UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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FORM 10-K

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

For the fiscal year ended December 31, 2002

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.



|Delaware                                                       | 94-3187233                       
|-------------------------------------------------------------- | ---------------------------------
|(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.)

2207 Bridgepointe ParkwaySan Mateo, CA     94404

(650) 477-5000(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:  None
Securities registered pursuant to Section 12(g) of the Act:  Common Stock, $0.001 par value per share







Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
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. [  ]

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

The aggregate market value of the voting stock held by non-affiliates
of the registrant, based on the closing sale price of the Registrant's Common Stock on
June 28, 2002, as reported on the Nasdaq National Market was
approximately $6,172,781,000.  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 Registrant. Share ownership information of certain persons
known by the Registrant 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
June 28, 2002. 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 $0.001 per share, as of  February 7, 2003, was 487,687,081.







TABLE OF CONTENTS



|Part I.        |                                                                                                | Page
|-------------- | ---------------------------------------------------------------------------------------------- | ----
|Item 1.        | Business                                                                                       | 1   
|Item 2.        | Properties                                                                                     | 12  
|Item 3.        | Legal Proceedings                                                                              | 12  
|Item 4.        | Submission of Matters to a Vote of Security Holders                                            | 13  
|Part II.       |                                                                                                |     
|Item 5.        | Market for Registrant's Common Equity and Related Stockholder Matters                          | 13  
|Item 6.        | Selected Financial Data                                                                        | 14  
|Item 7.        | Management's Discussion and Analysis of Financial Condition and Results of Operations          | 15  
|Item 7a.       | Quantitative and Qualitative Disclosures About Market Risks                                    | 52  
|Item 8.        | Financial Statements and Supplementary Data                                                    | 53  
|Item 9.        | Changes in and Disagreements with Accountants on Accounting and Financial Disclosures          | 53  
|Part III.      |                                                                                                |     
|Item 10.       | Directors and Executive Officers of the Registrant                                             | 53  
|Item 11.       | Executive Compensation                                                                         | 57  
|Item 12.       | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 66  
|Item 13.       | Certain Relationships and Related Transactions                                                 | 67  
|Item 14.       | Contols and Procedures                                                                         | 68  
|Part IV.       |                                                                                                |     
|Item 15.       | Exhibits, Financial Statements and Reports on Form 8-K                                         | 70  
|Signatures     |                                                                                                | 107 
|Certifications |                                                                                                | 108 

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The statements contained in this annual
report that are not historical are forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934.  Forward-looking statements include, without limitation,
statements regarding the extent and timing of future revenues, restructuring and
other expenses and customer demand, statements regarding the deployment of our
products, and statements regarding reliance on third parties.  All forward-looking
statements included in this annual report are based on information
available to us as of the date of this annual report.  We assume no obligation
to update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise, unless we are required to do so by law.
We have based these forward-looking statements on our current expectations and
projections about future events.  These forward-looking statements are not
guarantees of future performance and are subject to risks, uncertainties and
assumptions, including those in the section entitled "Risk Factors"
and elsewhere in this annual report.

PART I

Item 1.  Business

Overview

Siebel Systems, Inc. is a leading
provider of eBusiness applications software.  Siebel eBusiness
Applications are a family of enterprise applications software that enables an
organization to better manage its most important relationships: its customer,
partner and employee relationships.  Siebel eBusiness Applications are
designed to meet the information system requirements needed
to manage these relationships for organizations of all sizes, from small
businesses to the largest multinational organizations and government
agencies.  Our customer relationship management applications enable an
organization to sell to, market to, and serve its customers across multiple
channels and lines of business.  Our partner relationship management
applications seamlessly unite the organization's partners, resellers and
customers in one global information system to facilitate greater collaboration
and increased revenues, productivity and customer satisfaction.  Our employee
relationship management applications enable an organization to drive employee
and organizational performance and increase employee satisfaction through the
support of each stage of the employee life cycle.  By deploying the
comprehensive functionality of Siebel eBusiness Applications to better
manage their customer, partner and employee relationships, our customers achieve
high levels of satisfaction from these constituencies and improve their
competitiveness in their markets.

In conjunction with customers and partners, we have
identified business processes based on best practices and incorporated these
business processes into the Siebel eBusiness suite of applications.
Business processes are a structured series of documented activities that
accomplish a discrete business objective.  Best practices are proven
methodologies for consistently achieving business objectives.  For example, a
best practice in call centers is to efficiently and effectively route customer
calls to the most qualified agents for first-call resolution.  With the business
process "Skills-Based Routing" embedded in the application,
organizations can achieve higher customer satisfaction, reduce average
call-handling times, and improve agent productivity.  By deploying Siebel
eBusiness Applications, organizations can take advantage of best
practices and business processes in sales, marketing and service to quickly and
cost-effectively deliver superior customer experiences.  In addition, through
cross-application integration via Universal Application Network, or UAN, Siebel
eBusiness Applications can support complex multi-step business processes
that span multiple applications.

We are principally engaged in the design, development,
marketing and support of Siebel eBusiness Applications.  Substantially
all of our revenues are derived from a perpetual license of our software
products and the related professional services and customer support, otherwise
known as maintenance.  We license our software in arrangements in which the
customer purchases a combination of software, maintenance and/or professional
services, i.e., training and implementation services.  Maintenance, which
includes technical support and product updates, is typically sold with the
related software license and is renewable at the option of the customer on an
annual basis after the first year.  Our professional services and technical
support organizations, which we collectively refer to as our Global Services
Organization, provide a broad range of implementation services, training and
technical support, to our customers and implementation partners.  Our Global
Services Organization has significant product and implementation expertise and
is committed to supporting customers and partners through every phase of the
eBusiness transformation cycle.  Substantially all of our professional service
arrangements are billed on a time and materials basis.  Payment terms for the
above arrangements are negotiated with our customers and determined based on a
variety of factors, including the customer's credit standing and our history
with the customer.

Through global strategic alliances with industry-leading
organizations, we continue to enhance Siebel eBusiness Applications,
ensuring that we continue to fully support our customers' rapidly evolving
technology and business requirements, today and in the future.

Products

Released in the third quarter of 2002, Siebel 7.5 is the
latest version of our eBusiness software.  We believe that Siebel 7.5 is the
industry's most comprehensive suite of Web-based eBusiness software
applications, with approximately 400 applications for sales, marketing, service,
interactive selling, analytics, partner relationship management and employee
relationship management.

Featuring industry-specific best practices and new
functionality for multi-channel sales, marketing, service, and partner and
employee relationship management, Siebel 7.5 enables organizations to leverage
and modify proven business processes to deliver superior customer experiences.
Current versions of Siebel eBusiness Applications interoperate
with J2EE and Microsoft .NET platforms, and future versions will be developed to
run on both J2EE and .NET.

With Siebel 7.5, we offer enhanced, out-of-the-box
industry applications to support segment-specific requirements within
industries. As a pioneer of the industry-specific application model, we
recognize that each industry has different business processes, competitive
challenges, and information systems requirements that cannot be addressed with a
"one size fits all" approach.  As such, Siebel 7.5 provides customers
with 21 industry-specific applications to address the unique business
requirements in the following industries:

|Consumer Sector
Apparel and Footwear
Consumer Goods
Retail | Communications
Wireless
Wireline
Media                                                    
|---------------------------------------------------------- | ------------------------------------------------------------------------------------------
|Energy
Chemicals
Energy
Oil and Gas                        | Financial Services
Institutional Finance
Retail Banking and Brokerage
Insurance
Healthcare
|Industrial
Automotive
High Technology                      | Life Sciences
Clinical
Medical Products
Pharmaceuticals                                   
|Public Sector
Government
Homeland Security                 | Travel and Transportation
Travel and Hospitality                                          

Shipping in 17 languages, Siebel 7.5 meets the rigorous
demands of large-scale global deployments.  With full Unicode support, global
organizations can implement Siebel eBusiness Applications in multiple
languages and across multiple platforms, character sets and countries while
maintaining a single, unified repository.  Companies that deploy Siebel 7.5 and
leverage the Unicode support are able to reduce the time and costs associated
with implementing and maintaining global deployments.

Siebel 7.5 also introduces the Siebel Universal Customer
Master, or Siebel UCM, which unifies customer information across multiple
business units and disparate systems into a comprehensive, accurate and up-to-date
customer profile repository.  Reflecting best practices for effectively
managing customer data, Siebel UCM enables enterprises to maximize cross-selling
opportunities and improve the customer experience, while reducing data
management costs.

Recognizing that customer-driven business processes
require information from multiple applications and data sources, we enable
application interoperability by supporting Web Services and standards-based
integration through UAN.  Taking a standards-based approach to the design and
development of cross-application business processes, UAN leverages the proven
integration server technology of leading vendors.  Customers can easily
integrate data and cross-application business processes from various
applications and benefit from reduced integration and deployment costs.  As part
of UAN development, we continue to invest in making the business services and
business processes incorporated in Siebel 7.5 applications capable of
interacting with Web Services, facilitating seamless business process
execution.

Siebel 7.5 provides significant new functionality within
the Siebel Analytics and Siebel Employee Relationship Management product
lines.  For example, Siebel Analytics 7.5 provides role-based analytic
applications that deliver relevant, actionable, just-in-time intelligence to
employees, partners and customers.  Intelligently analyzing Siebel and
non-Siebel data from historical and real-time sources, including third-party
operational systems, Siebel Analytics 7.5 delivers fact-based and personalized
insight to thousands of decision-makers both inside and outside the
organization.

Siebel 7.5 provides our customers with the cost savings
associated with rapidly deploying a zero-install Web application, along with the
rich, interactive, intuitive user experience available only from a desktop
application.  As with prior releases of Siebel eBusiness Applications,
Siebel 7.5 offers a clear and easy upgrade path for customers, including
automated upgrade functionality, which can result in reduced deployment times
and the lowest total cost of ownership.

The following is a brief discussion of the major product
lines within the Siebel application suite as of December 31, 2002:

Siebel Sales

Siebel Sales provides comprehensive visibility into the sales
pipeline, enabling sales professionals to identify specific actions that will
help them better manage opportunities to rapid closure.  Siebel Sales is
designed to allow organizations to take advantage of embedded sales management,
sales effectiveness and sales motivation best practices with accessibility both
in the office and in the field.  The base application includes Account
Management, Activity Tracking, Assignment Manager, Calendar, Contact Management,
Content Management, Employee Directory, Encyclopedia, Executive Information
System, Global Accounts, Office, Opportunity and Pipeline Management, Paging,
Portal Platform, Replication Manager, Sales Assistant, Service Assistant, System
Software and Workflow.

Siebel Sales options, as of December 31, 2002, include Siebel
Sales Analytics, Siebel Forecasting, Siebel Incentive Compensation, Siebel
Target Account Selling, Siebel Enterprise Selling Process, Siebel Strategic
Selling, Siebel Proposals and Presentations, Siebel Customer Service Information
for Sales, Siebel Partner Management for Sales, Siebel Remote Client, Siebel
Sales Handheld and Siebel Sales Wireless.

Siebel Marketing

The Siebel Marketing product suite enables organizations
to better understand their customers; plan and execute personalized marketing
programs synchronized across all channels; and optimize strategies through
continuous tests, measurement and feedback.  By combining embedded best
practices and world-class technology, organizations can more successfully
acquire, retain and grow profitable customer relationships and maximize the
return on their marketing investment.  The Siebel Marketing base application
includes Account Management, Assignment Manager, Calendar, Campaign Management,
Contact Management, Content Management, Employee Directory, Encyclopedia,
Executive Information System, Global Accounts, Household Management, List
Management, Literature Management, Multi-channel Execution, Office, Opportunity
Management, Paging, Portal Platform, Replication Manager, Response Management,
Sales Assistant, Service Assistant, System Software and Workflow.

Siebel Marketing options, as of December 31, 2002,
include Siebel Marketing Analytics, Siebel Marketing Manager, Siebel Marketing
Server, Siebel Web Marketing, Siebel Events, Siebel Decision Manager, Siebel
Data Quality and Siebel Campaigns.

Siebel Service

Siebel Service enables service organizations to
effectively manage all constituencies involved in the service delivery
process.  The ability to manage this process from start to finish allows
service departments to increase customer satisfaction, service productivity and
revenues.  The base application includes Account Management, Activity
Tracking, Asset Tracking, Assignment Manager, Audit Trail Management, Calendar,
Contact Management, Content Management, Employee Directory, Encyclopedia,
Executive Information System, Global Accounts, Global Time Zone Management,
Office, Paging, Portal Platform, Replication Manager, Sales Assistant, Service
Assistant, Service Request Management, Solution Management, System Software and
Workflow.

Siebel Service options, as of December 31, 2002,
include Siebel Field Service, Siebel Barcode, Siebel Contracts, Siebel
Logistics Manager, Siebel Preventive Maintenance, Siebel Quality Management,
Siebel Repair and Siebel Scheduling.

Siebel Call Center

Siebel Call Center combines Siebel Sales and Siebel
Service functionality to enable call center agents to effectively manage
service, support and sales interactions across multi-channel global call
centers.  With the ability to view integrated sales and service histories for
each customer, call center agents can turn service requests into additional
sales opportunities.  The base application includes Account Management, Activity
Tracking, Assignment Manager, Calendar, Contact Management, Content Management,
CTI, Customer Dashboard, Employee Directory, Encyclopedia, Executive Information
System, Global Accounts, Global Time Zone Support, Message Broadcasting, Office,
Opportunity and Pipeline Management, Paging, Portal Platform, Problem
Resolution, Replication Manager, Sales Assistant, Service Assistant, Service
Request/Trouble Ticket Management, System Software, Web Collaboration API and
Workflow.

Siebel Call Center options, as of December 31, 2002, include
Siebel CTI Connect, Siebel Universal Queuing, Siebel Campaigns, Siebel Order
Management, Siebel Email Response and Service Analytics.

Siebel Web Service

Siebel Web Service applications allow organizations to extend
their service operations to the Internet by intelligently processing inbound
emails and enabling 24x7 customer self-service and assisted service on an
organization's Web site. Customers can resolve their own problems and questions
and escalate unsolved issues to product experts.  Siebel Web Service offers
up-sell and cross-sell recommendations, enabling organizations to improve customer
satisfaction, minimize service costs and increase revenue.

Siebel Web Service applications, as of December 31, 2002,
include Siebel eService, Siebel Email Response, Siebel Partner Web
Services, Siebel Smart Answer and Siebel Collaboration.

Siebel Partner Relationship Management

Siebel Partner Relationship Management, or Siebel PRM,
delivers a global, enterprise-wide partner relationship management platform that
enables organizations to more effectively manage their relationships with
channel and alliance partners, distributors, resellers, agents, brokers and
dealers.  Siebel PRM automates and streamlines the business processes between
organizations and their partners, therefore facilitating collaboration with
partners in sales, service and marketing to increase revenue, improve customer
satisfaction and decrease partner management costs.  The Siebel PRM base
application includes Assignment Manager, Calendar, Content Management, Employee
Directory, Encyclopedia, Executive Information System, Global Accounts,
Marketing Development Funds, Office, Paging, Partner Community, Partner CRM,
Partner Manager, Partner Manager Analytics, Partner Portal, Partner Web
Services, Portal Analytics, Portal Platform, Replication Manager, Sales
Assistant, Service Assistant, System Software and  Workflow.

Siebel PRM options, as of December 31,
2002, include Siebel Partner Commerce, Siebel Wireless, Siebel Reports, Siebel
Training, Siebel Forecasting, Siebel Incentive Compensation, Siebel Advisor,
Siebel Configurator, Siebel Pricer, Siebel Campaigns, Siebel SmartScript, Siebel
Field Service, Siebel Advanced Partner Marketing and Siebel Contracts.

Siebel Employee Relationship Management

Siebel Employee Relationship Management, or Siebel ERM,
helps a company drive superior business execution by aligning its employees'
objectives with the organization's key objectives and driving business unit and
employee performance. Based on the best practices of industry-leading, global
organizations, Siebel ERM provides more than 25 out-of-the-box, fully integrated
applications for executives, managers and employees.  The Siebel ERM base
application includes Assignment Manager, Calendar, Content Management,
Competency Management, Employee Directory, Encyclopedia, Executive Information
System, Global Accounts, News and Microsites, Office, Paging, Portal Platform,
Replication Manager, Sales Assistant, Search, Service Assistant, System Software
and Workflow.

Siebel ERM options, as of December 31, 2002, include
Siebel Objectives and Reviews, Siebel Compensation Planning, Siebel Career
Planning, Siebel Content Services, Siebel Training, Siebel Distance Learning,
Siebel HelpDesk Agent, Siebel HelpDesk Requestor, Siebel Automated Desktop
Support, Siebel Employee Self-Service, Siebel Time & Expense Reporting,
Siebel Projects, Siebel Executive Analytics and Siebel Workforce Analytics.

Siebel Interactive Selling

Siebel Interactive Selling allows companies to more
effectively manage product, pricing and order information by enabling three key
business process areas: Customer Order Management, Product and Catalog
Management, and Pricing Management. Siebel Customer Order Management allows
companies to create, validate and manage customer quotes and orders across
multiple enterprise systems.  Siebel Product and Catalog Management enable
companies to publish dynamic product catalogs containing customizable sales
bundles, configure complex products and services, and analyze product
information from all customer channels.  Siebel Pricing Management enables
companies to plan, deploy, execute and analyze pricing policies across all lines
of business.  Using the best practices embedded within Siebel Interactive
Selling applications, companies can reduce order errors and order cycle time,
while increasing revenue through up-sell and cross-sell effectiveness.

Siebel Interactive Selling products, as of December 31,
2002, include Siebel Configurator, Siebel Pricer, Siebel Quotes, Siebel Orders,
Siebel Sales Catalog, Siebel Advisor, Siebel eSales, Siebel Order
Management, Siebel Product and Pricing Analytics and Siebel Order Analytics.

Siebel Analytics

Siebel Analytics empowers users throughout the extended
enterprise with up-to-the-moment and actionable customer and business insight.
Siebel Analytics enables organizations to leverage the valuable data collected
in Siebel eBusiness Applications, combine this data with information from
any internal or external source, and provide any user-including employees,
suppliers, partners and customers-with a comprehensive and personalized view of
their customers and business operations.

Siebel Analytics options, as of December 31, 2002,
include Siebel Answers, Siebel Delivers, Siebel Sales Analytics, Siebel Service
Analytics, Siebel Marketing Analytics, Siebel Executive Analytics, Siebel
Intelligence Dashboard, Siebel Decision Manager, Siebel Partner Manager
Analytics, Siebel Partner Portal Analytics, Siebel Order Analytics, Siebel
Product and Pricing Analytics, Siebel Incentive Compensation Analytics and
Siebel Workforce Analytics.

Siebel eBusiness Applications, MidMarket
Edition

Siebel eBusiness Applications, MidMarket Edition
are a family of multi-channel sales, marketing and customer service applications
that help small and medium-size companies create a single source of customer
information. Siebel eBusiness Applications, MidMarket Edition make it
easier to sell to, market to, and serve customers across multiple channels,
including the Web, call centers, field sales and reseller networks.  Designed
for fast deployment, Siebel eBusiness Applications, MidMarket Edition
help small and medium-size companies increase their productivity, improve
customer satisfaction and predictably grow revenues.

General Product Options

As of December 31, 2002, general product options
typically available on any of the Siebel base applications include:

- Siebel Advanced Search:  Siebel Advanced Search helps
users to locate information contained in the corporate knowledge base. Siebel
Advanced Search enhances the base Siebel Search capabilities by locating
documents using term proximity, word stemming, advanced thesaurus, term
inflection, fuzzy searching and other searching features.
- Siebel Anywhere:  Siebel Anywhere distributes and
installs upgrade kits for Siebel mobile clients.  Siebel Anywhere can also be
used to distribute or install upgrade kits to Siebel servers and distribute
Siebel Repository File changes, client configuration changes and database
changes.
- Siebel Remote Client:  Siebel Remote Client enables true
mobile computing by providing a comprehensive bi-directional exchange of
information between laptops and corporate servers.  Using Siebel Remote Client,
mobile users can access Siebel eBusiness Applications while out of the
office and later synchronize to upload local changes to the server.
- Siebel Data Quality:  Siebel Data Quality addresses an
organization's need for real-time and batch mode data quality processing.  It
enables customers to identify duplicate account, contact and prospect records by
comparing account and contact names, postal addresses, email addresses and other
fields that customers can define for themselves.  Accordingly, it helps
organizations ensure accurate, consistent and consolidated customer
information.
- Siebel Data Quality Matching Server:  The Siebel Data
Quality Matching Server is a scalable and Unicode-enabled matching engine that
can identify potential duplicate data among existing accounts, contacts and
prospects in the Siebel transactional database.
- Siebel Dun & Bradstreet Integration Solution:  The
Siebel Dun & Bradstreet Integration Solution enables customers to access Dun
& Bradstreet's marketing data, which covers more than 31 million
organizations around the world, and Business and Credit Reports from within
Siebel eBusiness Applications.  The Siebel Dun & Bradstreet
Integration Solution provides the ability to create more targeted marketing
lists, supplies corporate linkage information and provides online access to
selected Dun & Bradstreet reports.
- Siebel Briefings:  Siebel Briefings is a knowledge
management solution that enables employees and partners to more effectively
acquire and retain customers.  Sales, marketing and service professionals are
provided with convenient access to relevant, critical business information about
their accounts, opportunities, competitors and related markets.
- Siebel Reports Server:  The Siebel Reports Server allows
users and partners to schedule, run and distribute reports using an easy-to-use
and intuitive user interface.  Reports can be run in both batch and interactive
modes.
- Siebel Smart Answer for Employees:  Siebel Smart Answer
for Employees leverages the natural language processing technology available in
Siebel Smart Answer to interpret unstructured text and intelligently respond to
inquiries with the appropriate answers.  Siebel Smart Answer enables customer
service representatives to respond to customer inquiries and service requests
faster than they previously could, while still maintaining the personalized and
professional dialog that customers expect.
- Siebel SmartScript:  Siebel SmartScript (formerly
Siebel

Siebel Sync:  Siebel Sync allows users to export contacts
and accounts from Siebel eBusiness Applications to various third-party
applications, including Outlook, Notes, Palm or GroupWise, and allows for
synchronization of these applications with the Calendars and Activities views in
Siebel eBusiness Applications.

Siebel Time and Expense Reporting:  Siebel Time and
Expense Reporting helps consultants, project managers, field service
representatives and call center representatives capture, report and manage
billable time and expenses for their projects, accounts and
opportunities.

Product Development Expense

Since we introduced the first
versions of our products, we have expanded the product footprint in terms of
functional and industry-specific breadth and depth.  Our competitive position
has developed to a large extent because of our emphasis on research and
development.  During 2002 we continued to increase our investment in product
development to further extend our functional and technology leadership and
enhance customer satisfaction.  In the third quarter of 2002, we released Siebel
7.5, which we believe sets the standard for technology leadership in eBusiness
applications.  During 2000, 2001 and 2002, we invested approximately $238.0
million, $333.7 million and $366.2 million, respectively, in additional product
development.  We currently expect that most of our development of new products
and enhancements to existing and future products will be developed internally.
We rely primarily on a combination of patent, copyright, trade secret and
trademark laws, confidentiality procedures and contractual provisions to protect
our proprietary rights.  Please refer to "Risk Factors - We may not be able
to protect our proprietary information" for further discussion of
proprietary technology and intellectual property.

Our past development efforts have resulted in leading
software applications for managing customer, partner and employee relationships.
We believe that our current and future product development efforts will continue
this history of developing leading software applications.  However, our existing
and future development efforts may not be completed within our anticipated
schedules or, if completed, the products may not have the features or quality
necessary to make them successful in the marketplace.  We test all of our
products prior to their general release and only release our products after the
products have equaled or exceeded our high standards.  Despite our vigorous
testing, software products may contain errors or failures, especially when first
introduced or when new versions are released, and could be affected by viruses.
Please refer to "Risk Factors - Software errors or defects in our products
could reduce revenues" for further discussion of risks associated with
product development.

Professional
Services

We provide a proven, phased methodology and wide
range of professional services to Siebel customers and partners through our
worldwide Global Services Organization.  Our Global Services Organization is
committed to supporting customers through every phase of planning, designing,
deploying and using Siebel eBusiness Applications.  With its unique
access to internal Siebel Systems resources, our Global Services Organization
offers in-depth product knowledge and industry-specific expertise through such
offerings as implementation services, review and validation services and user
adoption services.

Implementation Services

While our customers frequently rely on third-party
systems integrators for the majority of their implementation services, our
Global Services Organization often provides a portion of these services to help
mitigate risk and ensure project success.  Our Global Services Organization
partners with the world's leading systems integrators through the Siebel
Alliance Program to perform a portion of these implementation services, thereby
helping to ensure that our customers receive the full array of services
necessary to install, integrate, customize and deploy Siebel eBusiness
Applications.

Services offered by our Global Services Organization
include the Technical Account Manager program, Siebel Expert Services and Siebel
Global Competency Practices.  Technical Account Managers serve as the customer's
technology advocate throughout the entire project by sharing their broad
experience in management, design, development and deployment.  Siebel Expert
Services helps mitigate project risk by delivering technical implementation
audits and reviews throughout the project life cycle.  Siebel Global Competency
Practices offer new product and industry-specific expertise to help
organizations define and implement best practices and business processes for
Siebel eBusiness Applications.

Education and User Adoption Solutions

Our Global Services Organization provides comprehensive
education and adoption solutions for deploying Siebel eBusiness
Applications to end users.  Through a variety of offerings, including technical
training, end user adoption and sales effectiveness methodologies, the Siebel
University and Siebel Multi-channel Effectiveness Services groups help customers
and partners develop competencies needed to fully leverage Siebel
eBusiness Applications.  Specific user adoption offerings help end users
understand and embrace new business processes and Siebel Systems' technologies
to achieve measurable business results.

Technical Support

Our Global Services Organization offers a
comprehensive suite of global support programs designed to ensure implementation
success and customer satisfaction.  Siebel Technical Support, which we refer to
as maintenance, is delivered from 12 support centers around the world, where
technical support engineers deliver responsive and accurate resolution of
service requests via the Internet, email and telephone.

Marketing and Sales

Our sales and service professionals are located in 29
countries, with 56 offices in the United States and 54 offices outside of the
United States.  Our ability to achieve revenue growth will depend in large part
on how successfully we recruit, train and retain sufficient direct sales,
technical and global services personnel and how well we continue to establish
and maintain relationships with our strategic partners.  We believe that the
complexity of our products and the large-scale deployments anticipated by our
customers require a number of highly trained global services personnel.

Our marketing and sales strategy is composed of the
following key elements:

Target Customers in a Broad Range of Industries and the
Public Sector

Our customer base consists of a significant number of
organizations of all sizes, from small businesses to the largest multinational
organizations and government agencies.  Siebel eBusiness Applications'
Web architecture supports the complex needs of the largest global organizations.
We intend to leverage our experience and continue to target sales and marketing
activities through our direct sales force and partners to expand worldwide
market acceptance of Siebel eBusiness Applications.

Maintain and Extend Advanced Technology Position

We provide what we believe to be the industry's most
comprehensive family of multi-channel eBusiness applications, enabling
organizations to sell to, market to and serve customers across multiple channels
and lines of business.  Siebel eBusiness Applications enable
organizations to manage, synchronize and coordinate their customer touchpoints.
Utilizing advanced information technology, Siebel eBusiness Applications
are built on a component-based architecture that provides a broad range of
functionality for eBusiness applications deployments.

We intend to continue investing substantial resources in
technological research and developments.  Our current technological research and
development efforts include:

Universal Application Network: Our Universal
Application Network, or UAN, is a customer-centric solution that provides a
library of pre-built, industry-specific business processes that can be executed
across multiple systems of record and business logic-resulting in reduced cost,
complexity and time to deployment.  These processes embed industry best
practices and can be easily modified to adapt to unique requirements and
changing market conditions.  Based on emerging XML and Web Services standards,
UAN includes an industry-standard specification for defining business processes
that is supported by the leading providers of integration servers, including BEA
Systems, IBM, Mercator, Microsoft, SeeBeyond, TIBCO, Vitria, and webMethods.  As
part of UAN development, we will continue to invest in making the business
services and business processes incorporated in Siebel eBusiness
Applications capable of interacting with Web Services, facilitating seamless
business process execution.

Smart Web Architecture:  Introduced with Siebel 7, the
Siebel Smart Web Architecture combines a zero-footprint, browser-based Web
client with levels of interactivity traditionally available only in Windows
applications.  With Siebel Smart Web Architecture, organizations can generate
cost savings associated with administering a zero-install Web client, while
providing a rich, interactive and productive end user experience.

We will continue to enhance this architecture and invest
in the development of support for J2EE and .NET.  Specifically, we are building
native components that run in J2EE and .NET and that can read our application
meta data, enabling organizations to take advantage of the services made
available by both platforms.  This strategy will enable us to support
organizations that run J2EE, .NET or both.

Full Life Cycle Management to Reduce Total Cost of
Ownership:  Our technology makes it easier for organizations to manage the
full application deployment life cycle, thereby lowering the total cost of
ownership.  The Siebel eBusiness architecture enables organizations to configure
their Siebel eBusiness Applications once and then deploy that same
configuration to all users.  Once an organization makes customizations to the
underlying objects, the customizations can operate automatically across nearly
all types of client computing devices.

This technology is designed to enhance usability, provide
significant cost savings in deployment and implementation costs, and assure
consistency across customer-facing channels.  In addition, automatic application
upgrades and remote software distribution contribute to reduce the total cost of
ownership associated with deploying Siebel eBusiness Applications and
help to ensure the success of the deployment.

Global Deployment Support: We designed and built
Siebel eBusiness Applications to support global deployments, including
most major European and Asian languages.  Siebel eBusiness Applications
support single- and double-byte characters, multiple currencies, automatic
currency conversions including the EMU standards for supporting the euro, and
real-time interfaces to accept new exchange rates from leading online
services.

Siebel eBusiness Applications provide support for
multiple organizations, allowing companies to define different organizational
structures to manage data visibility, security and business processes across
both centralized and decentralized deployment locations.  We continue to expand
the global deployment capabilities of previous releases with significant
enhancements in the areas of Unicode support, multilingual data, installation
and localization for global deployments, resulting in a dramatic lowering of the
deployment and maintenance costs for global organizations.

Product Footprint:  We continue to invest in
broadening our product footprint and in enhancing the features and functionality
of Siebel eBusiness Applications.  Significant new functionality is
included in our new strategic applications, UAN, Siebel ERM and Siebel
Analytics.  We are also increasing our industry expertise by broadening our line
of industry-specific applications and in expanding the footprint of our existing
industry applications.

Business Process Computing:  We have modeled
hundreds of cross-industry and industry-specific customer-centric business
processes, which are now being embedded in Siebel eBusiness Applications.
Our business processes are incorporated in UAN, resulting in lower cost of
integration.  We also support business process computing by including our
business processes in the Siebel Implementation Plan, allowing for faster and
easier configuration and implementation.

Develop and Maintain Global Strategic Alliances

Having long recognized the power and value of strategic
alliances, one of our core competencies is our ability to develop and maintain
long-term global strategic partnerships with the largest and most influential
corporations in the technology marketplace, including Accenture, Avaya, Cap
Gemini Ernst & Young, Deloitte Consulting, Hewlett-Packard Compaq, IBM,
Microsoft and Sun Microsystems.  These global strategic alliances with industry
leaders help ensure that we deliver solutions that meet our global customers'
sales, marketing and customer service requirements.

In addition, we have strategic relationships with more
than 500 hardware, software, support, integration and training partners to help
ensure the successful deployment of Siebel eBusiness Applications across
the globe.  We believe these alliances enable us to deliver the most
comprehensive suite of eBusiness solutions to our customers.

Our global strategic partners as of December 31, 2002,
include the following industry leaders:

|System Integrator

Accenture LTD
American Management Systems, Inc.
BearingPoint, Inc.
Cap Gemini Ernst & Young S.A.
Deloitte Consulting
IBM Corporation
Lockheed Martin Corporation
Siemens Business Services GmbH & Co.
SYNAVANT, Inc.
Unisys Corporation | Platform

Fujitsu Siemens Computers B.V.
Hewlett-Packard Compaq
IBM Corporation
Microsoft Corporation
Pitney Bowes, Inc. 
Precision Research Corporation 
Sun Microsystems, Inc.
Xerox Corporation
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Support Successful Customer Implementations

Our success depends on our customers' successful
implementations of Siebel eBusiness Applications.  To this end, we
actively support the customer's deployment efforts by providing Internet and
telephone technical support and comprehensive instructor-led training and by
assigning an account management team to each customer that consists of a sales
representative, a technical account manager and an executive sponsor.

Expand Global Capabilities

We currently have offices in Argentina, Australia,
Austria, Belgium, Brazil, Canada, China, Columbia, the Czech Republic, Denmark,
Finland, France, Germany, Ireland, Italy, Japan, Korea, Mexico, The Netherlands,
Norway, Portugal, Scotland, Singapore, South Africa, Spain, Sweden, Switzerland,
the United Kingdom and the United States and have introduced localized versions
of Siebel eBusiness Applications in major European and Asian markets.  As
market conditions warrant, we may increase our direct sales and marketing
activities worldwide.

During 2000, 2001 and 2002, no individual customer
accounted for more than 10% of our revenues.  International license revenues for
2000, 2001 and 2002 were $441.7 million, $479.3 million and $290.8 million,
respectively, representing 40%, 45% and 42% of software license revenues,
respectively.  Total international revenues for 2000, 2001 and 2002 were $648.5
million, $838.1 million and $619.2 million, respectively, representing 36%, 40%
and 38% of total revenues, respectively.  Please refer to Note 11 to the
accompanying consolidated financial statements for further discussion of our
geographic operations.

Our international operations are subject to a variety of
risks, including: (i) foreign currency fluctuations; (ii) economic or political
instability; (iii) shipping delays; and (iv) various trade restrictions.  Please
refer to "Risk Factors - Our international operations involve unique
risks" for further discussion of risks related to foreign operations.

Competition

Our products target the eBusiness systems market.  This
market is highly competitive, rapidly changing and significantly affected by new
product introductions and other market activities of industry participants.  Our
products are targeted at the emerging market for customer, partner and employee
relationship information systems.  We face competition primarily from our
customers' internal information technology departments and systems integrators,
as well as other application software providers that offer a variety of products
and services designed to address this market.  We believe 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.  We may not be able to
compete successfully against such internal development efforts.

During 2001 and 2002, the global economy impacted the
competitive dynamics of the eBusiness systems market in which we compete in
variety ways.  Specifically, our customers and prospective customers are
increasingly evaluating their software procurement needs with a focus on the
long term total cost of ownership (which includes the cost of the license and
the cost of professional services, such as implementation, training, and
technical support).  With significantly lower license costs from competitive
solutions, and no license cost for internal projects, our success is dependent
on our ability to justify both the lowest total cost of ownership and overall
return on investment.

We believe that the market for global eBusiness
information systems has historically not been well served by the application
software industry.  We have been able to capitalize on this inability and, as a
result, we believe we have become a leading provider of eBusiness applications
that manage customer, partner and employee relationships.  In addition, in
response to changing competitive dynamics and focus on the total cost of
ownership, we led a team of systems integrators and software vendors in a
collaborative effort to reduce the cost of integrating software applications.
Through this collaborative effort, we released UAN in the fourth quarter of
2002.  UAN is designed to address one of the primary challenges currently facing
the software applications industry: driving down the cost of application
ownership and maintenance.  Please refer to "Risk Factors - To be
successful, we must effectively compete in the eBusiness systems
market."

Internal Development

Many of our customers and potential customers have in the
past attempted to develop sales, marketing, customer service and employee
relationship 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.  To compete successfully, our products must conform to
the customer's information technology standards, scale to meet the needs of
large enterprises, operate globally and cost less than the result of an internal
development effort.  We may not be able to compete effectively against these
internal development efforts.

Custom System Integration Projects

We also face competition from systems integrators engaged
by companies to build a custom development application.  The introduction of a
systems integrator typically increases the likelihood of success for the
customer.  To successfully compete in this area, we must demonstrate and provide
to the customer the cost savings and advantages of a configurable, upgradable
and commercially supported product developed by a dedicated professional
software organization.

We frequently rely on a number of systems consulting and
systems integration firms for a substantial portion of implementation and other
global services, as well as recommendations of our products during the
evaluation stage of the purchase process.  Although we seek to maintain close
relationships with these service providers, many of them have similar and often
more established relationships with our competitors.  If we are unable to
develop and retain effective, long-term relationships with these third parties,
our competitive position could be materially and adversely affected.  Further,
some of these third parties have significantly greater resources than we do and
may market software products that compete with us and may otherwise reduce or
discontinue their relationships with or support of us and our products.

Other Competitors

A large number of personal, departmental and other
products exist in the eBusiness applications market. Our competitors include a
number of companies that compete with us primarily within a particular product
line (e.g., analytics, interactive selling, etc.) and/or the prospective
customer's industry (e.g., life sciences, financial services, etc.).  These
companies include Amdocs Limited; CAS GmbH; Chordiant Software, Inc.; Dendrite
International, Inc.; E.piphany, Inc.; FrontRange Solutions, Inc.; Interact
Commerce Corporation; Kana Software, Inc.; ONYX Software Corporation; Pivotal
Corporation; and Salesforce.com, Inc., among many others.  In addition, our
competitors include several companies, such as Oracle Corporation, PeopleSoft,
Inc. and SAP AG, which compete in a majority of the Company's product lines.

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 we do.  In addition, many competitors have well-established
relationships with our current and potential customers.  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 we can.

We believe that we compete favorably in this marketplace
based on the following competitive advantages: a breadth and depth of
functionality, a modern and enduring Web-based product architecture, tailored
industry-specific design, an ability to manage all customer interactions support
across multiple channels, configurable business objects, support for the global
enterprise, scalability allowing support for large user communities and
strategic alignments with industry leaders.  In general, we have priced our
products at or above those of many of our competitors, and we believe this
pricing is justified by the scope of functionality delivered and the performance
characteristics afforded by our products.

There are many factors that may increase competition in
the eBusiness systems market, including: (i) entry of new competitors; (ii)
alliances among existing competitors; (iii) alliances between our competitors
and systems integrators; (iv) consolidation in the software industry or among
systems integrators; and (v) technological changes or changes in the use of the
Internet.  Increased competition may result in price reductions, reduced gross
margins or loss of market share, any of which could materially and adversely
affect our business, financial condition or results of operations.  We may not
be able to compete successfully against current and future competitors or
competitive pressures faced by us may materially and adversely affect our
business, financial condition or results of operations.

Employees

As of December 31, 2002, we had a total of 5,909
employees, of which 1,211 were engaged in sales and marketing; 1,644 were
engaged in product development; 2,441 were engaged in global services; and 613
were engaged in finance and administration.  Our future performance depends in
significant part upon the continued service of our key technical, sales and
senior management personnel, particularly Thomas M. Siebel, our Chairman and
Chief Executive Officer, none of whom is bound by an employment agreement.  The
loss of the services of one or more of our key employees could have a material
adverse effect on our business, financial condition or results of operations.
Our future success also depends on our continuing ability to attract, train and
retain highly qualified technical, sales and managerial personnel.  Competition
for such personnel has been intense in the past, and we cannot assure you that
we can retain our key technical, sales and managerial personnel in the future.
None of our employees are represented by a labor union.  We have not experienced
any work stoppages and consider our relations with our employees to be good.

Availability of this Report

We intend to make this Annual Report on Form 10-K and other periodic reports
publicly available on our Web site (www.siebel.com) without charge immediately following our
filing with the Securities and Exchange Commission.  We assume no obligation to
update or revise any forward-looking statements in this Annual Report on Form
10-K, whether as a result of new information, future events or otherwise, unless
we are required to do so by law.  A copy of this Annual Report on Form 10-K is
available without charge upon written request to:  Corporate Secretary, Siebel
Systems, Inc., 2207 Bridgepointe Parkway, San Mateo, California, 94404.

Item 2.  Properties

Our principal administrative, sales, marketing, support
and research and development facilities are located in San Mateo, California,
pursuant to leases that expire between April 2005 and December 2015, and
Emeryville, California, pursuant to a lease that expires in March 2013.  As of
December 31, 2002, we were occupying approximately 700,000 square feet in our
San Mateo locations and approximately 265,000 square feet in our Emeryville
location.  We currently also occupy a number of domestic and international sales
and support offices pursuant to leases that expire between 2003 and 2022.

We believe that our current facilities are adequate for
our current needs and suitable additional or substitute space will be available
as needed to accommodate expansion of our operations.  See Note 5 to the
Consolidated Financial Statements for information regarding our lease
obligations.

Item 3.  Legal Proceedings

We are subject to legal proceedings and claims, either
asserted or unasserted, that arise in the ordinary course of business.  While
the outcome of these proceedings and claims cannot be predicted with certainty,
management does not believe that the outcome of any pending legal matters will
have a material adverse effect on our consolidated financial position, results
of operations or cash flows.

Item 4.  Submission of Matters to a Vote of Security
Holders

No matters were submitted to a vote of our security
holders during the fourth quarter of 2002.

PART II

Item 5.  Market for Registrant's Common Equity and Related
Stockholder Matters

(a) Our common stock is traded on the Nasdaq
National Market under the symbol "SEBL."  The following high and low
sales prices were reported by Nasdaq in each quarter during the last two
years.

`High      Low
                                             -------- --------
Quarter Ended March 31, 2001................ $ 84.50  $ 24.14
Quarter Ended June 30, 2001.................   55.90    22.95
Quarter Ended September 30, 2001............   50.91    12.32
Quarter Ended December 31, 2001.............   31.06    12.24
Quarter Ended March 31, 2002................   38.38    27.25
Quarter Ended June 30, 2002.................   34.27    12.55
Quarter Ended September 30, 2002............   14.92     5.72
Quarter Ended December 31, 2002.............    9.50     5.33`

As of December 31, 2002, we had approximately 1,760
holders of record of our common stock.  Our policy has been to reinvest earnings
to fund future growth and, accordingly, we have never paid any cash dividends on
our common stock and do not expect to pay any such dividends in the foreseeable
future.  The last reported sale price of our common stock on February 7, 2003,
was $8.21 per share.

Item 6.  Selected Financial Data

The following selected financial data should be read in
conjunction with our consolidated financial statements and notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this annual report.  The selected
financial data for each of the years in the three-year period ended December 31,
2002, and as of December 31, 2001 and 2002, is derived from our consolidated
financial statements that have been included in this annual report.  The
selected financial data as of December 31, 1998, 1999 and 2000 and for the years
ended December 31, 1998 and 1999, is derived from consolidated financial
statements that have not been included in this annual report.

For each of the periods presented, our financial data has
been restated to reflect the acquisitions of Scopus Technology, Inc. in 1998;
OnTarget, Inc. in 1999; and OpenSite Technologies, Inc., OnLink Technologies,
Inc. and Janna Systems Inc. in 2000; all of which have been accounted for as
poolings-of-interests.

`Year Ended December 31,
                                                             --------------------------------------------------------------
                                                                1998        1999         2000         2001         2002
                                                             ----------  -----------  -----------  -----------  -----------
                                                                   (in thousands, except per share data and employees)
Operating Data:                                                                                                             
   Total revenues..........................................  $ 421,554   $  822,454   $1,820,206   $2,084,596   $1,635,307
   Operating income (loss) (1) (2).........................  $  64,469   $  161,187   $  322,535   $  357,882   $  (94,262)
   Net income (loss) (1) (2)...............................  $  42,290   $  110,025   $  221,899   $  254,575   $  (35,704)
   Net income (loss) available to
    common stockholders (1) (2) (3)........................  $  41,926   $   56,861   $  123,144   $  254,575   $  (35,704)
   Diluted net income (loss) per common share (1) (2) (3)..  $    0.10   $     0.12   $     0.24   $     0.49   $    (0.08)
   Basic net income (loss) per common share (1) (2) (3)....  $    0.11   $     0.15   $     0.29   $     0.56   $    (0.08)
   Cash and short-term investments.........................  $ 242,350   $  685,199   $1,152,584   $1,656,655   $2,161,604
   Total assets............................................  $ 464,063   $1,275,601   $2,161,741   $2,744,844   $3,033,018
   Convertible subordinated debentures.....................  $      --   $  300,000   $  300,000   $  300,000   $  300,000
   Mandatorily redeemable convertible
    preferred stock........................................  $   4,818   $   80,459   $       --   $       --   $       --
   Total stockholders' equity..............................  $ 299,068   $  644,670   $1,279,946   $1,836,102   $1,957,460
   Cash flows from operations..............................  $  86,430   $   89,746   $  438,568   $  588,201   $  433,203
   Employees...............................................      1,655        3,604        7,389        7,403        5,909`

1. The Company completed a restructuring of its operations
and an associated workforce reduction (the "Restructuring") and a
tender offer for certain employee options (the "Option Repurchase")
during 2002, which are discussed further in Notes 2 and 7 to our consolidated
financial statements, respectively.  Accordingly, operating income for 2002 has
been reduced by $205.3 million related to the Restructuring and $54.9 million
related to the Option Repurchase.  On an after-tax basis, these charges reduced
earnings for 2002 by an aggregate of $166.5 million.
2. In accordance with SFAS No. 142 "Goodwill and Other
Intangible Assets" ("SFAS 142"), the Company ceased amortizing
goodwill on January 1, 2002.  Amortization of goodwill was not significant for
any period presented in the above table.  Please refer to Note 13 to the
accompanying consolidated financial statements for a further discussion of the
impact on Company's operations of ceasing amortization of goodwill.
3. Net income has been reduced by the accretion of
OpenSite's mandatorily redeemable convertible preferred stock to determine net
income available to common stockholders.  The accounting for OpenSite's
mandatorily redeemable convertible preferred stock required non-cash accretion
to the then current fair value of the common stock into which the mandatorily
redeemable convertible preferred stock was convertible.  This resulted in a
non-cash charge to accretion and offsetting credit to mandatorily redeemable
convertible preferred stock for each of the years ended December 31, 1998, 1999
and 2000, the only periods in which the mandatorily redeemable convertible
preferred stock was outstanding.  The amount of accretion for a statement of
operations period was dependent upon how much the fair value of OpenSite's
common stock fluctuated during that period.  In connection with our acquisition
of OpenSite, the holders of the mandatorily redeemable convertible preferred
stock converted their shares pursuant to its existing terms on a one-for-one
basis into shares of OpenSite's common stock.  Accordingly, we stopped recording
accretion on the mandatorily redeemable convertible preferred stock on May 17,
2000, the date of acquisition.

Item 7.  Management's Discussion and Analysis of
Financial Condition and Results of Operations

The Company's consolidated financial statements are
included following Item 15 of this Annual Report on Form 10-K.  The following
discussion is designed to provide a better understanding of these financial
statements, including the Company's business, its performance over the past
three years, key factors that impacted this performance and risks that may
impact the Company's on-going operations.

Overview of the Company's Business

Siebel Systems is a leading provider of eBusiness
applications software.  Siebel eBusiness Applications are a family of
enterprise applications software that enables an organization to better manage
its most important relationships: its customer, partner and employee
relationships.  Siebel eBusiness Applications are designed to meet the
information system requirements needed to manage these relationships for
organizations of all sizes, from small businesses to the largest multinational
organizations and government agencies.  The Company's customer relationship
management applications enable an organization to sell to, market to, and serve
its customers across multiple channels and lines of business.  The Company's
partner relationship management applications seamlessly unite the organization's
partners, resellers and customers in one global information system to facilitate
greater collaboration and increased revenues, productivity and customer
satisfaction.  The Company's employee relationship management applications
enable an organization to drive employee and organizational performance and
increase employee satisfaction through the support of each stage of the employee
life cycle.  By deploying the comprehensive functionality of Siebel
eBusiness Applications to better manage their customer, partner and
employee relationships, the Company's customers achieve high levels of
satisfaction from these constituencies and improve their competitiveness in
their markets.

Siebel Systems recognizes that each industry has
different business processes, competitive challenges and information systems
requirements, which cannot be addressed with a "one size fits all"
eBusiness approach.  Accordingly, Siebel eBusiness Applications are
available in 21 industry applications designed for specific segments within
multiple industries, including financial services, communications, travel and
transportation, energy, the consumer sector, life sciences, the industrial
sector and the public sector.  Providing best-of-class eBusiness functionality,
Siebel eBusiness Applications enable organizations to create a single
source of customer information that sales, service and marketing professionals
can use to tailor product and service offerings to meet each of their customers'
needs.  By using Siebel eBusiness Applications, organizations can develop
new customer relationships, profitably serve existing customers, and integrate
their systems with those of their partners, suppliers and customers, regardless
of location.

The Company and its subsidiaries are principally engaged
in the design, development, marketing and support of Siebel eBusiness
Applications.  Substantially all of the Company's revenues are derived from a
perpetual license of these software products and the related professional
services and customer support, otherwise known as maintenance.  The Company
licenses its software in multiple element arrangements in which the customer
purchases a combination of software, maintenance and/or professional services,
i.e., training, implementation services, etc.  First-year maintenance, which
includes technical support and product updates, is typically sold with the
related software license and is renewable at the option of the customer on an
annual basis after the first year.  The Company's Global Services Organization
provides professional services, which include a broad range of implementation
services, training and technical support, to the Company's customers and
implementation partners.  The Company's Global Services Organization has
significant product and implementation expertise and is committed to supporting
customers and partners through every phase of the eBusiness transformation
cycle.  Substantially all of the Company's professional service arrangements are
billed on a time and materials basis.  Payment terms for the above arrangements
are negotiated with the Company's customers and determined based on a variety of
factors, including the customer's credit standing and the Company's history with
the customer.

The Company plans to continue its efforts to develop
software applications that meet its customers' and potential customers' changing
business needs and to further reduce the total cost of ownership of the
Company's software applications through the introduction of the Company's newest
product Universal Application Network, or UAN.  The Company regularly faces
competition from new entrants to the Company's product market.  The Company will
continue to take various steps, including the introduction of new products,
reducing prices or other incentives, at such times as the Company deems
appropriate, in order to further increase the acceptance of the Company's
products.

Overview of 2002 Results

Throughout much of 2001, the global economy was in the
midst of a downward course that was so pronounced that many economists believed
that several countries, most notably the United States, Japan and Germany, had
slipped toward a recession.  While the global economy declined during much of
2001, there were indications in the fourth quarter of 2001 and the first part of
the first quarter of 2002 that an end to the economic slow-down appeared to be
forthcoming.  Throughout 2002 much of the economic data did indeed appear to
indicate that macroeconomic conditions were stabilizing; however, capital
spending by corporations, and more specifically information technology spending,
appears to be lagging behind the overall economic recovery.  Specifically,
according to industry reports, worldwide spending by corporations on information
technology as a percentage of the surveyed companies' total revenues decreased
by 11% during 2002 and in terms of absolute dollars it decreased by
approximately 3%.  This compared to no growth in terms of absolute dollars of
worldwide information technology spending in 2001 and 16% growth in 2000.

While there are undoubtedly numerous reasons for the lag
in corporate information technology spending, the Company believes that the
primary reason for the decrease in information technology spending relates to
corporations intensifying their efforts to identify and realize potential cost
savings in these difficult economic circumstances.  In addition, in the years
preceding 2001 and 2002, many corporations made capital expenditures in
anticipation of future growth that did not materialize, thereby impacting their
capital expenditures in 2001 and 2002.  The geopolitical uncertainties and
investors' concern regarding corporate governance have only exacerbated
corporations' general cautiousness in setting their capital spending budgets.

The Company's operations and financial performance during
2002 were impacted by these economic conditions and uncertainties and the
resulting decrease in information technology spending.  Specifically, the
Company's revenue growth and profitability depend in large part on the overall
global economic and business conditions, business and consumer confidence in the
economy, and the demand for information technology, particularly within the
markets in which the Company offers industry-specific versions of its products.
Many of the Company's customers and potential customers have: (i) delayed the
initiation of the purchasing process; (ii) increased the evaluation time to
complete a software purchase; and/or (iii) reduced their capital expenditure
budgets, thereby restricting their software procurement to well-defined current
needs.  Increased competition in the market for the Company's products has also
contributed to these changes and lead to a more volatile purchasing cycle for
the Company's software applications.  As a result of these factors, both the
number of software license revenue transactions and average transaction size
were negatively impacted during 2002, with individual transactions generating
license revenues greater than $5 million affected to the greatest extent.

Despite these difficult economic challenges, the Company
was able to improve many of its key operating metrics, as discussed further
below; resize its operations to better align its costs with anticipated
revenues; and continue its ongoing technological leadership through increased
investment in product development and the release in the second half of 2002 of
Siebel 7.5 and UAN, a standards-based, vendor-independent application
integration solution.  The Company proactively addressed the challenging
economic conditions by setting five broad objectives at the beginning of 2002,
which guided management's decisions: (i) operate a cash-positive, profitable
business; (ii) maintain and improve customer satisfaction levels; (iii) maintain
and improve the Company's market leadership; (iv) maintain the Company's product
leadership in eBusiness applications software; and (v) continue to develop
solutions for the Company's customers that lower the total cost of integrating
software applications.  To better enable the Company to effectively achieve
these five objectives, management undertook the following actions during
2002:

- The Company completed a Restructuring of its operations
in order to better align the Company's cost structure with its anticipated
future revenues.  The Company believes that the Restructuring will reduce its
future operating costs and related cash requirements, thereby strengthening the
Company's future operating performance.  Please refer to
"Restructuring" below and to Note 2 to the accompanying consolidated
financial statements for an explanation and further discussion of the
Restructuring.
- The Company repurchased 28.1 million employee stock
options with exercise prices equal to or greater than $40.00 per share on
September 30, 2002.  The Company repurchased these options in order to: (i)
improve employee morale by realigning the cash and equity components of its
compensation programs; (ii) eliminate the distraction to its employees of
significantly out-of-the-money stock options; and (iii) reduce the number of
outstanding stock options relative to the number of shares outstanding, or
"option overhang," thereby reducing future potential dilution to
existing stockholders.  Please refer to "Option Repurchase" below and
to Note 7 to the accompanying consolidated financial statements for an
explanation and further discussion of the repurchase of these stock
options.
- The Company maintained the cost controls that it
initiated in 2001 and, accordingly, reduced the discretionary portion of its
cost structure to near minimal levels during 2002.  Specifically, management
continued to reduce advertising expenditures; maintained the Chief Executive
Officer salary at one dollar per year; maintained the previously established 20%
reductions in senior executive compensation; reduced bonuses for all employees,
including officers; deferred merit increases until the third quarter of 2002;
and reduced discretionary expenditures, such as travel and
recruiting.
- The Company continued its requirement of obtaining
competitive bids for its purchases, where appropriate, and required Chief
Executive Officer approval for all significant purchases.
- To ensure that the Company maintains continuity of
business operations under adverse circumstances, including a significant
geopolitical dislocation or earthquake in the San Francisco Bay Area, the
Company continued to strengthen its data communications and customer service
infrastructure.  In October 2002, the Company completed a redundant backup
information technology infrastructure site in Salt Lake City, Utah, thereby
strengthening its ability to provide high-quality customer service globally even
in the event of a significant and sustained system outage at any of the
Company's facilities.
- The Company continued its focus on customer satisfaction
by leading a team of systems integrators and software vendors in a collaborative
effort to reduce the cost of integrating software applications.  Through this
collaborative effort, the Company released UAN in the fourth quarter of 2002.
UAN is designed to address one of the primary challenges currently facing the
software applications industry: driving down the cost of application ownership
and maintenance.

As a result of these actions, the Company believes it was
able to maintain its high customer satisfaction levels, maintain its market
share in the majority of the product categories in which it operates, continue
as a technology leader in the customer relationship management market, and
continue its efforts to lower the total cost to its customers of integrating
software applications.  In addition, information technology surveys indicate
customer relationship management software is among the top spending priorities
of corporations and, accordingly, the Company believes it is well positioned for
future growth when information technology spending returns to normalized levels.
Excluding the costs relating to the Restructuring and Option Repurchase, the
Company was able to operate a cash-positive, profitable business in
exceptionally challenging economic times.  In addition, the Company achieved the
following financial results:

- Total expenses, excluding the cost of the Restructuring
and the Option Repurchase, decreased by 15%, from $1,726.7 million in 2001 to
$1,469.4 million in 2002.
- Cash and short-term investments increased by $504.9
million, or 30%, from $1,656.7 million as of December 31, 2001, to $2,161.6
million as of December 31, 2002, representing approximately 60% and 71% of total
assets, respectively.  During the periods of deteriorating global economic
conditions of 2001 and 2002, the Company increased cash and short-term
investments by $1,009.0 million, or 88%, primarily through cash flows from
operations.
- Days sales outstanding decreased from 80 days and 73 days
as of December 31, 2000 and 2001, respectively, to 63 days as of December 31,
2002.
- Cash flows from operations were
$588.2 million and $433.2 million during 2001 and 2002,
respectively.
- Working capital increased by 22%, from $1,584.4 million
as of December 31, 2001, to $1,940.3 million as of December 31,
2002.
- Deferred revenue, which consists primarily of deferred
maintenance revenue, increased by 12%, from $241.0 million as of December 31,
2001, to $270.6 million as of December 31, 2002.
- Stockholders' equity increased by 7%, from $1,836.1
million as of December 31, 2001, to $1,957.5 million as of December 31,
2002.

As a result of current economic uncertainties and
concerns regarding the accounting practices of publicly traded companies, the
Company believes that three specific factors will increasingly become important
measures of a company's overall performance and value: (i) positive cash flows
from operations; (ii) positive earnings that are reported in accordance with
both the form and the intent of generally accepted accounting principles; and
(iii) a strong balance sheet.  Since shipment of its first product in the fourth
quarter of 1994, the Company's operations have produced positive annual cash
flows.  Excluding the impact of the Restructuring and the Option Repurchase, the
Company's operations have also produced positive annual earnings during this
period.  The Company believes that its financial position is strong, with total
assets of $3,033.0 million, cash and short-term investments of $2,161.6 million,
working capital of $1,940.3 million and stockholders' equity of $1,957.5
million.

The Company believes the above actions will better enable
the Company to return to positive revenue growth and improved operating
performance.  As the Company begins 2003, management has developed additional
goals that, if accomplished, will further strengthen the Company's financial
position and build on the actions initiated by management during 2002.  These
broad objectives include:

- Increase software license revenue from the Company's core
customer relationship management products and verticals;
- Continue to increase market share and software license
revenues in the Company's newest product lines: UAN, Siebel ERM, and Siebel
Analytics;
- Increase the Company's customer base in key vertical
markets, such as Life Sciences, Public Sector, Retail, and Travel and
Transportation;
- Identify opportunities to expand product lines, both
organically and through acquisition;
- Improve the execution within the Company's sales
organization;
- Grow professional services, maintenance and other
revenues;
- Commence new cost control initiatives to further reduce
total cost per employee; and
- Expand operating margins.

The Company is committed to pursuing these objectives and
building on the initiatives undertaken during 2002, thereby allowing the Company
to return to positive revenue growth and to expand its operating margins.  In
addition, the Company will continue to follow its high professional standards in
measuring and reporting its performance against these objectives.  The Company
believes that the application of accounting standards and the related
disclosures in the public filings with the Securities and Exchange Commission
are as important as a company's reported financial position, results of
operations and cash flows.  The Company believes that its accounting policies
are prudent and provide a clear view of the Company's financial performance.
The Company utilizes its internal audit function to help ensure that it follows
these accounting policies and maintains its internal controls.  The Company has
formed a Disclosure Committee, composed primarily of senior financial and legal
personnel, to help ensure the completeness and accuracy of the Company's
financial results and disclosures.  In addition, prior to the release of the
Company's financial results, key members of the Company's management review the
Company's annual and quarterly results and key accounting policies and estimates
with its Audit Committee, which is composed of independent members of the
Company's Board of Directors.

Restructuring

As discussed above, throughout 2001 and 2002 the Company
reduced the discretionary portion of its operating costs to near minimal levels.
As a result of the continued downturn in the information technology industry
during 2002, certain of the Company's key operating metrics, such as total
revenue, operating margin and revenue per employee, continued to decline from
the Company's historical levels.  In response to this decline, the Company
announced a planned Restructuring of its operations in July 2002, which was
completed in December 2002.  The Restructuring was intended to: (i) strengthen
the Company's competitive position; and (ii) reduce its cost structure and
thereby improve the Company's revenue per employee, operating margin and overall
operating performance.

The Company recognized a total charge related to this
Restructuring of $205.3 million, of which the Company recognized $109.4 million
in the third quarter of 2002 and $95.9 million in the fourth quarter of 2002.
The Restructuring charge is comprised primarily of: (i) severance and associated
employee termination costs related to the reduction of the Company's workforce;
(ii) lease termination costs and other costs associated with permanently
vacating certain facilities; and (iii) impairment costs related to certain
long-lived assets that were abandoned in connection with the Company's consolidation
of its facilities.

As part of the Restructuring, the Company reduced its
workforce by a total of approximately 1,150 employees, or 16%.  This workforce
reduction affected substantially all of the Company's organizations and
geographical regions.  The costs associated with the Company's workforce
reduction consist primarily of severance, COBRA benefits, payroll taxes and
other associated employment termination costs.

As a result of the workforce reduction and previous
employee attrition, certain of the Company's facilities were under-utilized and
certain facilities that were scheduled to be occupied in early 2003 were
expected to be under-utilized.  Accordingly, during the third and fourth
quarters of 2002, the Company consolidated its workforce into existing
facilities, thereby permanently removing from its operations certain facilities
then occupied and facilities that the Company does not plan to occupy.  The
facilities permanently removed from the Company's operations were primarily
located in Emeryville and San Mateo, California; Egham, England; and several
smaller offices in North America and Europe.  The costs associated with the
Company's facilities consolidation primarily relate to lease termination costs,
costs associated with satisfying remaining lease commitments, and expected
brokerage and other re-letting costs, partially offset by estimated sublease
income.  The Company is in the process of negotiating with its lessors
appropriate lease termination fees and/or seeking suitable subtenants of these
facilities.  The Company's estimates of the excess facilities charge may vary
significantly depending, in part, on factors which may be beyond the Company's
control, such as the Company's success in negotiating with lessors, the time
periods required to locate and contract suitable subleases and the market rates
at the time of such subleases.  Adjustments to the facilities reserve will be
made if further consolidations are required or if actual lease exit costs or
sublease income differ from amounts currently expected.

As part of the consolidation of the Company's facilities,
certain leasehold improvements, furniture and fixtures were abandoned in the
third and fourth quarters of 2002.  As a result, the Company recorded a non-cash
charge equal to the net book value of these abandoned long-lived assets in
Restructuring-related expenses.

Subject to the timely and successful implementation of
the Restructuring, the Company believes that the Restructuring will further
reduce the Company's expense levels and a portion of the related cash
requirements, resulting in a cost structure that is better aligned with the
Company's anticipated future revenues.  Specifically, the Company expects the
implementation of the Restructuring to reduce the Company's quarterly operating
expenses by approximately $30.0 million from the levels where operating expenses
would have been absent the Restructuring.  The majority of the quarterly
operating expense savings are expected to be derived from reductions of
compensation and benefits totaling approximately $20.0 million, with the
remaining savings being derived from reductions of facility-related expenses
totaling approximately $10.0 million, which includes depreciation expense of
$3.0 million related to abandoned leasehold improvements, furniture and
fixtures.  In addition, as the result of removing certain facilities from the
Company's operations that were scheduled to be occupied in the first quarter of
2003, the Company will avoid up to an additional $4.0 million in quarterly
expenses.  These expense savings and avoidance amounts are prior to expenses
that may increase, such as bonuses, commissions and advertising, among others.
The Company expects to achieve these expense savings by the end of the first
quarter of 2003.

Because the Restructuring charge and related benefits are
derived from management's estimates, which are based on currently available
information, the Restructuring may not achieve the benefits currently
anticipated or on the timetable or at the level currently contemplated.  In
addition, the Company's software license revenues and operating performance may
continue to be negatively impacted by: (i) the uncertainty in the information
technology industry and associated reductions in capital expenditures; (ii)
geopolitical uncertainties; (iii) additional terrorist attacks; (iv) a lack of
confidence in corporate governance and accounting practices; (v) the diversity
in global economic conditions; (vi) continued intense competition; (vii)
corporate and consumer confidence in the economy, evidenced, in part, by stock
market levels; and (viii) other factors described under "Risk Factors"
below.  Accordingly, additional actions, including a further Restructuring of
the Company's operations, may be required in the future.  As a result, the
demand for the Company's products and services and, ultimately, the Company's
future financial performance, are difficult to predict with any degree of
certainty.

Please refer to "We may not be able to successfully
implement our Restructuring efforts, and such efforts may adversely impact our
ability to retain and attract future employees" under Risk Factors for
further discussion of risks associated with the Restructuring.

Option Repurchase

On August 29, 2002, the Company commenced an offer to its
employees to repurchase outstanding stock options with exercise prices equal to
or greater than $40.00 per share ("Eligible Options").  Stock options
to purchase an aggregate of 32.0 million shares were eligible for tender at the
commencement of the Option Repurchase.  Members of the Company's Board of
Directors were excluded from the Option Repurchase and, accordingly two
individuals, the Company's Chairman and CEO and its Vice Chairman, Co-Founder
and Vice President, Strategic Planning did not participate.  The Company also
excluded employees on a leave of absence (other than for medical, maternity,
military, workers' compensation or other statutorily protected reasons) and
employees who submitted a letter of resignation or received notice of
termination prior to the termination of the offer period.

Eligible employees who participated in the Option
Repurchase received, in exchange for the repurchase of tendered stock options, a
fixed amount of consideration equal to the number of common shares underlying
such tendered stock options, multiplied by $1.85.  In accordance with terms of
the Option Repurchase, employees who were due total consideration of $5,000 or
less received the consideration (less applicable tax withholdings) in cash, and
employees who were due more than $5,000 received the consideration (less
applicable tax withholdings) in fully vested, non-forfeitable shares of the
Company's common stock, which are subject to certain holding periods as
described below.  On September 30, 2002, the offer period ended and the Company
repurchased 28.1 million Eligible Options for total consideration of $51.9
million, consisting of $31.5 million of fully vested, non-forfeitable shares of
the Company's common stock (5.5 million shares) and $20.4 million in cash.  The
number of fully vested, non-forfeitable shares of the Company's common stock
issued was determined by dividing the total consideration due (less the amount
of applicable tax withholdings) by the closing price of the Company's common
stock on September 30, 2002, of $5.75 per share.  The Company recorded a
compensation charge of $54.9 million related to the Option Repurchase,
consisting of $51.9 million related to the consideration paid and $3.0 million
of associated employer payroll taxes and other costs.  The Company has allocated
this expense to the respective categories within the accompanying consolidated
statement of operations based on the individual option holder's functional
responsibility.

While the shares of common stock issued under the Option
Repurchase are fully vested and non-forfeitable, a total of 4.1 million shares
of common stock are subject to a "holding period" of one to four
years, depending on the number of Eligible Options available to be tendered.
Holders of these 4.1 million fully vested, non-forfeitable shares issued in the
Option Repurchase are prohibited from selling, transferring, making a short
sale, granting any option to purchase or entering into any hedging transaction
with the same economic effect as the sale of such shares during the holding
period.  Accordingly, 1.9 million, 1.9 million, 0.2 million and 0.1 million
fully vested, non-forfeitable shares of the Company's common stock will be
released from the holding period on October 1, 2003, 2004, 2005 and 2006,
respectively.  The remaining 1.4 million shares of common stock issued in the
Option Repurchase were freely tradable at issuance.

Discussion of the Results of
Operations for Each of the Years Ended December 31, 2000, 2001 and 2002

Revenues

The following table sets forth the Company's revenues,
both in absolute dollars and expressed as a percentage of total revenues, for
the years ended December 31, 2000, 2001 and 2002 (in thousands, except
percentages):

`Year Ended December 31,
                                         ------------------------------------------------------------------------
                                                  2000                      2001                    2002
                                         ------------------------  ----------------------  ----------------------
Revenues:                                                                                                        
  Software.............................. $ 1,114,753      61.2 %   $ 1,065,618    51.1 %   $   700,344    42.8 %
  Professional services,
    maintenance and other...............     705,453      38.8       1,018,978    48.9         934,963    57.2
                                         ------------  ----------  ------------ ---------  ------------ ---------
      Total revenues.................... $ 1,820,206     100.0 %   $ 2,084,596   100.0 %   $ 1,635,307   100.0 %
                                         ============  ==========  ============ =========  ============ =========`

Please refer to Note 1 to the accompanying consolidated
financial statements and the section entitled "Application of Critical
Accounting Policies and Use of Estimates" below for description of the
Company's accounting policies and use of estimates related to revenue
recognition.

Software.  Software license revenues decreased by
4% from $1,114.8 million for the year ended December 31, 2000, to $1,065.6
million for the year ended December 31, 2001, and decreased an additional 34% to
$700.3 million for the year ended December 31, 2002.  Software license revenues
as a percentage of total revenues were 61%, 51% and 43% in 2000, 2001 and 2002,
respectively.

The Company's customers include several of its suppliers
and on occasion, the Company has purchased goods or services for the Company's
operations from these vendors at or about the same time the Company has licensed
its software to these same organizations (a "Concurrent Transaction").
Software license transactions that occur within six months (i.e., "at or
about the same time") of a purchase by the Company from that same customer
are reviewed by management for appropriate accounting and disclosure.  The
Company accounts for Concurrent Transactions in accordance with APB No. 29
"Accounting for Nonmonetary Transactions" and EITF No. 01-02
"Interpretations of APB Opinion 29," collectively referred to as
"APB 29."  Concurrent Transactions are separately negotiated, settled
in cash, and recorded at terms the Company considers to be arm's length.  In
addition, the Company receives competitive bids for the goods or services
purchased by the Company in connection with Concurrent Transactions and these
goods or services were budgeted by the Company in advance of the transaction,
where appropriate.

Prior to recognizing any revenue from a Concurrent
Transaction, the Company ensures that: (i) the transaction meets its standard
revenue recognition policies, as discussed above; (ii) the customer meets the
Company's standard credit requirements; (iii) the transaction represents the
culmination of the earnings process; and (iv) all goods or services purchased by
the Company are necessary for its current operations and are expected to be
placed into service shortly after purchase.  If the Concurrent Transaction meets
these requirements, the Company records the revenue at fair value, as defined by
APB 29.  The Company determines Fair Value based on a comparison of cash
transactions for its software that are of similar size and on similar terms as
the Concurrent Transaction or the Fair Value of the goods or services purchased
by the Company, whichever is more readily determinable.  During 2000, 2001 and
2002, the Company recognized $11.6 million, $76.4 million and $50.6 million,
respectively, of software license revenues from Concurrent Transactions.  The
Company did not have any Concurrent Transactions during the third and fourth
quarters of 2002.

During 2001 and 2002, the Company's customers were
impacted by: (i) the overall weakness of the global economy; (ii) continued
reductions in corporate capital expenditures; (iii) geopolitical uncertainties;
and (iv) operational execution, among many other factors.  Accordingly, many of
the Company's customers and potential customers have: (i) delayed the initiation
of the purchasing process; (ii) increased the evaluation time to complete a
software purchase; and/or (iii) reduced their capital expenditure budgets,
thereby restricting their software procurement to well-defined current needs.
In addition, the length of the purchasing cycle for the Company's software
applications has increased slightly as the result of increased competition.

As a result of these factors, both the number of software
license revenue transactions and average transaction size were negatively
impacted during 2002, with individual transactions generating software license
revenues greater than $5 million affected to the greatest extent.  Specifically,
the average transaction size has decreased in each of the last two years from
$466,000 in 2000, to $414,000 in 2001 and $374,000 in 2002.  In addition, the
number of transactions generating software license revenues greater than $5
million has decreased from 36 transactions in 2000 and 32 transactions in 2001,
to 23 transactions in 2002.  Consequently, the Company's software license
revenues also decreased in 2001 and 2002.  The decline in software license
revenues as a percentage of total revenues in both 2001 and 2002 was primarily
due to the factors described above impacting software license revenues to a
greater extent than professional services, maintenance and other revenues.

The Company markets its products through its direct sales
force and to a limited extent through distributors, primarily in Europe, Asia
Pacific, Japan and Latin America.  International license revenues accounted for
40%, 45% and 42% of software license revenues in 2000, 2001 and 2002,
respectively.  The Company expects international software license revenues will
continue to account for a significant portion of its overall software license
revenues in the future.

The Company and its management are committed to improving
the performance of its sales organization and returning the Company's software
license revenues to positive sequential quarterly growth.  Although the
Company's software license revenues decreased on a year-over-year basis during
2002, the Company was able to take several steps in 2002 that it believes will
better position it for future growth.  Specifically, the Company reorganized its
sales management in the fourth quarter, including the hiring of a new Senior
Vice President, Worldwide Sales, in order to improve the sales organization's
performance.  In addition, the Company continued to increase its customer base
with more than 50% of software license revenues coming from new customer
projects during 2002.  The Company believes that the continued growth of its
customer base will provide a competitive advantage through increased future
sales opportunities when corporate capital expenditures return to normalized
levels.  Finally, many smaller software providers that compete with the Company
fell into financial difficulties during 2002 as a result of the reluctance of
customers to procure their software needs from a vendor lacking either a mature
solution offering or secure financial outlook.  Accordingly, the Company
believes that it is well positioned to offer the customers and potential
customers of these vendors the software solution they need.

The Company anticipates that its software license
revenues will return to positive growth as the overall economic conditions
strengthen and, more specifically, the overall demand for information technology
increases.  While the Company does not expect a significant improvement in
information technology spending in the immediate future, the Company expects
that the actions taken by management during 2002, along with a stabilizing
economy in 2003, may result in a modest increase in software license revenues in
2003.  The Company expects the increase in software license revenues, if any,
will occur primarily in the second half of 2003.  As a percentage of total
revenues, the Company expects software license revenues to remain comparable to
the levels achieved in 2002.

The Company's future software license revenues and
operating performance may be negatively impacted by: (i) the uncertainty in the
information technology industry and associated reductions in capital
expenditures; (ii) geopolitical uncertainties, including hostilities involving
the United States and Iraq; (iii) additional terrorist attacks; (iv) a lack of
confidence in corporate governance and accounting practices; (v) the diversity
in global economic conditions; (vi) continued intense competition; (vii)
corporate and consumer confidence in the economy, evidenced, in part, by stock
market levels; and (viii) other factors described under "Risk Factors"
below.

Professional Services, Maintenance and Other.
Professional services, maintenance and other revenues are primarily comprised of
professional services (i.e., implementation services and training) and
maintenance (i.e., technical support and product updates).  Professional
services are typically provided over a period of three to six months subsequent
to the signing of a software license arrangement.  Accordingly, the Company's
professional services revenues depend in large part on the Company's software
license revenues.  The Company's maintenance revenues depend on both the
Company's software license revenues and renewals of maintenance agreements by
the Company's existing customer base.

Professional services, maintenance and other revenues
increased by 44% from $705.5 million for the year ended December 31, 2000, to
$1,019.0 million for the year ended December 31, 2001, and decreased by 8% from
2001 to $935.0 million for the year ended December 31, 2002.  As a percentage of
total revenues, professional services, maintenance and other revenues were 39%,
49% and 57% in 2000, 2001 and 2002, respectively.

The increase in the absolute dollar amount of
professional services, maintenance and other revenues from 2000 to 2001 was
primarily due to growth in the Company's installed base of customers receiving
maintenance and the growth of the Company's consulting and training services.
The decrease in the absolute dollar amount of these revenues from 2001 to 2002
was primarily due to a decline in demand for the Company's implementation and
training services, partially offset by an increase in the installed base of
customers receiving maintenance.  The year-over-year changes for 2001 and 2002
in both professional services and maintenance are discussed further below.

The Company's maintenance revenues have continued to
increase each quarter and on a year-over-year basis in both 2001 and 2002,
primarily due to the renewal of customer maintenance agreements and the signing
of new maintenance agreements at the time of the software license.  However, due
primarily to weak economic conditions, the Company's efforts to renew existing
customers' maintenance agreements have become progressively more challenging
during 2002.  While maintenance revenues have continued to increase each year,
professional services revenues decreased on a year-over-year basis during 2002
compared to an increase during 2001.  Because the Company's professional
services revenues lag software license revenues by three to six months, both the
increase in 2001 and the decrease in 2002 were largely dependent on the amount
of software license revenues in the immediate preceding period.  Specifically,
the significant growth in software license revenues in the second half of 2000
and the first quarter of 2001 enabled the Company to grow professional services
revenues in 2001, despite the onset in early 2001 of deteriorating economic
conditions.  The deteriorating economic conditions and resulting decline in
software license revenues began to negatively impact professional services
revenues in the second half of 2001 (i.e., three to six months subsequent to the
decline in software license revenues).  Accordingly, the Company's professional
services revenues began to decline in the second half of 2001 and continued to
decrease or remain at decreased levels throughout much of 2002, and therefore
declined on a year-over-year basis in 2002.  In addition, the Company has seen
progressive pricing pressure on its professional services hourly rates as
customers continue to focus on reducing costs in difficult economic
conditions.

Professional services, maintenance and other revenues
increased as a percentage of total revenues during both 2001 and 2002 due
primarily to growth in the number of customers receiving maintenance, coupled
with a comparatively sharper decrease in the Company's software license
revenues.  The Company expects that professional services, maintenance and other
revenues will return to positive growth soon after the Company's software
license revenues return to positive growth.  The Company currently anticipates
that professional services, maintenance and other revenues will remain
comparable to or increase from the levels achieved in 2002.  As a percentage of
total revenues, the Company expects professional services, maintenance and other
revenues to remain comparable to the levels achieved in 2002.  The Company
expects to continue to manage its professional services organization to ensure
that it does not compete with implementation partners.

On January 1, 2002, the Company adopted Emerging Issues
Task Force ("EITF") Issue No. 01-14 "Income Statement
Characterization of Reimbursements Received for 'Out-of-Pocket' Expenses
Incurred" ("EITF 01-14").  EITF 01-14 requires that certain
out-of-pocket expenses rebilled to customers be recorded as revenue versus an offset
to the related expense.  Prior to the adoption of EITF 01-14, the Company
recorded rebilled out-of-pocket expenses as an offset to the related expense.
Comparative financial statements for prior periods have been conformed to the
current year presentation.  Amounts reclassified were not significant for any
period presented.

Cost of Revenues and Gross Margin

The Company has reclassified certain prior year amounts
to conform to the current year presentation.  The following table sets forth the
Company's cost of revenues and gross margin, both in absolute dollars and
expressed as a percentage of total revenues, for the years ended December 31,
2000, 2001 and 2002 (in thousands, except percentages):

`Year Ended December 31,
                                         ------------------------------------------------------------------------
                                                  2000                      2001                    2002
                                         ------------------------  ----------------------  ----------------------
Cost of revenues:                                                                                                
  Software.............................. $    18,391       1.0 %   $    16,294     0.8 %   $    21,612     1.3 %
  Professional services,
    maintenance and other...............     462,694      25.4         624,731    30.0         540,194    33.1
                                         ------------  ----------  ------------ ---------  ------------ ---------
      Total cost of revenues............ $   481,085      26.4 %   $   641,025    30.8 %   $   561,806    34.4 %
                                         ============  ==========  ============ =========  ============ =========
Gross margin.....................        $ 1,339,121      73.6 %   $ 1,443,571    69.2 %   $ 1,073,501    65.6 %
                                         ============  ==========  ============ =========  ============ =========`

As discussed further above and in Note 7 to the
accompanying consolidated financial statements, the Company completed a tender
offer for certain of its stock options during the third quarter of 2002.
Included in cost of professional services, maintenance and other revenues for
the year ended December 31, 2002, is a compensation charge of $14.1 million
related to the repurchase of stock options held by the Company's professional
services and technical support personnel.  The Company views these expenses as
significant special charges that make year-over-year comparison of the Company's
normal ongoing operating performance difficult.  Accordingly, the following
table sets forth the cost of revenues and gross margin for the years ended
December 31, 2000, 2001 and 2002, expressed both in absolute dollars and as a
percentage of total revenues, prior to the cost of the Option Repurchase (in
thousands, except percentages):

`Year Ended December 31,
                                         ------------------------------------------------------------------------
                                                  2000                      2001                    2002
                                         ------------------------  ----------------------  ----------------------
Cost of revenues:                                                                                                
  Software.............................. $    18,391       1.0 %   $    16,294     0.8 %   $    21,612     1.3 %
  Professional services,
    maintenance and other...............     462,694      25.4         624,731    30.0         526,075    32.2
                                         ------------  ----------  ------------ ---------  ------------ ---------
      Total cost of revenues............ $   481,085      26.4 %   $   641,025    30.8 %   $   547,687    33.5 %
                                         ============  ==========  ============ =========  ============ =========
Gross margin.....................        $ 1,339,121      73.6 %   $ 1,443,571    69.2 %   $ 1,087,620    66.5 %
                                         ============  ==========  ============ =========  ============ =========`

Please refer to Note 1 to the accompanying consolidated
financial statements and the section entitled "Application of Critical
Accounting Policies and Use of Estimates" below for description of the
Company's accounting policies and use of estimates related to expenses included
in cost of revenues.

Software.  Cost of software license revenues
includes amortization of acquired technology; third-party software royalties;
and product packaging, production and documentation.  All costs incurred in the
research and development of software products and enhancements to existing
products have been expensed as incurred.  Cost of software license revenues was
$18.4 million, $16.3 million and $21.6 million in 2000, 2001 and 2002,
respectively.  As a percentage of software license revenues, cost of software
license revenues was 2% for the years ended December 31, 2000 and 2001, as
compared to 3% for the year ended December 31, 2002.  Cost of software license
revenues decreased in absolute dollars from 2000 to 2001 primarily due to the
decrease in software license revenues and a decrease in third-party royalties.
Cost of software license revenues increased in absolute dollars and as a
percentage of software license revenue from 2001 to 2002 primarily due to: (i)
an increase in amortization expense associated with the acquired technology
obtained in the acquisition of nQuire Software, Inc., as discussed in Note 13 to
the accompanying consolidated financial statements; and (ii) a shift to products
with higher third-party royalties from products with either no royalty
obligation or lower royalty rates.  These costs as a percentage of software
license revenues are expected to remain comparable to the percentage incurred
during 2002.

Professional Services, Maintenance and Other.Cost of professional services, maintenance and other revenues consist
primarily of personnel, facilities and systems costs incurred to provide
training, consulting and other global services.  Cost of professional services,
maintenance and other revenues was $462.7 million, $624.7 million and $540.2
million for the years ended December 31, 2000, 2001 and 2002, respectively.  As
discussed above, the Company completed a tender offer for certain of its options
during the third quarter of 2002.  Included in cost of professional services,
maintenance and other revenues for the year ended December 31, 2002, is a
compensation charge of $14.1 million related to the repurchase of stock options
held by the Company's professional service and technical support personnel.
Excluding this compensation charge, cost of professional services, maintenance
and other revenues was $462.7 million, $624.7 million and $526.1 million for the
years ended December 31, 2000, 2001 and 2002, respectively, or approximately
66%, 61% and 56% of professional services, maintenance and other revenues,
respectively.

Cost of professional services, maintenance and other
revenues increased in terms of the absolute dollar amount from 2000 to 2001
primarily due to the increased headcount and associated costs that resulted from
the Company's expansion of its Global Services Organization in order to meet the
demand for the Company's consulting and training services.  The decrease in the
absolute dollar amount of these costs from 2001 to 2002 reflects: (i) the
reduction of headcount in response to the decrease in demand for the Company's
implementation services; (ii) partial realization of the cost savings from the
Restructuring, including savings from the reduction of approximately 250
personnel; (iii) a reduction in the use of third-party contractors; and (iv) an
acceleration of the Company's cost control initiatives, including reductions of
discretionary expenditures such as travel and entertainment and incentive and
other variable compensation.  The decrease as a percentage of professional
services, maintenance and other revenues for each of the periods reflects: (i)
the continued growth of the Company's higher-margin maintenance revenues; (ii) a
higher utilization of the Company's global services personnel; (iii) a reduction
in the use of third-party contractors; (iv) an acceleration of the Company's
cost control initiatives discussed above; and (v) partial realization in 2002 of
the cost savings from the Restructuring.

The Company expects to realize the full benefit of the
Restructuring in its professional services and technical support organizations
beginning in the second quarter of 2003.  In addition, the Company expects to
continue to reduce the cost of professional services, maintenance and other
revenues through continuing its cost controls, further aligning its incentive
compensation plans with gross margin attainment, and monitoring headcount within
its professional services organization.  The Company expects that the cost
savings from these initiatives will be partially offset by an increase in
compensation expense associated with: (i) additional personnel needed to meet
the anticipated increase in demand for the Company's professional services and
maintenance services (primarily in the second half of 2003); and (ii) the
renewal of merit increases and incentive compensation payments.  The Company
expects that professional services, maintenance and other costs in terms of
absolute dollars will remain comparable to the levels incurred during 2002 and
that these costs will decrease as a percentage of professional services,
maintenance and other revenues from the percentage in 2002.

As discussed above, prior to adoption of EITF 01-14, the
Company recorded rebilled out-of-pocket expenses as an offset to the related
expense.  Comparative financial statements for prior periods have been conformed
to the current year presentation.

Operating Expenses

The Company has reclassified certain prior year amounts
to conform to the current year presentation.  The following table sets forth the
Company's operating expenses, both in absolute dollars and expressed as a
percentage of total revenues, for the years ended December 31, 2000, 2001 and
2002 (in thousands, except percentages):

`Year Ended December 31,
                                         ------------------------------------------------------------------------
                                                  2000                      2001                    2002
                                         ------------------------  ----------------------  ----------------------
Operating expenses:                                                                                              
  Product development................... $   238,020      13.1 %   $   333,661    16.0 %   $   366,230    22.4 %
  Sales and marketing...................     609,898      33.5         615,675    29.5         476,975    29.2
  General and administrative............     132,164       7.3         136,353     6.5         119,253     7.3
  Restructuring-related expenses........          --        --              --      --         205,305    12.5
  Merger-related expenses...............      36,504       2.0              --      --             --       --
                                         ------------  ----------  ------------ ---------  ------------ ---------
      Total operating expenses.......... $ 1,016,586      55.9 %   $ 1,085,689    52.0 %   $ 1,167,763    71.4 %
                                         ============  ==========  ============ =========  ============ =========`

As further described below and in Note 12 to the
accompanying consolidated financial statements, the Company incurred $36.5
million of merger-related expenses in connection with its acquisitions during
2000.  In addition, the Company completed the Restructuring
and Option Repurchase during 2002, which are discussed further above and in
Notes 2 and 7 to the accompanying consolidated financial statements,
respectively.  Included in operating expenses for 2002 is a charge of $205.3
million related to the Restructuring and a compensation charge of $40.8 million
related to the repurchase of stock options held by the Company's product
development, sales and marketing and general and administrative personnel.
The Company views these expenses as significant special charges that make
year-over-year comparison of the Company's normal ongoing operating performance
difficult.

The following table sets forth the Company's operating
expenses for the years ended December 31, 2000, 2001 and 2002, expressed both in
absolute dollars and as a percentage of total revenues, prior to the impact of
the merger-related costs, the Restructuring expenses and the Option Repurchase
expenses (in thousands, except percentages):

`Year Ended December 31,
                                         ------------------------------------------------------------------------
                                                  2000                      2001                    2002
                                         ------------------------  ----------------------  ----------------------
Operating expenses:                                                                                              
  Product development................... $   238,020      13.1 %   $   333,661    16.0 %   $   347,497    21.2 %
  Sales and marketing...................     609,898      33.5         615,675    29.5         464,743    28.5
  General and administrative............     132,164       7.3         136,353     6.5         109,458     6.7
                                         ------------  ----------  ------------ ---------  ------------ ---------
      Total operating expenses.......... $   980,082      53.9 %   $ 1,085,689    52.0 %   $   921,698    56.4 %
                                         ============  ==========  ============ =========  ============ =========`

Please refer to Note 1 to the accompanying consolidated
financial statements and the section entitled "Application of Critical
Accounting Policies and Use of Estimates" below for description of the
Company's accounting policies and use of estimates related to expenses included
in operating expenses.

Product Development.  Product development expense
includes costs associated with the development of new products, enhancements of
existing products, quality assurance activities and vertical engineering.  These
costs consist primarily of employee salaries, benefits, consulting costs and the
cost of software development tools and equipment.  The Company considers
technological feasibility of its software products to have been reached upon
completion of a working model that has met certain performance criteria.  The
period between achievement of technological feasibility and general release of a
software product is typically very short, and development costs incurred during
that period have not been material.  Accordingly, the Company has not
capitalized any software development costs to date.  Product development
expenses increased from $238.0 million and $333.7 million for the years ended
December 31, 2000 and 2001, respectively, to $366.2 million for the year ended
December 31, 2002.  As a percentage of total revenues, product development
expense was 13%, 16% and 22% in 2000, 2001 and 2002, respectively.

Included in product development expense for 2002 is a
compensation charge of $18.7 million related to the repurchase of stock options
held by the Company's product development personnel.  Excluding this
compensation charge, product development expense was $238.0 million and $333.7
million for the years ended December 31, 2000 and 2001, respectively, as
compared to $347.5 million for the year ended December 31, 2002.  As a
percentage of total revenues, product development expense, excluding the
compensation charge for the repurchase of stock options, was 13%, 16% and 21% in
2000, 2001 and 2002, respectively.

The increase in product development expense from 2000 to
2001 was primarily attributable to costs of additional personnel in the
Company's product development operations to support the development and testing
of Siebel 7.  Excluding the compensation charge from the Option Repurchase,
product development expense increased from 2001 to 2002 primarily as the result
of: (i) the Company's continued investment in the development of new products,
new versions of its existing products and additional modules; and (ii) an
increase in depreciation of equipment utilized in the Company's product
development operations.   Partially offsetting the increase in product
development expense during 2002 are: (i) the Company's cost control initiatives
described above; and (ii) cost savings from the reduction of approximately 400
product development personnel and consolidation of the remaining personnel into
more highly utilized facilities in connection with the Restructuring.  Product
development expense as a percentage of total revenues increased during each of
the periods primarily as a result of the Company's continued investment in the
research and development of new products during a period in which the Company's
software license revenues decreased.

The Company anticipates that it will continue to devote
substantial resources to develop new products, new versions of its existing
products and additional modules for its products in the future.  Accordingly,
the Company expects product development expenses, both in terms of absolute
dollars and as a percentage of total revenues, to remain comparable to or
increase from the levels incurred during 2002.  The Company expects that the
anticipated increases in product development expenditures during 2003 will be
partially offset by the full realization of the benefits of the Restructuring in
its product development organization beginning in the second quarter of
2003.

Sales and Marketing.  The Company continues to
place significant emphasis, both domestically and internationally, on direct
sales through its own sales force.  Sales and marketing expense is composed
primarily of costs associated with the Company's sales and marketing personnel
and consists primarily of: (i) salaries, commissions and bonuses; (ii) facility-related
(i.e., rent) and equipment-related (i.e., depreciation) expenses; (iii)
travel and entertainment expenses; and (iv) promotional and advertising
expenses.  Sales and marketing expenses were $609.9 million, $615.7 million and
$477.0 million for the years ended December 31, 2000, 2001 and 2002,
respectively.  As a percentage of total revenues, sales and marketing expenses
were 34%, 30% and 29% in 2000, 2001 and 2002, respectively.

Included in sales and marketing expense for the year
ended December 31, 2002, is a compensation charge of $12.2 million related to
the repurchase of stock options held by the Company's sales and marketing
personnel.  Excluding this compensation charge, sales and marketing expenses
were $609.9 million, $615.7 million and $464.8 million for the years ended
December 31, 2000, 2001 and 2002, respectively.  As a percentage of total
revenues, sales and marketing expenses, excluding the compensation charge for
the repurchase of stock options, were 34%, 30% and 28% in 2000, 2001 and 2002,
respectively.

In response to the weakening global economy, the Company
began reducing discretionary expenditures in the second half of 2001 and
implementing several cost control initiatives, which are described further
above.  In addition, the Company reduced its sales and marketing personnel
beginning in the third quarter of 2001.  As a result of these cost controls,
sales and marketing expense decreased as a percentage of total revenues in 2001
compared to 2000 and remained comparable in terms of absolute dollars.
Excluding the cost of the Option Repurchase, sales and
marketing expense decreased in terms of absolute dollars from 2001 to 2002 due
to: (i) the continued close monitoring of the Company's expenses and further
implementation of the above cost control initiatives; (ii) the decrease in sales
commissions and other incentive compensation that resulted from a decrease in
the Company's software license revenues; (iii) the further reduction of expenses
in the second half of 2002 as a result of the Restructuring, including the
reduction of approximately 420 sales and marketing personnel and consolidation
of the remaining personnel into more highly utilized facilities; and (iv)
reduced advertising.

The Company expects to continue to closely monitor sales
and marketing expenses in 2003 and to achieve additional cost savings from: (i)
the continued close monitoring of discretionary expenditures; (ii) the
continuation of many of the cost control initiatives discussed above; and (iii)
the realization of the full benefit of the Company's Restructuring efforts
beginning in the second quarter of 2003.  The anticipated reduction in sales and
marketing expense will be offset by: (i) a modest increase in compensation
expense associated with the renewal of merit compensation increases and
incentive compensation plans; and (ii) an increase in advertising expenditures.
Accordingly, the Company currently expects sales and marketing expense, both in
terms of the absolute dollar amount and as a percentage of total revenues, to
remain comparable to the levels incurred during 2002.

General and Administrative.  General and
administrative expense consists primarily of salaries and occupancy costs for
administrative, executive and finance personnel, along with bad debt expense.
General and administrative expenses decreased from $132.2 million and $136.4
million for the years ended December 31, 2000 and 2001, respectively, to $119.3
million for the year ended December 31, 2002.  As a percentage of total
revenues, general and administrative expenses were 7% for each of the years
ended December 31, 2000, 2001 and 2002.

Included in general and administrative expense for the
year ended December 31, 2002, is a compensation charge of $9.8 million related
to the repurchase of stock options held by the Company's general and
administrative personnel.  Excluding this compensation charge, general and
administrative expense was $132.2 million, $136.4 million and $109.5 million for
the years ended December 31, 2000, 2001 and 2002, respectively.  As a percentage
of total revenues, general and administrative expenses, excluding the
compensation charge for the repurchase of stock options, were 7% for each of the
years ended December 31, 2000, 2001 and 2002.

General and administrative expenses increased from 2000
to 2001 primarily due to increased staffing and associated expenses necessary to
manage and support the increased size of the Company's operations, partially
offset by management's cost control initiatives and reductions in the provision
for doubtful accounts.  Excluding the impact of the Option Repurchase, general
and administrative expenses decreased from 2001 to 2002 primarily due to: (i)
management's cost control initiatives described above; (ii) a decrease in the
Company's provision for doubtful accounts associated with reduced receivable
levels; (iii) the further reduction of expenses in the second half of 2002 as a
result of the Restructuring, including the reduction of approximately 80 general
and administrative personnel and consolidation of the remaining personnel into
higher-utilized facilities; and (iv) the elimination of the requirement to
amortize goodwill in 2002 as a result of the adoption of SFAS No. 142
"Goodwill and Other Intangible Assets" ("SFAS 142").
Partially offsetting the decrease in general administrative expenses in 2002
were increases in rent and depreciation expense.

The Company expects general and administrative expenses
to continue to decrease in 2003 primarily due to: (i) the continued close
monitoring of discretionary expenditures; (ii) the continuation of many of the
cost control initiatives discussed above; and (iii) the realization of the full
benefit of the Company's Restructuring efforts beginning in the second quarter
of 2003.  The anticipated reduction in general and administrative expense will
be partially offset by an increase in compensation expense associated with the
renewal of merit compensation increases and anticipated bonuses.  Accordingly,
the Company anticipates general and administrative expense, both in terms of the
absolute dollar amount and as a percentage of total revenues, will decrease from
the levels incurred during 2002.

Restructuring-Related Expenses.  In July 2002, the
Company announced a planned Restructuring of its operations and associated
workforce reduction intended to strengthen the Company's competitive position
and future operating performance.  The Restructuring was planned to take place
in the third and fourth quarters of 2002.  The Company recognized a total charge
related to this Restructuring of $205.3 million, of which $109.4 million was
recognized in the third quarter of 2002 and $95.9 million was recognized in the
fourth quarter of 2002.  Total remaining cash outlays under the Restructuring
that was recognized in 2002 are expected to be $154.5 million, of which $42.7
million is expected to be in 2003.

The Restructuring charge is comprised primarily of: (i)
severance and associated employee termination costs related to the reduction of
the Company's workforce; (ii) lease termination costs and/or costs associated
with permanently vacating certain facilities; and (iii) impairment costs related
to certain long-lived assets that were abandoned in connection with the
Company's consolidation of its facilities.  The following table summarizes the
Company's Restructuring-related expenses incurred during 2002 and the related
liabilities as of December 31, 2002 (in thousands):

`Employee    Facility-     Asset
                                                  Termination    Related   Abandonment
                                                     Costs        Costs       Costs       Total
                                                  -----------  ----------- ------------ ----------
Restructuring-related expenses.................... $  23,649   $  155,701  $  25,955    $ 205,305
Cash payments in 2002.............................   (19,714)      (5,088)        --      (24,802)
Non-cash charges..................................        --           --    (25,955)     (25,955)
                                                  -----------  ----------- ------------ ----------
   Restructuring obligations, December 31, 2002... $   3,935   $  150,613  $      --      154,548
                                                  ===========  =========== ==========
   Less: Restructuring obligations, short-term....                                         42,703
                                                                                        ----------
   Restructuring obligations, long-term...........                                      $ 111,845
                                                                                        ==========`

The costs associated with permanently vacating facilities
will generally be paid over the remaining lease terms, ending at various dates
through March 2022 or over a shorter period as the Company may negotiate with
its lessors.  Please refer to Note 5 to the accompanying consolidated financial
statements for a summary of future lease commitments related to facilities that
are part of the Restructuring.  The remaining costs associated with the
reduction of the Company's workforce will be paid during early 2003.  The
Restructuring charge and related cash outlay are based on management's current
estimates, which may change if further consolidations are required or if actual
lease commitments or sublease income differ from amounts currently expected.

Merger-Related Expenses.  The Company did not
incur any significant merger-related costs during 2001 or 2002.  During 2000,
the Company expensed an aggregate of $36.5 million of direct merger-related
expenses, of which $10.0 million related to OpenSite Technologies, Inc.; $9.0
million related to OnLink Technologies, Inc.; and $17.5 million related to Janna
Systems Inc.  These costs primarily consisted of investment banker fees;
compensation expense associated with the acceleration of stock options in
accordance with their existing terms; integration charges related to duplicate
facilities and equipment; legal, accounting and other professional fees; and
other miscellaneous expenses.  As of December 31, 2002, the Company had settled
substantially all of these expenses.

Operating Income (Loss) and Operating Margin

Operating income was $322.5 million and $357.9 million
for the years ended December 31, 2000 and 2001, respectively, as compared to an
operating loss of $94.3 million for the year ended December 31, 2002.  Operating
margin was 18% and 17% in 2000 and 2001, respectively, as compared to a negative
operating margin of 6% in 2002.  The Company incurred negative operating income
and margins during the year ended December 31, 2002, primarily as the result of
the Restructuring and Option Repurchase.  In addition, the Company's operating
income and operating margin was negatively impacted during the year ended
December 31, 2000, by merger-related expenses associated with the acquisitions
of OpenSite, OnLink and Janna.

Excluding the impact of the expenses associated with the
acquisitions, Restructuring and Option Repurchase, operating income was $359.0
million, $357.9 million and $165.9 million for the years ended December 31,
2000, 2001 and 2002, respectively, and operating margin was 20%, 17% and 10%,
respectively.  Operating margins, excluding these expenses, decreased in 2001
primarily due to: (i) the increase as a percentage of total revenues of
professional services, maintenance and other revenues, which are at lower
margins than software license revenues; and (ii) the increase in the Company's
investment in product development to support the release of Siebel 7.
Management's cost control initiatives partially offset these factors that
contributed to the decline in operating margin in 2001.

Excluding the impact of the Restructuring and Option
Repurchase, the Company's operating income and operating margin decreased in
2002 due primarily to: (i) the year-over-year decrease in total revenues; (ii)
the comparatively sharper decrease in software license revenues, which are at
higher margins than professional services, maintenance and other revenues; and
(iii) the increase in facility-related (i.e., rent) and equipment-related (i.e.,
depreciation) expenses.  The decline in operating income and operating margins
was partially offset by: (i) management's cost control initiatives; (ii) the
partial realization of the benefits of the Restructuring; and (iii) the
elimination of the requirement to amortize goodwill, which totaled $14.7 million
and $20.0 million during the years ended December 31, 2000 and 2001,
respectively.  Please refer to Notes 1 and 13 to the accompanying consolidated
financial statements for further discussions regarding the elimination of the
requirement to amortize goodwill.

As a result of the Company's Restructuring efforts and
the continued cost control efforts, the Company anticipates that its cost
structure will be better aligned with its anticipated future revenue levels.
While the Company does not expect a significant improvement in information
technology spending in the immediate future, the Company expects that the
actions taken by management during 2002, along with a stabilizing economy in
2003, may result in a modest increase in total revenues in 2003.  The Company
expects the increase in total revenues, if any, will occur primarily in the
second half of 2003.  As a result of the better alignment of the Company's cost
structure with anticipated revenue levels, coupled with the anticipated modest
increase in revenues, the Company currently expects operating margins to
increase in 2003 from the levels achieved in 2002.

Other Income, Net

For 2000, 2001 and 2002, other income, net was comprised
of the following (in thousands):

`December 31,
                                                   ---------------------------------
                                                      2000        2001       2002
                                                   ---------- ----------- ---------- 

Interest income................................... $  56,766  $   67,332  $  58,348
Interest expense..................................   (17,909)    (18,326)   (20,016)
Losses from equity method investee (Sales.com)....    (7,481)         --         --
Charitable contributions..........................   (30,705)     (1,404)        --
Net gains on marketable investments...............    60,901       3,399     12,420
Write-down of cost-method investments.............        --      (3,073)    (9,990)
Other, net........................................       303      (1,726)    (2,287)
                                                   ---------- ----------- ----------
                                                   $  61,875  $   46,202  $  38,475
                                                   ========== =========== ==========`

Interest income represents earnings on the Company's cash
and short-term investments.  Interest income increased from 2000 to 2001 due to
increased balances of cash, cash equivalents and short-term investments,
partially offset by a decline in interest rates.  Interest income decreased from
2001 to 2002 primarily due to a decline in interest rates, partially offset by
the Company's increased balances of cash and short-term investments.  Interest
expense primarily represents interest on the Company's $300.0 million
convertible subordinated debentures (see Note 4 to the accompanying consolidated
financial statements).  Interest expense has increased in 2002 from the levels
in 2000 and 2001, primarily as the result of interest expense associated with
the increase in capital lease obligations.  In December 1999, the Company sold a
controlling interest in Sales.com and therefore accounted for this investment
under the equity method during 2000.  In January 2001, the Company reacquired
the outstanding interest in Sales.com and, accordingly, the Company consolidated
the activities of Sales.com subsequent to its acquisition

Net gains on marketable investments in 2000 were
primarily the result of gains from sales of marketable equity securities.
During both 2001 and 2002, net gains on marketable investments resulted
primarily from sales of certain short-term investments, partially offset by net
write-downs of $2.4 million and $2.0 million, respectively, to the Company's
marketable equity securities, as the decline was determined to be
other-than-temporary.  The Company holds several minority interests, included in other
assets, in companies having operations or technology in areas within its
strategic focus.  During 2001 and 2002, the write-down of cost-method
investments represents adjustments to certain of these investments to estimated
fair value as the decline in these investments was deemed to be
other-than-temporary.  Other, net for all periods presented is primarily comprised of
banking fees and foreign currency transaction gains or losses.

Income Taxes and Income Tax Benefit

Income taxes totaled $162.5 million and $149.5 million
for the years ended December 31, 2000 and 2001, respectively, as compared to an
income tax benefit of $20.1 million for the year ended December 31, 2002.
Income taxes as a percentage of pretax income (i.e., the "Effective
Rate") were 42% and 37% in 2000 and 2001, respectively, as compared to an
income tax benefit of 36% in 2002.  The Company's Effective Rate for 2000 was
higher than the rates in 2001 and 2002 primarily due to non-deductible items
related to acquisitions.  The Company anticipates the Effective Rate to be
approximately 36% in 2003.

Net Income (Loss) and Net Income (Loss) Available to
Common Stockholders

The Company had net income of $221.9 million and $254.6
million in 2000 and 2001, respectively, as compared to a net loss of $35.7
million in 2002.  Net income available to common stockholders was $123.1 and
$254.6 million in 2000 and 2001, respectively, as compared to a net loss of
$35.7 million in 2002.  Diluted net income per common share was $0.24 and $0.49
in 2000 and 2001, respectively, compared to a net loss per common share of $0.08
in 2002.

The Company incurred a net loss during 2002 primarily as
the result of expenses associated with the Restructuring and Option Repurchase.
These expenses, net of the tax benefit of $93.7 million, reduced net income
during 2002 by $166.5 million, or $0.33 per share.

For the year ended December 31, 2000, net income has been
reduced by accretion on OpenSite's mandatorily redeemable convertible preferred
stock to determine net income available to common stockholders.  In connection
with the Company's acquisition of OpenSite, the mandatorily redeemable
convertible preferred stock was converted into shares of OpenSite's common
stock, pursuant to its existing terms, on a one-for-one basis.  Accordingly, the
Company ceased recording accretion on the mandatorily redeemable convertible
preferred stock on May 17, 2000, the date of acquisition.  Please refer to Note
6 to the accompanying consolidated financial statements for further discussion
of the mandatorily redeemable convertible preferred stock.

Liquidity and Capital Resources

Overview

The Company derives its liquidity and capital
resources primarily from the Company's cash flows from operations and from
working capital.  The Company's working capital increased by 22%, from $1,584.4
million as of December 31, 2001, to $1,940.3 million as of December 31, 2002.
The significant components of the Company's working capital are liquid assets
such as cash, short-term investments and trade accounts receivable, reduced by
accounts payable, accrued expenses and deferred revenue.  The Company continues
to operate a cash-positive business and, accordingly, the Company has continued
to increase its cash and short-term investment balances.  Specifically, the
Company's cash, cash equivalents and short-term investments increased from
$1,656.7 million as of December 31, 2001, to $2,161.6 million as of December 31,
2002, representing approximately 60% and 71% of total assets, respectively.  In
addition, the Company improved the days sales outstanding in accounts
receivable, which decreased from 73 days as of December 31, 2001, to 63 days as
of December 31, 2002.  In addition, the Company has improved the average payment
terms on license revenue transactions from 39 days as of December 31, 2001, to
28 days as of December 31, 2002.

The Company does not use off-balance-sheet arrangements
with unconsolidated entities or related parties, nor does it use other forms of
off-balance-sheet arrangements such as research and development arrangements.
Accordingly, the Company's liquidity and capital resources are not subject to
off-balance-sheet risks from unconsolidated entities.  The Company's liquidity
could be negatively impacted by a decrease in demand for the Company's products,
which are subject to rapid technological changes, or a reduction of capital
expenditures by the Company's customers as a result of a downturn in the global
economy, among other factors.

While the Company believes that its current working
capital and its anticipated cash flows from operations will be adequate to meet
its cash needs for daily operations and capital expenditures for at least the
next 12 months, the Company may elect to raise additional capital through a
public offering of securities or other means in the future, depending upon
market conditions.

Commitments

As of December 31, 2002, the Company's future fixed
commitments are as follows (in thousands):

`Commitment Year
                                                      ----------------------------------------
                                                                 2004 to    2006 to   2008 and
Contractual Obligations                                  2003      2005      2007      Beyond     Total
----------------------------------------------------- --------- --------- ---------- --------- -----------
Operating lease obligations not in Restructuring..... $ 88,389  $168,389  $ 165,132  $524,692  $  946,602
Operating lease obligations in Restructuring.........   37,789    73,059     47,192   130,445     288,485
Capital lease obligations............................   11,486    16,492         --        --      27,978
Convertible subordinated debentures..................       --        --    300,000        --     300,000
                                                      --------- ---------  --------- --------- -----------
      Total fixed commitments........................ $137,664  $257,940  $ 512,324  $655,137  $1,563,065
                                                      ========= ========= ========== ========= ===========`

The lease commitments in the above table designated as
"Lease obligations in Restructuring" only include the non-cancelable
portion of lease commitments included in the Restructuring and, accordingly,
have not been reduced by estimated sublease income.  However, as required by
EITF Issue No. 88-10 "Costs Associated with Lease Modification or
Termination" ("EITF 88-10"), the Company has reduced these lease
commitments by estimated sublease income of $159.1 million in determining the
total Restructuring obligations of $154.5 million recorded in the accompanying
balance sheet as of December 31, 2002.  Please refer to Notes 2 and 5 for a
further discussion of the Restructuring and the Company's lease commitments and
other contingencies, respectively.

Cash Flows

Cash provided by operating activities was $438.6 million,
$588.2 million and $433.2 million for 2000, 2001 and 2002, respectively.
Despite the weak economic conditions, the Company has continued to operate its
business to produce positive cash flows from operations.  Cash provided by
operating activities decreased in 2002 from 2001 primarily as the result of the
decreases in revenues and earnings that occurred, in part, as a result of the
weak global economic conditions.  During 2000, 2001 and 2002, the Company's cash
flows from operations were primarily derived from: (i) the Company's earnings
from on-going operations prior to non-cash expenses such as depreciation,
amortization, and bad debt, less the cash portion of Restructuring-related
expenses and Option Repurchase expenses; (ii) the tax benefit related to the
exercise of employee stock options, which reduces the Company's cash outlay for
income tax expense; and (iii) changes in the Company's working capital, which is
primarily composed of collections of accounts receivable and increases in
deferred revenue, partially offset by payments of accounts payable and accrued
expenses.

Because the majority of the Restructuring-related
expenses will be paid over time or do not involve cash outlays, cash provided by
operating activities for the year ended December 31, 2002, was only impacted by
the $24.8 million of cash payments made to date on these obligations.  As the
Company settles its remaining Restructuring obligations ($154.5 million as of
December 31, 2002), the Company's future cash flows from operations will be
reduced in the period of settlement.  The Company currently estimates that it
will settle $42.7 million of these obligations in 2003.

Cash used in investing activities was $384.3 million,
$694.0 million and $692.4 million for 2000, 2001 and 2002, respectively.  During
each of these periods, the Company's investment activities primarily related to
the purchase of additional property and equipment and the reinvestment of the
Company's cash into short-term investments.  For 2000, 2001 and 2002, the
Company reinvested its cash flows from operations into short-term investments in
net amounts of $197.8 million, $445.0 million and $629.3 million, respectively,
and had net purchases of property and equipment, including leasehold
improvements, of $162.2 million, $245.9 million and $70.8 million, respectively.
Other investing activities resulted in net expenditures of $24.3 million and
$3.1 million during 2000 and 2001, respectively, as compared to a net increase
in cash of $7.7 million during 2002.

Capital expenditures were significantly higher in 2001
compared to both 2000 and 2002, primarily as a result of the following: (i)
expansion of the Company's infrastructure during 2001 to support the development
and testing of Siebel 7; and (ii) purchases of tenant improvements and furniture
and fixtures for newly leased facilities.  The Company will continue to closely
monitor its capital expenditures and currently expects that capital expenditures
will continue to decrease in 2003.

Cash provided by financing activities was $208.9 million,
$156.8 million and $109.1 million for 2000, 2001 and 2002, respectively.  For
2000, 2001 and 2002, the Company's financing activities consisted primarily of
net proceeds of $189.2 million, $156.2 million and $92.5 million, respectively,
from the issuance of common stock pursuant to the exercise of stock options and
the Company's employee stock purchase plan.  During 2000, the Company's
financing activities reflect $20.0 million of proceeds from the issuance of
preferred stock by OnLink prior to its acquisition by the Company.  During 2002,
the Company received proceeds of $24.9 million from equipment financing.  These
cash inflows from financing activities were partially offset during 2000, 2001
and 2002 by the Company's repayment of its capital lease obligations, net of
collections by the Company of stockholder notes.

Adoption of Accounting Standards

During 2002, the Company adopted new accounting
standards related to the accounting for its business combinations, intangible
assets and goodwill, impairment of long-lived assets, discontinued operations,
presentation of rebilled out-of-pocket expenses and stock-based compensation.
There was not a cumulative transition adjustment upon the adoption of any of
these accounting standards, and the adoption of these accounting standards did
not have a material impact on the Company's consolidated financial position,
results of operations or cash flows.  Please refer to Note 1 to the accompanying
consolidated financial statements for further discussion of the accounting
standards adopted during 2002.

Recent Accounting Pronouncements

In June 2001, the Financial Accounting Standards
Board (the "FASB") issued SFAS No. 143 "Accounting for Asset
Retirement Obligations" ("SFAS 143").  The Company is required to
adopt SFAS 143 effective January 1, 2003.  In July 2002, the FASB issued SFAS
No. 146 "Accounting for Exit or Disposal Activities" ("SFAS
146").  SFAS 146 is effective for exit or disposal activities initiated
after December 31, 2002.  In November 2002, the FASB issued Interpretation No.
45, "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others"
("Interpretation 45").  The initial recognition and measurement
provisions of Interpretation 45 apply on a prospective basis to guarantees
issued or modified after December 31, 2002, and the disclosure requirements
apply to guarantees outstanding as of December 31, 2002.  The Company does not
expect the adoption of SFAS 143, SFAS 146 or Interpretation 45 to have a
material effect on its consolidated financial position, results of operations or
cash flows.  Please refer to Note 1 to the accompanying consolidated financial
statements for further discussion of these accounting standards.

Seasonality

The Company's first quarter revenues have typically been
lower than the revenues in the immediately preceding fourth quarter because the
majority of the Company's customers begin a new fiscal year on January 1 and
capital expenditures tend to be lower in an organization's first quarter than in
its fourth quarter.  The Company anticipates that this seasonality will
continue; however, the seasonality between the fourth quarter and first quarter
may be further impacted by changes in the global economy and other factors.
Please refer to "Risk Factors-Our quarterly operating results may
fluctuate."

Application of Critical Accounting
Policies and Use of Estimates

Use of Estimates

The Company's consolidated financial statements are
prepared in accordance with accounting principles generally accepted in the
United States (herein after referred to as "GAAP") and the application
of GAAP requires management to make estimates that affect the Company's reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities.  In many instances, the Company could have
reasonably used different accounting estimates, and in other instances changes
in the accounting estimates are reasonably likely to occur from period to
period.  Accordingly, actual results could differ significantly from the
estimates made by management.  To the extent that there are material differences
between these estimates and actual results, the Company's future financial
statement presentation of its financial condition or results of operations will
be affected.

On an ongoing basis, the Company evaluates its estimates,
including those related to revenue recognition, provision for doubtful accounts
and sales returns, fair value of investments, fair value of acquired intangible
assets and goodwill, useful lives of intangible assets and property and
equipment, income taxes, Restructuring obligations, and contingencies and
litigation, among others.  The Company bases its estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources.  The Company refers to accounting estimates
of this type as "critical accounting estimates," which are discussed
further below.

In addition to these estimates and assumptions that are
utilized in the preparation of historical financial statements, the inability to
properly estimate the timing and amount of future revenues could significantly
impact the Company's future operations.  While the Company's software allows it
to monitor potential revenues and aids in its ability to manage the size of its
operations, management must make assumptions and estimates as to the timing and
amount of future revenue.  Specifically, the Company's sales personnel monitor
the status of all proposals, including the estimated closing date and potential
dollar amount of such transaction.  The Company aggregates these estimates
periodically to generate a sales pipeline and then evaluates the pipeline to
identify trends in the Company's business.  This pipeline analysis and related
estimates of revenue may differ significantly from actual revenues in a
particular reporting period as the estimates and assumptions were made using the
best available data at the time, which is subject to change.  Specifically, the
slowdown in the global economy and information technology spending has caused
and may continue to cause customer purchasing decisions to be delayed, reduced
in amount or canceled, all of which have reduced and could continue to reduce
the rate of conversion of the pipeline into contracts.  A variation in the
pipeline or in the conversion rate of the pipeline into contracts could cause
the Company to plan or budget inaccurately and thereby could adversely affect
the Company's business, financial condition or results of operations.  In
addition, because a substantial portion of the Company's software license
contracts close in the latter part of a quarter, management may not be able to
adjust the Company's cost structure to respond to a variation in the conversion
of the pipeline in a timely manner, and thereby the delays may adversely and
materially affect the Company's business, financial condition or results of
operations.

Critical Accounting Policies

In addition to making critical accounting estimates, the
Company must ensure that its financial statements are properly stated in
accordance with GAAP.  In many cases, the accounting treatment of a particular
transaction is specifically dictated by GAAP and does not require management's
judgment in its application, while in other cases, management's judgment is
required in selecting among available alternative accounting standards that
allow different accounting treatment for similar transactions (e.g., stock-based
compensation, restructuring activities, depreciation methodology, etc.).  The
Company believes that the following accounting policies are critical to
understanding the Company's historical and future performance, as these policies
relate to the more significant areas involving management's judgments and
estimates: revenue recognition, Restructuring-related expenses, stock-based
compensation, Option Repurchase, the provision for doubtful accounts, acquired
intangible assets, impairment of long-lived assets, other-than-temporary
declines in the market value of investments, and income taxes.

The Company's management has reviewed its critical
accounting policies, its critical accounting estimates, and the related
disclosures with our Disclosure and Audit Committees.  These policies, and the
Company's procedures related to these policies, are described in detail below.
In addition, please refer to Note 1 to the accompanying consolidated financial
statements for a further description of the Company's accounting policies.

Revenue Recognition

The Company generates its revenues primarily by licensing
software, providing software support and maintenance and providing professional
services to its customers.  The Company's software arrangements typically
include: (i) an end user license that provides for an initial fee in exchange
for a customer's use of the Company's products in perpetuity based on a
specified number of users; (ii) a maintenance arrangement that provides for
technical support and product updates over a period of 12 months; and (iii) a
professional services arrangement on a time and materials basis.

The Company recognizes software revenue using the
residual method pursuant to the requirements of Statement of Position No. 97-2
"Software Revenue Recognition" ("SOP 97-2"), as amended by
Statement of Position No. 98-9 "Software Revenue Recognition with Respect
to Certain Arrangements."  Under the residual method, revenue is recognized
when Company-specific objective evidence of fair value exists for all of the
undelivered elements in the arrangement (i.e., professional services and
maintenance), but does not exist for one or more of the delivered elements in
the arrangement (i.e., the software product).  Each license arrangement requires
careful analysis to ensure that all of the individual elements in the license
transaction have been identified, along with the fair value of each element.

The Company allocates revenue to each undelivered element
based on its respective fair value, with the fair value determined by the price
charged when that element is sold separately.  The Company determines the fair
value of the maintenance portion of the arrangement based on the renewal price
of the maintenance charged to the customer based on full deployment of the
licensed software products and the fair value of the professional services
portion of the arrangement based on the hourly rates that the Company charges
for these services when sold independently from a software license.  If evidence
of fair value cannot be established for the undelivered elements of a license
agreement, the entire amount of revenue from the arrangement is deferred and
recognized over the period that these elements are delivered.

For substantially all of the Company's software
arrangements, the Company defers revenue for the fair value of the maintenance
and professional services to be provided to the customer and recognizes revenue
for the software license when persuasive evidence of an arrangement exists and
delivery has occurred, provided the fee is fixed or determinable and collection
is deemed probable.  The Company evaluates each of these criteria as
follows:

- Evidence of an arrangement: The Company considers
a non-cancelable agreement signed by the Company and the customer to be evidence
of an arrangement.
- Delivery: Delivery is considered to occur when
media containing the licensed programs is provided to a common carrier or, in
the case of electronic delivery, the customer is given access to the licensed
programs.  The Company's typical end user license agreement does not include
customer acceptance provisions.
- Fixed or determinable fee: The Company considers
the fee to be fixed or determinable if the fee is not subject to refund or
adjustment.  If the arrangement fee is not fixed or determinable, the Company
recognizes the revenue as amounts become due and payable.
- Collection is deemed probable: The Company
conducts a credit review for all significant transactions at the time of the
arrangement to determine the credit-worthiness of the customer.  Collection is
deemed probable if the Company expects that the customer will be able to pay
amounts under the arrangement as payments become due.  If the Company determines
that collection is not probable, the Company defers the revenue and recognizes
the revenue upon cash collection.

A customer typically prepays maintenance for the first 12
months, and the related revenue is deferred and recognized over the term of the
initial maintenance contract.  Maintenance is renewable by the customer on an
annual basis thereafter.  Rates for maintenance, including subsequent renewal
rates, are typically established based upon a specified percentage of net
license fees as set forth in the arrangement.  Professional services revenue
primarily consists of implementation services related to the installation of the
Company's products and training revenues.  The Company's software is ready to
use by the customer upon receipt.  While many of the Company's customers may
choose to tailor the software to fit their specific needs, the Company's
implementation services do not involve significant customization to or
development of the underlying software code.  Substantially all of the Company's
professional services arrangements are on a time and materials basis and,
accordingly, are recognized as the services are performed, which is typically
over a three- to six-month period subsequent to licensing of the Company's
software.

Restructuring-Related Expenses

The Company's Restructuring charges are comprised
primarily of: (i) severance and associated employee termination costs related to
the reduction of the Company's workforce in 2002; (ii) lease termination costs
and/or costs associated with permanently vacating its facilities
("abandonment"); and (iii) impairment costs related to certain long-lived
assets abandoned.  The Company accounts for each of these costs in
accordance with SEC Staff Accounting Bulletin No. 100 "Restructuring and
Impairment Charges."  In addition, the Company accounts for the individual
components of the Restructuring as discussed further below.

The Company accounts for the costs associated with the
reduction of the Company's workforce in accordance with EITF Issue No. 94-3
"Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (Including Certain Costs Incurred in a
Restructuring)" ("EITF 94-3").  Accordingly, the Company records
the liability related to these termination costs when the following conditions
have been met: (i) management with the appropriate level of authority approves a
termination plan that commits the Company to such plan and establishes the
benefits the employees will receive upon termination; (ii) the benefit
arrangement is communicated to the employees in sufficient detail to enable the
employees to determine the termination benefits; (iii) the plan specifically
identifies the number of employees to be terminated, their locations and their
job classifications; and (iv) the period of time to implement the plan does not
indicate changes to the plan are likely.  The termination costs recorded by the
Company are not associated with nor do they benefit continuing activities.

The Company accounts for the costs associated with lease
termination and/or abandonment in accordance with EITF 88-10.  Accordingly, the
Company records the costs associated with lease termination and/or abandonment
when the leased property has no substantive future use or benefit to the
Company.  Under EITF 88-10, the Company records the liability associated with
lease termination and/or abandonment as the sum of the total remaining lease
costs and related exit costs, less probable sublease income.  The Company
accounts for costs related to long-lived assets abandoned in accordance with
SFAS 144 and, accordingly, charges to expense the net carrying value of the
long-lived assets when the Company ceases to use the assets.

Inherent in the estimation of the costs related to the
Company's Restructuring efforts are assessments related to the most likely
expected outcome of the significant actions to accomplish the Restructuring.  In
determining the charge related to the Restructuring, the majority of estimates
made by management related to the charge for excess facilities.  In determining
the charge for excess facilities, the Company was required to estimate future
sublease income, future net operating expenses of the facilities, and brokerage
commissions, among other expenses.  The most significant of these estimates
related to the timing and extent of future sublease income in which to reduce
the Company's lease obligations.  Specifically, in determining the Restructuring
obligations related to facilities as of December 31, 2002, the Company reduced
its lease obligations by estimated sublease income of $159.1 million.  The
Company based its estimates of sublease income, in part, on the opinions of
independent real estate experts, current market conditions and rental rates, an
assessment of the time period over which reasonable estimates could be made, the
status of negotiations with potential subtenants, and the location of the
respective facility, among other factors.

These estimates, along with other estimates made by
management in connection with the Restructuring, may vary significantly
depending, in part, on factors that may be beyond the Company's control.
Specifically, these estimates will depend on the Company's success in
negotiating with lessors, the time periods required to locate and contract
suitable subleases and the market rates at the time of such subleases.
Adjustments to the facilities reserve will be required if actual lease exit
costs or sublease income differ from amounts currently expected.  The Company
will review the status of Restructuring activities on a quarterly basis and, if
appropriate, record changes to its Restructuring obligations in current
operations based on management's most current estimates.

Stock-Based Compensation

The Company has elected to continue to account for its
employee stock-based compensation plans using the intrinsic value method, as
prescribed by APB No. 25 "Accounting for Stock Issued to Employees"
and interpretations thereof (collectively "APB 25") versus the fair
value method allowed by SFAS No. 123 "Accounting for Stock-Based
Compensation" ("SFAS 123").  Accordingly, deferred compensation
is only recorded if the current price of the underlying stock exceeds the
exercise price on the date of grant.  The Company records and measures deferred
compensation for stock options granted to non-employees at their fair value.
Deferred compensation is expensed on a straight-line basis over the vesting
period of the related stock option, which is generally five years.  Please refer
to the section entitled "Employee Stock Options" for further
discussion of the Company's accounting for its stock-based compensation
plans.

Option Repurchase

The Company accounted for the Option Repurchase in
accordance with APB 25.  Specifically, the Company determined that the
consideration paid for the Eligible Options represented "substantial
consideration" as required by Issue 39(f) of EITF Issue No. 00-23
"Issues Relating to Accounting for Stock Compensation Under APB Opinion No.
25 and FASB Interpretation No. 44," as the $1.85 offered by the Company for
each Eligible Option was at least the fair value for each Eligible Option, as
determined using the Black-Scholes option-pricing model.  In determining the
fair value of the Eligible Options using the Black-Scholes option-pricing model,
the Company used the following assumptions:  (i) the expected remaining life was
deemed to be the remaining term of the stock options, which ranged from
approximately seven years to eight years; (ii) a volatility of 45.0% during the
expected life; (iii) a risk-free interest rate of 4.0%; and (iv) no dividends.
The repurchase amount of $1.85 per Eligible Option was established at the
commencement of the offer period and remained unchanged throughout the offer
period.

Because substantial consideration was provided in exchange
for repurchase of Eligible Options, as described in Issue 39(f) of EITF Issue
No. 00-23, the Company concluded that variable accounting would not be required
for stock options granted to participants more than six months prior to the date
of the offer.  Further, variable accounting is not required under Issue 39(a) of
EITF Issue No. 00-23 for Eligible Options subject to the offer that were not
surrendered for repurchase, because: (i) the shares of common stock offered were
fully vested and non-forfeitable; and (ii) the number of common shares to be
received by an employee who accepts the offer is based on the number of
surrendered stock options multiplied by $1.85, divided by the fair value of the
common stock at the date of repurchase.  The Company further concluded that the
"look back" and "look forward" provisions of FASB
Interpretation No. 44, paragraph 45 apply to the stock options surrendered for
repurchase.  Because the Company had granted no stock options to the holders of
the Eligible Options in the six months preceding the commencement of the tender
offer period, variable accounting is not required for any of the Company's
outstanding stock options not subject to the Option Repurchase.  The Company
does not intend to grant stock options to any participants in the Option
Repurchase for at least six months following the conclusion of the tender offer
period.  If any stock options are granted to participants in the Option
Repurchase within the six months following the end of the tender offer period,
those stock options will receive variable accounting.

Provision for Doubtful Accounts

The Company initially records its provision for
doubtful accounts based on its historical experience and then adjusts this
provision at the end of each reporting period based on a detailed assessment of
its accounts receivable and allowance for doubtful accounts.  In estimating the
provision for doubtful accounts, management considers: (i) the aging of the
accounts receivable; (ii) trends within and ratios involving the age of the
accounts receivable; (iii) the customer mix in each of the aging categories and
the nature of the receivable (i.e. license, consulting, maintenance, etc.); (iv)
the Company's historical provision for doubtful accounts, which has ranged on a
quarterly basis between 1.0% and 3.5% of total revenues and on an annual basis
between 1.0% and 2.2% of total revenues (generally approximately 1% of total
revenues); (v) the credit-worthiness of each customer; (vi) the economic
conditions of the customer's industry; and (vii) general economic conditions,
among other factors.

Should any of these factors change, the estimates made by
management will also change, which could impact the level of the Company's
future provision for doubtful accounts.  Specifically, if the financial
condition of the Company's customers were to deteriorate, affecting their
ability to make payments, an additional provision for doubtful accounts may be
required.  If the Company had recorded its provision for doubtful accounts based
on the historical annual ranges above, the Company's provision for doubtful
accounts for 2002 would have ranged between $16.0 million and $36.0 million,
compared to the $21.4 million reflected in the accompanying consolidated
statement of operations for 2002.  The Company recorded the provision for
doubtful accounts for 2002 at the lower end of this range (approximately 1.0% of
total revenues), based on improvement in the above metrics, including a decrease
in days sales outstanding from 73 days as of December 31, 2001, to 63 days as of
December 31, 2002.  A number of the Company's customers are in the
telecommunications industry and, as discussed previously, as part of the
Company's evaluation of its provision for doubtful accounts, the Company has
considered not only the economic conditions in that industry but also the
financial condition of the Company's customers in that industry in determining
the provision for doubtful accounts.  If conditions continue to deteriorate in
that industry, or any other industry, then an additional provision for doubtful
accounts may be required.

Acquired Intangible Assets

The Company accounts for its purchases of acquired
companies in accordance with SFAS No. 141 "Business Combinations"
("SFAS 141") and accounts for the related acquired intangible assets
in accordance with SFAS 142.  In accordance with SFAS 141, the Company allocates
the cost of the acquired companies to the identifiable tangible and intangible
assets and liabilities acquired, with the remaining amount being classified as
goodwill.  Certain intangible assets, such as "acquired technology,"
are amortized to expense over time, while in-process research and development
costs ("IPR&D"), if any, are recorded at the acquisition date.

The majority of entities acquired by the Company do not
have significant tangible assets and, as a result, a significant portion of the
purchase price is typically allocated to intangible assets and goodwill.  The
Company's future operating performance will be impacted by the future
amortization of intangible assets, potential charges related to IPR&D for
future acquisitions, and potential impairment charges related to goodwill.
Accordingly, the allocation of the purchase price to intangible assets and
goodwill has a significant impact on the Company's future operating results.
The allocation of the purchase price of the acquired companies to intangible
assets and goodwill requires management to make significant estimates and
assumptions, including estimates of future cash flows expected to be generated
by the acquired assets and the appropriate discount rate for these cash flows.
Should different conditions prevail, material write-downs of intangible assets
and/or goodwill could occur.

As required by SFAS 142, the Company has not amortized
goodwill associated with acquisitions completed after June 30, 2001, for any
period presented and ceased amortization of goodwill associated with
acquisitions completed prior to July 1, 2001, effective January 1, 2002.  Prior
to January 1, 2002, the Company amortized goodwill associated with the pre-July
1, 2001 acquisitions over three to five years using the straight-line method.
Identifiable intangibles (acquired technology) are currently amortized over
three years using the straight-line method.  As described below, in lieu of
amortizing goodwill, the Company tests goodwill for impairment periodically and
records any necessary impairment in accordance with SFAS 142.

Impairment of Long-Lived Assets

The Company tests goodwill for impairment in accordance
with SFAS 142, which requires that goodwill be tested for impairment at the
"reporting unit level" ("Reporting Unit") at least annually
and more frequently upon the occurrence of certain events, as defined by SFAS
142.  Consistent with the Company's determination that it has only one reporting
segment, the Company has determined that it has only one Reporting Unit,
specifically the license, implementation and support of its software
applications.  Goodwill is tested for impairment annually on July 1 in a two-step
process.  First, the Company must determine if the carrying amount of its
Reporting Unit exceeds the "fair value" of the Reporting Unit based on
quoted market prices of the Company's common stock, which would indicate that
goodwill may be impaired.  If the Company determines that goodwill may be
impaired, the Company compares the "implied fair value" of the
goodwill, as defined by SFAS 142, to its carrying amount to determine the
impairment loss, if any.

The Company evaluates all of its long-lived assets,
including intangible assets other than goodwill, for impairment in accordance
with the provisions of SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS 144").  SFAS 144 requires
that long-lived assets and intangible assets other than goodwill be evaluated
for impairment whenever events or changes in circumstances indicate that the
carrying value of an asset may not be recoverable based on expected undiscounted
cash flows attributable to that asset.  Should events indicate that any of the
Company's assets are impaired, the amount of such impairment will be measured as
the difference between the carrying value and the fair value of the impaired
asset and recorded in earnings during the period of such impairment.

Other-Than-Temporary Declines in the Market Value of
Investments

The Company records an investment impairment charge
when it determines an investment has experienced a decline in value that is
other-than-temporary.  To make this determination, the Company reviews the
carrying value of its short-term investments and marketable equity securities,
along with investments accounted for under the cost method, at the end of each
reporting period to determine if any investments are impaired.  This review
includes an evaluation of historical and projected financial performance,
expected cash needs and recent funding events.  Other-than-temporary impairments
are recognized in operations if: (i) the market value of the investment is below
its current carrying value for an extended period, which the Company generally
defines as six to nine months; (ii) the issuer has experienced significant
financial difficulties; or (iii) the issuer has experienced significant problems
in raising capital to continue operations, among other factors.  Future adverse
changes in market conditions or poor operating results of underlying investments
could result in an inability to recover the carrying value of the investments,
thereby possibly requiring an impairment charge in the future.

Income Taxes

As of December 31, 2002, the Company's valuation
allowance on its deferred tax assets pertains to certain tax credits and net
operating loss carryforwards resulting from the exercise of certain employee
stock options.  The valuation allowance will be reduced in the period in which
the Company realizes a benefit on its tax return from a reduction of income
taxes payable from the utilization of these credits and losses.  When realized,
the tax benefit of these credits and losses will be accounted for as a credit to
stockholders' equity rather than as a reduction of income tax expense.

The Company is required to estimate its income taxes in
each of the jurisdictions in which the Company operates.  This involves
estimating the Company's current tax liabilities in each jurisdiction, including
the impact, if any, of additional taxes resulting from tax examinations as well
as making judgments regarding the recoverability of deferred tax assets.  To the
extent recovery of deferred tax assets is not likely based on the Company's
estimation of future taxable income in each jurisdiction, a valuation allowance
is established.  Tax liabilities can involve complex issues and may require an
extended period to resolve.   The Company has considered future taxable income
and the existence of prudent and feasible tax planning strategies in assessing
the need for an additional valuation allowance on its remaining deferred tax
assets and has concluded that no additional allowance is currently required.  In
the event the Company were to determine in the future that it would not be able
to realize all or part of its net deferred tax assets, an adjustment to the
deferred tax assets would be charged to income in the period such determination
was made.

Pre-approval of Non-Audit Services

On October 15, 2002, the Audit
Committee of the Board of Directors approved the engagement of KPMG LLP, the
Company's independent auditors, to perform certain permitted tax-related and
other non-audit services for the Company.  However, the Audit Committee resolved
that, to the extent the fees for any particular engagement exceed $20,000, each
such engagement must be approved in advance in writing by the Audit Committee or
its appointed delegate.

Employee Stock Options

Section I.  Description of Plans

Since the Company's inception in 1993, the Company's
compensation philosophy has been based on its belief in broad employee
ownership.  Accordingly, the Company's stock option program has been a key
component of the Company's compensation packages for its employees and has been
instrumental in attracting and retaining talented employees and aligning their
interests with the interests of existing stockholders.  The Company's stock
option program consists of two plans:  the Siebel Systems, Inc. 1996 Stock
Option Plan, which amended and restated the Company's 1994 Stock Option Plan and
the 1996 Supplemental Stock Option Plan (collectively, the "1996
Plan"); and the Siebel Systems, Inc. 1998 Equity Incentive Plan (the
"1998 Plan").  Stock options granted to executive officers, key
employees and non-employee directors are made under the 1996 Plan and stock
options granted to employees other than officers and directors are made under
the 1998 Plan.  The Company's Board of Directors and stockholders have approved
the 1996 Plan, and the Company's Board of Directors have approved the 1998 Plan.

All stock option grants are made after a review by, and
with the approval of, the Compensation Committee of the Board of Directors.  All
members of the Compensation Committee are independent directors, as defined in
the applicable rules for issuers traded on The Nasdaq Stock Market.
Substantially all of the Company's employees participate in one of the above
plans, thereby providing the Company the ability to meet its goal of long-term
retention of its employees.  Stock options granted under these plans expire no
later than ten years from the grant date and generally vest over five years.
Please refer to the "Report of the Compensation Committee of the Board of
Directors on Executive Compensation" appearing in Item 11 of this Annual
Report on Form 10-K for further information concerning the policies and
procedures of the Company and the Compensation Committee regarding the use of
stock options.

Section II.  Significant Actions Taken During 2002
Related to Stock Options

Historically, stock options have been an important
component of total compensation for the Company's employees.  Accordingly,
substantially all employees are granted stock options upon employment, including
the Company's assumption of outstanding stock options of acquired businesses.
In addition, the Company has on occasion rewarded existing employees for high
levels of performance with additional grants of stock options.   These factors,
coupled with significant growth in the Company's employee base, resulted in a
significant number of outstanding stock options relative to shares outstanding
as of December 31, 2001 (the Company had 247.2 million stock options outstanding
as compared to 467.0 common shares outstanding).

The Company recognizes that stock options may dilute
existing stockholders and, accordingly, took several steps during 2002 and early
2003 to reduce the number of stock options outstanding by 87.7 million, or 35%,
from the levels outstanding as of December 31, 2001.  As a result, stock options
outstanding relative to shares outstanding decreased from 53% as of December 31,
2001, to 33% as of December 31, 2002 (calculated as if all actions had occurred
as of December 31, 2002).  These actions, each of which is described further
below, included: (i) the Option Repurchase; (ii) the cancellation of 26.0
million of the Company's CEO's stock options in January 2003; and (iii)
significantly reduced levels of stock option grants during 2002, coupled with
forfeitures of stock options by terminated employees.

The Company believes that these actions will continue to
better align the interests of its employees and management with the interests of
its stockholders.

Option Repurchase

As discussed previously and in Note 7 to the accompanying
consolidated financial statements, the Company completed a tender offer during
2002 to repurchase 28.1 million stock options for total consideration of $51.9
million, consisting of $31.5 million of fully vested, non-forfeitable shares of
the Company's common stock (5.5 million shares) and $20.4 million in cash.  A
total of 4.1 million of these shares are subject to a holding period as further
described in Note 7 to the accompanying consolidated financial statements.  The
Company offered to repurchase these stock options primarily through the issuance
of shares of its common stock in order to: (i) improve employee morale by
eliminating "out-of-the-money" stock options; (ii) reduce the net
future dilution to existing stockholders; and (iii) better align employees'
interests with those of stockholders.  As a result of the Option Repurchase,
outstanding stock options decreased by 11% from the levels as of December 31,
2001, representing net potential dilution to existing stockholders of 5%.  The
potential dilution to stockholders is calculated as the stock options canceled
less 5.5 million shares of common stock issued in exchange for the stock
options, divided by the number of shares of common stock outstanding as of
December 31, 2001.

CEO Option Cancellation

As described more fully in Note 7 to the accompanying
consolidated financial statements, at the request of its CEO, the Company
cancelled 26.0 million of the CEO's stock options in January 2003.  The stock
options cancelled had exercise prices ranging from $4.91 to $59.81 per share and
a Black-Scholes calculated fair value of $56.1 million at the time of
cancellation (stock options that were "in-the-money" at the time of
cancellation represented $30.2 million, or 54%, of the total fair value at
cancellation).  This cancellation represented all stock options granted to the
Company's CEO since October 1998.  The Company's CEO requested the cancellation
of these stock options primarily to reduce the number of outstanding stock
options relative to the number of shares outstanding.  As a result of this
cancellation, outstanding stock options decreased by 10% from the levels as of
December 31, 2001, representing net potential dilution to existing stockholders
of 6%.  The potential dilution to stockholders is calculated as the stock
options canceled, divided by the number of shares of common stock outstanding as
of December 31, 2001.  The Company has provided no compensation in exchange for
the cancellation of the CEO's stock options, nor will it provide any
compensation in the future in exchange for such cancellation.

2002 Grants and Forfeitures

In order to maintain the proper balance between the need
to attract and retain employees and minimize the dilution to existing
stockholders in 2002, the Company adjusted its compensation structure to
significantly reduce the number of stock options issued to new and existing
employees.  Moreover, the Company limited the number of stock options that it
granted to its employee base, such that substantially all 2002 stock option
grants related to newly hired employees.  Accordingly, the Company's CEO and
five most highly compensated executive officers in 2002 (collectively the
"Named Executive Officers") did not receive any stock option grants
during 2002, other than a grant to an officer hired in the third quarter of
2002.  In addition, the number of stock options outstanding decreased during
2002 as a result of forfeitures by employees upon termination, the majority of
which resulted from the Company's workforce reduction described above under the
heading "Restructuring."

As a result of the forfeitures by employees upon
termination and the Company's limitation of stock option grants, the Company's
outstanding stock options decreased by 9% from the levels as of December 31,
2001, representing a decrease in net potential dilution to existing stockholders
of 5%.  This percentage decrease compared to an increase in incremental net
potential dilution to stockholders of 8% and 21% during the years ended December
31, 2000 and 2001, respectively.  The potential dilution to stockholders from
stock options (otherwise known as the "Dilution Percentage") is
calculated as the stock options forfeited by employees leaving the Company, net
of new stock options granted during the year, divided by the total outstanding
shares of common stock at the beginning of the year.  Please refer to Note 7 to
the accompanying consolidated financial statements for a rollforward of stock
option activity, including stock options granted and forfeited, for each of the
years ended December 31, 2000, 2001 and 2002.

2003 Anticipated Stock Option Grants

The Company intends to continue to manage the number of
stock options granted in the future, while still providing competitive
compensation packages to its employees. The Company currently expects that the
incremental Dilution Percentage resulting from new stock option grants for 2003
will be less than the Dilution Percentage for 2000 and 2001, but will be higher
than the percentage for 2002.  This estimate could differ from the actual
percentage for 2003, depending on various factors, including changes in
estimated stock option grants for planned hiring, acquisition, merit and
retention-based programs.

Section III.  General Option Information

Combined plan activity for the year ended December 31,
2002, along with the impact on options outstanding as a result of the
cancellation of the Company's CEO's stock options, is summarized as follows:

`Shares                    Wtd. Avg.
                                                               Available    Number of      Exercise
                                                               for Grant      Shares    Price per Share
                                                              ------------ ------------ --------------- 
   Balances, December 31, 2001............................... 117,178,547  247,203,762   $       23.81
     Issuance of restricted stock............................    (200,000)          --
     Options granted to employees............................  (5,667,300)   5,667,300   $       20.62
     Options granted to officers and directors...............    (220,000)     220,000   $        6.20
     Options exercised.......................................          --  (10,650,943)  $        5.97
     Options forfeited/canceled upon termination.............  28,012,567  (28,910,626)  $       32.84
     Options repurchased.....................................  22,203,279  (28,056,712)  $       62.81
                                                              ------------ ------------ ---------------
   Balances, December 31, 2002............................... 161,307,093  185,472,781   $       17.42
     Options cancelled by the Company's CEO in January 2003..  25,950,000  (25,950,000)  $       34.63
                                                              ------------ ------------ ---------------
   Balances, December 31, 2002, giving effect to
      the CEO's option cancellation.......................... 187,257,093  159,522,781   $       14.62
                                                              ============ ============   =============`

The Company continues to believe in broad-based employee
stock ownership.  As the table below indicates, the Company has continued to
allocate the vast majority of its stock options to its employees who are not
officers and directors.  Summarized below is the distribution of the Company's
stock options for 2000, 2001 and 2002:

`Year Ended December 31,
                                                                  ------------------------------------
                                                                     2000        2001        2002
                                                                  ---------- ----------- -------------
Grants during the period as a percentage of total options granted:
  Named Executive Officers.......................................      22.9 %      12.4 %        3.4 %
  All other officers and directors as a group....................       1.3         2.4          0.3
                                                                   ---------- ----------- ------------
    Total for all officers and directors.........................      24.2        14.8          3.7
  All other employees as a group.................................      75.8        85.2         96.3
                                                                   ---------- ----------- ------------
    Total all grants.............................................     100.0 %     100.0 %      100.0 %
                                                                   ========== =========== ============`

The above table does not reflect the cancellation of stock
options granted to the Company's CEO in 2000 and 2001.  After considering the
cancellation of these stock options, during the past three years more than 90%
of the Company's stock options were distributed to employees who were not
officers or directors.

The following table details the "in-the-money" and
"out-of-the-money" status of the Company's stock options outstanding
as of December 31, 2002:

`Options Outstanding                 Options Exercisable
                   ------------------------------------------- --------------------------
                                     Wtd. Avg.      Wtd. Avg.                  Wtd. Avg.
                      Number         Remaining       Exercise     Number       Exercise
Options              of Shares     Life (Years)       Price     of Shares        Price
------------------ -------------   -------------  ------------ ------------ -------------
In-the-Money         63,968,804             4.6    $     3.58   52,374,819   $      3.45
Out-of-the-Money    121,503,977             7.9    $    24.71   47,743,441   $     25.01
------------------ -------------   -------------  ------------ ------------ -------------
                    185,472,781             6.8    $    17.42  100,118,260   $     13.73
                   =============                               ============`

In-the-money stock options in the above table have
exercise prices below the closing price of the Company's common stock as of
December 31, 2002, of $7.40 and out-of-the money stock options have exercise
prices equal to or greater than $7.40.

For additional information regarding the Company's
employee stock option plans, please refer to Notes 1 and 7 to the accompanying
consolidated financial statements.

Section IV.  Accounting for Stock-Based Compensation

The Company accounts for its employee stock-based
compensation plans using the intrinsic value method, as prescribed by APB 25.
Accordingly, deferred compensation is only recorded if the current market price
of the underlying stock exceeds the exercise price of the stock option on the
date of grant.  The Company records and measures deferred compensation for stock
options granted to non-employees at their fair value.  Deferred compensation is
expensed on a straight-line basis over the vesting period of the related stock
option, which is generally five years.  There were no grants of stock options at
exercise prices below the fair market value of the Company's common stock on the
date of grant during 2000, 2001 and 2002.  The Company did, however, grant
100,000 shares of restricted common stock to its Senior Vice President,
Worldwide Sales in connection with his commencement of employment in September
2002 for cash consideration of $100.  The shares of restricted stock had a fair
value at the date of grant of $647,000, which was recorded as deferred
compensation and will be amortized to compensation expense over the five-year
vesting period.

An alternative to the intrinsic value method of
accounting for stock options is the fair value approach allowed by SFAS 123.
The Company has continued to follow the intrinsic value method of APB 25, as the
Company believes the accounting for stock options under SFAS 123 is highly
subjective and does not necessarily reflect the economic substance of an
employee stock option.  Specifically, the compensation cost under SFAS 123 is
recognized ratably over the vesting period, regardless of whether the stock
options' exercise prices are below the fair value of the Company's common stock.
In addition, compensation expense related to vested stock options that are
subsequently forfeited or canceled is reflected in operations, despite the fact
that the stock options did not provide an equivalent monetary value in
compensation to the employee or dilute existing stockholders.  Subsequent to
cancellation of a stock option, no additional compensation expense for that
cancelled stock option is reported in the pro forma disclosure of stock-based
compensation.

Further, under the fair value approach, employee stock
options are required to be valued at grant date using an option valuation model,
such as Black-Scholes.  The Company believes there are limitations to the
appropriateness of the Black-Scholes option valuation model, including the fact
that the Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions,
are fully transferable, and typically have shorter terms.  In addition, the
Black-Scholes option valuation model requires the use of subjective assumptions
including expected stock price volatility and the expected remaining life.
Because the Company's stock-based awards have characteristics significantly
different from those of traded options and because changes in the subjective
input assumptions can materially affect the fair value estimate, in the
Company's opinion, the existing models that are available to value stock options
do not provide an appropriate measure of the fair value of stock-based awards to
its employees.

As required by SFAS 123, the Company discloses the pro
forma effect on its earnings and earnings per share data, as if the Company had
adopted SFAS 123, in the notes to the accompanying consolidated financial
statements.  This pro forma effect on earnings represents the amortization of
the deferred compensation that is computed using the Black-Scholes option
valuation model at the date of the stock option grant.  Summarized below are the
pro forma effects on the Company's net income (loss), if the Company had elected
to use the fair value approach prescribed by SFAS 123 to account for its
employee stock-based compensation plans (in thousands):

`Year Ended December 31,
                                                                                   -----------------------------------
                                                                                      2000        2001        2002
                                                                                   ---------- ----------- ------------
 Net income (loss) available to common stockholders: 
   As reported.................................................................... $ 123,144  $  254,575  $   (35,704)
                                                                                   ---------- ----------- ------------
   Less compensation expense under SFAS 123 related to:
     In-the-money stock options...................................................    29,227      28,366       23,114
     Stock purchase rights under the Purchase Plan................................    16,515      21,634       23,087
                                                                                   ---------- ----------- ------------
        Total pro forma expense, in the money stock options and Purchase Plan.....    45,742      50,000       46,201
     Out-of-the-money stock options...............................................    83,853     232,294      261,160
     Stock options granted to the Company's CEO (cancelled in January 2003).......    40,087     132,181      110,553
     Stock options forfeited/cancelled in connection with terminations............    30,858     108,423       32,959
     Stock options repurchased on September 30, 2002..............................    85,720     284,836      595,297
                                                                                   ---------- ----------- ------------
        Total pro forma expense giving effect to SFAS 123.........................   286,260     807,734    1,046,170
                                                                                   ---------- ----------- ------------
   Pro forma giving effect to SFAS 123............................................ $(163,116) $ (553,159) $(1,081,874)
                                                                                   ========== =========== ============`

As the table above illustrates, $1,000.0 million, or
96%, of the total pro forma expense for stock options during the year ended
December 31, 2002, relates to: (i) the CEO's stock options that were cancelled
for no consideration; (ii) stock options forfeited by employees upon termination
for no consideration; (iii) stock options that are significantly out of the
money (i.e., the weighted-average exercise price of the out-of-the-money stock
options is $24.71 per share compared to a closing price of $7.40 per share as of
December 31, 2002); or (iv) stock options exchanged in the Option Repurchase for
consideration substantially less than is reflected in the table above as a pro
forma expense (i.e., the Company repurchased all stock options for $54.9 million
versus $595.3 million recognized during 2002, as required by SFAS 123).  In
addition, 84% and 94% of the pro forma expense for stock options for the years
ended December 31, 2000 and 2001, respectively, relates to these same option
categories.

Please refer to Note 1 to the accompanying consolidated
financial statements for a further discussion of the fair value approach
prescribed by SFAS 123, including the assumptions used to determine the fair
value of and resulting SFAS 123 expense related to stock options granted, and
the procedures followed by the Company in determining those assumptions.

Section V.  Executive Stock-Based Compensation

As discussed above, the Company limited stock option
grants to employees hired in 2002.  Accordingly, the only stock options granted
to the Named Executive Officers during 2002 related to an officer hired in the
third quarter of 2002.  Specifically, the Company granted 200,000 stock options
and 100,000 shares of restricted common stock to the Company's Senior Vice
President, Worldwide Sales in October 2002.  Please refer to "Summary
Compensation Table" in Item 11(a) of this Annual Report on Form 10-K for
more information regarding the terms of this restricted common stock grant.

The following table sets forth certain information regarding
stock options granted to the Named Executive Officers during 2002:

`Potential Realizable Value
                        Number of     Percent of                                 at Assumed Annual Rates of
                       Securities    Total Options                              Stock Price Appreciation for
                       Underlying     Granted to     Exercise or                    the Option Term (4)
                         Options       Employees      Base Price   Expiration   -----------------------------
Officer Name           Granted (1)    in 2002 (2)   ($/Share) (3)     Date            5%             10%
--------------------- -------------  -------------  ------------- ------------  --------------  -------------
Thomas M. Siebel               --            -- %    $        --           --    $         --    $        --
Paul Wahl                      --            -- %    $        --           --    $         --    $        --
R. David Schmaier              --            -- %    $        --           --    $         --    $        --
Kenneth A. Goldman             --            -- %    $        --           --    $         --    $        --
Richard P. Chiarello      200,000          3.40 %    $      6.20   10/21/2012    $    779,829    $ 1,976,241
William R. McDermott           --            -- %    $        --           --    $         --    $        --`

1. Options vest at a rate of 5% each quarter after October
21, 2003, and have a term of ten years.
2. Based on an aggregate of 5.9 million shares subject to
options granted to employees pursuant to the Company's 1996 and 1998 Plans
during the year ended December 31, 2002, including grants to the Named Executive
Officers.
3. Under all stock option plans, the stock option exercise
price is equal to the fair market value at the date of grant.
4. The potential realizable value is calculated based on the
term of the option at the time of grant (ten years). Stock price appreciation of
5% and 10% is assumed pursuant to rules promulgated by the SEC and does not
represent the Company's prediction of its stock price performance.

The following summarizes the distribution and dilutive
impact of the stock options held by the Company's Named Executive Officers as of
December 31, 2000, 2001 and 2002:

`Year Ended December 31,
                                                                                    -----------------------------------
                                                                                       2000       2001        2002
                                                                                    ---------- ----------- ------------
Stock options held by Named Executive Officers as a percentage of:
  Total options outstanding.......................................................      28.4 %      23.8 %       29.3 %
                                                                                    ========== =========== ============
  Outstanding shares of common stock..............................................      11.3 %      12.6 %       11.2 %
                                                                                    ========== =========== ============`

As discussed above, the Company cancelled 26.0 million
stock options held by its CEO in January 2003.  Accordingly, the stock options
held by the Company's Named Executive Officers as a percentage of both
outstanding stock options and shares of common stock is expected to decrease in
2003.  Specifically, this cancellation would have reduced the stock options held
by Named Executive Officers as a percentage of stock options and shares of
common stock outstanding to 17.8% and 5.8%, respectively, as of December 31,
2002.

The following table sets forth for each of the Named
Executive Officers the shares acquired and the value realized on each exercise
of stock options during the year ended December 31, 2002, and the number and
value of securities underlying unexercised options held by the Named Executive
Officers as of December 31, 2002:

`Number of
                                                            Securities Underlying       Value of Unexercised
                                                            Unexercised Options at     In-the-Money Options at
                            Shares                           December 31, 2002 (2)      December 31, 2002 (3)
                          Acquired on       Value         -------------------------- ---------------------------
Officer Name               Exercise      Realized (1)     Exercisable  Unexercisable  Exercisable  Unexercisable
------------------------ ------------- ---------------   ------------  -------------  ------------ -------------
Thomas M. Siebel (4)        1,000,000   $  34,586,250      32,436,142    12,199,992   $91,834,069   $ 8,757,464
Paul Wahl                     500,000   $  13,568,063       1,552,000     2,450,000   $        --   $        --
R. David Schmaier             455,824   $  10,758,740       1,018,576     1,861,427   $ 1,267,256   $ 2,458,956
Kenneth A. Goldman             50,000   $     760,900         840,000     1,780,000   $        --   $        --
Richard P. Chiarello               --   $          --              --       200,000   $        --   $   240,000
William R. McDermott           15,000   $     249,450              --            --   $        --   $        --`

1. Based on the fair market value of the Company's Common
Stock on the exercise date, minus the exercise price, multiplied by the number
of shares exercised.
2. Represents the total number of shares of the Company's
common stock subject to stock options held by the Named Executive Officers as of
December 31, 2002.
3. Based on the fair market value of the Company's Common
Stock as of December 31, 2002 ($7.40 per share), minus the exercise price,
multiplied by the number of shares underlying the options.
4. As discussed above, the Company cancelled 26.0 million
stock options held by Mr. Siebel in January 2003 and as a result, Mr. Siebel has
a total of 18.7 million stock options that remain outstanding.  Of the 26.0
million stock options cancelled, 15.1 million were exercisable and 10.9 million
were unexercisable.  The "in-the-money" value of the stock options
cancelled was $14.9 million as of December 31, 2002.

Section VI.  Equity Compensation Plan Information

The number of shares issuable upon exercise of
outstanding stock options, the weighted-average exercise price of the
outstanding options, and the number of stock options remaining for future
issuance for each of the Company's plans are summarized as follows:

`Number of Shares
                                        Number of     Weighted     Remaining Available
                                      Shares to Be     Average         for Future
                                       Issued Upon    Exercise       Issuance Under
                                       Exercise of    Price of     Equity Compensation
                                       Outstanding   Outstanding    Plans (Excluding
           Plan Category                 Options       Options     Options Outstanding)
------------------------------------  ------------- -----------    -------------------
 Equity compensation plans:
   Approved by shareholders (1).....    85,923,893   $   15.61             45,404,042
   Not approved by shareholders (2).    98,102,634   $   19.14            116,831,667
   Acquired companies' plans (3)....     1,446,254   $    8.32                     --
                                      -------------   ---------    -------------------
                                       185,472,781   $   17.42            162,235,709
                                      =============   =========    ===================`

1. Includes 44,475,426 stock options available for future
issuance under the 1996 Plan, which is used for grants to officers and
directors.  This amount also includes 928,616 shares available under Siebel
Systems' Employee Stock Purchase Plan.  As described further in Note 7 to the
accompanying consolidated financial statements, at the request of our CEO, we
cancelled 26.0 million of our CEO's stock options in January 2003.  As a result
of this cancellation, the number of stock options outstanding under the 1996
Plan decreased by 26.0 million and the number of stock options available for
grant increased by like amount.
2. Represents shares available under the 1998 Plan, which is
used for grants to employees other than officers and directors.  Please refer to
the summary of the 1998 Plan below for a further description of the 1998
Plan.
3. The Company has assumed certain stock options granted to
former employees of acquired companies (the "Acquired Options").  All
of the Acquired Options have been adjusted to give effect to the conversion
under the terms of the agreements between the Company and the companies
acquired.  The Acquired Options generally become exercisable over a four-year
period and expire ten years from the date of grant.  Additional stock options
will not be granted under any of the acquired companies' plans, and these plans
have not been approved by the Company's stockholders.

Summary of the 1998 Equity Incentive Plan

The following is a summary of the major provisions of the
1998 Plan:

Shares Reserved for Issuance:  The 1998 Plan
reserves for issuance up to 240.0 million shares of Company Common Stock
pursuant to the exercise of stock options, the receipt of stock bonus awards and
the purchase of restricted stock.  The number of shares available for future
grant and previously granted but unexercised options is subject to adjustment
for any future stock dividend, splits, mergers, combinations, or other changes
in capitalization as described in the 1998 Plan.

Eligibility:  Nonstatutory stock options, stock
bonus awards, and rights to acquire restricted stock may be granted to
consultants and to employees who are not officers of the Company.

Stock Options:  Nonstatutory stock options, which
are not intended to satisfy the requirements of Section 422 of the Code, may be
granted under the 1998 Plan.  The exercise price of a stock option may not be
less than eighty-five percent (85%) of the fair market value of the stock
underlying the stock option on the date of grant.  Payment of the exercise price
may be made in cash, by delivery of other Company common stock, by promissory
note, or in any other form of legal consideration approved by the Board of
Directors.  Stock options granted under the 1998 Plan have a maximum term of ten
(10) years.  A stock option generally is exercisable in installments based on
the continuous service of the optionholder.  If an optionholder's service to the
Company terminates for any reason, the stock option remains exercisable for a
period of approximately three (3) months or such longer period as my be
determined by the Board of Directors up to the remainder of the stock option
term.

Stock Bonus Awards and Rights to Acquire Restricted
Stock:  Stock bonus awards may be granted in consideration for the past
services rendered to the Company by the recipient.  The purchase price of a
restricted stock award may not be less than eighty-five percent (85%) of the
fair market value of the stock on the date of grant.  The purchase price may be
paid in cash, by deferred payment, or in any other form of legal consideration
approved by the Board of Directors.  Stock bonus and restricted stock awards may
be subject to a vesting schedule based on the continuous service of the
recipient or may be fully vested at the time of grant.  If the recipient's
continuous service with the Company terminates, unvested stock received pursuant
to a stock bonus award will be forfeited back to the Company and unvested stock
purchased pursuant to a restricted stock award will be repurchased by the
Company.

Cancellation and Re-Grant of Stock Options:  The
1998 Plan provides that the Board of Directors may, at its discretion, effect,
with the consent of the adversely affected optionholder, (i) the reduction of
the exercise price of any outstanding stock options under the 1998 Plan to the
then fair market value of the underlying stock and/or (ii) the cancellation of
any of the outstanding stock options and the grant in substitution therefor a
new stock option covering the same or a different number of shares of common
stock, a stock bonus, the right to acquire restricted stock, cash and/or other
valuable consideration as determined by the Board of Directors.  In the event
that the Board of Directors elects to cancel a stock option and grant a new
stock option to that same optionholder within six months of such cancellation,
the Company may incur negative accounting consequences.  Accordingly, the
Company has no intention at this time to re-price any of its stock options or
cancel and re-grant any of its stock options.

Corporation Transactions:In the event of a
dissolution, liquidation or sale of substantially all of the assets of the
Company, a merger or consolidation in which the Company is not the surviving
corporation, or a reverse merger in which the Company is the surviving
corporation but the shares of the Company's common stock outstanding immediately
preceding the merger are converted by virtue of the merger into other property,
whether in the form of securities, cash or otherwise, then any surviving
corporation or an affiliate of such surviving corporation will assume any
outstanding stock awards under the 1998 Plan or substitute similar stock awards
for such outstanding stock awards or such stock awards will continue in full
force and effect.  If the surviving corporation and its affiliates refuse to
assume, substitute or continue the stock awards, then, with respect to stock
awards held by recipients whose continuous service with the Company has not
terminated, the time during which such stock awards may be exercised shall be
accelerated and the stock awards shall terminate if not exercised prior to such
event.

Risk Factors

Set forth below and elsewhere in this
annual report and in the other documents we file with the SEC are risks and
uncertainties that could cause actual results to differ materially from the
results contemplated by the forward-looking statements contained in this annual
report.  Prospective and existing investors are strongly urged to carefully
consider the various cautionary statements and risks set forth in this annual
report and our other public filings.

Our total revenue and operating results
may fluctuate.

We have experienced and in the future may experience a
shortfall in revenue or earnings or otherwise fail to meet public market
expectations, which could materially and adversely affect our business and the
market price of our common stock.  Our total revenue and operating results may
fluctuate significantly because of a number of factors, many of which are
outside of our control.  These factors include:

- Corporate and consumer confidence in the economy,
evidenced, in part, by stock market levels;
- Changes in the domestic and international economic,
business and political conditions;
- Economic conditions within the information technology
industry;
- Level of product and price competition;
- Length of our sales cycle and customer licensing
patterns;
- Size and timing of individual license
transactions;
- Delay or deferral of customer implementations of our
products;
- Success in expanding our Global Services Organization,
direct sales force and indirect distribution channels;
- Timing of new product introductions and product
enhancements;
- Appropriate mix of products licensed and services
sold;
- Levels of international transactions;
- Activities of and acquisitions by competitors;
- Timing of new hires and the allocation of our
resources;
- Increases in the cost of software and professional
services;
- Changes in foreign currency exchange rates; and
- Our ability to develop and market new products and
control costs.

One or more of the foregoing factors may cause our
operating expenses to be disproportionately high during any given period or may
cause our net revenue and operating results to fluctuate significantly.  Based
upon the preceding factors, we may experience a shortfall in revenue or earnings
or otherwise fail to meet public market expectations, which could materially and
adversely affect our business, financial condition, results of operations and
the market price of our common stock.

Our quarterly operating results may fluctuate.

Our total revenue and operating results may vary
significantly from quarter to quarter.  The main factors that may affect these
fluctuations are:

- Domestic and international economic, business and
political conditions;
- Economic conditions within the information technology
industry;
- The discretionary nature of our customers' purchase and
budget cycles;
- The size and complexity of our license
transactions;
- The potential delays in recognizing revenue from license
transactions;
- The timing of new product releases;
- Seasonal variations in operating results; and
- Variations in the fiscal or quarterly cycles of our
customers.

Each customer's decision to implement our products and
services is discretionary, involves a significant commitment of resources and is
subject to its budget cycles.  In addition, the timing of license revenue is
difficult to predict because of the length of our sales cycle, which has ranged
to date from one to twenty-four months.  We base our operating expenses on
anticipated revenue trends.  Because a high percentage of these expenses are
relatively fixed, a delay in recognizing revenue from license transactions could
cause significant variations in operating results from quarter to quarter and
could result in operating losses.  If these expenses precede, or are not
subsequently followed by, increased revenues, our business, financial condition
or results of operations could be materially and adversely affected.

As a result of these and other factors, revenues for any
quarter are subject to significant variation, and we believe that period-to-period
comparisons of our results of operations are not necessarily meaningful.
You should not rely on these comparisons as indications of future performance.
Our future quarterly operating results from time to time may not meet the
expectations of market analysts or investors, which would likely have an adverse
effect on the price of our common stock.

Economic conditions could adversely affect our revenue
growth and ability to forecast revenue.

The revenue growth and profitability of our business
depends on the overall demand for eBusiness applications software and services,
particularly within the industries in which we offer specific versions of our
products.  Because our sales are primarily to major corporate customers in the
high technology, telecommunications, financial services (including insurance),
pharmaceutical, utilities and consumer packaged goods industries, our business
depends on the overall economic conditions and the economic and business
conditions within these industries.  The progressive weakening of the global
economy, the weakening of the information technology industry, and the weakening
of the business conditions within the industries listed above has caused a
decrease in our software license revenues in both 2001 and 2002.  A decrease in
demand for computer software caused, in part, by a continued weakening of the
economy, domestically or internationally, may result in a continued decrease in
revenues and growth rates.

Hostilities involving the United States and/or
Terrorist attacks could harm our business.

The financial, political, economic and other
uncertainties following the terrorist attacks upon the United States have led to
a weakening of the global economy.  As a result, many of our customers and
potential customers have become much more cautious in setting their capital
expenditure budgets, thereby restricting their software procurement to well-defined
current needs.  In addition, recent economic data, such as the United
States unemployment rate and consumer confidence measures, appear to indicate
that the growing threat of hostilities involving the United States and Iraq has
further weakened the global economy.  The reduction in business and investor
confidence is also reflected in the weakening equity markets.  Subsequent
terrorist acts and/or the threat of future outbreak or continued escalation of
hostilities involving the United States or other countries could adversely
affect the growth rate of our software license revenue and have an adverse
effect on our business, financial condition or results of operations.  In
addition, any escalation in these events or similar future events may disrupt
our operations or those of our customers, distributors and suppliers, which
could adversely affect our business, financial condition or results of
operations.

A variation in the conversion of our revenue pipeline
to contracts could adversely affect our revenues and ability to forecast
operations.

Our revenue pipeline estimates may not consistently
correlate to actual revenues in a particular quarter or over a longer period of
time.  A slowdown in the economy, domestically and internationally, has caused
and may continue to cause customer purchasing decisions to be delayed, reduced
in amount or canceled, all of which have reduced and could continue to reduce
the rate of conversion of the pipeline into contracts.  A variation in the
pipeline or in the conversion of the pipeline into contracts could cause us to
plan or budget inaccurately and thereby could adversely affect our business,
financial condition or results of operations.  In addition, primarily due to a
substantial portion of our license revenue contracts closing in the latter part
of a quarter, management may not be able to adjust our cost structure in
response to a variation in the conversion of the pipeline into contracts in a
timely manner, thereby adversely affecting our business, financial condition or
results of operations.

We may not be able to successfully implement our
Restructuring efforts, and such efforts may adversely impact our ability to
retain and attract future employees.

During 2002, we completed a Restructuring of our
operations involving, among other things, the reduction of our workforce by
approximately 1,150 employees worldwide and the consolidation of excess
facilities.  As part of this Restructuring, we permanently removed from our
operations certain of our leased facilities.  The removal of these facilities
from our operations will require us to negotiate certain lease terminations
and/or subleases of our facilities.  We cannot predict when or if we will be
successful in negotiating lease termination agreements or subleases of our
facilities on terms acceptable to us.  Should we be unsuccessful in such
negotiations or if the negotiated terms are less favorable than currently
anticipated, we may be required to materially increase our Restructuring charge
in future periods.  In addition, our Restructuring program may not achieve all
of the benefits we currently anticipate or on the timetable contemplated.

Workforce reductions, including the one we completed in
2002, could result in a lack of focus and reduced productivity by our remaining
employees, which in turn may affect our revenues in a future quarter.  In
addition, prospects and current customers may decide to delay or not purchase
our products due to the perceived uncertainty caused by our Restructuring.  We
cannot assure you that we will not reduce or otherwise adjust our workforce
again in the future or that the related transition issues associated with such a
reduction will not occur again.  In addition, employees, whether or not directly
affected by the reduction, may seek future employment with our business
partners, customers or competitors.  Although our employees are required to sign
a confidentiality agreement at the time of hire, we cannot assure you that the
confidential nature of certain proprietary information will be maintained in the
course of such future employment.  Further, we believe that our future success
will depend in large part upon our ability to attract and retain highly skilled
personnel.  We may have difficulty attracting such personnel as a result of a
perceived risk of future workforce reductions.

If we do not successfully manage the size of our
operations, our business may be negatively impacted.

If we fail to manage the size of our operations
effectively, our business, financial condition or results of operations could be
materially and adversely affected.  Since we began operations in 1994 and
continuing throughout early 2001, our business grew rapidly.  Throughout 2001
and 2002, our revenues have declined as a result of deterioration in the overall
economy and information technology industry.  These rapid changes in our
business have placed a significant strain on our management systems and
resources.  In response to the continued deterioration in the information
technology industry, management completed a Restructuring of our operations in
2002.  This Restructuring has particular risks, many of which are discussed
above under "We may not be able to successfully implement our Restructuring
efforts, and such efforts may adversely impact our ability to retain and attract
future employees."  In addition, if we return to growth in the future, that
growth may require us to implement new systems or upgrade current systems, and
the failure to successfully implement such new or improved systems could
materially and adversely affect our business.

Rapid change will require us to manage the size of our
employee base, particularly our direct sales force and global support staff.

The majority of our expenses are personnel-related costs
such as employee compensation and benefits, along with the cost of the
infrastructure (occupancy and equipment) to support our employee base.  The
failure to adjust our employee base, particularly our direct sales force and
technical and global services staff, to the appropriate level to support our
revenues could materially and adversely affect our business, operating results
and financial condition.  In addition, expansion of the distribution of our
products may place new and increased demands on our direct sales force and
technical and sales support staff.  Although we currently invest sufficient
resources in our direct sales force and our technical and global services staff,
there are only a limited number of qualified personnel in these areas.  Our
ability to achieve expanded distribution and revenue growth in the future will
depend, in part, on our success in recruiting and training sufficient direct
sales, technical and global services personnel.  We may not be able to expand
our direct sales force and technical support staff as necessary to support our
operations.

We rely on strategic relationships with systems
integrators, distributors, resellers and technology vendors.

Failure to maintain existing strategic relationships with
systems integrators, distributors, resellers and technology vendors, or to
establish new relationships in the future, could have a material adverse effect
on our business.  We have established strategic relationships with a number of
organizations that we believe are important to our sales, marketing and support
activities and the implementation of our products.  We believe that our
relationships with these organizations provide marketing and sales opportunities
for our direct sales force and expand the distribution of our products.  These
relationships allow us to keep pace with the technological and marketing
developments of major software vendors and provide us with technical assistance
for our product development efforts.

In particular, we have established non-exclusive
strategic relationships with Accenture, Cap Gemini Ernst & Young, Deloitte
Consulting, IBM Global Services and PricewaterhouseCoopers, among others.  A
significant portion of our revenues has historically been derived from customers
that have engaged systems integrators with which we have a relationship.  Any
deterioration of our relationship with these significant third-party systems
integrators could have a material adverse effect on our business, financial
condition or results of operations.  We also have relationships with technology
vendors such as Hewlett-Packard Compaq, IBM Corporation; Microsoft Corporation;
and Sun Microsystems, Inc., among others.  Failure to maintain existing
relationships on terms equally favorable to us, or to establish new
relationships in the future, could have a material adverse effect on our
business, financial condition or results of operations.

Our current and potential customers may also rely on
third-party systems integrators to develop, deploy or manage Siebel
eBusiness Applications.  If we do not adequately train a sufficient
number of systems integrators, or if these integrators do not have, or do not
devote, the resources necessary to implement our products, our business,
financial condition or results of operations could be materially and adversely
affected.

Our customers may not successfully implement our
products.

If existing customers have difficulty deploying Siebel
eBusiness Applications or for any other reason are not satisfied with
Siebel eBusiness Applications, our business, operating results and
financial condition could be materially and adversely affected.  Many of our
customers purchase and implement our products in phases.  Our customers
frequently deploy our products to large numbers of sales, marketing and customer
service personnel.  These end users may not accept our products.  Our products
are also being deployed on a variety of computer hardware platforms and used
with a number of third-party software applications and programming tools.  This
use may present significant technical challenges, particularly as large numbers
of personnel attempt to use our products concurrently.

A limited number of products provide
a substantial part of our license revenues.

A majority of our software license revenues in 2002 are
attributable to sales of Siebel Sales, Siebel Service, Siebel Call Center,
Siebel Analytics, Siebel Interactive Selling, Siebel Employee Relationship
Management and related products.  In addition, we offer industry-specific
versions of these products.  We expect that these products and related
consulting, maintenance and training services will continue to account for a
majority of our future revenues.  Our success depends in part on our ability to
market and maintain the industry-specific versions of our products.  Factors
adversely affecting the cost and pricing of, or demand for, these products, such
as competition or technological change, could have a material adverse effect on
our business, financial condition or results of operations.

The length of time required to engage a client and to
implement our products may be lengthy and unpredictable.

The timing of the sales and implementation of our
products and services is lengthy and not predictable with any degree of
accuracy.  Prior sales and implementation cycles should not be relied upon as
any indication of future cycles.  The license of our software products is often
an enterprise-wide decision by prospective customers and generally requires us
to provide a significant level of education to prospective customers regarding
the use and benefits of our products.  In addition, the implementation of our
products involves a significant commitment of resources by prospective customers
and is commonly associated with reengineering efforts that may be performed by
the customer or third-party systems integrators.  The cost to the customer of
our product is typically only a portion of the related hardware, software,
development, training and integration costs of implementing a large-scale
eBusiness software system.  For these and other reasons, the period between
initial contact and the implementation of our products is often lengthy and is
subject to a number of factors that may cause significant delays, over many of
which we have little or no control.  These factors include the size and
complexity of the overall project and delays in our customers' implementation of
Web-based computing environments.  A delay in the sale or implementation of even
a limited number of license transactions could have a material adverse effect on
our business, financial condition or results of operations and cause our
operating results to vary significantly from quarter to quarter.  As a result of
current economic conditions, our sales cycle has recently become longer than
historical sales cycles.

Our software license revenue is dependent on our ability to enter into
significant software license transactions with new and existing customers.

Our success depends on gaining new
customers and maintaining relationships with our existing customers.  In
particular, if the number of software license transactions and the average size
of these transactions decrease, our software license revenue may be negatively
impacted.  Both the number of transactions generating software license revenues
and the average size of these transactions have declined over the past two
years.  Specifically, the number of transactions generating software license
revenues greater than $5 million has decreased from 36 transactions in 2000 and
32 transactions in 2001, to 23 transactions in 2002.  In addition, the average
size of these transactions has decreased in each of the last two years from
$466,000 in 2000, to $414,000 in 2001 and $374,000 in 2002.  Consequently, our
software license revenue also decreased in both 2001 and 2002.  The failure to
enter into significant software license transactions with new and existing
customers could have a material adverse effect on our business, financial
condition or results of operations.  No single customer has accounted for 10% or
more of our software license revenues in 2000, 2001 or 2002.

Our distribution channels may create additional risks.

Failure to minimize channel conflicts could materially
and adversely affect our business, operating results and financial condition.
We have a number of relationships with resellers, which assist us in obtaining
broad market coverage.  We have generally avoided exclusive relationships with
resellers of our products.  Discount policies and reseller licensing programs
are intended to support each distribution channel with a minimum level of
channel conflicts.

Our continued success will require us to keep pace with
technological developments, evolving industry standards and changing customer
needs.

The software market in which we compete is characterized
by: (i) rapid technological change; (ii) frequent introductions of new products;
(iii) changing customer needs; and (iv) evolving industry standards.  To keep
pace with technological developments, evolving industry standards and changing
customer needs, we must support existing products and develop new products.  We
may not be successful in developing, marketing and releasing new products or new
versions of Siebel eBusiness Applications that respond to technological
developments, evolving industry standards or changing customer requirements.  We
may also experience difficulties that could delay or prevent the successful
development, introduction and sale of these enhancements.  In addition, these
enhancements may not adequately meet the requirements of the marketplace and may
not achieve any significant degree of market acceptance.  If release dates of
any future products or enhancements to Siebel eBusiness Applications are
delayed, or if these products or enhancements fail to achieve market acceptance
when released, our business, operating results and financial condition could be
materially and adversely affected.  In addition, new products or enhancements by
our competitors may cause customers to defer or forego purchases of our
products, which could have a material adverse effect on our business, financial
condition or results of operations.

We may not be able to compete effectively in the
Internet-related products and services market.

Siebel eBusiness Applications communicate through
public and private networks over the Internet.  The success of our products may
depend, in part, on our ability to continue developing products that are
compatible with the Internet.  We cannot predict with any assurance whether the
demand for Internet-related products and services will increase or decrease in
the future.  The increased commercial use of the Internet could require
substantial modification and customization of our products and the introduction
of new products.

Critical issues concerning the commercial use of the
Internet, including security, privacy, demand, reliability, cost, ease of use,
accessibility, quality of service and potential tax or other government
regulation remain unresolved and may affect the use of the Internet as a medium
to support the functionality of our products and distribution of our software.
If these critical issues are not favorably resolved, our business, financial
condition or results of operations could be materially and adversely
affected.

We operate in a competitive and rapidly changing
market.

If the Web-based applications market fails to grow, our
business, operating results and financial condition could be materially and
adversely affected.  The market for Web-based applications software is
relatively new, highly competitive and rapidly changing.  We market our products
only to customers who have migrated or are in the process of migrating their
enterprise computing systems to Web-based computing environments.  Our future
financial performance will partly depend on the continued growth of
organizations successfully adopting Web-based computing environments.

To be successful, we must effectively compete in the
eBusiness systems market.

Our products target the eBusiness systems market.  This
market is highly competitive, rapidly changing and significantly affected by new
product introductions and other market activities of industry participants.  Our
products are targeted at the emerging market for customer, partner and employee
relationship information systems.  We face competition primarily from our
customers' internal information technology departments and systems integrators,
as well as from other application software providers that offer a variety of
products and services designed to address this market.  We believe 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.  We may
not be able to compete successfully against such internal development
efforts.

During 2001 and 2002, the global economy impacted the
competitive dynamics of the eBusiness systems market in which we compete in
variety ways.  Specifically, our customers and prospective customers are
increasingly evaluating their software procurement needs with a focus on the
long term total cost of ownership (which includes the cost of the license and
the cost of professional services, such as implementation, training, and
technical support).  With significantly lower license costs from competitive
solutions, and no license cost for internal projects, our success is dependent
on our ability to justify both the lowest total cost of ownership and overall
return on investment.

We frequently rely on a number of systems consulting and
systems integration firms for a substantial portion of implementation and other
global services, as well as for recommendations of our products during the
evaluation stage of the purchase process.  Although we seek to maintain close
relationships with these service providers, many of them have similar and often
more established relationships with our competitors.  If we are unable to
develop and retain effective, long-term relationships with these third parties,
our competitive position could be materially and adversely affected.  Further,
many of these third parties have significantly greater resources than we do and
may market software products that compete with us and may otherwise reduce or
discontinue their relationships with or support of us and our products.

A large number of personal, departmental and other
products exist in the eBusiness applications market. Our competitors include a
number of companies that compete with us primarily within a particular product
line (e.g., analytics, interactive selling, etc.) and/or the prospective
customer's industry (e.g., life sciences, financial services, etc.).  These
companies include Amdocs Limited; CAS GmbH; Chordiant Software, Inc.; Dendrite
International, Inc.; E.piphany, Inc.; FrontRange Solutions, Inc.; Interact
Commerce Corporation; Kana Software, Inc.; ONYX Software Corporation; Pivotal
Corporation; and Salesforce.com, Inc., among many others.  In addition, our
competitors include several companies, such as Oracle Corporation, PeopleSoft,
Inc. and SAP AG, which compete in a majority of the Company's product lines.
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 we do.  In addition,
many competitors have well-established relationships with our current and
potential customers.  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 we can.

There are many factors that may increase competition in
the eBusiness systems market, including: (i) entry of new competitors; (ii)
alliances among existing competitors; (iii) alliances between our competitors
and systems integrators; (iv) consolidation in the software industry or among
systems integrators; and (v) technological changes or changes in the use of the
Internet.  Increased competition may result in price reductions, reduced gross
margins or loss of market share, any of which could materially and adversely
affect our business, operating results and financial condition.  We may not be
able to compete successfully against current and future competitors and
competitive pressures faced by us may materially and adversely affect our
business, financial condition or results of operations.

If we do not maintain our relationships with third-party
vendors, interruptions in the supply of our products may result.

We may not be able to replace the functionality provided
by the third-party software currently offered with our products if that software
becomes obsolete or incompatible with future versions of our products or is not
adequately maintained or updated.  Portions of our products incorporate software
that was developed and is maintained by third-party software developers.
Although we believe there are other sources for these products, any significant
interruption in the supply of these products could adversely impact our sales
unless and until we can secure another source.  We depend in part on these 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.  The absence of or any significant delay in the
replacement of functionality provided by third-party software in our products
could materially and adversely affect our sales.

Software errors or defects in our products could reduce
revenues.

Software products frequently contain errors or failures,
especially when first introduced or when new versions are released, and could be
affected by viruses.  We have, in the past, been forced to delay the commercial
release of products until the correction of software problems.  We could lose
revenues as a result of software viruses, errors or defects, including defects
in third-party products with which our products work.  Our products are intended
for use in applications that may be critical to a customer's business.  As a
result, we expect that our customers and potential customers will have a greater
sensitivity to product defects than the market for software products generally.
Testing errors may also be found in new products or releases after commencement
of commercial shipments, resulting in loss of revenue or delay in market
acceptance, damage to our reputation, or increased service and warranty costs,
any of which could have a material adverse effect upon our business, financial
condition or results of operations.

We need to successfully integrate acquisitions.

Our business strategy includes pursuing opportunities to
grow our business, internally and through selective acquisitions, investments,
joint ventures and strategic alliances.  Our ability to implement this strategy
depends, in part, on our success in making such acquisitions, investments, joint
ventures and strategic alliances on satisfactory terms and successfully
integrating them into our operations.  Implementation of this strategy may
impose significant strains on our management, operating systems and financial
resources.  Failure to manage this growth, or unexpected difficulties
encountered during expansion, could have an adverse effect on our business,
financial condition or results of operations.

Integration of personnel and operations relating to our
previous or future acquisitions may disrupt our business and management.

We have in the past and may in the future acquire
additional companies.  We may not be able to successfully assimilate the
additional personnel, operations, acquired technology and products acquired from
these companies into our business.  In particular, we will need to assimilate
and retain key professional services, sales, engineering and marketing
personnel.  Key personnel from the acquired companies have in certain instances
decided, and they may in the future decide, to pursue other opportunities.  In
addition, it may be necessary to integrate products of these companies with our
technology, and it is uncertain whether we may accomplish this easily or at all.
These integration difficulties could disrupt our ongoing business, distract
management and employees or increase expenses.  Acquisitions are inherently
risky, and we may also face unexpected costs, which may adversely affect
operating results in any quarter.

If we acquire additional companies, products or
technologies, we may face risks similar to those faced in our other
acquisitions.

We may continue to make other investments in
complementary companies, products or technologies.  We may not realize the
anticipated benefits of any other acquisition or investment.  If we acquire
another company, we will likely face the same risks, uncertainties and
disruptions as discussed above with respect to our other acquisitions.  In
addition, our profitability may suffer because of acquisition-related costs or
amortization costs for acquired intangible assets.

The loss of key personnel could negatively affect our
performance.

Our performance depends on the continued service of our
key technical, sales and senior management personnel, particularly Thomas M.
Siebel, our Chairman and CEO.  Our key employees have not entered into
employment agreements with us.  The loss of one or more of our executive
officers could have a material adverse effect on our business, operating results
and financial condition.  On September 9, 2002, we announced the appointment of
Richard P. Chiarello as our Senior Vice President, Worldwide Sales.  Mr.
Chiarello replaced Mark Hanson, who managed our worldwide sales activities in an
interim capacity and remains with the Company in a senior executive role.  To
integrate into our company, new senior personnel must spend a significant amount
of time learning our business model and management systems, in addition to
performing their regular duties.  Accordingly, until new senior personnel become
familiar with our business model and systems, their integration may result in
some disruption to our ongoing operations.  In addition, we
announced in January 2003 that Paul Wahl, our President and Chief Operating
Officer, will retire in March 2003.  We do not currently intend to replace Mr.
Wahl, and as a result, have modified certain of our day-to-day operational
matters.  Until senior personnel become familiar with our modified operational
structure, there may be some disruption to our ongoing operations.

Leverage and debt service obligations may adversely
affect our cash flow.

As of December 31, 2002, we have $300.0 million of
convertible subordinated notes outstanding, bearing interest at 5.50% and due
September 15, 2006 (see Note 4 to the accompanying consolidated financial
statements).  While our current cash and short-term investments are sufficient
to pay our current outstanding indebtedness, we cannot assure you that any
future financing arrangements will be available, or if available, on terms
acceptable to us.  Our current or future leverage could have negative
consequences, including:

- Increasing our vulnerability to general adverse economic
and industry conditions;
- Limiting our ability to obtain additional
financing;
- Requiring the dedication of a substantial portion of our
expected cash flow from operations to service our indebtedness, thereby reducing
the amount of our expected cash flow available for other purposes, including
capital expenditures;
- Limiting our flexibility in planning for, or reacting to,
changes in our business and the industry in which we compete; and
- Placing us at a competitive disadvantage compared to less
leveraged competitors and competitors that have better access to capital
resources.

We may not be able to protect our proprietary
information.

We rely primarily on a combination of patent, copyright,
trade secret and trademark laws; confidentiality procedures; and contractual
provisions to protect our proprietary rights.  We also believe that the
technological and creative skills of our personnel, new product developments,
frequent product enhancements, name recognition and reliable product maintenance
are essential to establishing and maintaining a technology leadership position.
We seek to protect our software, documentation and other written materials under
patent, trade secret and copyright laws, which afford only limited protection.
Any patents issued to us may be invalidated, circumvented or challenged.  Any of
our pending or future patent applications, whether or not being currently
challenged, may not be issued with the scope of the claims we seek, if at all.
Furthermore, others may develop technologies that are similar or superior to our
technology or design around our patents.

Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy aspects of our products or to obtain
and use information that we regard as proprietary.  Policing unauthorized use of
our products is difficult.  In addition, the laws of some foreign countries do
not protect our proprietary rights as fully as do the laws of the United States.
Our means of protecting our proprietary rights in the United States or abroad
may not be adequate.  We have entered into agreements with substantially all of
our customers that require us to place Siebel eBusiness Applications
source code into escrow.  Such agreements generally provide that such parties
will have a limited, non-exclusive right to use such code if: (i) there is a
bankruptcy proceeding by or against us; (ii) we cease to do business; or (iii)
we fail to meet our support obligations.

Although we do not believe that we are infringing any
proprietary rights of others, third parties may claim that we have infringed
their intellectual property rights.  Furthermore, former employers of our
former, current or future employees may assert claims that such employees have
improperly disclosed to us the confidential or proprietary information of such
former employers.  Any such claims, with or without merit, could: (i) be time-consuming
to defend; (ii) result in costly litigation; (iii) divert management's
attention and resources; (iv) cause product shipment delays; and (v) require us
to pay monetary damages or enter into royalty or licensing agreements.  A
successful claim of product infringement against us and our failure or inability
to license or create a workaround for such infringed or similar technology may
materially and adversely affect our business, financial condition or results of
operations.

We license certain software from third parties.  These
third-party software licenses may not continue to be available to us on
acceptable terms.  The loss of, or inability to maintain, any of these software
licenses could result in shipment delays or reductions.  This could materially
and adversely affect our business, financial condition or results of
operations.

Our international operations involve unique risks.

Our revenues are primarily derived from large
multinational companies.  To service the needs of these companies, we must
provide worldwide product support services.  We have expanded and in the future
may expand our international operations and enter additional international
markets.  This will require significant management attention and financial
resources that could adversely affect our operating margins and earnings.  We
may not be able to maintain or increase international market demand for Siebel
eBusiness Applications.  If we do not, our international sales will be
limited and our business, financial condition or results of operations could be
materially and adversely affected.

Our international operations are subject to a variety of
risks, including: (i) foreign currency fluctuations; (ii) economic or political
instability; (iii) shipping delays; and (iv) various trade restrictions.  Any of
these risks could have a significant impact on our ability to deliver products
on a competitive and timely basis.  Significant increases in the level of
customs duties, export quotas or other trade restrictions could also have an
adverse effect on our business, financial condition or results of operations.
In situations where direct sales or purchases are denominated in foreign
currency, any fluctuation in the exchange rate may adversely affect our
business, financial condition or results of operations.  Generally, we manage
our foreign currency exchange rate risk by entering into contracts to sell or
purchase foreign currency at the time a foreign currency receivable or payable
is generated.  When the foreign currency asset or liability is extinguished, the
contract is liquidated, and the resulting gain or loss on the contract mitigates
the exchange rate risk of the associated asset or liability.  In certain
instances, we have not hedged foreign currency receivables and payables when the
forward contracts in the relevant currency were not readily available or were
not cost-effective.

Our current officers, directors and entities affiliated with
us may be able to exercise control over matters requiring stockholder
approval.

Our current officers, directors and entities affiliated
with us together beneficially owned a significant portion of the outstanding
shares of common stock as of December 31, 2002.  While these stockholders do not
hold a majority of our outstanding common stock, they will be able to exercise
significant influence over matters requiring stockholder approval, including the
election of directors and the approval of mergers, consolidations and sales of
our assets.  This may prevent or discourage tender offers for our common
stock.

Our stock price may continue to be volatile.

Our stock price has fluctuated substantially since our
initial public offering in June 1996.  The trading price of our common stock is
subject to significant fluctuations in response to variations in quarterly
operating results; the gain or loss of significant orders; changes in earning
estimates by analysts; changes in our revenue and/or earnings expectations as
announced in our earnings call; announcements of technological innovations or
new products by us or our competitors; changes in the domestic and international
economic, political and business conditions; general conditions in the software
and computer industries; the recent lack of confidence in corporate governance
and accounting practices; and other events or factors.  In addition, the stock
market in general has experienced extreme price and volume fluctuations that
have affected the market price for many companies in industries similar or
related to ours and that 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 our common stock.

Provisions in our charter documents may prevent certain
corporate actions.

Our Board of Directors is authorized 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 approval by our stockholders.  One of these shares
has been designated Series A1 Preferred Stock, which was issued in connection
with the acquisition of Janna Systems Inc., and 100,000 shares have been
designated as Series A2 Junior Participating Preferred Stock, which was
authorized in connection with a stockholders' rights plan that we implemented in
January 2003.  Please refer to Notes 6 and 14 to the accompanying consolidated
financial statements for a more detailed description of the Series A1 Preferred
Stock and Series A2 Junior Participating Preferred Stock.  Additional shares of
preferred stock could be authorized or 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 the Series A2 Junior
Participating Preferred Stock or the authorization of additional classes of
preferred stock by our Board of Directors in the future, while providing
desirable flexibility in connection with possible acquisitions and other
corporate purposes, could make it more difficult for a third party to acquire a
majority of our outstanding voting common stock.  In addition, the following
factors could also delay or make more difficult a merger, tender offer or proxy
contest: (i) our classified Board of Directors; (ii) certain provisions of our
certificate of incorporation; (iii) certain provisions of our bylaws; and (iv)
certain provisions of Delaware law.

Item 7A.  Quantitative and Qualitative
Disclosures About Market Risk.

The tables below provide information about our derivative
financial instruments and financial instruments that are subject to market risk.
The first table includes our foreign currency contracts used to minimize the
impact of changes in currency rates on existing foreign currency receivables,
payables and intercompany balances, which are subject to exchange rate risk.
The second table includes our available-for-sale short-term investments, which
are subject to interest rate risk.

We manage our foreign currency exchange rate risk by
entering into contracts to sell or buy foreign currency at the time a foreign
currency receivable or payable is generated.  When the foreign currency asset or
liability is extinguished, the contract is liquidated, and the resulting gain or
loss on the contract mitigates the exchange rate risk of the associated asset or
liability.

The following table summarizes as of December 31, 2002,
our foreign currency forward contracts, by currency.  All of our foreign
currency forward contracts mature within a year.  Contract amounts are
representative of the expected payments to be made under these instruments (in
thousands):

`Contract Amount   Contract       Fair
                                             (Local Currency)   Amount     Value (US$)
                                             ----------------  ---------  -------------
Australian dollars ("AUD") (contracts
  to pay AUD/receive US$)...................      (AUD) 5,158   US$2,800  $        (63)

Brazilian real ("BRL") (contracts to
  pay BRL/receive US$)......................     (BRL) 15,458   US$4,185  $       (179)

Japanese yen ("YEN") (contracts to
  pay YEN/receive US$)......................  (YEN) 4,211,850  US$34,666  $       (567)

Mexican peso ("MXN") (contracts
  to pay MXN/receive US$)...................     (MXN) 19,832   US$1,921  $         17

British pounds ("GBP") (contracts to
  receive GBP/pay EUR)......................     (GBP) 15,333  EUR 23,761 $       (112)

Canadian dollars ("CAD") (contracts
  to receive CAD/pay US$)...................     (CAD) 10,477   US$6,799  $        (87)

Czech Republic koruna ("CZK") (contracts
  to receive CZK/pay EUR)...................     (CZK) 50,536  EUR 1,615  $        (10)

Euro ("EUR") (contracts to receive
  EUR/pay US$)..............................    (EUR) 199,193  US$198,461 $      6,570

Korea won ("KRW") (contracts to receive
  KRW/pay US$)..............................    (KRW) 948,880     US$780  $         10

Singapore dollars ("SGD") (contracts
  to receive SGD/pay US$)...................      (SGD) 2,628   US$1,534  $        (21)

Swedish krona ("SEK") (contracts to
  receive SEK/pay EUR)......................     (SEK) 15,814  EUR 1,736  $        (11)

Swiss franc ("CHF") (contracts to
  receive EUR/pay CHF)......................      (CHF) 6,007  EUR 4,149  $          8`

The following table summarizes the Company's short-term
investments and the weighted average yields, as of December 31, 2002 (in
thousands):

`Expected Maturity Date
                           -----------------------------------------------------------------------------
                             2003       2004       2005       2006       2007    Thereafter     Total
                           ---------  ---------  ---------  ---------  --------  ----------  -----------
US Treasury and Agency
  securities.............. $120,620   $301,861   $219,581    $58,156   $38,905          --     $739,123
Weighted average yield....     1.56%      1.78%      2.10%      1.98%     2.07%

Municipal securities......       --    $11,231     $4,338         --        --          --      $15,569
Weighted average yield....                1.33%      1.62%

Corporate bonds........... $223,373   $119,309   $118,862    $64,018   $51,936          --     $577,498
Weighted average yield....     2.35%      2.46%      2.75%      3.18%     3.35%

Asset-backed securities...  $41,202    $87,518    $33,183         --        --          --     $161,903
Weighted average yield....     2.41%      2.65%      2.56%`

As of December 31, 2002, we had an investment portfolio of
fixed income securities, excluding those classified as cash and cash
equivalents, of $1,494.1 million.  These securities, like all fixed income
instruments, are subject to interest rate risk and, accordingly, if market
interest rates increase, these investments will decline in value.  If market
interest rates were to increase immediately and uniformly by 100 basis points
from levels as of December 31, 2002, the fair value of the portfolio would
decline by $22.5 million.

We manage our interest rate risk by maintaining an
investment portfolio with debt instruments of high credit quality and relatively
short average maturities.  We also manage interest rate risk by maintaining
sufficient cash and cash equivalent balances such that we are typically able to
hold our investments to maturity.

We are exposed to equity price risks on marketable equity
securities.  These investments are in publicly traded companies in the high
technology industry sector.  We typically do not attempt to reduce or eliminate
our market exposure on these securities.  A 10% adverse change in the equity
price would result in an approximate $0.5 million decrease in the fair value of
our marketable equity securities as of December 31, 2002.

The fair value of our convertible subordinated debentures
fluctuates based upon changes in the price of our common stock, changes in
interest rates and changes in our credit-worthiness.  The fair market value of
the convertible subordinated debentures as of December 31, 2002, was $289.4
million.

Item 8.  Financial Statements and Supplementary
Data

Our consolidated financial statements, together with
related notes and the report of KPMG LLP, our independent auditors, are set
forth on the pages indicated in Item 15.

Item 9.  Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure

Not applicable.

PART III

Item 10.  Directors and Executive Officers of the Registrant

(a) Executive Officers

The following sets forth certain information regarding
our executive officers as of February 1, 2003, and their ages as of such
date:

|Name
Thomas M. Siebel
Patricia A. House
Paul Wahl
R. David Schmaier
Richard P. Chiarello
Kenneth A. Goldman
Edward Y. Abbo 
Mark D. Hanson
Steven M. Mankoff 
Karen M. Riley | Age
50
48
50
39
50
53
38
42
40
49 | Position
Chairman and Chief Executive Officer
Vice Chairman, Co-Founder and Vice President, Strategic Planning
President and Chief Operating Officer
Executive Vice President
Senior Vice President, Worldwide Sales
Senior Vice President, Finance and Administration and Chief Financial Officer
Senior Vice President, Technology and Chief Technology Officer 
Senior Vice President, Corporate Development and Investor Relations
Senior Vice President, Technical Services
Senior Vice President, Global Services
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Thomas M. Siebel has served as our Chairman and CEO
since its inception in July 1993.  From July 1993 until May 1999, Mr. Siebel
also served as our President.  Mr. Siebel was elected to serve on our Board of
Directors through our 2005 Annual Meeting of Stockholders.

Patricia A. Househas been with Siebel Systems
since its inception in July 1993 and has served as our Vice Chairman, Co-Founder
and Vice President, Strategic Planning since January 2001.  From February 1996
to January 2001, she served as our Co-Founder and Executive Vice President and
from July 1993 to February 1996 as Co-Founder and Senior Vice President,
Marketing.  Ms. House was elected to serve on our Board of Directors through our
2003 Annual Meeting of Stockholders, at which time, she will be nominated for
re-election.

Paul Wahl has served as our President and Chief
Operating Officer since April 1999.  Mr. Wahl currently plans to retire as of
March 31, 2003.  From November 1998 to April 1999, he served as Chief Executive
Officer and President of TriStrata, an Internet security company.  From January
1996 to September 1998, Mr. Wahl served as Chief Executive Officer of SAP
America, Inc. and was an Executive Board Member of SAP AG, a software company.
From June 1991 to December 1995, Mr. Wahl served as Executive Vice President of
SAP AG.

R. David Schmaierhas served as our Executive Vice
President since January 2001.  Mr. Schmaier served as our Senior Vice President,
Products from January 1998 to January 2001 and as our Vice President, Product
Marketing from October 1995 to January 1998.  Mr. Schmaier joined the Company in
1994 as Director, Product Marketing.

Richard P. Chiarello has served as our Senior Vice
President, Worldwide Sales since October 2002.  From December 1998 to September
2002, Mr. Chiarello served as President of ATL LLC Consulting, a private sales
consulting company founded by Mr. Chiarello to serve clients in the information
technology industry.  Mr. Chiarello also served as President and Chief Operating
Officer of AMC Computer Corporation, a hardware and professional services
company, from October 2000 to June 2001.  From December 1985 to December 1998,
Mr. Chiarello held several sales, marketing and executive management positions
at Computer Associates International, Inc., the most recent of which was
Executive Vice President and General Manager, Worldwide Sales and Channels.
Prior to joining Computer Associates International, Inc., Mr. Chiarello served
in a variety of sales positions with IBM Corporation from 1977 to 1985.  Mr.
Chiarello currently serves on the Board of Directors of LiquidGolf.com.

Kenneth A. Goldmanhas served as our Senior Vice
President, Finance and Administration and Chief Financial Officer since August
2000.  From July 1996 to July 2000, Mr. Goldman served as Senior Vice President
of Finance and Chief Financial Officer of Excite@Home, Inc.  From 1992 to 1996,
Mr. Goldman served as Senior Vice President of Finance and Chief Financial
Officer of Sybase, Inc.  Mr. Goldman is an advisory council member of the
Financial Accounting Standards Board and serves on the Board of Directors of
Legato Systems, Inc.

Edward Y. Abbo has served as our Senior Vice
President, Technology and Chief Technology Officer since April 2002.  Mr. Abbo
served as our Senior Vice President, Industry Applications from June 2001 to
April 2002 and as our Senior Vice President, Industry Solutions from January
2001 to June 2001.   From July 1994 to December 2000, Mr. Abbo held a variety of
senior engineering positions within Siebel Systems.

Mark D. Hanson has served as our Senior Vice
President, Corporate Development and Investor Relations since October 2002 and
our Senior Vice President of Corporate Development from January 2001 to October
2002.  From December 1998 to January 2001, Mr. Hanson served as our Vice
President, Corporate Development.  From 1984 to March 1998, Mr. Hanson served in
a variety of senior management positions in the high technology industry,
including positions at Visigenic Software, Inc.; Sybase, Inc.; Macromedia, Inc.;
and Informix Software.

Steven M. Mankoffhas served as our Senior Vice
President, Technical Services since January 2001 and served as our Vice
President, Technical Services from March 1998 to December 2000.   From October
1994 to February 1998, Mr. Mankoff held a variety of senior engineering
positions within Siebel Systems.

Karen M. Riley has served as our Senior Vice
President, Global Services since July 2000 and served as Vice President, Global
Services from May 1999 to June 2000.  From 1979 to April 1999, Ms. Riley served
in a variety of software development, product management and services executive
positions at IBM.  Ms. Riley's last position at IBM was the General Manager of
Global CRM and Business Process Outsourcing.

Our current officers, directors and entities affiliated
with us together beneficially owned a significant portion of the outstanding
shares of our common stock as of December 31, 2002.  While these stockholders do
not hold a majority of our outstanding common stock, they will be able to
exercise significant influence over matters requiring stockholder approval,
including the election of directors and the approval of mergers, consolidations
and sales of our assets.  This may prevent or discourage tender offers for our
common stock.

(b)  Directors

The following sets forth certain information regarding
our Board of Directors as of February 1, 2003, and their ages as of such
date:

|Name
Thomas M. Siebel
Patricia A. House
Eric E. Schmidt, Ph.D.
A. Michael Spence, Ph.D.
Charles R. Schwab
George T. Shaheen
James C. Gaither
Marc F. Racicot | Age
50
48
48
59
65
58
65
54 | Position
Chairman
Vice Chairman
Director
Director
Director
Director
Director
Director
|------------------------------------------------------------------------------------------------------------------------------------------------------------ | --------------------------- | -------------------------------------------------------------------------------------

Information pertaining Mr. Siebel and Ms. House, both of
whom are directors and officers of Siebel Systems, may be found in the section
entitled "Executive Officers" above.

Directors Continuing in Office until the 2003 Annual
Meeting of Stockholders

Eric E. Schmidt, Ph.D. has served as a Director of
Siebel Systems since May 1996.  Since July 2001, Dr. Schmidt has been the
Chairman and Chief Executive Officer of Google, Inc., a provider of Internet
search technology.  From April 1997 to July 2001, Dr. Schmidt was the Chairman
of the Board of Directors and the Chief Executive Officer of Novell, Inc., a
software supplier for large networks.  From 1983 to 1997, Dr. Schmidt held
various positions at Sun Microsystems, Inc., including Chief Technology Officer;
Corporate Executive Officer; President, Sun Technology Enterprises; Vice
President, General Systems Group; and Vice President and General Manager,
Software Products division.  Prior to joining Sun Microsystems, Inc., Dr.
Schmidt was a member of the research staff at the Computer Science Lab at Xerox
Palo Alto Research Center (PARC).  He also held positions at Bell Laboratories
and Zilog, Inc.  Dr. Schmidt received a B.S. in Electrical Engineering from
Princeton University and an M.S. in Electrical Engineering and a Ph.D. in
Computer Science from the University of California at Berkeley.

A. Michael Spence, Ph.D. has served as a Director
of Siebel Systems since October 1995.  Since September 1999, Dr. Spence has
served as a Partner of Oak Hill Venture Partners.  Dr. Spence served as
Professor of Management in the Graduate School of Business at Stanford
University until August 2000. From 1990 until August 1999, Dr. Spence served as
Phillip H. Knight Professor and Dean of the Graduate School of Business at
Stanford University.  From 1984 to 1990, Dr. Spence served as Dean of Faculty of
Arts and Sciences at Harvard University. Dr. Spence also serves as a director of
General Mills, Inc.; Nike, Inc.; Exult Inc.; and Torstar Corporation.  Dr.
Spence received a B.A. in Philosophy from Princeton University, a B.A. and an
M.A. in Mathematics from Oxford University and a Ph.D. in Economics from Harvard
University.  Dr. Spence is a 2001 recipient of the Nobel Memorial Prize in
Economic Sciences.

Directors Continuing in Office until the 2004 Annual Meeting
of Stockholders

Charles R. Schwab has served as a Director of
Siebel Systems since October 1994.  Since November 1997, Mr. Schwab has been the
Chairman and Co-Chief Executive Officer of The Charles Schwab Corporation, a
brokerage firm that he founded in 1971.  Mr. Schwab plans to step down as Co-Chief
Executive Officer after The Charles Schwab Corporation's 2003 annual
meeting of stockholders.  From 1987 until November 1997, Mr. Schwab served as
The Charles Schwab Corporation's Chairman and Chief Executive Officer.  Mr.
Schwab also serves as a director of The Gap, Inc. and is a member of the Board
of Trustees of Stanford University.  Mr. Schwab received a B.A. in Economics
from Stanford University and an M.B.A. from the Graduate School of Business at
Stanford University.

George T. Shaheen has served as a Director of
Siebel Systems since October 1995.  From September 1999 until April 2001, Mr.
Shaheen served as President, Chief Executive Officer and Chairman of the Board
of Directors of Webvan Group, Inc.  From 1989 to September 1999, Mr. Shaheen was
the Managing Partner and Chief Executive Officer of Andersen Consulting (now
Accenture).  Mr. Shaheen was a partner of Andersen Consulting from 1977 to
September 1999 and held various other positions at Andersen Consulting from 1967
to 1977.  Mr. Shaheen currently serves on the Advisory Board of the Marcus &
Millichap Company.  Mr. Shaheen is a member of the Board of Advisors for the
Northwestern University J.L. Kellogg Graduate School of Business.  Mr. Shaheen
received a B.S. in Marketing and an M.B.A. from Bradley University.

Directors Continuing in Office until the 2005 Annual Meeting
of Stockholders

James C. Gaither has served as a Director of
Siebel Systems since February 1994.  Since July 2000, Mr. Gaither has been a
Managing Director of Sutter Hill Ventures.  From February 1994 to April 1998,
Mr. Gaither served as Secretary of the Company.  From 1971 to 2000, Mr. Gaither
was a Partner of, and currently is Senior Counsel to, the law firm Cooley
Godward LLP.  Prior to beginning his law practice with the firm in 1969, he
served as law clerk to The Honorable Earl Warren, Chief Justice of the United
States; Special Assistant to the Assistant Attorney General in the U.S.
Department of Justice; and Staff Assistant to the President of the United
States, Lyndon Johnson.  Mr. Gaither is a former president of the Board of
Trustees at Stanford University and is a former member of the Board of Trustees
of the Carnegie Endowment for International Peace and RAND.  He is currently a
Director at The William and Flora Hewlett Foundation and the Chairman of the
Board of The James Irvine Foundation.  Mr. Gaither is a director of nVidia
Corporation and Levi Strauss & Company. Mr. Gaither received a B.A. in
Economics from Princeton University and a J.D. from Stanford University.

Marc F. Racicot has served as a Director of Siebel
Systems since April 2001. Since February 2001, Mr. Racicot has been a Partner of
the law firm Bracewell & Patterson L.L.P.  From 1993 until January 2001, Mr.
Racicot served as the Governor of the State of Montana and from 1989 until 1993
he served as its Attorney General. Prior to being elected Attorney General in
1989, Mr. Racicot was an Assistant Attorney General and Special Prosecutor for
the State of Montana.  Mr. Racicot began his legal career as a prosecutor in the
United States Army in West Germany, eventually becoming the Chief Prosecutor for
the largest U.S. military jurisdiction in Europe.  While serving as an Army JAG
Officer, he taught business and criminal law for the University of Maryland.
Mr. Racicot serves as the Chairman of the Republican National Committee and is
on the Board of Directors for Jobs for America's Graduates and The Corporation
for National Service as well as the Board of Visitors for the University of
Montana School of Law.

Section 16(A) Beneficial Ownership Reporting
Compliance

Section 16(a) of the Securities Exchange Act of 1934
requires our directors and executive officers, and persons who own more than 10%
of a registered class of our equity securities, to file with the SEC initial
reports of ownership and reports of changes in ownership of common stock and
other equity securities of Siebel Systems.  Officers, directors and greater than
10% stockholders are required by SEC regulation to furnish us with copies of all
Section 16(a) forms they file.

To our knowledge, based solely on a review of the copies
of such reports furnished to us and written representations that no other
reports were required, during the year ended December 31, 2002, all Section
16(a) filing requirements applicable to our officers, directors and greater than
10% beneficial owners were complied with, except that Mr. Schwab filed one
report covering three transactions late, Messrs. Cleveland and Schwartz each
filed one report covering one transaction late, and Mr. Schmaier filed two
reports, each covering one transaction, late.

Item 11.  Executive Compensation

(a)  Compensation of Executive Officers

Summary Compensation Table

The following table provides information for 2000, 2001
and 2002 regarding the compensation awarded or paid to, or earned by, our CEO
and each of our four most highly compensated executive officers and a former
officer who would have been listed but for the fact that he was no longer an
executive officer as of December 31, 2002.  We refer to these individuals
elsewhere in this Annual Report on Form 10-K as "Named Executive
Officers."

`Long-Term
                                                                                                                      Compensation Awards
                                                                                                                  ------------------------       All
                                                                              Annual Compensation                Restricted     Securities      Other
                                                                  --------------------------------------------   Stock Awards   Underlying     Compen-
    Officer Name                        Position                   Year      Salary     Bonus (1)    Other (2)     ($) (3)      Options (#)   sation (4)
---------------------   ----------------------------------------  ------  -----------  -----------  ----------  -------------   ----------  ------------
Thomas M. Siebel        Chairman and CEO (5)                       2002   $        1   $       --   $      --    $        --           --    $       --
                                                                   2001            1           --          --             --    7,950,000            --
                                                                   2000    1,000,000    1,502,466          --             --    8,000,000            --

Paul Wahl               President and Chief                        2002      600,000           --      53,635             --           --       462,500
                          Operating Officer                        2001      643,750           --          --             --    1,350,000            --
                                                                   2000      500,000    1,500,000          --             --      500,000            --

R. David Schmaier       Executive Vice President                   2002      400,000      500,000          --             --           --            --
                                                                   2001      429,167           --          --             --    1,330,000            --
                                                                   2000      400,000      852,839          --             --      200,000            --

Kenneth A. Goldman      Senior Vice President, Finance             2002      320,000      200,000          --             --           --     2,775,000
                          and Administration and                   2001      343,333           --          --             --    2,170,000            --
                          Chief Financial Officer (6)              2000      147,180      134,641          --             --    2,000,000            --

Richard P. Chiarello    Senior Vice President, Worldwide           2002      161,217      221,259          --        646,900      200,000            --
                           Sales (7)                               2001           --           --          --             --           --            --
                                                                   2000           --           --          --             --           --            --

William R. McDermott    Former Executive Vice President,           2002      355,061       96,006     191,647             --           --            --
                           Worldwide Sales Operations (8)          2001      270,833       99,747          --             --    1,000,000            --
                                                                   2000           --           --          --             --           --            --`

1. Amounts set forth under "Bonus" for Mr.
McDermott for both 2001 and 2002 represent sales commissions earned in
accordance with our sales commission plans.  Amounts set forth under
"Bonus" for Mr. Chiarello for 2002 represent sales commissions earned
in accordance with our sales commission plans.
2. In accordance with SEC rules, other annual compensation
in the form of perquisites and other personal benefits has been omitted where
the aggregate amount of such perquisites and other personal benefits constitutes
less than the lower of $50,000 or 10% of the total annual salary and bonus for
the Named Executive Officer for the fiscal year.  During 2002, amounts set forth
under "Other Annual Compensation" for Mr. Wahl relate to life
insurance premiums paid by Siebel Systems totaling $45,150 and $8,485 in other
perquisites.  Amounts for Mr. McDermott relate to $189,646 for reimbursement of
relocation expenses and $2,001 in other perquisites.
3. In October 2002, we granted 100,000 shares of restricted
stock, with a fair value of $647,000 at the date of grant, to Mr. Chiarello for
aggregate cash consideration of $100.  The restricted stock vests over five
years of service with Siebel Systems, with 20% vesting on September 4, 2003, and
the remaining shares vesting 5% each quarter of service thereafter.  We may
repurchase any unvested shares of restricted stock at the time of termination at
the lower of (i) the original purchase price of the restricted stock; or (ii)
the fair value of our common stock.  As of December 31, 2002, the fair value of
the restricted stock granted to Mr. Chiarello was $740,000.  Although we do not
have any intention to pay dividends on our common stock at this time, should we
declare any dividends on our common stock, Mr. Chiarello is entitled to such
dividends, when and if paid.
4. Amounts set forth under "All Other
Compensation" represent consideration paid to each Named Executive Officer
who tendered stock options under the terms of the Option Repurchase.  Please
refer to the "Report of the Compensation Committee of the Board of
Directors on Executive Compensation" below  for a further description of
the Option Repurchase.
5. As described further in Note 7 to
the accompanying consolidated financial statements, at the request of our CEO,
we cancelled 26.0 million of our CEO's stock options in January 2003. This
cancellation included the options granted to Mr. Siebel in 2000 and 2001 and
represented all stock options granted to our CEO since October 1998.
6. Mr. Goldman joined Siebel Systems in August
2000.
7. Mr. Chiarello joined Siebel Systems in September 2002 at
an annual salary of $500,000.
8. Mr. McDermott joined Siebel Systems in June 2001 and left
in September 2002.

Stock Option Grants in the Year Ended December 31,
2002

We grant stock options to our executive officers and
directors under the 1996 Plan.  As of December 31, 2002, stock options to
purchase a total of 85.9 million shares were outstanding under the 1996 Plan,
and stock options to purchase 44.5 million shares remained available for grant
under this plan.  As described further in Note 7 to the accompanying
consolidated financial statements, at the request of our CEO, we cancelled 26.0
million of our CEO's stock options in January 2003.  As a result of this
cancellation, the number of stock options outstanding under the 1996 Plan
decreased by 26.0 million and the number of stock options available for grant
increased by like amount.  We grant options to our other employees under the
1998 Plan.  As of December 31, 2002, options to purchase a total of 98.1 million
shares were outstanding under the 1998 Plan, and options to purchase 116.8
million shares remained available for grant under this plan.  The information
related to the summary of the 1998 Plan is incorporated by reference from the
section entitled "Section VI.  Equity Compensation Plan Information"
in Item 7 of this Annual Report on Form 10-K.

The information related to the stock options granted to
our Named Executive Officers during 2002 is incorporated by reference from the
section entitled "Section V.  Executive Stock-Based Compensation" in
Item 7 of this Annual Report on Form 10-K.

Aggregated Stock Option Exercises for the Year Ended
December 31, 2002, and Stock Option Values as of December 31, 2002

The information required by this Item is incorporated by
reference from the section entitled "Section V.  Executive Stock-Based
Compensation" in Item 7 of this Annual Report on Form 10-K.

Employment, Severance and Change of Control
Agreements

We do not have any employment, severance or change of
control agreements with any Named Executive Officer.

(b)  Compensation of Directors

Our directors do not currently receive any cash
compensation for service on the Board of Directors or any committee thereof, but
are eligible for reimbursement for certain expenses incurred in attending Board
and committee meetings.  Each non-employee director of the Company may receive
discretionary periodic stock option grants under the 1996 Plan for service on
the Board of Directors.  We do not intend for stock options granted to non-
employee directors to qualify as incentive stock options under the Internal
Revenue Code.  Directors who are also our employees are eligible to receive
options under the 1996 Plan and to participate in our Employee Stock Purchase
Plan and 401(k) Plan.

During the year ended December 31, 2002, we only granted
stock options to one director.  Mr. Racicot received a stock option grant
for 20,000 shares of common stock at an exercise price of $6.20 per share.  The
exercise price per share was equal to the fair market value of common stock on
the date of grant (based on the closing sales price reported on the Nasdaq Stock
Market on the date immediately preceding the date of grant).  The shares subject
to each grant vest and become exercisable in 20 equal quarterly installments
upon the director's completion of each quarter of service on the Board of
Directors over the five-year period beginning on the grant date.  The term of
options granted under the 1996 Plan is six to ten years.

Compensation Committee Interlocks and Insider
Participation

Our Compensation Committee consists of Drs. Eric E.
Schmidt and A. Michael Spence.   No member of this Committee was at any time
during the year ended December 31, 2002, or at any other time an officer or
employee of Siebel Systems.  None of our executive officers has served on the
board of directors or compensation committee of any other entity that has or has
had one or more executive officers serving as a member of our Board of
Directors.

See "Item 13.  Certain Relationships and Related
Transactions" for a description of transactions between Siebel Systems,
members of the Compensation Committee and/or entities affiliated with members of
the Compensation Committee.

---

Report of the Compensation Committee of the Board of
Directors on Executive Compensation

Our Board of Directors has delegated to the Compensation
Committee of the Board (the "Committee") the power and authority to
review, modify and approve the overall compensation strategy and policies for
the Company.  The Committee is comprised of two non-employee directors:  Drs.
Eric E. Schmidt and A. Michael Spence.  The Committee is responsible
for, among other things: (i) reviewing and approving corporate performance
goals and objectives relevant to the compensation of the Company's executive
officers and other senior management, based upon Siebel Systems' business needs
and consistent with the interests of its stockholders; (ii) administering
our executive compensation plans, programs and policies; (iii) monitoring
corporate performance and its relationship to compensation of executive
officers; and (iv) making appropriate recommendations to the Board
concerning matters of executive compensation.

Compensation Philosophy

The policies of the Committee with
respect to executive officers, including our CEO, are to provide compensation
sufficient to attract, motivate and retain executives of outstanding ability and
potential.  To emphasize sustained performance of our executive officers, the
Committee has adopted policies to align executive compensation with the creation
of stockholder value as measured in the equity markets.  These policies are
implemented using a mix of the following key elements:

1. We pay base salaries that are generally competitive with
other leading high technology companies with which we compete for personnel.  To
ensure that our salaries are sufficient to attract and retain highly qualified
executives and other key employees, we regularly compare salaries with those of
our competitors and set salary parameters based on this review;
2. We pay cash bonuses based on the achievement of specific
operating goals and high levels of performance; and
3. We provide our executive officers and key employees with
equity-based incentives pursuant to our 1996 Equity Incentive Plan, 1998 Equity
Incentive Plan and Employee Stock Purchase Plan in order to motivate them to
achieve our long-term goals and to align their interests with those of our
non-employee stockholders.

In 2002, we retained an independent human resource
consulting firm to conduct a global benefits and compensation review.As
a result of the findings of this study, at the beginning of 2003, we launched a
compensation initiative that we believe will continue to attract top talent. Our
base salaries on average are at or above industry averages, and total cash
compensation on average is targeted at or above the industry averages. Under
restructured discretionary bonus and stock option programs, potential awards
will be tied to individual and corporate performance.

In addition, over the past year, we have significantly
realigned our business and restructured our equity and other compensation
programs to serve the best interests of our stockholders.  These actions
included:

1. In 2002, we adjusted our compensation structure to reduce
the guidelines regarding the number of stock options issued to our
employees.
2. In September 2002, we completed the Option Repurchase,
under which approximately 28.1 million shares underlying employee stock options
were cancelled in exchange for common stock or cash.
3. In January 2003, we cancelled approximately 26.0 million
shares subject to stock options held by our Chairman and CEO, Thomas M. Siebel,
at his request.  These stock options represented all options that had been
granted to Mr. Siebel during the past four years, including all options granted
to him from October 1998 through October 2001 (the date of his last option
grant).

Cash Compensation

Base Salary

The Committee recognizes the importance of maintaining
compensation practices and levels of compensation competitive with other leading
high technology companies with which we compete for personnel. Base salary
represents the fixed component of the executive compensation program.  Our
philosophy regarding base salaries is to be at or above the comparable industry
median.  Base salary levels are established based on an annual review of
published executive salary levels at high technology companies with comparable
revenues and on the basis of individual performance.  The industry group index
shown on the Performance Measurement Comparison Graph included in this Annual
Report on Form 10-K includes many of the larger software companies included in
our compensation survey.  Periodic increases in base salary are the result of
individual contributions evaluated against established annual and long-term
performance objectives and an annual salary survey of high technology companies
with comparable revenues.

Cash Bonuses

Cash bonus awards are designed to reward our executives
and other senior managers for assisting us in achieving our operational goals
through exemplary individual performance. Bonuses, if any, are linked to both
the achievement of specified individual and corporate goals as well as a review
of personal performance, which is determined at the discretion of the Committee.
Due in part to economic conditions, no bonuses were paid to employees (including
executive officers) for the first half of 2002.

Target bonus levels for the second half of 2002 were
established based in part on the Committee's review of published executive total
compensation levels at high technology companies with comparable revenues.
Corporate performance goals upon which 2002 target bonus levels were based
included: the execution of license agreements with a significant number of new
customers; continuation of high customer and employee satisfaction levels; the
introduction of additional products and the improvement of our existing
products; the restructuring of our operations; and the achievement of quarterly
and annual revenue, profitability and other financial goals.

In January 2003, the Committee reviewed Siebel Systems'
2002 corporate performance goals. These goals were comprised of five broad
objectives: (i) operate a cash-positive, profitable business;
(ii) maintain and improve customer satisfaction levels; (iii) maintain
and improve our market leadership; (iv) maintain our product leadership in
eBusiness applications software, including releasing the latest version of our
products and (v) continue to develop solutions for our customers that lower the
total cost of integrating software applications.

In reviewing our 2002 performance goals, the Committee
noted that our annual results were commendable in light of the adverse global
economic conditions that existed in 2002.  In particular, the Committee noted
that we (i) achieved positive cash flows from operations in 2002 of
$433.2 million, (ii) increased our financial position with cash and short-term
investments increasing by $504.9 million, (iii) produced earnings prior to
the Restructuring and Option Repurchase of $130.8 million, (iv) maintained
our customer satisfaction levels, (v) maintained our market share in the
majority of product categories in which we operate, and (vi) continued our
technology leadership in the customer relationship management market with the
release of Siebel 7.5 and UAN in the second half of 2002.

Notwithstanding these positive results, the Committee
agreed that reduced executive compensation levels that were initiated by our
management as part of our overall program to reduce costs in 2001 should be
maintained.  These cost control measures included, among other actions discussed
in this Annual Report on Form 10-K, the following:

1. Our CEO's salary and bonus were maintained at a total of
$1 for 2002;
2. The salaries of executives with the title of Senior Vice
President and above were maintained at levels which had been reduced by 20% in
April 2001; and
3. Bonuses for our executive management team were not paid
for the first half of 2002.

Equity Compensation

Our 1996 Equity Incentive Plan, 1998 Equity Incentive
Plan and Employee Stock Purchase Plan have been established to provide all of
our employees, including executive officers, with an opportunity to share, along
with our stockholders, in our long-term performance. The Committee strongly
believes that a primary goal of the compensation program should be to provide
key employees who have significant responsibility for our management, growth and
future success with an opportunity to increase their ownership of Siebel
Systems.  The interests of stockholders, executives and employees should thereby
be closely aligned. Executives are eligible to receive stock options at the
discretion of the Committee, giving executives the right to purchase shares of
our common stock in the future at a price equal to fair market value at the date
of grant.  All grants must be exercised according to the provisions of our 1996
Equity Incentive Plan or 1998 Equity Incentive Plan, as applicable.  All
outstanding options held by executive officers vest over a period of five years
and generally expire six to ten years from the date of grant.

As total cash compensation for our executive officers is
targeted to be competitive with high technology companies with comparable
revenue, we have used stock options to incentivize, attract and motivate our
executive officers. The goal of the Committee historically has been to provide
equity compensation for executive officers, including the Chief Executive
Officer, which equals or exceeds levels at comparable companies.  However, we
have recently realigned the equity and cash components of our compensation plans
and reduced our option grant guidelines such that equity compensation, in
addition to cash compensation, is competitive with that provided by high
technology companies with comparable revenue.  In addition, we have recently
revised our option grant guidelines for existing employees (including our
executive officers) to correlate directly with each employee's individual
performance.  After considering the criteria relating to awarding stock options
and general market conditions, the Committee determined that no executive
officer, other than one newly-hired executive officer, would receive option
grants in 2002. Options granted to the newly-hired executive officer vest over a
five-year period and expire ten years from the date of grant. See "Option
Grants in the Year Ended December 31, 2002."

Section 162(m) of the Internal Revenue Code (the
"Code") limits us to a deduction for federal income tax purposes of no
more than $1 million of compensation paid to certain named executive
officers in a taxable year. Compensation above $1 million may be deducted
if it is "performance-based compensation" within the meaning of the
Code. The Committee intends to satisfy the requirements for "performance-based
compensation" with respect to compensation awarded to its named
executive officers whenever possible and to the extent then practicable.

Chief Executive Officer Compensation

The Committee uses the procedures described above in
setting the annual salary, bonus and stock option awards for Thomas M. Siebel,
the Company's Chairman and CEO. At his request, during 2002, we maintained
Mr. Siebel's reduced base salary and bonus levels of $1 and $0,
respectively.  Consistent with our treatment of option grants to other executive
officers and at Mr. Siebel's request, the Committee did not grant any options to
Mr. Siebel in 2002.  Additionally, in January 2003, at Mr. Siebel's request, we
cancelled 26.0 million stock option shares held by him, as further described
above.  These stock options represented all options that had been granted to Mr.
Siebel during the past four years, including all options granted to him from
October 1998 through October 2001 (the date of his last option grant).  The
total fair value (using the Black-Scholes option valuation model) of the 26.0
million stock option shares cancelled was approximately $56.1 million at the
time of cancellation.  Based on the number of shares of our common stock
outstanding as of December 31, 2002, Mr. Siebel's beneficial ownership of Siebel
Systems was reduced from approximately 14.0% to approximately 11.2% as a result
of the option cancellation.

Summary

The Committee believes that the compensation of our
executives is appropriate and competitive with the compensation programs
provided by other leading software companies with which we compete for
executives and employees. The Committee believes its compensation strategy,
principles and practices result in a compensation program tied to stockholder
returns and linked to the achievement of our annual and longer-term financial
and operational results on behalf of our stockholders.

Stock Options Repurchased

As discussed previously and in Note 7 to the Company's
consolidated financial statements, we completed a tender offer to repurchase
certain stock options with exercise prices greater than $40 per share (the
"Option Repurchase").  The Option Repurchase was implemented in order
to better: (i) improve employee morale by realigning the cash and equity
components of its compensation programs; (ii) eliminate the distraction of
significantly out-of-the-money stock options; and (iii) reduce the number of
outstanding stock options relative to the number of shares outstanding, or
"option overhang," thereby reducing future potential dilution to
existing stockholders.  Members of our Board of Directors were excluded from the
Option Repurchase and, accordingly two individuals, our Chairman and CEO, along
with our Vice Chairman, Co-Founder and Vice President, Strategic Planning, did
not participate.  Other executives were allowed to participate.

In September 2002, we repurchased 28.1 million stock
options tendered under the Option Repurchase for total consideration of $51.9
million, consisting of $31.5 million of fully vested, non-forfeitable shares of
our common stock (5.5 million shares) and $20.4 million in cash.  A total of 4.1
million of these shares are subject to a holding period as further described in
Note 7 to our consolidated financial statements.

The following table details the stock options tendered by
each Named Executive Officer and the consideration paid to such officer during
2002 to repurchase the tendered options:

`Remaining                     Shares of
                                       Number of    Market Price    Exercise     Contractual                   Common Stock
                                      Securities     of Common      Price of       Life of                     Received in
                                      Underlying     Stock at        Stock      Stock Options       Total        Exchange
                        Repurchase   Stock Options    Time of       Options      Repurchased    Consideration   for Stock
     Officer Name          Date       Repurchased    Repurchase   Repurchased    (in Years)      Received (1)  Options (2)
---------------------- ------------  ------------- ------------ --------------  -------------   -------------  -----------
Thomas M. Siebel                --             --   $       --   $         --             --    $         --           --

Paul Wahl               09/30/2002        250,000         5.75          59.81           8.23         462,500       52,725

R. David Schmaier               --             --           --             --             --              --           --

Kenneth A. Goldman      09/30/2002      1,500,000         5.75          72.56           7.74       2,775,000      316,350

Richard P. Chiarello            --             --           --             --             --              --           --

William R. McDermott            --             --           --             --             --              --           --`

1. Named Executive Officers who participated in the Option
Repurchase received, in exchange for the repurchase of the tendered stock
options, a fixed amount of consideration equal to the number of shares
underlying such tendered stock options, multiplied by $1.85.
2. In accordance with terms of the Option Repurchase, each
participating Named Executive Officer received shares of our common stock in
payment for the tendered stock options.  The number of fully vested,
non-forfeitable shares of our common stock issued was determined by dividing the
total consideration (less the amount of applicable tax withholdings) by the
closing price of our common stock on September 30, 2002, of $5.75 per share.
While the shares of common stock issued to the Named Executive Officers are
fully vested and non-forfeitable, a portion of the shares of common stock are
subject to a "holding period" of four years, as determined in
accordance with the terms of the Option Repurchase.

The Named Executive Officers are prohibited from selling,
transferring, making a short sale, granting any option to purchase or entering
into any hedging transaction with the same economic effect as the sale of such
shares during the holding period.  Accordingly, Mr. Wahl and Mr. Goldman will be
required to hold 40,217 and 241,304 shares of our common stock, respectively,
received in the Option Repurchase until released from the holding period.  The
shares will be released from the holding period in equal annual installments on
October 1, 2003, 2004, 2005 and 2006.  The remaining 12,508 and 75,046 shares of
our common stock issued to Mr. Wahl and Mr. Goldman, respectively, as part of
the consideration received in the Option Repurchase were freely tradable at
issuance.

Compensation Committee

Eric E. Schmidt
A. Michael Spence

---

Performance Measurement Comparison

This section is not "soliciting material," is
not deemed "filed" with the SEC and is not to be incorporated by
reference in any filing of the Company under the Securities Act of 1933 or the
Securities  Exchange Act of 1934 whether made before or after the date hereof
and irrespective of any general incorporation language in any such filing.

The following graph shows the total stockholder return of
an investment of $100 in cash on December 31, 1997 for (i) the Company's common
stock; (ii) the JP Morgan H&Q Technology Index; (iii) the Nasdaq Computer
& Data Processing Index; and (iv) the S&P 500 Index.  All values assume
reinvestment of the full amount of all dividends and are calculated as of
December 31 of each year:



`Measurement                             JP Morgan       Nasdaq Computer
       Period (Fiscal Year      Siebel         H & Q Technology  and Data Processing   S&P 500
          Covered) (1)      Systems, Inc. (1)   Index (2), (3)     Index (2), (3)      Index (2)
      --------------------  -----------------  ----------------  -------------------  ----------
            12/31/1997      $         100.00   $        100.00   $          100.00    $  100.00
            06/30/1998                154.26            123.96              146.34       117.71
            12/31/1998                162.33            155.54              178.39       128.58
            06/30/1999                317.19            200.63              223.78       144.50
            12/31/1999                803.59            347.38              392.44       155.64
            06/30/2000              1,564.73            351.98              316.31       154.97
            12/31/2000              1,293.87            224.57              180.62       141.46
            06/29/2001                897.34            175.06              171.56       131.99
            12/31/2001                535.34            155.23              145.44       124.65
            06/28/2002                272.07                --              106.66       108.25
            12/31/2002                141.58                --              100.29        97.10`

1. Assumes that $100.00 was invested on
December 31, 1997, in our common stock, after giving effect to a 2-for-1 split
of our common stock in March 1998, November 1999 and September 2000, and at the
closing sales price for our common stock on that date and that all dividends
were reinvested. No cash dividends have been declared on our common stock.
Stockholder returns over the indicated period should not be considered
indicative of future stockholder returns.
2. Assumes that $100.00 was invested on December 31, 1997,
in each index and that all dividends were reinvested. The Nasdaq Computer &
Data Processing Index is calculated by the Center for Research in Securities
Prices.  The S&P 500 Index is calculated by Standard & Poor's, a
division of the McGraw-Hill Companies, Inc.  The JP Morgan H&Q Technology
Index was calculated by Chase H&Q.
3. The JP Morgan H&Q Technology Index was terminated on
March 28, 2001.  It has been replaced with the Nasdaq Computer and Data
Processing Index.  A comparison of the total returns of both the JP Morgan
H&Q Technology Index and the Nasdaq Computer and Data Processing Indexes for
the applicable period is provided.

From our initial public offering in June
1996 to December 31, 2002, the price of our common stock has increased from
$1.06 to $7.40 per share, an increase of approximately 600%.  These results were
achieved as a result of the dedication and hard work of our employees, our CEO
and our Board of Directors.  Past performance of our common stock should not be
considered indicative of future performance.

---

Item 12.  Security Ownership of Certain Beneficial Owners and
Management

The following table sets forth certain information
regarding the beneficial ownership of our outstanding common stock as of
December 31, 2002 by: (i) each director; (ii) each Named Executive Officer;
(iii) all of our executive officers and directors as a group; and (iv) all those
known by us to be beneficial owners of more than 5% of our common stock:

`Amount and
                                           Nature of
                                           Beneficial      Percent
Name and Address of Beneficial Owner (1)  Ownership (2)    of Class
----------------------------------------  -------------  -----------
Thomas M. Siebel (3)....................   72,735,981       13.97 %
The TCW Group, Inc. (4).................   48,581,539        9.97 %
  865 South Figueroa Street
  Los Angeles, CA 90017
Patricia A. House (5)...................    7,717,282        1.57 %
Paul Wahl (6)...........................    1,869,762           *
R. David Schmaier (7)...................    1,819,962           *
Kenneth A. Goldman (8)..................    1,258,884           *
Richard P. Chiarello....................      100,000           *
William R. McDermott....................        1,426           *
Eric E. Schmidt, Ph.D. (9)..............    1,830,208           *
A. Michael Spence, Ph.D. (10)...........    1,063,400           *
Charles R. Schwab (11)..................    3,340,510           *
George T. Shaheen (12)..................    2,334,280           *
James C. Gaither (13)...................      632,856           *
Marc F. Racicot (14)....................       19,000           *
All directors and executive officers as
  a group (15 persons) (15).............   98,296,883       18.24 %`

_____________________________________

*	Represents beneficial ownership of less than 1%.

1. Unless otherwise provided, the address for each of the
beneficial owners listed is c/o Siebel Systems, Inc., 2207 Bridgepointe Parkway,
San Mateo, CA 94404.
2. Beneficial ownership is determined in accordance with
the rules of the Securities and Exchange Commission (the "SEC") and
generally includes voting or investment power with respect to securities.
Except as indicated by footnote, and subject to community property laws where
applicable, the persons named in the table above have sole voting and investment
power with respect to all shares of Common Stock shown as beneficially owned by
them.  Percentage of beneficial ownership is based on 486,427,813 shares of
Common Stock and exchangeable shares outstanding as of December 31, 2002.
3. Includes 30,285,592 shares held as trustee under the
Siebel Living Trust u/a/d 7/27/93; 2,349,904 shares held by Siebel Asset
Management, L.P., of which Mr. Siebel is a general partner; 2,000,000 shares
held by Siebel Asset Management III, L.P., of which Mr. Siebel is a general
partner; and 1,600,000 shares held by Siebel Asset Management IV, L.P., of which
Mr. Siebel is a general partner.  Also includes 2,426,845 shares held by the
Thomas and Stacey Siebel Foundation.  Also includes 34,073,640 shares issuable
upon exercise of outstanding stock options exercisable within 60 days of
December 31, 2002.  As described more fully in Note 7 to the accompanying
consolidated financial statements, at the request of our CEO, we cancelled
25,950,000 of our CEO's stock options with exercise prices ranging from $4.91 to
$59.81 per share in January 2003.  Accordingly, Mr. Siebel's beneficial
ownership percentage was reduced to 11.21% in January 2003.
4. Based solely on information contained on Schedule 13G
filed with the SEC.  Shares are held on behalf of TCW Business Unit, a group of
direct and indirect subsidiaries of TCW Group, Inc. (collectively
"TCW").  Includes 310,083 shares that would be derived from conversion
of $7,230,000 million face amount of the Company's Convertible Subordinated
Debentures, maturing September 15, 2006, and held indirectly by TCW and 390,900
shares that would be derived from conversion of $390,900 face amount of Morgan
Stanley Dean Witter & Co. Medium Term Note PERQS Exchangeable Convertible
Preferred Siebel Systems, Inc., held by TCW.
5. Includes 89,364 shares held by Patricia A. House
Separate Property UTA 1/21/00 Patricia A. House TTEE.  Also includes 6,597,151
shares issuable upon exercise of outstanding stock options exercisable within 60
days of December 31, 2002.
6. Includes 1,814,500 shares issuable upon exercise of
outstanding stock options exercisable within 60 days of December 31, 2002.
7. Includes 5,684 shares held by Mr. Schmaier's minor
children.  Also includes 1,239,647 shares issuable upon exercise of outstanding
stock options exercisable within 60 days of December 31, 2002.
8. Includes 20,034 shares held by the Goldman-Valeriote
Family Trust and 8,070 shares held by Mr. Goldman's minor children.  Also
includes 922,500 shares issuable upon exercise of outstanding stock options
exercisable within 60 days of December 31, 2002.
9. Includes 208 shares held by Dr. Schmidt's wife.  Also
includes 1,654,000 shares issuable upon exercise of outstanding stock options
exercisable within 60 days of December 31, 2002.
10. Includes 206,000 shares held by A. Michael Spence,
Trustee or Successor Trustee under The A. Michael Spence Revocable Trust u/a/d
October 26, 1996, and 380,000 shares held by the Spence Family Investments LP.
Also includes 1,800 shares held by A. Michael Spence TTEE by James Graham Spence
Trust, 1,800 shares held by A. Michael Spence TTEE by Cathy B. Spence
Irrevocable Trust and 1,800 shares held by A. Michael Spence TTEE by Marya W.
Spence Irrevocable Trust. Also includes 472,000 shares issuable upon exercise of
outstanding stock options exercisable within 60 days of December 31, 2002.
11. Includes 360,000 shares held by the Schwab Family
Partners to which Mr. Schwab disclaims beneficial ownership and 18,000 shares
held by Mr. Schwab's spouse.  Also includes 541,600 shares issuable upon
exercise of outstanding stock options exercisable within 60 days of December 31,
2002.
12. Includes 50,280 shares held by the Shaheen Revocable
Trust.  Also includes 2,284,000 shares issuable upon exercise of outstanding
stock options exercisable within 60 days of December 31, 2002.
13. Includes 479,200 shares issuable upon exercise of
outstanding stock options exercisable within 60 days of December 31, 2002.
14. Includes 19,000 shares issuable upon exercise of
outstanding stock options exercisable within 60 days of December 31, 2002.
15. Includes 52,496,024 shares issuable upon exercise of
stock options held by all executive officers and directors currently exercisable
or exercisable within 60 days of December 31, 2002.  As described more fully in
Note 7 to the accompanying consolidated financial statements, at the request of
our CEO, we cancelled 25,950,000 of our CEO's stock options with exercise prices
ranging from $4.91 to $59.81 per share in January 2003.  Accordingly, the
beneficial ownership percentage of all of our officers and directors as a group
was reduced to 15.75% in January 2003.  See footnotes (3) through (14)
above.

Equity Compensation Plan Information

The information required by this Item is incorporated by
reference from the section entitled "Section VI.  Equity Compensation Plan
Information" in Item 7 of this Annual Report on Form 10-K.

Item 13.  Certain Relationships and Related Transactions

Mr. Schwab, a member of our Board of Directors, serves as
an officer for one of our customers.  During the year ended December 31, 2002,
software license revenues from this customer totaled $1,531,000.

In June 2002, we assigned our lease of an aircraft to
First Virtual Air LLC, a company wholly-owned by Thomas M. Siebel, our Chairman
and CEO.  First Virtual Air took over all obligations of the lease in June 2002,
including lease payments of $197,719 per month.  However, we made lease payments
totaling $104,006 relating to a period subsequent to the assignment, for which
First Virtual Air reimbursed us.  First Virtual Air makes this aircraft
available to us for business use.  Through a sublease agreement between us and
First Virtual Air, we incur certain costs associated with operating and
maintaining the aircraft, and we contract with third parties to perform the
services related to this operation and maintenance.  To the extent that Mr.
Siebel uses the aircraft for personal use, he has agreed to reimburse us for the
applicable operating costs.During 2002, First Virtual Air reimbursed us for $293,222 of our
operating costs related to Mr. Siebel's nominal personal use of the aircraft.
We also reimbursed First Virtual Air $107,480 for contracts with third parties
to perform maintenance services related to our business use of the aircraft.

We also lease three corporate aircraft, own one aircraft,
and operate and maintain these aircraft, contracting with third parties to
perform the services related to this operation and maintenance.  On a limited
basis, certain of our officers have used these aircraft for personal use, and we
report the standard industry fare level for all personal travel as income for
these officers.  We have also entered into an arrangement pursuant to which Mr.
Siebel may use the aircraft for personal use, provided that he reimburses us for
the operating costs, valued at fair market rates as determined by applicable
rules, associated with his personal use of the aircraft.  During 2002, Mr.
Siebel reimbursed us for $48,225 of our operating costs related to his nominal
personal use of three of these aircraft.

Entities affiliated with Mr. Siebel lease office space at
our principal offices, 2207 Bridgepointe Parkway, San Mateo, California 94404.
During 2002, Mr. Siebel reimbursed us $74,248 for the use of this office space.
We lease a residence owned by Mr. Siebel at 2 Boulevard Suchet, Paris, France
for certain business-related use.  During 2002, we reimbursed Mr. Siebel
$169,813 for the business use of this residence.

We believe that the foregoing transactions were on terms
no less favorable to us than could be obtained from unaffiliated third
parties.

In response to a lawsuit filed against Siebel Systems and
Mr. Siebel, Mr. Siebel instituted a malicious prosecution lawsuit against the
attorneys representing the plaintiff in the original lawsuit.  We have agreed to
pay Mr. Siebel's litigation fees and expenses in connection with his suit.
During 2002, we incurred fees totaling $132,526 under this agreement.

We have entered into indemnity agreements with certain
employees, officers and directors that provide, among other things, that we will
indemnify such employee, officer or director, under the circumstances and to the
extent provided for therein, for expenses, damages, judgments, fines and
settlements he or she may be required to pay in actions or proceedings which he
or she is or may be made a party by reason of his or her position as an
employee, officer, director or other agent of Siebel Systems, and otherwise to
the full extent permitted under Delaware law and our Bylaws.

James C. Gaither, one of our Directors, is Senior Counsel
to Cooley Godward LLP, which has provided legal services to us since our
inception.

Item 14.  Controls and Procedures

Evaluation of Our Disclosure Controls and Internal
Controls

Within the 90 days prior to the date of this Annual
Report on Form 10-K ("Evaluation Date"), we evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures (the "Disclosure Controls"), as such term is defined in
Rules 13a-14(c) and 15d-14(c) under the Securities and Exchange Act of 1934, and
our internal controls and procedures for financial reporting (the "Internal
Controls").  This evaluation (the "Controls Evaluation") was done
under the supervision and with the participation of management, including our
CEO and CFO.  Rules adopted by the SEC require that we present the conclusions
of the CEO and the CFO about the effectiveness of our Disclosure Controls and
Internal Controls based on and as of the date of the Controls Evaluation.

CEO and CFO Certifications

Appearing immediately following the Signatures section of
this Annual Report on Form 10-K and attached as Exhibit 99 are two separate
forms of certifications of the CEO and the CFO.  The first certification is
required in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 (the
"Section 302 Certification").  The information contained in this Item
14 relates to the Controls Evaluation referred to in the Section 302
Certifications, and should be read with the Section 302 Certifications for a
more complete understanding of the topics presented.

Disclosure Controls and Internal Controls

Disclosure Controls are procedures that are designed with
the objective of ensuring that information required to be disclosed in our
reports filed under the Securities Exchange Act of 1934, such as this Annual
Report on Form 10-K, is recorded, processed, summarized and reported within the
time periods specified in the SEC rules and forms.  Disclosure Controls are also
designed with the objective of ensuring that such information is accumulated and
communicated to our management, including the CEO and CFO, as appropriate to
allow timely decisions regarding required disclosure.  Internal Controls are
procedures that are designed with the objective of providing reasonable
assurance that our transactions are properly authorized, our assets are
safeguarded against unauthorized or improper use, and our transactions are
properly recorded and reported, all to permit the preparation of our financial
statements in conformity with GAAP.

Limitations on the Effectiveness of Controls

Our management, including the CEO and CFO, does not
expect that our Disclosure Controls or our Internal Controls will prevent all
error and all fraud.  A control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met.  Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs.  Because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within a company have been detected.  These inherent limitations include
the realities that judgments in decision-making can be faulty and that
breakdowns can occur because of simple error or mistake.  Additionally, controls
can be circumvented by the individual acts of some persons, by collusion of two
or more people, or by management override of the control.  The design of any
system of controls also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions.  In
addition, over time, controls may become inadequate because of changes in
conditions, or the degree of compliance with the policies or procedures may
deteriorate.  Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected.

Scope of the Controls Evaluation

The CEO and CFO evaluation of our Disclosure Controls and
our Internal Controls included a review of the controls' objectives and design,
our controls' implementation and the effect of the controls on the information
generated for use in this Annual Report on Form 10-K.  In the course of the
Controls Evaluation, we sought to identify data errors, controls problems or
acts of fraud and to confirm that appropriate corrective action, including
process improvements, were being undertaken.  We will perform this type of
evaluation on a quarterly basis so that the conclusions concerning controls
effectiveness can be reported in our Quarterly Reports on Form 10-Q and Annual
Report on Form 10-K.  Our Internal Controls are also evaluated on an ongoing
basis by our internal audit department, by other personnel in our finance
organization.  The overall goals of these various evaluation activities are to
monitor our Disclosure Controls and our Internal Controls and to make
modifications as necessary.  Our intent in this regard is that the Disclosure
Controls and the Internal Controls will be maintained as dynamic systems that
change (including with improvements and corrections) as conditions warrant.

Among other matters, we sought in our evaluation to
determine whether there were any "significant deficiencies" or
"material weaknesses" in our Internal Controls, or whether we have
identified any acts of fraud involving personnel who have a significant role in
our Internal Controls.  This information was important both for the Controls
Evaluation generally and because items 5 and 6 in the Section 302 Certifications
require that the CEO and CFO disclose such information to our Audit Committee of
the Board of Directors and to our independent auditors and to report on related
matters in this section of the Annual Report on Form 10-K.  In the professional
auditing literature, "significant deficiencies" are referred to as
"reportable conditions," which are control issues that could have a
significant adverse effect on the ability to record, process, summarize and
report financial data in the financial statements.  A "material
weakness" is defined in the auditing literature as a particularly serious
reportable condition where the internal control does not reduce to a relatively
low level the risk that misstatements caused by error or fraud may occur in
amounts that would be material in relation to the financial statements and not
be detected within a timely period by employees in the normal course of
performing their assigned functions.  We also sought to deal with other controls
matters in the Controls Evaluation, and in each case if a problem was
identified, we considered what revision, improvement or correction to make in
accordance with our on-going procedures.

Conclusions

Based upon the Controls Evaluation, our CEO and CFO have
concluded that, subject to the limitations noted above, our Disclosure Controls
and procedures are effective in alerting them on a timely basis to material
information related to us (including our consolidated subsidiaries) that is
required to be included in our reports filed or submitted under the Securities
and Exchange Act of 1934, as amended.

Changes in Internal Controls

Our CEO and CFO note that, from the Evaluation Date to
the filing date of this Annual Report on Form 10-K, there have been no
significant changes in Internal Controls or in other factors that could
significantly affect such controls, including any corrective actions with regard
to significant deficiencies and material weaknesses.



PART IV

Item 15.  Exhibits, Financial Statements and Reports on Form 8-K

(a) The following documents are filed as
part of this Annual Report on Form 10-K:

1. 	Financial Statements



|                                                         | Page
|-------------------------------------------------------- | ----
|Independent Auditors' Report                             | 73  
|Consolidated Financial Statements:                       |     
|Balance Sheets                                           | 74  
|Statements of Operations and Comprehensive Income (Loss) | 75  
|Statements of Stockholders' Equity                       | 76  
|Statements of Cash Flows                                 | 77  
|Notes to Consolidated Financial Statements               | 78  

2. Exhibits

The exhibits in the accompanying index to exhibits are
filed or incorporated by reference as part of this Annual Report on Form 10-K.

(b) Reports on Form 8-K

The Registrant did not file any reports on Form 8-K
during the fourth quarter of 2002.

---

EXHIBIT INDEX

|Exhibit Number | Description of Document                                                                                                                                                                          
|-------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.1            | Agreement and Plan of Merger and Reorganization dated April 5, 2000, among the Registrant,
OS Acquisition Corp., OpenSite Technologies, Inc. and Alan Taetle as Stockholders' Agent. (1)         
|2.2            | Agreement and Plan of Merger and Reorganization dated August 3, 2000, among the Registrant,
Ocelot Acquisition Corp., OnLink Technologies, Inc. and Cornell P. French as Stockholders' Agent. (2)
|2.3            | Arrangement Agreement dated September 11, 2000, among the Registrant, certain indirectly
wholly owned subsidiaries of the Registrant, and Janna Systems Inc. (3)                                 
|3.1            | Amended and Restated Certificate of Incorporation of the Registrant, as amended to date. (4)                                                                                                     
|3.2            | Amended and Restated Bylaws of the Registrant. (5)                                                                                                                                               
|4.1            | Reference is made to Exhibit 3.1 and Exhibit 3.2.                                                                                                                                                
|4.2            | Specimen Stock Certificate. (6)                                                                                                                                                                  
|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. (6)                                       
|4.4            | Certificate of Designation of Series A1 Preferred Stock of the Registrant. (3)                                                                                                                   
|4.5            | Indenture between the Registrant, as Issuer, and Chase Manhattan Bank and Trust Company,
National Association, as Trustee, dated September 15, 1999. (7)                                         
|4.6            | Certificate of Designation of Series A2 Junior Participating Preferred Stock. (8)                                                                                                                
|4.7            | Rights Agreement dated as of January 29, 2003, between Siebel Systems, Inc. and Mellon
Investors Services LLC, as Rights Agent. (8)                                                              
|4.8            | Form of Rights Certificate. (8)                                                                                                                                                                  
|10.1           | Registrant's 1996 Equity Incentive Plan, as amended. (5)                                                                                                                                         
|10.2           | Registrant's Employee Stock Purchase Plan, as amended. (9)                                                                                                                                       
|10.3           | Form of Indemnity Agreement entered into between the Registrant and its officers and directors. (6)                                                                                              
|10.4           | Registrant's Deferred Compensation Plan, dated January 10, 1997. (10)                                                                                                                            
|10.5           | Master Alliance Agreement, dated March 17, 1995, between the Registrant and
Andersen Consulting LLP. (6)(11)                                                                                     
|10.6           | Assignment Agreement, dated September 20, 1995, by and between the Registrant
and Thomas M. Siebel. (6)                                                                                          
|10.7           | Lease Agreement, dated June 4, 1996, by and between the Registrant and Crossroad Associates
and Clocktower Associates. (6)                                                                       
|10.7.1         | Amendments to Lease Agreement, by and between the Registrant and Crossroad Associates and
Clocktower Associates. (12)                                                                            
|10.7.2         | Seventeenth Amendment of Lease, dated February 5, 2003, by and between Registrant and Crossroads
Associates and Clocktower Associates, and ancillary documents thereto. (5)                      
|10.8           | Lease Agreement, dated March 11, 1999, by and between the Registrant and Sobrato Interests III,
as amended. (13)                                                                                 
|10.8.1         | First Amendment to Lease  dated June 11, 1999 and Second Amendment to Lease dated
July 31, 1999. (14)                                                                                            
|10.9           | Lease Agreement, dated March 11, 1999, by and between the Registrant and Sobrato Interests III,
as amended. (13)                                                                                 
|10.9.1         | First Amendment to Lease  dated June 11, 1999 and Second Amendment to Lease dated
July 31, 1999. (14)                                                                                            
|10.10          | Lease Agreement, dated June 11, 1999, by and between the Registrant and Sobrato Interests III,
as amended. (13)                                                                                  
|10.10.1        | First Amendment to Lease  dated September 23, 2000. (14)                                                                                                                                         
|10.11          | Lease Agreement, dated August 24, 1994, by and between the Registrant and Watergate Tower
Associates. (13)                                                                                       
|10.12          | Lease Agreement, dated August 16, 1999, by and between the Registrant and Spieker
Properties, L.P. (13)                                                                                          
|10.12.1        | Amendment Number One to Lease, dated October 26, 2000, and Amendment Number Two to Lease,
dated June 29, 2001. (12)                                                                              
|10.13          | Lease Amendment 10, dated April 8, 1999, by and between the Registrant and Spieker
Properties, L.P. (13)                                                                                         
|10.14          | Lease Amendment 11, dated August 13, 1999, by and between the Registrant and Spieker
Properties, L.P. (13)                                                                                       
|10.15          | Lease Amendment 12, dated October 28, 1999, by and between the Registrant and Spieker
Properties, L.P. (13)                                                                                      
|10.16          | Office Lease Agreement, dated September 14, 2000, by and between the Registrant and Wilson Equity
Office, LLC.  (15)                                                                             
|10.16.1        | First Amendment to Office Lease Agreement, dated December 21, 2001, and Second Amendment to
Office Lease Agreement, dated September 25, 2002. (15)                                               
|10.17          | Lease, dated December 29, 2000, by and between the Registrant and PW Acquisitions VIII, LLC. (5)                                                                                                 
|10.18          | Registrant's 1998 Equity Incentive Plan, as amended. (5)                                                                                                                                         
|10.19          | Form of Registrant's Restricted Stock Grant Notice. (5)                                                                                                                                          
|21.1           | Subsidiaries of the Registrant. (5)                                                                                                                                                              
|23.1           | Independent Auditors' Consent. (5)                                                                                                                                                               
|99.1           | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (5)                                                                                                                     

____________________________

1. Incorporated by reference to the Registrant's
Current Report on Form 8-K filed on June 1, 2000.
2. Incorporated by reference to the Registrant's Current
Report on Form 8-K filed on October 10, 2000.
3. Incorporated by reference to the Registrant's Current
Report on Form 8-K filed on November 27, 2000.
4. Incorporated by reference to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2001.
5. Filed herewith.
6. Incorporated by reference to the Registrant's
Registration Statement on Form S-1 (No. 333-03751), as amended.
7. Incorporated by reference to the Registrant's
Registration Statement on Form S-3 (No. 333-91777) filed on November 30,
1999.
8. Incorporated by reference to the Registrant's Current
Report on Form 8-K filed on January 29, 2003.
9. Incorporated by reference to the Registrant's
Registration Statement on Form S-8 (No. 333-07983), as amended.
10. Incorporated by reference to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996.
11. Confidential treatment has been granted with respect
to portions of this exhibit.
12. Incorporated by reference to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.
13. Incorporated by reference to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1999.
14. Incorporated by reference to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30, 2000.
15. Incorporated by reference to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
2002.

---

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 (the "Company") as of
December 31, 2001 and 2002, and the related consolidated statements of
operations and comprehensive income, stockholders' equity and cash flows for
each of the years in the three-year period ended December 31, 2002.  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 auditing
standards generally accepted in the United States of America.  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, 2001 and
2002, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 2002, in conformity with
accounting principles generally accepted in the United States of America.  As
discussed in Notes 1 and 13 to the consolidated financial statements, the
Company changed its method of accounting for goodwill in 2002.

/s/ KPMG LLP

Mountain View, California
January 20, 2003, except Note 14 as to which the date is
February 13, 2003

---

**SIEBEL SYSTEMS, INC.****Consolidated Balance Sheets
               (in thousands; unaudited)**

`December 31,
                                                                      ----------------------------
                                                                            2001          2002
                                                                      -------------- -------------
Assets

Current assets:
   Cash and cash equivalents......................................... $     799,090  $    667,511
   Short-term investments............................................       857,565     1,494,093
                                                                      -------------- -------------
          Total cash, cash equivalents, and short-term investments...     1,656,655     2,161,604

   Marketable equity securities......................................         8,254         4,613
   Accounts receivable, net..........................................       396,297       275,764
   Deferred income taxes.............................................        58,131        96,518
   Prepaids and other................................................        70,766        49,901
                                                                      -------------- -------------
          Total current assets.......................................     2,190,103     2,588,400

Property and equipment, net..........................................       353,242       273,024
Goodwill.............................................................        72,869        80,949
Intangible assets, net...............................................        19,000        10,354
Other assets.........................................................        56,905        37,580
Deferred income taxes................................................        52,725        42,711
                                                                      -------------- -------------
          Total assets............................................... $   2,744,844  $  3,033,018
                                                                      ============== =============

Liabilities and Stockholders' Equity

Current liabilities:
   Accounts payable.................................................. $      14,395  $     15,239
   Accrued expenses..................................................       350,282       319,622
   Restructuring obligations.........................................            --        42,703
   Deferred revenue..................................................       241,017       270,575
                                                                      -------------- -------------
          Total current liabilities..................................       605,694       648,139

Capital lease obligations, less current portion......................         3,048        15,574
Restructuring obligations, less current portion......................            --       111,845
Convertible subordinated debentures..................................       300,000       300,000
                                                                      -------------- -------------
          Total liabilities..........................................       908,742     1,075,558
                                                                      -------------- -------------

Commitments and contingencies

Stockholders' equity:
  Common stock; $0.001 par value; 2,000,000 shares authorized;
     466,950 and 486,428 shares issued and outstanding, respectively.           467           486
  Additional paid-in capital.........................................     1,357,422     1,486,612
  Notes receivable from stockholders.................................          (422)           --
  Deferred compensation..............................................        (8,362)       (3,438)
  Accumulated other comprehensive income.............................         6,174        28,681
  Retained earnings..................................................       480,823       445,119
                                                                      -------------- -------------
          Total stockholders' equity.................................     1,836,102     1,957,460
                                                                      -------------- -------------
          Total liabilities and stockholders' equity................. $   2,744,844  $  3,033,018
                                                                      ============== =============`

See accompanying notes to consolidated financial statements.

---

**SIEBEL SYSTEMS, INC.

       Consolidated Statements of Operations and Comprehensive Income (Loss)**
               (in thousands, except per share data)

`Year Ended December 31,
                                                                 --------------------------------------
                                                                     2000         2001         2002
                                                                 ------------ ------------ ------------
Revenues:                                                                                              
    Software.................................................... $ 1,114,753  $ 1,065,618  $   700,344
    Professional services, maintenance and other................     705,453    1,018,978      934,963
                                                                 ------------ ------------ ------------
        Total revenues..........................................   1,820,206    2,084,596    1,635,307
                                                                 ------------ ------------ ------------
Cost of revenues:
    Software....................................................      18,391       16,294       21,612
    Professional services, maintenance and other................     462,694      624,731      540,194
                                                                 ------------  -----------  -----------
        Total cost of revenues..................................     481,085      641,025      561,806
                                                                 ------------ ------------ ------------
        Gross margin............................................   1,339,121    1,443,571    1,073,501
                                                                 ------------ ------------ ------------
Operating expenses:
    Product development.........................................     238,020      333,661      366,230
    Sales and marketing.........................................     609,898      615,675      476,975
    General and administrative..................................     132,164      136,353      119,253
    Restructuring-related expenses..............................          --           --      205,305
    Merger-related expenses.....................................      36,504           --           --
                                                                 ------------ ------------ ------------
        Total operating expenses................................   1,016,586    1,085,689    1,167,763
                                                                 ------------ ------------ ------------
        Operating income (loss).................................     322,535      357,882      (94,262)
                                                                 ------------ ------------ ------------
Other income, net:
    Interest and other income, net..............................      79,784       64,528       58,491
    Interest expense............................................     (17,909)     (18,326)     (20,016)
                                                                 ------------ ------------ ------------
        Total other income, net.................................      61,875       46,202       38,475
                                                                 ------------ ------------ ------------
        Income (loss) before income taxes.......................     384,410      404,084      (55,787)
Income taxes (benefit)..........................................     162,511      149,509      (20,083)
                                                                 ------------ ------------ ------------
        Net income (loss).......................................     221,899      254,575      (35,704)
Accretion of preferred stock....................................     (98,755)          --           --
                                                                 ------------ ------------ ------------
        Net income (loss) available to common stockholders...... $   123,144  $   254,575  $   (35,704)
                                                                 ============ ============ ============

Diluted net income (loss) per common share...................... $      0.24  $      0.49  $     (0.08)
                                                                 ============ ============ ============
Basic net income (loss) per common share........................ $      0.29  $      0.56  $     (0.08)
                                                                 ============ ============ ============

Shares used in diluted share computation........................     522,321      522,970      475,617
                                                                 ============ ============ ============
Shares used in basic share computation..........................     423,067      457,031      475,617
                                                                 ============ ============ ============
Comprehensive income (loss): 
      Net income (loss)......................................... $   221,899  $   254,575  $   (35,704)
Other comprehensive income (loss), net of taxes:
    Foreign currency translation adjustments....................       1,836       (3,238)      18,500
    Realized (gain) loss on marketable investments previously
      recognized in other comprehensive income..................     (60,901)      (3,399)     (12,420)
    Unrealized gain (loss) on investments.......................     (17,444)       5,332       16,427
                                                                 ------------ ------------ ------------
      Other comprehensive income (loss).........................     (76,509)      (1,305)      22,507
                                                                 ------------ ------------ ------------
      Total comprehensive income (loss)......................... $   145,390  $   253,270  $   (13,197)
                                                                 ============ ============ ============`

See accompanying notes to consolidated financial statements.

---

**SIEBEL SYSTEMS, INC.

                Consolidated Statements of Stockholders' Equity**

                                (in thousands)

`Notes                        Accumulated
                                                                       Common Stock         Additional      Receivable                        Other                        Total
                                                       Preferred   ---------------------      Paid-in          from          Deferred      Comprehensive   Retained     Stockholders'
                                                         Stock      Shares      Amount        Capital      Stockholders    Compensation    Income (Loss)   Earnings        Equity
                                                      ----------   ---------  ----------   ------------   -------------   -------------   -------------   ----------   -------------
Balances, December 31, 1999.......................... $        3    402,779   $     403    $   461,270    $       (548)   $     (3,550)   $     83,988    $ 103,104    $    644,670
Stock option exercises...............................         --     29,498          29        147,382          (1,153)             --              --           --         146,258
Employee stock purchase plan issuances...............         --        885           1         40,088              --              --              --           --          40,089
Other common stock issuances, net....................         --        390          --          4,747              --              --              --           --           4,747
Convertible preferred stock issuance.................          1         --          --         19,974              --              --              --           --          19,975
Issuance of warrants.................................         --         --          --          1,176              --              --              --           --           1,176
Tax benefit from stock options.......................         --         --          --        185,613              --              --              --           --         185,613
Deferred compensation related to stock options.......         --         --          --         24,307              --         (24,307)             --           --              --
Forfeiture of stock options issued below fair value..         --         --          --         (1,167)             --           1,167              --           --              --
Amortization of stock-based compensation.............         --         --          --             --              --          11,491              --           --          11,491
Unrealized gain on marketable investments, net
  of taxes of ($47,938)..............................         --         --          --             --              --              --         (78,345)          --         (78,345)
Currency translation adjustment, net of taxes
  of $1,125..........................................         --         --          --             --              --              --           1,836           --           1,836
Repayments of stockholder notes......................         --         --          --             --              78              --              --           --              78
Conversion of mandatorily redeemable
   convertible preferred stock.......................         --      5,324           5        179,209              --              --              --           --         179,214
Conversion of convertible preferred stock............         (4)     3,516           4             --              --              --              --           --              --
Accretion of mandatorily redeemable
   convertible preferred stock.......................         --         --          --             --              --              --              --      (98,755)        (98,755)
Net income...........................................         --         --          --             --              --              --              --      221,899         221,899
                                                      ----------   ---------  ----------   ------------   -------------   -------------   -------------   ----------   -------------
Balances, December 31, 2000..........................         --    442,392         442      1,062,599          (1,623)        (15,199)          7,479      226,248       1,279,946
Stock option exercises...............................         --     20,597          21        108,089              --              --              --           --         108,110
Employee stock purchase plan issuances...............         --      1,470           1         48,282              --              --              --           --          48,283
Repurchase of common stock subject to vesting........         --       (143)         --           (237)             --              --              --           --            (237)
Tax benefit from stock options.......................         --         --          --         53,800              --              --              --           --          53,800
Forfeiture of stock options issued below fair value..         --         --          --         (2,953)             --           2,953              --           --              --
Amortization of stock-based compensation, net........         --         --          --           (112)             --           5,281              --           --           5,169
Unrealized gain on marketable investments, net
  of taxes of $1,185.................................         --         --          --             --              --              --           1,933           --           1,933
Currency translation adjustment, net of taxes
  of ($1,985)........................................         --         --          --             --              --              --          (3,238)          --          (3,238)
Issuance of common stock and stock options
  in connection with acquisitions....................         --      2,634           3         87,954              --          (1,397)             --           --          86,560
Repayments of stockholder notes......................         --         --          --             --           1,201              --              --           --           1,201
Net income...........................................         --         --          --             --              --              --              --      254,575         254,575
                                                      ----------   ---------  ----------   ------------   -------------   -------------   -------------   ----------   -------------
Balances, December 31, 2001..........................         --    466,950         467      1,357,422            (422)         (8,362)          6,174      480,823       1,836,102
Stock option exercises...............................         --     10,651          11         63,547              --              --              --           --          63,558
Employee stock purchase plan issuances...............         --      3,109           3         29,363              --              --              --           --          29,366
Common stock issuance in connection with
  Option Repurchase..................................         --      5,473           5         31,466              --              --              --           --          31,471
Restricted stock issuances...........................         --        200          --          1,447              --          (1,447)             --           --              --
Repurchase of common stock subject to vesting........         --       (217)         --           (392)             --              --              --           --            (392)
Forfeiture of stock options issued below fair value..         --         --          --         (1,424)             --           1,424              --           --              --
Amortization of stock-based compensation, net........         --         --          --         (1,048)             --           5,174              --           --           4,126
Unrealized gain on marketable investments, net
  of taxes of $2,671.................................         --         --          --             --              --              --           4,007           --           4,007
Currency translation adjustment, net of taxes
  of $11,339.........................................         --         --          --             --              --              --          18,500           --          18,500
Issuance of common stock in connection with
  acquisition earnouts...............................         --        262          --          6,231              --            (227)             --           --           6,004
Repayments of stockholder notes......................         --         --          --             --             422              --              --           --             422
Net loss.............................................         --         --          --             --              --              --              --      (35,704)        (35,704)
                                                      ----------   ---------  ----------   ------------   -------------   -------------   -------------   ----------   -------------
Balances, December 31, 2002.......................... $       --    486,428   $     486    $ 1,486,612    $         --    $     (3,438)   $     28,681    $ 445,119    $  1,957,460
                                                      ==========   =========  ==========   ============   =============   =============   =============   ==========   =============`

See accompanying notes to consolidated financial statements.

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**SIEBEL SYSTEMS, INC.

                     Consolidated Statements of Cash Flows**
                           (in thousands)

`Year Ended December 31,
                                                                                   -------------------------------------
                                                                                      2000        2001          2002
                                                                                   ---------- ------------ -------------
Cash flows from operating activities:                                                                                    
   Net income (loss).............................................................. $ 221,899  $   254,575  $    (35,704)
   Adjustments to reconcile net income (loss) to net cash
    provided by operating activities:
      Depreciation and other amortization.........................................    35,352       93,179       145,238
      Amortization of goodwill....................................................    14,713       20,041            --
      Amortization of identifiable intangible assets..............................     1,326        6,518         8,646
      Compensation related to stock options, net..................................    11,491        5,169         4,126
      Compensation expense related to common shares issued in Option Repurchase...        --           --        31,471
      Write-off of property and equipment abandoned in restructuring..............        --           --        25,955
      Write-off of acquired companies' assets.....................................     2,298           --            --
      Provision for doubtful accounts and sales returns...........................    39,385       26,403        21,376
      Tax benefit from exercise of stock options..................................   185,613       53,800            --
      Deferred income taxes.......................................................   (62,059)     (11,636)      (50,431)
      Write-down of cost-method investments to fair value.........................        --        3,073         9,990
      Net realized gains on marketable investments................................   (60,901)      (3,399)      (12,420)
      Charitable contribution of marketable investments...........................    28,700           --            --
      Loss from equity method investee............................................     7,481           --            --
      Exchange of software for cost-method investments............................   (13,068)        (971)           --
      Loss on disposal of property and equipment..................................        13           --            --
      Changes in operating assets and liabilities:
         Accounts receivable......................................................  (264,251)     105,816        99,157
         Prepaids and other.......................................................   (53,095)      17,247        20,865
         Accounts payable and accrued expenses....................................   230,807      (19,616)      (19,172)
         Restructuring obligations................................................        --           --       154,548
         Deferred revenue.........................................................   112,864       38,002        29,558
                                                                                   ---------- ------------ -------------
           Net cash provided by operating activities..............................   438,568      588,201       433,203
                                                                                   ---------- ------------ -------------
Cash flows from investing activities:
   Purchases of property and equipment............................................  (162,161)    (245,945)      (70,809)
   Purchases of short-term investments............................................  (487,888)  (1,113,004)   (2,347,660)
   Sales and maturities of short-term investments.................................   290,088      668,028     1,718,362
   Purchase of marketable equity securities.......................................        --           --        (1,000)
   Proceeds from sale of marketable equity securities.............................    35,351          821         1,189
   Purchase consideration paid for acquired businesses, net of cash received......   (29,212)       8,555          (500)
   Other non-operating assets and non-marketable securities.......................   (18,084)     (23,068)        7,991
   Repayments from (advances to) affiliate, net...................................   (12,362)      10,579            --
                                                                                   ---------- ------------ -------------
           Net cash used in investing activities..................................  (384,268)    (694,034)     (692,427)
                                                                                   ---------- ------------ -------------
Cash flows from financing activities:
   Proceeds from issuance of common stock, net of repurchases.....................   189,173      156,156        92,532
   Proceeds from issuance of preferred stock......................................    19,975           --            --
   Proceeds from equipment financing..............................................        --           --        24,873
   Repayments of capital lease obligations........................................      (299)        (580)       (8,714)
   Repayments of stockholder notes................................................        78        1,201           422
                                                                                   ---------- ------------ -------------
           Net cash provided by financing activities..............................   208,927      156,777       109,113
                                                                                   ---------- ------------ -------------
Effect of exchange rate fluctuations..............................................     1,836       (3,238)       18,532
                                                                                   ---------- ------------ -------------
Change in cash and cash equivalents...............................................   265,063       47,706      (131,579)
Cash and cash equivalents, beginning of period....................................   486,321      751,384       799,090
                                                                                   ---------- ------------ -------------
Cash and cash equivalents, end of period.......................................... $ 751,384  $   799,090  $    667,511
                                                                                   ========== ============ =============

Supplemental disclosures of cash flows information:
   Cash paid for interest......................................................... $  16,324  $    17,029  $     18,455
                                                                                   ========== ============ =============

   Cash paid for income taxes..................................................... $  15,434  $    18,837  $     36,692
                                                                                   ========== ============ =============
Supplemental disclosures of non-cash activities:
   Purchase price payable to acquired companies................................... $   3,000  $        --  $         --
                                                                                   ========== ============ =============

   Conversion of preferred stock into common stock................................ $ 179,214  $        --  $         --
                                                                                   ========== ============ =============

   Common stock and stock options issued for acquisitions......................... $      --  $    87,957  $      6,004
                                                                                   ========== ============ =============`

See accompanying notes to consolidated financial statements.

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SIEBEL SYSTEMS, INC.
                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



1. Summary of Significant Accounting Policies
2. Restructuring
3. Financial Statement Details
4. Convertible Subordinated Debentures
5. Commitments and Contingencies
6. Preferred Stock and Stockholders' Equity
7. Stock Options
8. Net Income (Loss) per Share
9. Income Taxes
10. Related Party Transactions
11. Segment and Geographic Information
12. Business Combinations
13. Acquisitions
14. Subsequent Events
15. Selected Quarterly Financial Data
(unaudited)
16. The Company's gross margin in the above table for all
quarters presented has been conformed to the presentation for the year ended
December 31, 2002.  Specifically, the Company's gross margin reflects the
reclassification of certain expenses related to its information technology
support group from operating expenses to cost of professional services,
maintenance and other revenues.  These reclassifications did not impact
previously reported revenues, operating income, net income or earnings per share
data.

These expense reclassifications reduced the Company's gross
margin from the previously reported amounts by $4,965,000, $4,509,000,
$3,809,000, and $4,354,000 for the periods ended March 31, June 30, September
30, and December 31, 2001, respectively.  These expense reclassifications
reduced the Company's gross margin from the previously reported amounts by
$5,119,000, $5,742,000, $7,691,000, and $9,418,000 for the periods ended March
31, June 30, September 30, and December 31, 2002, respectively.
17. As further described in Note 7, during the third quarter
of 2002, the Company recorded a compensation charge of $54,879,000 related to
the Option Repurchase.  The Company has allocated this expense to the respective
categories within the accompanying consolidated statement of operations based on
the individual option holder's functional responsibility.  Accordingly, gross
margin for the third quarter of 2002 has been reduced by $14,119,000 for
expenses incurred related to the repurchase of stock options held by the
Company's professional service and technical support personnel.
18. The Company completed the Restructuring and the Option
Repurchase during 2002, which are discussed further in Notes 2 and 7,
respectively.  Included in operating expenses for the third quarter of 2002 is a
charge of $109,383,000 related to the Restructuring and a compensation charge of
$54,879,000 related to the Option Repurchase.  On an after-tax basis, these
charges reduced net income by $105,128,000 during the third quarter of 2002.
Included in operating expenses for the fourth quarter of 2002 is a charge of
$95,922,000 related to the Restructuring.  On an after-tax basis, these charges
reduced net income by $61,390,000 during the fourth quarter of 2002.
19. The Company's third and fourth quarter operating results
have been reduced by after-tax charges of $105,128,000 and $61,390,000,
respectively, related to the Restructuring and Option Repurchase.  Accordingly,
the Company's diluted and basic loss per share data both include $0.22 per share
during the third quarter of 2002 and $0.13 per share during the fourth quarter
of 2002 related to these charges.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the
Securities 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 13, 2003

By:	/s/ Kenneth A. Goldman
Kenneth A. Goldman

Senior Vice President, Finance and Administration
and Chief Financial Officer

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 Kenneth A. Goldman, 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 our 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. SiebelThomas M. Siebel                 | Chairman, Chief  Executive
    Officer and Director
    (Principal Executive Officer)                                                           | March 13, 2003
|/s/ Kenneth A. GoldmanKenneth A. Goldman             | Senior Vice President Finance
       and Administration and Chief
       Financial Officer (Principal
   Financial and Accounting
     Officer) | March 13, 2003
|/s/ Patricia A. HousePatricia A. House               | Vice Chairman and Vice President,
Strategic Planning                                                                                            | March 14, 2003
|/s/ James C. GaitherJames C. Gaither                 | Director                                                                                                                                        | March 14, 2003
|/s/ Marc F. RacicotMarc F. Racicot                   | Director                                                                                                                                        | March 14, 2003
|/s/ Eric E. Schmidt, Ph.D.Eric E. Schmidt, Ph.D.     | Director                                                                                                                                        | March 13, 2003
|_________________
Charles R. Schwab                  | Director                                                                                                                                        | March __, 2003
|/s/ George T. ShaheenGeorge T. Shaheen               | Director                                                                                                                                        | March 14, 2003
|/s/ A. Michael Spence, Ph.D.A. Michael Spence, Ph.D. | Director                                                                                                                                        | March 14, 2003

---



CERTIFICATIONS



I, Thomas M. Siebel, certify that:

1.	I have reviewed this annual report on Form 10-K of Siebel Systems, Inc.;

2. 	Based on my knowledge, this annual report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this annual report;

3. 	Based on my knowledge, the financial statements, and other financial information included in this annual
report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this annual report;

4. 	The registrant's other certifying officers and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a) 	designed such disclosure controls and procedures to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;

b) 	evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90
days prior to the filing date of this annual report (the "Evaluation Date"); and

c) 	presented in this annual report our conclusions about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation Date;

5. 	The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to
the registrant's auditors and the audit committee of registrant's Board of Directors (or persons performing the equivalent
functions):

a) 	all significant deficiencies in the design or operation of internal controls which could adversely affect
the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors
any material weaknesses in internal controls; and

b) 	any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant's internal controls; and

6. 	The registrant's other certifying officers and I have indicated in this annual report whether
there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material
weaknesses.

Dated: March 13, 2003By:
    /s/ Thomas M. SiebelThomas M. SiebelChairman and CEO

---

I, Kenneth A. Goldman, certify that:

1.	I have reviewed this annual report on Form 10-K of Siebel Systems, Inc.;

2. 	Based on my knowledge, this annual report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this annual report;

3. 	Based on my knowledge, the financial statements, and other financial information included in this annual
report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this annual report;

4. 	The registrant's other certifying officers and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a) 	designed such disclosure controls and procedures to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;

b) 	evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90
days prior to the filing date of this annual report (the "Evaluation Date"); and

c) 	presented in this annual report our conclusions about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation Date;

5. 	The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to
the registrant's auditors and the audit committee of registrant's Board of Directors (or persons performing the equivalent
functions):

a) 	all significant deficiencies in the design or operation of internal controls which could adversely affect
the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors
any material weaknesses in internal controls; and

b) 	any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant's internal controls; and

6. 	The registrant's other certifying officers and I have indicated in this annual report whether
there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material
weaknesses.

Dated: March 13, 2003By:
    /s/ Kenneth A. GoldmanKenneth A. GoldmanSenior Vice President, Finance and
                                    Administration and
                                    Chief Financial Officer

---