPSS for a period of three to five years
from the date of grant in order for the recipient to be entitled to the full
benefit of the option, although certain options granted to executives with
policy-making responsibility provide for accelerated vesting if the Company
significantly exceeds its budget projections. In determining the size of the
option grants, the Compensation Committee considers the impact of the grants on
existing stockholders' stock ownership positions and the prospective value of
the options as a performance incentive. The number of options previously awarded
to and held by executive officers is reviewed and is also considered as a factor
in determining the size of current option grants.

CHIEF EXECUTIVE OFFICER COMPENSATION

The Compensation Committee has established the CEO's base salary and bonus
employing largely the same principles described above, except that the amount of
the CEO's bonus is purely a function of the financial performance of SPSS
measured against the operating and net income goals established by the
Compensation Committee and approved by the Board of Directors at the beginning
of each year. The Compensation Committee believes that it has established a
total compensation package that compares favorably to industry standards. The
Compensation Committee considers the total salary and incentive compensation
provided to chief executives of companies in the SPSS "peer group," although it
does not target a specific percentile range within this group of similar
companies in determining the CEO's compensation.

Mr. Noonan's bonus is determined in the same manner as the other
policy-making senior executives, except that no portion of Mr. Noonan's bonus is
based on exceptional individual performance. It is the Compensation Committee's
view that the CEO's compensation should be based solely on the financial
performance of SPSS and that, for the CEO, exceptional individual performance is
so closely aligned with SPSS financial performance that the CEO's bonus should
be based solely on overall SPSS financial performance.

In 2003, Mr. Noonan received approximately twice the number of stock
options received by the other policy-making senior executives. The Compensation
Committee recommended grants to Mr. Noonan of stock options to acquire 70,000
shares of common stock at $14.599 per share effective January 2, 2003. These
options vested ratably over a four-year vesting schedule, beginning at the
conclusion of the first month following the grant date. These options were
granted with the same vesting schedule applied to options granted to other named
executive officers, which vesting schedule was deemed appropriate by the
Compensation Committee. The Compensation Committee determined that the level of
options granted to Mr. Noonan was appropriate given the importance of his
contributions to the Company. In recommending these grants, the Compensation
Committee also considered that such grants would further the Company's policy of
seeking to align the interests of its senior executives with those of its
stockholders.

TAX CONSIDERATIONS

To the extent readily determinable and as one of the factors in its
consideration of compensation matters, the Compensation Committee considers the
anticipated tax treatment to SPSS and to the executive officers of various
payments and benefits. Some types of compensation payments and their
deductibility (e.g., the spread on exercise of non-qualified options) depend
upon the timing of an executive officer's vesting or exercise of previously
granted rights. Interpretations of and changes in the tax laws and other factors
beyond the

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Compensation Committee's control also affect the deductibility of compensation.
For these and other reasons, SPSS will not necessarily and in all circumstances
limit executive compensation to the amount which is permitted to be deductible
as an expense of SPSS under Section 162(m) of the Internal Revenue Code. The
Compensation Committee will consider various alternatives to preserving the
deductibility of compensation payments and benefits to the extent reasonably
practicable and to the extent consistent with its other compensation objectives.

COMPENSATION COMMITTEE OF SPSS INC.

William Binch
Michael Blair
Merritt Lutz

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PERFORMANCE GRAPH

The following graph shows the changes in $100 invested since December 31,
1998, in SPSS's common stock, the NASDAQ 100 Stocks Index and S&P Computer
Software and Services Index, a specialized industry focus group, assuming that
all dividends were reinvested.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

The following table shows, as of July 1, 2004, the number and percentage of
shares of common stock beneficially owned by:

- each person known by SPSS to own beneficially more than five percent of
the outstanding shares of the common stock;

- each director of SPSS;

- each named executive officer of SPSS; and

- all directors and executive officers of SPSS as a group.

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Unless otherwise indicated in a footnote, each person possesses sole voting
and investment power with respect to the shares indicated as beneficially owned.

- ---------------

* The percentage of shares beneficially owned does not exceed one percent of
the Common Stock.

(1) Includes 69,489 shares through options exercisable within 60 days; 75,933
shares held of record by the Norman and Carol Nie Foundation, Inc.; and
671,353 shares held by the Norman H. Nie Revocable Trust, dated November
15, 1991. Dr. Nie shares voting and investment power over the 75,933 shares
held by the Nie Foundation with Carol Nie.

(2) Brown Capital Management, Inc. is the beneficial owner of 2,409,175 shares
of SPSS common stock and an investment advisor in accordance with Section
203 of the Investment Advisor Act. This information was taken from Brown's
Schedule 13G dated December 31, 2003 and filed with the SEC on February 11,
2004.

(3) T. Rowe Price Associates, Inc. is the beneficial owner of 1,796,387 shares
of SPSS common stock and an investment advisor registered under Section 203
of the Investment Advisors Act of 1940. This information was taken from T.
Rowe Price' Schedule 13G dated February 11, 2004 and filed with the SEC on
February 11, 2004.

(4) Daruma Asset Management, Inc. is the beneficial owner of 1,380,800 shares
of SPSS common stock and an investment advisor in accordance with Section
203 of the Investment Advisor Act. This information was taken from Daruma's
Schedule 13G dated February 11, 2004 and filed with the SEC on February 11,
2004.

(5) Includes 530,014 shares through options exercisable within 60 days.

(6) Includes 236,597 shares through options exercisable within 60 days.

(7) Includes 109,713 shares through options exercisable within 60 days.

(8) Includes 131,766 shares through options exercisable within 60 days; 333
shares registered in the name of each of Mr. Otterstatter's three minor
children; 915 shares held jointly by Jonathan P. and Pamela J.
Otterstatter; 34,285 shares held by Jonathan P. and Pamela J. Otterstatter
as trustees of the Jonathan P. Otterstatter Revocable Trust dated 12/15/99;
and 3,579 shares held by the Jonathan P. Otterstatter IRA.

106

(9) Includes 0 shares through options exercisable within 60 days.

(10) Includes 69,489 shares through options exercisable within 60 days.

(11) Includes 64,489 shares through options exercisable within 60 days.

(12) Includes 43,561 shares through options exercisable within 60 days. Dr.
Haque's beneficial ownership also includes 631,044 shares held by Norwest
Equity Partners IV, L.P. and 305,455 shares held by Norwest Equity Partners
V, L.P. Dr. Haque, one of the Company's directors, is a general partner of
Norwest Equity Partners IV, L.P. and a general partner of Norwest Equity
Partners V, L.P. He shares voting and dispositive power shares held by the
Norwest funds with other general and managing partners of the Norwest
funds.

(13) Includes 43,561 shares through options exercisable within 60 days.

(14) Includes 89,561 options exercisable within 60 days and 3,500 shares
registered in the name of each of Mr. Holec's three minor children.

(15) Includes 7,777 shares through options exercisable within 60 days.

(16) Includes 1,396,017 shares through options exercisable within 60 days.

(17) The business address of each of Dr. Nie, Mr. Noonan, Dr. Hamburg, Mr.
Zanghi, Mr. Otterstatter, Mr. Shap, Mr. Binch and Mr. Holec is the office
of SPSS at 233 South Wacker Drive, Chicago, Illinois 60606. The business
address for Mr. Lutz is the office of Morgan Stanley Dean Witter & Co., 750
Seventh Avenue, 16th Floor, New York, New York 10019. The business address
for Mr. Blair is the office of Hewitt Associates, Inc., 120 S. Riverside
Plaza, 17th Floor, Chicago, Illinois 60606. The business address for Dr.
Haque is Norwest Venture Partners, 525 University Avenue, Suite 800, Palo
Alto, California 94301. The business address for Mr. Whitchurch is the
office of Zebra Technologies Corporation, 333 Corporate Woods Parkway,
Vernon Hills, Illinois 60061. The business address for the T. Rowe Price
Associates, Inc. is 100 East Pratt Street, Baltimore, Maryland 21202. The
business address for Daruma Asset Management, Inc. is 80 West 40th Street,
9th Floor, New York, New York 10018. The business address for Brown Capital
Management, Inc. is 1201 N. Calvert Street, Baltimore, Maryland 21202.

107

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

SPSS has one equity based compensation plan, the SPSS Inc. 2002 Equity
Incentive Plan (the "2002 Plan"). The following table sets forth information as
of December 31, 2003 concerning the 2002 Plan, which initially was approved by
the stockholders at the 2002 Annual Meeting of Stockholders and was subsequently
amended by the stockholders at the 2003 Annual Meeting of Stockholders. SPSS
does not have any equity compensation plans under which shares of its common
stock are authorized for issuance that were not approved by stockholders.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

TRANSACTIONS WITH NORMAN NIE

Norman Nie, the Chairman of the Board of Directors of SPSS, received
$135,600 for consulting work on a part-time basis through Nie Consulting.

TRANSACTIONS WITH WILLIAM BINCH

William Binch, a member of the Board of Directors of SPSS and a member of
the Audit Committee of the Board, received a monthly consulting fee of $3,000
for consulting work on a part-time basis. He received this fee from January 2003
through June 2003. After June 2003, this consulting arrangement was terminated.

TRANSACTIONS WITH KENNETH HOLEC

Kenneth Holec, a member of the Board of Directors of SPSS, was entitled to
receive a consulting fee in the amount of $1,000 from July 2002 to March 2003 as
a retainer for consulting work on a part-time basis. This $1,000 payment was
made to Mr. Holec during 2002 and no additional compensation for consulting work
was paid to him during 2003. Mr. Holec also received an additional grant of an
option to purchase 46,000 shares of SPSS common stock at an exercise price of
$11.00 per share, which option grant was approved by the Board on April 23, 2003
and granted in exchange for various Board services provided by him.

TRANSACTIONS WITH LEXIQUEST, S.A.

On January 31, 2002, SPSS acquired all of the issued and outstanding shares
of stock of LexiQuest, S.A., a corporation organized under the laws of France,
pursuant to a Stock Purchase Agreement between SPSS, LexiQuest and the
shareholders of LexiQuest. Norman Nie, the Chairman of the Board of Directors of
SPSS, was both a shareholder of and the Chairman of the Board of Directors of
LexiQuest. The aggregate purchase price for all of the issued and outstanding
shares of capital stock of LexiQuest was determined by the parties in
arms-length negotiations and consisted of guaranteed and contingent components.
The guaranteed portion of the purchase price consisted of a payment of
$2,500,000. The contingent payments, if any, are capped at a total of
$1,500,000, if fully earned during fiscal years 2002 and 2003. No contingent
payments were earned for fiscal year 2002 or fiscal year 2003. The guaranteed
portion of the purchase price was placed into escrow with

108

Bank One, N.A. (f/k/a American National Bank and Trust Company of Chicago)
pursuant to an Escrow Agreement between SPSS, Oak Investment Partners (the
LexiQuest shareholder representative) and Bank One. That portion of the escrow
fund not necessary to satisfy indemnification claims was to be distributed among
the former LexiQuest shareholders, in accordance with their former proportionate
ownership of LexiQuest stock. In accordance with the Escrow Agreement, a portion
of the escrow funds were distributed to the former LexiQuest shareholders at the
end of the escrow period in 2003. The balance of the escrow funds were held in
escrow because SPSS made a claim against such funds for indemnification under
the Stock Purchase Agreement. In the second fiscal quarter of 2004, SPSS and Oak
determined that SPSS should receive $671,049 of the funds that remain in escrow.
The balance will be distributed among the former LexiQuest shareholders. In
exchange for his shares of LexiQuest stock, Dr. Nie is entitled to receive less
than 1% of any distribution made from the escrow fund.

TRANSACTIONS WITH NETEXS LLC

On June 20, 2002, SPSS acquired all of the assets of netExs LLC, a
Wisconsin limited liability company. Jonathan Otterstatter, the Executive Vice
President and Chief Technology Officer of SPSS, was a member of the Board of
Managers of netExs. The aggregate purchase price of the netExs assets was
determined by the parties in arms-length negotiations and consisted of
guaranteed and contingent components. The guaranteed portion of the purchase
price consisted of a payment of $1,000,000. Under the terms of the Asset
Purchase Agreement, the contingent payments, if any, were capped at a total of
$1,450,000 if fully earned during fiscal years 2003, 2004 and 2005. In June
2004, SPSS and netExs agreed that SPSS would pay the sum of $400,000 in full
satisfaction of all obligations under the Asset Purchase Agreement, including
without limitation, the contingent payments, and in full settlement of certain
claims asserted by netExs. Mr. Otterstatter did not receive and will not receive
any remuneration in connection with the transaction. SPSS was not obligated to
make any such contingent payments during 2003.

TRANSACTIONS WITH BRIAN ZANGHI

Brian Zanghi joined SPSS as its Executive Vice President and Chief
Operating Officer following the merger of SPSS and NetGenesis Corp. in December
2001. At the time of the merger, Mr. Zanghi was indebted to NetGenesis in the
amount of $100,000 which had been previously approved by the NetGenesis board of
directors. SPSS became the payee with respect to this $100,000 indebtedness as a
result of the merger. SPSS agreed that this principal amount would be paid to
SPSS with an interest rate equal to the prime rate on the first day of each
fiscal year. At the time of the merger, SPSS also agreed (a) to forgive all
interest payments owed by him at the end of each year, (b) to require him to pay
all taxes owed on the forgiveness of these interest payments at the end of each
year and (c) to allow him to repay the indebtedness through the allocation
toward this debt of 35% of the net bonus payments made to him by SPSS. During
2003, Mr. Zanghi chose not to automatically allocate a portion of his bonus
compensation toward the repayment of the indebtedness, and, instead, chose to
repay the portion of the indebtedness owed for fiscal year 2003 by check. As of
March 15, 2004, he has paid to SPSS all amounts owed since the date of the
merger. As of March 15, 2004, the outstanding principal balance on the loan was
$63,321.36. Neither this indebtedness nor the method of repayment has been
amended or modified since June 2002. In connection with his resignation, Mr.
Zanghi has agreed to repay this indebtedness within 15 days after the
termination of his employment with SPSS.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

(a) Audit Fees. The aggregate fees billed for each of the last two fiscal
years for services rendered by KPMG LLP, the Company's independent auditors, for
the audit of the Company's annual financial statements, the review of financial
statements included in the Company's Form 10-Q and other services

109

normally provided in connection with statutory and regulatory filings or
engagements for those fiscal years are as follows:

(b) Audit-Related Fees. The aggregate fees billed for each of the last two
fiscal years for assurance and related services by KPMG that are reasonably
related to the performance of the audit or review of the Company's financial
statements and are not reported in Item 14(a) above are as follows:

In fiscal year 2002, these fees related to services provided by KPMG in
connection with a registration statement on Form S-4 relating to the acquisition
of NetGenesis Corp., providing assistance to the Company in responding to
comment letters from the Securities and Exchange Commission, matters related to
the filing of registration statements on Form S-3 and matters relating to the
acquisition of LexiQuest S.A. In fiscal year 2003, these fees related to
services provided by KPMG in connection with the review of revenue
classifications for prior filings, matters related to the filing of registration
statements on Form S-3, providing assistance to the Company in responding to
comment letters from the Securities and Exchange Commission and matters related
to the filing of registration statements on Form S-8.

(c) Tax Fees. The aggregate fees billed for each of the last two fiscal
years for professional services rendered by KPMG for tax compliance, tax advice
and tax planning are as follows:

These fees relate to services provided by KPMG in connection with
international tax advice on mergers, due diligence, reorganizations and asset
transfers.

(d) All Other Fees. The aggregate fees billed for each of the last two
fiscal years for products and services provided by KPMG other than the services
reports in Items 14(a-c) above are as follows:

In fiscal year 2002, these fees related to acquisition-related due diligence
services.

(e) Audit Committee Administration of the Engagement -- Procedures for
Pre-Approval of Audit and Permissible Non-Audit Services of the Company's
Independent Auditor.

The Audit Committee of the Board of Directors of SPSS has the exclusive
authority and responsibility to engage, direct, pre-approve and oversee the
Company's independent auditors with respect to all audit or non-audit services
and has the exclusive authority and responsibility to either retain or terminate
the Company's independent auditors. The Audit Committee's exclusive authority
and responsibility with respect to these matters is set forth in the SPSS Inc.
Charter of the Audit Committee of the Board of Directors. The Audit Committee
approved the engagement of KPMG to conduct the audit of the Company on April 23,
2003. The Audit Committee reported to the Board that it had retained KPMG to
conduct the audit of the Company and the Board accepted the Audit Committee's
report on this matter.

On February 5, 2004, the Audit Committee adopted a formal procedure for the
approval of all non-audit related services provided by the Company's independent
auditor. This procedure is set forth in Supplement A to the SPSS Inc. Charter of
the Audit Committee of the Board of Directors which is attached as Exhibit 99.2
to this Form 10-K. Any request for the Company's independent auditor to perform
non-audit related services must be made pursuant to this procedure. In
accordance with the procedure, when the Company identifies a non-audit related
service that it wants its independent auditor to perform, the Company must first
submit a written request (the "Company Request") to its independent auditor that
includes (i) a detailed description

110

of the type and scope of the non-audit related service that the Company requests
(the "Requested Non-Audit Related Services") and (ii) an explanation as to why
the Company believes that the Company's independent auditor will provide the
most effective and efficient service. Upon the receipt of the Company Request,
the Company's independent auditor will calculate the fees that would be charged
by the independent auditor in providing the Requested Non-Audit Related
Services. The Company's independent auditor will then provide the Audit
Committee chairman with (i) a written description of the Requested Non-Audit
Related Services, (ii) a written description of the fees that would be charged
by the independent auditor in providing the Requested Non-Audit Related Services
(including the amount of such fees denominated in the applicable local currency
and the amount of such fees denominated in United States dollars (the "Dollar
Denominated Fee")) and (iii) a written request for Audit Committee approval of
the Requested Non-Audit Related Services in the amount of the Dollar Denominated
Fee plus ten percent (10%) of the Dollar Denominated Fee rounded to the nearest
$1,000. If the amount of the Dollar Denominated Fee exceeds $10,000, the request
will be in the form of a formal engagement letter. The Audit Committee chairman
will then review the materials provided by the independent auditor. If the Audit
Committee chairman determines that the Requested Non-Audit Related Services are
appropriate, the Audit Committee chairman will approve the Requested Non-Audit
Related Services. The Audit Committee chairman will then provide written notice
of this approval to both the Company's independent auditor and the Company. If a
formal engagement letter is required for the approved Requested Non-Audit
Related Services, the Audit Committee chairman will, instead, execute the
engagement letter and return an executed copy to the Company's independent
auditor. The Committee chairman will collect all materials relating to Requested
Non-Audit Related Services, including the Audit Committee chairman's
authorization of such Requested Non-Audit Related Services, and will present a
copy of all such materials to the full Audit Committee for ratification at the
next scheduled Audit Committee meeting. All written correspondence relating to
Requested Non-Audit Related Services will be included in the official records of
the Audit Committee.

On August 12, 2003, the Audit Committee pre-approved a license by the
Company of the KPMG Accounting Research Online Database, a program that would
allow the Company to access accounting literature and interpretations for
research purposes. In August 2003, the Audit Committee pre-approved the
retention of KPMG to perform a due diligence review of the work papers of an
acquisition-related target company's auditors and other tax-related due
diligence, in an amount not to exceed $50,000. Finally, on October 24, 2002, the
Audit Committee pre-approved the retention of KPMG to perform services for the
Company related to tax planning and tax preparation in the amount of $50,000. No
additional pre-approval with respect to tax services was obtained during fiscal
year 2003 for tax services to be performed subsequent to May 6, 2003. In the
process of implementing the Audit Committee's procedure for the approval of
non-audit related services, KPMG performed approximately $43,000 of tax-related
services subsequent to May 6, 2003 without pre-approval from the Audit
Committee. SPSS considers this incident to be a one-time event.

During fiscal year 2003, $43,000 of the fees described in this Item 14 were
not approved by the Audit Committee pursuant to the de minimus exception.

None of the hours expended on KPMG's engagement to audit SPSS financial
statements for 2003 were attributed to work performed by persons other than the
KPMG's full-time, permanent employees.

PART IV

ITEM 15. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON
FORM 8-K

(a) (1) Consolidated Financial statements commence on page 35:

Independent Auditors' Report

Consolidated Balance Sheets as of December 31, 2002 and 2003

Consolidated Statements of Operations for the years ended December 31,
2001, 2002 and 2003

Consolidated Statements of Comprehensive Income (Loss) for the years
ended December 31, 2001, 2002 and 2003
111

Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2001, 2002 and 2003

Consolidated Statements of Cash Flows for the years ended December 31,
2001, 2002 and 2003

Notes to Consolidated Financial Statements

(2) Consolidated Financial Statement Schedule -- see page 73:

Schedule II Valuation and qualifying accounts

Schedules not filed:

All schedules other than that indicated in the index have been omitted
as the required information is inapplicable or the information is presented
in the consolidated financial statements or related notes.

(3) Exhibits required by Item 601 of Regulation S-K. (Note: Management
contracts and compensatory plans or arrangements are identified with a "+" in
the following list.)

112

113

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(1) Previously filed with the Report on Form 8-K of SPSS Inc., dated September
26, 1996, filed on October 11, 1996, as amended on Form 8-K/A-1, filed
November 1, 1996. (File No. 000-22194)

(2) Previously filed with Amendment No. 1 to the Registration Statement on Form
S-4 of SPSS Inc. filed on November 7, 1996. (File No. 333-15427)

(3) Previously filed with the Report on Form 8-K of SPSS Inc., dated September
30, 1997, filed on October 15, 1997. (File No. 000-22194)

(4) Previously filed with the Registration Statement on Form S-3 of SPSS Inc.
filed on November 26, 1997. (File No. 333-41207)

114

(5) Previously filed with Amendment No. 2 to the Registration Statement on Form
S-1 of SPSS Inc. filed on August 4, 1993. (File No. 33-64732)

(6) Previously filed with Amendment No. 1 to the Registration Statement on Form
S-1 of SPSS Inc. filed on July 23, 1993. (File No. 33-64732)

(7) Previously filed with the Quarterly Report on Form 10-Q of SPSS Inc. for
the quarterly period ended September 30, 1993. (File No. 000-22194)

(8) Previously filed with the Registration Statement on Form S-1 of SPSS Inc.
filed on June 22, 1993. (File No. 33-64732)

(9) Previously filed with the Registration Statement on Form S-1 of SPSS Inc.
filed on December 5, 1994. (File No. 33-86858)

(10) Previously cited with the Annual Report on Form 10-K of SPSS Inc. for the
year ended December 31, 1994. (File No. 000-22194)

(11) Previously filed with the 1995 Proxy Statement of SPSS Inc. (File No.
000-22194)

(12) Previously filed with the Annual Report on Form 10-K of SPSS Inc. for the
year ended December 31, 1995. (File No. 000-22194)

(13) Previously filed with the 1996 Proxy Statement of SPSS Inc. (File No.
000-22194)

(14) Previously filed with the Annual Report on Form 10-K of SPSS Inc. for the
year ended December 31, 1996. (File No. 000-22194)

(15) Previously filed with the Quarterly Report on Form 10-Q of SPSS Inc. for
the quarterly period ended March 31, 1997. (File No. 000-22194)

(16) Previously filed with the Quarterly Report on Form 10-Q of SPSS Inc. for
the quarterly period ended June 30, 1997. (File No. 000-22194)

(17) Previously filed with the Annual Report on Form 10-K of SPSS Inc. for the
year ended December 31, 1997. (File No. 000-22194)

(18) Previously filed with the Report on Form 8-K of SPSS Inc., dated December
31, 1998, filed on January 15, 1999, as amended on Form 8-K/A filed March
12, 1999. (File No. 000-22194)

(19) Previously filed with the 1998 Proxy Statement of SPSS Inc. (File No.
000-22194)

(20) Previously filed with the Annual Report on Form 10-K of SPSS Inc. for the
year ended December 31, 1998. (File No. 000-22194)

(21) Previously filed with the Report on Form 8-K of SPSS Inc., dated November
29, 1999, filed December 10, 1999. (File No. 000-22194)

(22) Previously filed with the Quarterly Report on Form 10-Q of SPSS Inc. for
the quarterly period ended June 30, 1999. (File No. 000-22194)

(23) Intentionally Omitted.

(24) Previously filed with the Annual Report on Form 10-K of SPSS Inc. for the
year ended December 31, 1999. (File No. 000-22194).

(25) Previously filed with the Report on Form 8-K of SPSS Inc., filed November
15, 2000. (File No. 000-22194).

(26) Previously filed with the Registration Statement on Form S-4 of SPSS Inc.,
filed on December 19, 2000. (File No. 333-52216)

(27) Previously filed with the Annual Report on Form 10-K of SPSS Inc. for the
year ended December 31, 2000. (File No. 000-22194)

(28) Previously filed with Registration Statement on the Form S-3 of SPSS Inc.
filed on October 9, 2001. (File No. 333-71236)

(29) Previously filed with the Report on Form 8-K of SPSS Inc., dated October
28, 2001, filed on October 29, 2001. (File No. 000-22194)

115

(30) Previously filed with the Registration Statement on Form S-8 of SPSS Inc.
filed on September 15, 2000. (File No. 333-45900)

(31) Previously filed with the Registration Statement on Form S-3 of SPSS Inc.
filed on December 12, 2001. (File No. 333-74944)

(32) Previously filed with the Report on Form 8-K/A (Amendment No. 1) of SPSS
Inc. filed on December 12, 2001. (File No. 000-22194)

(33) Previously filed with the Report on Form 8-K of SPSS Inc., dated February
6, 2002, filed on February 21, 2002. (File No. 000-22194)

(34) Previously filed with the Registration Statement on Form S-8 of SPSS Inc.
filed on June 18, 2002. (File No. 333-90694)

(35) Intentionally Omitted.

(36) Intentionally Omitted.

(37) Previously filed with the Annual Report on Form 10-K of SPSS Inc. for the
year ended December 31, 2002. (File No. 000-22194)

(38) Previously filed with the Report on Form 8-K of SPSS Inc., dated October 1,
2003, filed on October 15, 2003. (File No. 000-22194)

(39) Previously filed with the Quarterly Report on Form 10-Q of SPSS Inc. for
the quarterly period ended September 30, 2003. (File No. 000-22194)

(40) Previously filed with the Report on Form 8-K of SPSS Inc., dated November
5, 2003, filed on November 18, 2003) (File No. 000-22194)

(41) Previously filed with the Form 8-A12G of SPSS Inc. filed on June 18, 1998.
(File No. 000-22194)

(b) Reports on Form 8-K

The current report of SPSS Inc. on Form 8-K, dated October 1, 2003, filed
with the SEC on October 15, 2003. The Form 8-K reported that SPSS had entered
into an amended agreement with AOL. The terms of the amended agreement are
specified in an Amendment to Stock Purchase Agreement by and between SPSS and
AOL and an Amended and Restated Strategic Online Research Services Agreement.

The current report of SPSS Inc. on Form 8-K, dated October 23, 2003, filed
with the SEC on October 24, 2003. The Form 8-K reported the retirement of Mr.
Bernard Goldstein from the Company's Board of Directors. The Form 8-K also
reported the appointment of Mr. Charles R. Whitchurch to fill the vacant board
seat left by Mr. Goldstein and to serve as the Chairman of the Audit Committee
of the Board.

The current report of SPSS Inc. on Form 8-K, dated October 28, 2003, filed
with the SEC on October 30, 2003. The Form 8-K reported that SPSS had issued a
press release announcing its results for its fiscal quarter ended September 30,
2003 and attached a copy of the press release as an exhibit. The report also
described certain non-GAAP financial measures included in the press release.

The current report of SPSS Inc. on Form 8-K, dated October 29, 2003, filed
with the SEC on November 3, 2003. The Form 8-K reported that SPSS had held its
Third Quarter 2003 Earnings Release Conference Call on October 29, 2003. The
Form 8-K report attached a transcript of the conference call as an exhibit.

The current report of SPSS on Form 8-K, dated November 5, 2003, filed with
the SEC on November 18, 2003. The Form 8-K announced the acquisition by SPSS,
through its wholly-owned subsidiary, SPSS International B.V., of all of the
issued and outstanding shares of capital stock of Data Distilleries B.V.

The current report of SPSS on Form 8-K, dated December 29, 2003, filed with
the SEC on January 6, 2004. The Form 8-K announced the consummation of an
agreement by SPSS to grant to Systat Software, Inc., a subsidiary of Cranes
Software International Ltd., an exclusive worldwide license to distribute the
Sigma-series line of products for a three-year period, to sell to Systat certain
related assets and to grant to Systat an option to purchase the licensed
property.

116

The current report of SPSS Inc. on Form 8-K/A (Amendment No. 1), dated
November 5, 2003, filed with the SEC on January 20, 2004. The Report on Form
8-K/A (Amendment No. 1) amended the Report on Form 8-K filed with the SEC on
November 18, 2004 (see above) announcing the acquisition of Data Distilleries
B.V. The Report on Form 8-K contained the following financial information: (a)
Financial Statements of Business Acquired including (i) Data Distilleries B.V.
Audited Financial Statements for the years ended December 31, 2002 and 2001 and
(ii) Data Distilleries B.V. Unaudited Financial Statements for the Nine Months
Ended September 30, 2003 and 2002, and (b) Pro Forma Financial Information for
the combined businesses.

The current report of SPSS Inc. on Form 8-K, dated December 31, 2003, filed
with the SEC on January 20, 2004. The Form 8-K reported that Mr. Patrick Dauga
no longer serves as the Executive Vice President, Worldwide Sales of SPSS and
that SPSS has hired Mr. John Shap as its new Senior Vice President, Worldwide
Sales.

The current report of SPSS Inc. on Form 8-K, dated February 17, 2004, filed
with the SEC on February 18, 2004. The Form 8-K reported that SPSS had issued a
press release announcing its results for its fourth quarter and fiscal year
ended December 31, 2003 and attached a copy of the press release as an exhibit.
The report also described certain non-GAAP financial measures included in the
press release.

The current report of SPSS Inc. on Form 8-K, dated February 18, 2004, filed
with the SEC on February 20, 2004. The Form 8-K reported that SPSS had held its
Fourth Quarter 2003 Earnings Release Conference Call on February 18, 2004. The
Form 8-K report attached a transcript of the conference call as an exhibit.

The current report of SPSS Inc. on Form 8-K, dated March 30, 2004, filed
with the SEC on March 30, 2004. The Form 8-K reported the facts that have caused
SPSS to further delay the filing of its Annual Report on Form 10-K for fiscal
year 2003 with the SEC.

The current report of SPSS Inc. on Form 8-K, dated April 7, 2004, filed
with the SEC on April 8, 2004. The Form 8-K reported that SPSS had received a
Nasdaq Staff Determination, the impact of this determination and certain
information regarding the review being conducted by the Audit Committee.

The current report of SPSS Inc. on Form 8-K, dated May 4, 2004, filed with
the SEC on May 6, 2004. The Form 8-K reported that SPSS had issued a press
release announcing its preliminary results for its fiscal quarter ended March
31, 2004 and attached a copy of the press release as an exhibit. The report also
described certain non-GAAP financial measures included in the release.

The current report of SPSS Inc. on Form 8-K, dated May 5, 2004, filed with
the SEC on May 6, 2004. The Form 8-K reported that SPSS had held its First
Quarter 2004 Earnings Release Conference Call on May 5, 2004. The Form 8-K
attached a transcript of the conference call as an exhibit.

The current report of SPSS Inc. on Form 8-K, dated May 14, 2004, filed with
the SEC on May 20, 2004. The Form 8-K reported that a class action lawsuit has
been filed against SPSS, Jack Noonan and Edward Hamburg alleging certain
violations of the federal securities laws. The Form 8-K also reports that the
Company and the other defendants believe that the suit is without merit and
intend to defend vigorously against the allegations contained in the complaint.

The current report of SPSS Inc. on Form 8-K, dated June 10, 2004, filed
with the SEC on June 14, 2004. The Form 8-K reported that SPSS had received a
Nasdaq staff determination and the impact of this determination.

The current report of SPSS Inc. on Form 8-K, dated July 1, 2004, filed with
the SEC on July 2, 2004. The Form 8-K reported the resignation of Brian Zanghi
as Executive Vice President and Chief Operating Officer of SPSS.

The current report of SPSS Inc. on Form 8-K, dated July 22, 2004, filed
with the SEC on July 23, 2004. The Form 8-K reported that SPSS had received a
Nasdaq staff determination and the impact of this determination.

117

SIGNATURES

Pursuant to requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized as of July 29, 2004.

SPSS INC.

By: /s/ JACK NOONAN
---------------------------------
Jack Noonan
President and Chief Executive
Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities indicated as of July 29, 2004.

118

EXHIBIT INDEX