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.

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.

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.

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.

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.

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:

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.

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.

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:

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.

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.

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."

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.

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.

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.

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.

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.

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.

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.

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

(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.

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.

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.

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.

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.

                                                                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 %
                                         ============  ==========  ============ =========  ============ =========

                                                                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 %
                                         ============  ==========  ============ =========  ============ =========

                                                                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 %
                                         ============  ==========  ============ =========  ============ =========