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                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
                               ----------------
 
                                   FORM 10-K
 
      [X]    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934
 
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
 
                                      OR
 
     [_]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934
 
                FOR THE TRANSITION PERIOD FROM        TO
 
                        COMMISSION FILE NUMBER: 0-20725
 
                             SIEBEL SYSTEMS, INC.
            (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
            DELAWARE                                 94-3187233
 (STATE OR OTHER JURISDICTION OF        (I.R.S. EMPLOYER IDENTIFICATION NO.)
 INCORPORATION OR ORGANIZATION)                             

                            1855 SOUTH GRANT STREET
                              SAN MATEO, CA 94402
         (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
 
                                (650) 295-5000
             (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
 
  Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 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
such filing requirements for the past 90 days.
 
                               Yes [X]    No [_]
 
  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 the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K. [_]
 
  The aggregate market value of the voting stock held by non-affiliates of the
registrant, based on the closing sale price of the Common Stock on February 4,
1998 as reported on the Nasdaq National Market was approximately $880,799,528.
Shares of Common Stock held by each current executive officer and director and
by each person who is known by the registrant to own 5% or more of the
outstanding Common Stock have been excluded from this computation in that such
persons may be deemed to be affiliates of the Company. Share ownership
information of certain persons known by the Company to own greater than 5% of
the outstanding common stock for purposes of the preceding calculation is
based solely on information on Schedule 13G filed with the Commission and is
as of December 31, 1997. This determination of affiliate status is not a
conclusive determination for other purposes.
 
  The number of shares outstanding of the registrant's Common Stock, par value
$.001 per share, as of March 12, 1998, was 35,716,709. Share and per share
information do not reflect the 100% stock dividend on the registrant's common
stock to be paid on March 20, 1998.
 
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                               TABLE OF CONTENTS
 
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ITEM                                                                       PAGE
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PART I.
Item  1. Business.........................................................   2
Item  2. Properties.......................................................  23
Item  3. Legal Proceedings................................................  23
Item  4. Submission of Matters to a Vote of Security Holders..............  24
PART II.
Item  5. Market for Registrant's Common Stock and Related Stockholder
 Matters..................................................................  24
Item  6. Selected Financial Data..........................................  25
Item  7. Management's Discussion and Analysis of Financial Condition and
 Results of Operations....................................................  25
Item  8. Financial Statements and Supplementary Data......................  31
Item  9. Changes in and Disagreements with Accountants on Accounting and
 Financial Disclosure.....................................................  31
PART III.
Item 10. Directors and Executive Officers of the Registrant...............  31
Item 11. Executive Compensation...........................................  31
Item 12. Security Ownership of Certain Beneficial Owners and Management...  31
Item 13. Certain Relationships and Related Transactions...................  31
PART IV.
Item 14. Exhibits, Financial Statements and Reports on Form 8-K...........  32
SIGNATURES................................................................  51
</TABLE>
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
  Portions of the registrant's Proxy Statement for its 1998 Annual
Stockholders Meeting are incorporated by reference in Part III hereof.
<PAGE>
 
                                    PART I
 
  The statements contained in this Annual Report on Form 10-K (the "Report")
that are not historical are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act")
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), including statements regarding the Company's expectations,
beliefs, intentions or strategies regarding the future. Forward-looking
statements include, without limitation, statements regarding the extent and
timing of future revenues and expenses and customer demand, statements
regarding the deployment of the Company's products, and statements regarding
reliance on third parties. All forward-looking statements included in this
document are based on information available to the Company as of the date
hereof, and the Company assumes no obligation to update any such forward-
looking statement. It is important to note that the Company's actual results
could differ materially from those in such forward-looking statements as a
result of certain factors, including, without limitation, those discussed
under the heading "Risk Factors" on page 29 in Item 7 and elsewhere in this
Report.
 
ITEM 1. BUSINESS
 
OVERVIEW
 
  Siebel Systems, Inc. ("Siebel," "Siebel Systems" or the "Company") is an
industry leading provider of enterprise-class sales, marketing and customer
service information software systems. The Company designs, develops, markets,
and supports Siebel Enterprise Applications, a leading Internet-enabled,
object oriented client/server application software product family designed to
meet the sales, marketing and customer service information system requirements
of even the largest multi-national organizations.
 
  In today's increasingly competitive global markets, businesses must
continuously improve their operations. Having spent considerable effort and
resources in previous years automating finance, manufacturing, distribution,
human resources management, and general office operations, many businesses are
now looking to apply the leverage of information technology to their sales,
marketing and customer service processes. Unlike previous automation efforts
which have focused on decreasing expenses, sales, marketing and customer
service information systems focus primarily on increasing revenues.
 
  The Siebel Enterprise Applications are comprised of a broad range of
advanced client/server application products designed to allow corporations to
deploy comprehensive customer information systems, product information
systems, competitive information systems, and decision support systems on a
global basis. The Company's products provide support for multiple languages
and multiple currencies with support for a number of frequently interdependent
distribution channels, including direct field sales, telesales, telemarketing,
distribution, retail and Internet-based selling and support.
 
THE SIEBEL SOLUTION
 
  The Company is a leading provider of Internet-enabled, object oriented,
enterprise-class sales, marketing and customer service information systems
designed to meet the needs of even the largest multi-national organizations.
 
  The Siebel Enterprise Applications are designed to offer users a customer
information solution that is functionally comprehensive, is built upon a
modern technology foundation, and scales to meet the requirements of global
organizations with thousands of concurrent users and very large data stores.
The Siebel solution is designed to be easily and extensively configured to
meet industry-specific and company-specific data processing and data
presentation requirements.
 
                                       2
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 Functionally Complete
 
  The Siebel Enterprise Applications are designed to provide comprehensive
functionality for sales, marketing and customer service information systems.
The products are intended to enable the organization to deploy enterprise-wide
customer information systems, product information systems, competitive
information systems and decision support systems. Specific functionality
includes opportunity and account management, product and revenue forecasting,
quote generation, on-line sales tools, contact and activity management,
correspondence and fulfillment. The Siebel Enterprise Applications fully
support team selling across multiple distribution channels, including field
sales, telesales, telemarketing and resellers. The Siebel products are
designed to improve internal and external communications by integrating with
e-mail, intranet and Internet services.
 
 Modern Technology Foundation
 
  The Siebel solution takes advantage of advanced developments in technology
and computing trends, including Internet and intranet interoperability,
client/server architecture, configurable business object technology
(BusObjects), 32-bit processing capability, modern client operating systems
(Microsoft Windows 95 and Windows NT), relational database servers, modern
development environments (Microsoft Visual C++ and Microsoft Foundation Class
Libraries (MFC)), inter-application communications technologies (Microsoft OLE
2/Com) and database synchronization and replication.
 
  The Company believes that the use of these modern and industry-standard
development tools and technologies has allowed Siebel Systems to rapidly
develop a comprehensive, configurable, scalable, enterprise-wide customer
information solution. The Company has found that sales of the Siebel
Enterprise Applications have been facilitated by the fact that its customers
and prospects have often adopted as their MIS standards these same
technologies used by the Company to build its products.
 
  The Company believes that the technologies utilized to build Siebel
Enterprise Applications--many of which became commercially available in the
mid-1990s--are required to build applications of this nature and scope. Prior
to the advent of these technologies, it was technically difficult to build an
application robust enough to solve the information requirements of global
sales, marketing and customer service organizations. The Company believes that
its use of these technologies provides the Company with a significant market
advantage.
 
 Internet-Enabled
 
  The Siebel Enterprise Applications are designed to allow organizations to
harness the power of the Internet to facilitate the sales, marketing and
customer service process. The Siebel Enterprise Applications enable
organizations to use the Internet today for collecting leads, for accessing
product, company and competitive information through the World Wide Web, for
communicating with prospects and customers via Internet-based electronic mail
and for synchronizing and replicating data for remote computing.
 
  Many companies are using their home page to collect sales leads and customer
service information. The information that prospects and customers enter on
these web-based forms, (e.g., name, address, etc.) can be automatically loaded
into Siebel Enterprise Applications using a standard CGI (Common Gateway
Interface) to the Siebel Open Interface product. Sales leads can then be
automatically processed by the Siebel Enterprise Applications Territory
Manager, assigned, and distributed to the appropriate sales representatives
for follow up.
 
  Siebel customers can also integrate Siebel Enterprise Applications and the
Siebel Marketing Encyclopedia with a web browser, such as Microsoft Internet
Explorer, to allow their sales and marketing professionals to automatically
access remotely stored and managed sales and marketing information using the
World Wide Web. In this fashion, sales, marketing, and customer service
personnel can readily gain remote access to a broad range of product marketing
materials including product catalogues, data sheets and annual reports.
 
 
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  Using Siebel Enterprise Applications, sales and service professionals can
send correspondence and quotes to their prospects and customers via Internet-
based electronic mail.
 
  Siebel Remote offers support for sales and service representatives using the
Internet to synchronize their remote laptop computers with the corporate
databases. Users can employ a local Internet access point to communicate
"directly" with the corporate headquarters to exchange account information,
access new leads, and update service requests. The Company believes the
ability to use the Internet for data synchronization or "docking" offers
significant communications cost savings to Siebel users and allows easy, local
and lower cost computer access globally.
 
 Enterprise Scalability
 
  The Siebel solution is designed to scale to meet the needs of organizations
whose sales forces range in size from fifty to thousands, including even the
largest global organizations. Many of the Company's customers have purchased
Siebel Enterprise Applications with the goal of automating thousands of sales,
marketing and customer service professionals accessing multiple gigabyte data
repositories. Most of the Company's customers are currently in the early
stages of enterprise-wide deployment. The largest production deployments of
Siebel Enterprise Applications to date are measured in thousands of sales
professionals. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Risk Factors--Limited Deployment."
 
 BusObject Configurability
 
  Siebel Systems employs the use of BusObjects, highly configurable object
oriented business objects, as the basic building blocks of Siebel Enterprise
Applications. Included in the family of Siebel BusObjects are Opportunity,
Account, Customer, Product, Competitor and Campaign. The BusObjects contain
semantic information about the sales, marketing and customer service entities
as well as presentation and navigation logic. BusObjects control the physical
access of information from data sources, organize and inter-relate that
information and present the information to the user. The Siebel Enterprise
Applications are comprised of a collection of these BusObjects. Highly
configurable at the object code level, Siebel BusObjects are designed to allow
organizations to rapidly configure the application to meet their business
requirements while ensuring a clear and consistent upgrade path for future
releases. This flexibility is expected to substantially reduce the long term
maintenance costs associated with deploying a highly configured application.
 
MARKET STRATEGY
 
  The Company's objective is to establish and maintain a clear market
leadership position in the sales, marketing and customer service information
systems market. The Company's strategy incorporates the following key
elements:
 
 Target Large Multi-National Customers in a Broad Range of Industries
 
  The Company has designed Siebel Enterprise Applications to satisfy the most
rigorous sales, marketing and customer service information requirements of
multi-national corporations that frequently employ multi-tiered distribution
strategies. Siebel Enterprise Applications are intended to be deployed on a
global basis, and provide shared, up-to-date information for field sales,
telemarketing, telesales, marketing, customer service, and third party
reseller sales organizations. The Company intends to leverage its experience
and continue to target product development, sales and marketing activities to
expand worldwide market acceptance of Siebel Enterprise Applications.
 
 Maintain and Extend Advanced Technology Position
 
  The Siebel Enterprise Applications utilize advanced information technology.
The Company employs the use of configurable business objects (BusObjects)
designed to allow organizations to configure the Siebel application
 
                                       4
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to fit their unique needs while ensuring a clear and consistent upgrade path
for future releases. The Company has developed sophisticated database
synchronization capabilities intended to allow large numbers of mobile users
to intermittently connect and synchronize their local database with a server
database. The Company has made extensive use of object oriented technology to
develop a multi-tiered architecture that supports Internet-enabled
client/server, three-tiered and N-tiered deployment strategies. The Company
intends to continue to commit substantial resources to maintain and extend its
advanced technology position.
 
 Global Strategic Alignment
 
  The Company seeks to promote widespread adoption of Siebel Enterprise
Applications through the establishment of strategic relationships with leading
systems integrators, technology providers and distributors.
 
  Siebel Systems has formalized a global strategic business alliance with
Andersen Consulting to maximize the growth and establish the market leadership
position of both companies in the sales and marketing information systems
marketplace. Under this worldwide alliance agreement, Andersen Consulting
provides Siebel-related professional services including sales force
reengineering, change management, systems integration, configuration,
installation, project management and training. This relationship provides
Siebel and Siebel's customers immediate access to a highly trained global
professional service organization to customize, integrate and deploy medium-
and large-scale Siebel implementations.
 
  The relationship between Siebel Systems and Andersen Consulting is non-
exclusive. Siebel Systems frequently utilizes other systems integrators,
including Price Waterhouse LLP, Cambridge Technology Partners (Massachusetts),
Inc., Deloitte & Touche LLP and Inforte Corp. to provide Siebel-related
professional services.
 
  The Company has technology and marketing relationships with other leading
companies such as Microsoft Corporation, Compaq Computer Corporation, Itochu
Corporation and Itochu Techno-Science Corporation (collectively, "Itochu") and
intends to establish additional relationships.
 
  These relationships allow the Company to focus on its core areas of
expertise of developing and marketing sales, marketing and customer service
information systems software, while leveraging the strength and influence of
complementary information technology leaders in their respective domains.
 
 Fully Exploit Intranets and the Internet
 
  The Siebel Enterprise Applications have been designed to expand the
accessibility of comprehensive sales, marketing and customer service
information to sales, marketing and customer service representatives through
the use of intranets and the Internet as a global, low-cost, virtual private
network. The Company believes that the Internet will enable the entire
corporate sales, marketing and customer service information base, currently
only available to users connected over a LAN (local area network) or WAN (wide
area network), to be available without geographic limitation for the low cost
of a local Internet connection. This capability will allow organizations to
deploy targeted, fully-informed sales, marketing and customer service
professionals wherever needed without the expense and overhead of physical
offices or private leased lines. The Company plans to continue to exploit the
Internet and believes that in the future it will allow customers to access
comprehensive information systems which recommend and deliver customized
products, goods and services directly to customers worldwide.
 
 Promote Successful Customer Implementations
 
  The Company's success is dependent upon its customers' successful
implementation of Siebel Enterprise Applications. As a result, the Company
actively supports the customer's deployment efforts by providing Internet and
telephone technical support, providing comprehensive instructor-led training
and assigning an account management team that consists of a sales
representative, technical account manager and an executive sponsor.
 
                                       5
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To objectively measure customer satisfaction, Siebel Systems employs an
independent third-party organization to perform periodic customer satisfaction
audits.
 
 Expand Global Sales Capabilities
 
  The Company intends to expand its global sales capabilities by increasing
the size of its direct sales organization in major markets and continuing to
leverage distributors in other selected markets. In particular, the Company
plans to expand its direct sales and marketing activities in Asia, Australia,
Europe, South America and North America. The Company has operations in
Australia, Brazil, Canada, Colombia, France, Germany, Italy, Japan, Mexico,
the Netherlands, Norway, Sweden, Switzerland, the United Kingdom, and the
United States, and has introduced with Itochu localized versions of Siebel
Enterprise Applications for the Japanese market. The Company also has
developed localized versions for several major European markets. The Company
is currently developing other localized versions, which will be released as
market conditions warrant.
 
VERTICAL PRODUCTS
 
 Consumer Packaged Goods
 
  Siebel Consumer Packaged Goods (CPG) is designed to deliver a fully
integrated, closed-loop selling process designed specifically to support the
unique selling process within consumer goods sector and is optimized for key
account management and retail sales.
 
  Siebel CPG is designed to support these selling processes by augmenting
standard product modules from Siebel Sales Enterprise with consumer goods
specific product modules. Siebel CPG utilizes standard product modules such as
Account/Store Management, Contact Management, Activity Management, Team
Selling, Calendar and Marketing Encyclopedia. These tools cross the bounds of
key account management and retail sales as they can be applied across both
selling organizations. Additional consumer goods product modules are combined
with these standard product modules. These modules include trade funds
management, promotion planning, shipment and consumption analysis, retail
activity assignment, retail activity execution and post event promotion
analysis.
 
 Pharmaceutical
 
  Siebel Pharma is designed to provide pharmaceutical companies with
unparalleled functionality to support not only the unique selling and
marketing strategies to roll out and successfully brand new products, but the
entire range of sales, marketing support, and customer service activities as
well. As a result, sales representatives can now target physicians who will
most likely prescribe their products, easily track return on investment in
sample programs and effectively manage their call schedules to meet customer
requirements and maximize their sales call productivity.
 
  Siebel Pharma features easy-to-use and comprehensive Account, Contact and
Time Management tools that allow sales professionals to understand and address
the needs of their medical professional and health care institution customers.
Additionally, complete Sample Management capabilities allow sales
professionals to easily track the stock of samples used in the promotion
process, including quantities, lot numbers and usage tracking. And deep
analytical capabilities allow sales professionals, sales managers and brand
managers to understand the dynamics of the market and target more effectively
to high-prescribing physicians.
 
 Insurance
 
  Siebel Insurance is an industry-specific sales, marketing and customer
service solution designed to meet the insurance industry's unique requirements
for a front-office policy, quoting, acquisition and servicing systems. Siebel
Insurance introduces new policy and claims management functionality for the
personal lines, commercial and life insurance lines of business and is
designed to increases sales and service productivity, improve customer
satisfaction and enhance cross-selling and up-selling opportunities to the end
customer. Siebel Insurance supports
 
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client management, campaigns, new quotes, policy management and claims
management for personal lines of business.
 
PRODUCTS
 
  The Siebel Enterprise Applications are client/server application software
product families designed to meet the sales, marketing and customer service
information system requirements of large, frequently multi-national,
organizations. Each is comprised of a broad range of advanced client/server
application products designed to allow corporations to deploy comprehensive
customer information systems, product information systems, competitive
information systems and decision support systems on a global basis. The
Company shipped Siebel Sales Enterprise version 1.0 in April 1995, and
subsequently shipped version 2.0 in November 1995 and version 3.0 in February
1997. The Company shipped Siebel Service Enterprise version 2.2 in December
1996, and subsequently shipped version 3.0 in February 1997.
 
  The Siebel Enterprise Applications support Windows for Workgroups, Windows
95 and Windows NT Workstation clients. The Siebel application server operates
on Windows NT and can work with Microsoft, Oracle, Sybase and Informix
relational databases operating on a variety of leading UNIX servers and
Windows NT database server platforms.
 
  The Company generally licenses its software based on the number of users.
Siebel Sales Enterprise and Siebel Service Enterprise each have a U.S. list
price of $1,350 per user, or $1,950 per user if both applications are licensed
together. The price for Siebel Marketing Enterprise is $2,700 per user.
Additional product options range from $100 to $500 per module. As of December
31, 1997, the average dollar value of the Company's licensing transactions was
approximately $580,000. The total number of licensed users of the Siebel
Enterprise Applications as of such date was approximately 86,000 users, and
the average number of users per customer was approximately 700 users.
 
  Software products as internally complex as those offered by the Company
frequently contain errors or failures, especially when first introduced or
when new versions are released. Although the Company conducts extensive
product testing during product development, the Company has been forced to
delay commercial release of products until the correction of software problems
and, in some cases, has provided product enhancements to correct errors in
released products. The Company could, in the future, lose revenues as a result
of software errors or defects. The Company's products are intended for use in
sales applications that may be critical to a customer's business. As a result,
the Company expects that its customers and potential customers have a greater
sensitivity to product defects than the market for software products
generally. There can be no assurance that, despite testing by the Company and
by current and potential customers, errors will not be found in new products
or releases after commencement of commercial shipments, resulting in loss of
revenue or delay in market acceptance, diversion of development resources,
damage to the Company's reputation, or increased service and warranty costs,
any of which could have a material adverse effect upon the Company's business,
operating results and financial condition.
 
  The Company's license agreements with its customers typically contain
provisions designed to limit the Company's exposure to potential product
liability claims. It is possible, however, that the limitation of liability
provisions contained in the Company's license agreements may not be effective
under the laws of certain jurisdictions. Although the Company has not
experienced any product liability claims to date, the sale and support of
products by the Company may entail the risk of such claims in the future. A
successful product liability claim brought against the Company could have a
material adverse effect upon the Company's business, operating results and
financial condition.
 
 Siebel Sales Enterprise
 
  The Siebel Sales Enterprise is designed to allow teams of sales and
marketing professionals to manage sales information throughout the entire
sales cycle. This core application includes the Opportunity Management,
Account Management, Contact Management, Activity Tracking and Calendar
Systems.
 
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<PAGE>
 
  The Siebel Sales Enterprise product family includes Siebel Marketing
Encyclopedia, Siebel Office, Siebel Quotes, Siebel Revenue Forecasting, Siebel
Product Forecasting, Siebel Reports, Siebel EIS, Siebel Tele-Business, Siebel
Remote Client, Siebel Target Account Selling, Siebel BusObject Designer,
Siebel Systems Administration and Management Software, Siebel CPG, Siebel
Pharma, and Siebel Insurance. Siebel Systems Administration and Management
Software components include Siebel BusObject Configurator, Siebel Marketing
Manager, Siebel Sales Manager, Siebel Anywhere, Siebel Enterprise Integration
Manager and Siebel Database Extension Manager.
 
 Siebel Service Enterprise
 
  The Siebel Service Enterprise enables service and sales organizations,
including customer support, help desks, call centers, telesales and field
sales, to provide higher levels of customer service by easily sharing all
customer information across functions. The Siebel Service Enterprise is
designed to increase the productivity of service personnel, allowing them to
assist more customers with high levels of customer satisfaction.
 
  The base Siebel Service Enterprise application includes the Service Request
Management, Account Management and Profile, Contact Management, Activity
Tracking, Service Agreement Management, Customer Satisfaction Surveying and
Calendar Systems. Additional options include Siebel Service Encyclopedia,
Siebel Reports, Siebel EIS, Siebel BusObject Configurator, Siebel Service
Manager, Siebel Tele-Business, Siebel Enterprise Integration Manager and
Siebel Database Extension Manager.
 
 Siebel Marketing Enterprise
 
  The Company is currently developing an additional base application known as
Siebel Marketing Enterprise which it expects to ship in the first half of
1998. The Siebel Marketing Enterprise is designed to allow marketing
professionals, sales and service managers, and business analysts to monitor
overall company performance and the effectiveness of company programs and
activities. Siebel Marketing Enterprise is designed to extract information
from Siebel Sales Enterprise, Siebel Service Enterprise and Siebel Call Center
into a customer data mart, designed for fast data analysis. Siebel Marketing
Enterprise is designed to include a broad range of pre-built analyses about
customers, sales pipeline, customer service, competitors, campaigns, and
products, allowing managers and analysts to drill down into key operational
details.
 
 Siebel Product Advantages
 
  Application Configuration
 
  The Company's customers each have unique business needs requiring varying
levels of application configuration. For instance, different organizations may
use a combination of direct sales, field sales, telesales or third-party
sales. The Company believes it has anticipated these needs and provides
configurable business objects to allow organizations to configure the
application to fit their unique requirements. Each business object defines the
look and feel, the information displayed and the workflow of the application
to address major areas of business functionality. For example, a business
object may contain the business logic and rules that describe how leads and
prospects are shared across multiple sales channels. The Company provides a
range of business objects that address the sales, marketing and customer
service process.
 
  The Siebel Enterprise Applications are designed to allow organizations to
configure and modify the properties and attributes of the business objects
without needing to change application source code. The Company believes this
approach to configuration provides several key benefits:
 
    . Reduces cost of configuration and maintenance,
 
    . Permits a clear and consistent upgrade path for future releases of
    Siebel software, and
 
    . Allows the Company to maintain and support a single source code base
     that addresses the varied needs of its customers.
 
  Application configuration is typically performed by a Siebel systems
integration partner or the customer's MIS department. The software may be
configured in a number of manners including:
 
    . User Preferences
 
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    . System Administration Preferences
 
    . Server Preferences
 
    . Database Extensibility
 
    . Object Definitions
 
  This combination of configuration options offers customers extensive
configurability without having to write or modify source code.
 
 Siebel Application Upgrader
 
  The Siebel Application Upgrader module reduces time and cost of version
upgrades by allowing the Company's customers to better determine what changes
are available with each release of the Siebel Enterprise Applications, and
compare unique object customizations from prior release with changes in the
new release. Siebel Application Upgrader provides systems administrators with
notification of conflicts between object customizations and new releases,
automatically merges differences between object definitions, and allows
administrators to manually override and apply any changes.
 
 Data Synchronization and Replication
 
  Typically, field sales, telesales, customer service and order administration
personnel all have contact with the same customers. Sharing information about
customers across often geographically dispersed sales teams can be difficult.
The challenge is to provide every member of the sales team with up-to-date
information on the account or prospect. Siebel Remote, the Company's
asynchronous replication technology, addresses the data synchronization and
distribution needs of these sales teams. Siebel has applied for a patent on
its proprietary data synchronization and replication technology. See "--
Intellectual Property and Other Proprietary Rights."
 
  Mobile users can utilize Siebel Remote to synchronize their laptop or hand-
held computer with the central data repository. Adhering to pre-established
visibility rules, Siebel users can share overlapping subsets of data to
support team selling. Traditional data synchronization approaches are
typically limited, allowing only the primary user to update shared data. With
such limited approaches, other synchronized users only have read access to
information entered by the primary owner. Siebel Remote is designed to allow
any designated member of the sales team to update records and to automatically
synchronize the updates with all other users.
 
  Giving multiple users update rights can create conflicts, particularly when
some users operate in a mobile environment and are not permanently connected
to the central data repository. The Siebel Enterprise Applications support an
extensive set of configurable business rules that detect and resolve conflicts
at the database field level.
 
  Siebel uses a sophisticated "net change" architecture with highly compressed
transaction instructions designed to minimize network traffic, reduce data
synchronization time and limit network expense. Siebel's architecture is
network independent, allowing data synchronization to occur over LAN, WAN,
dial-up, as well as intranet and Internet connections.
 
 User Interface
 
  The Siebel Enterprise Applications have been ergonomically designed by human
factors experts to be easy to use and easy to learn. The use of Microsoft
Windows and Microsoft Office compliant user interface technology is intended
to ensure that users are immediately familiar with buttons, menus and
industry-standard commands. A tab metaphor allows users to click a mouse and
view the key components of their sales and marketing information system.
Siebel's patented Thread Manager technology displays, records and restores the
user's screen-by-screen navigation. System-wide, context sensitive help
provides immediate answers to questions.
 
 Scalability and Performance
 
  Scalability and performance are key considerations in enterprise-wide
deployments of customer information systems. For large deployments, thousands
of users need to access a common data repository that may contain tens of
gigabytes of information. Scalability and performance are impacted by design
and implementation of both the client and server side of the application. The
Siebel Enterprise Applications are designed to address the performance and
usability issues that arise in large-scale deployments.
 
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 Efficient Use of Network Bandwidth to Optimize Performance
 
  The Siebel client/server architecture is designed to minimize network
traffic to optimize performance. The client is designed to intelligently cache
data and group database queries and updates, thereby minimizing the number of
transactions over the network. This feature is intended to allow large numbers
of users to be simultaneously connected over a LAN or WAN to a single
centralized database while exhibiting acceptable performance characteristics.
 
 High Performance Application Server
 
  The Siebel Application Server has been designed to permit high throughput.
Multiple application servers can run in parallel with a single database
server. The number of users each Siebel Application Server can support varies
depending on the type and frequency of data updates, as well as the particular
server hardware.
 
 High Performance Computer Hardware and Database Support
 
  The Siebel products are designed to support scalability for large user
communities by taking advantage of leading, high-performance databases and
computer hardware. The Company supports industry-standard approaches to high-
performance such as symmetric multi-processing hardware which allows multiple
processors within one server machine.
 
 Support for Global Enterprises
 
  Built for multi-national customers, Siebel software supports international
standards in several ways, including support for:
 
    . Local language support for non-English application deployment
 
    . Multiple currencies, exchange rates and automatic currency
    conversions
 
    . International time, date and phone number conventions
 
    . Double-byte Asian character sets
 
  The Company introduced with Itochu a localized version of the Siebel
Enterprise Applications for the Japanese market. The Company also has
developed localized versions of the Siebel Enterprise Applications for several
major European markets. The Company is currently developing other localized
versions, which will be released as market conditions warrant.
 
TECHNOLOGY
 
  The Siebel Enterprise Applications exploit an advanced information
technology platform. The Siebel products embrace and incorporate the utility
and power of the Internet. The applications are built on a multi-tiered
client/server architecture supporting Microsoft Windows clients and a variety
of Windows NT and UNIX servers running Informix, Microsoft, Oracle and Sybase
relational databases. The technology foundation includes object oriented
application development, Microsoft Visual C++, MFC Libraries, OLE 2/Com, 32-
or 16-bit processing and Microsoft Windows and Microsoft Office user interface
compliance. The Siebel applications are modern, scalable and customizable
enterprise-wide client/server sales and marketing information systems. The
applications use a multi-tiered architecture with separate client, application
server and database server layers connected together over a LAN or a WAN.
 
 The Siebel N-Tiered Architecture
 
  The Company has developed an advanced, N-tiered object oriented software
architecture. The software architecture is designed to provide Siebel
customers with robust flexibility in application deployment to meet the unique
needs of the organization. Siebel's N-tiered architecture is designed to allow
customers the flexibility of deploying their applications on remote pen-based
and laptop computers, on standalone desktop workstations, on client/server
systems, on highly distributed replicated "mainframe" server environments, and
on the Internet, or any combination thereof.
 
 
                                      10
<PAGE>
 
  Siebel's N-tiered architecture separates the information presentation,
application logic, database access, and interprocess communications layers
into separate tiers in order to partition and distribute the application
components to run where necessary.
 
  Siebel's N-tiered architecture currently supports the following application
deployments: Personal Computing for mobile sales and service professionals and
Client/Server for connected sales and service professionals. The Company
expects that this architecture can be further exploited to support additional
Internet-enabled application deployment configurations in future Siebel
product releases, including the Virtual Computing for Internet-connected sales
professionals, resellers, partners and individual buyers.
 
 Personal Computing
 
  Siebel Personal Computing supports mobile sales and service professionals
who typically use either laptops or hand-held portable computers. These users
are not permanently connected to their organization's network and usually run
the client disconnected from the central database. Mobile clients have a local
SQL database that contains a subset of the information in the server database.
While the field sales representative is disconnected from the LAN or WAN, the
local database is used for information access and updates. This gives mobile
users the complete range of functionality available to connected users
anywhere their business takes them. The Company's patent-pending technology
allows for exchange and synchronization of information between the mobile and
server databases, using LANs, WANs, dial-up or the Internet.
 
 Client/Server
 
  The Siebel Client/Server software connects the client to the server database
via a LAN or WAN. Connected clients access and update information directly
against the server database. A typical use for a connected client is a
telesales representative based in the headquarters office or possibly in a
regional office connected to headquarters through a WAN.
 
 Virtual Computing
 
  Siebel Virtual Computing is being designed to expand the accessibility of
comprehensive sales and marketing information to sales representatives through
use of the Internet as a global, low-cost, virtual private network. The
Company believes that the Internet will enable the entire corporate sales and
marketing information base, previously available only to users connected over
a LAN or WAN, to be available without geographic limitation for the cost of a
local Internet connection. The Company believes that this capability will
allow organizations to deploy targeted, fully-informed sales professionals
wherever needed without the expense and overhead of private leased lines or
physical offices.
 
  Siebel Virtual Computing is being designed to deliver one-to-one sales,
marketing and service on a global basis. The Company believes this may well
re-define the concept of "selling on the Internet." Today, buyers can order
anything from consumer goods to automobiles using the Internet to browse home
pages and tour virtual shopping malls. This passive approach to selling can be
characterized as using the Internet simply as an inexpensive way to deliver an
electronic catalog. Electronic catalogs do not currently lead customers
through the product evaluation and selection phase, do not up-sell or cross-
sell, only offer limited customized alternatives, and add no incremental value
to the selling process. The Company believes that such electronic catalogs are
not a replacement for a true sales professional who can identify the specific
product configuration that best suits the customers' needs and requirements.
 
  The Company believes that its N-tiered architecture will, in the future, be
able to provide organizations with the technology foundation to deliver a
powerful new generation of selling applications over the Internet. For
example, through a web page, buyers may have access to a virtual sales
consultant, fully knowledgeable about the buyer's demographics, interests and
buying patterns. The Company believes that this virtual sales approach will
allow organizations to dynamically target marketing programs, tailor solutions
and deliver customized
 
                                      11
<PAGE>
 
products, goods and services worldwide, directly to customers based on their
needs. The Company believes that this use of the Internet may fundamentally
change the economics of selling by permitting organizations to reduce
distribution and selling costs, while simultaneously increasing revenues and
growing new markets through disintermediation.
 
  The software market in which the Company competes is characterized by rapid
technological change, frequent introductions of new products, changes in
customer demands and evolving industry standards. The introduction of products
embodying new technologies and the emergence of new industry standards can
render existing products obsolete and unmarketable. For example, the Company's
customers have adopted a wide variety of hardware, software, database and
networking platforms, and as a result, to gain broad market acceptance, the
Company must support Siebel Enterprise Applications and the Company's other
products on a variety of such platforms. The Company's future success will
depend upon its ability to address the increasingly sophisticated needs of its
customers by supporting existing and emerging hardware, software, database and
networking platforms and by developing and introducing enhancements to Siebel
Enterprise Applications and new products on a timely basis that keep pace with
technological developments, evolving industry standards and changing customer
requirements. There can be no assurance that the Company will be successful in
developing and marketing enhancements that respond to technological
developments, evolving industry standards or changing customer requirements,
or that the Company will not experience difficulties that could delay or
prevent the successful development, introduction and sale of such enhancements
or that such enhancements will adequately meet the requirements of the
marketplace. If release dates of any future Siebel Enterprise Application
enhancements or new products are delayed or if these products or enhancements
fail to achieve market acceptance when released, the Company's business,
operating results and financial condition could be materially and adversely
affected. In addition, the introduction or announcement of new product
offerings or enhancements by the Company or the Company's competitors or major
hardware, systems or software vendors may cause customers to defer or forgo
purchases of the Company's products, which could have a material adverse
effect on the Company's business, financial condition and results of
operations.
 
  During 1997, 1996, and 1995, the Company had product development expenses of
$13.3 million, $5.9 million, and $2.8 million, respectively.
 
                                      12
<PAGE>
 
CUSTOMERS AND MARKETS
 
  Siebel has targeted large organizations operating globally and conducting
business through multiple sales channels. The Company believes this market has
been underserved by existing vendors and offers substantial opportunities to
the Company. The following is a representative list of customers of the
Company as of December 31, 1997.

  FINANCIAL SERVICES                       HIGH TECHNOLOGY
   . Charles Schwab & Co., Inc.             . Altera Corporation
   . Nationsbanc Montgomery                 . BMC Software, Inc.         
       Securities, Inc.                     . Compaq Computer Corporation 
                                            . Digital Equipment Corporation
  BANKING                                   . Hewlett-Packard               
   . Nationsbanc Services, Inc.             . LSI Logic Corporation         
   . Texas Commerce Bank National           . Mentor Graphics Corporation
        Association                         . Novell, Inc.               
                                            . Peoplesoft, Inc.           
  INSURANCE                                 . Sybase, Inc.               
   . Connecticut General (Cigna)                                         
   . Diversified Distribution Services,    TRANSPORTATION                
       a member of The Travelers Group      . American President Companies   
   . Nationwide Mutual Insurance Company        Ltd.                         
   . The Prudential Insurance Company                                        
        of America                         CONSUMER PACKAGED GOODS           
                                            . British-American Tobacco Company
  PHARMA                                        Limited
   . Bayer Yakushin, Ltd.                   . The Dial Corp                   
   . Berlex Laboratories, Inc.              . Kellogg Company                 
   . Hoechst Marion Roussel, Ltd.           . The Quaker Oats Company         
                                                                              
  TELECOMMUNICATIONS                       MANUFACTURING                      
   . Lucent Technologies, Inc.              . AMP Incorporated                
   . MCI Telecommunications Corporation     . Siemens                         
   . Telecom Finland OY                     . The Dow Chemical Company        
   . Telenor Mobil AS                                                         
                                           UTILITIES                          
  SERVICE                                                                     
   . Andersen Consulting LLP                . AEP Energy Solutions, Inc.      
                                            . Halliburton Energy Services     


  The Siebel Enterprise Applications have been selected for use by a wide
variety of industries as illustrated by the following customer examples:
 
 Financial Services
 
  In December 1995, Charles Schwab & Co., Inc. licensed the Siebel Sales
Enterprise software as an important sales system to be used by more than 4,000
brokers. After reviewing multiple products in the areas of configurability,
scalability and functionality, the firm chose the Siebel Sales Enterprise. The
Siebel Sales Enterprise is designed to allow shared access to updated customer
profiles and histories to improve the organization's responsiveness to its
nearly 3.5 million active customer accounts and prospects.
 
 Transportation
 
  American President Companies Ltd. was challenged with providing their sales
representatives with the tools necessary to compete in a global marketplace.
After conducting an extensive review of sales and marketing
 
                                      13
<PAGE>
 
information systems, they selected Siebel Sales Enterprise. This
implementation is being designed to integrate internal customer information
and government trade data, to optimize work loads and to provide increased
customer service. Utilizing Siebel's work flow capabilities, these sales
representatives are expected to be able to balance multiple customer inquiries
and increase their revenue generating capacity.
 
 High Technology
 
  Compaq chose Siebel Sales Enterprise because of its advanced technology and
Siebel's in-depth understanding of the sales process. Initially, Compaq plans
to roll out Siebel Sales Enterprise in its U.S. geography in order to maximize
administrative efficiency for their widely-dispersed field sales, field
service engineering, reseller management, channel management, reseller sales
consulting, marketing and call center professionals.
 
MARKETING
 
  The Company's marketing efforts are directed at establishing a market
leadership position for Siebel Systems. Targeted at sales, marketing, customer
service and information technology executives within large, multi-national
organizations, Siebel's marketing programs are focused on creating awareness
and generating interest in the Siebel solution.
 
  Siebel Systems is an active participant in the Digital Consulting Inc. (DCI)
Sales Force Automation Conferences, a leading international conference and
trade show in the sales and marketing information systems marketplace. In
1997, the DCI conferences were held in San Jose, Chicago, Toronto, Boston and
New York. These conferences featured Thomas M. Siebel, Chairman and Chief
Executive Officer of the Company, delivering the plenary Keynote Address. In
addition, Siebel Systems demonstrated its products and showcased its partners'
solutions. The Company intends to participate in each of the 1998 DCI
conferences being held in San Jose, Chicago, Boston and New York. In addition,
Thomas Siebel is a frequent speaker at many software industry events,
including the Sales Automation Association and Insight Technology Group's
Chief Sales Officer Conferences, as well as the Andersen Global Consulting
Seminar.
 
  Siebel's marketing personnel engage in a variety of marketing activities,
including managing and maintaining the Siebel web site, issuing newsletters,
making direct mailings, placing advertisements, conducting public relations
and establishing and maintaining close relationships with recognized industry
analysts.
 
SALES
 
  As of December 31, 1997, the Company's sales force consisted of 161
employees located in ten offices around the world. In addition to the
Company's direct presence in Japan, sales in the Asia/Pacific market are
leveraged through distribution agreements with several distributors, including
Itochu, NEC, Hitachi and Matsushita. The Company also has several other
distributors which distribute the Company's products around the world. The
Company intends to continue to add sales representatives and sales consultants
worldwide. The Company believes that in order to increase sales opportunities
and profitability it will be required to expand its international operations.
The Company has committed and continues to commit significant management time
and financial resources to developing direct and indirect international sales
and support channels. There can be no assurance, however, that the Company
will be able to maintain or increase international market demand for Siebel
Enterprise Applications. To the extent that the Company is unable to do so in
a timely manner, its international sales will be limited, and it's business,
operating results and financial condition could be materially and adversely
affected.
 
  The Company deploys sales teams consisting of both sales and technical
professionals who work with strategic systems integration partners to create
industry specific proposals, presentations and demonstrations which address
the exact requirements of the customer. The decision makers within Siebel's
prospective customers for the Siebel products are their executive management
teams, frequently consisting of the Chief Information Officer, VP Sales, VP
Marketing, the Chief Financial Officer and the Chief Executive Officer.
 
  The Company manages its business using the Siebel Enterprise Applications,
running on the Company's intranet. The Siebel product is used to manage all
aspects of the sales process and to share information among members of the
sales team and Siebel management.
 
  The Company believes that the deployment of an integrated sales, marketing
and customer service information system offers a distinct competitive
advantage and that focusing corporate resources on revenue
 
                                      14
<PAGE>
 
generating systems offers greater return than automation efforts focused on
cost reduction in areas such as human resources and accounting. The Company
believes its customers' understanding of this fact establishes the value of
the Siebel Enterprise Applications and shortens the Company's sales cycle.
 
  The Company's sales process consists of several phases: lead generation,
initial contact, lead qualification, needs assessment, company overview,
product demonstration, proposal generation and contract negotiations. In a
number of instances the Company believes that its relationships with strategic
partners, including systems integrators, has substantially shortened the
Company's sales cycle. Partners have generated and qualified sales leads, made
initial customer contacts and assessed needs prior to Siebel's introduction.
Additionally, systems integration partners have assisted the Company in the
creation of customized presentations and demonstrations which the Company
believes enhance the competitive position. While the sales cycle varies
substantially from customer to customer, for initial sales it has ranged to
date from two to eighteen months, due to the fact that the license of the
Company's products is often an enterprise-wide decision by prospective
customers involving a significant level of customer education and is
associated with a significant commitment of customer resources. The Company's
sales and implementation cycle could be lengthened by increases in the size
and complexity of its license transactions and by delays in its customers'
implementation of client/server computing environments. Delay in the sale or
implementation of a limited number of license transactions could have a
material adverse effect on the Company's business and operations and cause the
Company's operating results to vary significantly from quarter to quarter.
 
  Prior growth rates in the Company's revenue and net income should not be
considered indicative of future operating results. Future operating results
will depend on many factors, including the demand for the Company's products,
the level of product and price competition, the length of the Company's sales
cycle, the size and timing of individual license transactions, the delay or
deferral of customer implementations, the Company's success in expanding its
customer support organization, direct sales force and indirect distribution
channels, the timing of new product introductions and product enhancements,
the mix of products and services sold, levels of international sales,
activities of and acquisitions by competitors, the timing of new hires,
changes in foreign currency exchange rates and the ability of the Company to
develop and market new products and control costs. In addition, the decision
to implement a sales and marketing information system is discretionary,
involves a significant commitment of customer resources and is subject to the
budget cycles of the Company's customers. The Company's sales generally
reflect a relatively high amount of revenue per order. The loss or delay of
individual orders, therefore, would have a significant impact on the revenue
and quarterly results of the Company. The timing of license revenue is
difficult to predict because of the length and variability of the Company's
sales cycle. The Company's operating expenses are based on anticipated revenue
trends and, because a high percentage of these expenses are relatively fixed,
a delay in the recognition of revenue from a limited number of license
transactions could cause significant variations in operating results from
quarter to quarter and could result in operating losses. To the extent such
expenses precede, or are not subsequently followed by, increased revenues, the
Company's operating results would be materially and adversely affected. To
date, the Company has not experienced significant seasonality of operating
results. The Company expects future revenues for any period may be affected by
the fiscal or quarterly budget cycles of its customers. As a result of these
and other factors, revenues for any period are subject to significant
variation, and the Company believes that period-to-period comparisons of its
results of operations are not necessarily meaningful and should not be relied
upon as indications of future performance. It is likely that the Company's
future operating results from time to time will not meet the expectations of
market analysis or investors, which would likely have an adverse effect on the
price of the Company's Common Stock. In addition, fluctuations in operating
results may also result in volatility in the price of the Company's Common
Stock.
 
  To date, the Company has sold its products primarily through its direct
sales force and has supported its customers with its technical and customer
support staff. The Company's ability to achieve significant revenue growth in
the future will depend in large part on its success in recruiting and training
sufficient direct sales, technical and customer support personnel and
establishing and maintaining relationships with its strategic partners. The
Company believes the complexity of its products and the large-scale deployment
anticipated by its customers will require a number of highly trained customer
support personnel. There can be no assurance that
 
                                      15
<PAGE>
 
the Company will successfully expand its technical and customer support staff
to meet customer demands. Any failure by the Company to expand its direct
sales force or other distribution channels, or to expand its technical and
customer support staff, could materially and adversely affect Siebel's
business, operating results and financial condition.
 
GLOBAL STRATEGIC ALIGNMENT
 
  An important element of the Company's sales and marketing strategy is to
continue to enhance and expand its strategic partnerships with key industry
leaders in order to increase market awareness and acceptance of Siebel
Systems. The Company believes these relationships with industry leaders help
to ensure that Siebel Systems delivers a comprehensive solution to its
customers for their sales and marketing information system needs. The Company
has established relationships with organizations in two general categories:
systems integrators and technology and distribution partners. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Risk Factors--Reliance on Andersen Consulting and Other
Relationships; Dependence on Other Relationships."
 
 Systems Integrators
 
  Andersen Consulting--Strategic Business Alliance
 
  Siebel Systems and Andersen Consulting have formalized a strategic business
alliance designed to maximize the growth and establish the market leadership
position of both organizations in the sales and marketing information systems
marketplace. Worldwide in scope, the parties' agreement includes cooperative
specification and development of products and solutions, technology transfer
and training and joint marketing and sales programs. Under this agreement,
Siebel promotes Andersen as its preferred systems integration partner and
Andersen promotes Siebel as its preferred software solution for sales and
marketing information systems. In connection with the strategic alignment,
Andersen Consulting has made an equity investment in Siebel Systems and George
Shaheen, the Managing Partner of Andersen Consulting, serves on the Company's
Board of Directors.
 
  Andersen Consulting provides Siebel-related professional services including
sales force reengineering, change management, system integration,
configuration, installation, project management and training. Andersen
Consulting operates Siebel Configuration Centers in San Mateo, Minneapolis,
London and Tokyo. Siebel believes that this relationship provides Siebel and
Siebel's customers immediate access to a highly trained global professional
service organization to customize, integrate and deploy medium- and large-
scale Siebel deployments. Andersen Consulting has provided system integration
services in connection with a majority of the Company's customers to date.
 
  Siebel Systems and Andersen Consulting conduct joint market development and
promotional activities, including joint advertising, joint public relations,
jointly developed brochures and market-specific product demonstrations, and
collateral. The two companies jointly participate in industry events and
conduct Executive Briefings both in worldwide seminar programs as well as in
DCI Field and Sales Automation tradeshows. Siebel and Andersen Consulting have
created a global joint selling model targeted at specific vertical markets and
major accounts.
 
 Other Systems Integrators
 
  The relationship between Siebel Systems and Andersen Consulting is non-
exclusive. Siebel Systems frequently utilizes other systems integrators,
including Price Waterhouse LLP, Cambridge Technology Partners (Massachusetts),
Inc. Deloitte & Touche LLP and Inforte Corp., to provide Siebel-related
professional services.
 
 Technology and Distribution Partners
 
  Itochu Techno-Science Corporation--Strategic Business Alliance
 
  Siebel and Itochu Techno-Science Corporation have entered into a strategic
alliance agreement under which the two companies have agreed to jointly
develop, promote, market, sell and support the Company's products in Japan.
The companies have localized the Siebel products for the Japanese market and
jointly promote and support these products in Japan. In connection with the
alliance, Itochu Techno-Science Corporation and related entities
 
                                      16
<PAGE>
 
have made an equity investment in the Company. Itochu Techno-Science
Corporation is a large technology provider to the Japanese market,
representing many leading companies including Sun Microsystems, Inc., Compaq
Computer Corporation and Sybase, Inc. Itochu Techno-Science Corporation is a
subsidiary of Itochu Corporation, which is one of the largest companies in the
world.
 
  Under the agreement, Itochu Techno-Science Corporation has prepared Japanese
localized versions of the Company's products, including the software, on-line
help and training materials. Acting as the distributor of the Siebel products
in Japan, Itochu Techno-Science Corporation promotes and markets the Siebel
software to Japanese end-user organizations. A dedicated, full-time marketing
team within Itochu Techno-Science Corporation coordinates the marketing,
promotion and distribution efforts for the Siebel products. This marketing
team promotes the Siebel products through marketing programs including
seminars, trade shows and conferences. In addition, Itochu Techno-Science
Corporation produces Japanese versions of Siebel sales tools and collateral.
 
  Itochu Techno-Science Corporation provides the installation, training,
technical support and maintenance to Siebel end-users. To promote customer
satisfaction in the Japanese market, Itochu provides technical support and
administers maintenance and software upgrade programs.
 
  Microsoft Corporation
 
  The Company and Microsoft have a strategic technology and marketing
relationship. As a member of the Microsoft Developer Network and Microsoft
Solution Provider programs, the Company receives frequent briefings on
Microsoft's strategic and technical product direction, as well as early access
to new software releases.
 
  The Company uses Microsoft development tools extensively, including
Microsoft Visual C++, MFC and OLE 2. The Siebel applications run under Windows
for Workgroups in 16-bit, and Windows 95 and Windows NT in a native 32-bit
environment. Microsoft has promoted Siebel's extensive use of its technology
in a Siebel Systems Solutions Datasheet, a Siebel Systems focus brochure, and
has featured the Siebel Sales Enterprise in multiple Microsoft product
launches.
 
  Siebel and Microsoft have collaborated in numerous joint marketing programs
targeted at Microsoft's key customers and prospects. The two companies have
conducted a nationwide series of Executive Sales Information Systems Briefings
and jointly participated with each other in trade shows and industry events.
 
  Compaq Computer Corporation
 
  Siebel and Compaq entered into a global partnership to provide integrated
enterprise solutions for automating sales, telemarketing and call-center
information systems. As part of the alliance, Siebel has selected Compaq as
its software development and preferred deployment platform for Microsoft
Windows NT and Compaq has selected Siebel as its preferred sales automation
solutions partner. The companies will participate in joint testing,
performance optimization and technology sharing, as well as coordinate field
sales and support activities. The Company believes the partnership will allow
customers to rapidly and cost-effectively develop and deploy customized sales
information systems worldwide, based on Compaq platforms and the Siebel
Enterprise Applications.
 
  Within the framework of this global partnership, Compaq and Siebel plan to
work together to deliver Siebel-ready solutions that include portables,
desktops, servers, networking products and services for customers and Compaq's
partners. The companies intend to leverage each others' technologies and
partnerships to optimize the use of Siebel applications on Compaq products.
Compaq and Siebel also intend to create strategic account programs and provide
joint training for their respective organizations and Compaq resellers to help
ensure customers take full advantage of the alliance's benefits.
 
  In addition, the companies plan to cooperate on technical white papers and
system sizing tools to help customers and resellers worldwide obtain optimum
performance, reliability and scalability for Compaq/Siebel solutions. To
familiarize customers and resellers with the benefits of this alliance, Compaq
and Siebel will cooperate on joint sales and marketing programs including
advertising, sponsorship of executive seminars, collateral development and
participation in trade shows and key industry events.
 
                                      17
<PAGE>
 
CUSTOMER SUPPORT AND TRAINING
 
  The Company has implemented a multi-tiered strategy designed to provide
comprehensive customer support programs to ensure successful implementation
and customer satisfaction. This multi-tiered approach includes on-line support
via the Internet, toll-free telephone technical support and direct support
from a customer satisfaction team.
 
  Through on-line support, a suite of Internet-based User Groups for specific
topics is available to Siebel customers. Internet support also includes a
knowledge repository to address customers' questions. The Company's Internet
service programs provide links to selective Siebel product documentation,
technical notes and frequently asked questions (FAQs). Customers can directly
check the status of their technical support requests over the Internet.
Separately, a toll-free phone number provides customers with direct access to
technical service professionals.
 
  Another facet of Siebel's customer support is provided by the customer
satisfaction team. Each Siebel customer is assigned a team which consists of a
sales representative, a technical account manager and an executive sponsor.
The goal of this team is to ensure the success and satisfaction of the
customer by facilitating open communications to quickly identify, analyze and
solve problems. Through a combination of regularly scheduled conference calls,
on-site visits, and project team planning meetings, Siebel personnel
participate in every phase of the customer implementation from planning to
project management to system test and organizational design. Customer
satisfaction is tracked on an account-by-account basis and reported weekly to
the Company's executive management. Customer satisfaction is also audited
periodically by an independent, objective third-party organization.
 
  The Company and independent third-party training organizations offer a wide
range of training courses in the configuration, administration and use of the
Siebel products. Training is available at the Company's Learning Center or at
the customer site. Andersen Consulting also offers training services in
connection with implementation of Siebel Enterprise Applications.
 
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
 
  The Company relies primarily on a combination of patent, copyright and
trademark laws, trade secrets, confidentiality procedures and contractual
provisions to protect its proprietary rights. The Company also believes that
factors such as the technological and creative skills of its personnel, new
product developments, frequent product enhancements, name recognition and
reliable product maintenance are essential to establishing and maintaining a
technology leadership position. The Company seeks to protect its software,
documentation and other written materials under patent, trade secret, and
copyright laws, which afford only limited protection. The Company currently
has ten patent applications pending in the United States, and one issued
patent. There can be no assurance that any patents issued to the Company will
not subsequently be invalidated, circumvented or challenged, that the rights
granted thereunder will provide competitive advantages to the Company or that
any of the Company's pending or future patent applications, whether or not
being currently challenged by applicable governmental patent examiners, will
be issued with the scope of the claims sought by the Company, if at all.
Furthermore, there can be no assurance that others will not develop
technologies that are similar or superior to the Company's technology or
design around any patents issued to the Company. Despite the Company's efforts
to protect its proprietary rights, unauthorized parties may attempt to copy
aspects of the Company's products or to obtain and use information that the
Company regards as proprietary. Policing unauthorized use of the Company's
products is difficult, and while the Company is unable to determine the extent
to which piracy of its software products exists, software piracy can be
expected to be a persistent problem. In addition, the laws of some foreign
countries do not protect the Company's proprietary rights as fully as do the
laws of the United States. There can be no assurance that the Company's means
of protecting its proprietary rights in the United States or abroad will be
adequate or that competition will not independently develop similar
technology. The Company has entered into agreements with substantially all of
its customers which require the Company to place Siebel Enterprise
Applications source code into escrow. Such agreements generally provide that
such parties will have a limited, non-exclusive right to use the source code
in the event that there is a bankruptcy proceeding by or against the Company,
if the Company ceases to do business or if the Company fails to meet its
support obligations. Entering into such agreements may increase the likelihood
of misappropriation by third parties.
 
 
                                      18
<PAGE>
 
  The Company is not aware that it is infringing any proprietary rights of
third parties. There can be no assurance, however, that third parties will not
claim infringement by the Company of their intellectual property rights. The
Company expects that software product developers will increasingly be subject
to infringement claims as the number of products and competitors in the
Company's industry segment grows and the functionality of products in
different industry segments overlaps. Furthermore, there can be no assurance
that former employers of the Company's present and future employees will not
assert claims that such employees have improperly disclosed confidential or
proprietary information to the Company. Any such claims, with or without
merit, could be time consuming to defend, result in costly litigation, divert
management's attention and resources, cause product shipment delays or require
the Company to pay money damages or enter into royalty or licensing
agreements. Such royalty or licensing agreements, if required, may not be
available on terms acceptable to the Company, if at all. In the event of a
successful claim of product infringement against the Company and failure or
inability of the Company to license the infringed or similar technology, the
Company's business, operating results and financial condition would be
materially and adversely affected.
 
  The Company relies upon certain software that it licenses from third
parties, including software that is integrated with the Company's internally
developed software and used in Siebel Enterprise Applications to perform key
functions. There can be no assurance that these third-party software licenses
will continue to be available to the Company on commercially reasonable terms.
In addition, the Company is to a certain extent dependent upon such third
parties' abilities to enhance their current products, to develop new products
on a timely and cost-effective basis and to respond to emerging industry
standards and other technological changes. There can be no assurance that the
Company would be able to replace the functionality provided by the third party
software currently offered in conjunction with the Company's products in the
event that such software becomes obsolete or incompatible with future versions
of the Company's products or is otherwise not adequately maintained or
updated. The loss of, or inability to maintain, any such software licenses
could result in shipment delays or reductions until equivalent software could
be developed, identified, licensed and integrated which could materially and
adversely affect the Company's business, operating results and financial
condition.
 
ACQUISITIONS
 
  In October 1997, the Company acquired InterActive WorkPlace, Inc. of Boston,
Massachusetts, a developer of intranet-based business intelligence software
technology that will be incorporated into the Siebel Enterprise Applications
as the Siebel InterActive module. Under the terms of the agreement,
InterActive WorkPlace's security holders received or will receive 459,000
shares of Siebel common stock in exchange for all outstanding shares and
options in InterActive WorkPlace. The transaction was valued at approximately
$15 million, and was accounted for as a purchase. InterActive WorkPlace became
the Siebel InterActive business unit, responsible for product marketing and
development of the Siebel InterActive module.
 
  In November 1997, the Company acquired Nomadic Systems, Inc. of Morris
Plains, New Jersey, a provider of innovative business solutions to
pharmaceutical sales forces that will be incorporated into the Siebel
Enterprise Applications as the Siebel Pharma module. Under the terms of the
agreement, Nomadic Systems' security holders received approximately 300,000
shares of Siebel common stock in exchange for all outstanding shares of
Nomadic Systems. The transaction was valued at approximately $11 million and
was accounted for as a purchase. Nomadic Systems became the Siebel Pharma
business unit, responsible for product marketing and development of the Siebel
Pharma module.
 
  In March 1998, the Company entered into a definitive agreement to acquire
Scopus Technology, Inc. ("Scopus") of Emeryville, California, a leading
provider of customer service, field service, and call center software
solutions. Under the terms of the agreement, each outstanding share of Scopus
common stock will be exchanged, at a fixed exchange ratio of .36405 (adjusted
for any stock split or dividends or the like), for newly issued shares of
common stock of the Company. This will result in the issuance of approximately
7.5 million additional Siebel shares (adjusted for any stock split or
dividends or the like), valued at approximately $460 million, based upon the
Company's closing price on Friday, February 27, 1998. In addition, all
outstanding employee stock options of Scopus will convert into Siebel options
at the same exchange ratio. The Company
 
                                      19
<PAGE>
 
anticipates that the transaction will be accounted for as a pooling of
interests, and will qualify as a tax-free reorganization. The acquisition of
Scopus is subject to a number of closing conditions, including the approval of
the acquisition by the Scopus shareholders and approval of the issuance of the
Company's Common Stock in connection with the merger by the Siebel
stockholders and there can be no assurance that such transaction will be
completed. The failure to consummate the merger, for whatever reason, could
have a material adverse effect on the Company's stock price and business. The
transaction is expected to close in the second quarter of 1998. After the
merger, the Company anticipates that Scopus will operate as the Company's
customer service, field service, and call center business unit. In the event
the Scopus acquisition is completed, the integration of products and personnel
as a result of such acquisition will result in a significant diversion of the
Company's management and other resources. There can be no assurance that
difficulties will not arise in integrating the operations, products, personnel
or businesses of Scopus. There can also be no assurance that the Company will
be able to retain key technical, managerial and other employees. Failure to
quickly and cost-effectively integrate such products or operations could have
a material adverse effect on this Company's business financial condition and
results of operations. In addition, the merger with Scopus may potentially
result in the loss or delay of customer orders for either company, which could
adversely affect the Company's operating results. See "Item 3. Legal
Proceedings."
 
COMPETITION
 
  The market for the Company's products is intensely competitive, subject to
rapid change and significantly affected by new product introductions and other
market activities of industry participants. The Company's products are
targeted at the emerging market for sales, marketing and customer information
systems. The Company faces competition from customers' internal development
efforts, custom system integration products, as well as other application
software providers that offer a variety of products and services designed to
address this market. The Company believes that the market for global sales and
marketing information systems has historically not been well served by the
application software industry. The Company believes that most customer
deployments have been the result of large internal development projects,
custom solutions from systems integrators or the application of personal and
departmental productivity tools to the global enterprise.
 
 Internal Development
 
  Many of the Company's customers and potential customers have in the past
attempted to develop sales, marketing and customer service information
systems, in-house either alone or with the help of systems integrators.
Internal information technology departments have staffed projects to build
their own systems utilizing a variety of tools. In some cases, such internal
development projects have been successful in satisfying the needs of an
organization. However, since software development, support and maintenance are
not core competencies of these organizations in some cases such projects are
unsuccessful. The competitive factors in this area require that the Company
produce a product that conforms to the customer's information technology
standards, scales to meet the needs of large enterprises, operates globally
and costs less than the result of an internal development effort. There can be
no assurance that the Company will be able to compete effectively against such
internal development efforts.
 
 Custom System Integration Projects
 
  A second source of competition results from system integrators engaged to
build a custom development application. The introduction of a system
integrator typically increases the likelihood of success for the customer.
However, this approach can be expensive as compared to the purchase of third
party products and typically results in a product that has not been designed
to be supported, maintained and enhanced by a focused software development
company. Maintenance and support for the custom code can become burdensome in
future years, with enhancements and modifications being cost-prohibitive. The
competitive factors in this area require that the Company demonstrate to the
customer the cost savings and advantages of a configurable, upgradeable and
commercially-supported product developed by a dedicated professional software
organization.
 
  The Company relies on Andersen Consulting and other system consulting and
system integration firms for implementation and other customer support
services, as well as recommendations of its products during the evaluation
stage of the purchase process. Although the Company seeks to maintain close
relationships with these
 
                                      20
<PAGE>
 
service providers, many of these third parties have similar, and often more
established, relationships with the Company's competitors. If the Company is
unable to develop and retain effective, long-term relationships with Andersen
Consulting or other such third parties, the Company's competitive position
would be materially and adversely effected. Further, there can be no assurance
that these third parties, many of which have significantly greater resources
than the Company, will not market software products in competition with the
Company in the future or will not otherwise reduce or discontinue their
relationships with or support of the Company and its products.
 
 Other Competitors
 
  A large number of personal, departmental and other products exist in the
sales automation market. Companies (Products) such as Symantec (ACT!),
Borealis Corporation (Arsenal), Saratoga Systems (Avenue), Early Cloud & Co.
(CallFlow), Epiphany (Clarity, Momentum, Relevance), Clarify Inc. (ClearSales,
ClearSupport), Sales Technologies (Cornerstone), Onyx (Customer Center), IMA
(EDGE), Applix (Enterprise), Dendrite International, Inc. (Force One),
Marketrieve Company (Marketrieve PLUS), Firstwave Technologies, Inc.
(Netgain), Broadvision, Inc. (One-To-One Application System), Oracle
Corporation (Oracle Sales and Marketing, Oracle Service and Oracle Call, Front
Office Application)), Pivotal Software, Inc. (Relationship), SAP AG (Sales
Force Automation Solution) Software Artistry (SA-Expert Sales), SalesKit
Software Corporation (SalesKit), SalesLogix (SalesLogix), Kiefer & Veittinger
GmbH (K&V) International (SALES Manager) (SAP AG has recently announced its
intention to acquire a 50% equity interest in K&V), Scopus Technology, Inc.
(SalesTEAM, ServiceTEAM, Voyager), Aurum (SalesTrak) (recently acquired by
Baan Company N.V.), MEI (UniverSell) and The Vantive Corporation (Vantive
Enterprise) are among the many firms in this market segment. Some of these
competitors have longer operating histories, significantly greater financial,
technical, marketing and other resources, significantly greater name
recognition and a larger installed base of customers than the Company. In
addition, many competitors have well-established relationships with current
and potential customers of the Company. As a result, these competitors may be
able to respond more quickly to new or emerging technologies and changes in
customer requirements, or to devote greater resources to the development,
promotion and sale of their products, than can the Company. The Company
believes it competes favorably in this marketplace based on the following
competitive advantages: breadth and depth of functionality, configurable
business objects, Internet and intranet enablement, strategic alignments with
industry leaders, support for the global enterprise, scalability allowing
support for large user communities and a modern and enduring product
architecture. In general, the Company has priced its products at or above
those of its competitors, which pricing the Company believes is justified by
the scope of functionality delivered and the performance characteristics
afforded by the Company's products.
 
  It is also possible that new competitors or alliances among competitors may
emerge and rapidly acquire significant market share. The Company also expects
that competition will increase as a result of consolidation in the software
industry. Increased competition may result in price reductions, reduced gross
margins and loss of market share, any of which could materially adversely
affect the Company's business, operating results and financial condition.
There can be no assurance that the Company will be able to compete
successfully against current and future competitors or that competitive
pressures faced by the Company will not materially and adversely affect its
business, operating results and financial condition.
 
EMPLOYEES
 
  As of December 31, 1997, the Company had a total of 473 employees, of which
388 were based in the United States, 4 in Australia, 1 in Colombia, 8 in
Canada, 1 in France, 15 in Germany, 14 in Japan, 6 in the Netherlands, 1 in
Sweden and 25 in the United Kingdom. Of the total, 203 were engaged in sales
and marketing, 110 were in product development, 117 were in customer support
and 43 were in finance, administration and operations. The Company's future
performance depends in significant part upon the continued service of its key
technical, sales and senior management personnel, particularly Thomas M.
Siebel, the Company's Chairman and Chief Executive Officer, none of whom is
bound by an employment agreement. The loss of the services of one or more of
the Company's key employees could have a material adverse effect on the
Company's business, operating results and financial condition. The Company's
future success also depends on its continuing ability to
 
                                      21
<PAGE>
 
attract, train and retain highly qualified technical, sales and managerial
personnel. Competition for such personnel is intense, and there can be no
assurance that the Company can retain its key technical, sales and managerial
personnel in the future. None of the Company's employees are represented by a
labor union. The Company has not experienced any work stoppages and considers
its relations with its employees to be good.
 
EXECUTIVE OFFICERS
 
  The executive officers of the Company as of February 1, 1998, and their ages
as of such date, are as follows:
 
<TABLE>
<CAPTION>
   NAME                   AGE POSITION
   ----                   --- --------
   <S>                    <C> <C>
   Thomas M. Siebel......  45 Chairman, Chief Executive Officer and President
   Patricia A. House.....  43 Executive Vice President and Chief Operating
                              Officer
   Howard H. Graham......  50 Senior Vice President, Finance and Administration
                              and Chief Financial Officer
   Craig D. Ramsey.......  51 Senior Vice President, Worldwide Operations
   R. David Schmaier.....  34 Vice President, Product Marketing
   Stephen J. Sharp......  39 Senior Vice President, Worldwide Services
</TABLE>
 
  THOMAS M. SIEBEL has served as Chairman, Chief Executive Officer, and
President of the Company since its inception in July 1993. From July 1991
until December 1992, he served as Chief Executive Officer of Gain Technology,
a multimedia software company which merged with Sybase in December 1992. Mr.
Siebel served as President and Chief Operating Officer of Gain Technology from
May 1991 to July 1991. From January 1984 until September 1990, Mr. Siebel
worked at Oracle Corporation where he held a number of executive management
positions including Vice President Product Line Marketing, Group Vice
President Industry Marketing, Group Vice President and General Manager Direct
Marketing Division, and most recently Group Vice President Oracle USA. Mr.
Siebel is a graduate of the University of Illinois at Urbana-Champaign from
which he holds a B.A. in History, an M.B.A. and an M.S. in Computer Science.
 
  PATRICIA A. HOUSE has been with the Company since its inception in July
1993. From February 1996 to the present, she has served as the Company's
Executive Vice President and Chief Operating Officer, and from July 1993 to
February 1996, she served as Senior Vice President of Marketing. From
September 1989 to June 1993, Ms. House served in various senior management
positions including Executive Vice President of Frame Technology Corporation,
a document authoring software company. Ms. House received a B.A. in Education
from Western Michigan University.
 
  HOWARD H. GRAHAM has served as the Company's Senior Vice President, Finance
and Administration and Chief Financial Officer since January 1997. From
February 1990 to December 1996, Mr. Graham served as Senior Vice President and
Chief Financial Officer of Informix, Inc. From April 1988 to February 1990,
Mr. Graham served as Senior Vice President Finance and Chief Financial Officer
of Wyse Technology. From 1973 to 1988, Mr. Graham was employed by Zenith
Electronics, most recently as Vice President Finance and Chief Financial
Officer. Mr. Graham received a B.S. in management science from Carnegie-Mellon
University and an M.B.A. from the University of Chicago.
 
  CRAIG D. RAMSEY has served as the Company's Senior Vice President, Worldwide
Operations since March 1996. From March 1994 to March 1996, Mr. Ramsey served
as Senior Vice President of Worldwide Sales, Marketing and Support for nCUBE,
a leader in distribution of digitized media. From February 1986 to March 1994,
Mr. Ramsey was employed by Oracle Corporation and held a variety of executive
positions, including Vice President of U.S. Commercial Sales and Vice
President of OEM Strategic Accounts. Mr. Ramsey received a B.A. in Economics
from Denison University.
 
  R. DAVID SCHMAIER has served as Vice President, Product Marketing since
March 1994. From 1989 to 1993, Mr. Schmaier worked at Oracle Corporation where
he held a variety of positions including Product Marketing Manager, as well as
a variety of field sales positions. From 1985 to 1987, Mr. Schmaier worked as
Management Consultant at Braxton Associates, a strategic consulting firm based
in Boston. Mr. Schmaier received a B.S. in mechanical engineering from
Rensselaer Polytechnic Institute and an M.B.A. from Harvard Business School.
 
                                      22
<PAGE>
 
  STEPHEN J. SHARP joined Siebel Systems in November 1997 as Senior Vice
President of Worldwide Services. Mr. Sharp manages the company's consulting,
implementation and technical support services, and has overall responsibility
for customer satisfaction. Mr. Sharp also has responsibility for Siebel's
vertical industry program. From July 1990 to November 1997 Mr. Sharp worked at
Sybase Inc. where he held a number of senior management positions and had
overall responsibility for the company's services. Prior to joining Sybase,
Mr. Sharp worked at Andersen Consulting in the UK and in the US.
 
  The Company's current officers, directors and affiliated entities together
beneficially owned approximately 41.5% of the outstanding shares of Common
Stock as of December 31, 1997. In particular, Thomas M. Siebel, the Company's
Chairman and Chief Executive Officer, owned approximately 27.8% of the
outstanding shares of Common Stock as of December 31, 1997. As a result, these
stockholders will be able to exercise control over matters requiring
stockholder approval, including the election of directors, and the approval of
mergers, consolidations and sales of all or substantially all of the assets of
the Company. This may prevent or discourage tender offers for the Company's
Common Stock unless the terms are approved by such stockholders. Mr. Siebel
and certain affiliated entities have entered into agreements with the Company
and Scopus pursuant to which they have agreed to vote their shares of the
Company's Common Stock in favor of the issuance of the Company's Common Stock
in connection with the acquisition of Scopus.
 
  The Company's Board of Directors has the authority to issue up to 2,000,000
shares of Preferred Stock and to determine the price, rights, preferences,
privileges and restrictions, including voting rights, of those shares without
any further vote or action by the stockholders. The Preferred Stock could be
issued with voting, liquidation, dividend and other rights superior to those
of the Common Stock. The rights of the holders of Common Stock will be subject
to, and may be adversely affected by, the rights of the holders of any
Preferred Stock that may be issued in the future. The issuance of Preferred
Stock, while providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of making it
more difficult for a third party to acquire a majority of the outstanding
voting stock of the Company. Pursuant to the Company's Certificate of
Incorporation, the Company has instituted a classified Board of Directors.
This and certain other provisions of the Company's Certificate of
Incorporation and certain provisions of the Company's Bylaws and of Delaware
law, could delay or make more difficult a merger, tender offer or proxy
contest involving the Company.
 
ITEM 2. PROPERTIES
 
  The Company's principal administrative, sales, marketing, support and
research and development facilities are located in San Mateo, California,
pursuant to a lease which expires in July 2006. The Company currently occupies
a number of domestic and international sales and support offices.
 
ITEM 3. LEGAL PROCEEDINGS
 
  In June 1996, Debra Christoffers, a former sales person of the Company,
filed a complaint for wrongful termination against the Company and Thomas
Siebel, in the Superior Court of California, County of San Mateo, where this
matter is currently being tried. The Company believes it has adequate legal
defenses and believes that the ultimate outcome of these actions will not have
a material effect on the Company's financial position or result of operations,
although there can be no assurance as to the outcome of such litigation.
 
  In March 1998, a purported class action complaint was filed against the
Company and Scopus Technology Inc. in the Superior Court of the State of
California for the County of Alameda by a person claiming to be a Scopus
stockholder. The complaint alleges that the Scopus board breached its
fiduciary duties to the shareholders of Scopus in connection with its approval
of Scopus' proposed merger with a subsidiary of the Company. The complaint
further alleges that the Company aided and abetted the alleged breach of
fiduciary duty. The complaint seeks monetary and other relief. The Company
believes the suit is completely without merit and intends to contest the
matter vigorously, although there can be no assurance as to the outcome of
such litigation. The failure of the Company to complete the acquisition of
Scopus, for whatever reason, could have a material adverse effect on the
Company's stock price and business.
 
                                      23
<PAGE>
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
  Not Applicable.
 
                                    PART II
 
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
 
  (a) The Company's Common Stock is traded on the Nasdaq National Market under
the symbol "SEBL." Following the Company's initial public offering on June 27,
1996, the following high and low sales prices were reported by Nasdaq in each
quarter:
 
<TABLE>
<CAPTION>
                                                                   HIGH   LOW
                                                                  ------ ------
   <S>                                                            <C>    <C>
   Quarter Ended June 30, 1996 (subsequent to June 27, 1996)..... $17.56 $12.37
   Quarter Ended September 30, 1996..............................  23.94  11.13
   Quarter Ended December 31, 1996...............................  30.25  23.00
   Quarter Ended March 31, 1997..................................  25.50  15.00
   Quarter Ended June 30, 1997...................................  32.25  13.25
   Quarter Ended September 30, 1997..............................  42.56  30.31
   Quarter Ended December 31, 1997...............................  49.00  32.75
</TABLE>
 
  As of December 31, 1997, the Company had approximately 282 holders of record
of its Common Stock.
 
  The Company has declared a 100% stock dividend on its Common Stock to be
paid on March 20, 1998. Share and per share information have not been adjusted
to reflect such dividend.
 
  The Company has never paid any cash dividends on its capital stock and does
not expect to pay any such dividends in the foreseeable future. The Company's
stock price has fluctuated substantially since its initial public offering in
June 1996. The trading price of the Company's Common Stock is subject to
significant fluctuations in response to variations in quarterly operating
results, the gain or loss of significant orders, changes in earnings estimates
by analysts, announcements of technological innovations or new products by the
Company or its competitors, general conditions in the software and computer
industries and other events or factors. In addition, the stock market in
general has experienced extreme price and volume fluctuations which have
affected the market price for many companies in industries similar or related
to that of the company and which have been unrelated to the operating
performance of these companies. These market fluctuations have adversely
affected and may continue to adversely affect the market price of the
Company's Common Stock.
 
  In October 1997, the Company issued 346,379 shares of its Common Stock to
the security holders of privately-held InterActive WorkPlace, Inc. in exchange
for all of the outstanding securities of InterActive WorkPlace pursuant to
Section 4(2) of the Securities Act.
 
  In November 1997, the Company issued 300,338 shares of its Common Stock to
the security holders of privately-held Nomadic Systems, Inc. in exchange for
all of the outstanding securities of Nomadic Systems pursuant to Section 4(2)
of the Securities Act.
 
  (b) There has been no change to the disclosure contained in the Company's
report on Form 10-Q for the quarter ended September 30, 1997 regarding the use
of proceeds generated by the Company's initial public offering.
 
 
                                      24
<PAGE>
 
ITEM 6. SELECTED FINANCIAL DATA (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                  YEAR ENDED DECEMBER 31,
                                              ---------------------------------
                                               1994     1995    1996     1997
                                              -------  ------- ------- --------
                                              (IN THOUSANDS, EXCEPT PER SHARE
                                                           DATA)
   <S>                                        <C>      <C>     <C>     <C>
   OPERATING DATA
   Net revenues.............................. $    50  $ 8,038 $39,152 $118,775
   Operating income (loss)...................  (1,779)     372   6,714    7,132
   Net income (loss).........................  (1,766)     317   5,025   (2,427)
   Pro forma net income (loss)*..............  (1,766)     317   5,025   20,313
   Net income (loss) per diluted share.......             0.01    0.15    (0.07)
   Pro forma net income per diluted share*...             0.01    0.15     0.50
   Total assets..............................   1,203   16,091  99,501  149,312
   Total equity..............................   1,189    9,934  81,191  112,565
   Employees.................................      20       67     213      473
</TABLE>
--------
* Excludes write-off of acquired research and development
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
 
OVERVIEW
 
  Siebel is the global market leader in enterprise-class sales, marketing and
customer service information systems for global organizations focused on
increasing sales and service effectiveness in field sales, service
organizations, telesales, telemarketing, call centers and third-party
resellers. The Company designs, develops, markets and supports Siebel
Enterprise Applications, a leading Internet-enabled, object oriented
client/server application software product family designed to meet the sales,
marketing and customer service information system requirements of even the
largest multi-national organizations.
 
  This Report contains forward looking statements that involve risks and
uncertainties. The Company's future financial results are subject to a number
of risk factors which may cause the Company's actual results to vary, perhaps
materially, from current expectations. Some of these factors are discussed in
"Risk Factors" commencing on page 29 below and elsewhere in this Report.
 
                                      25
<PAGE>
 
RESULTS OF OPERATIONS
 
  The following table sets forth statement of operations data for the three
years ended December 31, 1997 expressed as a percentage of total revenues:
 
<TABLE>
<CAPTION>
                                                   YEAR ENDED DECEMBER 31,
                                               ----------------------------------
                                               PRO FORMA* ACTUAL   ACTUAL  ACTUAL
                                                  1997     1997     1996    1995
                                               ---------- ------   ------  ------
   <S>                                         <C>        <C>      <C>     <C>
   Revenues:
     Software.................................    84.8%    84.8%    91.1%   95.0%
     Maintenance, consulting and other........    15.2     15.2      8.9     5.0
                                                 -----    -----    -----   -----
       Total revenues.........................   100.0    100.0    100.0   100.0
   Cost of Revenues:
     Software.................................     1.9      1.9      0.3     0.5
     Maintenance, consulting and other........     6.4      6.4      5.4     4.8
                                                 -----    -----    -----   -----
       Total cost of revenues.................     8.3      8.3      5.7     5.3
                                                 -----    -----    -----   -----
       Gross margin...........................    91.7     91.7     94.3    94.7
   Operating expenses:
     Product development......................    11.2     11.2     15.1    35.0
     Sales and marketing......................    47.1     47.1     50.0    40.2
     General and administrative...............     8.2      8.2     12.1    14.8
     Write-off of acquired research and
      development.............................     --      19.2      --      --
                                                 -----    -----    -----   -----
       Total operating expenses...............    66.5     85.7     77.2    90.0
                                                 -----    -----    -----   -----
       Operating income.......................    25.2      6.0     17.1     4.7
   Other income, net..........................     2.4      2.4      3.6     1.9
                                                 -----    -----    -----   -----
       Income before taxes....................    27.6      8.4     20.7     6.6
   Income tax expense.........................    10.5     10.5      7.9     2.6
                                                 -----    -----    -----   -----
       Net income (loss)......................    17.1%    (2.1%)   12.8%    4.0%
                                                 =====    =====    =====   =====
</TABLE>
--------
* Excludes write-off of acquired research and development
 
REVENUES
 
  Software. License revenues increased to $100,700,000 for the year ended
December 31, 1997 from $35,658,000 and $7,636,000 for the years ended December
31, 1996 and 1995, respectively, and decreased as a percentage of total
revenues to 85% in the fiscal 1997 period from 91% and 95% in the fiscal 1996
and 1995 periods, respectively. License revenues increased in absolute dollar
amount during these periods from the respective prior year periods due to an
increase in the number of licenses of Siebel Enterprise Applications sold to
new and existing customers. This increase in the number of licenses was
primarily due to continued demand by new and existing customers for products
in the Siebel Enterprise Applications family both in the United States and
internationally. In December 1996, the Company introduced Siebel Service
Enterprise, its customer service applications suite. Increases in revenues
from prior periods was due in part to new and existing customers licensing
Siebel Service Enterprise to manage their customer service functions. Siebel
Service Enterprise license revenues were $20,820,000 for the year ended
December 31, 1997. The decrease in license revenues as a percentage of total
revenues was primarily due to increased levels of maintenance, consulting and
other revenues.
 
  Maintenance, Consulting and Other. Maintenance, consulting and other
revenues increased to $18,075,000 for the year ended December 31, 1997 from
$3,494,000 and $402,000 for the years ended December 31, 1996 and 1995,
respectively, and increased as a percentage of total revenues to 15% in the
fiscal 1997 period from 9% and 5% in the fiscal 1996 and 1995 periods,
respectively. These increases in absolute dollar amount and as a percentage of
total revenues were due to the widespread licensing of products to customers
pursuant to agreements with a maintenance component, maintenance renewals from
products licensed in prior periods and
 
                                      26
<PAGE>
 
one customer obtaining implementation services for the Siebel Enterprise
Applications through the Company. The Company expects that maintenance,
consulting and other revenues will remain the same or increase as a percentage
of total revenues due to maintenance components of new and existing license
agreements.
 
  A relatively small number of customers account for a significant percentage
of the Company's license revenues. For 1997 and 1996, sales to the Company's
ten largest customers accounted for 46% and 59% of total revenues,
respectively. The Company expects that licenses of its products to a limited
number of customers will continue to account for a large percentage of revenue
for the foreseeable future.
 
  The Company markets its products in the United States through its direct
sales force and internationally through its sales force and distributors in
Japan. International revenues accounted for 28% and 11% of total revenues in
1997 and 1996, respectively. The Company is increasing its international sales
force and is seeking to establish distribution relationships with appropriate
strategic partners and expects international revenues will continue to account
for a substantial portion of total revenues in the future.
 
COST OF REVENUES
 
  Software. Cost of software license revenues includes product packaging,
documentation and production. Cost of license revenues through December 31,
1997 has averaged less than 2% of software license revenues. All costs
incurred in the research and development of software products and enhancements
to existing products have been expensed as incurred, and, as a result, cost of
license revenues includes no amortization of capitalized software development
costs. These costs are expected to remain the same or increase as a percentage
of total revenues.
 
  Maintenance, Consulting and Other. Cost of maintenance, consulting and other
revenues consist primarily of personnel, facility and systems costs incurred
in providing customer support. Cost of maintenance, consulting and other
revenues increased to $7,617,000 for the year ended December 31, 1997 from
$2,113,000 and $385,000 for the years ended December 31, 1996 and 1995,
respectively, and increased as a percentage of total revenues to 6% for the
year ended December 31, 1997 from 5% in both the fiscal 1997 and the fiscal
1996 periods. The increases in the absolute dollar amount reflect the effect
of fixed costs resulting from the Company's expansion of its maintenance and
support organization and the costs of one customer obtaining implementation
services for the Siebel Enterprise Applications through the Company. The
Company expects that maintenance, consulting and other costs will continue to
increase in absolute dollar amount as the Company expands its customer support
organization to meet anticipated customer demands in connection with product
implementation. These costs are expected to remain the same or increase as a
percentage of total revenues.
 
OPERATING EXPENSES
 
  Product Development. Product development expenses include expenses
associated with the development of new products, enhancements of existing
products and quality assurance activities, and consist primarily of employee
salaries, benefits, consulting costs and the cost of software development
tools. Product development expenses increased to $13,349,000 for the year
ended December 31, 1997 from $5,894,000 and $2,816,000 for the years ended
December 31, 1996 and 1995, respectively, and decreased as a percentage of
total revenues to 11% in the fiscal 1997 period from 15% and 35% in the fiscal
1996 and 1995 periods, respectively. The increases in the dollar amount of
product development expenses were primarily attributable to costs of
additional personnel in the Company's product development operations. The
Company anticipates that it will continue to devote substantial resources to
product development. The Company expects product development expenses to
increase in absolute dollar amount but remain at a similar percentage of total
revenues as fiscal 1997. The Company to date has not capitalized any software
development costs.
 
  Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, commissions and bonuses earned by sales and marketing personnel,
field office expenses, travel and entertainment and promotional expenses.
Sales and marketing expenses increased to $55,983,000 for the year ended
December 31, 1997 from
 
                                      27
<PAGE>
 
$19,577,000 and $3,232,000 for the years ended December 31, 1996 and 1995,
respectively, and as a percentage of total revenues sales and marketing
expenses were 47%, compared with 50% and 40% in the fiscal 1996 and 1995
periods, respectively. The increases in the dollar amount of sales and
marketing expenses reflect primarily the hiring of additional sales and
marketing personnel and, to a lesser degree, costs associated with expanded
promotional activities. The Company expects that sales and marketing expenses
will continue to increase in absolute dollar amount as the Company continues
to expand its sales and marketing efforts, establishes additional sales
offices in the United States and internationally and increases promotional
activities. These expenses are expected to remain at a similar percentage of
total revenues as fiscal 1997.
 
  General and Administrative. General and administrative expenses consist
primarily of salaries and occupancy costs for administrative, executive and
finance personnel. General and administrative expenses increased to $9,682,000
for the year ended December 31, 1997 from $4,748,000 and $1,192,000 for the
years ended December 31, 1996 and 1995, respectively, and decreased as a
percentage of total revenues to 8% in the fiscal 1997 period from 12% and 15%
in the fiscal 1996 and 1995 periods. The increases in the absolute dollar
amount of general and administrative expenses were primarily due to increased
staffing and associated expenses necessary to manage and support the Company's
increased scale of operations. The Company believes that its general and
administrative expenses will continue to increase in absolute dollar amount as
a result of the continued expansion of the Company's administrative staff and
facilities to support growing operations and the expenses associated with
being a public company. The Company anticipates that its general and
administrative expenses as a percentage of total revenues should remain at a
similar percentage as fiscal 1997.
 
  Write-off of Acquired Research and Development. On October 1, 1997, the
Company completed its purchase of InterActive WorkPlace, Inc. ("InterActive"),
a developer of intranet-based business intelligence software technology that
will be incorporated into the Siebel InterActive product. The Company took a
one-time charge of $14,017,000 million, or $0.34 per diluted share, pursuant
to an allocation of the purchase price by an independent appraiser, as a
write-off of acquired research and development. The acquisition was accounted
for by the purchase method of accounting.
 
  On November 1, 1997, the Company completed its purchase of Nomadic Systems,
Inc. ("Nomadic"), a provider of innovative business solutions to
pharmaceutical sales forces that will be incorporated into the Siebel Pharma
product. The Company took a one-time charge of $8,723,000 or $0.21 per diluted
share, pursuant to an allocation of the purchase price by an independent
appraiser, as a write-off of acquired research and development. The
acquisition also was accounted for by the purchase method of accounting.
 
  Year 2000. The Company is reviewing its information systems for any
potential problems that might arise as a result of the need for its installed
computer systems and software to reference dates following December 31, 1999
("Year 2000 Issues") and does not believe such systems will be adversely
affected by the upcoming change in century. The Company has not made an
assessment as to whether any of its customers, suppliers or service providers
will be adversely affected by Year 2000 Issues. The failure of the Company's
software or the software of its customers, suppliers or service providers as a
result of Year 2000 Issues could have a material adverse effect on the
Company's business, financial condition and results of operations.
 
OPERATING INCOME AND OPERATING MARGIN
 
  Operating income increased to $7,132,000 for the year ended December 31,
1997 from $6,714,000 and $372,000 for the years ended December 31, 1996 and
1995, respectively, and operating margin was 6% in the fiscal 1997 period,
compared with 17% and 5% in the fiscal 1996 and 1995 periods, respectively.
Excluding the write-off of acquired research and development, operating income
increased to $29,872,000 for the year ended December 31, 1997 from $6,714,000
and $372,000 for the years ended December 31, 1996 and 1995, respectively, and
operating margin increased to 25% in the fiscal 1997 period from 17% and 5% in
the fiscal 1996 and 1995 periods, respectively. These increases in operating
income and margin were due to increases in license revenues without a
proportional increase in cost, particularly costs associated with the hiring
of new personnel. The Company expects operating margins in 1998 and subsequent
years to decline as compared to operating margin for fiscal 1997 as it
continues to invest heavily in sales, marketing, development and support
activities globally.
 
                                      28
<PAGE>
 
OTHER INCOME, NET
 
  Other income, net is primarily comprised of interest income earned on the
Company's cash and cash equivalents and short-term investments and reflects
earnings on increasing cash and cash equivalents and short-term investment
balances.
 
PROVISION FOR INCOME TAXES
 
  Income taxes have been provided at an effective rate of 38%, which is
comprised primarily of federal and state taxes. The provision for income taxes
was $12,451,000, $3,080,000, and $211,000 in fiscal 1997, 1996, and 1995,
respectively. The provision for income taxes as a percentage of pretax income
was 124%, 38% and 40%, respectively. The tax rate in fiscal 1997 was higher
than the rates in fiscal 1996 and 1995 primarily due to non-deductible items
related to acquisitions.
 
NET INCOME (LOSS)
 
  The Company had a net loss (after provision for income taxes) of $2,427,000
for the year ended December 31, 1997 compared to net income of $5,025,000 and
$317,000 for the years ended December 31, 1996 and 1995, respectively. Net
loss per share was $0.07 per diluted share in fiscal 1997, compared with net
income of $0.15 and $0.01 in the fiscal 1996 and 1995 periods, respectively.
 
  Excluding the write-off of acquired research and development, the Company
had net income (after provision for income taxes) of $20,313,000 for the year
ended December 31, 1997 compared to net income of $5,025,000 and $317,000 for
the years ended December 31, 1996 and 1995, respectively. Net income per
diluted share was $0.50 per share in fiscal 1997, compared with net income of
$0.15 and $0.01 in the fiscal 1996 and 1995 periods, respectively. Net income
increased as a percentage of total revenues to 17% in the year ended December
31, 1997 from 13% and 4% in the years ended December 31, 1996 and 1995,
respectively.
 
LIQUIDITY AND CAPITAL RESOURCES
 
  The Company's cash, cash equivalents and short-term investments increased to
$94,151,000 as of December 31, 1997 from $72,387,000 as of December 31, 1996,
representing approximately 63% of total assets. This increase was primarily
attributable to increases in accrued expenses and deferred revenue, partially
offset by increases in accounts receivable and purchases of property and
equipment. The Company's Days Sales Outstanding (dso) in accounts receivable
was 71 as of December 31, 1997 compared with 74 as of December 31, 1996. The
Company expects that dso will fluctuate significantly in future quarters and
that future levels of dso will likely be higher than those experienced in the
past two years.
 
  The Company believes that the anticipated cash flows from operations, cash,
cash equivalents and short-term investments, will be adequate to meet its cash
needs for working capital and capital expenditures for at least the next
twelve months.
 
RISK FACTORS
 
  Limited Operating History. The Company commenced operations in July 1993 and
shipped version 1.0 of Siebel Sales Enterprise in April 1995, version 2.2 in
December 1996, and version 3.0 in February 1997. The Company shipped Siebel
Service Enterprise version 2.2 in December 1996, and subsequently shipped
version 3.0 in February 1997. The Company has only a limited operating
history, and its prospects must be evaluated in light of the risks and
uncertainties encountered by a company in its early stage of development.
 
  Reliance on Andersen Consulting and Other Relationships; Dependence on
System Integrators. The Company has established strategic relationships with a
number of organizations that it believes are important to its worldwide sales,
marketing and support activities and the implementation of its products. The
Company believes that its relationships with such organizations provide
marketing and sales opportunities for the Company's direct sales force and
expand the distribution of its products. These relationships also assist the
Company in keeping pace with the technological and marketing developments of
major software vendors, and,
 
                                      29
<PAGE>
 
in certain instances, provide it with technical assistance for its product
development efforts. In particular, the Company has established a non-
exclusive strategic relationship with Andersen Consulting, a principal
stockholder of the Company. In 1997 and 1996, approximately 41% and 46%,
respectively, of the Company's revenues were derived from customers for which
Andersen Consulting had been engaged to provide system integration services.
Any deterioration of the Company's relationship with Andersen Consulting could
have a material adverse effect on the Company's business, financial condition
and results of operations.
 
  Limited Deployment. Many of the Company's customers are in the pilot phase
of implementing the Company's software. There can be no assurance that
enterprise-wide deployments by such customers will be successful. The
Company's customers frequently contemplate the deployment of its products
commercially to large numbers of sales, marketing and customer service
personnel, many of whom have not previously used application software systems,
and there can be no assurance of such end-users acceptance of the product. If
any of the Company's customers are not able to customize and deploy Siebel
Enterprise Applications successfully and on a timely basis to the number of
anticipated users, the Company's reputation could be significantly damaged,
which could have a material adverse effect on the Company's business,
operating results and financial condition.
 
  Reliance on Single Product Family. Approximately 79% of the Company's
license revenues in fiscal 1997 were attributable to sales of Siebel Sales
Enterprise. The remaining revenues were attributable to sales of Siebel
Service Enterprise. The Company currently expects Siebel Sales Enterprise and
related maintenance and training services to continue to account for a
substantial majority of the Company's future revenues. As a result, factors
adversely affecting the pricing of or demand for Siebel Sales Enterprise, such
as competition or technological change, could have a material adverse effect
on the Company's business, operating results and financial condition.
 
  Dependence on Large License Fee Contracts and Customer Concentration. A
relatively small number of customers have accounted for a significant
percentage of the Company's revenues. For 1997 and 1996, sales to the
Company's 10 largest customers accounted for 46% and 59% of total revenues,
respectively. For 1997, one company accounted for 13% of total revenues. The
Company expects that sales of its products to a limited number of customers
will continue to account for a significant percentage of revenue for the
foreseeable future. The loss of any major customer or any reduction or delay
in orders by any such customer, or the failure of the Company to market
successfully its products to new customers could have a material adverse
effect on the Company's business, financial condition and results of
operations.
 
  Management of Growth; Dependence upon Key Personnel. In the event that the
significant growth of the Company's revenues continues, such growth may place
a significant strain upon the Company's management systems and resources. The
Company's ability to compete effectively and to manage future growth, if any,
will require the Company to continue to improve its financial and management
controls, reporting systems and procedures on a timely basis and expand, train
and manage its employee work force. There can be no assurance that the Company
will be able to do so successfully. The Company's failure to do so could have
a material adverse effect upon the Company's business, operating results and
financial condition. The Company's future performance depends in significant
part upon the continued service of its key technical, sales and senior
management personnel, particularly Thomas M. Siebel, the Company's Chairman
and Chief Executive Officer, none of whom has entered into an employment
agreement with the Company. The loss of the services of one or more of the
Company's executive officers could have a material adverse effect on the
Company's business, operating results and financial condition.
 
  International Operations. The Company's sales are primarily to large multi-
national companies. To service the needs of such companies, both domestically
and internationally, the Company must provide worldwide product support
services. As a result, the Company has expanded and intends to continue to
expand its international operations and enter additional international
markets, which will require significant management attention and financial
resources and could adversely affect the Company's operating margins and
earnings, if any. Revenues from international sales accounted for
approximately 28% and 11% of the Company's total revenues in fiscal 1997 and
1996, respectively.
 
                                      30
<PAGE>
 
  The growth in the Company's revenues from international sales is expected to
continue to subject a portion of the Company's revenues to the risks
associated with international sales, including foreign currency fluctuations,
economic or political instability, shipping delays and various trade
restrictions, any of which could have a significant impact on the Company's
ability to deliver products on a competitive and timely basis. Future
imposition of, or significant increases in the level of, customs duties,
export quotas or other trade restrictions, could have an adverse effect on the
Company's business, financial condition and results of operations. As the
Company develops an international sales force, it expects to be more directly
subject to foreign currency fluctuations. To the extent such direct sales are
denominated in foreign currency, any such fluctuation may adversely affect the
Company's business, financial condition and results of operations. Finally,
the laws of certain foreign countries do not protect the Company's
intellectual property rights to the same extent as do the laws of the United
States.
 
  Risk Relating to Acquisitions. The Company has acquired in the past, and may
acquire in the future, other products or businesses which are complementary to
the Company's business. The integration of products and personnel as a result
of any such acquisitions has and will continue to divert the Company's
management and other resources. There can be no assurance that difficulties
will not arise in integrating such operations, products, personnel or
businesses. The failure to successfully integrate such products or operations
could have a material adverse effect on the Company's business, financial
condition and results of operations.
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
  The Company's consolidated financial statements, together with related notes
and the report of KPMG Peat Marwick LLP, the Company's independent
accountants, are set forth on the pages indicated in Item 14.
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
 
  Not Applicable.
                                   PART III
 
  Certain information required by Part III is omitted from this Report on Form
10-K since the Company will file a definitive Proxy Statement for its Annual
Meeting of Stockholders to be held on April 29, 1998, pursuant to Regulation
14A of the Securities Exchange Act of 1934, as amended (the "Proxy
Statement"), not later than 120 days after the end of the fiscal year covered
by this Report, and certain information included in the Proxy Statement is
incorporated herein by reference.
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
  (a)Executive Officers
 
    Please refer to the Section entitled "Executive Officers" in Part I,
    Item 1 hereof.
 
  (b)Directors
 
    The information required by this Item is incorporated by reference to
    the section entitled "Election of Directors" in the Proxy Statement.
 
ITEM 11. EXECUTIVE COMPENSATION
 
  The information required by this Item is incorporated by reference to the
section entitled "Executive Compensation" in the Proxy Statement.
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
  The information required by this Item is incorporated by reference to the
section entitled "Security Ownership of Certain Beneficial Owners and
Management" in the Proxy Statement.
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
  The information required by this Item is incorporated by reference to the
section entitled "Certain Transactions" in the Proxy Statement.
 
                                      31
<PAGE>
 
                                    PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
 
  (a)The following documents are filed as part of this Report:
 
    1.Financial Statements
 
<TABLE>
<CAPTION>
                                                                            PAGE
                                                                            ----
      <S>                                                                   <C>
      Independent Auditors' Report.........................................  34
      Consolidated Financial Statements:
        Balance Sheets.....................................................  35
        Statements of Operations...........................................  36
        Statements of Stockholders' Equity.................................  37
        Statements of Cash Flows...........................................  38
      Notes to Consolidated Financial Statements...........................  39
 
    2.Financial Statement Schedule
 
      Schedule II--Valuation and Qualifying Accounts.......................  50
</TABLE>
 
    3.Exhibits
 
<TABLE>
<CAPTION>
       EXHIBIT
       NUMBER  DESCRIPTION OF DOCUMENT
       ------- -----------------------
       <C>     <S>
        2.1    Agreement and Plan of Merger and Reorganization, dated March 1,
               1998, among the Registrant, Syracuse Acquisition Sub, Inc. and
               Scopus Technology, Inc.(5)
        3.1    Amended and Restated Certificate of Incorporation of the
                Registrant, as amended.(4)
        3.2    Bylaws of the Registrant.(1)
        4.1    Reference is made to Exhibits 3.1 and 3.2.
        4.2    Specimen Stock Certificate.(1)
        4.3    Restated Investor Rights Agreement, dated December 1, 1995,
               between the Registrant and certain investors, as amended April
               30, 1996 and June 14, 1996.(1)
       10.1    Registrant's 1996 Equity Incentive Plan, as amended.(3)
       10.2    Registrant's Employee Stock Purchase Plan, as amended.(3)
       10.3    Form of Indemnity Agreement entered into between the Registrant
               and its officers and directors.(1)
               Registrant's Deferred Compensation Plan, dated January 10,
       10.4     1997.(6)
       10.5    Master Alliance Agreement, dated March 17, 1995, between the
               Registrant and Andersen Consulting LLP.(1)(2)
       10.6    Assignment Agreement, dated September 20, 1995, by and between
               the Registrant and Thomas M. Siebel.(1)
       10.7    Lease Agreement, dated June 4, 1996, by and between the
               Registrant and Crossroad Associates and Clocktower
               Associates.(1)
       10.8    Form of Voting Agreement dated as of March 1, 1998, a
               substantially similar version of which has been executed by and
               between the Registrant, Scopus Technology, Inc. and each of
               Thomas M. Siebel, Thomas M. Siebel as Trustee under the Siebel
               Living Trust u/a/d 7/29/93, the Thomas and Stacey Siebel
               Foundation and First Virtual Capital, Inc.(7)
       10.9    Form of Affiliate Agreement, substantially similar versions of
               which are to be executed by the Registrant, Scopus Technology,
               Inc. and each of the affiliates of the Registrant.(8)
       11.1    Statement Regarding Computation of Net Income Per Share.(4)
       21.1    Subsidiaries of the Registrant.(4)
       23.1    Consent of KPMG Peat Marwick LLP, Independent Auditors.(4)
       27.1    Financial Data Schedule.(4)
</TABLE>
 
                                       32
<PAGE>
 
--------
(1) Incorporated by reference to the Registrant's Registration Statement on
    Form S-1 (No. 333-03751), as amended.
(2) Confidential treatment has been granted with respect to portions of this
    exhibit.
(3) Incorporated by reference to the Registrant's Registration Statement on
    Form S-8 (No. 333-07983), as amended.
(4) Filed herewith.
(5) Incorporated by reference to exhibit 99.1 of the Registrant's Current
    Report on Form 8-K filed by the Registrant on March 16, 1998.
(6) Incorporated by reference to the Registrant's Annual Report on Form 10-K
    for the year ended December 31, 1996.
(7) Incorporated by reference to exhibit 99.3 of the Registrant's Current
    Report on Form 8-K filed by the Registrant on March 16, 1998.
(8) Incorporated by reference to exhibit 99.5 of the Registrant's Current
    Report on Form 8-K filed by the Registrant on March 16, 1998.
 
  (b) Reports on Form 8-K
 
  On October 16, 1997, the Company filed a Report on Form 8-K relating to the
Company's acquisition of InterActive WorkPlace, Inc.
 
  On October 20, 1997, the Company filed a Report on Form 8-K relating to the
Company's results of operations for the quarter ended September 30, 1997. Such
report included the statements of operations for the three and nine month
periods ended September 30, 1996 and 1997 as well as balance sheet data at
September 30, 1997 and December 31, 1996.
 
                                      33
<PAGE>
 
                         INDEPENDENT AUDITORS' REPORT
 
The Board of Directors and Stockholders Siebel Systems, Inc.:
 
  We have audited the accompanying consolidated balance sheets of Siebel
Systems, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1997.
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
 
  We conducted our audits in accordance with generally accepted auditing
standards. 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 Siebel
Systems, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997, in conformity with generally
accepted accounting principles.
 
                                          KPMG Peat Marwick LLP
 
San Jose, California
January 21, 1998,
 except as to Note
 8, which is as of
 March 2, 1998
 
                                      34
<PAGE>
 
                          CONSOLIDATED BALANCE SHEETS
                     (In thousands, except per share data)
 
<TABLE>
<CAPTION>
                                                      DECEMBER 31, DECEMBER 31,
                                                          1997         1996
                                                      ------------ ------------
<S>                                                   <C>          <C>
                       ASSETS
Current assets:
  Cash and cash equivalents..........................   $ 31,257     $22,671
  Short-term investments.............................     62,894      49,716
  Accounts receivable, net...........................     33,246      12,855
  Deferred income taxes..............................      3,076       1,067
  Prepaids and other.................................      4,954       4,258
                                                        --------     -------
    Total current assets.............................    135,427      90,567
  Property and equipment, net........................     11,129       8,310
  Other assets.......................................      2,756         624
                                                        --------     -------
    Total assets.....................................   $149,312     $99,501
                                                        ========     =======
        LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable...................................   $  1,702     $ 3,107
  Accrued expenses...................................     20,802       6,768
  Income taxes payable...............................      1,178       2,018
  Deferred revenue...................................     12,903       6,212
                                                        --------     -------
    Total current liabilities........................     36,585      18,105
  Deferred income taxes..............................        162         205
                                                        --------     -------
    Total liabilities................................     36,747      18,310
Commitments and contingencies
Stockholders' equity:
  Common stock; $.001 par value; 100,000 shares
   authorized; 35,447 and 33,604 shares issued and
   outstanding, respectively.........................         35          34
  Additional paid-in capital.........................    110,600      77,359
  Notes receivable from stockholders.................       (406)       (508)
  Deferred stock compensation........................       (578)     (1,035)
  Retained earnings..................................      2,914       5,341
                                                        --------     -------
    Total stockholders' equity.......................    112,565      81,191
                                                        --------     -------
    Total liabilities and stockholders' equity.......   $149,312     $99,501
                                                        ========     =======
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                       35
<PAGE>
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                     (In thousands, except per share data)
 
<TABLE>
<CAPTION>
                                                      YEARS ENDED DECEMBER 31,
                                                      -------------------------
                                                        1997     1996    1995
                                                      --------  ------- -------
<S>                                                   <C>       <C>     <C>
Revenues:
  Software........................................... $100,700  $35,658 $ 7,636
  Maintenance, consulting and other..................   18,075    3,494     402
                                                      --------  ------- -------
    Total revenues...................................  118,775   39,152   8,038
Cost of revenues:
  Software...........................................    2,272      106      41
  Maintenance, consulting and other..................    7,617    2,113     385
                                                      --------  ------- -------
    Total cost of revenues...........................    9,889    2,219     426
                                                      --------  ------- -------
    Gross margin.....................................  108,886   36,933   7,612
Operating expenses:
  Product development................................   13,349    5,894   2,816
  Sales and marketing................................   55,983   19,577   3,232
  General and administrative.........................    9,682    4,748   1,192
  Write-off of acquired research and development.....   22,740      --      --
                                                      --------  ------- -------
    Total operating expenses.........................  101,754   30,219   7,240
                                                      --------  ------- -------
    Operating income.................................    7,132    6,714     372
Other income, net....................................    2,892    1,391     156
                                                      --------  ------- -------
    Income before income taxes.......................   10,024    8,105     528
Income tax expense...................................   12,451    3,080     211
                                                      --------  ------- -------
    Net income (loss)................................ $ (2,427) $ 5,025 $   317
                                                      ========  ======= =======
Diluted Earnings (Loss) Per Share:
Net income (loss) per share.......................... $  (0.07) $  0.15 $  0.01
                                                      ========  ======= =======
Shares used in net income (loss) per share
 computation.........................................   34,428   33,731  25,051
                                                      ========  ======= =======
Basic Earnings (Loss) Per Share:
Net income (loss) per share.......................... $  (0.07) $  0.20 $  0.02
                                                      ========  ======= =======
Shares used in net income (loss) per share
 computation.........................................   34,428   24,800  16,148
                                                      ========  ======= =======
</TABLE>
 
 
 
          See accompanying notes to consolidated financial statements.
 
                                       36
<PAGE>
 
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                 (In thousands)
 
<TABLE>
<CAPTION>
                              CONVERTIBLE                                     NOTES                    RETAINED
                             PREFERRED STOCK     COMMON STOCK   ADDITIONAL  RECEIVABLE    DEFERRED     EARNINGS       TOTAL
                  PARTNERS' -------------------  --------------  PAID-IN       FROM        STOCK     (ACCUMULATED STOCKHOLDERS'
                   CAPITAL   SHARES    AMOUNT    SHARES  AMOUNT  CAPITAL   STOCKHOLDERS COMPENSATION   DEFICIT)      EQUITY
                  --------- ---------  --------  ------  ------ ---------- ------------ ------------ ------------ -------------
<S>               <C>       <C>        <C>       <C>     <C>    <C>        <C>          <C>          <C>          <C>
Balances,
 December 31,
 1994...........   $ 1,153        --   $   --       100   $ 1    $     49     $ (13)      $   --       $    (1)     $  1,189
Conversion of
 partners'
 capital........    (1,153)     4,689        5   16,161    14       1,134       --            --           --            --
Compensation
 related to
 stock options..       --         --       --       --    --          381       --           (381)         --            --
Issuance of
 common stock...       --         --       --       657     1          82       --            --           --             83
Repurchase and
 retirement of
 common stock...       --         --       --      (420)  --           (9)      --            --           --             (9)
Issuance of
 Series B
 preferred
 stock..........       --       3,933        4      --    --        4,890       --            --           --          4,894
Issuance of
 Series C
 preferred
 stock..........       --       1,189        1      --    --        3,459       --            --           --          3,460
Net income......       --         --       --       --    --          --        --            --           317           317
                   -------  ---------  -------   ------   ---    --------     -----       -------      -------      --------
Balances,
 December 31,
 1995...........       --       9,811       10   16,498    16       9,986       (13)         (381)         316         9,934
Issuance of
 common stock,
 net of issuance
 costs of
 $1,216.........       --         --       --     6,842     8      63,731      (507)          --           --         63,232
Repurchase and
 retirement of
 common stock...       --         --       --       (44)  --           (1)      --            --           --             (1)
Shares issued
 under Employee
 Stock Purchase
 Plan...........       --         --       --       100   --          722       --            --           --            722
Repayment of
 note
 receivable.....       --         --       --       --    --          --         12           --           --             12
Issuance of
 Series B
 preferred
 stock..........       --          67      --       --    --          195       --            --           --            195
Exercise of
 warrant for
 Series C
 preferred
 stock..........       --         150      --       --    --          437       --            --           --            437
Issuance of
 Series D
 preferred
 stock..........       --         180      --       --    --          900       --            --           --            900
Conversion of
 preferred stock
 into common
 stock..........       --     (10,208)     (10)  10,208    10         --        --            --           --            --
Compensation
 related to
 stock options..       --         --       --       --    --          893       --           (893)         --            --
Amortization of
 deferred stock
 compensation...       --         --       --       --    --          --        --            239          --            239
Tax benefits
 related to
 stock options..       --         --       --       --    --          496       --            --           --            496
Net income......       --         --       --       --    --          --        --            --         5,025         5,025
                   -------  ---------  -------   ------   ---    --------     -----       -------      -------      --------
Balances,
 December 31,
 1996...........       --         --       --    33,604    34      77,359      (508)       (1,035)       5,341        81,191
Shares issued
 under Employee
 Stock Option
 Plan...........       --         --       --       918     1       2,982       --            --           --          2,983
Shares issued
 under Employee
 Stock Purchase
 Plan...........       --         --       --       279   --        2,923       --            --           --          2,923
Issuance of
 common stock
 related to
 Nomadic
 acquisition....       --         --       --       346   --       14,581       --            --           --         14,581
Issuance of
 common stock
 related to
 InterActive
 acquisition....       --         --       --       300   --       10,394       --            --           --         10,394
Repayment of
 note
 receivable.....       --         --       --       --    --          --        102           --           --            102
Compensation
 related to
 stock options..       --         --       --       --    --         (256)      --            256          --            --
Amortization of
 deferred stock
 compensation...       --         --       --       --    --          --        --            201          --            201
Tax benefits
 related to
 stock options..       --         --       --       --    --        2,617       --            --           --          2,617
Net loss........       --         --       --       --    --          --        --            --        (2,427)       (2,427)
                   -------  ---------  -------   ------   ---    --------     -----       -------      -------      --------
Balances,
 December 31,
 1997...........   $   --         --   $   --    35,447   $35    $110,600     $(406)      $  (578)     $ 2,914      $112,565
                   =======  =========  =======   ======   ===    ========     =====       =======      =======      ========
</TABLE>
 
          See accompanying notes to consolidated financial statements
 
                                       37
<PAGE>
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)
 
<TABLE>
<CAPTION>
                                                   YEARS ENDED DECEMBER 31,
                                                   ---------------------------
                                                     1997      1996     1995
                                                   --------  --------  -------
<S>                                                <C>       <C>       <C>
Cash flows from operating activities:
  Net income (loss)............................... $ (2,427) $  5,025  $   317
  Adjustments to reconcile net income (loss) to
   net cash provided by operating activities:
    Compensation related to stock options.........      201       239      --
    Depreciation and amortization.................    3,888     1,197      142
    Deferred income taxes.........................   (1,552)     (576)    (286)
    Tax benefit from exercise of stock options....    2,617       496      --
    Loss on disposal of property and equipment....      307       155      --
    Allowances for doubtful accounts and returns..      848       269      --
    Write-off of acquired research and
     development..................................   22,740       --       --
    Software licenses exchanged for equipment and
     prepaid assets...............................      --     (3,408)     --
    Changes in operating assets and liabilities:
      Accounts receivable.........................  (20,779)  (10,058)  (3,066)
      Prepaids and other..........................     (686)   (1,868)    (411)
      Accounts payable............................   (1,622)    2,614      479
      Accrued expenses............................   13,340     5,693    1,075
      Income taxes payable........................     (840)    1,623      395
      Deferred revenue............................    6,691     2,046    4,166
                                                   --------  --------  -------
        Net cash provided by operating activities.   22,726     3,447    2,811
                                                   --------  --------  -------
Cash flows from investing activities:
  Purchases of property and equipment.............   (6,677)   (7,341)    (872)
  Purchases of short-term investments.............  (41,756)  (49,716)     --
  Maturities of short-term investments............   28,578       --       --
  Cash acquired in acquisitions...................      129       --       --
  Other assets....................................     (422)     (607)       7
                                                   --------  --------  -------
        Net cash used in investing activities.....  (20,148)  (57,664)    (865)
                                                   --------  --------  -------
Cash flows from financing activities:
  Proceeds from issuance of common stock, net of
   repurchases....................................    5,906    63,953       74
  Proceeds from issuance of preferred stock.......      --      1,532    8,354
  Repayment of stockholder notes..................      102        12      --
                                                   --------  --------  -------
        Net cash provided by financing activities.    6,008    65,497    8,428
Change in cash and cash equivalents...............    8,586    11,280   10,374
Cash and cash equivalents, beginning of year......   22,671    11,391    1,017
                                                   --------  --------  -------
Cash and cash equivalents, end of year............ $ 31,257  $ 22,671  $11,391
                                                   ========  ========  =======
Supplemental disclosures of cash flows
 information:
  Cash paid for income taxes...................... $ 12,225  $  1,488  $   100
                                                   ========  ========  =======
 Noncash investing and financing activities:
  Conversion of partnership units into common
   stock and Series A preferred stock............. $     --  $     --  $ 1,153
                                                   ========  ========  =======
  Conversion of preferred stock into common stock. $     --  $     10  $    --
                                                   ========  ========  =======
  Common stock issued for acquisitions............ $ 24,975  $     --  $    --
                                                   ========  ========  =======
  Exercise of common stock options in exchange for
   stockholder notes receivable................... $     --  $    507  $    --
                                                   ========  ========  =======
</TABLE>
 
          See accompanying notes to consolidated financial statements
 
 
                                       38
<PAGE>
 
                             SIEBEL SYSTEMS, INC.
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1)SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
THE COMPANY
 
  Siebel Systems, Inc. ("Siebel" or the "Company") is the global market leader
in enterprise-class sales, marketing and customer service information systems
for global organizations focused on increasing sales and service effectiveness
in field sales, service organizations, telesales, telemarketing, call centers
and third-party resellers. The Company designs, develops, markets and supports
Siebel Enterprise Applications, a leading Internet-enabled, object oriented
client/server application software product family designed to meet the sales,
marketing and customer service information system requirements of even the
largest multi-national organizations.
 
PRINCIPLES OF CONSOLIDATION
 
  The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All intercompany accounts and
transactions have been eliminated.
 
REVENUE RECOGNITION
 
  The Company recognizes revenue in accordance with Statement of Position No.
91-1, Software Revenue Recognition. Software license revenue is recognized
when all of the following criteria have been met: there is an executed license
agreement, software has been shipped to the customer, no significant vendor
obligations remain, the license fee is fixed and payable within twelve months
and collection is deemed probable. Maintenance, consulting and other revenues
consist primarily of maintenance and are recognized ratably over the term of
the maintenance contract, typically 12 to 36 months.
 
USE OF ESTIMATES
 
  The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
 
CASH AND CASH EQUIVALENTS, AND SHORT-TERM INVESTMENTS
 
  The Company considers all highly liquid investments with an original
maturity of 90 days or less to be cash equivalents. Short-term investments
generally consist of highly liquid municipal securities with original
maturities in excess of 90 days.
 
  The Company has classified its investments in certain debt and equity
securities as "available for sale." Such investments are carried at fair
value, with gross unrealized gains and losses, when material, reported as a
separate component of stockholders' equity.
 
PROPERTY AND EQUIPMENT
 
  Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is calculated using the straight-line method over
the estimated useful lives of the respective assets, generally three to five
years. Leasehold improvements are amortized over the lesser of the lease term
or the estimated useful lives of the improvements, generally seven years.
 
 
                                      39
<PAGE>
 
                             SIEBEL SYSTEMS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
CAPITALIZED SOFTWARE
 
  Development costs incurred in the research and development of new software
products and enhancements to existing software products are expensed as
incurred until technological feasibility in the form of a working model has
been established. To date, the Company's software development has been
completed concurrent with the establishment of technological feasibility, and,
accordingly, no costs have been capitalized.
 
ADVERTISING
 
  Advertising costs are expensed as incurred. Advertising expense is included
in sales and marketing expense and amounted to $6,639,000 in 1997 and $140,000
in 1996.
 
INCOME TAXES
 
  The Company uses the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the estimated future tax consequences
attributable to differences between the consolidated financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets are recognized for deductible temporary
differences, net operating loss carryforwards and credit carryforwards if it
is more likely than not that the tax benefits will be realized. To the extent
a deferred tax asset cannot be recognized under the preceding criteria,
available allowances must be established. Deferred tax assets and liabilities
are measured using enacted tax rates in effect for the year in which those
temporary differences are expected to be recovered or settled.
 
NET INCOME (LOSS) PER SHARE
 
  During 1997, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 128, Earnings Per Share. SFAS No. 128 requires the presentation of
basic earnings per share (EPS) and, for companies with potentially dilutive
securities, such as options, diluted EPS.
 
  Basic earnings per share is computed using the weighted average number of
shares of common stock outstanding. Diluted earnings per share is computed
using the weighted average number of shares of common stock and, when
dilutive, convertible preferred stock outstanding and common equivalent shares
from options to purchase common stock and warrants outstanding using the
treasury stock method. Dilutive potential common shares for the years ended
December 31, 1996 and 1995 were 8,931,000 and 8,903,000, respectively.
 
  Effective February 3, 1998, the Securities and Exchange Commission (SEC)
issued Staff Accounting Bulletin (SAB) No. 98 which changes the calculation of
earnings per share in periods prior to initial public offerings as previously
applied under SAB No. 83. When a registrant issued common stock, warrants,
options, or other potentially dilutive instruments for consideration or with
exercise prices below the initial public offering price, within a one year
period prior to the initial filing of a registration statement relating to an
initial public offering, SAB No. 83 required such equity instruments to be
treated as outstanding for all periods presented in the filing using the
anticipated initial public offering price and the treasury stock method. Under
SAB No. 98, when common stock, options, warrants, or other potentially
dilutive instruments have been issued for nominal consideration during the
periods covered by income statements in the filing, those nominal issuances
are to be reflected in earnings per share calculations for all periods
presented. Based on the Company's current understanding of the definition of
"nominal consideration," the Company has concluded that during all periods
prior to the Company's initial public offering, no equity instruments were
issued for nominal consideration. Net income per share for periods prior to
the Company's initial public offering have been restated in accordance with
SAB No. 98.
 
 
                                      40
<PAGE>
 
                             SIEBEL SYSTEMS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
EMPLOYEE STOCK OPTION AND PURCHASE PLANS
 
  The Company accounts for its stock-based compensation plans in accordance
with the provisions of Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations. As
such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price.
 
FOREIGN CURRENCY TRANSLATION
 
  The Company considers the functional currency of its foreign subsidiaries to
be the local currency, and accordingly, they are translated into U.S. dollars
using exchange rates in effect at period end for assets and liabilities and
average exchange rates during each reporting period for the results of
operations. Adjustments resulting from translation of foreign subsidiary
financial statements have been immaterial to date.
 
CONCENTRATIONS OF CREDIT RISK
 
  Financial instruments that potentially subject the Company to a
concentration of credit risk principally consist of trade accounts receivable.
The Company performs ongoing credit evaluations of its customers and generally
does not require collateral on accounts receivable, as the majority of the
Company's customers are large, well established companies. The Company
maintains reserves for potential credit losses, but historically has not
experienced any significant losses related to individual customers or groups
of customers in any particular industry or geographic area.
 
FAIR VALUE OF FINANCIAL INSTRUMENTS
 
  The fair value of the Company's cash and cash equivalents, accounts
receivable, and accounts payable approximate their respective carrying amounts
defined as the amount at which the instrument could be exchanged in a current
transaction between willing parties.
 
IMPAIRMENT OF LONG-LIVED ASSETS
 
  The Company adopted Statement of Financial Accounting Standards (SFAS) No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of on January 1, 1996. This statement requires long-
lived assets to be evaluated for impairment whenever events or changes in
circumstances indicate that the carrying value of an asset may not be
recoverable. The adoption of SFAS No. 121 did not have a material impact on
the Company's consolidated results of operations.
 
RECENT ACCOUNTING PRONOUNCEMENTS
 
  In October, 1997, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 97-2 Software Revenue Recognition, which
supercedes SOP 91-1. SOP 97-2 is effective for transactions entered into after
December 31, 1997. SOP No. 97-2 generally requires revenue earned on software
arrangements involving multiple elements to be allocated to each element based
on the relative fair values of the elements. The fair value of an element must
be based on evidence that is specific to the vendor. If a vendor does not have
evidence of the fair value for all elements in a multiple-element arrangement,
all revenue from the arrangement is deferred until such evidence exists or
until all elements are delivered. The Company is still considering the effect
of adopting SOP 97-2, however, the Company generally does not anticipate that
it will have a material impact on the Company's consolidated results of
operations or financial position.
 
  In June, 1997, the Financial Accounting Standards Board issued SFAS No. 130,
Reporting Comprehensive Income, which is effective beginning in 1998.
 
 
                                      41
<PAGE>
 
                             SIEBEL SYSTEMS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
  SFAS No. 130 establishes standards for reporting and disclosure of
comprehensive income and its components which will be presented in association
with the Company's consolidated financial statements. Comprehensive income is
defined as the change in an enterprise's equity during a reporting period
arising from transactions, events or circumstances relating to nonowner
sources, such as foreign currency translation adjustments and unrealized gains
or losses on available-for-sale securities. It includes all changes in equity
during a period except those resulting from investments by or distributions to
owners.
 
  SFAS No. 130 is not expected to have a material effect on the Company's
consolidated results of operations or financial position.
 
(2) FINANCIAL STATEMENT DETAILS
 
  Short-Term Investments. Short-term investments, $26,592,000 of which mature
in less than one year, and $36,302,000 of which mature in one to five years,
consisted of the following (in thousands):
 
<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                                ---------------
                                                                 1997    1996
                                                                ------- -------
   <S>                                                          <C>     <C>
   Certificates of deposit..................................... $    -- $ 1,325
   Municipal securities........................................  62,894  48,391
                                                                ------- -------
                                                                $62,894 $49,716
                                                                ======= =======
</TABLE>
 
  Accounts Receivable, Net. Accounts receivable, net consisted of the
following (in thousands):
 
<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                                ---------------
                                                                 1997    1996
                                                                ------- -------
   <S>                                                          <C>     <C>
   Trade accounts receivable................................... $34,363 $13,124
   Less: allowances for doubtful accounts and returns..........   1,117     269
                                                                ------- -------
                                                                $33,246 $12,855
                                                                ======= =======
</TABLE>
 
  Property and Equipment, Net. Property and equipment, net consisted of the
following (in thousands):
 
<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                                 --------------
                                                                  1997    1996
                                                                 ------- ------
   <S>                                                           <C>     <C>
   Computer equipment........................................... $ 2,682 $5,506
   Furniture and fixtures.......................................   9,182  1,380
   Computer software............................................   2,987  2,202
   Leasehold improvements.......................................   1,185    575
                                                                 ------- ------
                                                                  16,036  9,663
   Less: accumulated depreciation...............................   4,907  1,353
                                                                 ------- ------
                                                                 $11,129 $8,310
                                                                 ======= ======
</TABLE>
 
                                      42
<PAGE>
 
                             SIEBEL SYSTEMS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
 
ACCRUED EXPENSES
 
  Accrued expenses consisted of the following (in thousands):
 
<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                                  --------------
                                                                   1997    1996
                                                                  ------- ------
     <S>                                                          <C>     <C>
     Bonuses..................................................... $ 6,127 $1,672
     Commissions.................................................   4,117  1,846
     Vacation....................................................   1,158    388
     Sales tax...................................................   2,005    513
     Other.......................................................   7,395  2,349
                                                                  ------- ------
                                                                  $20,802 $6,768
                                                                  ======= ======
</TABLE>
 
OTHER INCOME, NET
 
  Other income, net consisted of the following (in thousands):
 
<TABLE>
<CAPTION>
                                                     YEARS ENDED DECEMBER 31,
                                                     ----------------------------
                                                       1997      1996     1995
                                                     --------  --------  --------
     <S>                                             <C>       <C>       <C>
     Interest income................................ $  3,114  $  1,554  $  163
     Interest expense...............................       (4)       (8)     (7)
     Other..........................................     (218)     (155)    --
                                                     --------  --------  ------
                                                     $  2,892  $  1,391  $  156
                                                     ========  ========  ======
</TABLE>
 
(3) COMMITMENTS AND CONTINGENCIES
 
LEASE OBLIGATIONS
 
  As of December 31, 1997, the Company leased facilities under noncancelable
operating leases expiring between 1998 and 2006. Future minimum lease payments
are as follows (in thousands):
 
<TABLE>
<CAPTION>
     YEAR ENDING
     DECEMBER 31,
     ------------
     <S>                                                                 <C>
     1998............................................................... $ 1,887
     1999...............................................................   1,900
     2000...............................................................   1,894
     2001...............................................................   1,785
     2002...............................................................   1,785
     Thereafter.........................................................   6,395
                                                                         -------
                                                                         $15,646
                                                                         =======
</TABLE>
 
  Rent expense for the years ended December 31, 1997, 1996 and 1995, was
$3,205,000, $1,245,000, and $191,000, respectively.
 
EMPLOYEE BENEFIT PLAN
 
  The Company has a 401(k) plan that allows eligible employees to contribute
up to 20% of their compensation, limited to $9,500 in 1997. Employee
contributions and earnings thereon vest immediately. Although, the Company may
make discretionary contributions to the 401(k) plan, none have been made to
date.
 
 
                                      43
<PAGE>
 
                             SIEBEL SYSTEMS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
LEGAL ACTIONS
 
  The Company is engaged in certain legal actions arising in the ordinary
course of business. The Company believes it has adequate legal defenses and
believes that the ultimate outcome of these actions will not have a material
effect on the Company's consolidated financial position or results of
operations, although there can be no assurance as to the outcome of such
litigation.
 
(4) STOCKHOLDERS' EQUITY
 
EMPLOYEE STOCK OPTION AND PURCHASE PLANS
 
  The 1996 Equity Incentive Plan (the Plan), which amended and restated the
Company's 1994 Stock Option Plan and 1996 Supplemental Stock Option Plan,
provides for the issuance of up to an aggregate of 20,000,000 shares of common
stock to employees, directors and consultants. The Plan provides for the
issuance of incentive and nonstatutory stock options, restricted stock
purchase awards, stock bonuses and stock appreciation rights.
 
  Under the Plan, the exercise price for incentive stock options is at least
100% of the fair market value on the date of the grant. The exercise price for
incentive stock options is at least 110% of the fair market value on the date
of the grant for persons with greater than 10% of the voting power of all
classes of stock. Options generally expire in 10 years; however, incentive
stock options may expire in 5 years if the optionee owns stock representing
more than 10% of the voting power of all classes of stock. Vesting periods are
determined by the Board of Directors and generally provide for shares to vest
ratably over 5 years.
 
  The Plan also allows for the exercise of certain unvested options. Shares of
common stock issued to employees upon exercise of unvested options are subject
to repurchase by the Company at the original exercise price. The Company's
ability to repurchase these shares expires at a rate equivalent to the current
vesting schedule of each option. As of December 31, 1997, 676,600 shares of
common stock had been issued to employees upon the exercise of unvested
options, which are subject to repurchase.
 
  During the period from October 1995 through April 1996, the Company granted
options to purchase an aggregate of 8,152,500 shares of common stock at
exercise prices ranging from $.25 to $3.25 per share. Based in part on an
independent appraisal obtained by the Company's Board of Directors, and other
factors, the Company recorded $381,000 of deferred compensation expense in
1995 and an additional $893,000 of deferred compensation expense in 1996
relating to these options. These amounts are being amortized over the vesting
period of the individual options, generally five years.
 
  In May 1996, the Company adopted the 1996 Employee Stock Purchase Plan (the
"Purchase Plan") and reserved 700,000 shares for issuance thereunder. The
Purchase Plan became effective upon the completion of the Company's initial
public offering. In January 1997, the Board of Directors of the Company
adopted an amendment to the Purchase Plan to increase the number of shares
authorized for issuance under the Purchase Plan to 1,700,000 shares. The
Purchase Plan permits eligible employees to purchase common stock, through
payroll deductions of up to 15% of the employee's compensation, at a price
equal to 85% of the fair market value of the common stock at either the
beginning or the end of each offering period, whichever is lower. As of
December 31, 1997, 379,174 shares had been purchased under the Purchase Plan.
 
FAIR VALUE INFORMATION
 
 The Company has elected to continue to use the intrinsic value-based method
to account for all of its employee stock-based compensation plans. The Company
has recorded no compensation costs related to its stock option plans for the
years ended December 31, 1997, 1996 and 1995, except for the options granted
during the period from October 1995 through April 1996, because the exercise
price of each option equals or exceeds the fair value of the underlying common
stock as of the grant date for each stock option.
 
                                      44
<PAGE>
 
                             SIEBEL SYSTEMS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
 
  Pursuant to SFAS No. 123, the Company is required to disclose the pro forma
effects on net income (loss) and net income (loss) per share data as if the
Company had elected to use the fair value approach to account for all its
employee stock-based compensation plans. Had compensation cost for the
Company's plans been determined consistent with the fair value approach
enumerated in SFAS No. 123, the Company's net income (loss) and net income
(loss) per share for the years ended December 31, 1997, 1996 and 1995 would
have been as indicated below (in thousands, except per share data):
 
<TABLE>
<CAPTION>
                                                           1997     1996  1995
                                                         --------  ------ -----
   <S>                                                   <C>       <C>    <C>
   Net income (loss)
     As reported........................................ $ (2,427) $5,025 $ 317
     Pro forma.......................................... $(14,990) $2,847 $ 297
   Net income (loss) per diluted share
     As reported........................................ $  (0.07) $ 0.15 $0.01
     Pro forma.......................................... $  (0.44) $ 0.08 $0.01
   Net income (loss) per basic share
     As reported........................................ $  (0.07) $ 0.20 $0.02
     Pro forma.......................................... $  (0.44) $ 0.11 $0.02
</TABLE>
 
  The fair value of options granted was estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1997: risk-free interest rate of 6.1%, expected
life of 3.5 years, 83.9% expected volatility and no dividends. The weighted-
average assumptions used for grants in 1996 and 1995 were risk-free interest
rate of 6%, expected life of 3.5 years, 68.5% expected volatility and no
dividends.
 
  The fair value of employees' stock purchase rights under the Purchase Plan
was estimated using the Black-Scholes model with the following assumptions for
1997 and 1996, respectively: risk-free interest rate of 5.3% and 5.5%;
expected life of 0.7 and 0.5 years: 83.9% and 68.5% expected volatility; and
no dividends.
 
  Plan activity is summarized as follows:
 
<TABLE>
<CAPTION>
                                                                     WEIGHTED
                                            SHARES                   AVERAGE
                                          AVAILABLE     NUMBER    EXERCISE PRICE
                                          FOR GRANT   OF SHARES     PER SHARE
                                          ----------  ----------  --------------
   <S>                                    <C>         <C>         <C>
   Balances, December 31, 1994...........  5,816,000     184,000      $ 0.05
     Options granted..................... (2,881,570)  2,881,570      $ 0.17
     Options exercised...................        --     (656,570)     $ 0.12
     Options canceled....................    491,000    (491,000)     $ 0.14
   Balances, December 31, 1995...........  3,425,430   1,918,000      $ 0.19
     Additional shares authorized........ 14,000,000         --
     Options granted..................... (9,701,000)  9,701,000      $ 6.85
     Options exercised...................        --   (1,127,600)     $ 0.60
     Options canceled....................    650,500    (650,500)     $ 3.64
   Balances, December 31, 1996...........  8,374,930   9,840,900      $ 6.46
     Additional shares authorized........  1,350,000         --
     Options granted..................... (4,557,044)  4,557,044      $27.35
     Options exercised...................        --     (906,704)     $ 3.76
     Options canceled....................  1,292,850  (1,292,850)     $ 9.55
   Balances, December 31, 1997...........  6,460,736  12,198,390      $14.17
</TABLE>
 
                                      45
<PAGE>
 
                             SIEBEL SYSTEMS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
  Options on 3,099,002, 2,842,900, and 41,900 shares were vested at December
31, 1997, 1996, and 1995, respectively, with a weighted average exercise price
of $5.33, $0.68, and $0.19 per share, respectively.
 
  Under SFAS No. 123, the weighted average estimated fair value of employee
stock options granted at exercise price equal to market price at grant date
during 1997, 1996 and 1995 was $16.97, $3.72 and $0.09 per share,
respectively.
 
  The following table summarizes information about fixed stock options
outstanding as of December 31, 1997:
 
<TABLE>
<CAPTION>
                                      OPTIONS OUTSTANDING                      OPTIONS EXERCISABLE
                          ---------------------------------------------- --------------------------------
                                             WEIGHTED
                                              AVERAGE
                               NUMBER        REMAINING       WEIGHTED         NUMBER          WEIGHTED
                          OUTSTANDING AS OF CONTRACTUAL      AVERAGE     EXERCISABLE AS OF    AVERAGE
RANGE OF EXERCISE PRICES  DECEMBER 31, 1997    LIFE       EXERCISE PRICE DECEMBER 31, 1997 EXERCISE PRICE
------------------------  ----------------- -----------   -------------- ----------------- --------------
<S>                       <C>               <C>           <C>            <C>               <C>
$ 0.05- 1.45                  2,631,706         7.8 years     $ 1.06         1,717,725         $ 0.85
$ 2.75- 3.25                  2,745,500         8.3           $ 2.83           626,700         $ 2.77
$ 5.75- 5.75                    338,000         8.4           $ 5.75            78,606         $ 5.75
$ 6.25- 6.25                    759,415         8.2           $ 6.25           187,815         $ 6.25
$ 8.50- 8.50                     23,000         8.5           $ 8.50             5,000         $ 8.50
$11.63-11.63                     70,000         8.5           $11.63            15,500         $11.63
$16.25-16.88                    558,100         9.3           $16.82             6,281         $16.79
$22.88-23.25                  2,314,000         9.0           $23.21           255,383         $23.19
$26.13-27.78                  1,311,869         8.7           $26.24           200,850         $26.25
$34.25-34.25                    161,200         9.9           $34.25               --          $  --
$36.00-37.19                    364,450         9.6           $36.62             5,142         $37.19
$40.75-41.50                    921,150         9.7           $40.96               --          $  --
------------                 ----------         ---           ------         ---------         ------
$ 0.05-41.50                 12,198,390         8.6           $14.13         3,099,002         $ 5.34
                             ==========                                      =========
</TABLE>
 
(5) INCOME TAXES
 
  The components of income tax expense for the years ended December 31, 1997,
1996 and 1995 are as follows (in thousands):
 
<TABLE>
<CAPTION>
                                                          1997     1996   1995
                                                         -------  ------  ----
   <S>                                                   <C>      <C>     <C>
   Current:
     Federal............................................ $ 8,715  $2,316  $289
     State..............................................   2,270     544   108
     Foreign............................................     400     300   100
                                                         -------  ------  ----
       Total current....................................  11,385   3,160   497
   Deferred:
     Federal............................................  (1,334)   (480) (228)
     State..............................................    (217)    (96)  (58)
                                                         -------  ------  ----
       Total deferred...................................  (1,551)   (576) (286)
       Charge in lieu of taxes attributable to
        employer's stock option plans...................   2,617     496   --
                                                         -------  ------  ----
       Total income taxes............................... $12,451  $3,080  $211
                                                         =======  ======  ====
</TABLE>
 
 
                                      46
<PAGE>
 
                             SIEBEL SYSTEMS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
 
  The differences between the income tax expense computed at the federal
statutory rate of 35% and the Company's actual income tax expense for the
years ended December 31, 1997, 1996 and 1995 are as follows (in thousands):
 
<TABLE>
<CAPTION>
                                                           1997     1996   1995
                                                          -------  ------  ----
     <S>                                                  <C>      <C>     <C>
     Expected income tax expense......................... $ 3,508  $2,756  $180
     State income taxes, net of federal tax benefit......   1,674     381    33
     In-process research and development.................   7,959     --    --
     Research and experimentation credit.................    (343)   (136)  --
     Tax exempt interest.................................    (995)   (204)  --
     Other, net..........................................     648     283    (2)
                                                          -------  ------  ----
        Total income taxes............................... $12,451  $3,080  $211
                                                          =======  ======  ====
</TABLE>
 
  The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities as of December 31, 1997 and
1996 are as follows (in thousands):
 
<TABLE>
<CAPTION>
                                                                 1997    1996
                                                                ------  ------
     <S>                                                        <C>     <C>
     Deferred tax assets:
      Deferred state taxes..................................... $  472  $  145
      Accruals and reserves, not currently taken for tax
       purposes................................................  2,002     922
      Net operating loss carryforward..........................    602     --
                                                                ------  ------
       Deferred assets.........................................  3,076   1,067
     Deferred tax liability--depreciation......................   (162)   (205)
                                                                ------  ------
       Net deferred assets..................................... $2,914  $  862
                                                                ======  ======
</TABLE>
 
  Management believes it is more likely than not that future operations will
generate sufficient taxable income to realize the deferred tax assets.
 
(6) RELATED PARTIES, SIGNIFICANT CUSTOMERS AND GEOGRAPHIC INFORMATION
 
  Certain members of the Company's Board of Directors serve as officers for
customers of the Company. In 1997, aggregate revenues associated with
shipments to these customers was $1,598,000 and accounts receivable from these
customers was $654,000. The Company also had revenue in 1997 of $15 million or
approximately 13% of total revenues from one customer and receivables
outstanding from the customer of $551,000 as of December 31, 1997. Revenue
from this customer in 1996 was less than 10% of total revenues.
 
  The Company's export sales for the years ended December 31, 1997 and 1996
were $33.6 million and $4.3 million, respectively, (28% and 11% of total
revenues, respectively), principally in Europe and Asia.
 
(7) ACQUISITIONS
 
INTERACTIVE WORKPLACE, INC
 
  On October 1, 1997, the Company issued shares of common stock in exchange
for all outstanding securities of privately-held InterActive WorkPlace, Inc.
("InterActive"), a developer of intranet-based business intelligence software
technology. The transaction was valued at approximately $15 million and was
accounted for by the purchase method of accounting. Accordingly, the operating
results of InterActive have been included in the accompanying consolidated
financial statements of the Company from the date of acquisition. Under the
 
                                      47
<PAGE>
 
                             SIEBEL SYSTEMS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
terms of the agreement, InterActive's securityholders received or will receive
up to approximately 427,000 shares of the Company's common stock in exchange
for all outstanding shares in InterActive. Additionally, InterActive optionees
received options to purchase an aggregate of approximately 32,000 shares of
the Company's common stock in exchange for their options to purchase
InterActive common stock. The excess of the purchase price over the fair value
of the net assets acquired was allocated to purchased in-process research and
development and intangible assets of $14,017,000 and $104,000, respectively.
The purchased in-process research and development was charged to operations in
the fourth quarter of fiscal 1997. The amounts allocated to intangible assets
will be amortized over three years.
 
  The results of operations of InterActive prior to the acquisition date are
not considered material to the consolidated results of operations of the
Company and, accordingly, pro forma financial information has not been
presented.
 
NOMADIC SYSTEMS, INC
 
  On November 1, 1997, the Company issued shares of common stock in exchange
for all outstanding securities of privately-held Nomadic Systems, Inc.
("Nomadic"), a provider of innovative business solutions to pharmaceutical
sales forces. The transaction was valued at approximately $11 million and was
accounted for by the purchase method of accounting. Accordingly, the operating
results of Nomadic have been included in the accompanying consolidated
financial statements of the Company from the date of acquisition. Under the
terms of the agreement, Nomadic's securityholders received approximately
300,000 shares of the Company's common stock in exchange for all outstanding
shares of Nomadic. The excess of the purchase price over the fair value of the
net assets acquired was allocated to purchased in-process research and
development and intangible assets of $8,723,000 and $1,553,000, respectively.
The purchased in-process research and development was charged to operations in
the fourth quarter of fiscal 1997. The amounts allocated to intangible assets
will be amortized over three years.
 
  The results of operations of Nomadic prior to the acquisition date are not
considered material to the consolidated results of operations of the Company
and, accordingly, pro forma financial statement information has not been
presented.
 
(8) SUBSEQUENT EVENTS
 
  On March 2, 1998, the Company entered into a definitive merger agreement
with Scopus Technology, Inc. ("Scopus") The agreement provides for the
issuance of .36405 shares of the Company's common stock in exchange for each
outstanding share of Scopus common stock and for the assumption of all Scopus
stock options. Scopus had approximately 20,581,000 common shares and
approximately 3,197,000 options outstanding at February 23, 1998. The
transaction is expected to close in the second quarter of 1998 and will be
accounted for as a pooling of interests.
 
  On February 26, 1998, the Company's stockholders approved a two-for-one
stock split (to be effective in the form of a stock dividend) to be effective
on March 20, 1998. The accompanying consolidated financial statements do not
give effect to the pending stock split.
 
                                      48
<PAGE>
 
SELECTED QUARTERLY FINANCIAL DATA
 
  The following table presents selected quarterly information for fiscal 1997,
1996 and 1995:
 
<TABLE>
<CAPTION>
                                               FIRST   SECOND   THIRD   FOURTH
                                              QUARTER  QUARTER QUARTER QUARTER
                                              -------  ------- ------- --------
                                              (IN THOUSANDS, EXCEPT PER SHARE
                                                           DATA)
   <S>                                        <C>      <C>     <C>     <C>
   1997:
   Net revenues.............................. $19,485  $24,514 $32,617 $ 42,159
   Gross profit..............................  17,771   22,574  30,228   38,313
   Net income (loss).........................   2,758    4,061   5,702  (14,948)
   Net income (loss) per diluted share.......    0.07     0.10    0.14    (0.43)
   Net income (loss) per basic share.........    0.08     0.12    0.17    (0.43)
   1996:
   Net revenues.............................. $ 4,709  $ 7,546 $11,171 $ 15,726
   Gross profit..............................   4,340    7,113  10,626   14,854
   Net income................................     198      701   1,593    2,533
   Net income per diluted share..............    0.01     0.02    0.04     0.06
   Net income per basic share................    0.01     0.04    0.05     0.08
   1995:
   Net revenues.............................. $    30  $ 1,284 $ 2,564 $  4,160
   Gross profit..............................      21    1,233   2,439    3,919
   Net income (loss).........................    (720)      42     287      708
   Net income (loss) per diluted share.......   (0.04)    0.00    0.01     0.03
   Net income (loss) per basic share.........   (0.04)    0.00    0.02     0.04
</TABLE>
 
                                       49
<PAGE>
 
                                                                     SCHEDULE II
 
                       VALUATION AND QUALIFYING ACCOUNTS
 
<TABLE>
<CAPTION>
                                     BALANCE AT CHARGED TO            BALANCE AT
                                     BEGINNING  COSTS AND               END OF
                                      OF YEAR    EXPENSES  DEDUCTIONS    YEAR
                                     ---------- ---------- ---------- ----------
                                                   (IN THOUSANDS)
<S>                                  <C>        <C>        <C>        <C>
Allowance For Doubtful Accounts
  Year ended December 31, 1997......   $ 269      $ 848      $ --       $1,117
  Year ended December 31, 1996......   $ --       $ 269      $ --       $  269
  Year ended December 31, 1995......   $ --       $ --       $ --       $  --
</TABLE>
 
                                       50
<PAGE>
 
                                   SIGNATURE
 
  Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
 
                                          SIEBEL SYSTEMS, INC.
 
                                          Date: March 16, 1998
 
                                                  /s/ Howard H. Graham
                                          By: _________________________________
                                                    HOWARD H. GRAHAM
                                            SENIOR VICE PRESIDENT FINANCE AND
                                           ADMINISTRATION AND CHIEF FINANCIAL
                                                         OFFICER
 
 
                                      51
<PAGE>
 
                               POWER OF ATTORNEY
 
  KNOW ALL PERSONS BY THESE PRESENTS, that each of the persons whose signature
appears below hereby constitutes and appoints Thomas M. Siebel and Howard H.
Graham, each of them acting individually, as his or her attorney-in-fact, each
with the full power of substitution, for him or her in any and all capacities,
to sign any and all amendments to this Annual Report on Form 10-K, and to file
the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact, and each of them, full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises as fully to all intents and purposes as he or she might or
could do in person, hereby ratifying and confirming our signatures as they may
be signed by ours said attorney-in-fact and any and all amendments to this
Annual Report on Form 10-K.
 
  Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report on Form 10-K has been signed by the following persons in the
capacities and on the dates indicated.
 
              SIGNATURE                        TITLE                   DATE
 
                       
    /s/ Thomas M. Siebel               Chairman, Chief           March 16, 1998
----------------------------            Executive Officer and
      THOMAS M. SIEBEL                  Director (Principal
                                        Executive Officer)
 
                       
    /s/ Howard H. Graham               Senior Vice President     March 16, 1998
----------------------------            Finance and
      HOWARD H. GRAHAM                  Administraiton and
                                        Chief Financial
                                        Officer (Principal
                                        Financial and
                                        Accounting Officer)
 
                       
    /s/ James C. Gaither               Director                  March 16, 1998
----------------------------         
      JAMES C. GAITHER
 
                             
 /s/ Eric E. Schmidt, Ph.D.            Director                  March 16, 1998
----------------------------         
   ERIC E. SCHMIDT, PH.D.
 
                        
    /s/ Charles R. Schwab              Director                  March 16, 1998
----------------------------          
     CHARLES R. SCHWAB
 
                        
    /s/ George T. Shaheen              Director                  March 16, 1998
----------------------------          
     GEORGE T. SHAHEEN
 
                               
 /s/ A. Michael Spence, Ph.D.          Director                  March 16, 1998
----------------------------          
  A. MICHAEL SPENCE, PH.D.
 
                                      52