8-K

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

FORM 8-K

Current Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of report (Date of earliest event reported): October 2, 2000

SIEBEL SYSTEMS, INC.
(Exact name of registrant as specified in its charter)

Delaware (State or Other Jurisdiction of Incorporation)

 

0-20725	94-3187233
(Commission File Number)	(I.R.S. Employer Identification No.)

1855 South Grant Street
San Mateo, CA    94402
(Address of principal executive offices, including zip code)

650-295-5000
(Registrant's telephone number, including area code)

Not Applicable
(Former name or former address, if changed since last report)

Item 5. Other Events

On October 2, 2000, Ocelot Acquisition Corp., a Delaware corporation ("Merger Sub"), which was a wholly-owned subsidiary of Siebel Systems, Inc., a Delaware corporation ("Siebel" or the "Registrant"), was merged (the "Merger") with and into OnLink Technologies, Inc., a Delaware corporation ("OnLink"), pursuant to an Agreement and Plan of Merger and Reorganization (the "Reorganization Agreement") dated August 3, 2000 by and among Siebel, Merger Sub, OnLink and Cornell P. French, as Stockholders' Agent. The description contained in this Item 5 of the transactions consummated pursuant to the terms and conditions of the Reorganization Agreement is qualified in its entirety by reference to the full text of the Reorganization Agreement, a copy of which is attached to this Report as Exhibit 99.1.

In the Merger, each then-outstanding share of common stock of OnLink was converted into the right to receive the "Applicable Fraction" of a share of common stock of Siebel. The Applicable Fraction is the fraction having a numerator equal to 7,413,128 and a denominator equal to the sum of (i) the aggregate number of shares of common stock of OnLink outstanding immediately prior to the effective time of the Merger (the "Effective Time") (including any shares that are subject to a repurchase option or risk of forfeiture under any restricted stock purchase or other agreement), plus (ii) the aggregate number of shares of common stock of OnLink purchasable under or otherwise subject to all options, warrants or convertible debentures to purchase shares of OnLink common stock outstanding immediately prior to the Effective Time (including all shares of OnLink common stock that may be ultimately purchased under options, warrants or convertible debentures to purchase shares of OnLink common stock that are unvested or are otherwise not then exercisable). Pursuant to the Reorganization Agreement, all rights with respect to outstanding options and warrants to acquire common stock of OnLink were converted into and became rights with respect to Siebel common stock and Siebel assumed such options and warrants in accordance with the terms of such options and warrants. In no event will Siebel be required to issue in excess of 7,413,128 shares of its common stock in respect of the securities of OnLink. No fractional shares of Siebel common stock will be issued in connection with the Merger. In lieu thereof, any holder of OnLink common stock who would otherwise have been entitled to receive fractional shares of Siebel common stock will be paid an amount based on the value of a whole share of approximately $109.87 (rounded to the nearest whole cent) without interest. At the Effective Time, Merger Sub ceased to exist and OnLink, as the surviving corporation in the Merger, became a wholly-owned subsidiary of Siebel.

The Merger is intended to qualify as a tax-free reorganization under the Internal Revenue Code of 1986, as amended, and is expected to be accounted for as a pooling-of-interests.

Attached as Appendix A to this current report on Form 8-K are the Registrant's audited supplemental combined financial statements as of December 31, 1998 and 1999 and for each of the years in the three-year period ended December 31, 1999, along with the unaudited supplemental combined financial statements as of June 30, 2000 and for the six months ended June 30, 1999 and 2000, all of which have been restated to include the results of operations and financial position of OnLink Technologies, Inc. as if the two companies were combined as of the beginning of the earliest period presented. In addition, the Registrant has included the following, all of which have been restated to reflect the acquisition of OnLink Technologies, Inc. as of the beginning of the earliest period presented: the supplemental combined financial statement schedule for the three years ended December 31, 1999; supplemental selected financial data for the five years ended December 31, 1999; and management's discussion and analysis of financial condition and results of operations.

The supplemental combined financial statements give retroactive effect to the merger of a wholly owned subsidiary of Siebel Systems, Inc. into OnLink Technologies, Inc. on October 2, 2000, which has been accounted for as a pooling-of-interests as described in Note 10 to the supplemental combined financial statements. Generally accepted accounting principles proscribe giving effect to a consummated business combination accounted for by the pooling-of-interests method in financial statements that do not include the date of consummation. These financials statements do not extend through the date of consummation. However, they will become the historical consolidated financial statements of Siebel Systems, Inc. and subsidiaries after financial statements covering the date of consummation of the business combination are issued.

On May 17, 2000 the Registrant acquired OpenSite Technologies, Inc. in a transaction accounted for as a pooling-of-interests. The Registrant's financial statements as of December 31, 1998 and 1999 and for each of the years in the three-year period ended December 31, 1999, which were restated to include the financial position and operating results of OpenSite Technologies, Inc. as of the earliest period presented, were filed in the Registrant's current report on Form 8-K on September 28, 2000. The Registrant's quarterly report on Form 10-Q as of June 30, 2000 and for the six month periods ended June 30, 1999 and 2000 included the financial position and results of operations of the Registrant restated to include OpenSite Technologies, Inc. as of the earliest period presented. Accordingly, all supplemental financial data and financial statements included in this current report on Form 8-K also reflect the financial position and operating results of OpenSite Technologies, Inc. as of the earliest period presented.

Item 7. Financial Statements, Pro Forma Financial Information and Exhibits

(c) Exhibits

The following Exhibits are filed as part of this report:

23.1	Consent of KPMG LLP
27.1	Financial Data Schedule
99.1	Agreement and Plan of Merger and Reorganization, dated August 3, 2000, by and among Siebel Systems, Inc., Ocelot Acquisition Corp., OnLink Technologies, Inc. and Cornell P. French, as Stockholders' Agent. The disclosure schedule of OnLink and certain exhibits to the agreement are omitted. The registrant agrees to furnish supplemental copies of such schedule and exhibits to the Commission upon request.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

SIEBEL SYSTEMS, INC.

Date: October 10, 2000

By: /s/ Kenneth Goldman

Kenneth Goldman

Senior Vice President,
Finance and Administration
and Chief Financial Officer

By: /s/ Paul J. Gifford

Paul J. Gifford

Vice President, Controller

Appendix A

Selected Supplemental Combined Financial Data
(in thousands, except per share data and employees)

The following selected supplemental financial data should be read in conjunction with our Supplemental Combined Financial Statements and Notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Form 8-K. The selected supplemental financial data for each of the years in the three-year period ended December 31, 1999, and as of December 31, 1998 and 1999 is derived from our supplemental combined financial statements that have been included in this Form 8-K and has been audited by KPMG LLP, independent auditors. The selected supplemental financial data as of December 31, 1995, 1996 and 1997 and the years ended December 31, 1995 and 1996 is derived from supplemental combined financial statements that have not been included in this Form 8-K. The selected financial data as of and for the six months ended June 30, 1999 and 2000 is derived from our unaudited supplemental combined financial statements included elsewhere in this Form 8-K.

The unaudited supplemental combined financial statements have been prepared on the same basis as the audited supplemental combined financial statements and include all adjustments, consisting of normal, recurring adjustments, that in the opinion of management are necessary for a fair presentation of the information set forth therein. Historical results are not necessarily indicative of the results to be expected in the future.

For each of the periods presented the Company's financial data has been restated to reflect the acquisitions of Scopus Technology, Inc. ("Scopus") in 1998, OnTarget, Inc. ("OnTarget") in 1999, OpenSite Technologies, Inc. ("OpenSite") in 2000, and OnLink Technologies, Inc. ("OnLink") in 2000, all of which have been accounted for as pooling-of-interests.

                                                                                           Six Months Ended
                                                Year Ended December 31,                       June 30,
                                ------------------------------------------------------  ---------------------
                                  1995       1996       1997       1998        1999       1999        2000
                                ---------  ---------  ---------  ---------  ----------  ---------  ----------
Operating Data
   Total revenues............. $  45,010  $ 112,135  $ 222,638  $ 411,207  $  800,984  $ 319,835  $  704,598
   Operating income........... $   3,797  $  18,086  $   8,667  $  63,360  $  159,493  $  63,297  $  102,246
   Net income................. $   3,122  $  13,660  $     805  $  41,105  $  108,111  $  42,946  $   78,473
   Net income (loss) available
    to common stockholders(1). $   3,122  $  13,660  $     805  $  40,741  $   54,947  $   1,037  $  (20,282)
   Pro forma net income(2).... $   2,764  $  13,255  $     152  $  40,729  $  107,746  $  42,946  $   78,473
   Pro forma net income (loss)
    available to common
    stockholders(1)........... $   2,764  $  13,255  $     152  $  40,365  $   54,582  $   1,037  $  (20,282)
   Pro forma diluted net
    income (loss) available
    per common share.......... $    0.01  $    0.04  $    0.00  $    0.10  $     0.12  $    0.00  $    (0.05)
   Pro forma basic net
    income (loss) available
    per common share.......... $    0.01  $    0.05  $    0.00  $    0.11  $     0.14  $    0.00  $    (0.05)
   Total assets............... $  60,003  $ 209,684  $ 271,872  $ 457,094  $1,248,972  $ 657,619  $1,648,873
   Convertible subordinated
    debentures................ $      --  $      --  $      --  $      --  $  300,000  $      --  $  300,000
   Mandatorily redeemable
    convertible preferred
    stock..................... $      --  $      --  $      --  $   4,818  $   80,459  $  69,204  $       --
   Total equity............... $  43,543  $ 173,070  $ 211,056  $ 293,962  $  619,297  $ 392,575  $  916,987
   Employees..................       246        513        973      1,566       3,429      2,428       5,402

(1) Both net income and pro forma net income have been reduced by accretion on OpenSite's mandatorily redeemable convertible preferred stock to determine net income (loss) available to common stockholders and pro forma net income (loss) available to common stockholders, respectively. The accounting for mandatorily redeemable convertible preferred stock requires non-cash accretion to the then current fair value of the common stock into which the mandatorily redeemable convertible preferred stock is convertible. This resulted in a non-cash charge to accretion and offsetting credit to mandatorily redeemable convertible preferred stock for the years ended December 31, 1998 and 1999 and the six months ended June 30, 1999 and 2000, the only periods in the above table 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 the Company's acquisition of OpenSite, the holders of the mandatorily redeemable convertible preferred stock converted their shares pursuant to their existing terms on a one for one basis into shares of OpenSite's common stock. Accordingly, the Company stopped recording accretion on the mandatorily redeemable convertible preferred stock on May 17, 2000.

(2) Prior to the acquisition of OnTarget by the Company in 1999, OnTarget had elected subchapter S status for Federal income tax purposes. Prior to January 1, 1998 and July 1, 1998, OpenSite and OnLink, respectively, had also elected subchapter S status for Federal income tax purposes. Accordingly, no income tax provision was presented in the historical financial statements of OnTarget, OpenSite, and OnLink for these periods, as the income was taxable personally to the stockholders. The Company has reduced net income and net income (loss) available to common stockholders by pro forma income taxes in order to reflect income tax expense that would have been reported if OnTarget, OpenSite and OnLink had been C corporations for each of the applicable periods in which they were subchapter S corporations. Pro forma income taxes for the six months ended June 30, 1999 was not considered material and, accordingly, has not been reflected.

Management's Discussion and Analysis of Supplemental Combined Financial Condition and Results of Operations

The statements contained in this Current Report on Form 8-K (the "Report") that are not historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), including statements regarding Siebel Systems, Inc.'s ("Siebel" or the "Company") expectations, beliefs, intentions or strategies regarding the future. Forward-looking statements include, without limitation, statements regarding the extent and timing of future revenues and expenses and customer demand, statements regarding the deployment of the Company's products, and statements regarding reliance on third parties. All forward-looking statements included in this document are based on information available to the Company as of the date hereof, and the Company assumes no obligation to update any such forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company, or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Some of these factors are discussed in "Risk Factors" starting on page 21 of the Company's Form 10-Q for the quarterly period ended June 30, 2000.

Overview

Siebel Systems, Inc. ("Siebel" or the "Company") is the world's leading provider of eBusiness application software. Siebel eBusiness Applications enable organizations to sell to, market to, and service their customers across multiple channels, including the Web, call centers, field, resellers, retail, and dealer networks. By employing comprehensive eBusiness applications to better manage their customer relationships, the Company's customers continue to be leaders in their markets.

Siebel eBusiness Applications are available in industry-specific versions designed for the pharmaceutical, healthcare, consumer goods, telecommunications, insurance, energy, apparel and footwear, automotive, technology, public sector, and finance markets. With best-of-class functionality of eBusiness software, 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 customer's unique 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.

In December 1999, May 2000 and October 2000, the Company acquired OnTarget, Inc. ("OnTarget"), OpenSite Technologies, Inc. ("OpenSite"), and OnLink Technologies, Inc. ("OnLink"), respectively. Each of these acquisitions have been accounted for as pooling-of-interests. Accordingly, the financial statements of the Company have been restated to include the financial position and results of operations of OnTarget, OpenSite and OnLink for all periods presented. Under the terms of each of the agreements, each outstanding share of OnTarget, OpenSite, and OnLink common stock was exchanged for 0.615503, 0.262956 and 0.330791, respectively, of newly issued shares of common stock of the Company. This resulted in the issuance of approximately 7,400,000 additional shares of the Company's common stock in each transaction to the former shareholders of OnTarget, OpenSite and OnLink. In addition, all outstanding stock options of OnTarget, OpenSite and OnLink were converted into the right to acquire the Company's common stock at the same respective exchange ratio with a corresponding adjustment to the exercise price.

OnTarget develops and implements advanced sales and marketing training and consulting programs for sales organizations competing in complex, multilevel sales campaigns. OnTarget's goal is to provide its clients with a pragmatic, repeatable and implementable process that will create lasting change within sales organizations, and which will enable Siebel's clients to effectively respond to today's market challenges. OpenSite develops and markets internet auction and dynamic pricing technology that enables companies to create branded, interactive, real-time Internet auctions. OpenSite's products and services automate the client's process of installing, running and maintaining its dynamic commerce applications. OnLink's technology is designed to provide companies with guided, interactive online communication with customers to find out what they need and automatically match them to product and service configurations.

Results of Operations

The following table sets forth the supplemental combined statement of operations data for each of the years in the three-year period ended December 31, 1999 and the six months ended June 30, 1999 and 2000 expressed as a percentage of total revenues:

                                                                                     Six Months Ended
                                                       Year Ended December 31,             June 30,
                                                 ----------------------------------  --------------------
                                                    1997        1998        1999       1999       2000
                                                 ----------  ----------  ----------  ---------  ---------
Revenues:
  Software.....................................       70.6        71.0        63.3       64.4       62.1
  Professional services, maintenance and other.       29.4        29.0        36.7       35.6       37.9
                                                 ----------  ----------  ----------  ---------  ---------
    Total revenues.............................      100.0       100.0       100.0      100.0      100.0
                                                 ----------  ----------  ----------  ---------  ---------
Cost of revenues:
  Software.....................................        2.0         1.4         1.0        1.1        1.3
  Professional services, maintenance and other.       14.2        15.9        21.9       19.8       23.8
                                                 ----------  ----------  ----------  ---------  ---------
    Total cost of revenues.....................       16.2        17.3        22.9       20.9       25.1
                                                 ----------  ----------  ----------  ---------  ---------
    Gross margin...............................       83.8        82.7        77.1       79.1       74.9
                                                 ----------  ----------  ----------  ---------  ---------
Operating expenses:
  Product development..........................       12.1        11.1         9.9       11.7        8.2
  Sales and marketing..........................       46.5        44.2        38.5       39.1       42.3
  General and administrative...................        9.6         8.7         8.8        8.5        8.5
  Merger-related expenses......................       11.7         3.3         --          --        1.4
                                                 ----------  ----------  ----------  ---------  ---------
    Total operating expenses...................       79.9        67.3        57.2       59.3       60.4
                                                 ----------  ----------  ----------  ---------  ---------
    Operating income...........................        3.9        15.4        19.9       19.8       14.5
Other income, net..............................        2.4         1.6         1.9        1.4        4.2
                                                 ----------  ----------  ----------  ---------  ---------
    Income before income taxes.................        6.3        17.0        21.8       21.2       18.7
Income taxes...................................        5.9         7.0         8.3        7.8        7.6
                                                 ----------  ----------  ----------  ---------  ---------
    Net income.................................        0.4        10.0        13.5       13.4       11.1
                                                 ==========  ==========  ==========  =========  =========

For Each of the Years Ended December 31, 1997, 1998 and 1999

Revenues

Software. License revenues increased from $157,148,000 and $291,962,000 for the years ended December 31, 1997 and 1998, respectively, to $506,789,000 for the year ended December 31, 1999. License revenues as a percentage of total revenues were 71% in both the fiscal 1997 and 1998 periods as compared to 63% in the fiscal 1999 period. License revenues increased in absolute dollars during these periods from the respective prior year periods due to an increase in the number of licenses of Siebel applications sold to new and existing customers and also due to licenses of new modules, released with the latest version of Siebel applications, to existing users of Siebel base applications. This increase in the number of licenses was primarily due to continued demand by new and existing customers for products in the Siebel applications family both in the United States and internationally. The Company expects that license revenues will continue to increase in absolute dollars, but will remain the same or decrease as a percentage of total revenues as the Company's maintenance and other services revenues continue to grow as a result of increases in the installed base of customers purchasing such services.

Professional Services, Maintenance and Other. Professional services, maintenance and other revenues increased from $65,490,000 and $119,245,000 for the years ended December 31, 1997 and 1998, respectively, to $294,195,000 for the year ended December 31, 1999 and as a percentage of total revenues were 29% in both the fiscal 1997 and 1998 periods as compared to 37% in the fiscal 1999 period. These increases in absolute dollars were due to growth in the Company's sales and marketing training businesses, consulting business and in the installed base of customers on maintenance. First-year maintenance is typically sold with the related software license. Revenue related to such maintenance is deferred based on vendor-specific objective evidence of fair value and amortized over the term of the maintenance contract, typically twelve months. The Company expects that professional services, maintenance and other revenues will remain the same or increase as a percentage of total revenues due to increased maintenance revenues derived from the Company's growing installed customer base and due to the Company's expansion of its consulting and training organization to meet anticipated customer demands in connection with product implementation and sales training.

The Company markets its products in the United States through its direct sales force and internationally through its sales force and distributors, primarily in Europe, Japan, Latin America, South Africa and Asia. International revenues accounted for 27%, 30% and 31% of license revenues in 1997, 1998 and 1999, respectively. The Company is increasing its international sales force and is seeking to establish distribution relationships with appropriate strategic partners and expects international revenues will continue to account for a substantial portion of total revenues in the future.

Cost of Revenues

Software. Cost of software license revenues includes third-party software royalties, product packaging, documentation and production. Cost of software license revenues through December 31, 1999 has averaged less than 2% of software license revenues. All costs incurred in the research and development of software products and enhancements to existing products have been expensed as incurred, and, as a result, cost of license revenues includes no amortization of capitalized software development costs. These costs are expected to remain the same or increase as a percentage of total revenues.

Professional Services, Maintenance and Other. Cost of professional services, maintenance and other revenues consist primarily of personnel, facilities and systems costs incurred in providing consulting, customer support, and training. Cost of professional services, maintenance and other revenues increased from $31,665,000 and $65,518,000 for the years ended December 31, 1997 and 1998, respectively, to $175,630,000 for the year ended December 31, 1999 and as a percentage of professional services, maintenance and other revenues were 48% in fiscal 1997 and 55% in fiscal 1998 as compared to 60% for the year ended December 31, 1999. The increases in the absolute dollar amount reflect the effect of fixed costs resulting from the Company's expansion of its maintenance and support organization and growth in the Company's consulting and training businesses. The Company expects that professional services, maintenance and other costs will continue to increase in absolute dollar amount as the Company expands its customer support organization to support a growing installed customer base; its consulting organization to meet anticipated customer demands in connection with product implementation; and the training organization to support the growing needs of its customers. These costs are expected to remain the same or increase as a percentage of total revenues in the future.

Operating Expenses

Product Development. Product development expenses include expenses associated with the development of new products, enhancements of existing products and quality assurance activities, and consist primarily of employee salaries, benefits, consulting costs and the cost of software development tools. Product development expenses increased from $26,918,000 and $45,500,000 for the years ended December 31, 1997 and 1998, respectively, to $79,177,000 for the year ended December 31, 1999 and decreased as a percentage of total revenues from 12% and 11% in the fiscal 1997 and 1998 periods, respectively, to 10% in the fiscal 1999 period. The increases in the absolute dollar amount of product development expenses were primarily attributable to costs of additional personnel in the Company's product development operations. The Company anticipates that it will continue to devote substantial resources to product development. The Company expects product development expenses to increase in absolute dollar amount but remain at a similar percentage of total revenues as in 1999. 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.

Sales and Marketing. Sales and marketing expenses consist primarily of salaries, commissions and bonuses earned by sales and marketing personnel, field office expenses, travel and entertainment and promotional expenses. Sales and marketing expenses increased from $103,594,000 and $181,736,000 for the years ended December 31, 1997 and 1998, respectively, to $308,222,000 for the year ended December 31, 1999 and as a percentage of total revenues, sales and marketing expenses decreased from 47% and 44% in the fiscal 1997 and 1998 periods, respectively, to 39% in the fiscal 1999 period. The increases in the absolute dollar amount of sales and marketing expenses reflect the hiring of additional sales and marketing personnel, costs associated with expanded promotional activities, and indirect merger-related costs, such as corporate sales training and marketing programs. The Company expects that sales and marketing expenses will continue to increase in absolute dollar amount as the Company continues to expand its sales and marketing efforts, establishes additional sales offices in the United States and internationally and increases promotional activities. These expenses are expected to remain at a similar percentage of total revenues as in 1999.

General and Administrative. General and administrative expenses consist primarily of salaries and occupancy costs for administrative, executive and finance personnel. General and administrative expenses increased from $21,354,000 and $35,975,000 for the years ended December 31, 1997 and 1998, respectively, to $70,357,000 for the year ended December 31, 1999 and as a percentage of total revenues were 10% and 9% in the fiscal 1997 and 1998 periods, respectively, as compared to 9% in the fiscal 1999 period. The increases in the absolute dollar amount of general and administrative expenses were primarily due to increased staffing and associated expenses necessary to manage and support the Company's increased scale of operations. The Company believes that its general and administrative expenses will continue to increase in absolute dollar amount as a result of the continued expansion of the Company's administrative staff and facilities to support growing operations. The Company anticipates that general and administrative expenses as a percentage of total revenues will remain at a similar percentage as in 1999.

Merger-Related Expenses. The Company did not incur any significant merger-related costs in connection with the merger with OnTarget.

In connection with the merger with Scopus, the Company incurred direct merger-related expenses of approximately $13,500,000, comprised of investment bankers, attorneys, accountants and other professional fees of $9,100,000, duplicate facilities and equipment of $3,100,000 and other miscellaneous expenses of $1,300,000.

The Company incurred costs of approximately $3,300,000 in 1997 in connection with Scopus' planned merger with Clear With Computers, Inc. The merger plan was terminated early in the fourth quarter of 1997.

On October 1, 1997, the Company completed its purchase of InterActive WorkPlace, Inc. ("InterActive"), a developer of intranet-based business intelligence software technology that has been incorporated into the Siebel eBriefings product. The acquisition was accounted for by the purchase method of accounting. The Company recorded a charge to income of $14,017,000, or $0.04 per diluted share, pursuant to an allocation of the purchase price by an independent appraiser, as a write-off of acquired research and development. Purchased in-process research and development is related to the completion of InterActive's data integration, filtering and formatting technology and its integration into the Company's products. At the time of acquisition, a prototype of InterActive's product existed and was in limited trials; however, the prototype was not stable or sufficiently developed to be scalable on an enterprise-wide basis. InterActive's technology was completed, at a cost of approximately $400,000, and incorporated as a separate module into the Siebel 98 product suite, which was released in June 1998. The Company estimated that technology was approximately 75% complete as of the acquisition date. At that date, the only identifiable intangible asset acquired was the technology under development. Accordingly, essentially all of the excess purchase price over net assets acquired, except for amounts assigned to net current assets, fixed assets and workforce-in-place, was assigned to in-process research and development.

The valuation of acquired research and development was prepared using the income approach and contemplated that sales of products incorporating InterActive's technology would be $11,500,000 in 1998, increasing to $35,000,000 in 2000, and declining significantly thereafter. Revenue increases were based upon the historical growth rate of software sales for the customer relationship management market and the Company. Operating costs as a percentage of revenue ranged from 56% in 1998 to 47% in 2000 based upon the Company's normal operating margin. Operating cash flows were reduced by an expected effective tax rate of 38% consistent with the Company's effective tax rate. Net cash flows were discounted to their present value at the acquisition date using an after-tax risk-adjusted discount rate of 30%. The Company believes this discount rate is consistent with that required by venture capitalists for investments in unproven but partially developed software products. Through the end of 1999, total revenues from Siebel eBriefings were approximately $11,000,000; however, the Company is unable to quantify the effect of Siebel eBriefings as a competitive differentiator. The Company does not track selling, general and administrative costs by product, but believes the incremental costs associated with selling and distributing Siebel eBriefings were substantially lower than those used in the valuation due to synergies associated with selling the product as a separate component of the Siebel 98 product suite and subsequent versions. If the Company is unable to continuously upgrade the Siebel eBriefings product or existing and future customers do not elect to purchase this module, the Company's ability to recover the value assigned to the acquired research and development will be impaired and revenue and profitability will be adversely affected.

On November 1, 1997, the Company completed its purchase of Nomadic, a provider of innovative business solutions to pharmaceutical sales forces. The acquisition was accounted for by the purchase method of accounting. Technology acquired from Nomadic has been incorporated into the Siebel ePharma product. The Company recorded a charge to income of $8,723,000, or $0.02 per diluted share, pursuant to an allocation of the purchase price by an independent appraiser, as a write-off of acquired research and development. The appraisal of the acquired research and development was based upon the present value of forecasted operating cash flows from the technology acquired, giving effect to the stage of completion at the acquisition date. These forecasted cash flows were then discounted at a rate commensurate with the risk involved in completing the acquired technology. The forecasted cash flows assumed inclusion of the product developed from acquired technology into the existing Siebel product suite. The purchased in-process research and development expense related to completion of Nomadic's second generation pharmaceutical sales force automation product. This product was completed and enterprise-wide deployment to end-user customers commenced in March 1998. Much of the functionality was incorporated into the Company's Siebel ePharma product, which was released in June 1998. At the time of the acquisition, Nomadic had a first-generation product at a limited number of customers, with a very small user base. There were a considerable number of uncertainties as to increasing the product's scalability for deployment on an enterprise-wide basis, improving the stability of the application and identifying and fixing bugs. The Company allocated limited excess purchase price over net assets acquired to net current assets, fixed assets and workforce-in-place. The majority of the excess purchase price was allocated to in-process research and development and other intangible assets (goodwill) based upon the expected cash flows from Nomadic's existing product and the product under development, giving consideration to the stage of completion of the technology under development at the acquisition date. This technology was completed, at a cost of approximately $1,300,000, for enterprise-wide release in March 1998.

The valuation of acquired research and development was prepared using the income approach and contemplated that sales of products incorporating Nomadic's technology would be $11,500,000 in 1998, increasing to $35,000,000 in 2000, and declining significantly thereafter. Revenue increases were based upon the historical growth rate of software sales for the customer relationship management market and the Company. Operating costs as a percentage of revenue were estimated at 70%, based upon the Company's normal operating margin. Operating cash flows were reduced by an expected effective tax rate of 39% consistent with the Company's effective tax rate. Net cash flows were discounted to their present value at the acquisition date using an after-tax risk-adjusted discount rate of 25%. The Company believes this discount rate is consistent with that required by venture capitalists for investments in unproven but partially developed software products. Through the end of 1999, total revenues from products incorporating the Nomadic technology under development at the acquisition date were approximately $35,000,000. Although the Company does not track selling, general and administrative costs by product, because these products are sold as vertical eBusiness solutions for the pharmaceutical industry, the Company believes the operating margin is similar to the Company's consolidated operating margin. If the Company is unable to continuously upgrade the Siebel ePharma product or superior products are released by competitors, the Company's ability to recover the value assigned to the acquired research and development will be impaired and revenue and profitability will be adversely affected.

Operating Income and Operating Margin

Operating income increased from $8,667,000 for the year ended December 31, 1997 and $63,360,000 for the year ended December 31, 1998 to $159,493,000 for the year ended December 31, 1999 and operating margin was 4% and 15% in the fiscal 1997 and 1998 periods, respectively, as compared to 20% in the fiscal 1999 period. Excluding merger-related expenses, operating income increased from $34,705,000 and $76,860,000 for the years ended December 31, 1997 and 1998, respectively, to $159,493,000 for the year ended December 31, 1999 and operating margin was 16% and 19% in the fiscal 1997 and 1998 periods, respectively, as compared to 20% in the fiscal 1999 period. These increases in operating income and margin, excluding merger-related expenses, were due to increases in license revenues without a proportional increase in cost, particularly costs associated with the hiring of new personnel. The Company believes it is likely that operating margins in future periods will be less than the 20% achieved in 1999.

Other Income, Net

Other income, net, is primarily comprised of interest income earned on the Company's cash and cash equivalents and short-term investments and reflects earnings on increasing cash and cash equivalents and short-term investment balances.

Pro Forma Income Taxes

Income taxes are comprised primarily of federal and state taxes.

Prior to the acquisition of OnTarget by the Company in 1999, OnTarget had elected subchapter S status for Federal income tax purposes. Prior to January 1, 1998 and July 1, 1998, OpenSite and OnLink, respectively, had also elected subchapter S status for Federal income tax purposes. Accordingly, no income tax was presented in the historical financial statements of OnTarget, OpenSite or OnLink for these periods as the income was taxable personally to the stockholders. Pro forma income taxes for each of the three years ended December 31, 1999 reflect income tax expense that would have been reported if OnTarget, OpenSite or OnLink had been C corporations for each of the applicable periods in which they were subchapter S corporations. Pro forma income taxes were $13,913,000, $29,041,000, and $66,617,000 in 1997, 1998, and 1999, respectively. Pro forma income taxes as a percentage of pretax income were 99%, 42%, and 38% in 1997, 1998, and 1999, respectively. Pro forma tax rate in 1997 was higher than the rates in 1998 and 1999 primarily due to non-deductible items related to acquisitions. The Company expects its effective tax rate in 2000 to be approximately 38%, excluding the effect of non-deductible costs such as merger-related expenses.

As a result of deductions relating to stock options, the Company paid no federal income taxes during 1999.

Pro Forma Net Income and Pro Forma Net Income Available to Common Stockholders

The Company had pro forma net income of $152,000, $40,729,000, and $107,746,000 for the years ended December 31, 1997, 1998 and 1999, respectively. Pro forma net income available to common stockholders was $152,000 and $40,365,000 for the years ended December 31, 1997 and 1998, respectively, as compared to $54,582,000 for the year ended December 31, 1999. Pro forma net income has been reduced by accretion on OpenSite's mandatorily redeemable convertible preferred stock to determine pro forma net income available to common stockholders. The accounting for mandatorily redeemable convertible preferred stock requires non-cash accretion to the then current fair value of the common stock into which the mandatorily redeemable convertible preferred stock is convertible. This resulted in a non-cash charge to accretion and offsetting credit to mandatorily redeemable convertible preferred stock for the years ended December 31, 1998 and 1999, the only years in which the preferred stock was outstanding. The amount of accretion for an income statement period was dependent upon how much the fair value of OpenSite's common stock fluctuated during that period. In connection with the Company's acquisition of OpenSite, the holders of the mandatorily redeemable convertible preferred stock converted their shares pursuant to their existing terms on a one for one basis into shares of OpenSite's common stock. Accordingly, the Company stopped recording accretion on the mandatorily redeemable convertible preferred stock on May 17, 2000.

Pro forma net income per diluted share was $0.00 in the fiscal 1997 and $0.10 in fiscal 1998 compared with $0.12 in fiscal 1999.

Liquidity and Capital Resources

The Company's cash, cash equivalents, short-term investments and marketable equity securities increased from $238,754,000 as of December 31, 1998 to $820,604,000 as of December 31, 1999, representing approximately 52% and 66% of total assets, respectively. The Company's days sales outstanding (DSO) in accounts receivable was 89 as of December 31, 1998 compared with 98 as of December 31, 1999.

The Company completed a private placement of $300,000,000 of convertible subordinated debentures in September 1999. The seven-year term notes bear interest at a rate of 5.50% and are convertible into approximately 12,864,000 shares of the Company's common stock at any time prior to maturity, at a conversion price of approximately $23.32 per share, subject to adjustment under certain conditions. The Company may redeem the notes, in whole or in part, at any time on or after September 15, 2002. The redemption price will range from $309,420,000 to $302,370,000 if the notes are redeemed between September 15, 2002 through September 14, 2006. Any redemption made on or after September 15, 2006 will be redeemed at $300,000,000. In addition, accrued interest to the redemption date will be paid by the Company in each redemption.

Throughout 1999 the Company received proceeds of approximately $75 million related to the issuance of common stock under employee stock option and stock purchase plans. In March and April 1999 OpenSite and OnLink completed private placements of approximately $34,500,000 of convertible preferred stock (the "Preferred Stock"). Immediately prior to the Company's acquisitions of OpenSite and OnLink on May 17, 2000 and October 2, 2000, respectively, the holders of the Preferred Stock, along with the holders of previously issued Preferred Stock of OpenSite and OnLink, converted all of the issued and outstanding shares pursuant to their existing terms into shares of the respective company's common stock. These shares along with the remaining outstanding shares of common stock of OpenSite and OnLink were exchanged for shares of the Company's common stock on May 17, 2000 and October 2, 2000, respectively.

The Company recently entered into a lease agreement for a new headquarters facility in San Mateo, California. The Company expects significant capital expenditures in connection with tenant improvements and furniture and fixtures for this facility. These expenditures are expected to be incurred through the end of 2000. In addition, the Company expects to continue to incur capital expenditures associated with tenant improvements, furniture and fixtures for newly-leased offices.

The Company has used full-serviced office suites on a month-to-month rental basis to establish its presence in new locations. As these locations expand, the Company has begun to transition more of the fully serviced office suites to leased space. This transition has involved build-out of tenant improvements, acquisition of furniture and fixtures, and other capital costs, which were not incurred in connection with the use of fully serviced office suites. The Company has already built out a number of leased facilities, both domestically and internationally, and expects this trend to continue.

Capital expenditures of the nature described above are expected to increase during 2000 and 2001.

The Company believes that the anticipated cash flows from operations, cash, cash equivalents and short-term investments will be adequate to meet its cash needs for working capital and capital expenditures for at least the next twelve months.

For Each of the Six Months Ended June 30, 1999 and 2000

Revenues

Software. License revenue increased from $205,940,000 for the six months ended June 30, 1999 to $437,636,000 for the six months ended June 30, 2000 and decreased as a percentage of total revenues from 64% in the fiscal 1999 period to 62% in the fiscal 2000 period. License revenues increased in absolute dollars due to an increase in the number of licenses of Siebel applications sold to new and existing customers and also due to licenses of new modules, released with the latest version of Siebel applications, sold to existing users of Siebel base applications. The increase in the number of licenses was primarily due to continued demand by new and existing customers for products in the Siebel applications family both in the United States and internationally. The Company expects that license revenues will continue to grow in absolute dollars, but will remain the same or decrease as a percentage of total revenues as the Company's maintenance and other services revenues continue to grow as a result of increases in the installed base of customers purchasing such services.

Professional Services, Maintenance and Other. Professional services, maintenance and other revenues increased from $113,895,000 for the six months ended June 30, 1999 to $266,962,000 for the six months ended June 30, 2000 and increased as a percentage of total revenues from 36% in the fiscal 1999 period to 38% in the fiscal 2000 period. The increase in the absolute dollar amount was due to growth in the Company's sales and marketing training business, consulting business and growth in the installed base of customers receiving maintenance. First-year maintenance is typically sold with the related software license. Revenue related to such maintenance is deferred based on vendor-specific objective evidence of fair value and amortized over the term of the maintenance contract, typically 12 months. The Company expects that professional services, maintenance and other revenues will remain the same or increase as a percentage of total revenues due to increased maintenance revenues derived from the Company's growing installed customer base and due to the Company's expansion of its consulting and training organization to meet anticipated customer demands in connection with product implementation and sales training.

A relatively small number of customers account for a significant percentage of the Company's license revenues. For the six months ended June 30, 1999 and 2000, sales to the Company's ten largest customers accounted for 32% and 33%, respectively, of total license revenues. The Company expects that licenses of its products to a limited number of customers will continue to account for a large percentage of revenue for the foreseeable future.

The Company markets its products in the United States through its direct sales force and internationally through its sales force and distributors, primarily in Europe, Japan, Latin America, South Africa and Asia. International license revenues accounted for 32% and 38% of license revenues for the six months ended June 30, 1999 and 2000, respectively. The Company is increasing its international sales force and is seeking to establish distribution relationships with appropriate strategic partners and expects international revenues will continue to account for a substantial portion of total revenues in the future.

On January 6, 2000, the Company acquired Paragren Technologies, Inc. ("Paragren") in a purchase transaction for cash consideration of $18,050,000 (see Note 10 to the supplemental combined financial statements). Concurrently, the Company licensed software to APAC Customer Services, Inc. ("APAC"), the former parent of Paragren. The Company recognized $1,080,000 of license revenue in the six months ended June 30, 2000 from APAC.

During the first quarter of 2000, the Company established a program whereby qualified startup companies can obtain Siebel eBusiness software in exchange for shares of their equity securities. The Company recognized $4,196,000 of license revenues related to this program during the six months ended June 30, 2000.

Cost of Revenues

Software. Cost of license revenues includes third party software royalties, product packaging, documentation and production. Cost of license revenues increased from $3,683,000 for the six months ended June 30, 1999 to $9,094,000 for the six months ended June 30, 2000 and as a percentage of total revenues were 1% for each of the six months ended June 30, 1999 and 2000. All costs incurred in the research and development of software products and enhancements to existing products have been expensed as incurred, and, as a result, cost of license revenues includes no amortization of capitalized software development costs. Cost of license revenues are expected to remain the same as the first six months of 2000 or increase as a percentage of total revenues.

Professional Services, Maintenance and Other. Cost of professional services, maintenance and other revenues consists primarily of personnel, facilities and systems costs incurred in providing sales and marketing training, consulting, and customer support. Cost of professional services, maintenance and other revenues increased from $63,241,000 for the six months ended June 30, 1999 to $167,911,000 for the six months ended June 30, 2000 and increased as a percentage of professional services, maintenance and other revenues from 56% in the fiscal 1999 period to 63% in the fiscal 2000 period. The increase in the absolute dollar amount reflects the effect of fixed costs resulting from the Company's expansion of its maintenance and support organization and growth in the Company's consulting business. The Company expects that professional services, maintenance and other costs will continue to increase in absolute dollar amount as the Company expands its customer support organization to support a growing installed customer base; its consulting organization to meet anticipated customer demands in connection with product implementation; and the training organization to support the growing needs of its customers. These costs are expected to remain the same as the first six months of 2000 or increase as a percentage of total revenues.

Operating Expenses

Product Development. Product development expenses include expenses associated with the development of new products, enhancements of existing products and quality assurance activities, and consist primarily of employee salaries, benefits, consulting costs and the cost of software development tools. Product development expenses increased from $37,421,000 for the six months ended June 30, 1999 to $57,442,000 for the six months ended June 30, 2000 and decreased as a percentage of total revenues from 12% in the fiscal 1999 period to 8% in the fiscal 2000 period. The increase in the absolute dollar amount of product development expenses was primarily attributable to costs of additional personnel in the Company's product development operations. The Company anticipates that it will continue to devote substantial resources to product development. The Company expects product development expenses to increase in absolute dollar amount but remain at a similar percentage of total revenues as in the first six months of 2000. 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 to date during that period have not been material. Accordingly, the Company has not capitalized any software development costs to date.

Sales and Marketing. Sales and marketing expenses consist primarily of salaries, commissions and bonuses earned by sales and marketing personnel, field office expenses, travel and entertainment and promotional expenses. Sales and marketing expenses increased from $125,102,000 for the six months ended June 30, 1999 to $297,784,000 for the six months ended June 30, 2000 and increased as a percentage of total revenues from 39% in the fiscal 1999 period to 42% in the fiscal 2000 period. The increase in the dollar amount of sales and marketing expenses reflects primarily the hiring of additional sales and marketing personnel and costs associated with expanded promotional activities. The Company expects that sales and marketing expenses will continue to increase in absolute dollars as the Company continues to expand its sales and marketing efforts, establishes additional sales offices in the United States and internationally and increases its promotional activities. These expenses are expected to remain at a similar percentage of total revenues as the first six months of 2000.

General and Administrative. General and administrative expenses consist primarily of salaries and occupancy costs for administrative, executive and finance personnel. General and administrative expenses increased from $27,091,000 for the six months ended June 30, 1999 to $60,119,000 for the six months ended June 30, 2000 and as a percentage of total revenues was 9% in both the six months ended June 30, 1999 and 2000. The increase in the absolute dollar amount of general and administrative expenses was primarily due to increased staffing and associated expenses necessary to manage and support the Company's increased scale of operations. The Company believes that its general and administrative expenses will continue to increase in absolute dollars as a result of the continued expansion of the Company's administrative staff and facilities to support growing operations. The Company anticipates that its general and administrative expenses as a percentage of total revenues should remain at a similar percentage as in the first half of 2000.

Merger-Related Expenses. During the second quarter of 2000, the Company expensed $10,002,000 of direct merger-related expenses in connection with the Company's acquisition of OpenSite. These costs primarily consisted of investment banker fees, along with attorneys, accountants and other professional fees. As of June 30, 2000, the Company had settled approximately $2,202,000 of these merger-related costs and, accordingly, has reflected the remaining $7,800,000 of these merger-related costs in accrued liabilities. The remaining liabilities consist of approximately $7,500,000 of investment banker and other professional fees and $300,000 of severance-related costs. The Company expects to settle these liabilities by December 31, 2000. The Company did not incur any significant merger-related costs during the first six months of 1999.

Operating Income and Operating Margin

Operating income increased from $63,297,000 for the six months ended June 30, 1999 to $102,246,000 for the six months ended June 2000 and operating margin decreased from 20% in the fiscal 1999 period to 15% in the fiscal 2000 period. Excluding merger-related expenses, operating income increased from $63,297,000 for the six months ended June 30, 1999 to $112,248,000 for the six months ended June 30, 2000 and operating margin decreased from 20% in the first six months of 1999 to 16% in the first six months of 2000. This decrease in the operating margin, excluding merger-related expenses, was mainly due to operating losses incurred by both OpenSite and OnLink prior to their acquisition by the Company. Prior to their acquisition, OpenSite and OnLink were expanding their sales and marketing activities without a corresponding increase in sales, resulting in OpenSite and OnLink incurring combined operating losses prior to merger-related expenses of $26,250,000 for the six months ended June 30, 2000 compared to operating losses of $8,100,000 for the comparable period in 1999.

Other Income, Net

For the six months ended June 30, 1999 and 2000, other income, net was comprised of the following:

                                           Six Months Ended June 30,
                                          --------------------------
                                              1999          2000
                                          ------------  ------------
  Realized gains on disposition of
   marketable equity securities........  $    104,000  $ 50,112,000
  Charitable contributions.............           --    (28,700,000)
  Interest income......................     5,354,000    22,597,000
  Interest expense.....................      (259,000)   (8,878,000)
  Losses of an equity method investee..           --     (5,408,000)
  Losses on disposal of assets.........      (688,000)          --
  Other, net...........................       (47,000)     (156,000)
                                          ------------  ------------
                                         $  4,464,000  $ 29,567,000
                                          ============  ============

Provision for Income Taxes

Income taxes are comprised primarily of federal and state taxes. The pro forma provision for income taxes would not have been materially different from the income tax provision as presented if OnTarget (an S corporation for income tax reporting purposes) had been a C corporation during the six months ended June 30, 1999. The provision for income taxes increased from $24,815,000 for the six months ended June 30, 1999 to $53,340,000 for the six months ended June 2000 and as a percentage of pretax income increased from 37% in the fiscal 1999 period to 40% in the fiscal 2000 period. The increase in the provision for income taxes as a percentage of pretax income was primarily due to non-deductible merger-related expenses. The Company expects its effective tax rate for the remainder of 2000 to be approximately 38%, excluding the effect of non-deductible costs such as merger-related expenses.

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

Net income increased from $42,946,000 for the six months ended June 30, 1999 to $78,473,000 for the six months ended June 30, 2000. Net income as a percentage of total revenues was 13% and 11% for the six months ended June 30, 1999 and June 30, 2000, respectively.

Net income available to common stockholders was $1,037,000 for the six months ended June 30, 1999 compared to a net loss available to common stockholders of $20,282,000 for the comparable period in 2000. Net income has been reduced by accretion on OpenSite's mandatorily redeemable convertible preferred stock to arrive at net income (loss) available to common stockholders. The accounting for mandatorily redeemable convertible preferred stock requires non-cash accretion to the then current fair value of the common stock into which the mandatorily redeemable convertible preferred stock is convertible. This resulted in a non-cash charge to accretion and offsetting credit to mandatorily redeemable convertible preferred stock for each period presented. The amount of accretion for an income statement period was dependent upon how much the fair value of OpenSite's common stock fluctuated during that period. In connection with the Company's acquisition of OpenSite, the holders of the mandatorily redeemable convertible preferred stock converted their shares pursuant to their existing terms on a one for one basis into shares of OpenSite's common stock. Accordingly, the Company stopped recording accretion on the mandatorily redeemable convertible preferred stock on May 17, 2000.

For the six months ended June 30, 1999 diluted net income (loss) per share was $0.00 compared to $(0.05) for the six months ended June 30, 2000.

Liquidity and Capital Resources

The Company's cash, cash equivalents and short-term investments increased from $820,604,000 as of December 31, 1999 to $1,009,518,000 as of June 30, 2000, representing approximately 66% and 61% of total assets, respectively. The Company's days sales outstanding in accounts receivable was 98 as of December 31, 1999 compared with 74 as of June 30, 2000.

For the six months ended June 30, 1999, cash provided by operating activities of $26,331,000 was primarily due to net income, the tax benefit from exercise of stock options, and increases in accounts payable and accrued expenses, partially offset by an increase in accounts receivable. For the six months ended June 30, 2000, cash provided by operating activities of $258,632,000 was primarily due to net income, the tax benefit from exercise of stock options, increases in accounts payable and accrued expenses and in deferred revenue, partially offset by deferred income taxes and gain on sale of marketable equity securities.

For the six months ended June 30, 1999, cash used in investing activities of $12,662,000 was primarily due to purchases of property and equipment, including leasehold improvements, and net purchases of short-term investments, partially offset by proceeds from disposals of property and equipment. Cash used in investing activities of $123,028,000 for the six months ended June 30, 2000 was primarily the result of the Company's purchases of Paragren Technologies, Inc. and MOHR Development, Inc., along with the purchases of property and equipment and net purchases of short-term investments, partially offset by proceeds from sales of the Company's marketable equity securities.

For the six months ended June 30, 1999, cash provided by financing activities of $63,124,000 was primarily due to the issuance of common stock pursuant to the exercise of stock options and the issuances of convertible preferred stock by OpenSite and OnLink. For the six months ended June 30, 2000, cash provided by financing activities of $95,607,000 resulted primarily from the issuance of common stock pursuant to the exercise of stock options and the issuance of convertible preferred stock by OnLink.

During the six months ended June 30, 2000, the Company entered into a lease agreement for a new headquarters facility in San Mateo, California. The Company has incurred and expects to continue to incur significant capital expenditures in connection with tenant improvements and furniture and fixtures for this facility. These expenditures are expected to be incurred through the end of 2000. In addition, the Company expects to continue to incur capital expenditures associated with tenant improvements, furniture and fixtures for newly leased offices.

The Company has used full-serviced office suites on a month-to-month rental basis to establish its presence in new locations. As these locations expand, the Company has begun to transition more of the office suites to leased space. This transition has involved build-out of tenant improvements, acquisition of furniture and fixtures, and other capital costs, which were not incurred in connection with the use of fully serviced office suites. The Company has already built out a number of leased facilities, both domestically and internationally, and expects this trend to continue.

Capital expenditures of the nature described above are expected to increase during 2000 and 2001.

The Company believes that the anticipated cash flows from operations, cash, cash equivalents and short-term investments will be adequate to meet its cash needs for working capital and capital expenditures for at least the next twelve months.

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
Siebel Systems, Inc.:

We have audited the accompanying supplemental combined balance sheets of Siebel Systems, Inc. and subsidiaries as of December 31, 1998 and 1999, and the related supplemental combined statements of operations and comprehensive income, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1999. These supplemental combined financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these supplemental combined financial statements based on our audits.

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

The supplemental combined financial statements give retroactive effect to the merger of a wholly owned subsidiary of Siebel Systems, Inc. into OnLink Technologies, Inc. on October 2, 2000, which has been accounted for as a pooling-of-interests as described in Note 10 to the supplemental combined financial statements. Generally accepted accounting principles proscribe giving effect to a consummated business combination accounted for by the pooling-of-interests method in financial statements that do not include the date of consummation. These financials statements do not extend through the date of consummation. However, they will become the historical consolidated financial statements of Siebel Systems, Inc. and subsidiaries after financial statements covering the date of consummation of the business combination are issued.

In our opinion, the supplemental combined financial statements referred to above present fairly, in all material respects, the financial position of Siebel Systems, Inc. and subsidiaries as of December 31, 1998 and 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1999, in conformity with generally accepted accounting principles applicable after financial statements are issued for a period which includes the date of consumation of the business combination.

/s/ KPMG LLP

Mountain View, California
January 24, 2000, except for Notes 10 and 11 which are as of October 9, 2000

SIEBEL SYSTEMS, INC.
Supplemental Combined Balance Sheets
(in thousands, except per share data)

                                                              December 31,
                                                        ------------------------   June 30,
                                                           1998         1999         2000
                                                        -----------  -----------  -----------
                                                                                  (unaudited)
                    Assets                                                            
Current assets:
  Cash and cash equivalents........................... $    86,866  $   479,787  $   711,260
  Short-term investments..............................     151,888      198,878      251,183
  Marketable equity securities........................         --       141,939       47,075
  Accounts receivable, net............................     126,848      295,930      322,210
  Deferred income taxes...............................      14,617          --        79,716
  Prepaids and other..................................      14,515       31,298       59,390
                                                        -----------  -----------  -----------
    Total current assets..............................     394,734    1,147,832    1,470,834
  Property and equipment, net.........................      47,297       59,381      106,589
  Other assets........................................      15,063       41,759       71,450
                                                        -----------  -----------  -----------
    Total assets...................................... $   457,094  $ 1,248,972  $ 1,648,873
                                                        ===========  ===========  ===========

     Liabilities and Stockholders' Equity                                             
Current liabilities:
  Accounts payable.................................... $     4,880  $    12,318  $    24,018
  Accrued expenses....................................      88,764      129,293      246,138
  Income taxes payable................................      10,917          --           --
  Deferred revenue....................................      52,851       88,259      160,301
  Capital lease obligations-current portion...........          22          --           --
  Deferred income taxes...............................         --        17,907          --
                                                        -----------  -----------  -----------
    Total current liabilities.........................     157,434      247,777      430,457

Convertible subordinated debentures...................         --       300,000      300,000
Capital lease obligations-noncurrent portion..........          43          --           --
Deferred income taxes.................................         783        1,439        1,429
                                                        -----------  -----------  -----------
    Total liabilities.................................     158,260      549,216      731,886
                                                        -----------  -----------  -----------

Mandatorily redeemable convertible preferred stock....       4,818       80,459          --
Redeemable common stock warrants......................          54          --           --

Commitments and contingencies

Stockholders' equity:
  Preferred stock; $0.001 par value; 1,784, 2,815
   and 3,512 shares issued and outstanding,
   respectively.......................................           2            3            4
  Common stock; $0.001 par value; 800,000 shares
   authorized; 368,569, 393,943 and 414,883 shares
   issued and outstanding, respectively...............         369          394          415
  Additional paid-in capital..........................     241,891      433,170      817,714
  Notes receivable from stockholders..................        (488)        (548)      (1,623)
  Deferred stock compensation.........................        (456)      (3,513)     (10,885)
  Accumulated other comprehensive income (loss).......        (669)      83,611       25,464
  Retained earnings...................................      53,313      106,180       85,898
                                                        -----------  -----------  -----------
    Total stockholders' equity........................     293,962      619,297      916,987
                                                        -----------  -----------  -----------
    Total liabilities and stockholders' equity........ $   457,094  $ 1,248,972  $ 1,648,873
                                                        ===========  ===========  ===========

See accompanying notes to supplemental combined financial statements.

SIEBEL SYSTEMS, INC.
Supplemental Combined Statements of Operations and Comprehensive Income
(in thousands, except per share data)

                                                                                     Six Months Ended
                                                       Year Ended December 31,             June 30,
                                                 ----------------------------------  --------------------
                                                    1997        1998        1999       1999       2000
                                                 ----------  ----------  ----------  ---------  ---------
                                                                                          (unaudited)
Revenues:
  Software..................................... $  157,148  $  291,962  $  506,789  $ 205,940  $ 437,636
  Professional services, maintenance and other.     65,490     119,245     294,195    113,895    266,962
                                                 ----------  ----------  ----------  ---------  ---------
    Total revenues.............................    222,638     411,207     800,984    319,835    704,598
                                                 ----------  ----------  ----------  ---------  ---------
Cost of revenues:
  Software.....................................      4,402       5,618       8,105      3,683      9,094
  Professional services, maintenance and other.     31,665      65,518     175,630     63,241    167,911
                                                 ----------  ----------  ----------  ---------  ---------
    Total cost of revenues.....................     36,067      71,136     183,735     66,924    177,005
                                                 ----------  ----------  ----------  ---------  ---------
    Gross margin...............................    186,571     340,071     617,249    252,911    527,593
                                                 ----------  ----------  ----------  ---------  ---------
Operating expenses:
  Product development..........................     26,918      45,500      79,177     37,421     57,442
  Sales and marketing..........................    103,594     181,736     308,222    125,102    297,784
  General and administrative...................     21,354      35,975      70,357     27,091     60,119
  Merger-related expenses......................     26,038      13,500         --          --     10,002
                                                 ----------  ----------  ----------  ---------  ---------
    Total operating expenses...................    177,904     276,711     457,756    189,614    425,347
                                                 ----------  ----------  ----------  ---------  ---------
    Operating income...........................      8,667      63,360     159,493     63,297    102,246
Other income, net..............................      5,398       6,410      14,870      4,464     29,567
                                                 ----------  ----------  ----------  ---------  ---------
    Income before income taxes.................     14,065      69,770     174,363     67,761    131,813
Income taxes...................................     13,260      28,665      66,252     24,815     53,340
                                                 ----------  ----------  ----------  ---------  ---------
    Net income.................................        805      41,105     108,111     42,946     78,473
Distributions to preferred stockholders........        --          (39)        --          --         --
Accretion of preferred stock...................        --         (325)    (53,164)   (41,909)   (98,755)
                                                 ----------  ----------  ----------  ---------  ---------
    Net income (loss) available to common
      stockholders............................. $      805  $   40,741  $   54,947  $   1,037  $ (20,282)
                                                 ==========  ==========  ==========  =========  =========

Diluted net income (loss) available per
  common share................................. $     0.00  $     0.10  $     0.12  $    0.00  $   (0.05)
                                                 ==========  ==========  ==========  =========  =========

Basic net income (loss) available per
  common share................................. $     0.00  $     0.11  $     0.14  $    0.00  $   (0.05)
                                                 ==========  ==========  ==========  =========  =========

Pro forma net income (loss) and per share data:
    Income before income taxes as reported..... $   14,065  $   69,770  $  174,363  $  67,761  $ 131,813
    Pro forma income taxes.....................     13,913      29,041      66,617     24,815     53,340
                                                 ----------  ----------  ----------  ---------  ---------
    Pro forma net income.......................        152      40,729     107,746     42,946     78,473
    Distributions to preferred stockholders
      as reported..............................        --          (39)        --          --         --
    Accretion of preferred stock as reported...        --         (325)    (53,164)   (41,909)   (98,755)
                                                 ----------  ----------  ----------  ---------  ---------
    Pro forma net income (loss) available to
      common stockholders...................... $      152  $   40,365  $   54,582  $   1,037  $ (20,282)
                                                 ==========  ==========  ==========  =========  =========

Pro forma diluted net income (loss) available
  per common share............................. $     0.00  $     0.10  $     0.12  $    0.00  $   (0.05)
                                                 ==========  ==========  ==========  =========  =========

Pro forma basic net income (loss) available
  per common share............................. $     0.00  $     0.11  $     0.14  $    0.00  $   (0.05)
                                                 ==========  ==========  ==========  =========  =========

Shares used in diluted pro forma net income
  (loss) available per common share
  computation..................................    385,836     409,153     459,720    441,825    403,959
                                                 ==========  ==========  ==========  =========  =========
Shares used in basic pro forma net income
  (loss) available per common share
  computation..................................    342,968     358,713     380,619    374,394    403,959
                                                 ==========  ==========  ==========  =========  =========

Comprehensive income:
  Net income................................... $      805  $   41,105  $  108,111  $  42,946  $  78,473

Other comprehensive income (loss), net of tax:
  Foreign currency translation adjustments.....       (365)       (505)        614        261        261
  Unrealized gains (loss) on securities........       --           201      83,666     35,364    (58,408)
                                                 ----------  ----------  ----------  ---------  ---------
Other comprehensive income (loss)..............       (365)       (304)     84,280     35,625    (58,147)
                                                 ----------  ----------  ----------  ---------  ---------
    Total comprehensive income................. $      440  $   40,801  $  192,391  $  78,571  $  20,326
                                                 ==========  ==========  ==========  =========  =========

See accompanying notes to supplemental combined financial statements.

SIEBEL SYSTEMS, INC.
Supplemental Combined Statements of Stockholders' Equity
(in thousands)

                                                                                               Accumu-
                                                                            Notes               lated
                                                                           Receiv-              Other
                                                                             able    Deferred  Compre-                Total
                            Preferred Stock    Common Stock     Additional   from     Stock    hensive               Stock-
                          ------------------ -----------------   Paid-in    Stock-   Compen-    Income   Retained   holders'
                           Shares    Amount   Shares   Amount    Capital   holders    sation    (Loss)   Earnings    Equity
                          --------  -------- --------  -------  ---------  --------  --------  --------  ---------  ---------
Balances, December 31,
 1996....................     --   $   --    335,488  $   335  $ 156,968  $   (508) $ (1,173) $     --  $  17,448  $ 173,070
Issuance of common
 stock under Employee
 Stock Option Plans......     --       --      8,269        9      4,781       --         --        --        --       4,790
Issuance of common
 stock under Employee
 Stock Purchase Plans....     --       --      2,503        3      4,297       --         --        --        --       4,300
Issuance of common
 stock related to
 InterActive WorkPlace
 acquisition.............     --       --      2,408        2     14,579       --         --        --        --      14,581
Issuance of common
 stock related to
 Nomadic acquisition.....     --       --      2,400        2     10,391       --         --        --        --      10,393
Issuance of common
 stock...................     --       --        220      --          30       --         --        --        --          30
Repayment of note
 receivable..............     --       --        --       --          --       102        --        --        --         102
Compensation related
 to stock options........     --       --        --       --        (256)      --        256        --        --         --
Cancellation of stock
 options issued below
 fair value..............     --       --        --       --          (1)      --          1        --        --         --
Tax benefit from
 stock options...........     --       --        --       --       4,046       --         --        --        --       4,046
Amortization of
 deferred compensation
 related to stock
 options.................     --       --        --       --          --       --        277        --        --         277
Currency translation
 adjustment (net of
 taxes of $214)..........     --       --        --       --          --       --         --      (365)       --        (365)
Subchapter S
 distributions by
 OnTarget................     --       --        --       --          --       --         --        --       (973)      (973)
Net income...............     --       --        --       --          --       --         --        --        805        805
                          --------  -------- --------  -------  ---------  --------  --------  --------  ---------  ---------
Balances, December 31,
 1997....................     --       --    351,288      351    194,835      (406)     (639)     (365)    17,280    211,056
Issuance of common stock
 under Employee Stock
 Option Plans............     --       --     13,534       14     17,848       --         --        --        --      17,862
Issuance of common stock
 under Employee Stock
 Purchase Plans..........     --       --      2,464        2      8,532       --         --        --        --       8,534
Issuance of common
 stock...................     --       --        398        1         82       (82)       --        --        --           1
Adjustment to conform
 acquired company's
 year-end................     --       --        --       --          --       --         --        --     (1,464)    (1,464)
Cancellation of stock
 options issued below
 fair value..............     --       --        --       --         (39)      --         39        --        --         --
Forgiveness of notes
 payable to a
 shareholder of Onlink
 Technologies, Inc. .....     --       --        --       --         141       --         --        --        --         141
Issuance of common
 stock related to
 Interactive Data
 Systems, LLC
 acquisition.............     --       --        885        1        303       --       (144)       --        --         160
Issuance of Series A
 convertible
 preferred stock.........   1,784         2      --       --       6,049       --         --        --        --       6,051
Tax benefit from
 stock options...........     --       --        --       --      13,517       --         --        --        --      13,517
Amortization of deferred
 compensation related
 to stock options........     --       --        --       --          --       --        288        --        --         288
Unrealized gain on
 short-term investments
 (net of taxes of $118)..     --       --        --       --          --       --         --       201        --         201
Currency translation
 adjustment (net of
 taxes of $297)..........     --       --        --       --          --       --         --      (505)       --        (505)
Transfer of common
 stock to employees......     --       --        --       --         631       --         --        --        --         631
Subchapter S
 distributions by
 OnTarget................     --       --        --       --          --       --         --        --     (3,111)    (3,111)
Subchapter S
 distributions by
 OpenSite................     --       --        --       --          --       --         --        --       (141)      (141)
Change of OpenSite
 and Onlink from
 S corporations to
 C corporations..........     --       --        --       --          (8)      --         --        --          8        --
Distributions to
 preferred stockholders..     --       --        --       --          --       --         --        --        (39)       (39)
Accretion of mandatorily
 redeemable convertible
 preferred stock.........     --       --        --       --          --       --         --        --       (325)      (325)
Net income...............     --       --        --       --          --       --         --        --     41,105     41,105
                          --------  -------- --------  -------  ---------  --------  --------  --------  ---------  ---------
Balances, December 31,
 1998....................   1,784         2  368,569      369    241,891      (488)     (456)     (669)    53,313    293,962
Issuance of common stock
 under Employee Stock
 Option Plans............     --       --     21,470       21     59,342       (60)       --        --        --      59,303
Issuance of common stock
 under Employee Stock
 Purchase Plans..........     --       --      1,655        2     15,735       --         --        --        --      15,737
Issuance of common stock
 under stock award
 plan....................     --       --        --       --         198       --         --        --        --         198
Issuance of common stock
 under stock warrants....     --       --         58      --           8       --         --        --        --           8
Repurchase of common
 stock...................     --       --       (490)     --      (2,795)      --         --        --        --      (2,795)
Termination of put
 provision of redeemable
 common stock warrants...     --       --        --       --         323       --         --        --        --         323
Repurchase of common
 stock which was subject
 to vesting..............     --       --        (79)     --         (27)      --         --        --        --         (27)
Issuance of Series A
 convertible preferred
 stock...................      29      --        --       --         100       --         --        --        --         100
Issuance of Series B
 convertible preferred
 stock...................   1,002         1      --       --      10,561       --         --        --        --      10,562
Issuance of warrants in
 connection with license
 agreement...............     --       --        --       --           4       --         --        --        --           4
Tax benefit from
 stock options...........     --       --        --       --      91,679       --         --        --        --      91,679
Compensation related
 to stock options........     --       --        --       --       4,072       --     (4,072)       --        --         --
Amortization of deferred
 compensation related
 to stock options........     --       --        --       --          --       --      1,015        --        --       1,015
Unrealized gain on
 short-term investments
 (net of taxes
  of $51,279)............     --       --        --       --          --       --         --    83,666        --      83,666
Currency translation
 adjustment (net of
 taxes of $361)..........     --       --        --       --          --       --         --       614        --         614
Subchapter S
 distributions by
 OnTarget................     --       --        --       --          --       --         --        --     (2,080)    (2,080)
Conversion of
 convertible notes to
 common stock............     --       --      1,290        1      6,918       --         --        --        --       6,919
Issuance of common stock
 related to Target
 Marketing Systems
 Worldwide and Target
 Marketing Systems S.A.
 acquisitions............     --       --      1,470        1      5,161       --         --        --        --       5,162
Accretion of mandatorily
 redeemable convertible
 preferred stock.........     --       --        --       --          --       --         --        --    (53,164)   (53,164)
Net income...............     --       --        --       --          --       --         --        --    108,111    108,111
                          --------  -------- --------  -------  ---------  --------  --------  --------  ---------  ---------
Balances, December 31,
 1999....................   2,815         3  393,943      394    433,170      (548)   (3,513)   83,611    106,180    619,297
Issuance of common stock
 under Employee Stock
 Option Plans (unaudited)     --       --     15,086       15     59,142    (1,153)       --        --        --      58,004
Issuance of common stock
 under Employee Stock
 Purchase Plans               --       --        492        1     17,521       --         --        --        --      17,522
 (unaudited).............
Issuance of common stock
 under common stock
 warrants (unaudited)....     --       --         52      --          41       --         --        --        --          41
Issuance of common stock
 for services rendered
 (unaudited).............     --       --          4      --         264       --         --        --        --         264
Repurchase of common
 stock which was
 subject to vesting
 (unaudited).............     --       --        (18)     --         (13)      --         --        --        --         (13)
Issuance of Series C
 convertible preferred
 stock (unaudited).......     697         1      --       --      19,974       --         --        --        --      19,975
Issuance of warrants in
 connection with license
 agreement (unaudited)...     --       --        --       --       1,176       --         --        --        --       1,176
Tax benefits from stock
 options (unaudited).....     --       --        --       --      97,854       --         --        --        --      97,854
Compensation related
 to stock options
 (unaudited)                  --       --        --       --       9,376       --     (9,376)       --        --         --
Amortization of
 deferred compensation
 related to stock
 options (unaudited).....     --       --        --       --          --       --      2,004        --        --       2,004
Unrealized loss on
 short-term investments
 (net of taxes of
 $36,213) (unaudited)....     --       --        --       --          --       --         --   (58,408)       --     (58,408)
Currency translation
 adjustment (net of
 taxes of $162)
 (unaudited).............     --       --        --       --          --       --         --       261        --         261
Repayment of note
 receivable (unaudited)..     --       --        --       --          --        78        --        --        --          78
Conversion of
 mandatorily redeemable
 convertible preferred
 stock (unaudited).......     --       --      5,324        5    179,209       --         --        --        --     179,214
Accretion of
 mandatorily redeemable
 convertible preferred
 stock (unaudited).......     --       --        --       --          --       --         --        --    (98,755)   (98,755)
Net income (unaudited)...     --       --        --       --          --       --         --        --     78,473     78,473
                          --------  -------- --------  -------  ---------  --------  --------  --------  ---------  ---------
Balances, June 30, 2000
 (unaudited).............   3,512  $      4  414,883  $   415  $ 817,714  $ (1,623) $(10,885) $ 25,464  $  85,898  $ 916,987
                          ========  ======== ========  =======  =========  ========  ========  ========  =========  =========

See accompanying notes to supplemental combined financial statements.

SIEBEL SYSTEMS, INC.
Supplemental Combined Statements of Cash Flows
(in thousands)

                                                                                    Six Months Ended
                                                        Year Ended December 31,           June 30,
                                                   -------------------------------  --------------------
                                                     1997       1998       1999       1999       2000
                                                   ---------  ---------  ---------  ---------  ---------
                                                                                         (unaudited)
Cash flows from operating activities:
  Net income .................................... $     805  $  41,105  $ 108,111  $  42,946  $  78,473
  Adjustments to reconcile net income to net
   cash provided by operating activities:
    Compensation related to stock options........       277        288      1,015        447      2,004
    Compensation related to stock warrants.......        17         54        269        --         --
    Depreciation and amortization................     8,282     13,793     23,089     11,041     18,577
    Exchange of software for cost-method
     investments.................................       --         --         --         --      (4,196)
    Loss from equity method investee.............       --         --         --         --       5,408
    Deferred income taxes........................    (1,614)   (10,891)   (19,028)    (2,910)   (61,760)
    Tax benefit from exercise of stock options...     4,046     13,517     91,679     18,200     97,854
    Loss on disposal of property and equipment...       307      4,557        737        688        --
    Write-down of assets acquired in OpenSite
     merger......................................       --         --         --         --         622
    Gain on sale of marketable equity
     securities..................................       --         --         --         --     (50,112)
    Charitable contribution of marketable
     equity securities...........................       --         --         --         --      28,700
    Provision for doubtful accounts and
     returns, net................................     4,925      6,394      8,056      3,178     10,386
    Write-off of acquired research and
     development.................................    22,740        --         --         --         --
    Changes in operating assets and liabilities:
      Accounts receivable........................   (43,971)   (69,275)  (173,497)   (55,669)   (35,273)
      Prepaids and other.........................    (1,991)    (6,848)   (16,191)    (3,276)   (27,786)
      Accounts payable and accrued expenses......    14,196     50,630     52,018      7,572    123,929
      Income taxes payable.......................    (1,896)     9,228    (10,803)    (2,347)       --
      Deferred revenue...........................    15,744     31,104     35,388      6,461     71,806
                                                   ---------  ---------  ---------  ---------  ---------
        Net cash provided by operating
         activities..............................    21,867     83,656    100,843     26,331    258,632
                                                   ---------  ---------  ---------  ---------  ---------
Cash flows from investing activities:
  Proceeds from sale of marketable equity
   securities....................................       --         --         --         --      23,876
  Purchases of property and equipment............   (18,053)   (40,493)   (45,188)   (16,280)   (58,948)
  Purchases, sales and maturities of short-term
   investments, net..............................   (17,866)   (56,751)   (46,990)    (6,517)   (52,186)
  Proceeds from disposal of property and
   equipment.....................................       --         --      13,284     13,203        --
  Cash acquired in acquisitions..................       129        (31)       993        772        --
  Purchase of Paragren Technologies, Inc.........       --         --         --         --     (18,050)
  Purchase of MOHR, net of cash acquired.........       --         --         --         --      (7,734)
  Other non-operating assets.....................    (1,764)    (2,641)   (22,519)    (3,840)     1,409
  Other non-marketable securities................       --         --         --         --      (3,473)
  Advances to affiliate, net.....................       --         --         --         --      (7,922)
                                                   ---------  ---------  ---------  ---------  ---------
        Net cash used in investing activities....   (37,554)   (99,916)  (100,420)   (12,662)  (123,028)
                                                   ---------  ---------  ---------  ---------  ---------
Cash flows from financing activities:
  Proceeds from issuance of common stock,
   net of repurchases............................     8,755     27,254     75,032     30,964     75,554
  Proceeds from issuance of mandatorily
   redeemable convertible preferred stock........       --      10,544     34,537     34,537     19,975
  Proceeds from issuance of convertible
   debt, net.....................................       --         --     291,316        --         --
  Borrowings on line of credit and notes
   payable.......................................       130      1,542      5,874      3,231        --
  Repayments of line of credit and notes
   payable.......................................       --         (17)    (7,659)      (659)       --
  Repayments of capital lease obligations........       --         (10)       (67)       (11)       --
  Subchapter S distributions.....................      (974)    (2,366)    (2,080)      (745)       --
  Repurchase of common stock.....................       --         --      (2,795)    (2,795)       --
  Repurchase of preferred stock..................       --         --      (1,398)    (1,398)       --
  Dividends paid ................................       --        (180)       --         --         --
  Repayment of stockholder notes, net ...........       (43)       --         --         --          78
                                                   ---------  ---------  ---------  ---------  ---------
        Net cash provided by financing
         activities..............................     7,868     36,767    392,760     63,124     95,607
                                                   ---------  ---------  ---------  ---------  ---------
Effect of exchange rate changes in cash..........       --         --        (262)       --         262
                                                   ---------  ---------  ---------  ---------  ---------
Change in cash and cash equivalents..............    (7,819)    20,507    392,921     76,793    231,473
Adjustment to conform acquired company's
  year end.......................................       --      (4,140)       --         --         --
Cash and cash equivalents, beginning of period...    78,318     70,499     86,866     86,866    479,787
                                                   ---------  ---------  ---------  ---------  ---------
Cash and cash equivalents, end of period......... $  70,499  $  86,866  $ 479,787  $ 163,659  $ 711,260
                                                   =========  =========  =========  =========  =========

Cash paid for interest........................... $      22  $     --   $       3  $     --   $   7,989
                                                   =========  =========  =========  =========  =========

Cash paid for income taxes....................... $  14,579  $  14,194  $  14,537  $  11,988  $   9,503
                                                   =========  =========  =========  =========  =========

Supplemental disclosures of noncash financing
 and investing activities:
  Purchase price payable 20*20 Group, Ltd........ $     --   $   6,000  $     --   $     --   $     --
                                                   =========  =========  =========  =========  =========

  Purchase price payable MOHR.................... $     --   $     --   $     --   $     --   $   3,000
                                                   =========  =========  =========  =========  =========

  Common stock issued for acquisitions........... $  24,974  $     --   $   4,934  $     --   $     --
                                                   =========  =========  =========  =========  =========

  Subchapter S distributions payable............. $      22  $     745  $     --   $     --   $     --
                                                   =========  =========  =========  =========  =========

  Convertible notes issued for acquisitions...... $     --   $     --   $   6,918  $   4,358  $     --
                                                   =========  =========  =========  =========  =========

  Capital lease obligations...................... $     --   $      75  $     --   $     --   $     --
                                                   =========  =========  =========  =========  =========

  Issuance of common stock for notes receivable.. $     --   $      78  $     --   $     --   $     --
                                                   =========  =========  =========  =========  =========

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

See accompanying notes to supplemental combined financial statements.

SIEBEL SYSTEMS, INC.

NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS

(1) Summary of Significant Accounting Policies

The Company

Siebel Systems, Inc. ("Siebel" or the "Company") is the market leader in eBusiness application software for organizations focused on increasing sales, marketing and customer service effectiveness in field sales, customer service, telesales, telemarketing, call centers, and third-party resellers. The Company designs, develops, markets, and supports Siebel eBusiness Applications, a leading Web-based application software product family designed to meet the sales, marketing and customer service information system requirements of even the largest multi-national organizations.

In December 1999, May 2000 and October 2000, the Company acquired OnTarget, Inc. ("OnTarget"), OpenSite Technologies, Inc. ("OpenSite") and OnLink Technologies, Inc. ("OnLink"), respectively, in business combinations accounted for as pooling-of-interests. Accordingly, all financial information has been restated to reflect the combined operations of Siebel and these three companies. See Note 10.

The supplemental combined financial statements give retroactive effect to the merger of a wholly owned subsidiary of Siebel Systems, Inc. into OnLink Technologies, Inc. on October 2, 2000, which has been accounted for as a pooling-of-interests as described in Note 10 to the supplemental combined financial statements. Generally accepted accounting principles proscribe giving effect to a consummated business combination accounted for by the pooling-of-interests method in financial statements that do not include the date of consummation. These financials statements do not extend through the date of consummation. However, they will become the historical consolidated financial statements of Siebel Systems, Inc. and subsidiaries after financial statements covering the date of consummation of the business combination are issued.

Interim Financial Data

The accompanying unaudited supplemental combined financial statements as of June 30, 2000 and for the six months ended June 30, 1999 and 2000 have been prepared on substantially the same basis as the audited supplemental combined financial statements, and in the opinion of management include all adjustments, consisting only of normal recurring adjustments, necessary for their fair presentation. All amounts included herein related to the financial statements as of June 30, 2000 and for the six months ended June 30, 1999 and 2000 are unaudited. The interim results presented are not necessarily indicative of results for any subsequent quarter or for the year ending December 31, 2000.

Principles of Consolidation

The accompanying supplemental combined financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated.

Revenue Recognition

Prior to January 1, 1998, the Company recognized revenue in accordance with Statement of Position ("SOP") No. 91-1, "Software Revenue Recognition". Software license revenue was recognized when all of the following criteria had been met: there was an executed license agreement; software had been shipped to the customer; no significant vendor obligations remained; the license fee was fixed and payable within twelve months and collection was deemed probable.

On January 1, 1998, the Company adopted the provisions of Statement of Position No. 97-2, "Software Revenue Recognition". Revenue is recognized under SOP 97-2 when persuasive evidence of an arrangement exists and delivery has occurred, provided the fee is fixed and determinable, collectibility is probable and the arrangement does not require significant customization of the software. Under SOP 97-2, revenue on multiple element arrangements is allocated to the various elements based on fair values specific to the Company.

Prior to the Company's acquisition of OnLink, OnLink entered into arrangements with customers in which OnLink did not have vendor-specific objective evidence of the fair values of the service elements of the arrangement. In addition, certain of OnLink's products require significant customization of the software by OnLink such that the service element was essential to the functionality of the software. In those instances where the acquired company determines that the service elements are essential to the other elements of the arrangement, the Company accounts for the entire arrangement using the percentage-of-completion accounting method.

Professional services, maintenance and other revenues relate primarily to consulting services, maintenance and training. Maintenance revenues are recognized ratably over the term of the maintenance contract, typically 12 months. Consulting and training revenues are recognized as the services are performed and are usually on a time and materials basis. Such services primarily consist of implementation services related to the installation of the Company's products and do not include significant customization to or development of the underlying software code.

The Company's customer base includes a number of its suppliers (e.g., AT&T Corporation, BankBoston Robertson Stephens, Bank of America Corporation, Cabletron Systems, Inc., The Charles Schwab Corporation, Cigna Corporation, Cisco Systems, Inc., Compaq Computer Corporation, Dell Computer Corporation, Lucent Technologies, Inc., MCI WorldCom Inc., Microsoft Corporation, NationsBanc Montgomery Securities, Inc., PeopleSoft, Inc., Siemens Corporation and Sun Microsystems, Inc.). On occasion, the Company has purchased goods or services for company operations from these vendors at or about the same time Siebel has licensed its software to these organizations. These transactions are separately negotiated and recorded at terms the Company considers to be arm's-length.

Cost of Revenues

Cost of software consists primarily of media, product packaging, documentation and other production costs, and third-party royalties. Cost of professional services, maintenance and other consists primarily of salaries, benefits and allocated overhead costs related to consulting, training and customer support personnel, including cost of services provided by third party consultants engaged by the Company.

Use of Estimates

The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash, Cash Equivalents, Short-Term Investments and Marketable Equity Securities

The Company considers all highly liquid investments with a remaining maturity of 90 days or less to be cash equivalents. Short-term investments generally consist of highly liquid securities with original maturities in excess of 90 days. Marketable equity securities include an investment in a single publicly traded company. The Company has classified its short-term investments and marketable equity securities as "available-for-sale." Such investments are carried at fair value with unrealized gains and losses, net of related tax effects, reported within accumulated other comprehensive income (losses). Realized gains and losses on available-for-sale securities are computed using the specific identification method.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is calculated using the straight-line method over the estimated useful lives of the respective assets, generally three to five years. Leasehold improvements are amortized over the lesser of the lease term or the estimated useful lives of the improvements, generally seven years.

Expenditures for maintenance and repairs are charged to expense as incurred. Costs and accumulated depreciation of assets sold or retired are removed from the respective property accounts, and gain or loss is reflected in the statement of operations.

Software Development Costs

Software development costs associated with new products and enhancements to existing software products are expensed as incurred until technological feasibility in the form of a working model has been established. To date, the time period between the establishment of technological feasibility and completion of software development has been short, and no significant development costs have been incurred during that period. Accordingly, the Company has not capitalized any software development costs to date.

Intangible Assets

Included in other assets are various intangible assets, primarily goodwill related to acquisitions. These amounts are generally being amortized over three to five years using the straight-line method. Gross intangible assets were$9,851,000 and $17,633,000 and related accumulated amortization was$2,539,000 and $4,565,000 at December 31, 1998 and 1999, respectively.

Other Assets

Included in other assets is the Company's investment in Sales.com. In December 1999, the Company sold a controlling interest in Sales.com's voting equity to various outside investors. As a result, Sales.com is no longer being consolidated in the Company's financial statements, but is accounted for by the equity method. At December 31, 1999, the carrying value of the Company's investment in Sales.com was approximately $5,000,000.

The Company had non-cash reductions in accounts receivable, prepaids and other, property equipment, other assets, accounts payable, accrued expenses and deferred revenue of $116,000, $602,000, $35,000, $505,000, $4,398,000, $5,275,000 and $149,000, respectively, attributable to the deconsolidation of Sales.com.

Advertising

Advertising costs are expensed as incurred. Advertising expense is included in sales and marketing expense andamounted to $7,261,000, $13,297,000 and $29,788,000 during the years ended December 31, 1997, 1998 and 1999, respectively, and $12,603,000 and $35,030,000 during the six months ended June 30, 1999 and 2000 (unaudited), respectively.

Income Taxes

The Company uses the asset and liability method of accounting for income taxes. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets are recognized for deductible temporary differences, net operating loss carryforwards and credit carryforwards if it is more likely than not that the tax benefits will be realized. To the extent a deferred tax asset cannot be recognized under the preceding criteria, allowances must be established. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled.

Prior to the acquisition of OnTarget by the Company in 1999, OnTarget had elected subchapter S status for Federal income tax purposes. Prior to January 1, 1998 and July 1, 1998, OpenSite and OnLink, respectively, had also elected subchapter S status for Federal income tax purposes. Accordingly, no income tax was presented in the historical financial statements of OnTarget, OpenSite or OnLink for these periods as the income was taxable personally to the stockholders. Pro forma income taxes reflect income tax expense that would have been reported if OnTarget, OpenSite, and OnLink had been C corporations for each of the applicable periods in which they were subchapter S corporations.

Pro Forma Net Income (Loss) Available Per Common Share

Basic pro forma net income (loss) available per common share is computed using the weighted average number of shares of common stock outstanding. Diluted pro forma income (loss) available per common share is computed using the weighted average number of shares of common stock and, when dilutive, potential common shares from options to purchase common stock and warrants outstanding using the treasury stock method. Dilutive pro forma net income (loss) available per common share also gives effect, when dilutive, to the conversion of the convertible notes, subordinated debentures, and mandatorily redeemable convertible preferred stock, using the if-converted method.

For both basic and diluted net income (loss) available per common share, the Company has reduced net income (loss) by the accretion of preferred stock and the dividends on the preferred stock to arrive at the net income available to common stockholders.

Employee Stock Option and Purchase Plans

The Company accounts for its stock-based compensation plans using the intrinsic value method. As such, compensation expense is recorded on the date of grant if the current market price of the underlying stock exceeds the exercise price. The Company records and measures deferred compensation cost for options granted to non-employees at their fair value.

Foreign Currency Translation

The Company considers the functional currency of its foreign subsidiaries to be the local currency, and accordingly, they are translated into U.S. dollars using exchange rates in effect at period end for assets and liabilities and average exchange rates during each reporting period for the results of operations. Adjustments resulting from translation of foreign subsidiary financial statements are reported within accumulated other comprehensive income (loss).

The Company generally utilizes foreign currency forward contracts to hedge its exchange risk on foreign currency receivable and intercompany balances. While these forward contracts are subject to fluctuations in value, which are recorded in current results of operations, such fluctuations are generally offset by the changes in value of the underlying exposures being hedged. The Company does not hold or issue financial instruments for speculative or trading purposes.

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to a concentration of credit risk principally consist of trade accounts receivable. The Company performs ongoing credit evaluations of its customers and generally does not require collateral on accounts receivable, as the majority of the Company's customers are large, well established companies. The Company maintains reserves for potential credit losses, but historically has not experienced any significant losses related to any particular industry or geographic area since the Company's business is not concentrated on any one particular customer or customer base. No single customer accounts for more than 10% of revenues, and the Company's largest customer base, high technology, which accounted for approximately 24%of revenues during the year ended December 31, 1999, is sufficiently broad such that the Company does not consider itself significantly exposed to concentrations of credit risk.

Fair Value of Financial Instruments

The carrying amount of the Company's cash and cash equivalents, short-term investments, accounts receivable, and accounts payable approximate their respective fair values. Changes in the fair value of the Company's derivative financial instruments (foreign currency forward contracts) are generally offset by changes in the value of the underlying exposures being hedged. The unrealized loss of the Company's derivative financial instruments at December 31, 1999 was approximately $29,000.

The fair value of the Company's convertible subordinated debentures was $580,140,000 and $1,081,140,000 at December 31, 1999 and June 30, 2000 (unaudited), respectively, based on the quoted market price of the debentures.

Impairment of Long-Lived Assets

The Company evaluates long-lived assets, including goodwill, 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. The amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset. In connection with the acquisition of OpenSite, the Company reviewed the carrying value of OpenSite's fixed assets and certain long-term assets and as a result recorded a charge to earnings of $622,000 for assets that the Company plans on abandoning or disposing of at less than their carrying value. This provision has been reflected in merger-related expenses in the six months ended June 30, 2000. The Company does not have any additional long-lived assets it considers to be impaired.

Recent Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated and accounted for as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a forecasted transaction, or (c) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security, or a foreign-currency-denominated forecasted transaction. For a derivative not designated as a hedging instrument, changes in the fair value of the derivative are recognized in earnings in the period of change. This statement will be effective for all annual periods beginning after June 15, 2000, as amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of Effective Date of SFAS No. 133" and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities, amendment of SFAS No. 133." Management does not believe the adoption of this pronouncement will have a material effect on the Company's consolidated financial position or results of operations.

In December 1998, the Accounting Standards Executive Committee (AcSEC) of the AICPA issued SOP 98-9, "Software Revenue Recognition with Respect to Certain Arrangements", which requires recognition of revenue using the "residual method" in a multiple element arrangement when fair value does not exist for one or more of the undelivered elements in the arrangement. Under the "residual method", the total fair value of the undelivered elements is deferred and subsequently recognized in accordance with SOP 97-2. Management does not believe the adoption of SOP 98-9 will have a material effect on the Company's consolidated financial position or results of operations. SOP 98-9 will be effective for all annual and interim periods beginning on or after January 1, 2000.

In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements."  SAB 101 summarizes certain of the SEC's views in applying generally accepted accounting principles to revenue recognition in financial statements. In June 2000, the SEC issued SAB No. 101B to defer the effective date of implementation of SAB 101 until the fourth quarter of fiscal 2000. The SEC has recently indicated it intends to issue further guidance with respect to adoption of specific issues addressed by SAB No. 101. Until such time as this additional guidance is issued, the Company is unable to assess the impact, if any, it may have on its financial position or results of operations.

(2) Financial Statement Details

Cash and Cash Equivalents, Short-Term Investments and Marketable Equity Securities

Cash equivalents consist of securities with remaining maturities of 90 days or less at the date of purchase. Short-term investments as of December 31, 1999 consisted of $59,794,000 of securities which mature in less than one year, $139,084,000 of securities which mature in one to five years and no securities which mature in over five years. Cash and cash equivalents, short-term investments and marketable securities consisted of the following as of December 31, 1999 (in thousands):

                                                      Unrealized
                                                  --------------------
                                         Cost       Loss       Gain      Market
                                       ---------  ---------  ---------  ---------
   Cash and cash equivalents:
     Cash............................ $  35,652  $     --   $     --   $  35,652
     Certificates of deposit.........     1,727        --         --       1,727
     Money market funds..............   414,484        --         --     414,484
     US treasury & agency securities.     6,628        --         --       6,628
     Corporate notes.................    21,292         (1)         5     21,296
                                       ---------  ---------  ---------  ---------
                                      $ 479,783  $      (1) $       5  $ 479,787
                                       =========  =========  =========  =========
   Short-term investments:
     US treasury securities.......... $  35,749  $    (551) $       1  $  35,199
     Corporate notes...................  32,182       (261)       --      31,921
     Municipal securities............   133,071     (1,315)         2    131,758
                                       ---------  ---------  ---------  ---------
                                      $ 201,002  $  (2,127) $       3  $ 198,878
                                       =========  =========  =========  =========

   Marketable equity securities.......$   4,550  $     --   $ 137,389  $ 141,939
                                       ---------  ---------  ---------  ---------
                                      $   4,550  $     --   $ 137,389  $ 141,939
                                       =========  =========  =========  =========

Short-term investments as of December 31, 1998 consisted of $46,187,000 of municipal securities, which mature in less than one year, and $94,980,000 of municipal securities, which mature in one to five years, and $10,721,000 of securities, which mature in over five years. As of December 31, 1998, cost approximated market for short-term investments; realized and unrealized gains and losses were not significant.

Accounts Receivable, Net

Accounts receivable, net, consisted of the following (in thousands):

                                              December 31,
                                          --------------------
                                            1998       1999
                                          ---------  ---------  
   Trade accounts receivable.........    $ 137,287  $ 309,020
   Less: allowances for doubtful
     accounts and returns............       10,439     13,090
                                          ---------  ---------
                                         $ 126,848  $ 295,930
                                          =========  =========

Property and Equipment, Net

Property and equipment, net, consisted of the following (in thousands):

                                              December 31,
                                          --------------------
                                            1998       1999
                                          ---------  ---------  
   Computer equipment................    $  39,497  $  34,793
   Furniture and fixtures............       10,760     19,215
   Computer software.................        8,929     12,807
   Corporate aircraft................           --      6,963
   Leasehold improvements............        9,132     20,001
                                          ---------  ---------
                                            68,318     93,779
   Less: accumulated depreciation....       21,021     34,398
                                          ---------  ---------
                                         $  47,297  $  59,381
                                          =========  =========

Accrued Expenses

Accrued expenses consisted of the following (in thousands):

                                              December 31,
                                          --------------------
                                            1998       1999
                                          ---------  ---------  
   Bonuses...........................    $  23,132  $  24,699
   Commissions.......................       18,008     21,026
   Sales tax.........................        9,349      6,015
   Vacation..........................        4,037      8,550
   Acquisition-related...............        7,450      2,486
   Other.............................       26,788     66,517
                                          ---------  ---------
                                         $  88,764  $ 129,293
                                          =========  =========

Accumulated Other Comprehensive Income (Loss)

Accumulated other comprehensive income (loss) consisted of the following (in thousands):

                                                         December 31,
                                                     --------------------
                                                       1998       1999
                                                     ---------  ---------  
   Foreign currency translation adjustments,
     net of taxes of $511 and $150,
     respectively................................   $    (870) $    (256)
   Unrealized gains on securities, net of
     taxes of $118 and $51,397, respectively.....         201     83,867
                                                     ---------  ---------
                                                    $    (669) $  83,611
                                                     =========  =========

Other Income, Net

Other income, net, consisted of the following (in thousands):

                                                     December 31,
                                          -------------------------------
                                            1997       1998       1999
                                          ---------  ---------  ---------  
  Realized gains on disposition of
   marketable equity securities......    $      --  $      --  $  12,343
  Charitable contributions...........           --         --     (6,000)
  Interest income....................        6,068      7,762     17,848
  Interest expense...................          (29)       (73)    (6,064)
  Other, net.........................         (641)    (1,279)    (3,257)
                                          ---------  ---------  ---------
                                         $   5,398  $   6,410  $  14,870
                                          =========  =========  =========

(3) Convertible Subordinated Debentures

The Company completed a private placement of $300,000,000 of convertible subordinated debentures in September 1999. In connection with the issuance of these convertible subordinated debentures the Company incurred $8,684,000 of issuance costs, which primarily consisted of investment banker fees, legal, and other professional fees. The seven-year term notes bear interest at a rate of 5.50% and are convertible into approximately 12,864,000 shares of the Company's common stock at any time prior to maturity, at a conversion price of approximately $23.32 per share, subject to adjustment under certain conditions. The notes may be redeemed, in whole or in part, by the Company at any time on or after September 15, 2002. The redemption price will range from $309,420,000 to $302,370,000 if the notes are redeemed between September 15, 2002 through September 14, 2006. Any redemption made on or after September 15, 2006 will be redeemed at $300,000,000. Accrued interest to the redemption date will be paid by the Company in each redemption.

(4) Commitments and Contingencies

Letters of Credit

In August 1996, the Company entered into a $1,325,000 secured letter of credit with a bank. This letter of credit, which expires July 2006, collateralizes the Company's obligations to a third party for lease payments. In March 1999, the Company entered into an $8,400,000 secured letter of credit with a bank. This letter of credit, which expires November 2000, collateralizes the Company's obligations to a third party for tenant improvement costs. In October 1999, the Company entered into two $8,400,000 secured letters of credit with a bank. These letters of credit, which expire October 2000 and January 2001, collateralize the Company's obligations to a third party for tenant improvement costs. The Company also entered into a $3,000,000 secured letter of credit with a bank. This letter of credit, which expires August 2000, collateralizes the Company's obligation to a third party for lease payments.

The letters of credit are secured by cash, cash equivalents and short-term investments.

Lease Obligations

As of December 31, 1999, the Company leases facilities under noncancelable operating leases expiring between 2000 and 2009. Future minimum lease payments are as follows (in thousands):

   Year Ending December 31,
   ------------------------             
  2000......................................        $  35,098
  2001......................................           44,549
  2002......................................           41,854
  2003......................................           42,076
  2004 and thereafter.......................          282,647
                                                     ---------
                                                    $ 446,224
                                                     =========

Rent expense for the years ended December 31, 1997, 1998 and 1999 was $6,485,000, $12,067,000 and $16,595,000, respectively. Rent expense for the six months ended June 30, 1999 and 2000 (unaudited) was $6,362,000 and $18,361,000, respectively.

Employee Benefit Plan

The Company has a 401(k) plan that allows eligible employees to contribute up to 20% of their compensation, limited to $10,000 in 1999. Employee contributions and earnings thereon vest immediately. Although the Company may make discretionary contributions to the 401(k) plan, none have been made to date. Prior to their acquisition by the Company, subsidiaries made discretionary contributions of $154,000, $244,000 and $91,000 to its 401(k) and profit-sharing plans in 1997, 1998 and 1999, respectively.

Professional Service Arrangements

In March 1999, OpenSite entered into an agreement with Protégé Software Limited ("Protégé"), whereby Protégé managed OpenSite's European subsidiary, OpenSite Europe Ltd. The initial term of the agreement was for a period of eighteen months beginning April 1, 1999; however, the agreement was terminated by the Company effective June 30, 2000. Under the original terms of the agreement, Protégé earned a cash bonus (the "Cash Bonus") based on a percentage of sales within Protégé's territory, as defined in the agreement. At the option of Protégé, the Cash Bonus for the period ending March 30, 2000 could be converted into shares of common stock at a price of approximately $8 per share. During the three months ended March 31, 2000 OpenSite recorded a one-time non-cash expense of approximately $1,800,000 related to OpenSite's commitment to issue shares of common stock to Protégé. In May 2000, Protégé elected to convert its Cash Bonus for the twelve-month period ended March 30, 2000 into shares of common stock, and subsequently were issued an aggregate of 34,690 shares of equivalent Siebel common stock as full satisfaction of such election. Neither OpenSite nor the Company is obligated to issue Protégé any shares of its common stock for periods subsequent to March 31, 2000.

Legal Actions

In October 1999, SAP America, Inc. filed a complaint against the Company in the Court of Common Pleas of Delaware County, Pennsylvania. The complaint alleges tortious interference with contractual relations, predatory hiring, misappropriation of trade secrets, and unfair competition in connection with the Company's employment of 27 individuals formerly employed by SAP America or its affiliated companies. In October 1999, the Company filed a complaint against SAP America, Inc. and SAP Labs, Inc. in the Superior Court of California for the County of Santa Clara, alleging unfair competition, violations of Business and Professions Code section 17200, and seeking declaratory relief. In March 2000, the Company and SAP agreed to settle the litigation and dismissed both actions with prejudice.

The Company is engaged in other legal actions arising in the ordinary course of business. The Company believes it has adequate legal defenses and believes that the ultimate outcome of these actions will not have a material effect on the Company's supplemental combined financial position or results of operations, although there can be no assurance as to the outcome of such litigation.

(5) Stockholders' Equity

Stock Split

On August 24, 1999, the Company's Board of Directors approved a two-for-one stock split (to be effected in the form of a stock dividend) which was paid on November 12, 1999. The accompanying supplemental combined financial statements have been restated to give effect to the stock split.

Pro Forma Net Income (Loss) per Share

The following is a reconciliation of the number of shares used in the pro forma basic and proforma diluted net income (loss) per share computations for the periods presented (in thousands):

                                                                              Six Months Ended
                                              Year Ended December 31,            June 30,
                                          -------------------------------  --------------------
                                            1997       1998       1999       1999       2000
                                          ---------  ---------  ---------  ---------  ---------
                                                                                (unaudited)
 Shares used in basic pro forma net
   income (loss) per share computation..   342,968    358,713    380,619    374,394    403,959
 Effect of dilutive potential common
   shares resulting from stock
   options and common stock subject to
   repurchase...........................    42,868     49,567     75,662     65,242         --
 Effect of dilutive convertible
   preferred stock......................        --        873      2,505      2,189         --
 Shares used in diluted pro forma net
   income (loss)........................        --         --        934         --         --
                                          ---------  ---------  ---------  ---------  ---------
 Shares used in diluted pro forma net
   income (loss) per share computation..   385,836    409,153    459,720    441,825    403,959
                                          =========  =========  =========  =========  =========

The Company excludes potentially dilutive securities from its diluted net income (loss) per share computation when either the exercise price of the securities exceeds the average fair value of the Company's common stock or the Company reported net losses, because their effect would be anti-dilutive. The following common stock equivalents were excluded from the earnings per share computation as their inclusion would have been anti-dilutive (in thousands):

                                                                           Six Months Ended
                                              Year Ended December 31,            June 30,
                                          -------------------------------  --------------------
                                            1997       1998       1999       1999       2000
                                          ---------  ---------  ---------  ---------  ---------
Options excluded due to the exercise
  price exceeding the average fair
  value of the Company's common
  stock during the period...............        --     13,273      4,294      8,846      8,684
Weighted average options, calculated
  using the treasury stock method,
  that were  excluded due to the
  Company reporting a net loss
  available to common stockholders
  during the period.....................        --         --         --         --     81,220
Convertible subordinated debentures.....        --         --     12,864         --     12,864
Convertible preferred stock excluded
  due to  the Company reporting a
  net loss available to common
  stockholders during the period........        --         --         --         --      3,301
Manadatorily redeemable convertible                        --
  preferred stock.......................        --      2,413      5,323      3,886      4,036
                                          ---------  ---------  ---------  ---------  ---------
Total common stock equivalents
  excluded from per share calculation...        --     15,686     22,481     12,732    110,105
                                          =========  =========  =========  =========  =========

The shares excluded from the earnings per share computation due to the exercise prices exceeding the average fair value of the Company's common stock during the years ended December 31, 1998 and 1999 and the six months ended June 30, 1999 and 2000 (unaudited) had a weighted average exercise price of $7.16, $29.86, $11.82, and $71.02 per share, respectively. Prior to January 1998 and September 1999, respectively, the mandatorily redeemable convertible preferred stock and convertible subordinated debentures were not outstanding and, accordingly, were not included in the earnings per share computation for periods prior to issuance.

Employee Stock Option and Purchase Plans

The 1996 Equity Incentive Plan, which amended and restated the Company's 1994 Stock Option Plan and 1996 Supplemental Stock Option Plan and the 1998 Non-Officer Equity Incentive Plan (collectively, the "Plan"), provides for the issuance of up to an aggregate of 220,000,000 shares of common stock to employees, directors and consultants. The Plan provides for the issuance of incentive and nonstatutory stock options, restricted stock purchase awards, stock bonuses and stock appreciation rights.

Under the Plan, the exercise price for incentive stock options is at least 100% of the fair market value on the date of the grant. Options generally expire in 10 years; however, incentive stock options may expire in 5 years if the optionee owns stock representing more than 10% of the voting power of all classes of stock. Vesting periods are determined by the Board of Directors and generally provide for shares to vest ratably over 5 years.

The Plan also allows for the exercise of certain unvested options. Shares of common stock issued to employees upon exercise of unvested options are subject to repurchase by the Company at the original exercise price. The Company's ability to repurchase these shares expires at a rate equivalent to the current vesting schedule of each option. As of December 31, 1999, 15,105,200 shares of common stock had been issued to employees upon the exercise of unvested options, which are subject to repurchase, at a weighted average repurchase price of $0.09 per share. No compensation expense has resulted from repurchases of restricted shares since the amount of cash paid by the Company did not differ from the proceeds received from the employee from the sale of the restricted shares. The Company has not issued any other restricted stock purchase awards, stock bonuses or stock appreciation rights.

The Company has assumed certain options granted to former employees of acquired companies (the "Acquired Options"). The Acquired Options were assumed by the Company outside of the Plan, but all are administered as if issued under the Plan. All of the Acquired Options have been adjusted to give effect to the conversion under the terms of the Agreements and Plans of Reorganization between the Company and the companies acquired. The Acquired Options generally become exercisable over a four year period and generally expire either five or ten years from the date of grant. No additional options will be granted under any of the acquired companies' plans.

Combined plan activity is summarized as follows:

                                                                    Weighted
                                                                    average
                                            Shares                  exercise
                                          Available    Number of     price
                                          for grant      shares    per share
                                         ------------ ------------ ---------- 
   Balances, December 31, 1996..........   4,992,068   84,705,188      $0.91
     Additional shares authorized.......  64,000,000         --
     Options granted.................... (53,321,096)  53,321,096      $4.14
     Options exercised..................         --    (8,269,212)     $0.57
     Options canceled...................  21,526,428  (21,526,428)     $4.18
                                         ------------ ------------
   Balances, December 31, 1997..........  37,197,400  108,230,644      $1.87
     Additional shares authorized.......  40,000,000         --
     Options granted.................... (75,483,957)  75,483,957      $5.59
     Options exercised..................         --   (13,534,484)     $1.47
     Options canceled...................  15,690,736  (15,690,736)     $3.96
                                         ------------ ------------
   Balances, December 31, 1998..........  17,404,179  154,489,381      $3.51
     Additional shares authorized.......  45,000,000         --
     Options granted.................... (54,184,746)  54,184,746     $19.28
     Options exercised..................         --   (21,469,930)     $2.80
     Options canceled...................  11,027,000  (11,027,000)     $6.67
                                         ------------ ------------
   Balances, December 31, 1999..........  19,246,433  176,177,197      $8.27
                                         ============ ============

The following table summarizes information about fixed stock options outstanding as of December 31, 1999:

                          Options outstanding           Options exercisable
                   ----------------------------------- -----------------------
                                 Weighted
                                  average
                                 remaining   Weighted                Weighted
                                contractual  average                 average
     Range of         Number       life      exercise     Number     exercise
 exercise prices    of shares   (in years)    price     of shares     price
- ------------------ ------------ ----------- ---------- ------------ ----------
  $0.01                388,200         5.0      $0.01      388,200      $0.01
  $0.02                201,456         5.3      $0.02      201,456      $0.02
  $0.03                500,100         5.8      $0.03      500,100      $0.03
  $0.11              2,896,700         6.1      $0.11    2,896,700      $0.11
  $0.17 -    0.19    8,347,604         6.2      $0.18    4,000,910      $0.18
  $0.21 -    0.57   17,114,252         6.3      $0.36    8,705,268      $0.35
  $0.72 -    1.33    5,394,384         6.3      $0.76    2,376,780      $0.76
  $1.35 -    2.11    3,917,605         6.1      $2.00    1,650,801      $1.93
  $2.25 -    4.06   22,009,062         6.9      $3.04    7,988,538      $3.04
  $4.14 -    6.20   53,279,956         8.4      $5.17   13,559,244      $5.17
  $6.22 -    9.26   19,248,566         8.7      $7.46    2,440,692      $6.90
  $9.44 -   13.41   16,571,554         9.2     $10.72      536,384      $9.83
 $14.61 -   21.15   10,427,918         9.6     $15.96        2,848     $14.78
 $25.02 -   31.41    3,678,140         9.9     $31.35          524     $31.41
 $40.53             12,201,700        10.0     $40.53            0     $40.53
- ------------------ ------------ ----------- ---------- ------------ ----------
  $0.01 -   40.53  176,177,197        8.00      $8.30   45,248,445      $2.79
                   ============                        ============

In May 1996, the Company adopted the 1996 Employee Stock Purchase Plan (the "Purchase Plan") and reserved 5,600,000 shares for issuance thereunder. The Purchase Plan became effective upon the completion of the Company's initial public offering. In January 1997, the Board of Directors of the Company adopted an amendment to the Purchase Plan to increase the number of shares authorized for issuance under the Purchase Plan to 13,600,000 shares. The Purchase Plan permits eligible employees to purchase common stock, through payroll deductions of up to 15% of the employee's compensation, at a price equal to 85% of the fair market value of the common stock at either the beginning or the end of each offering period, whichever is lower. As of December 31, 1999, 7,802,000 shares had been purchased under the Purchase Plan.

Stock Based Compensation

The Company has elected to continue to use the intrinsic value-based method to account for all of its employee stock-based compensation plans. The Company records deferred compensation costs related to employee stock options when the exercise price of each option equals or is less than the fair value of the underlying common stock as of the grant date for each stock option. During 1998, the Company recorded compensation expense of $631,000 for the estimated fair value of common stock transferred from the majority shareholders of OnTarget to two key employees.

During the period from October 1995 through April 1996, the Company granted options to purchase an aggregate of 65,220,000 shares of common stock at exercise prices ranging from $0.03 to $0.41 per share. Based in part on an independent appraisal obtained by the Company's Board of Directors, and other factors, the Company recorded $748,000 of deferred compensation expense in 1995 and an additional $893,000 of deferred compensation expense in 1996 relating to these options. During the year ended December 31, 1999, OpenSite and OnLink granted an aggregate of 812,300 options with a weighted average exercise price of $1.11 per share to employees in which the exercise prices were below the fair market value of their common stock. Accordingly, the Company recorded deferred compensation during the year ended December 31, 1999 related to these options of $2,574,000. During the six months ended June 30, 2000 (unaudited), OnLink granted 710,500 options with a weighted average exercise price of $6.54 per share to employees in which the exercise prices were below the fair market value of their common stock. Accordingly, the Company recorded $8,846,000 of deferred stock compensation in the six months ended June 30, 2000 (unaudited) related to these options. The above grants are being amortized on a straight-line basis over the vesting period of the individual options, which range from three to five years.

During 1999, the Company granted options to a non-employee. As of December 31, 1999, there were 40,000 options outstanding pursuant to these grants, which are included in the combined plan activity summary below. The Company records and measures deferred compensation cost for options granted to non-employees at their fair value pursuant to the requirements of SFAS No. 123 and EITF 96-18. During the year ended December 31, 1999 and the six months ended June 30, 2000 (unaudited) the Company recorded deferred compensation related to these options of $1,498,000 and $530,000, respectively. These amounts are being amortized over the vesting period of five years.

Pursuant to SFAS No. 123, the Company is required to disclose the pro forma effects on net income (loss) and net income (loss) per share data as if the Company had elected to use the fair value approach to account for all its employee stock-based compensation plans. Had compensation cost for the Company's plans been determined consistent with the fair value approach enumerated in SFAS No. 123, the Company's net income (loss) and net income (loss) per share for the years ended December 31, 1997, 1998 and 1999 would have been as indicated below (in thousands, except per share data):

                                               1997       1998       1999
                                             ---------  ---------  ---------
 Pro forma net income (loss) available to
  common stockholders:
   As reported............................  $     152  $  40,365  $  54,582
   Pro forma giving effect to SFAS No 123.  $ (12,600) $  20,107  $  27,839

 Diluted pro forma net income (loss)
  per share:
   As reported............................  $    0.00  $    0.10  $    0.12
   Pro forma giving effect to SFAS No 123.  $   (0.04) $    0.05  $    0.06

 Basic pro forma net income (loss)
  per share:
   As reported............................  $    0.00  $    0.11  $    0.14
   Pro forma giving effect to SFAS No 123.  $   (0.04) $    0.06  $    0.07

The fair value of options was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for option grants:

                                               1997       1998       1999
                                             ---------  ---------  ---------
 Risk-free interest rate...................      6.10%      4.85%      5.44%
 Expected life (in years)..................       3.5        3.4        3.4
 Expected volatility.......................     83.90%     70.50%     69.00%

The fair value of employees' stock purchase rights under the Purchase Plan was estimated using the Black-Scholes model with the following weighted-average assumptions used for purchases:

                                               1997       1998       1999
                                             ---------  ---------  ---------
 Risk-free interest rate...................      5.30%      5.30%      4.66%
 Expected life (in years)..................       0.5        0.6        0.5
 Expected volatility.......................     83.90%     70.50%     69.00%

Under SFAS No. 123, the weighted-average estimated fair value of employee stock options granted at exercise prices equal to market price at grant date during 1997, 1998 and 1999 was $2.15, $2.97 and $10.43 per share, respectively. Under SFAS No. 123, the weighted average estimated fair value of employee stock options granted during 1999 at exercise prices below market price at grant date was $0.38 per share.

The Company determined the assumptions to be used in computing the fair value of stock options or stock purchase rights as follows. The risk-free rate is the U.S. treasury bill rate for the relevant expected life. The expected useful lives were estimated giving consideration to vesting and purchase periods, contractual lives, expected employee turnover and underlying stock volatility.

Warrants For Common Stock

In December 1999 and May 2000 (unaudited), OnLink issued approximately 34,700 and 109,100 warrants for shares of common stock, respectively, at an exercise price of $21.50 per share in connection with license agreements entered into with a customer. OnLink has recorded the value of these warrants for shares of common stock of $4,200 and $1,176,000 in the year ended December 31, 1999 and six months ended June 30, 2000 (unaudited), respectively, based on the Black-Scholes valuation model, using a risk-free interest rate of 4.85%, an expected life of 3 years, and a volatility factor of 71.0%. The value of these warrants is being amortized as a reduction to revenues earned on the contract during the period of contract services. The unamortized balance is recorded in deferred revenue as of June 30, 2000.

In August 1998, OpenSite entered into a consulting agreement with a former OpenSite director. Pursuant to this agreement, OpenSite issued warrants to purchase 66,430 shares of Siebel equivalent common stock at an exercise price of $0.80 per share (weighted-average fair value on date of grant of $0.19 per warrant). A warrant representing a total of 14,824 shares of common stock was repurchased from the holder in connection with the Series C preferred stock financing in March 1999 (see Note 6). As of December 31, 1999, the remaining 51,606 warrants were unexercised. OpenSite also issued warrants to the same director to purchase 58,128 shares of Siebel equivalent common stock at an exercise price of $0.15 (weighted-average fair value on date of grant of $0.04 per warrant), which were exercised in April 1999. During the period the warrants were outstanding, in the event that the holders of Series A preferred stock requested the redemption of their shares pursuant to the terms described in Note 6, this director could have elected to put any outstanding warrants back to OpenSite at the per share redemption value of the Series A preferred stock, less the exercise price of the warrants.

During the years ended December 31, 1998 and 1999, OpenSite recognized consulting expense of $54,221 and $268,516, respectively, to reflect the increase in value of the put feature of these warrants. In conjunction with the issuance of the Series C preferred stock and the director's resignation from the board of directors in March 1999, the warrants were amended such that the redemption provision expired on March 31, 1999. Accordingly, the carrying amount of the remaining outstanding warrants was transferred to additional paid-in capital as of that date.

(6) Convertible Preferred Stock and Mandatorily Redeemable Convertible Preferred Stock

During 1998, OnLink sold 1,783,879 shares of Series A convertible preferred stock in a private placement transaction for net proceeds of $6,051,000. During 1999, OnLink sold 29,243 shares of Series A and 1,002,497 shares of Series B convertible preferred stock in a private placement transaction for net proceeds of $100,000 and $10,562,000, respectively. During the six months ended June 30, 2000, OnLink sold 696,705 shares of Series C convertible preferred stock in a private placement transaction for net proceeds of $19,975,000. In connection with the Company's acquisition of OnLink, the holders of the preferred stock converted their shares pursuant to their existing terms on a one-for-one basis into shares of OnLink's common stock on October 2, 2000. Prior to the conversion of the preferred stock, the holders of the Series A, Series B, and Series C convertible preferred stock had certain preferences over the holders of OnLink's common stock, including liquidation preferences and dividend rights.

During 1998, OpenSite sold 1,097,956 shares of Series A mandatorily redeemable convertible preferred stock and 1,314,784 shares of Series B mandatorily redeemable convertible preferred stock in private placement transactions for net proceeds of $555,171 and $3,938,060, respectively. During 1999, OpenSite sold 3,155,470 shares of Series C mandatorily redeemable convertible preferred stock in a private placement transaction for net proceeds of $23,875,000. In conjunction with the sale of the Series C mandatorily redeemable convertible preferred stock, OpenSite repurchased 490,022 shares of common stock, 245,010 shares of Series A mandatorily redeemable convertible preferred stock, and 14,824 warrants for an aggregate purchase price of $4,265,635.

As of December 31, 1999, the Series A, B, and C mandatorily redeemable convertible preferred stock (collectively, the "Preferred Stock") had an aggregate liquidation preference of $600,000, $4,000,000, and $48,000,000, respectively. As of December 31, 1999, there were 852,946 Series A shares, 1,314,784 Series B shares, and 3,155,470 Series C shares outstanding.

In connection with the Company's acquisition of OpenSite, the holders of the Preferred Stock converted their shares pursuant to their existing terms on a one-for-one basis into shares of OpenSite's common stock on May 17, 2000. Prior to the conversion of the Preferred Stock, the holders of the Preferred Stock had certain preferences over the holders of OpenSite's common stock, including liquidation preferences, dividend rights and redemption rights.

In accordance with the redemption rights of the Preferred Stock, the holders of the Preferred Stock could have required OpenSite to repurchase the Preferred Stock at the then current fair value of OpenSite's common stock, subject to certain restrictions as defined in the purchase agreements regarding the Preferred Stock. Accordingly, the Company recorded a non-cash charge to stockholders' equity of $325,000 and $53,164,000 during the years ended December 31, 1998 and 1999, respectively, to reflect the Preferred Stock at its then current redemption value. These charges to equity have been deducted from the Company's net income in calculating both basic and diluted earnings per share. As a result of the conversion of the Preferred Stock, the Company stopped recording the accretion on the Preferred Stock on May 17, 2000.

(7) Income Taxes

Income before taxes includes income from foreign operations of approximately $680,000, $3,600,000 and $5,474,000 for the years ended December 31, 1997, 1998 and 1999, respectively.

Historical Information

The components of income tax expense (benefit) for the years ended December 31, 1997, 1998 and 1999 are as follows (in thousands):

                                               1997       1998       1999
                                             ---------  ---------  ---------
 Current:
   Federal................................. $   7,694  $  18,488  $  (8,796)
   State...................................     2,684      4,559         --
   Foreign.................................       400      1,289      1,586
                                             ---------  ---------  ---------
     Total current.........................    10,778     24,336     (7,210)
 Deferred:
   Federal.................................    (1,345)    (7,594)   (12,787)
   State...................................      (219)    (1,594)    (5,430)
                                             ---------  ---------  ---------
     Total deferred........................    (1,564)    (9,188)   (18,217)

 Charge in lieu of taxes attributable
   to employer's stock option plans........     4,046     13,517     91,679
                                             ---------  ---------  ---------
     Total income taxes.................... $  13,260  $  28,665  $  66,252
                                             =========  =========  =========

The differences between the income tax expense computed at the federal statutory rate of 35% and the Company's actual income tax expense for the years ended December 31, 1997, 1998 and 1999 are as follows:

                                               1997       1998       1999
                                             ---------  ---------  ---------
  Expected income tax expense..............      35.0%      35.0%      35.0%
  State income taxes, net of federal
    tax benefit............................      13.4%       4.4%       4.7%
  In-process research and development......      57.2%        --         --
  Non-deductible merger costs..............        --        4.8%        --
  Research and experimentation credit......     ( 3.9%)    ( 1.4%)    ( 0.7%)
  Tax exempt interest......................     ( 7.0%)    ( 2.6%)    ( 1.0%)
  Foreign sales corporation benefit........        --      ( 0.9%)       --
  S corporation benefit....................     ( 4.6%)    ( 0.6%)    ( 0.2%)
  Other, net...............................       4.2%       2.4%       0.2%
                                             ---------  ---------  ---------
    Total income taxes.....................      94.3%      41.1%      38.0%
                                             =========  =========  =========

The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities as of December 31, 1998 and 1999 are as follows (in thousands):

                                                          1998       1999
                                                        ---------  ---------
 Deferred tax assets:
  Deferred state taxes..............................   $     549  $     --
  Accruals and reserves, not currently taken
   for tax purposes.................................       8,111      4,899
  Allowance for doubtful accounts and returns.......       4,438      4,901
  Charitable contribution carryforward..............          --      2,451
  Research and development credit carryforward......          99      3,211
  Net operating loss carryforward...................       1,276     10,239
  Gain on investment................................          --      5,183
  Other.............................................         144      2,606
                                                        ---------  ---------
   Deferred assets..................................      14,617     33,490

 Deferred tax liabilities:
  Unrealized gain on marketable securities..........          --    (51,397)
  Depreciation......................................        (783)    (1,439)
                                                        ---------  ---------
   Deferred liabilities.............................        (783)   (52,836)
                                                        ---------  ---------
   Net deferred assets (liabilities)................   $  13,834  $ (19,346)
                                                        =========  =========

As of December 31, 1999, the Company had federal and state net operating loss carryforwards of approximately $23,671,000 and $46,671,000, respectively, available to offset future taxable income. In addition, the Company had federal and state research and development credit carryforwards of $2,011,000 and $1,200,000, respectively, available to offset future tax liabilities. The Company's federal net operating loss carryforwards expire in 2018 and 2019 if not utilized. The Company's state NOL carryforwards will expire in 2003 and 2004, if not utilized.The Company's federal research and development credit carryforward expires in 2018 and 2019, if not utilized. The state research and development credit can be carried forward indefinitely.

Management believes it is more likely than not that future operations will generate sufficient taxable income to realize any deferred tax assets.

Pro Forma Income Taxes

Prior to December 1, 1999, January 1, 1998, and July 1, 1998, respectively, OnTarget, OpenSite, and OnLink elected subchapter S status for Federal income tax purposes. Accordingly, no income tax provision was presented in the historical financial statements of OnTarget, OpenSite, and OnLink for these periods as the income was taxable personally to the stockholders. Pro forma income taxes reflect income tax expense that would have been reported if OnTarget, OpenSite and OnLink had been C corporations for each of the applicable periods in which they were subchapter S corporations. The components of pro forma income tax expense are as follows (in thousands):

                                               1997       1998       1999
                                             ---------  ---------  ---------
 Current:
   Federal................................. $   8,211  $  19,192  $  (8,548)
   State...................................     2,755      4,660         --
   Foreign.................................       400      1,289      1,586
                                             ---------  ---------  ---------
     Total current.........................    11,366     25,141     (6,962)
 Deferred:
   Federal.................................    (1,290)    (7,959)   (12,716)
   State...................................      (209)    (1,658)    (5,384)
                                             ---------  ---------  ---------
     Total deferred........................    (1,499)    (9,617)   (18,100)

 Charge in lieu of taxes attributable
   to employer's stock option plans........     4,046     13,517     91,679
                                             ---------  ---------  ---------
     Total income taxes.................... $  13,913  $  29,041  $  66,617
                                             =========  =========  =========

The differences between the pro forma income tax expense computed at the federal statutory rate of 35% and the Company's actual pro forma income tax expense for the years ended December 31, 1997, 1998 and 1999 are as follows:

                                               1997       1998       1999
                                             ---------  ---------  ---------
  Expected income tax expense..............      35.0%      35.0%      35.0%
  State income taxes, net of federal
    tax benefit............................      13.4%       4.4%       4.7%
  In-process research and development......      57.2%        --         --
  Non-deductible merger costs..............        --        4.8%        --
  Research and experimentation credit......     ( 3.9%)    ( 1.4%)    ( 0.7%)
  Tax exempt interest......................     ( 7.0%)    ( 2.6%)    ( 1.0%)
  Foreign sales corporation benefit........        --      ( 0.9%)       --
  Other, net...............................       4.2%       2.3%       0.2%
                                             ---------  ---------  ---------
    Total income taxes.....................      98.9%      41.6%      38.2%
                                             =========  =========  =========

Deferred tax assets and liabilities on a pro forma basis do not differ materially from the historical information presented above.

(8) Related Party Transactions

Certain members of the Company's Board of Directors serve as officers for customers of the Company. In 1999, aggregate license revenues associated with shipments to these customers were $1,382,000 and accounts receivable from these customers was $2,460,000 as of December 31, 1999. In 1998, aggregate revenues associated with shipments to these customers were $1,763,000 and accounts receivable from these customers was $1,335,000 as of December 31, 1998.

(9) Segment and Geographic Information

The Company and its subsidiaries are principally engaged in the design, development, marketing and support of Siebel eBusiness Applications, its family of proprietary software applications. Substantially all revenues result from the licensing of the Company's software products and related consulting and customer support (maintenance) services. The Company's chief operating decision maker reviews financial information presented on a consolidated basis, accompanied by disaggregated information about revenues by geographic region for purposes of making operating decisions and assessing financial performance. Accordingly, the Company considers itself to be in a single industry segment, specifically the license, implementation and support of its software applications.

The Company evaluates the performance of its geographic regions based on revenues and gross margin only. The Company does not assess the performance of its geographic regions on other measures of income or expense, such as depreciation and amortization, operating income or net income. In addition, as the Company's assets are primarily located in its corporate office in the United States and not allocated to any specific region, the Company does not produce reports for, or measure the performance of, its geographic regions based on any asset-based metrics. Therefore, geographic information is presented only for revenues and gross margin.

While a majority of the Company's revenues are derived from the United States, the Company's export sales have been growing. Export sales for the years ended December 31, 1997, 1998 and 1999 were $41,800,000, $88,200,000 and $158,277,000, respectively. This represented 27%, 30% and 31% of total license revenues, respectively. The Company's export sales are principally in Europe and Asia/Pacific.

The following geographic information is presented for the years ended December 31, 1997, 1998 and 1999 (in thousands):

                             North                Asia
                   Year     America    Europe    Pacific    Other     Totals
                  -------  ---------  --------  ---------  --------  ---------
   Revenues:
                    1999  $ 606,121  $159,925  $  11,331  $ 23,607  $ 800,984
                    1998    295,193    75,364     24,424    16,226    411,207
                    1997    172,058    35,052     10,115     5,413    222,638

   Gross margin:
                    1999  $ 435,331  $148,793  $  28,077  $  5,048  $ 617,249
                    1998    242,701    62,699     20,824    13,847    340,071
                    1997    142,515    30,535      9,161     4,360    186,571

No single customer has accounted for 10% or more of total revenues in 1997, 1998 or 1999.

(10)Acquisitions

OnLink Technologies, Inc.

On October 2, 2000, the Company acquired OnLink Technologies, Inc. ("OnLink"), a provider of eCommerce software. OnLink's technology is designed to provide companies with guided, interactive online communication with their customers to find out what they need and automatically match them to product and service configurations. Primary customers of OnLink include a full range of small, medium and large businesses.

Under the terms of the agreement, each outstanding share of OnLink common stock was exchanged for 0.330791 newly issued shares of common stock of the Company. This resulted in the issuance of approximately 7,400,000 additional shares of the Company's common stock. In addition, all outstanding stock options of OnLink were converted into the right to acquire the Company's common stock at the same exchange ratio with a corresponding adjustment to the exercise price. The transaction was accounted for as a pooling-of-interests and, accordingly, the financial position, results of operations and cash flows of OnLink have been combined with those of the Company for the same dates and periods as if the entities had been combined from the earliest date presented. There were no adjustments to conform accounting methods.

OpenSite Technologies, Inc.

On May 17, 2000, the Company acquired OpenSite Technologies, Inc. ("OpenSite"). OpenSite develops and markets Internet auction and dynamic pricing technology that enables companies to create branded, interactive, real-time Internet auctions. OpenSite's products and services automate the client's process of installing, running and maintaining its dynamic commerce applications. Primary customers of OpenSite include a full range of small, medium and large businesses that are focusing on expanding their sales focus to include dynamic commerce.

Under the terms of the agreement, each outstanding share of OpenSite common stock was exchanged for 0.262956 newly issued shares of common stock of the Company. This resulted in the issuance of approximately 7,400,000 additional shares of the Company's common stock. In addition, all outstanding stock options of OpenSite were converted into the right to acquire the Company's common stock at the same exchange ratio with a corresponding adjustment to the exercise price. The transaction was accounted for as a pooling-of-interests and, accordingly, the financial position, results of operations and cash flows of OpenSite have been combined with those of the Company for the same dates and periods as if the entities had been combined from the earliest date presented. There were no adjustments to conform accounting methods. During the second quarter of 2000, the Company expensed approximately $10,002,000 of direct merger-related expenses in connection with the Company's acquisition of OpenSite. These costs primarily consisted of investment banker fees, along with attorneys, accountants and other professional fees. As of June 30, 2000, the Company had settled approximately $2,202,000 of these merger-related costs and, accordingly, has reflected the remaining $7,800,000 of these merger-related costs in accrued liabilities. The remaining liabilities consist of approximately $7,500,000 of investment banker and other professional fees and $300,000 of severance-related costs. The Company expects to settle these liabilities by December 31, 2000.

OnTarget, Inc.

On December 1, 1999, the Company acquired OnTarget, Inc. OnTarget develops and implements advanced sales and marketing training and consulting programs for sales organizations competing in complex, multilevel sales campaigns. Primary customers include corporate clients and business owners who wish to provide for the development and training of their sales and marketing personnel.

Under the terms of the agreement, each outstanding share of OnTarget common stock was exchanged for 0.615503 newly issued shares of common stock of the Company. This resulted in the issuance of approximately 7,400,000 additional shares of the Company's common stock. In addition, all outstanding stock options of OnTarget were converted into the right to acquire the Company's common stock at the same exchange ratio with a corresponding adjustment to the exercise price. The acquisition of OnTarget has been accounted for as a pooling-of-interests and, accordingly, the financial position, results of operations and cashflows of OnTarget have been combined with those of the Company for the same dates and periods as if the entities had been combined from the earliest date presented. There were no adjustments to conform accounting methods. The Company did not incur any significant merger-related costs in connection with the acquisition of OnTarget.

Scopus Technology, Inc.

On May 18, 1998, the Company completed the acquisition of Scopus of Emeryville, California, a leading provider of customer service, field service, and call center software solutions. Under the terms of the agreement, each outstanding share of Scopus common stock was exchanged for newly issued shares of common stock of the Company. This resulted in the issuance of approximately 60,400,000 additional shares of the Company's common stock. In addition, all outstanding stock options of Scopus were converted into the right to acquire the Company's common stock at the same exchange ratio, with a corresponding adjustment to the exercise price. In connection with the merger, the Company incurred direct merger-related expenses of approximately $13,500,000, including fees for investment bankers, attorneys, accountants and other professional fees of $9,100,000, integration charges related to duplicate facilities and equipment of $3,100,000 and other miscellaneous expenses of $1,300,000.

The transaction has been accounted for as a pooling-of-interests and, accordingly, the financial statements of Siebel have been restated to include the financial position and results of operations of Scopus for all periods presented. Prior to the merger with Siebel, Scopus ended its fiscal year on March 31. The restated financial statements as of December 31, 1997 and for prior periods include Siebel's results of operations for the calendar periods noted and Scopus' results of operations for the fiscal periods ending three months later. Beginning January 1, 1998, the restated financial statements combine the operating results of Siebel and Scopus for the calendar periods noted. As a result of conforming the reporting periods of Siebel and Scopus, the operating results of Scopus for the three-month period ended March 31, 1998 are included in the restated financial statements for both 1997 and 1998. Scopus revenues and net income for the three-month period ended March 31, 1998 were $27,100,000 and $1,500,000, respectively. Net income for this period of approximately $1,500,000 is reflected as a reduction of opening retained earnings in the 1998 supplemental combined financial statements.

The results of operations for the separate companies and the combined amounts presented in the supplemental combined financial statements follow (in thousands):

                                                                       Six Months Ended
                                         Year Ended December 31,          June 30,
                                   -------------------------------  --------------------
                                     1997       1998       1999       1999       2000
                                   ---------  ---------  ---------  ---------  ---------
                                                                         (unaudited)
 Total revenues:
   Siebel......................   $ 118,775  $ 364,467  $ 761,768  $ 298,466  $ 693,530
   Scopus......................      88,853     27,072         --         --         --
   OnTarget....................      14,443     18,347     29,152     18,125         --
   OpenSite....................         340      1,281      7,878      2,586      6,375
   OnLink......................         227         40      2,186        658      4,693
                                   ---------  ---------  ---------  ---------  ---------
                                  $ 222,638  $ 411,207  $ 800,984  $ 319,835  $ 704,598
                                   =========  =========  =========  =========  =========

 Net income (loss):
   Siebel......................   $  (2,427) $  41,411  $ 122,172  $  47,092  $  93,202
   Scopus......................       1,240      1,464         --         --         --
   OnTarget....................       1,830      1,390        (80)       761         --
   OpenSite....................         130     (1,407)    (7,567)    (2,644)    (6,310)
   OnLink......................          32     (1,753)    (6,414)    (2,263)    (8,419)
                                   ---------  ---------  ---------  ---------  ---------
                                  $     805  $  41,105  $ 108,111  $  42,946  $  78,473
                                   =========  =========  =========  =========  =========

In combining the financial statements of Siebel and Scopus, certain reclassifications, conforming changes and adjustments relating to revenue recognition were made to the historical financial statements of Scopus. These conforming changes and adjustments resulted in a reduction of previously reported net income of approximately $2,930,000 in fiscal 1997 and $580,000 in fiscal 1996. These adjustments will not reverse in future periods.

MOHR Development, Inc.

On June 26, 2000, the Company acquired all of the outstanding securities of MOHR Development, Inc. ("MOHR"), a privately held provider of sales training solutions and consulting services. MOHR focuses on customers in the financial services, manufacturing and technology business sectors. The Company acquired MOHR for net cash consideration of $7,734,000 and a commitment to pay an additional $3,000,000. This transaction was accounted for by the purchase method of accounting and, accordingly, the operating results of MOHR have been included in the accompanying supplemental combined financial statements of the Company from the date of acquisition. The purchase price was allocated to tangible net assets, including current assets of $799,000, current liabilities of $4,847,000 and property and equipment of $115,000. The excess of the purchase price over the fair value of the tangible net assets acquired, $11,667,000 was allocated to goodwill. This amount is being amortized over three years.

The results of operations of MOHR prior to the acquisition date are not considered material to the supplemental combined results of operations of the Company and, accordingly, pro forma financial statement information has not been presented.

Paragren Technologies, Inc.

On January 14, 2000, the Company acquired all of the outstanding securities of Paragren Technologies, Inc. ("Paragren"), a leading provider of high-performance marketing automation software based in Reston, Virginia. Paragren was previously a wholly owned subsidiary of APAC Customer Services, Inc. The Company acquired Paragren for cash consideration of $18,050,000. This transaction was accounted for by the purchase method of accounting and, accordingly, the operating results of Paragren have been included in the accompanying supplemental combined financial statements of the Company from the date of acquisition. The purchase price was allocated to tangible net assets, including current assets of $942,000, current liabilities of $1,442,000 and property and equipment of $976,000. An independent appraiser was engaged to perform a valuation on Paragren and it was determined that there was no purchased in-process research and development. As a result, the excess of the purchase price over the fair value of the tangible net assets acquired of $17,574,000 was allocated to intangible assets and will be amortized over three years. Pro forma information giving effect to this acquisition has not been presented since it would not differ materially from the historical results of the Company.

Target Marketing Systems and The Sales Consultancy, Inc.

In January and February 1999, OnTarget acquired Target Marketing Systems Worldwide Limited, Target Marketing Systems S.A., and The Sales Consultancy Inc. in exchange for convertible notes and OnTarget stock. OnTarget recorded goodwill of $9,745,000 in connection with these acquisitions. The goodwill is being amortized over a five-year period using the straight-line method. Pro forma information giving effect to these mergers has not been presented since it would not differ materially from the historical results of the Company.

20*20 Group, Ltd.

On December 17, 1998, the Company acquired all of the outstanding securities of the privately held 20*20 Group, Ltd. ("20*20"), a provider of end-user training for the enterprise relationship management software market. The transaction was valued at approximately $6,000,000 and was accounted for by the purchase method of accounting. Accordingly, the operating results of 20*20 have been included in the accompanying supplemental combined financial statements of the Company from the date of acquisition. The purchase price was allocated to tangible net assets, including current assets, current liabilities and property, plant and equipment. The excess of the purchase price over the fair value of the tangible net assets acquired, $5,500,000, was allocated to goodwill. This amount is being amortized over three years.

The results of operations of 20*20 prior to the acquisition date are not considered material to the supplemental combined results of operations of the Company and, accordingly, pro forma financial statement information has not been presented.

Interactive Data Systems, LLC

In July 1998 in connection with a corporate restructuring, OnLink acquired the remaining 50% interest of Interactive Data Systems, LLC ("IDS"), OnLink's predecessor, in exchange for 464,677 shares of common stock valued at approximately $160,000 and the forgiveness of an intercompany receivable of $52,000. The acquisition was accounted for by the purchase method of accounting and the purchase price of $212,000 was allocated to goodwill, as there were no material identifiable tangible or intangible assets. This amount is being amortized over three years. OnLink also recorded deferred compensation of $144,000 relating to an additional 420,315 shares issued to the former shareholders of IDS, which were subject to repurchase over a period of 18 months. OnLink amortized the deferred compensation over the 18-month repurchase period and, accordingly, the deferred compensation was fully amortized as of December 31, 1999. In connection with this transaction, a note payable to a shareholder of OnLink in the amount of $141,000 was forgiven and recorded as a capital contribution in additional paid-in capital.

The results of operations of IDS prior to the acquisition date are not considered material to the supplemental combined results of operations of the Company and, accordingly, pro forma financial statement information has not been presented.

Nomadic Systems, Inc.

On November 1, 1997, the Company issued shares of its common stock in exchange for all outstanding securities of privately held Nomadic Systems, Inc. ("Nomadic"), a provider of innovative business solutions to pharmaceutical sales forces. The transaction was valued at approximately $11,000,000 and was accounted for by the purchase method of accounting. Accordingly, the operating results of Nomadic have been included in the accompanying supplemental combined financial statements of the Company from the date of acquisition. Under the terms of the agreement, Nomadic's security holders received approximately 2,400,000 shares of the Company's common stock in exchange for all outstanding shares of Nomadic. The purchase price was allocated to net current assets, fixed assets, purchased in-process research and development and intangible assets of $557,000, $186,000, $8,723,000 and $1,553,000, respectively. The purchased in-process research and development was charged to operations in the fourth quarter of 1997. The amounts allocated to intangible assets are being amortized over three years.

The appraisal of the acquired research and development was based upon the present value of forecasted operating cash flows from the technology acquired, giving effect to the stage of completion at the acquisition date. These forecasted cash flows were then discounted at a rate which gave consideration to the risk involved in completing the acquired technology. The forecasted cash flows assumed inclusion of the product developed from acquired technology into the existing Siebel product suite.

The purchased in-process research and development expense related to completion of Nomadic's second-generation pharmaceutical sales force automation product. At the time of the acquisition, Nomadic had a first-generation product at a limited number of customers, with a very small user base. There were a considerable number of uncertainties as to increasing the product's scalability for deployment on an enterprise-wide basis, improving the stability of the application and identifying and fixing bugs. The Company allocated limited excess purchase price over net assets acquired to net current assets, fixed assets and workforce-in-place. The majority of the excess purchase price was allocated to in-process research and development and other intangible assets (goodwill) based upon the expected cash flows from Nomadic's existing product and the product under development, giving consideration to the stage of completion of the technology under development at the acquisition date. This technology was completed, at a cost of approximately $1,300,000, for enterprise-wide release in March 1998.

The results of operations of Nomadic prior to the acquisition date are not considered material to the supplemental combined results of operations of the Company and, accordingly, pro forma financial statement information has not been presented.

InterActive WorkPlace, Inc.

On October 1, 1997, the Company issued shares of its common stock in exchange for all outstanding securities of privately held InterActive WorkPlace, Inc. ("InterActive"), a developer of intranet-based business intelligence software technology. The transaction was valued at approximately $15,000,000 and was accounted for by the purchase method of accounting. Accordingly, the operating results of InterActive have been included in the accompanying supplemental combined financial statements of the Company from the date of acquisition. Under the terms of the agreement, InterActive's security holders received approximately 3,051,000 shares of the Company's common stock in exchange for all outstanding shares in InterActive. Additionally, InterActive optionees received options to purchase an aggregate of approximately 256,000 shares of the Company's common stock in exchange for their options to purchase InterActive common stock. The excess of the purchase price over the fair value of the net assets acquired was allocated to purchased in-process research and development and intangible assets of $14,017,000 and $104,000, respectively. The purchased in-process research and development was charged to operations in the fourth quarter of 1997. The amounts allocated to intangible assets are being amortized over three years.

Purchased in-process research and development is related to the completion of InterActive's data integration, filtering and formatting technology and its integration into the Company's products. At the time of acquisition, a prototype of InterActive's product existed and was in limited trials; however, the prototype was not stable or sufficiently developed to be scalable on an enterprise-wide basis. InterActive's technology was completed, at a cost of approximately $400,000, and incorporated as a separate component of the Siebel 98 product suite, which was released in June 1998. The Company estimated that the technology was approximately 75% complete as of the acquisition date. At that date, the only identifiable asset acquired was the technology under development. Accordingly, essentially all of the excess purchase price over net assets acquired, except for amounts assigned to net current assets, fixed assets and workforce-in-place, was assigned to in-process research and development.

The results of operations of InterActive prior to the acquisition date are not considered material to the supplemental combined results of operations of the Company and, accordingly, pro forma financial information has not been presented.

Clear With Computers, Inc.

The Company incurred merger costs of approximately $3,300,000 in the third quarter of 1997 in connection with Scopus' planned merger with Clear With Computers, Inc. The merger plan was terminated early in the fourth quarter of 1997.

(11) Subsequent Events

On August 7, 2000, the Company's Board of Directors approved a two-for-one stock split (to be effected in the form of a stock dividend) which was paid on September 8, 2000. The accompanying supplemental combined financial statements have been restated to give effect to this stock split.

On September 11, 2000, the Company announced an agreement to acquire Janna Sytems, Inc. ("Janna"), a leading provider of eBusiness solutions for the financial services industry. Under the terms of the agreement, each outstanding share of Janna common stock would be exchanged at a fixed exchange ratio of 0.4970 for newly issued shares of common stock of the Company or, with respect to Janna shareholders resident in Canada, 0.4970 of a newly issued, exchangeable share of a Canadian subsidiary of the Company that is currently exchangeable for the Company's common stock. All outstanding stock options of Janna will also be exchanged for the Company's stock options at the same exchange ratio. This will result in the issuance of approximately 11,100,000 additional shares of common stock of the Company. The transaction is expected to be accounted for as a pooling-of-interests. The acquisition is subject to the approval of Janna's shareholders as well as the satisfaction of certain customary closing conditions. The transaction is expected to close in the fourth calendar quarter of 2000.

(12) Selected Quarterly Supplemental Combined Financial Data (unaudited)

The following table presents selected quarterly supplemental combined information for 1998, 1999 and 2000 (in thousands, except share data):

                                          First     Second      Third     Fourth
                                         quarter    quarter    quarter    quarter
                                        ---------  ---------  ---------  ---------
  2000:                                                                            
  Total revenues.......................$ 314,939  $ 389,659
  Gross margin.........................  238,128    289,465
  Net income...........................   38,274     40,199
  Net income (loss) available to
    common stockholders................  (38,774)    18,492
  Net income (loss) per
    diluted share......................    (0.10)      0.04
  Net income (loss) per
    basic share........................    (0.10)      0.05


  1999:                                                                            
  Total revenues.......................$ 142,825  $ 177,010  $ 209,051  $ 272,098
  Gross margin.........................  115,385    137,526    156,992    207,346
  Net income...........................   20,073     22,873     25,756     39,409
  Net income (loss) available to
    common stockholders................   11,149    (10,112)    22,652     31,258
  Pro forma net income (loss) per
    diluted share......................     0.03      (0.03)      0.05       0.07
  Pro forma net income (loss) per
    basic share........................     0.03      (0.03)      0.06       0.08


  1998:                                                                            
  Total revenues.......................$  78,824  $  94,245  $ 109,557  $ 128,581
  Gross margin.........................   66,197     75,781     90,645    107,448
  Net income (loss)....................    9,700     (1,122)    13,823     18,704
  Net income (loss) available to
    common stockholders................    9,700     (1,176)    13,742     18,475
  Pro forma net income (loss) per
    diluted share......................     0.02      (0.00)      0.03       0.04
  Pro forma net income (loss) per
    basic share........................     0.03      (0.00)      0.04       0.05

Schedule II

Valuation and Qualifying Accounts

                                     Balance    Charged                Balance
                                       at         to                     at
                                    Beginning  Costs and               End of
                                     of Year   Expenses   Deductions    Year
                                    ---------  ---------  ----------  ---------
                                               (in thousands)
Allowance For Doubtful Accounts:                                               
  Year ended December 31, 1999.....$  10,439  $   8,056  $    5,405  $  13,090
  Year ended December 31, 1998.....$   4,292  $   6,394  $      247  $  10,439
  Year ended December 31, 1997.....$   1,940  $   4,925  $    2,573  $   4,292

EX-23.1

Exhibit 23.1

Report on Supplemental Combined Financial Statement Schedule and Consent of Independent Auditors

The Board of Directors
Siebel Systems, Inc.

The audits referred to in our report dated January 24, 2000, except for Notes 10 and 11 which are as of October 9, 2000, included the related supplemental combined financial statement schedule as of December 31, 1999, and for each of the years in the three-year period ended December 31, 1999. The financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statement schedule based on our audits. In our opinion, the supplemental financial statement schedule, when considered in relation to the basic supplemental combined financial statements taken as a whole, presents fairly in all material respects, the information set forth therein.

We consent to incorporation by reference in the registration statements on Forms S-3 (Nos. 333-47062, 333-36967, 333-40437, 333-68041, 333-91777, and 333-94261) and Forms S-8 (Nos. 333-07983, 333-22763, 333-40259, 333-53369, 333-72969, 333-85007, 333-94243, and 333-41792) of Siebel Systems, Inc. of our reports dated January 24, 2000, except Notes 10 and 11 which are as of October 9, 2000, relating to the supplemental combined balance sheets of Siebel Systems, Inc. and subsidiaries as of December 31, 1999 and 1998, and the related supplemental combined statements of operations and comprehensive income, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1999, and related supplemental combined financial statement schedule, which reports appear in the current report on Form 8-K dated October 2, 2000 of Siebel Systems, Inc.

/s/ KPMG LLP

Mountain View, California
October 9, 2000

EX-99.1

Exhibit 99.1

AGREEMENT AND PLAN OF MERGER AND REORGANIZATION

among:

Siebel Systems, Inc.,
a Delaware corporation;

Ocelot Acquisition Corp.,
a Delaware corporation;

OnLink Technologies, Inc.,
a Delaware corporation

and

Cornell P. French,
as Stockholders' Agent.

___________________________

Dated as of August 3, 2000

___________________________

AGREEMENT AND PLAN

OF MERGER AND REORGANIZATION

This Agreement And Plan Of Merger And Reorganization ("Agreement") is made and entered into as of August 3, 2000, by and among: Siebel Systems, Inc. a Delaware corporation ("Parent"); Ocelot Acquisition Corp., a Delaware corporation ("Merger Sub"); OnLink Technologies, Inc. a Delaware corporation (the "Company"); and Cornell P. French, as Stockholders' Agent (as defined below). Certain other capitalized terms used in this Agreement are defined in Exhibit A.

Recitals

1. Parent, Merger Sub and the Company intend to effect a merger of Merger Sub into the Company in accordance with this Agreement and the Delaware General Corporation Law (the "Merger"). Upon consummation of the Merger, Merger Sub will cease to exist, and the Company will become a wholly owned subsidiary of Parent.
2. It is intended that the Merger qualify as a tax-free reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"). For accounting purposes, it is intended that the Merger be treated as a "pooling of interests."
3. This Agreement has been approved by the respective boards of directors of Parent, Merger Sub and the Company.
4. Concurrently with the execution of this Agreement, and as a condition and inducement to Parent's willingness to enter into this Agreement, each of the Stockholders listed on Exhibit B(2) (the "Proxy Stockholders") shall enter into a Voting Agreement and Irrevocable Proxy substantially in the form attached hereto as Exhibit B(1).

Agreement

The parties to this Agreement agree as follows:

1. Description of Transaction

1.1 Merger of Merger Sub into the Company. Upon the terms and subject to the conditions set forth in this Agreement, at the Effective Time (as defined in Section 1.3), Merger Sub shall be merged with and into the Company, and the separate existence of Merger Sub shall cease. The Company will continue as the surviving corporation in the Merger (the "Surviving Corporation").

1.2 Effect of the Merger. The Merger shall have the effects set forth in this Agreement and in the applicable provisions of the Delaware General Corporation Law (the "DGCL").

1.3 Closing; Effective Time. The consummation of the transactions contemplated by this Agreement (the "Closing") shall take place at the offices of Cooley Godward LLP, 3175 Hanover Street, Palo Alto, California 94304 at 10:00 a.m. on a date to be designated by Parent, which shall be no later than the fifth business day after the satisfaction or waiver of the last to be satisfied or waived of the conditions set forth in Sections 6 and 7 (other than those conditions that by their nature are to be satisfied at the Closing, but subject to the satisfaction or waiver of such conditions) or at such time and date as the parties may designate. The date on which the Closing actually takes place is referred to in this Agreement as the "Closing Date." Contemporaneously with or as promptly as practicable after the Closing, a properly executed certificate of merger conforming to the requirements of the DGCL shall be filed with the Secretary of State of the State of Delaware. The Merger shall become effective at the time such certificate of merger is filed with and accepted by the Secretary of State of the State of Delaware (the "Effective Time").

1.4 Certificate of Incorporation and Bylaws; Directors and Officers. Unless otherwise determined by Parent prior to the Effective Time:

1. the certificate of incorporation of the Surviving Corporation shall be amended and restated as of the Effective Time in a form acceptable to Parent;
2. the bylaws of the Surviving Corporation shall be amended and restated as of the Effective Time to conform to the bylaws of Merger Sub as in effect immediately prior to the Effective Time; and
3. the directors and officers of the Surviving Corporation immediately after the Effective Time shall be the individuals identified on Exhibit C.

1.5 Conversion of Shares.

1. Subject to Sections 1.8(c) and 1.9, at the Effective Time, by virtue of the Merger and without any further action on the part of Parent, Merger Sub, the Company or any stockholder of the Company:
1. each share of the common stock (par value $0.001 per share) of the Company (the "Company Common Stock") outstanding immediately prior to the Effective Time shall be converted into the right to receive the "Applicable Fraction" (as defined in Section 1.5(b)) of a share of the common stock (par value $0.01 per share) of Parent ("Parent Common Stock");
2. each share of the common stock (par value $0.001 per share) of Merger Sub outstanding immediately prior to the Effective Time shall be converted into one share of common stock of the Surviving Corporation; and
3. all calculations under this Section 1.5(a) shall be rounded to the nearest one millionth (1/1,000,000^th).
2. For purposes of this Agreement, the "Applicable Fraction" shall be the fraction having: (A) a numerator equal to 3,706,564 and (B) a denominator equal to the sum of (i) the aggregate number of shares of Company Common Stock outstanding immediately prior to the Effective Time (including any such shares that are subject to a repurchase option or risk of forfeiture under any restricted stock purchase agreement or other agreement), plus (ii) the aggregate number of shares of Company Common Stock purchasable under or otherwise subject to all Company options, warrants or other rights to purchase Company Common Stock outstanding immediately prior to the Effective Time (including all shares of Company Common Stock that may ultimately be purchased under Company Options (as defined in Section 1.6 below), warrants or other rights to purchase Company Common Stock that are unvested or are otherwise not then exercisable). Subject only to Section 1.5(c), in no case shall the number of shares of Parent Common Stock issued under Section 1.5(a), when added to the shares of Parent Common Stock issuable to the holders of options, warrants and convertible debentures to purchase Company Common Stock under Section 1.6, exceed 3,706,564 shares.
3. In the event Parent at any time or from time to time between the date of this Agreement and the Effective Time declares or pays any dividend on Parent Common Stock payable in Parent Common Stock or in any right to acquire Parent Common Stock, or effects a subdivision of the outstanding shares of Parent Common Stock into a greater number of shares of Parent Common Stock (by stock dividends, combinations, splits, recapitalizations and the like), or in the event the outstanding shares of Parent Common Stock shall be combined or consolidated, by reclassification or otherwise, into a lesser number of shares of Parent Common Stock, then the Applicable Fraction shall be appropriately adjusted.
4. If any shares of Company Common Stock outstanding immediately prior to the Effective Time are unvested or are subject to a repurchase option, risk of forfeiture or other condition under any applicable restricted stock purchase agreement or other agreement with the Company, then the shares of Parent Common Stock issued in exchange for such shares of Company Common Stock will also be unvested and/or subject to the same repurchase option, risk of forfeiture or other condition, and the certificates representing such shares of Parent Common Stock may accordingly be marked with appropriate legends.
5. A portion of the shares of Parent Common Stock issued in the Merger shall be delivered into escrow and held as specified in Section 1.8 hereof.

1.6 Employee Stock Options. At the Effective Time, each stock option that is then outstanding under the Company's 1998 Stock Plan, whether vested or unvested (a "Company Option"), shall be assumed by Parent in accordance with the terms (as in effect as of the date of this Agreement) of the Company's 1998 Stock Plan and the stock option agreement by which such Company Option is evidenced and the Company's repurchase right with respect to any unvested shares acquired by the exercise of Company Options shall be assigned to Parent. All rights with respect to Company Common Stock under outstanding Company Options shall thereupon be converted into rights with respect to Parent Common Stock. Accordingly, from and after the Effective Time, (a) each Company Option assumed by Parent may be exercised solely for shares of Parent Common Stock, (b) the number of shares of Parent Common Stock subject to each such assumed Company Option shall be equal to the number of shares of Company Common Stock that were subject to such Company Option immediately prior to the Effective Time multiplied by the Applicable Fraction, rounded down to the nearest whole number of shares of Parent Common Stock, (c) the per share exercise price for the Parent Common Stock issuable upon exercise of each such assumed Company Option shall be determined by dividing the exercise price per share of Company Common Stock subject to such Company Option, as in effect immediately prior to the Effective Time, by the Applicable Fraction, and rounding the resulting exercise price up to the nearest whole cent, and (d) each assumed Company Option designated an "incentive stock option" as defined in Section 422 of the Code ("ISO") immediately prior to the Effective Time shall remain an ISO; and (e) all restrictions on the exercise of each such assumed Company Option shall continue in full force and effect, and the term, exercisability, vesting schedule and other provisions of such Company Option shall otherwise remain unchanged; provided, however, that each such assumed Company Option shall, in accordance with its terms, be subject to further adjustment as appropriate to reflect any stock split, reverse stock split, stock dividend, recapitalization or other similar transaction effected by Parent after the Effective Time. The Company and Parent shall take all action that may be necessary (under the Company's 1998 Stock Plan and otherwise) to effectuate the provisions of this Section 1.6. Each holder of a Company Option will receive credit for time served as an employee of the Company for the purposes of the vesting schedule of such Company Option assumed by the Parent. Following the Closing, Parent will send to each holder of an assumed Company Option a written notice setting forth (i) the number of shares of Parent Common Stock subject to such assumed Company Option, and (ii) the exercise price per share of Parent Common Stock issuable upon exercise of such assumed Company Option. As soon as reasonably practicable, and in any event within 60 days after the Closing Date, unless such 60 day period is impracticable, Parent shall file with the SEC, a registration statement on Form S-8 registering the shares of Parent Common Stock issuable upon exercise of the Company Options assumed by Parent pursuant to this Section 1.6.

1.7 Closing of the Company's Transfer Books. At the Effective Time, holders of certificates representing shares of the Company's capital stock that were outstanding immediately prior to the Effective Time shall cease to have any rights as stockholders of the Company, and the stock transfer books of the Company shall be closed with respect to all shares of such capital stock outstanding immediately prior to the Effective Time. No further transfer of any such shares of the Company's capital stock shall be made on such stock transfer books after the Effective Time. If, after the Effective Time, a valid certificate previously representing any of such shares of the Company's capital stock (a "Company Stock Certificate") is presented to the Surviving Corporation or Parent, such Company Stock Certificate shall be canceled and shall be exchanged as provided in Section 1.8.

1.8 Exchange of Certificates; Escrow Shares.

1. (i) On or prior to the Closing Date, Parent shall select a reputable bank or trust company to act as exchange agent in the Merger (the "Exchange Agent"). Promptly after the Effective Time, Parent shall deposit with the Exchange Agent (1) certificates representing the shares of Parent Common Stock issuable pursuant to this Section 1, and (2) cash sufficient to make payments in lieu of fractional shares in accordance with Section 1.5(c). The shares of Parent Common Stock and cash amounts so deposited with the Exchange Agent, together with any dividends or distributions received by the Exchange Agent with respect to such shares, are referred to collectively as the "Exchange Fund."

(ii) As soon as reasonably practicable after the Effective Time, the Exchange Agent will mail to the Merger Stockholders (x) a letter of transmittal in customary form and containing such provisions as Parent may reasonably specify (including a provision confirming that delivery of Company Stock Certificates shall be effected, and risk of loss and title to Company Stock Certificates shall pass, only upon delivery of such Company Stock Certificates to the Exchange Agent), and (y) instructions for use in effecting the surrender of Company Stock Certificates in exchange for certificates representing Parent Common Stock. Upon surrender of a Company Stock Certificate to the Exchange Agent for exchange, together with a duly executed letter of transmittal and such other documents as may be reasonably required by the Exchange Agent or Parent, (1) the Merger Stockholder holding such Company Stock Certificate shall be entitled to receive in exchange therefor a certificate representing 90% of the number of whole shares of Parent Common Stock that such Merger Stockholder has the right to receive pursuant to the provisions of Section 1.5 (and cash in lieu of any fractional share of Parent Common Stock), and (2) the Company Stock Certificate so surrendered shall be canceled. The Exchange Agent shall thereupon also deliver to the escrow agent under the Escrow Agreement in the form of Exhibit H hereto (the "Escrow Agreement") a certificate representing 10% of the number of whole shares of Parent Common Stock that such Merger Stockholder has the right to receive pursuant to the provisions of Section 1.5. Until surrendered as contemplated by this Section 1.8, each Company Stock Certificate shall be deemed, from and after the Effective Time, to represent only the right to receive shares of Parent Common Stock (and cash in lieu of any fractional share of Parent Common Stock) as contemplated by Section 1. If any Company Stock Certificate shall have been lost, stolen or destroyed, Parent may, in its discretion and as a condition precedent to the issuance of any certificate representing Parent Common Stock, require the owner of such lost, stolen or destroyed Company Stock Certificate to provide an appropriate affidavit and to deliver a bond (in such sum as Parent may reasonably direct) as indemnity against any claim that may be made against the Exchange Agent, Parent or the Surviving Corporation with respect to such Company Stock Certificate.

2. No dividends or other distributions declared or made with respect to Parent Common Stock with a record date after the Effective Time shall be paid to the holder of any unsurrendered Company Stock Certificate with respect to the shares of Parent Common Stock represented thereby, and no cash payment in lieu of any fractional share shall be paid to any such holder, until such holder surrenders such Company Stock Certificate in accordance with this Section 1.8 (at which time such holder shall be entitled to receive all such dividends and distributions and such cash payment).
3. No fractional shares of Parent Common Stock shall be issued in connection with the Merger, and no certificates for any such fractional shares shall be issued. In lieu of such fractional shares, any holder of capital stock of the Company who would otherwise be entitled to receive a fraction of a share of Parent Common Stock (after aggregating all fractional shares of Parent Common Stock issuable to such holder) shall, upon surrender of such holder's Company Stock Certificate(s), be paid in cash the dollar amount (rounded to the nearest whole cent), without interest, determined by multiplying such fraction by the average of the closing sale prices of a share of Parent Common Stock as reported on the Nasdaq National Market for each of the five consecutive trading days ending on the trading day immediately preceding the Closing (the "Average Parent Common Stock Price").
4. Notwithstanding anything to the contrary contained in this Agreement, no shares of Parent Common Stock (or certificates therefor) shall be issued in exchange for any Company Stock Certificate to any Person who may be an "affiliate" (as that term is used in Rule 145 under the Securities Act) of the Company until such Person shall have delivered to Parent and the Company a duly executed Affiliate Agreement as contemplated by Section 5.9.
5. Any portion of the Exchange Fund that remains undistributed to holders of Company Stock Certificates as of the date 180 days after the date on which the Merger becomes effective shall be delivered to Parent upon demand, and any holders of Company Stock Certificates who have not theretofore surrendered their Company Stock Certificates in accordance with this Section 1.8 shall thereafter look only to Parent for satisfaction of their claims for Parent Common Stock, cash in lieu of fractional shares of Parent Common Stock and any dividends or distributions with respect to Parent Common Stock.
6. Each of the Exchange Agent, Parent and the Surviving Corporation shall be entitled to deduct and withhold from any consideration payable or otherwise deliverable to any holder or former holder of capital stock of the Company pursuant to this Agreement such amounts as Parent or the Surviving Corporation is required to deduct or withhold therefrom under the Code or under any provision of state, local or foreign tax law. To the extent such amounts are so deducted or withheld, such amounts shall be treated for all purposes under this Agreement as having been paid to the Person to whom such amounts would otherwise have been paid.
7. Neither Parent nor the Surviving Corporation shall be liable to any holder or former holder of capital stock of the Company for any shares of Parent Common Stock (or dividends or distributions with respect thereto), or for any cash amounts, delivered to any public official pursuant to any applicable abandoned property, escheat or similar law.

1.9 Dissenting Shares. Notwithstanding anything to the contrary contained in this Agreement, any shares ("Dissenting Shares") of Company Common Stock that are outstanding immediately prior to the Effective Time and that either (a) are or may become "dissenting shares" within the meaning of Section 1300(b) of the CGCL or (b) held by any Person who is entitled to demand and properly demands payment of the fair value of such Dissenting Shares pursuant to, and who complies in all respects with, Section 262 of the DGCL ("Section 262") shall not be converted into or be exchangeable for the right to receive Parent Common Stock in accordance with Section 1.5 (or cash in lieu of fractional shares in accordance with Section 1.5), but rather the holders of Dissenting Shares shall be entitled only to either (x) payment of the fair value of such Dissenting Shares in accordance with Section 262 or (y) such rights as may be granted to such holder or holders in Chapter 13 of the CGCL; provided, however, that if any such holder shall fail to perfect or otherwise shall waive, withdraw or lose the right to receive payment of the fair value of such holder's Dissenting Shares under Section 262 or Chapter 13 of the CGCL, as applicable, then the right of such holder to be paid the fair value of such holder's Dissenting Shares shall cease and such Dissenting Shares shall be deemed to have been converted as of the Effective Time into, and to have become exchangeable solely for the right to receive Parent Common Stock in accordance with Section 1.5 (and cash in lieu of fractional shares in accordance with Section 1.8(c)). The Company shall give prompt notice to Parent and Merger Sub of any demands received by the Company for payment of fair value of any shares of Company Common Stock (including a copy of each demand), and Parent and Merger Sub shall have the right to participate in and direct, at Parent's expense, all negotiations and proceedings with respect to such demands. Prior to the Effective Time, the Company shall not, without the prior written consent of Parent, make any payment with respect to, or settle or offer to settle, any such demands or agree to do any of the foregoing. From and after the Effective Time, Parent shall be responsible for all payments with respect to Dissenting Shares, including without limitation, all expense associated with negotiations and proceedings with respect to demands for appraisal required under DGCL or the CGCL.

1.10 Tax Consequences. For federal income tax purposes, the Merger is intended to constitute a reorganization within the meaning of Section 368 of the Code. The parties to this Agreement hereby adopt this Agreement as a "plan of reorganization" within the meaning of Sections 1.368-2(g) and 1.368-3(a) of the United States Treasury Regulations.

1.11 Accounting Treatment. For accounting purposes, the Merger is intended to be treated as a "pooling of interests."

1.12 Further Action. If, at any time after the Effective Time, any further action is determined by Parent to be necessary or desirable to carry out the purposes of this Agreement or to vest the Surviving Corporation or Parent with full right, title and possession of and to all rights and property of Merger Sub and the Company, the officers and directors of the Surviving Corporation and Parent shall be fully authorized (in the name of Merger Sub, in the name of the Company and otherwise) to take such action.

2. Representations and Warranties of the Company

The Company represents and warrants, except as set forth in the Disclosure Schedule, to and for the benefit of the Indemnitees, as follows:

2.1 Due Organization; Subsidiaries; Etc.

1. Each of the Acquired Corporations (as defined below) has been duly organized, and is validly existing and in good standing under the laws of the jurisdiction of its incorporation, has full power (corporate and other) and authority: (i) to conduct its business in the manner in which its business is currently being conducted; (ii) to own and use its assets in the manner in which its assets are currently owned and used; and (iii) to perform its obligations under all material Contracts by which it is bound.
2. Each of the Acquired Corporations has not conducted any business under or otherwise used, for any purpose or in any jurisdiction, any fictitious name, assumed name, trade name or other name.
3. Each of the Acquired Corporations is qualified to do business as a foreign corporation, and is in good standing, under the laws of all jurisdictions where the property owned, leased or operated by it or the nature of its business requires such qualification and where the failure to be so qualified would have a Material Adverse Effect on such Acquired Corporation. Each of the Acquired Corporations is in possession of and operating in compliance with all Governmental Authorizations that are material to the conduct of its business, all of which are valid and in full force and effect.
4. Part 2.1(d) of the Disclosure Schedule accurately sets forth (i) the names of the members of the Company's board of directors, (ii) the names of the members of each committee of the Company's board of directors, and (iii) the names and titles of the Company's officers.
5. The Company has no subsidiaries (as defined below) other than OnLink Europe Ltd., a company organized under the law of England and Wales (the "Subsidiary"). The Company directly owns 100% of the issued and outstanding stock of the Subsidiary. Other than the Company's equity ownership in the Subsidiary as set forth above, none of the Acquired Corporations has any equity or other interest in any Entity (as defined below). As used in this Agreement, the word "subsidiary" means any Entity of which the Company directly or indirectly owns 50% or more of the equity or that the Company directly or indirectly controls. The Company has not agreed and is not obligated to make any future investment in or capital contribution to any Entity, including, without limitation, the Subsidiary. The Company has not guaranteed and is not responsible or liable for any material obligation of any of the Entities, including, without limitation, the Subsidiary, in which it owns or has owned any equity or other interest.

2.2 Certificate of Incorporation and Bylaws; Records. The Company has delivered to Parent accurate and complete copies of: (1) each Acquired Corporation's certificate of incorporation and bylaws or equivalent governing documents, including all amendments thereto (the "Incorporation Documents"); (2) the stock records of the Acquired Corporations; and (3) the minutes and other records of the meetings and other proceedings (including any actions taken by written consent or otherwise without a meeting) of the stockholders, the board of directors and all committees of the board of directors of each of the Acquired Corporations. There have been no formal meetings or other proceedings of the stockholders, board of directors, or any committee of the board of directors of each of the Acquired Corporations that are not fully reflected in such minutes or other records. There has been no violation of any of the provisions of the Incorporation Documents of each Acquired Corporation, and each Acquired Corporation has not taken any action that is inconsistent in any material respect with any resolution adopted by such Acquired Corporation's stockholders, board of directors or any committee of such Acquired Corporation's board of directors, except, in each case, where such violation or action would not have a Material Adverse Effect on such Acquired Corporation. The books of account, stock records, minute books and other records of each Acquired Corporation are complete in all material respects, and have been maintained in accordance with prudent business practices.

2.3 Capitalization, Etc.

1. The authorized capital stock of the Company consists of 27,750,000 shares of Common Stock (par value $0.001 per share), of which 9,869,176 shares have been issued and are outstanding as of the date of this Agreement and of which 293,017 shares have been repurchased by the Company, 5,664,048 shares of Series A Preferred Stock (par value $0.001 per share), of which 5,487,046 shares have been issued and are outstanding and of which no shares have been repurchased by the Company as of the date of this Agreement, 3,750,000 shares of Series B Preferred Stock (par value $0.001 per share), of which 3,033,854 shares have been issued and are outstanding as of the date of this Agreement and 2,200,000 shares of Series C Preferred Stock (par value $0.001 per share), 2,108,437 shares of which have been issued and are outstanding as of the date of this Agreement (the Company's Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock shall be collectively referred to herein as the "Company Preferred Stock" and, together with the Company Common Stock, shall be referred to as the "Company Stock"). No shares of Company Preferred Stock have been repurchased. Each outstanding share of Company Preferred Stock is convertible into one share of Company Common Stock. All of the outstanding shares of Company Stock have been duly authorized and validly issued, and are fully paid and non-assessable. As of the date of this Agreement, the outstanding shares of Company Stock and all of the outstanding shares of capital stock of the Subsidiary is held by the Persons, with the addresses of record and in the amounts set forth in Part 2.3(a) of the Disclosure Schedule. Part 2.3(a) of the Disclosure Schedule also provides an accurate and complete description of the terms of each repurchase option which is held by the Company and to which any of such shares is subject.
2. All of the stock of the Subsidiary owned by the Company is owned by the Company free and clear of any Encumbrance. All of the outstanding stock of the Subsidiary has been duly authorized and validly issued and is fully paid and nonassessable, has been issued in compliance with all applicable Legal Requirements, including securities laws, and was not issued in violation of or subject to any preemptive rights or other rights to subscribe for or purchase securities of such respective Subsidiary. There are no options, warrants or other rights outstanding to subscribe for or purchase any shares of the capital stock of the Subsidiary and the Subsidiary is not subject to any obligation, commitment, plan, arrangement or court or administrative order with respect to same. There are no preemptive rights applicable to any shares of capital of any of the Subsidiary. The Subsidiary does not have the right to vote on or approve the Merger or any of the other transactions contemplated herein.
3. The Company has reserved 5,225,000 shares of Company Common Stock for issuance under its 1998 Stock Plan, of which options to purchase 1,599,104 shares are outstanding as of the date of this Agreement. Part 2.3(c) of the Disclosure Schedule accurately sets forth, with respect to each Company Option that is outstanding as of the date of this Agreement: (i) the name of the holder of such Company Option; (ii) the total number of shares of Company Common Stock that are subject to such Company Option and the number of shares of Company Common Stock with respect to which such Company Option is immediately exercisable; (iii) the date on which such Company Option was granted and the term of such Company Option; (iv) the vesting schedule for such Company Option; (v) the exercise price per share of Company Common Stock purchasable under such Company Option; and (vi) whether such Company Option has been designated an "incentive stock option" as defined in Section 422 of the Code.
4. Part 2.3(d) of the Disclosure Schedule accurately sets forth, with respect to each warrant issued to any Person: (A) the name of the holder of such warrant; (B) the total number of shares of Company Stock that are subject to such warrant; (C) the number of shares of Company Stock with respect to which such warrant is immediately exercisable; and (D) the term of such warrant.
5. There is no: (i) outstanding subscription, option, call, convertible note, warrant or right (whether or not currently exercisable) to acquire any shares of the capital stock or other securities of the Company; (ii) except for the Company Preferred Stock, outstanding security, instrument or obligation that is or may become convertible into or exchangeable for any shares of the capital stock or other securities of the Company; (iii) Contract under which the Company is or may become obligated to sell or otherwise issue any shares of its capital stock or any other securities; or (iv) to the best of the knowledge of the Company, condition or circumstance that may give rise to or provide a basis for the assertion of a claim by any Person to the effect that such Person is entitled to acquire or receive any shares of capital stock or other securities of the Company.
6. All outstanding shares of Company Stock and all outstanding Company Options, have been issued and granted in compliance with (i) all applicable securities laws and other applicable Legal Requirements, and (ii) all requirements set forth in applicable Contracts.
7. The Company has never repurchased, redeemed or otherwise reacquired any shares of capital stock or other securities of the Company.

2.4 Financial Statements.

1. The Company has delivered to Parent the following financial statements and notes (collectively, the "Company Financial Statements"):
1. the audited consolidated balance sheets of the Company as of December 31, 1997, 1998 and 1999, and the related audited consolidated statement of income, consolidated statement of shareholders' equity and consolidated statement of cash flows for the three (3) years ended December 31, 1999, together with the notes thereto and the unqualified report and opinion of Ernst & Young LLP relating thereto; and
2. the unaudited balance sheet of the Acquired Corporations, as of June 30, 2000 (the "Unaudited Interim Balance Sheet"), and the related unaudited income statement of the Acquired Corporations for the six months then ended.
2. The Company Financial Statements are accurate and complete in all material respects and present fairly the financial position of the Company as of the respective dates thereof and the results of operations and (in the case of the financial statements referred to in Section 2.4(a)(i)) cash flows of the Company for the periods covered thereby. The Company Financial Statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods covered (except that the financial statements referred to in Section 2.4(a)(ii) do not contain footnotes and are subject to normal and recurring year-end audit adjustments, which are not reasonably expected to be, individually or in the aggregate, material in magnitude).
3. The books, records and accounts of the Acquired Corporations accurately and fairly reflect, in reasonable detail, the transactions in and dispositions of the assets of the Acquired Corporations.

2.5 Absence of Changes. Since December 31, 1999 (or June 30, 2000 where specifically indicated):

1. there has not been any material adverse change in any of the Acquired Corporations' business, assets, liabilities, results of operations, financial performance or prospects, and, to the best of the knowledge of the Company, no event has occurred that could reasonably be expected to, have a Material Adverse Effect on any of the Acquired Corporations;
2. there has not been any material loss, damage or destruction to, or any material interruption in the use of, any of the Acquired Corporations' material assets (whether or not covered by insurance);
3. none of the Acquired Corporations has declared, accrued, set aside or paid any dividend or made any other distribution in respect of any shares of their respective capital stock, and have not repurchased, redeemed or otherwise reacquired any shares of their respective capital stock or other securities;
4. the Acquired Corporations have not sold, issued or authorized the issuance of (i) any capital stock or other security (except for, in the case of the Company, Company Common Stock issued upon the exercise of outstanding Company Options), (ii) any option or right to acquire any capital stock or any other security, or (iii) any instrument convertible into or exchangeable for any capital stock or other security;
5. the Company has not amended or waived any of its rights under, or permitted the acceleration of vesting under, (i) any provision of its 1998 Stock Plan, (ii) any provision of any agreement evidencing any outstanding Company Option, or (iii) any restricted stock purchase agreement;
6. there has been no amendment to any of the Acquired Corporations' Incorporation Documents, and none of the Acquired Corporations have effected or been a party to any Acquisition Transaction, recapitalization, reclassification of shares, stock split, reverse stock split or similar transaction;
7. none of the Acquired Corporations has formed any subsidiary or acquired any equity interest or other interest in any other Entity;
8. none of the Acquired Corporations has made any capital expenditure since June 30, 2000 which, when added to all other capital expenditures made on behalf of such respective Acquired Corporation since June 30, 2000, exceeds $100,000;
9. none of the Acquired Corporations has (i) since June 30, 2000 entered into or permitted any of the assets owned or used by it to become bound by any Contract that is or would constitute a Material Contract (as defined in Section 2.10(a)), or (ii) amended or prematurely terminated, or waived any material right or remedy under, any such Material Contract;
10. none of the Acquired Corporations has (i) acquired, leased or licensed any material right or other material asset from any other Person, (ii) sold or otherwise disposed of, or leased or licensed, any material right or other material asset to any other Person, or (iii) waived or relinquished any right, except for immaterial rights or other immaterial assets acquired, leased, licensed or disposed of in the ordinary course of business and consistent with each Acquired Corporation's past practices and except for the nonexclusive licenses of software by an Acquired Corporation to its customers in the ordinary course of business and consistent with the Acquired Corporation's past practices;
11. none of the Acquired Corporations has written off as uncollectible, or established any extraordinary reserve with respect to, any account receivable or other indebtedness in excess of $10,000 with respect to a single matter, or in excess of $75,000 in the aggregate;
12. none of the Acquired Corporations has made any pledge of any of its assets or otherwise permitted any of its assets to become subject to any Encumbrance, except for pledges of immaterial assets made in the ordinary course of business and consistent with such Acquired Corporation's past practices;
13. none of the Acquired Corporations has (i) lent money to any Person (other than pursuant to routine travel advances made to employees in the ordinary course of business), or (ii) incurred or guaranteed any indebtedness for borrowed money;
14. none of the Acquired Corporations has (i) established or adopted any Employee Benefit Plan, (ii) paid any bonus or made any profit-sharing or similar payment to, or increased the amount of the wages, salary, commissions, fringe benefits or other compensation or remuneration payable to, any of its directors, officers or employees, or (iii) other than in the ordinary course of business and consistent with past practices, hired any new employee;
15. none of the Acquired Corporations have changed any of their respective methods of accounting or material accounting practices in any respect;
16. none of the Acquired Corporations has made any Tax election;
17. none of the Acquired Corporations has commenced or settled any Legal Proceeding;
18. none of the Acquired Corporations has entered into any material transaction or taken any other material action outside the ordinary course of business or inconsistent with its past practices; and
19. none of the Acquired Corporations has agreed or legally committed to take any of the actions referred to in clauses "(c)" through "(r)" above".

2.6 Title to Assets.

1. The Company owns, and has good, valid and marketable title to, all assets purported to be owned by it sufficient to conduct its business as currently conducted, including: (i) all tangible assets reflected on the Unaudited Interim Balance Sheet; (ii) all tangible assets referred to in Parts 2.7(b) and 2.9 of the Disclosure Schedule and all of the Company's rights under the Contracts identified in Part 2.10 of the Disclosure Schedule; and (iii) all other tangible assets reflected in the Company's books and records as being owned by the Company. All of said assets are owned by the Company free and clear of any liens or other Encumbrances, except for (x) any lien for current taxes not yet due and payable, and (y) liens that have arisen in the ordinary course of business and that do not (in any case or in the aggregate) materially detract from the value of the assets subject thereto or materially impair the operations of the Company. The Subsidiary owns, or has valid rights to use, all items of real and personal property that are material to their respective businesses and such assets are owned or used by such Subsidiary free and clear of all Encumbrances.
2. Part 2.6(b) of the Disclosure Schedule identifies all assets that are material to the business of the Company and that are being leased or licensed to the Company for which the annual rental payment for each such asset exceeds $25,000.

2.7 Bank Accounts; Receivables.

1. Part 2.7(a) of the Disclosure Schedule describes each account maintained by or for the benefit of the Company at any bank or other financial institution.
2. Part 2.7(b) of the Disclosure Schedule provides an accurate and complete breakdown and aging of all accounts receivable, notes receivable and other receivables of the Company as of June 30, 2000. All existing accounts receivable of the Company (including those accounts receivable reflected on the Unaudited Interim Balance Sheet that have not yet been collected and those accounts receivable that have arisen since June 30, 2000 and have not yet been collected) (i) represent valid obligations of customers of the Company arising from bona fide transactions entered into in the ordinary course of business, (ii) are current and will be collected in full when due, without any counterclaim or set off (net of an allowance for doubtful accounts not to exceed $150,000 in the aggregate).

2.8 Equipment; Leasehold.

1. All material items of equipment and other tangible assets owned by or leased to each of the Acquired Corporations are reasonably adequate for the uses to which they are being put, are in good condition and repair (ordinary wear and tear excepted).
2. The Acquired Corporations do not own any real property or any interest in real property, except for the leasehold created under the real property leases identified in Part 2.10 of the Disclosure Schedule.

2.9 Proprietary Assets.

1. Part 2.9(a)(i) of the Disclosure Schedule sets forth, with respect to each Company Proprietary Asset registered with any Governmental Body or for which an application has been filed with any Governmental Body, (i) a brief description of such Proprietary Asset, and (ii) the names of the jurisdictions covered by the applicable registration or application. Other than unregistered trademarks, trade names and service marks (collectively, the "Unregistered Trademarks"), Part 2.9(a)(ii) of the Disclosure Schedule identifies and provides a brief description of all other Company Proprietary Assets owned by the Acquired Corporations. Part 2.9(a)(ii) of the Disclosure Schedule also discloses all Unregistered Trademarks that have been and are currently being used by the Acquired Corporations in the ordinary course of business. None of the Acquired Corporations have received any notice or other communication (in writing or otherwise) of any actual, alleged, possible or potential infringement or unlawful use of any Unregistered Trademark and to the best of the knowledge of the Company, the Acquired Corporations shall be entitled to use and will continue to use such Unregistered Trademarks on and after the Closing. Part 2.9(a)(iii) of the Disclosure Schedule identifies and provides a brief description of each Proprietary Asset licensed to any of the Acquired Corporations by any Person (except for any Proprietary Asset that is licensed to such Acquired Corporation under any third party software license generally available to the public at a cost of less than $5,000), and identifies the license agreement under which such Proprietary Asset is being licensed to such Acquired Corporation. Other than the Unregistered Trademarks identified in Part 2.9(a)(ii) of the Disclosure Schedule, each Acquired Corporation has good, valid and marketable title to all of the Company Proprietary Assets identified in Parts 2.9(a)(i) and 2.9(a)(ii) of the Disclosure Schedule owned by it, free and clear of all liens and other Encumbrances, and has a valid right to use all Proprietary Assets identified in Part 2.9(a)(iii) of the Disclosure Schedule owned by it. None of the Acquired Corporations are obligated to make any payment to any Person for the use of any Company Proprietary Asset. None of the Acquired Corporations have developed jointly with any other Person any Company Proprietary Asset with respect to which such other Person has any rights.
2. Except as to the absence of registrations referenced in Part 2.9(a)(ii) of the Disclosure Schedule, each Acquired Corporation has taken all measures and precautions reasonably necessary to protect and maintain the confidentiality and secrecy of all Company Proprietary Assets (except Company Proprietary Assets whose value would be unimpaired by public disclosure or Company Proprietary Assets that are trade secrets) and otherwise to maintain and protect the value of all Company Proprietary Assets. Each Acquired Corporation has taken all measures and precautions necessary to protect and maintain the confidentiality and secrecy of all Company Proprietary Assets that are trade secrets (the "Trade Secrets") and otherwise to maintain and protect the value of all Trade Secrets. None of the Acquired Corporations have disclosed or delivered to any Person, or permitted the disclosure or delivery to any Person of, (i) the source code, or any portion or aspect of the source code, of any Company Proprietary Asset, or (ii) the object code, or any portion or aspect of the object code, of any Company Proprietary Asset.
3. None of the Company Proprietary Assets infringes or conflicts with any Proprietary Asset owned or used by any other Person. Each Acquired Corporation is not infringing, misappropriating or making any unlawful use of, and each Acquired Corporation has not at any time infringed, misappropriated or made any unlawful use of, or received any notice or other communication (in writing or otherwise) of any actual, alleged, possible or potential infringement, misappropriation or unlawful use of, any Proprietary Asset owned or used by any other Person. To the best knowledge of the Company, no other Person is infringing, misappropriating or making any unlawful use of, and no Proprietary Asset owned or used by any other Person infringes or conflicts with, any Company Proprietary Asset.
4. Each Company Proprietary Asset conforms in all material respects with any enforceable specification, documentation, performance standard, representation or statement made or provided with respect thereto by or on behalf of each Acquired Corporation; and there has not been any claim by any customer or other Person alleging that any Company Proprietary Asset (including each version thereof that has ever been licensed or otherwise made available by any of the Acquired Corporations to any Person) does not conform in all material respects with any specification, documentation, performance standard, representation or statement made or provided by or on behalf of any of the Acquired Corporations, and, to the best of the knowledge of the Company, there is no basis for any such claim. Subject to Section 2.9(g) (as affected by Part 2.9(g) of the Disclosure Schedule), the Company has established adequate reserves on the Unaudited Interim Balance Sheet to cover all costs associated with any obligations that the Company may have with respect to the correction or repair of programming errors or other defects in the Company Proprietary Assets.
5. The Company Proprietary Assets constitute all the Proprietary Assets necessary to enable each of the Acquired Corporations to conduct its respective business in the manner in which such business has been and is being conducted. None of the Acquired Corporations have licensed any of the Company Proprietary Assets to any Person on an exclusive basis and none of the Acquired Corporations have entered into any covenant not to compete or Contract limiting its ability to exploit fully any of its Proprietary Assets or to transact business in any market or geographical area or with any Person.
6. All current and former employees of each of the Acquired Corporations have executed and delivered to the respective Acquired Corporation agreements (containing no exceptions to or exclusions from the scope of its coverage) that is substantially the same in all material respects as to the forms of the Proprietary Information and Inventions Agreement, Employee Proprietary Information and Inventions Agreement, or Confidentiality and Proprietary Information Agreement previously delivered to Parent, and all current and former consultants and independent contractors to each of the Acquired Corporations have executed and delivered to such respective Acquired Corporation an agreement (containing no exceptions to or exclusions from the scope of its coverage) that is substantially the same in all material respects as to the form of the Company Independent Consultant Agreement previously delivered to Parent.
7. The Company Proprietary Assets and all computer software programs, including operating systems, application programs, software tools, firmware and software imbedded in equipment of the Acquired Corporations, including both object code and source code versions thereof, are Year 2000 Compliant (as defined below) in all material respects and will not cease to be Year 2000 Compliant in all material respects at any time prior to, during or after the calendar year 2000 AD; provided, however, that no representation or warranty is made pursuant to this section with respect to any failure of the Company Proprietary Assets or such software programs to perform in accordance with the foregoing arising out of any error, failure, malfunction or incorrect result due to third party equipment, operating system software, third party tools, application or database software, or other third party products or materials (in each case, whether or not sold or licensed by Company). Part 2.9(g) of the Disclosure Schedule describes the steps that the Company has taken, and plans to take, in the review of its computer equipment and software applications used in its internal business operations (but not the operations of any other Person), with respect to the inability of its computerized systems to recognize and properly perform date-sensitive functions (the "Year 2000 Problem"). The Company has and is continuing to address the impact of the Year 2000 Problem on the Company Proprietary Assets and its internal business computer systems and software applications.

As used herein, the term "Year 2000 Compliant" means that neither the performance nor the functionality of any applicable product is or will be affected by dates prior to, during or after the calendar year 2000 AD and in particular (but without limitation):

1. such product accurately receives, provides and processes, and will accurately receive, provide and process, date/time data (including calculating, comparing and sequencing) from, into and between the twentieth and twenty-first centuries and including calendar years 1999 and 2000;
2. such product will not malfunction, cease to function, provide invalid or incorrect results or cause any interruption in the operation of the business of the Acquired Corporations as a result of any date/time data;
3. date-based functionality of such product behaves and will continue to behave consistently for dates prior to, during and after the year 2000;
4. in all interfaces and data storage of such product, the century in any date is and will be specified either explicitly or by unambiguous algorithms or inferencing rules; and
5. the year 2000 is and will be recognized as a leap year of such product.
8. Except with respect to demonstration or trial copies, no product, system, program or software module designed, developed, sold, licensed or otherwise made available by any of the Acquired Corporations to any Person contains any "back door," "time bomb," "Trojan horse," "worm," "drop dead device," "virus" or other software routines or hardware components designed to permit unauthorized access or to disable or erase software, hardware or data without the consent of the user.

2.10 Contracts.

1. Part 2.10 of the Disclosure Schedule identifies:
1. each Acquired Corporation Contract relating to the employment of, or the performance of services by, any employee, consultant or independent contractor; any Acquired Corporation Contract pursuant to which any of the Acquired Corporations is or may become obligated to make any severance, termination or similar payment to any current or former employee or director; and any Acquired Corporation Contract pursuant to which any of the Acquired Corporations is or may become obligated to make any bonus or similar payment (other than payment in respect of salary) in excess of $2,000 to any current or former employee or director;
2. each Acquired Corporation Contract relating to the voting and any other rights or obligations of a stockholder of any of the Acquired Corporations;
3. each Acquired Corporation Contract relating to the merger, consolidation, reorganization or any similar transaction with respect to any of the Acquired Corporations;
4. each Acquired Corporation Contract relating to the acquisition, transfer, use, development, sharing or license of any technology or material Proprietary Asset (other than any Proprietary Asset expressly licensed to the Acquired Corporations under any third party software license available to the public and at a cost to the Acquired Corporations of less than $5,000);
5. each Acquired Corporation Contract creating or relating to any partnership or joint venture or any sharing of revenues, profits, losses, costs or liabilities;
6. each Acquired Corporation Contract relating to the license of any patent, copyright, trade secret or other Proprietary Asset (other than with respect to any Proprietary Asset expressly licensed to the Acquired Corporations under any third party software license available to the public and at a cost to the Acquired Corporations of less than $5,000) to or from any of the Acquired Corporations other than non-exclusive licenses of software by an Acquired Corporation to its customers, and related maintenance and support agreements, in each case in the ordinary course of business and consistent with past practices of the Acquired Corporation;
7. each Acquired Corporation Contract imposing any restriction on any of the Acquired Corporations (A) to compete with any other Person, (B) to acquire any product or other asset or any services from any other Person, to sell any product or other asset to or perform any services for any other Person or to transact business or deal in any other manner with any other Person, or (C) to develop or distribute any technology;
8. each Acquired Corporation Contract creating or involving any agency relationship, distribution arrangement or franchise relationship;
9. each Acquired Corporation Contract regarding the acquisition, issuance or transfer of any securities and each Acquired Corporation Contract affecting or dealing with any securities of any of the Acquired Corporations including, without limitation, any restricted stock agreements or escrow agreements;
10. each Acquired Corporation Contract which provides for indemnification of any officer, director, employee or agent;
11. each Acquired Corporation Contract relating to the creation of any Encumbrance with respect to any material asset of any of the Acquired Corporations;
12. each Acquired Corporation Contract involving or incorporating any loan, guaranty, any pledge, any performance or completion bond, any indemnity or any surety arrangement;
13. each Acquired Corporation Contract related to or regarding the performance of consulting, advisory or other services or work of any type to any third party;
14. each Acquired Corporation Contract relating to the purchase or sale of any product or other asset by or to, or the performance of any services by or for, any Related Party (as defined in Section 2.18);
15. each Acquired Corporation Contract constituting or relating to a Government Contract or Government Bid;
16. any other Acquired Corporation Contract that was entered into outside the ordinary course of business or was inconsistent with any Acquired Corporation's past practices;
17. any other Acquired Corporation Contract that (A) contemplates or involves (1) the payment or delivery of cash or other consideration in an amount or having a value in excess of $10,000 in the aggregate, or (2) the performance of services having a value in excess of $10,000 in the aggregate and (B) that (1) has a term of more than 60 days or (2) may not be terminated by the respective Acquired Corporation (without penalty) within 60 days after the delivery of a termination notice by such Acquired Corporation; and
18. any other Acquired Corporation Contract that contemplates or involves (A) the payment or delivery of cash or other consideration in an amount or having a value in excess of $75,000 in the aggregate, or (B) the performance of services having a value in excess of $75,000 in the aggregate.

(Contracts in the respective categories described in clauses "(i)" through "(xviii)" above are referred to in this Agreement as "Material Contracts.")

2. The Company has delivered or made available to Parent accurate and complete copies of all Material Contracts identified in Part 2.10 of the Disclosure Schedule, including all amendments thereto. Part 2.10 of the Disclosure Schedule provides an accurate description of the terms of each Material Contract that is not in written form. Each Contract identified in Part 2.10 of the Disclosure Schedule is valid and in full force and effect, and, to the best of the knowledge of the Company, is enforceable by the respective Acquired Corporation in accordance with its terms, subject to (i) laws of general application relating to bankruptcy, insolvency and the relief of debtors, and (ii) rules of law governing specific performance, injunctive relief and other equitable remedies.
1. none of the Acquired Corporations has violated or breached in any material respect, or committed any material default under, any Acquired Corporation Contract to which it is a party, which remains uncured, and, to the best of the knowledge of the Company, no other Person has violated or breached, or committed any default under, any Acquired Corporation Contract which remains uncured;
2. to the best of the knowledge of the Company, no event has occurred, and no circumstance or condition exists, that (with or without notice or lapse of time) will, or could reasonably be expected to, (A) result in a violation or breach of any of the provisions of any Material Contract, (B) give any Person the right to declare a default or exercise any material remedy under any Material Contract, (C) give any Person the right to accelerate the maturity or performance of any Material Contract, or (D) give any Person the right to cancel, terminate or modify any Material Contract;
3. since January 1, 1997, the Company has not received any notice or other communication regarding any actual or possible violation or breach of, or default under, any Acquired Corporation Contract; and
4. to the best of the knowledge of the Company, none of the Acquired Corporations has waived any of its respective material rights under any Material Contract.
3. No Person is actively renegotiating, or has a contractual right pursuant to the terms of any Acquired Corporation Contract to renegotiate, any amount paid or payable in excess of $50,000, to the respective Acquired Corporation under any Material Contract or any other material term or provision of any Material Contract.
4. The Contracts identified in Part 2.10 of the Disclosure Schedule collectively constitute all of the Contracts necessary to enable each of the Acquired Corporations to conduct its business in the manner in which its business is currently being conducted.

2.11 Liabilities. None of the Acquired Corporations has any accrued, contingent or other liabilities of any nature, either matured or unmatured (whether or not required to be reflected in financial statements in accordance with generally accepted accounting principles, and whether due or to become due), except for: (a) liabilities identified as such in the "liabilities" column of the Unaudited Interim Balance Sheet; (b) normal and recurring current liabilities that have been incurred by each Acquired Corporation since December 31, 1999 in the ordinary course of business and consistent with such Acquired Corporation's past practices; (c) liabilities under the Acquired Corporation Contracts that are expressly set forth and identifiable by reference to the text of such Acquired Corporation Contracts; and (d) the liabilities identified in Part 2.11 of the Disclosure Schedule.

2.12 Compliance with Legal Requirements. Each of the Acquired Corporations is, and has at all times since January 1, 1997 been, in compliance with all applicable Legal Requirements, except where the failure to comply with such Legal Requirements has not had and could not reasonably be expected to have a Material Adverse Effect on such Acquired Corporation. Since January 1, 1997, none of the Acquired Corporations has received any written notice or written communication from any Governmental Body regarding any actual or possible violation of, or failure to comply with, any material Legal Requirement.

2.13 Governmental Authorizations. Part 2.13 of the Disclosure Schedule identifies each material Governmental Authorization held by the Acquired Corporations, and the Company has delivered or made available to Parent accurate and complete copies of all Governmental Authorizations identified in Part 2.13 of the Disclosure Schedule. The Governmental Authorizations identified in Part 2.13 of the Disclosure Schedule are valid and in full force and effect, and collectively constitute all Governmental Authorizations necessary to enable the respective Acquired Corporation to conduct its business in the manner in which its business is currently being conducted, except as would not have a Material Adverse Effect on such Acquired Corporation. Each Acquired Corporation is, and at all times since December 31, 1997 has been, in substantial compliance with the terms and requirements of the respective Governmental Authorizations identified in Part 2.13 of the Disclosure Schedule. Since December 31, 1997, each Acquired Corporation has not received any notice or other communication from any Governmental Body regarding (a) any actual or possible violation of or failure to comply with any term or requirement of any Governmental Authorization, or (b) any actual or possible revocation, withdrawal, suspension, cancellation, termination or modification of any Governmental Authorization.

2.14 Tax Matters.

1. All Tax Returns required to be filed by or on behalf of the Acquired Corporations with any Governmental Body with respect to any taxable period ending on or before the Closing Date (the "Company Returns") (i) have been or will be filed on or before the applicable due date (including any extensions of such due date), and (ii) have been, or will be when filed, accurately and completely prepared in compliance with all applicable Legal Requirements. Except as reserved on the Company Financial Statements, all amounts shown on the Company Returns to be due on or before the Closing Date have been or will be paid on or before the Closing Date. The Company has delivered to Parent accurate and complete copies of all Company Returns filed since December 31, 1997.
2. The Company Financial Statements fully accrue all actual and contingent liabilities for Taxes with respect to all periods through the dates thereof in accordance with generally accepted accounting principles. The Company will establish, in the ordinary course of business and consistent with its past practices, reserves adequate for the payment of all Taxes for the period from January 1, 2000 through the Closing Date, and the Company will disclose the dollar amount of such reserves to Parent on or prior to the Closing Date. All Taxes incurred since the date of the Unaudited Interim Balance Sheet have been incurred in the ordinary course of business.
3. No Company Return relating to Taxes has ever been examined or audited by any Governmental Body. No extension or waiver of the limitation period applicable to any of the Company Returns has been granted (by any of the Acquired Corporation or any other Person), and no such extension or waiver has been requested from any of the Acquired Corporations.
4. No claim or Proceeding is pending or to the best of the knowledge of the Company, has been threatened against or with respect to any of the Acquired Corporations in respect of any Tax. There are no unsatisfied liabilities for Taxes (including liabilities for interest, additions to tax and penalties thereon and related expenses) with respect to any notice of deficiency or similar document received by any of the Acquired Corporations with respect to any Tax (other than liabilities for Taxes asserted under any such notice of deficiency or similar document which are being contested in good faith by the respective Acquired Corporations and with respect to which adequate reserves for payment have been established). There are no liens for Taxes upon any of the assets of each of the Acquired Corporations except liens for current Taxes not yet due and payable. None of the Acquired Corporations have entered into or become bound by any agreement or consent pursuant to Section 341(f) of the Code. None of the Acquired Corporations have been, and none of the Acquired Corporations will be, required to include any adjustment in taxable income for any tax period (or portion thereof) pursuant to Section 481 or 263A of the Code or any comparable provision under state or foreign Tax laws as a result of transactions or events occurring, or accounting methods employed, prior to the Closing.
5. There is no agreement, plan, arrangement or other Contract covering any employee or independent contractor or former employee or independent contractor of any of the Acquired Corporations that, considered individually or considered collectively with any other such Contracts, will, or could reasonably be expected to, give rise directly or indirectly to the payment of any amount that would not be deductible pursuant to Section 280G or Section 162 of the Code. None of the Acquired Corporations is, or has been, a party to or bound by any tax indemnity agreement, tax-sharing agreement, tax allocation agreement or similar Contract.
6. The Acquired Corporations have no liability for any Tax pursuant to Treasury Regulations Section 1.1502-6 or any analogous state, local or foreign law or regulation or by reason of having been a member of any consolidated, combined or unitary group on or before the Closing Date.
7. None of the Acquiring Corporations has constituted either a "distributing corporation" or a "controlled corporation" in a distribution of stock qualifying under Section 355 of the Code (x) in the two years prior to the date of this Agreement or (y) in a distribution which could otherwise constitute part of a "plan" or "series of related transactions" (within the meaning of Section 355(e) of the Code) in conjunction with the Merger.
8. Each of the Acquired Corporations are in full compliance with all terms and conditions of any Tax exemptions, Tax holiday or other Tax reduction agreement or order of a territorial or foreign government, and the consummation of the Merger will not have any adverse effect on the continued validity and effectiveness of any such Tax exemptions, Tax holiday or other Tax reduction agreement or order.

2.15 Employee and Labor Matters; Benefit Plans.

1. Part 2.15(a) of the Disclosure Schedule identifies each salary, bonus, deferred compensation, incentive compensation, stock purchase, stock option, severance pay, termination pay, hospitalization, medical, life or other insurance, supplemental unemployment benefits, profit- sharing, pension or retirement plan, program or agreement (collectively, the "Plans") sponsored, maintained, contributed to or required to be contributed to by each Acquired Corporation for the benefit of any employee of the respective Acquired Corporation ("Employee"), except for Plans which would not require the respective Acquired Corporation to make payments or provide benefits having a value in excess of $50,000 in the aggregate.
2. Each Acquired Corporation does not maintain, sponsor or contribute to, and, to the best of the knowledge of the Company, has not at any time in the past maintained, sponsored or contributed to, any employee pension benefit plan (as defined in Section 3(2) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), whether or not excluded from coverage under specific Titles or Merger Subtitles of ERISA) for the benefit of Employees or former Employees (a "Pension Plan").
3. Each of the Acquired Corporations maintains, sponsors or contributes only to those employee welfare benefit plans (as defined in Section 3(1) of ERISA, whether or not excluded from coverage under specific Titles or Merger Subtitles of ERISA) for the benefit of Employees or former Employees which are described in Part 2.15(c) of the Disclosure Schedule (the "Welfare Plans"), none of which is a multiemployer plan (within the meaning of Section 3(37) of ERISA).
4. With respect to each Plan, the Company has delivered or made available to Parent:
1. an accurate and complete copy of such Plan (including all amendments thereto);
2. an accurate and complete copy of the annual report, if required under ERISA, with respect to such Plan for the last two years and, if such annual reports for the last two years were filed on Form 5500-R, the most recently filed Form 5500-C with respect to such plan;
3. an accurate and complete copy of the most recent summary plan description, together with each Summary of Material Modifications, if required under ERISA, with respect to such Plan, and all material employee communications relating to such Plan;
4. if such Plan is funded through a trust or any third party funding vehicle, an accurate and complete copy of the trust or other funding agreement (including all amendments thereto) and accurate and complete copies the most recent financial statements thereof;
5. accurate and complete copies of all material Contracts relating to such Plan, including service provider agreements, insurance contracts, minimum premium contracts, stop-loss agreements, investment management agreements, subscription and participation agreements and recordkeeping agreements; and
6. an accurate and complete copy of the most recent determination letter received from the Internal Revenue Service with respect to such Plan (if such Plan is intended to be qualified under Section 401(a) of the Code).
5. None of the Acquired Corporations is required to be, and, to the best of the knowledge of the Company, has ever been required to be, treated as a single employer with any other Person under Section 4001(b)(1) of ERISA or Section 414(b), (c), (m) or (o) of the Code, and none of the Acquired Corporations has been a member of an "affiliated service group" within the meaning of Section 414(m) of the Code. To the best of the knowledge of the Company, none of the Acquired Corporations has made a complete or partial withdrawal from a multiemployer plan, as such term is defined in Section 3(37) of ERISA, resulting in "withdrawal liability," as such term is defined in Section 4201 of ERISA (without regard to subsequent reduction or waiver of such liability under either Section 4207 or 4208 of ERISA).
6. None of the Acquired Corporations has any plan or commitment to create any additional Welfare Plan or any Pension Plan, or to modify or change any existing Welfare Plan or Pension Plan (other than to comply with applicable law or for administrative changes) in a manner that would materially affect any Employee.
7. No Welfare Plan provides death, medical or health benefits (whether or not insured) with respect to any current or former Employee after any such Employee's termination of service (other than (i) benefit coverage mandated by applicable law, including coverage provided pursuant to Section 4980B of the Code, (ii) deferred compensation benefits accrued as liabilities on the Unaudited Interim Balance Sheet, and (iii) benefits the full cost of which are borne by current or former Employees (or the Employees' beneficiaries)).
8. With respect to each of the Welfare Plans constituting a group health plan within the meaning of Section 4980B(g)(2) of the Code, the provisions of Section 4980B of the Code ("COBRA") have been complied with in all material respects.
9. Each of the Plans has been operated and administered in all material respects in accordance with applicable Legal Requirements, including but not limited to ERISA and the Code.
10. Each of the Plans intended to be qualified under Section 401(a) of the Code has received a favorable determination from the Internal Revenue Service, and the Company is not aware of any reason why any such determination letter should be revoked.
11. Neither the execution, delivery or performance of this Agreement, nor the consummation of the Merger or any of the other transactions contemplated by this Agreement, will result in any payment (including any bonus, golden parachute or severance payment) to any current or former Employee or director of any of the Acquired Corporations (whether or not under any Plan), or materially increase the benefits payable under any Plan, or result in any acceleration of the time of payment or vesting of any such benefits.
12. Part 2.15(l) of the Disclosure Schedule contains a list of all salaried employees of the Company as of the date of this Agreement, and correctly reflects, in all material respects, their salaries, any other compensation payable to them (including compensation payable pursuant to bonus, deferred compensation or commission arrangements), their dates of employment and their positions. The Company is not a party to any collective bargaining contract or other Contract with a labor union involving any of its Employees. All of the Company's employees are "at will" employees.
13. To the best of knowledge of the Company, Part 2.15(m) of the Disclosure Schedule identifies each Employee who is not fully available to perform work because of disability or other leave and sets forth the basis of such leave and the anticipated date of return to full service.
14. Each Acquired Corporation is in compliance in all material respects with all applicable Legal Requirements and Contracts relating to employment, employment practices, wages, bonuses and terms and conditions of employment, including employee compensation matters.
15. Each of the Acquired Corporations has satisfactory labor relations and to the best of the knowledge of the Company: (i) the consummation of the Merger or any of the other transactions contemplated by this Agreement will not have a material adverse effect on the labor relations of any of the Acquired Corporations, and (ii) none of the Company's employees intends to terminate his or her employment with the Company within 60 days of the Closing.

2.16 Environmental Matters. Each of the Acquired Corporations is in compliance in all material respects with all applicable Environmental Laws, which compliance includes the possession by each respective Acquired Corporation of all material permits and other Governmental Authorizations required under applicable Environmental Laws, and compliance with the terms and conditions thereof. None of the Acquired Corporations has received any written notice or written communication, whether from a Governmental Body, citizens group, employee or otherwise, that alleges that such Acquired Corporation is not in compliance with any Environmental Law, and, to the best of the knowledge of the Company, there are no circumstances that could reasonably be expected to prevent or interfere with such Acquired Corporation's compliance in all material respects with any Environmental Law in the future. To the best of the knowledge of the Company, no current or prior owner of any property leased or controlled by each of the Acquired Corporations has received any written notice or written communication, whether from a Government Body, citizens group, employee or otherwise, that alleges that such current or prior owner or such Acquired Corporation is not in compliance with any Environmental Law. All Governmental Authorizations currently held by each of the Acquired Corporations pursuant to Environmental Laws are identified in Part 2.16 of the Disclosure Schedule. (For purposes of this Section 2.16: (i) "Environmental Law" means any federal, state, local or foreign Legal Requirement relating to pollution or protection of human health or the environment (including ambient air, surface water, ground water, land surface or subsurface strata), including any law or regulation relating to emissions, discharges, releases or threatened releases of Materials of Environmental Concern, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Materials of Environmental Concern.); and (ii) "Materials of Environmental Concern" means chemicals, pollutants, contaminants, wastes, toxic substances, petroleum and petroleum products and any other substance that is now or hereafter regulated by any Environmental Law or that is otherwise a danger to health, reproduction or the environment.)

2.17 Insurance. Part 2.17 of the Disclosure Schedule identifies all insurance policies maintained by, at the expense of or for the benefit of each of the Acquired Corporations and identifies any material claims made thereunder, and the Company has delivered to Parent accurate and complete copies of the insurance policies identified on Part 2.17 of the Disclosure Schedule. Each of the insurance policies identified in Part 2.17 of the Disclosure Schedule is in full force and effect. Since December 31, 1997, none of the Acquired Corporations has received any notice or other communication regarding any actual or possible (a) cancellation or invalidation of any insurance policy, (b) refusal of any coverage or rejection of any claim under any insurance policy, or (c) material adjustment in the amount of the premiums payable with respect to any insurance policy.

2.18 Related Party Transactions. Since January 1, 1997: (a) No Related Party has, and no Related Party has had, any direct or indirect interest in any material asset used in or otherwise relating to the business of any of the Acquired Corporations; (b) no Related Party is, or has been, indebted to any of the Acquired Corporations (other than for ordinary travel advances and for amounts less than $10,000 in the aggregate); (c) to the knowledge of the Company, no Related Party has entered into, or has had any direct or indirect financial interest in, any material Contract, transaction or business dealing or involving any of the Acquired Corporations; (d) to the Knowledge of the Company, no Related Party is competing, or has at any time competed, directly or indirectly, with any of the Acquired Corporations; and (e) no Related Party has any claim or right against any of the Acquired Corporations (other than rights under Company Options and rights to receive compensation for services performed as an employee of the respective Acquired Corporation or other rights arising in the ordinary course of employment). (For purposes of the Section 2.18 each of the following shall be deemed to be a "Related Party": (i) each stockholder who holds more than 1% of an Acquired Corporation; (ii) each individual who is, or who has at any time since inception been, an officer of any of the Acquired Corporations; (iii) each member of the immediate family of each of the individuals referred to in clauses "(i)" and "(ii)" above; and (iv) any trust or other Entity (other than the Company) in which any one of the individuals referred to in clauses "(i)", "(ii)" and "(iii)" above holds (or in which more than one of such individuals collectively hold), beneficially or otherwise, a material voting, proprietary or equity interest.)

2.19 Legal Proceedings; Orders.

1. There is no pending Legal Proceeding, and (to the best of the knowledge of the Company) no Person has threatened in writing to commence any Legal Proceeding: (i) that involves any of the Acquired Corporations or any of the assets owned or used by any of the Acquired Corporations or any Person whose liability any of the Acquired Corporations has or may have retained or assumed, either contractually or by operation of law; (ii) that challenges, or that may have the effect of preventing, delaying, making illegal or otherwise interfering with, the Merger or any of the other transactions contemplated by this Agreement, (iii) that relates to the ownership of any capital stock of any of the Acquired Corporations, or any option or other right to the capital stock of any of the Acquired Corporations, or right to receive consideration as a result of the Merger, or (iv) seeking to compel any of the Acquired Corporations, Parent or any Subsidiary of Parent to dispose of or hold separate any material assets as a result of the Merger or any of the other transactions contemplated by this Agreement. To the best of the knowledge of the Company, no event has occurred, and no claim, dispute or other condition or circumstance exists, that could reasonably be expected to, give rise to or serve as a basis for the commencement of any such Legal Proceeding.
2. Since January 1, 1997, no Legal Proceeding has been commenced by or has ever been pending against any of the Acquired Corporations.
3. There is no order, writ, injunction, judgment or decree to which any of the Acquired Corporations, or any of the assets owned or used by each Acquired Corporation, is subject. To the best of the knowledge of the Company, no officer or other employee of any of the Acquired Corporations is subject to any order, writ, injunction, judgment or decree that prohibits such officer or other employee from engaging in or continuing any conduct, activity or practice relating to the respective Acquired Corporation's business.

2.20 Authority; Binding Nature of Agreement; Inapplicability of Anti-takeover Statutes.

1. The Company has the absolute and unrestricted right, power and authority to enter into and to perform its obligations under this Agreement; and the execution, delivery and performance by the Company of this Agreement have been duly authorized by all necessary action on the part of the Company and its board of directors. Assuming due authorization, execution and delivery by the other parties hereto, this Agreement constitutes the legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, subject to (i) laws of general application relating to bankruptcy, insolvency and the relief of debtors, and (ii) rules of law governing specific performance, injunctive relief and other equitable remedies.
2. The Company's board of directors has (i) unanimously determined that the Merger is advisable and fair and in the best interests of the Company and its stockholders, (ii) unanimously recommended the approval and adoption of this Agreement by the holders of Company Stock and directed that this Agreement and the Merger be submitted for consideration by the Company's stockholders in accordance with Section 5.2, and (iii) to the extent necessary, adopted a resolution having the effect of causing the Company not to be subject to any state takeover law or similar Legal Requirement that might otherwise apply to the Merger or any of the other transactions contemplated by this Agreement.
3. Prior to the execution of the Voting Agreements and Irrevocable Proxies with the Proxy Stockholders, the Company's board of directors approved such Voting Agreements and Irrevocable Proxies and the transactions contemplated thereby. No state takeover statute or similar Legal Requirement applies or purports to apply to the Merger, this Agreement or any of the transactions contemplated hereby.

2.21 Non-Contravention; Consents. Neither (1) the execution, delivery or performance of this Agreement or any of the other agreements referred to in this Agreement, nor (2) the consummation of the Merger or any of the other transactions contemplated by this Agreement, will directly or indirectly (with or without notice or lapse of time):

1. contravene, conflict with or result in a violation of (i) any of the provisions of each Acquired Corporation's respective certificate of incorporation or bylaws, or (ii) any resolution adopted by such Acquired Corporation's stockholders, board of directors or any committee of such Acquired Corporation's board of directors;
2. contravene, conflict with or result in a violation of, or give any Governmental Body or other Person the right to challenge any of the transactions contemplated by this Agreement or to exercise any remedy or obtain any relief under, any Legal Requirement or any order, writ, injunction, judgment or decree to which any of the Acquired Corporations, or any of the assets owned or used by any of the Acquired Corporations, is subject;
3. contravene, conflict with or result in a violation of any of the terms or requirements of, or give any Governmental Body the right to revoke, withdraw, suspend, cancel, terminate or modify, any Governmental Authorization that is held by any Acquired Corporation or that otherwise relates to such Acquired Corporation's business or to any of the assets owned or used by such Acquired Corporation;
4. contravene, conflict with or result in a violation or breach of, or result in a default under, any provision of any Acquired Corporation Contract that is or would constitute a Material Contract, or give any Person the right to (i) declare a default or exercise any remedy under any such Acquired Corporation Contract, (ii) accelerate the maturity or performance of any such Acquired Corporation Contract, or (iii) cancel, terminate or modify any such Acquired Corporation Contract; or
5. result in the imposition or creation of any lien or other Encumbrance upon or with respect to any asset owned or used by each Acquired Corporation (except for minor liens that will not, in any case or in the aggregate, materially detract from the value of the assets subject thereto or materially impair the operations of any of the Acquired Corporations).

Except as may be required by the DGCL, CGCL or the HSR Act, the Company is not and or will not be required to make any filing with or give any notice to, or to obtain any Consent from, any Governmental Body or any industry regulatory body in connection with (x) the execution, delivery or performance of this Agreement or any of the other agreements referred to in this Agreement, or (y) the consummation of the Merger or any of the other transactions contemplated by this Agreement.

2.22 Vote Required. The affirmative vote of the holders of a majority of the Company Common Stock, voting as a single class, and the affirmative vote of the holders of a majority of the Company Preferred Stock, voting as a single class, outstanding on the record date for the Company's stockholders' meeting (or the written consent in lieu thereof) are the only votes of the holders of any class or series of the Company's capital stock necessary to adopt this Agreement and approve the Merger and the other transactions contemplated by this Agreement.

2.23 Full Disclosure. This Agreement (including the Disclosure Schedule) does not, and the Company Closing Certificate will not, (i) contain any representation, warranty or information that is false or misleading with respect to any material fact, or (ii) omit to state any material fact necessary in order to make the representations, warranties and information contained and to be contained herein and therein (in the light of the circumstances under which such representations, warranties and information were or will be made or provided) not false or misleading.

2.24 Brokers. No broker, finder or investment banker (other than Credit Suisse First Boston Corporation) is entitled to any brokerage, finder's or other fee or commission in connection with the Merger or the transactions contemplated by this Agreement based upon arrangements made by or on behalf of the Company. The Company has heretofore furnished to Parent a complete and correct copy of all agreements between the Company and Credit Suisse First Boston Corporation pursuant to which such firms would be entitled to any payment relating to the Merger or the transactions contemplated by this Agreement.

2.25 No Existing Discussions. Neither the Company nor any of its Representatives is engaged, directly or indirectly, in any discussions or negotiations with any other Person (other than Parent and Merger Sub) relating to any Acquisition Transaction.

3. Certain Covenants of the Company

3.1 Access and Investigation. During the period from the date of this Agreement and continuing until the earlier of the termination of this Agreement pursuant to Section 8 or the Effective Time (the "Pre-Closing Period"), each of the Acquired Corporations shall, and shall cause its Representatives to: (a) provide Parent and Parent's Representatives with reasonable access during normal business hours to the Acquired Corporations' Representatives, personnel and assets and to all existing books, records, Tax Returns, work papers and other documents and information relating to the Acquired Corporations; and (b) provide Parent and Parent's Representatives (at Parent's expense) with copies of such existing books, records, Tax Returns, work papers and other documents and information relating to each of the Acquired Corporations, and with such additional financial, operating and other data and information regarding each of the Acquired Corporations, as Parent may reasonably request; provided, however, none of the Acquired Corporations shall be required to furnish any attorney-client privileged documents or information. During the Pre-Closing Period, Parent and its Representatives will hold any such information that is confidential to any of the Acquired Corporations in accordance with the terms of the Mutual Non-Disclosure Agreement executed on behalf of Parent on and the Company on February 15, 2000, as amended.

3.2 Operation of the Company's Business. Unless the Company obtains the prior written consent of Parent (which consent shall not be unreasonably withheld), during the Pre-Closing Period:

1. each Acquired Corporation shall conduct its business and operations in the ordinary course and in substantially the same manner as such business and operations have been conducted prior to the date of this Agreement;
2. each Acquired Corporation shall use reasonable efforts to preserve intact its current business organization, keep available the services of its current officers and employees and maintain its relations and good will with all suppliers, customers, landlords, creditors, employees and other Persons having business relationships with such Acquired Corporation;
3. none of the Acquired Corporations shall cancel any of its respective insurance policies identified in Part 2.17 of the Disclosure Schedule;
4. the Company shall cause its Chief Executive Officer to report regularly (but in no event less frequently than weekly) to the Senior Vice President, Products of Parent concerning the status of the Company's business other than with respect to potential customer contracts;
5. except for the distributions set forth in Part 3.2(e) of the Disclosure Schedule, none of the Acquired Corporations shall declare, accrue, set aside or pay any dividend or make any other distribution in respect of any shares of capital stock, nor repurchase, redeem or otherwise reacquire any shares of capital stock or other securities;
6. none of the Acquired Corporations shall sell, issue or authorize the issuance of (i) any capital stock or other security, (ii) any option or right to acquire any capital stock or other security, or (iii) any instrument convertible into or exchangeable for any capital stock or other security (except that the Company shall be permitted to issue Company Common Stock to employees upon the exercise of outstanding Company Options and upon the exercise of warrants for Company Common Stock held by GE Capital Equity Investments, Inc. as of the date hereof);
7. the Company shall not amend or waive any of its rights under, or amend or otherwise modify any provisions relating to the acceleration of vesting under, (i) any provision of its 1998 Stock Plan, or (ii) any provision of any agreement evidencing any outstanding Company Option;
8. none of the Acquired Corporations shall amend or permit the adoption of any amendment to such Acquired Corporation's certificate of incorporation or bylaws, or effect or permit such Acquired Corporation to become a party to any Acquisition Transaction, recapitalization, reclassification of shares, stock split, reverse stock split or similar transaction;
9. none of the Acquired Corporations shall form any subsidiary or acquire any equity interest or other interest in any other Entity;
10. none of the Acquired Corporations shall make any capital expenditure, except for capital expenditures that, when added to all other capital expenditures made on behalf of such Acquired Corporation during the Pre-Closing Period, do not exceed $75,000 per month;
11. none of the Acquired Corporations shall (i) enter into, or permit any of the assets owned or used by it to become bound by, any Contract that is or would constitute a Material Contract, or (ii) amend or prematurely terminate, or waive any material right or remedy under, any such Material Contract;
12. other than within the ordinary course of business and consistent with past practices, none of the Acquired Corporations shall (i) acquire, lease or license any right or other asset from any other Person for an aggregate value in excess of $20,000, (ii) sell or otherwise dispose of, or lease or license, any right or other asset to any other Person, or (iii) waive or relinquish any right, except for assets acquired, leased, licensed or disposed of by such Acquired Corporation pursuant to Contracts that are not Material Contracts;
13. none of the Acquired Corporations shall (i) lend money to any Person (except that each Acquired Corporation may make routine travel advances to employees in the ordinary course of business), or (ii) incur or guarantee any indebtedness for borrowed money in excess of $20,000 in the aggregate;
14. none of the Acquired Corporations shall (i) establish, adopt or amend any Employee Benefit Plan (other than amendments adopted solely to comply with applicable tax qualifications requirements under the Code and which do not materially increase any of the Acquired Corporation's cost of maintaining such plans), (ii) make any individual payment in excess of $2,000 in order to: (X) pay any bonus or make any profit-sharing payment, cash incentive payment or similar payment, other than commissions paid in the ordinary course of business and consistent with past practice, and except that payments up to $5,000 may be made pursuant to existing plans or arrangements, to, or (Y) increase the amount of the wages, salary, commissions, fringe benefits or other compensation or remuneration payable to, any of its directors, officers or employees, or (iii) hire any new employee whose aggregate annual compensation is expected to exceed $125,000;
15. none of the Acquired Corporations shall change any of its methods of accounting or accounting practices in any material respect;
16. none of the Acquired Corporations shall make any Tax election;
17. none of the Acquired Corporations shall commence or settle any material Legal Proceeding;
18. none of the Acquired Corporation shall agree or commit to take any of the actions described in clauses "(e)" through "(q)" above.

3.3 Notification; Updates to Disclosure Schedule.

1. During the Pre-Closing Period, the Company shall promptly notify Parent in writing of:
1. the discovery by any of the Acquired Corporations of any event, condition, fact or circumstance that occurred or existed on or prior to the date of this Agreement and that caused or constitutes a breach of or a material inaccuracy in any representation or warranty made by the Company in this Agreement;
2. any event, condition, fact or circumstance that occurs, arises or exists after the date of this Agreement and that would cause or constitute a breach of or a material inaccuracy in any representation or warranty made by the Company in this Agreement if (A) such representation or warranty had been made as of the time of the occurrence, existence or discovery of such event, condition, fact or circumstance, or (B) such event, condition, fact or circumstance had occurred, arisen or existed on or prior to the date of this Agreement;
3. any material breach of any covenant or obligation of any of the Acquired Corporations; and
4. any event, condition, fact or circumstance that would make the timely satisfaction of any of the conditions set forth in Section 6 or Section 7 impossible or unlikely.
2. If any event, condition, fact or circumstance that is required to be disclosed pursuant to Section 3.3(a) requires any change in the Disclosure Schedule, or if any such event, condition, fact or circumstance would require such a change assuming the Disclosure Schedule were dated as of the date of the occurrence, existence or discovery of such event, condition, fact or circumstance, then the Company shall promptly deliver to Parent an update to the Disclosure Schedule specifying such change. Except as set forth in Sections 9.2(a)(i) and (ii), no such update shall be deemed to supplement or amend the Disclosure Schedule for the purpose of (i) determining the accuracy of any of the representations and warranties made by the Company in this Agreement, or (ii) determining whether any of the conditions set forth in Section 6 has been satisfied.

3.4 No Negotiation. During the Pre-Closing Period, none of the Acquired Corporations shall, directly or indirectly:

1. solicit or encourage the initiation of any inquiry, proposal or offer from any Person (other than Parent) relating to a possible Acquisition Transaction;
2. participate in any discussions or negotiations or enter into any agreement with, or provide any non-public information to, any Person (other than Parent) relating to or in connection with a possible Acquisition Transaction; or
3. consider, entertain or accept any proposal or offer from any Person (other than Parent) relating to a possible Acquisition Transaction.

The Company shall promptly notify Parent in writing of any material inquiry, proposal or offer relating to a possible Acquisition Transaction that is received by any of the Acquired Corporations during the Pre-Closing Period.

3.5 Release of Security. Prior to the Closing Date, the Company shall take or shall cause to be taken all actions as shall be necessary or advisable in order to ensure any Encumbrances held by any Person with respect to any capital stock or securities of any of the Acquired Corporations are fully discharged. In the event such Encumbrances cannot be discharged without repayment of any loan or advance made to an Acquired Corporation by any Person, the Company shall pay or shall cause to be paid in full any loans, advances or other amounts owing to any Person.

3.6 Termination of 401(k) Plan. To the extent requested by Parent, the Company shall ensure that its Profit Sharing/401(k) Plan (the "401(k) Plan") shall be terminated immediately prior to the Effective Time. The parties agree that a determination letter shall be filed with the Internal Revenue Service with respect to the termination of the 401(k) Plan after the Closing Date.

3.7 Termination of Other Agreements.

1. To the extent requested by Parent, the Company shall ensure that the March 14, 2000 Amended and Restated Investors' Rights Agreement (the "Investors' Rights Agreement") shall be terminated immediately prior to the Effective Time.
2. To the extent requested by Parent, the Company shall ensure that the March 14, 2000 Amended and Restated Right of First Refusal and Co-Sale Agreement (the "Co-Sale Agreement") shall be terminated immediately prior to the Effective Time.

4. Representations and Warranties of Parent and Merger Sub

Parent and Merger Sub jointly and severally represent and warrant to the Company as follows:

4.1 SEC Filings; Financial Statements.

1. Parent has made available to the Company accurate and complete copies (excluding copies of exhibits) of each report, registration statement (on a form other than Form S-8) and definitive proxy statement filed by Parent with the SEC between May 15, 1996 and the date of this Agreement (the "Parent SEC Documents"). As of the time it was filed with the SEC (or, if amended or superseded by a filing prior to the date of this Agreement, then on the date of such filing): (i) each of the Parent SEC Documents complied in all material respects with the applicable requirements of the Securities Act or the Exchange Act (as the case may be); and (ii) none of the Parent SEC Documents contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading.
2. The consolidated financial statements contained in the Parent SEC Documents: (i) complied as to form in all material respects with the published rules and regulations of the SEC applicable thereto; (ii) were prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods covered, except as may be indicated in the notes to such financial statements and (in the case of unaudited statements) as permitted by Form 10-Q of the SEC, and except that unaudited financial statements may not contain footnotes and are subject to year-end audit adjustments (which are not reasonably expected to be, individually or in the aggregate, material in amount); and (iii) fairly present the consolidated financial position of Parent and its subsidiaries as of the respective dates thereof and the consolidated results of operations of Parent and its subsidiaries for the periods covered thereby.

4.2 Due Organization.

1. Each of Parent and Merger Sub is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has full power (corporate and other) and authority to conduct its business in the manner in which its business is currently being conducted and to own and use its assets in the manner in which its assets are currently owned and used and to perform its obligations under any contract filed as an exhibit to any Parent SEC Documents.
2. Parent is qualified to do business as a foreign corporation, and is in good standing, in each jurisdiction in which the nature of its business and of its properties makes such qualification necessary, except where the failure to be so qualified would not have a material adverse effect on Parent's business, condition (financial or otherwise), assets, liabilities or operations.

4.3 Non-Contravention; Consents. Neither (1) the execution, delivery or performance of this Agreement or any of the other agreements referred to in this Agreement, nor (2) the consummation of the Merger or any of the other transactions contemplated by this Agreement, will directly or indirectly (with or without notice or lapse of time) contravene, conflict with or result in a violation of (i) any of the provisions of the certificate of incorporation or bylaws of Parent or Merger Sub, (ii) any resolution adopted by the stockholders, the board of directors or any committee of the board of directors of Parent or Merger Sub, or (iii) any provision of any contract filed as an exhibit to any of the Parent SEC Documents. Except as otherwise may be required under the DGCL or CGCL, neither Parent nor Merger Sub will be required to make any filing with or give any notice to, or to obtain any Consent from, any Person in connection with (x) the execution, delivery or performance of this Agreement or any of the other agreements referred to in this Agreement, or (y) the consummation of the Merger or any of the other transactions contemplated by this Agreement, except for (i) the obtaining of the California Permit (as defined below) or the filing of a registration statement on Form S-4 with the SEC and the declaration of effectiveness of such registration statements by the SEC in accordance with Section 5.14(c), (ii) the filing of the certificate of merger with the Secretary of State of the State of Delaware, (iii) the filing of a Notification of Listing of Additional Shares with the Nasdaq National Market and (iv) the filings required under the HSR Act.

4.4 Authority; Binding Nature of Agreement. Parent and Merger Sub have the absolute and unrestricted right, power and authority to enter into and perform their obligations under this Agreement; and the execution, delivery and performance by Parent and Merger Sub of this Agreement (including the contemplated issuance of Parent Common Stock in the Merger in accordance with this Agreement) have been duly authorized by all necessary action on the part of Parent and Merger Sub and their respective boards of directors. No vote of Parent's stockholders is needed to approve the Merger. This Agreement constitutes the legal, valid and binding obligation of Parent and Merger Sub, enforceable against them in accordance with its terms, subject to (i) laws of general application relating to bankruptcy, insolvency and the relief of debtors, and (ii) rules of law governing specific performance, injunctive relief and other equitable remedies.

4.5 Valid Issuance. Subject to Section 1.5(c), the Parent Common Stock to be issued in the Merger will, when issued in accordance with the provisions of this Agreement, be validly issued, fully paid and nonassessable and issued in material compliance with applicable state and federal securities laws.

4.6 Absence of Changes. From December 31, 1999 to the date of this Agreement, there has not been any material adverse change in Parent's business, condition (financial or otherwise), assets, liabilities or operations.

4.7 Legal Proceedings; Orders. There is no pending Legal Proceeding and to the best knowledge of Parent and Merger Sub, no Person has threatened to commence any Legal Proceeding: (i) against Parent that could reasonably be expected to have a material adverse effect on Parent's business, condition (financial or otherwise), assets, liabilities or operations (other that any actual or threatened Legal Proceeding that has been previously disclosed in any of the Parent SEC Documents); or (ii) that challenges, or that may have the effect of preventing, delaying, making illegal or otherwise interfering with, the Merger or any of the other transactions contemplated by this Agreement. To the best of the knowledge of Parent and Merger Sub, no event has occurred, and no claim, dispute or other condition or circumstance exists, that will, or that could reasonably be expected to, give rise to or serve as a basis for the commencement of any such Legal Proceeding.

4.8 Brokers. No broker, finder or investment banker is entitled to any brokerage, finder's or other fee or commission in connection with the Merger or the transactions contemplated by this Agreement based upon arrangements made by or on behalf of Parent.

4.9 Interim Operation of Merger Sub. Merger Sub is a direct, wholly owned subsidiary of Parent, has engaged in no other business activities and has conducted its operations only as contemplated hereby.

5. Certain Covenants of the Parties

5.1 Regulatory Approvals. The Company and Parent shall use all commercially reasonable efforts to file, as soon as practicable after the date of this Agreement, all notices, reports and other documents required to be filed with any Governmental Body with respect to the Merger and the other transactions contemplated by this Agreement, and to submit promptly any additional information requested by any such Governmental Body to the extent that the Company or Parent determine it is reasonable and prudent to do so. Without limiting the generality of the foregoing, the Company and Parent shall, promptly after the date of this Agreement, prepare and file any notifications required under the HSR Act in connection with the Merger. The Company and Parent shall respond as promptly as practicable and reasonable to (i) any inquiries or requests received from the Federal Trade Commission or the Department of Justice for additional information or documentation and (ii) any inquiries or requests received from any state attorney general or other Governmental Body in connection with antitrust or related matters. Each of the Company and Parent shall (1) give the other party prompt notice of the commencement of any Legal Proceeding by or before any Governmental Body with respect to the Merger or any of the other transactions contemplated by this Agreement, (2) keep the other party informed as to the status of any such Legal Proceeding, and (3) promptly inform the other party of any communication to or from the Federal Trade Commission, the Department of Justice or any other Governmental Body regarding the Merger. The Company and Parent will consult and cooperate with one another, and will consider in good faith the views of one another, in connection with any analysis, appearance, presentation, memorandum, brief, argument, opinion or proposal made or submitted in connection with any Legal Proceeding under or relating to the HSR Act or any other federal or state antitrust or fair trade law. In addition, except as may be prohibited by any Governmental Body or by any Legal Requirement, and except as the parties may agree is not prudent or desirable, in connection with any Legal Proceeding under or relating to the HSR Act or any other federal or state antitrust or fair trade law or any other similar Legal Proceeding, each of the Company and Parent agrees to permit authorized Representatives of the other party to be present at each meeting or conference relating to any such Legal Proceeding and to have access to and be consulted in connection with any document, opinion or proposal made or submitted to any Governmental Body in connection with any such Legal Proceeding.

5.2 Stockholders' Consent. The Company shall, in accordance with its certificate of incorporation and bylaws and the applicable requirements of the DGCL and the CGCL, solicit the consent, either in writing or by a special meeting, of the stockholders of the Company as promptly as practicable for the purpose of permitting them to consider and to vote upon, approve and adopt the Merger and this Agreement. Without limiting the generality or the effect of anything contained in the Voting Agreements and Irrevocable Proxies in the form of Exhibit B(1) being executed and delivered by the Proxy Stockholders to Parent contemporaneously with the execution and delivery of this Agreement, the Company shall use commercially reasonable efforts to cause each Proxy Stockholder to vote all shares of the capital stock of the Company that are owned, beneficially or of record, by such Proxy Stockholder on the record date for the solicitation of the consent of the stockholders of the Company, either in writing or by special meeting, to be voted in favor of the Merger and this Agreement. For greater certainty, in lieu of calling and holding a special stockholders' meeting, the Company may solicit the approval of the stockholders of the Company of the Merger and the other transactions contemplated by this Agreement by written consent. In any event, the Company shall solicit by written consent, or hold a special meeting of stockholders, for the purpose of voting upon the approval and adoption of the Merger and this Agreement as soon as practicable and in any event no later than 5 business days after the date of issuance of the California Permit.

5.3 Public Announcements. During the Pre-Closing Period, (a) each of the Acquired Corporations shall not (and shall not permit any of their respective Representatives to) issue any press release or make any public statement regarding this Agreement or the Merger, or regarding any of the other transactions contemplated by this Agreement, without Parent's prior written consent, and (b) Parent will use commercially reasonable efforts to consult with the Company prior to issuing any press release or making any public statement regarding this Agreement or the Merger, or regarding any of the other transactions contemplated by this Agreement.

5.4 Commercially Reasonable Efforts. Prior to Closing, (a) each of the Acquired Corporations shall use commercially reasonable efforts to cause the conditions set forth in Section 6 to be satisfied on a timely basis (including without limitation to cure any inaccuracy in any representation or warranty that would exist as of the Scheduled Closing Time), and (b) Parent and Merger Sub shall use their commercially reasonable efforts to cause the conditions set forth in Section 7 to be satisfied on a timely basis.

5.5 Noncompetition Agreements. The Company shall use its commercially reasonable efforts to cause each of the individuals identified on Exhibits D(1), D(2) and D(3) to execute and deliver, at or prior to the Closing, a Noncompetition Agreement in the form of Exhibit E.

5.6 Employee Related Matters. Parent shall offer to employees of the Company as of the date of this Agreement who are also employees of the Company immediately prior to the Effective Time employment by the Parent after the Effective Time, and each such offer shall be in the form of an individual offer letter prepared in accordance with Parent's customary form (such letter to confirm such employee's initial position, compensation, location and reporting relationship). Those employees of the Company that continue to be employees of Parent or any of its affiliates, including the Company, following the Closing shall, subject to any necessary transition period and the terms of such plans, be immediately eligible to participate in Parent's health, vacation, employee stock purchase, 401(k) and other plans, to the same extent as comparably situated employees of Parent and shall receive credit under all Parent's benefit plans for time served as an employee of the Company (it being agreed that such credit shall not apply with respect to the vesting schedule of any stock options granted by Parent to such employees other than Company Options assumed by the Parent pursuant to Section 1.6).

5.7 FIRPTA Matters. At the Closing, the Company shall deliver to Parent a statement described in Section 1.1445-2(c)(3)(i) of the United States Treasury Regulations certifying the interests in the Company are not U.S. real property interests.

5.8 Release. The Company shall use commercially reasonable efforts to cause each Key Stockholder, each Person identified on Exhibits D(1), D(2), and D(3) and each other employee of the Company at a level of "director" or more senior to execute and deliver to the Company and Parent, at or prior to the Closing, a Release in the form of Exhibit F.

5.9 Affiliate Agreements. The Company shall use commercially reasonable efforts to cause each Person identified on Exhibit G(b) (and any other Person that could reasonably be deemed to be an "affiliate" of any of the Acquired Corporations for purposes of the Securities Act), to execute and deliver to Parent, as promptly as practicable after the execution of this Agreement, an Affiliate Agreement in the form of Exhibit G(a).

5.10 Termination of Employee Plans. At the Closing, each Company Option shall be assumed by Parent and the Company's repurchase right with respect to any shares acquired pursuant to the exercise of Company Options shall be assigned to Parent pursuant to Section 1.6 and the Company shall terminate its 1998 Stock Plan, and shall ensure that no employee or former employee of the Company has any rights under such Plan and that any liabilities of the Company under such Plan (including any such liabilities relating to services performed prior to the Closing) are fully extinguished at no cost to the Company, except as otherwise provided in Section 1.6.

5.11 Pooling of Interests. Each of the Company and Parent agrees (and the Company agrees to cause each of the Acquired Corporations) (a) not to take any action during the Pre-Closing Period that would adversely affect the ability of Parent to account for the Merger as a "pooling of interests," and (b) to use all reasonable efforts to attempt to ensure that none of its "affiliates" (as that term is used in Rule 145 under the Securities Act) takes any action that could adversely affect the ability of Parent to account for the Merger as a "pooling of interests."

5.12 Tax-Free Reorganization. No party shall take any action (or fail to take any action) either prior to or after the Effective Time that could reasonably be expected to cause the Merger to fail to qualify as a "reorganization" under Section 368(a) of the Code. Prior to the Effective Time, the Company, Parent and Merger Sub shall execute and deliver to Cooley Godward LLP and to Gunderson Dettmer Stough Villeneuve Franklin & Hachigian LLP, tax representation letters in customary form. To the extent requested by Cooley Godward LLP and Gunderson Dettmer Stough Villeneuve Franklin & Hachigian LLP, Parent, Merger Sub and the Company shall each confirm to Cooley Godward LLP and to Gunderson Dettmer Stough Villeneuve Franklin & Hachigian LLP, the accuracy and completeness of the foregoing tax representation letters as of the Effective Time. Following delivery of the foregoing tax representation letters, each of the Company and Parent shall use its reasonable efforts to cause Gunderson Dettmer Stough Villeneuve Franklin & Hachigian LLP and Cooley Godward, LLP, respectively, to deliver to it, prior to the Effective Time, a tax opinion that the Merger will constitute a reorganization within the meaning of Section 368(a) of the Code and otherwise satisfying the conditions set forth in Sections 7.3(b) and 6.5(e), respectively. In rendering such opinions, each of such counsel shall be entitled to rely on the foregoing tax representation letters.

5.13 Indemnification of Officers and Directors.

1. For seven years from and after the Closing Date, Parent agrees to indemnify (including advancement of expenses)and hold harmless all past and present officers and directors of the Company (the "Indemnified Persons") to the same extent such persons are indemnified as of the date of this Agreement by the Company pursuant to the Company's Incorporation Documents for acts or omissions which occurred at or prior to the Effective Time, employment agreements or indemnification agreements identified on the Disclosure Schedule or under applicable law. This indemnification shall not apply to any claim by an Indemnitee pursuant to the terms of this Agreement or any other agreement contemplated by this Agreement. This Section 5.13 shall survive the consummation of the Merger, and is intended to be for the benefit of, and shall be enforceable by, the Indemnified Persons, their heirs and personal representatives and shall be binding on Parent and the Surviving Corporation.
2. If Parent, the Surviving Corporation or any of its successors or assigns (A) consolidates with or merges into any other person and shall not be the continuing or surviving corporation or entity of such consolidation or merger, or (B) transfers or conveys all or substantially all of its properties and assets to any person, then, and in each such case, to the extent necessary, proper provision shall be made so that the successors and assigns of Parent or the Surviving Corporation, as the case may be, shall assume the obligations set forth in this Section 5.13(b).
3. The rights of each Indemnified Person under this Section 5.13 shall be in addition to any rights such Indemnified Person may have under the Certificate of Incorporation or By-laws of the Company or the Company Subsidiary, or under Delaware or California law or any other applicable laws.

5.14 California Permit; Company Stockholder Approval.

1. As promptly as practicable (and in any event within 20 business days) after the execution of this Agreement, Parent shall prepare the necessary documents and Parent shall apply to obtain a permit (a "California Permit") from the California Commissioner of Corporations (after a hearing before such Department) pursuant to Section 25121 of the California Corporate Securities Law of 1968 (the "Fairness Hearing Law") so that the issuance of the Parent Common Stock in the Merger shall be exempt from registration under the Securities Act, by virtue of the exemption from the registration contained in Section 3(a)(10) thereof, and Company shall prepare a related information statement or other disclosure document (the "Information Statement"). The Company shall cooperate with, and provide information to, Parent in connection with Parent's application for the California Permit. The Company and Parent will respond to any comments from the California Commissioner of Corporations and use their commercially reasonable efforts to cause the California Permit to be granted as soon as reasonably practicable after such filing; provided, however, that Parent shall not be required to modify any of the terms of the Merger in order to cause the California Secretary of State to approve the fairness of such terms and conditions. The Company shall provide and include in the Information Statement such information relating to the Company as may be required pursuant to the Fairness Hearing Law. The Information Statement shall include the recommendation of the board of directors of the Company in favor of the Merger. None of the information supplied by the Company to Parent in connection with the California Permit application or any other document prepared to comply with federal or state securities laws shall contain any untrue statement of material fact or omit to state any material fact necessary in order to make the statements contained therein, in light of the circumstances under which they were made, not misleading. None of the information supplied by Parent in connection with the California Permit application or any other document prepared to comply with federal or state securities laws shall contain any untrue statement of material fact or omit to state any material fact necessary in order to make the statements contained therein, in light of the circumstances under which they were made, not misleading.
2. The Company shall ensure that the stockholders of the Company, acting by meeting or written consent pursuant to applicable Legal Requirements, take all action necessary for the approval of the Merger and adoption of this Agreement within five business days of the date of the issuance of the California Permit. By way of amplification and not limitation, the Company, acting through its Board of Directors, shall, in accordance with all applicable Legal Requirements and its Certificate of Incorporation and By-Laws, (i) promptly solicit an action by written consent in lieu of a meeting of stockholders of the Company (or if, required by applicable Legal Requirements, duly call, give notice of, convene and hold a meeting of stockholders of the Company), (ii) recommend the approval of the Merger and adoption this Agreement, (iii) take all lawful action to solicit such approval and (iv) take all other action necessary or advisable to secure the vote or consent of stockholders required by applicable Legal Requirements.
3. In the event that the California permit cannot be issued for any reason, then the parties hereto shall take commercially reasonable steps to restructure the transactions contemplated by this Agreement to permit the delivery of Parent Common Stock pursuant to the Merger to be accomplished by means of a registered offering under the Securities Act; provided however, that on or after October 15, 2000 the parties hereto shall not be required to take such steps, or to continue to take such steps if, it is reasonably unlikely that the Merger could be consummated by November 30, 2000.
4. This Section 5.15 shall survive the (i) sale, merger or consolidation of the Parent, the Surviving Corporation or any of its successors or assigns with or into any other person where the Parent, the Surviving Corporation and any of its successors or assigns shall not be the continuing or surviving corporation or entity of such sale, merger or consolidation, or (ii) transference or conveyance of all or substantially all of the Parent's, Surviving Corporation's or any of its successors' or assigns' properties and assets to any person. In each such case, to the extent necessary, proper provision shall be made so that the successors and assigns of the Parent or the Surviving Corporation, as the case may be, shall assume the obligations set forth in this Section 5.15.

6. Conditions Precedent to Obligations of Parent and Merger Sub

The obligations of Parent and Merger Sub to effect the Merger and otherwise consummate the transactions contemplated by this Agreement are subject to the satisfaction (or waiver by the Parent), at or prior to the Closing, of each of the following conditions:

6.1 Accuracy of Representations. Each of the representations and warranties made by the Company in this Agreement and in each of the Transaction Documents shall have been accurate in all respects as of the date of this Agreement and shall be accurate in all respects as of the Closing Date as if made at the Closing Date (except, in each case, to the extent such representations and warranties expressly relate to any earlier date, in which case such representations and warranties shall be accurate on and as of such date) (in each case without giving effect to any update or purported update to the Disclosure Schedule or any "Material Adverse Effect" or other materiality qualifications, or any similar qualifications, contained or incorporated directly or indirectly in such representation and warranty) except, in each case, where the failure of such representation and warranty to be accurate, either alone or together with any failure of any other representations and warranties made the Company in this Agreement or the Transaction Documents to be accurate, has not had and could not reasonably be expected to have a Material Adverse Effect on an Acquired Corporation.

6.2 Performance of Covenants. All of the covenants and obligations that the Acquired Corporations are required to comply with or to perform at or prior to the Closing shall have been complied with and performed in all material respects.

6.3 Stockholder Approval. The Merger and this Agreement shall have been duly approved by the requisite affirmative vote of the stockholders of the Company in accordance with applicable Legal Requirements. The number of Dissenting Shares shall be less than 5% of the Company Stock outstanding immediately prior to the Scheduled Closing Time.

6.4 Consents. All Consents (a) required to be obtained from any Governmental Entity, (b) Consents identified in Part 6.4 of the Disclosure Schedule, and (c) otherwise required to be obtained, in each case, in connection with the Merger and the other transactions contemplated by this Agreement shall have been obtained and shall be in full force and effect, except, only in the case of clause (c), where the failure to obtain such Consent has not had and could not reasonably be expected to have a Material Adverse Effect on an Acquired Corporation.

6.5 Agreements and Documents. Parent and the Company shall have received the following agreements and documents, each of which shall be in full force and effect:

1. Noncompetition Agreements in the form of Exhibit E executed by the Persons identified in Exhibits D(1), D(2) and D(3);
2. a Release in the form of Exhibit F, executed by each of the Persons listed on Exhibits D(1), D(2) and D(3);
3. an estoppel certificate, dated as of a date not more than five days prior to the Closing Date and reasonably satisfactory in form and content to Parent, executed by each of Chestnut Bay LLC and Heartport, Inc.
4. a legal opinion of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP as of the Closing Date, substantially in the form of Exhibit I;
5. a legal opinion of Cooley Godward LLP dated as of the Closing, which states to the effect that the Merger will constitute a reorganization within the meaning of Section 368 of the Internal Revenue Code; provided however that if Cooley Godward LLP does not render such opinion, this condition shall nonetheless be deemed satisfied if counsel to the Company provides such opinion;
6. a certificate executed by the Company and containing the representation and warranty of the Company that the conditions set forth in Sections 6.1, 6.2, 6.3, 6.4, 6.6, 6.9, 6.11, 6.12, 6.14, and 6.15 have been duly satisfied (the "Company Closing Certificate");
7. a certificate executed by the Secretary of the Company attaching and certifying as to the Company's current Certificate of Incorporation and Bylaws and the resolutions of the Company's Board of Directors and stockholders approving this Agreement and the transactions relating thereto;
8. written resignations of all officers and directors of the Company, effective as of the Effective Time;
9. the Escrow Agreement in the form of Exhibit H, executed by the Stockholders' Agent and the other parties thereto, and the Escrow Shares shall have been deposited thereunder;
10. Affiliate Agreements in the form of Exhibit G (a), executed by the Persons identified on Exhibit G (b) and by any other Person who could reasonably be deemed to be an "affiliate" of the Acquired Corporations for purposes of the Securities Act; and
11. a letter from Ernst & Young LLP, dated as of the Closing Date and addressed to Parent and the Company, reasonably satisfactory in form and substance to Parent and KPMG LLP, to the effect that, after reasonable investigation, Ernst & Young LLP, is not aware of any fact concerning any of the Acquired Corporations or any of such Acquired Corporations' stockholders or affiliates that could preclude Parent from accounting for the Merger as a "pooling of interests" in accordance with GAAP, Accounting Principles Board Opinion No. 16 and all published rules, regulations and policies of the SEC.

6.6 FIRPTA Compliance. The Company shall have delivered to Parent the documents referred to in Section 5.7.

6.7 HSR Act. The waiting period applicable to the consummation of the Merger under the HSR Act shall have expired or been terminated.

6.8 No Restraints. No temporary restraining order, preliminary or permanent injunction or other order preventing the consummation of the Merger shall have been issued by any court of competent jurisdiction and remain in effect, and there shall not be any Legal Requirement enacted or deemed applicable to the Merger that makes consummation of the Merger illegal.

6.9 No Legal Proceedings. No Governmental Body shall have commenced or threatened to commence any Legal Proceeding (a) challenging or seeking the recovery of damages in excess of $1,000,000 (when aggregated with all such Legal Proceedings) in connection with the Merger; (b) seeking to prohibit or limit the exercise by Parent of any material right pertaining to its ownership of stock of Merger Sub or any of the Acquired Corporations; (c) that involves any of the Acquired Corporations or any of the assets owned or used by any of the Acquired Corporations or any Person whose liability any of the Acquired Corporations has or may have retained or assumed, either contractually or by operation of law; (d) that challenges, or that may have the effect of preventing, delaying, making illegal or otherwise interfering with, the Merger or any of the other transactions contemplated by this Agreement; or (e) seeking to compel any of the Acquired Corporations, Parent or any Subsidiary of Parent to dispose of or hold separate any material assets as a result of the Merger or any of the other transactions contemplated by this Agreement.

6.10 Termination of Employee Plans. The Company shall have provided Parent with evidence, reasonably satisfactory to Parent, as to the termination of the benefit plans referred to in Section 5.10.

6.11 Termination of Agreements. Prior to the Closing, the following agreements and/or provisions of the following agreements shall be terminated and shall no longer be in effect:

1. the Investors' Rights Agreement (as defined in Section 3.7);
2. the Co-Sale Agreement (as defined in Section 3.7); and
3. the Master Loan and Security Agreement listed in Part 2.5(l).

6.12 No Material Adverse Effect. Between the date of this Agreement and the Closing Date, there shall not have been any Material Adverse Effect on an Acquired Corporation.

6.13 Listing. The shares of Parent Common Stock to be issued in the Merger shall have been approved for listing (subject to notice of issuance) on the Nasdaq National Market.

6.14 Release of Security. Prior to the Closing Date, the Company shall have provided to Parent evidence satisfactory to Parent that, to the best of the knowledge of the Company, any and all Encumbrances held by any Person with respect to any capital stock or securities of any of the Acquired Corporations have been fully discharged and that all of the capital stock of each of the Acquired Corporations is free and clear of all Encumbrances. In the event such Encumbrances cannot be discharged without repayment of any loan or advance made to an Acquired Corporation by any Person, on or prior to the Closing Date, the Company shall have provided to Parent evidence satisfactory to Parent that any and all loans or other advances made by any Person in favor of any of the Acquired Corporations has been paid in full and any Encumbrances held by any Person with respect to any assets of the Acquired Corporations has been fully discharged.

6.15 Conversion of Preferred Stock; Exercise or Clarification of Warrants. All shares of Company Preferred Stock shall have converted into shares of Company Common Stock pursuant to their terms and conditions as in effect on the date of such conversion. The warrants to purchase Company Stock identified in Part 2.3(d) of the Disclosure Schedule shall have been exercised pursuant to their terms and conditions as in effect on the date of such exercise or the holders of such warrants shall have executed documentation reasonably satisfactory to Parent acknowledging that Sections 4.3 through 4.7 and Sections 14.1 and 14.2 of such warrants shall terminate concurrently with the Closing and modifying Section 5.2 of such warrants to provide that Parent would give notice of the events described therein at such time as it gives notice to the record holders of its securities rather than at the times specified in Section 5.2 of such warrants.

6.16 Compliance With 3(a)(10) of the Securities Act. Either (i) the California Secretary of State shall have issued an approval under the Fairness Hearing Law (following a hearing upon the fairness of the terms and conditions of the Merger, conducted pursuant to the Fairness Hearing Law) for the issuance of the Parent Common Stock to be issued in the Merger, and all applicable requirements of Section 3(a)(10) of the Securities Act shall have been satisfied or (ii) an appropriate registration statement relating to the issuance of Parent Common Stock hereunder shall have become effective under the Securities Act and shall not be the subject of any stop order or proceeding seeking a stop order.

7. Conditions Precedent to Obligations of the Company

The obligations of the Company to effect the Merger and otherwise consummate the transactions contemplated by this Agreement are subject to the satisfaction (or waiver), at or prior to the Closing, of the following conditions:

7.1 Accuracy of Representations. Each of the representations and warranties made by Parent and Merger Sub in this Agreement and in each of the Transaction Documents shall have been accurate in all respects as of the date of this Agreement and shall be accurate in all respects as of the Closing Date as if made at the Closing Date (except, in each case, to the extent such representations and warranties expressly relate to any earlier date, in which case such representations and warranties shall be accurate on and as of such date)(in each case without giving effect to any update or purported update to the Disclosure Schedule or any "Material Adverse Effect" or other materiality qualifications, or any similar qualifications, contained or incorporated directly or indirectly in such representation and warranty) except, in each case, where the failure of such representation and warranty of Parent to be accurate, either alone or together with any failure of any other representations and warranties to be accurate, has not had and could not reasonably be expected to have a material adverse effect on Parent's business, condition (financial or otherwise), assets, liabilities or operations.

7.2 Performance of Covenants. All of the covenants and obligations that Parent and Merger Sub are required to comply with or to perform at or prior to the Closing shall have been complied with and performed in all material respects.

7.3 Documents. The Company shall have received the following documents:

1. a legal opinion of Cooley Godward LLP, dated as of the Closing Date, in substantially the form of Exhibit J;
2. a legal opinion of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian LLP, dated as of the Closing, which states to the effect that the Merger will constitute a reorganization within the meaning of Section 368 of the Internal Revenue Code; provided however that if Gunderson Dettmer Stough Villeneuve Franklin & Hachigian LLP does not render such opinion, this condition shall nonetheless be deemed satisfied if counsel to Parent provides such opinion;
3. a certificate executed by Parent and containing the representation and warranty of Parent that the conditions set forth in Section 7.1 and 7.2 have been satisfied; and
4. a certificate executed by the Secretaries of Parent and Merger Sub attaching and certifying as to the current Certificates of Incorporation and Bylaws of Parent and Merger Sub and the resolutions of the Boards of Directors and stockholders of Parent and Merger Sub approving this Agreement and the transactions relating thereto.

7.4 No Restraints. No temporary restraining order, preliminary or permanent injunction or other order preventing the consummation of the Merger shall have been issued by any court of competent jurisdiction and remain in effect, and there shall not be any Legal Requirement enacted or deemed applicable to the Merger that makes consummation of the Merger illegal.

7.5 HSR Act. The waiting period applicable to the consummation of the Merger under the HSR Act shall have expired or been terminated.

7.6 Listing. The shares of Parent Common Stock to be issued in the Merger shall have been approved for listing (subject to notice of issuance) on the Nasdaq National Market.

7.7 Compliance With 3(a)(10) of the Securities Act. Either (i) the California Secretary of State shall have issued an approval under the Fairness Hearing Law (following a hearing upon the fairness of the terms and conditions of the Merger, conducted pursuant to the Fairness Hearing Law) for the issuance of the Parent Common Stock to be issued in the Merger, and all applicable requirements of Section 3(a)(10) of the Securities Act shall have been satisfied or (ii) an appropriate registration statement relating to the issuance of Parent Common Stock hereunder shall have become effective under the Securities Act and shall not be the subject of any stop order or proceeding seeking a stop order.

8. Termination

8.1 Termination Events. This Agreement may be terminated prior to the Closing:

1. by Parent if Parent reasonably determines in good faith that the timely satisfaction of any condition set forth in Section 6 has become impossible (other than as a result of any failure on the part of Parent or Merger Sub to comply with or perform any covenant or obligation of Parent or Merger Sub set forth in this Agreement);
2. by the Company if the Company reasonably determines in good faith that the timely satisfaction of any condition set forth in Section 7 has become impossible (other than as a result of any failure on the part of any of the Acquired Corporations or any of the stockholders of the Company to comply with or perform any covenant or obligation set forth in this Agreement or in any other agreement or instrument delivered to Parent);
3. by Parent if the Closing has not taken place on or before November 30, 2000 (other than as a result of any failure on the part of Parent to comply with or perform any covenant or obligation of Parent set forth in this Agreement);
4. by the Company if the Closing has not taken place on or before November 30, 2000 (other than as a result of any failure on the part of one of the Acquired Corporations to comply with or perform any covenant or obligation of such Acquired Corporation as set forth in this Agreement); or
5. by the mutual written consent of Parent and the Company.

8.2 Termination Procedures. If Parent wishes to terminate this Agreement pursuant to Section 8.1(a) or Section 8.1(c), Parent shall deliver to the Company a written notice stating that Parent is terminating this Agreement and setting forth a brief description of the basis on which Parent is terminating this Agreement. If the Company wishes to terminate this Agreement pursuant to Section 8.1(b) or Section 8.1(d), the Company shall deliver to Parent a written notice stating that the Company is terminating this Agreement and setting forth a brief description of the basis on which the Company is terminating this Agreement.

8.3 Effect of Termination. If this Agreement is terminated pursuant to Section 8.1, all further obligations of the parties under this Agreement shall terminate; provided, however, that: (a) neither any of the Acquired Corporations nor Parent shall be relieved of any obligation or liability arising from any prior willful breach by such party of any provision of this Agreement; (b) the parties shall, in all events, remain bound by and continue to be subject to the provisions set forth in Section 10; and (c) each of the parties shall, in all events, remain bound by and continue to be subject to Section 5.3.

9. Indemnification, Etc.

9.1 Survival of Representations, Etc.

1. The representations and warranties made by the Company (including the representations and warranties set forth in Section 2 and the representations and warranties set forth in the Company Closing Certificate) shall survive the Closing and shall expire on the first anniversary of the Closing Date; provided, however, that if, at any time prior to the first anniversary of the Closing Date, any Indemnitee (acting in good faith) delivers to the Stockholders' Agent a written notice alleging the existence of an inaccuracy in or a breach of any of the representations and warranties made by the Company (and setting forth in reasonable detail the basis for such Indemnitee's belief that such an inaccuracy or breach may exist) and asserting a claim for recovery under Section 9.2 based on such alleged inaccuracy or breach, then the claim asserted in such notice shall survive the first anniversary of the Closing until such time as such claim is fully and finally resolved. Notwithstanding the foregoing, any such notice asserting an inaccuracy in or breach of any representation or warranty concerning matters that are subject to resolution through the audit process must be delivered to the Stockholders' Agent prior to the earlier of (i) the date the audit of Parent for the fiscal year ended December 31, 2000 is completed or (ii) the first anniversary of the Closing Date, in which case the claim asserted in such notice shall survive until such time as such claim is fully and finally resolved. The representations and warranties made by Parent and Merger Sub in Sections 4.4 and 4.5 shall survive the Closing and shall expire on the first anniversary of the Closing Date. All other representations and warranties made by Parent and Merger Sub in this Agreement shall terminate and expire as of the Effective Time, and any liability of Parent or Merger Sub with respect to such representations and warranties shall thereupon cease; provided, however, that this provision shall not limit any rights or claims based on fraudulent or intentional misrepresentation.
2. Except for information expressly set forth in an update to the Disclosure Schedule (identified as such), the representations, warranties made by the Company, and the covenants and obligations of each of the Acquired Corporations, and the rights and remedies that may be exercised by the Indemnitees, shall not be limited or otherwise affected by or as a result of any information furnished to, or any investigation made by or knowledge of, any of the Indemnitees or any of their Representatives.
3. For purposes of this Agreement, each statement or other item of information set forth in the Disclosure Schedule or in any update to the Disclosure Schedule shall be deemed to be a representation and warranty made by the Company in this Agreement.

9.2 Indemnification by Stockholders.

1. From and after the Effective Time (but subject to Sections 9.1(a) and 9.2(b)), the stockholders of the Company who shall have received, or shall be entitled to receive, Parent Common Stock pursuant to Section 1.5 (the "Indemnitors"), severally but not jointly, shall hold harmless and indemnify each of the Indemnitees from and against, and shall compensate and reimburse (through the Escrow Shares or otherwise) each of the Indemnitees for, such Indemnitor's Pro Rata Allocation of any Damages which are directly or indirectly suffered or incurred by any of the Indemnitees or to which any of the Indemnitees may otherwise become subject (regardless of whether or not such Damages relate to any third-party claim) and which arise from or as a result of, or are directly or indirectly connected with: (i) any inaccuracy in or breach of any representation or warranty set forth in Section 2 made as of the date of this Agreement (without giving effect to any "Material Adverse Effect" or other materiality qualification or any similar qualification contained or incorporated directly or indirectly in such representation or warranty, but with giving effect to any update to the Disclosure Schedule delivered by the Company to Parent prior to the Closing, except to the extent such update(s) disclose matters, either individually or in the aggregate, which relate to the representations and warranties of the Company set forth in Sections 2.3, 2.4, 2.9, 2.10, 2.14 or 2.19 and which impact the value of the Acquired Corporations, taken as a whole, by an amount which equals or exceeds $250,000); (ii) any inaccuracy in or breach of any representation or warranty set forth in the Company Closing Certificate (without giving effect to any "Material Adverse Effect" or other materiality qualification or any similar qualification contained or incorporated directly or indirectly in such representation or warranty, but with giving effect to any update to the Disclosure Schedule delivered by the Company to Parent prior to the Closing); (iii) any breach of any covenant or obligation of each of Acquired Corporations (including the covenants set forth in Sections 3 and 5); or (iv) any Legal Proceeding relating to any inaccuracy or breach of the type referred to in clause "(i)", "(ii)" or "(iii)" above (including any Legal Proceeding commenced by any Indemnitee for the purpose of enforcing any of its rights under this Section 9).
2. (i) For greater certainty and notwithstanding anything set forth in Section 9.2(a)(i), the parties hereby agree that to the extent any update to the Disclosure Schedule delivered by the Company to Parent prior to the Closing discloses matters, either individually or in the aggregate, which relate to the representations and warranties of the Company set forth in Sections 2.3, 2.4, 2.9, 2.10, 2.14 or 2.19 and which impact the value of the Acquired Corporations, taken as a whole, by an amount which equals or exceeds $250,000, such update(s) shall not be given effect in determining whether any inaccuracy in or breach of any representation or warranty set forth in Section 2 made as of the date of this Agreement has occurred and Parent shall be entitled to full indemnification for Damages incurred in accordance with this Section 9 on such basis.

(ii) Any obligation on the part of an Indemnitor pursuant to Section 9.2(a) shall be satisfied by the delivery of shares of Parent Common Stock valued at the Average Parent Common Stock Price (the "Stock Delivery Obligation"), and in no event shall an Indemnitor be required to satisfy any such obligation in cash. In satisfying the Stock Delivery Obligation, the amount of Damages, for any claim, shall be divided by the Average Parent Common Stock Price and the resulting number shall be the number of shares of Parent Common Stock to be delivered by the Indemnitors. Under the Stock Delivery Obligation, the Indemnitors shall deliver shares of Parent Common Stock and the Indemnitees shall be required to accept shares of Parent Common Stock in all cases valued at the Average Parent Common Stock Price, regardless of the fair market value of shares of Parent Common Stock at time of such delivery or acceptance, and regardless of whether any Indemnitor has disposed of any of the shares of Parent Common Stock received in the Merger. Subject to Section 9.2(e)(ii), the Stock Delivery Obligation shall be satisfied from the Escrow Shares.

3. The Company acknowledges and agrees that, if the Surviving Corporation suffers, incurs or otherwise becomes subject to any Damages as a result of or in connection with any inaccuracy in or breach of any representation, warranty, covenant or obligation, then (without limiting any of the rights of the Surviving Corporation as an Indemnitee) Parent shall also be deemed, by virtue of its ownership of the stock of the Surviving Corporation, to have incurred Damages as a result of and in connection with such inaccuracy or breach.
4. Deductible. The Indemnitors shall not be required to make any indemnification payment pursuant to Section 9.2(a) until such time as the total amount of all Damages (including the Damages arising from any inaccuracies in or breaches of any representations or warranties) that have been directly or indirectly suffered or incurred by any one or more of the Indemnitees, or to which any one or more of the Indemnitees has or have otherwise become subject, exceeds $500,000 in the aggregate. (If the total amount of such Damages exceeds $500,000, then the Indemnitees shall be entitled to be indemnified against and compensated and reimbursed only for the portion of such Damages exceeding $500,000.)
5. Maximum Liability.
1. Subject to Section 9.2(e)(ii), Parent's recourse for all claims for Damages under clauses (i) or (ii) of Section 9.2(a) shall be limited to the Escrow Shares except with respect to any representation or warranty set forth in Section 2.3, 2.4, 2.9, 2.10, 2.14 or 2.19 (each a "Specified Representation").
2. The maximum liability (including under Section 9.2(e)(i)) of each Indemnitor to the Indemnitees for Damages relating to all breaches by the Company of Specified Representations, covenants or other provisions contained in this Agreement shall be limited to an amount equal to the product of (x) such Indemnitor's Pro Rata Allocation, (y) 926,641 and (z) the Average Parent Common Stock Price. Such amount shall include, and shall not be in addition to, the value of the Escrow Shares (based on the Average Parent Common Stock Price). Parent shall have recourse against the Indemnitors under this Section 9 to shares of Parent Common Stock other than the Escrow Shares for Damages relating to all breaches by the Company of Specified Representations, covenants or other provisions contained in this Agreement only in the event that the Escrow Shares have been exhausted; provided, however, that, subject to the first sentence of this Section 9.2(e)(ii), if Escrow Shares have been returned to Parent in connection with Damages resulting from breaches of Specified Representations, covenants or other provisions contained in this Agreement and there are insufficient remaining Escrow Shares to satisfy in full any claims for Damages under clauses (i) or (ii) of Section 9.2(a), Parent shall have recourse against the Indemnitors in connection with any Damages under clauses (i) or (ii) of Section 9.2(a) for a number of shares of Parent Common Stock other than the Escrow Shares equal to the number of Escrow Shares that have been returned to Parent in connection with Damages resulting from breaches of Specified Representations, covenants or other provisions contained in this Agreement. (By way of example: if Escrow Shares are returned to Parent in satisfaction of claims in connection with breaches of Specified Representations and there are insufficient remaining Escrow Shares to cover subsequent claims for breaches of representations or warranties that are not Specified Representations, Parent shall have recourse directly from the Indemnitors to shares of Parent Common Stock in an amount equal to the number of Escrow Shares that had been returned to Parent in connection with breaches of Specified Representations, provided that the Indemnitors' maximum liability shall be limited as set forth in the first sentence of this Section 9.2(e)(ii).)
6. Exclusions from Limitations. The limitations that are set forth in Sections 9.2(d) and 9.2(e) shall not apply in the case of fraud or intentional misrepresentation; provided, however, that in no event shall any Indemnitor's liability exceed the amount equal to the result of the multiplication of the Average Parent Common Stock Price by the number of shares of Parent Common Stock received by such Indemnitor in the Merger.

9.3 No Contribution. Each Indemnitor waives, and acknowledges and agrees that he shall not have and shall not exercise or assert (or attempt to exercise or assert), any right of contribution, right of indemnity or other right or remedy against Merger Sub or any of the Acquired Corporations in connection with any indemnification obligation or any other liability to which he may become subject under or in connection with this Agreement or the Company Closing Certificate.

9.4 Interest. Any Indemnitor who is required to hold harmless, indemnify, compensate or reimburse any Indemnitee pursuant to this Section 9 with respect to any Damages shall also be liable to such Indemnitee for interest on the amount of such Damages (for the period commencing as of the date on which such Indemnitor first received notice of a claim for recovery by such Indemnitee and ending on the date on which the liability of such Indemnitor to such Indemnitee is fully satisfied by such Indemnitor) at a floating rate equal to the rate of interest publicly announced by Bank of America, N.T. & S.A. from time to time as its prime, base or reference rate. Such interest shall be deemed to be "Damages" for purposes of this Section 9.

9.5 Mitigation of Loss. Indemnitees shall use their reasonable efforts to mitigate any Damages in connection with an indemnity claim made pursuant to Section 9.2(a) with the scope to be as required by applicable law. If the amount of Damages, at any time prior to or subsequent to the payment thereof by an Indemnitor to an Indemnitee pursuant to this Section 9 is reduced pursuant to any insurance coverage, the amount of such reduction (net of (i) any out-of-pocket expenses, (ii) increases in premiums or (iii) any deductible incurred in obtaining such reduction) shall promptly be repaid by the Indemnitee to the Indemnitor. Notwithstanding any other provision in this Agreement including this Section 9.5, there shall be no affirmative obligation or duty on the part of either Parent or Merger Sub to obtain insurance with respect to any aspect of their respective business, operations or assets.

9.6 Defense of Third Party Claims. In the event of the assertion or commencement by any Person of any claim or Legal Proceeding (whether against Merger Sub or any of the Acquired Corporations, against Parent or against any other Person) with respect to which any Indemnitor may become obligated to hold harmless, indemnify, compensate or reimburse any Indemnitee pursuant to this Section 9, Parent shall have the right, at its election, to proceed with the defense of such claim or Legal Proceeding on its own with counsel reasonably satisfactory to the Stockholders' Agent. If Parent so proceeds with the defense of any such claim or Legal Proceeding:

1. all reasonable expenses relating to the defense of such claim or Legal Proceeding shall be borne and paid exclusively by the Indemnitors;
2. each Indemnitor shall make available to Parent any documents and materials in his possession or control that may be necessary to the defense of such claim or Legal Proceeding; and
3. Parent shall have the right to settle, adjust or compromise such claim or Legal Proceeding with the consent of the Stockholders' Agent (as defined in Section 10.1); provided, however, that such consent shall not be unreasonably withheld.

Parent shall give the Stockholders' Agent prompt notice of the commencement of any such Legal Proceeding against Parent, Merger Sub or any of the Acquired Corporations and shall keep the Stockholders' Agent informed at all stages thereof; provided, however, that any failure on the part of Parent to so notify or inform the Stockholders' Agent shall not limit any of the obligations of the Indemnitors under this Section 9 (except to the extent such failure materially prejudices the defense of such Legal Proceeding). If Parent does not elect to proceed with the defense of any such claim or Legal Proceeding, the Stockholders' Agent may proceed with the defense of such claim or Legal Proceeding with counsel reasonably satisfactory to Parent; provided, however, that the Stockholders' Agent may not settle, adjust or compromise any such claim or Legal Proceeding without the prior written consent of Parent (which consent may not be unreasonably withheld).

9.7 Setoff. In addition to any rights of setoff or other similar rights that Parent or any of the other Indemnitees may have at common law or otherwise, Parent shall have the right to withhold and deduct any sum that may be owed to any Indemnitee under this Section 9 or pursuant to any other provision of this Agreement from any amount otherwise payable by any Indemnitee to the Stockholders' Agent or any stockholder of the Company; provided, however, that any such right of Parent shall be subject to the limitations set forth in Section 9.2(e) and provided further that Parent shall not be entitled to set off against Parent Shares held by Parent under any affiliate agreement in excess of an Indemnitor's Pro Rata Allocation of any Damages pursuant to this Section 9.

9.8 Exclusive Remedy. Subject to the rights of the Indemnitees set forth in Section 9.7, the Indemnitors shall not be liable or responsible in any manner whatsoever to Indemnitees, whether for indemnification or otherwise, except for indemnity as expressly provided in this Section 9 and this Section 9 provides the exclusive remedy and cause of action of Indemnitees against any Indemnitor with respect to any matter arising out of or in connection with this Agreement; provided, however, no claim against an Indemnitor for fraud or intentional misrepresentation by such Indemnitor shall be subject to the limitations of this paragraph or this Section 9, other than as set forth in the proviso set forth in Section 9.2(f).

9.9 Exercise of Remedies by Indemnitees Other Than Parent. No Indemnitee (other than Parent or any successor thereto or assign thereof) shall be permitted to assert any indemnification claim or exercise any other remedy under this Agreement unless Parent (or any successor thereto or assign thereof) shall have consented to the assertion of such indemnification claim or the exercise of such other remedy.

10. Miscellaneous Provisions

10.1 Stockholders' Agent. By virtue of their approval of the Merger, stockholders of the Company hereby irrevocably appoint Cornell P. French as their agent for purposes of Sections 6 and 9 (the "Stockholders' Agent"), and Cornell P. French hereby accepts his appointment as the Stockholders' Agent. Parent shall be entitled to deal exclusively with the Stockholders' Agent on all matters relating to Sections 6 and 9, and shall be entitled to rely conclusively (without further evidence of any kind whatsoever) on any document executed or purported to be executed on behalf of any Stockholder by the Stockholders' Agent, and on any other action taken or purported to be taken on behalf of any Stockholder by the Stockholders' Agent, as fully binding upon such Stockholder.

10.2 Further Assurances. Each party hereto shall execute and cause to be delivered to each other party hereto such instruments and other documents, and shall take such other actions, as such other party may reasonably request (prior to, at or after the Closing) for the purpose of carrying out or evidencing any of the transactions contemplated by this Agreement.

10.3 Fees and Expenses. Each party to this Agreement shall bear and pay all fees, costs and expenses (including legal fees and accounting fees) that have been incurred or that are incurred by such party in connection with the transactions contemplated by this Agreement, including all fees, costs and expenses incurred by such party in connection with or by virtue of (a) the investigation and review conducted by Parent and its Representatives with respect to any of the Acquired Corporation's business (and the furnishing of information to Parent and its Representatives in connection with such investigation and review), (b) the negotiation, preparation and review of this Agreement (including the Disclosure Schedule) and all agreements, certificates, opinions and other instruments and documents delivered or to be delivered in connection with the transactions contemplated by this Agreement, (c) the preparation and submission of any filing or notice required to be made or given in connection with any of the transactions contemplated by this Agreement, and the obtaining of any Consent required to be obtained in connection with any of such transactions, (d) the consummation of the Merger, provided, however, that, to the extent the total amount of all such fees, costs and expenses incurred by or for the benefit of any of the Acquired Corporations (including all such fees, costs and expenses incurred prior to the date of this Agreement and including the amount of all special bonuses and other amounts that may become payable to any officers of any of the Acquired Corporations or other Persons in connection with the consummation of the transactions contemplated by this Agreement) exceeds $5,400,000 in the aggregate, such fees, costs and expenses shall be borne and paid by the stockholders of the Company and not by any of the Acquired Corporations, and (e) the filing of the premerger notification and report forms relating to the Merger under the HSR Act.

10.4 Attorneys' Fees. If any action or proceeding relating to this Agreement or the enforcement of any provision of this Agreement is brought against any party hereto, the prevailing party shall be entitled to recover reasonable attorneys' fees, costs and disbursements (in addition to any other relief to which the prevailing party may be entitled).

10.5 Notices. Any notice or other communication required or permitted to be delivered to any party under this Agreement shall be in writing and shall be deemed properly delivered, given and received when delivered (by hand, by registered mail, by courier or express delivery service or by facsimile) to the address or facsimile telephone number set forth beneath the name of such party below (or to such other address or facsimile telephone number as such party shall have specified in a written notice given to the other parties hereto):

If to Parent or Merger Sub:

Siebel Systems, Inc.
1855 South Grant Street
San Mateo, CA 94402
Attention: Vice President, Legal Affairs
Facsimile Number: (650) 295-5116

If to the Company:

Onlink Technologies, Inc.
700 Bay Road, Suite 200
Redwood City, CA 94063
Attention: Cornell P. French
Facsimile Number: (650) 298-3809


If to the Stockholders' Agent or any of the Indemnitors:

Cornell P. French, c/o OnLink Technologies Inc.
700 Bay Road, Suite 200
Redwood City, CA 94063
Facsimile Number: (650) 298-3809

10.6 Confidentiality. Without limiting the generality of anything contained in Section 5.3, on and at all times after the Closing Date, the Company (and the Company shall cause the Subsidiary) to keep confidential, and not use or disclose to any other Person, any non-public document or other non-public information in each Acquired Corporation's possession that relates to the business of such Acquired Corporation or Parent.

10.7 Time of the Essence. For the purposes of this Agreement and the transactions contemplated by this Agreement, time is of the essence.

10.8 Headings. The underlined headings contained in this Agreement are for convenience of reference only, shall not be deemed to be a part of this Agreement and shall not be referred to in connection with the construction or interpretation of this Agreement.

10.9 Counterparts. This Agreement may be executed in several counterparts, each of which shall constitute an original and all of which, when taken together, shall constitute one agreement.

10.10 Governing Law. This Agreement shall be construed in accordance with, and governed in all respects by, the internal laws of the State of Delaware (without giving effect to principles of conflicts of laws).

10.11 Successors and Assigns. This Agreement shall be binding upon: the Company and its successors and assigns (if any); Parent and its successors and assigns (if any); and Merger Sub and its successors and assigns (if any). This Agreement shall inure to the benefit of: the Company; the Company's stockholders (to the extent set forth in Section 1.5); the holders of assumed Company Options (to the extent set forth in Section 1.6) and the Company's officers and directors to the extent described in Section 5.13; Parent; Merger Sub; the other Indemnitees (subject to Section 9.9); and the respective successors and assigns (if any) of the foregoing. After the Closing Date, Parent may freely assign any or all of its rights under this Agreement (including its indemnification rights (but not its obligations hereunder) under Section 9), in whole or in part, to any other Person without obtaining the consent or approval of any other party hereto or of any other Person.

10.12 Remedies Cumulative; Specific Performance. The rights and remedies of the parties hereto shall be cumulative (and not alternative). The parties to this Agreement agree that, in the event of any breach or threatened breach by any party to this Agreement of any covenant, obligation or other provision set forth in this Agreement for the benefit of any other party to this Agreement, such other party shall be entitled (in addition to any other remedy that may be available to it) to (a) a decree or order of specific performance or mandamus to enforce the observance and performance of such covenant, obligation or other provision, and (b) an injunction restraining such breach or threatened breach.

10.13 Waiver.

1. No failure on the part of any Person to exercise any power, right, privilege or remedy under this Agreement, and no delay on the part of any Person in exercising any power, right, privilege or remedy under this Agreement, shall operate as a waiver of such power, right, privilege or remedy; and no single or partial exercise of any such power, right, privilege or remedy shall preclude any other or further exercise thereof or of any other power, right, privilege or remedy.
2. No Person shall be deemed to have waived any claim arising out of this Agreement, or any power, right, privilege or remedy under this Agreement, unless the waiver of such claim, power, right, privilege or remedy is expressly set forth in a written instrument duly executed and delivered on behalf of such Person; and any such waiver shall not be applicable or have any effect except in the specific instance in which it is given.

10.14 Waiver of Jury Trial. Each of the parties hereto hereby irrevocably waives any and all right to trial by jury in any Legal Proceeding arising out of or related to this Agreement or the transactions contemplated hereby.

10.15 Amendments. This Agreement may not be amended, modified, altered or supplemented other than by means of a written instrument duly executed and delivered: (a) prior to the Closing Date, on behalf of Parent, Merger Sub, the Company and the Stockholders' Agent (acting exclusively for and on behalf of all of the Merger Stockholders); and (b) after the Closing Date, on behalf of Parent and the Stockholders' Agent (acting exclusively for and on behalf of all of the Merger Stockholders).

10.16 Severability. In the event that any provision of this Agreement, or the application of any such provision to any Person or set of circumstances, shall be determined to be invalid, unlawful, void or unenforceable to any extent, the remainder of this Agreement, and the application of such provision to Persons or circumstances other than those as to which it is determined to be invalid, unlawful, void or unenforceable, shall not be impaired or otherwise affected and shall continue to be valid and enforceable to the fullest extent permitted by law.

10.17 Parties in Interest. Except for the provisions of Sections 1.5, 1.6, 9, and 10.20, none of the provisions of this Agreement is intended to provide any rights or remedies to any Person other than the parties hereto and their respective successors and assigns (if any).

10.18 Entire Agreement. This Agreement and the other agreements referred to herein set forth the entire understanding of the parties hereto relating to the subject matter hereof and thereof and supersede all prior agreements and understandings among or between any of the parties relating to the subject matter hereof and thereof; provided, however, that the Mutual Non-Disclosure Agreement executed on behalf of Parent on and the Company on February 15, 2000, as amended, shall not be superseded by this Agreement and shall remain in effect in accordance with its terms until the earlier of (a) the Effective Time, or (b) the date on which such Mutual Non-Disclosure Agreement is terminated in accordance with its terms.

10.19 Construction.

1. For purposes of this Agreement, whenever the context requires: the singular number shall include the plural, and vice versa; the masculine gender shall include the feminine and neuter genders; the feminine gender shall include the masculine and neuter genders; and the neuter gender shall include the masculine and feminine genders.
2. The parties hereto agree that any rule of construction to the effect that ambiguities are to be resolved against the drafting party shall not be applied in the construction or interpretation of this Agreement.
3. As used in this Agreement, the words "include" and "including," and variations thereof, shall not be deemed to be terms of limitation, but rather shall be deemed to be followed by the words "without limitation."
4. Except as otherwise indicated, all references in this Agreement to "Sections", "Schedules" and "Exhibits" are intended to refer to Sections of this Agreement and Schedules and Exhibits to this Agreement.

10.20 Rule 144 (c). For the benefit of the Persons identified on Exhibit G(b) only, Parent will use reasonable efforts to file in a timely manner any reports required to be filed by it under the Securities Act and the Exchange Act in order to effect compliance under Rule 144 (c) promulgated under the Securities Act until the close of business on the first anniversary of the Effective Time.

The parties hereto have caused this Agreement to be executed and delivered as of the date first written above.

Siebel Systems, Inc.,
a Delaware corporation

By:  /s/ Howard H. Graham


Printed Name:  Howard H. Graham


Title:  Senior Vice President, Finance and
Administration and Chief Financial Officer

Ocelot Acquisition Corp.,
a Delaware corporation

By:  /s/ Justin Dooley


Printed Name:  Justin Dooley


Title:  President and Chief Executive Officer

OnLink Technologies, Inc.,
a Delaware corporation

By:  /s/ Cornell P. French


Printed Name:  Cornell P. French


Title:  Chief Executive Officer

Stockholders' Agent

By:  /s/ Cornell P. French


Cornell P. French

EXHIBIT A

CERTAIN DEFINITIONS

For purposes of the Agreement (including this Exhibit A):

Acquired Corporations. "Acquired Corporations" shall mean the Company and the Subsidiary.

Acquired Corporation Contract. "Acquired Corporation Contract" shall mean any Contract: (a) to which any of the Acquired Corporations is a party; (b) by which any of the Acquired Corporations or any of its assets is or may become bound or under which any of the Acquired Corporations has, or may become subject to, any obligation; or (c) under which any of the Acquired Corporations has or may acquire any right or interest.

Acquisition Transaction. "Acquisition Transaction" shall mean any transaction involving:

1. the sale, license, disposition or acquisition of all or a material portion of any of the Acquired Corporations' business or assets;
2. the issuance, disposition or acquisition of (i) any capital stock or other equity security of any of the Acquired Corporations (other than Company Common Stock issued to employees of the Company, upon exercise of Company Options and other than Company Common Stock issued to stockholders of the Company upon the conversion of Company Preferred Stock), (ii) any option, call, warrant or right (whether or not immediately exercisable) to acquire any capital stock or other equity security of any of the Acquired Corporations (other than stock options granted to employees of the Company in routine transactions in accordance with the Company's past practices), or (iii) any security, instrument or obligation that is or may become convertible into or exchangeable for any capital stock or other equity security of any of the Acquired Corporations; or
3. any merger, consolidation, business combination, reorganization or similar transaction involving any of the Acquired Corporations.

Agreement. "Agreement" shall mean the Agreement and Plan of Merger and Reorganization to which this Exhibit A is attached (including the Disclosure Schedule), as it may be amended from time to time.

Company Proprietary Asset. "Company Proprietary Asset" shall mean any Proprietary Asset owned by or licensed to any of the Acquired Corporations or otherwise used by any of the Acquired Corporations.

Consent. "Consent" shall mean any approval, consent, ratification, permission, waiver or authorization (including any Governmental Authorization).

Contract. "Contract" shall mean any written, oral or other agreement, contract, subcontract, lease, understanding, instrument, note, warranty, insurance policy, benefit plan or legally binding commitment or undertaking of any nature.

Damages. "Damages" shall include, without limitation, any loss, damage, injury, decline in value, liability, claim, demand, settlement, judgment, award, fine, penalty, Tax, fee (including reasonable attorneys' fees), charge, cost (including reasonable costs of investigation) or expense of any nature.

Disclosure Schedule. "Disclosure Schedule" shall mean the schedule (dated as of the date of the Agreement) delivered to Parent on behalf of the Company.

Encumbrance. "Encumbrance" shall mean any lien, pledge, hypothecation, charge, mortgage, security interest, encumbrance, claim, infringement, interference, option, right of first refusal, preemptive right, community property interest or restriction of any nature (including any restriction on the voting of any security, any restriction on the transfer of any security or other asset, any restriction on the receipt of any income derived from any asset, any restriction on the use of any asset and any restriction on the possession, exercise or transfer of any other attribute of ownership of any asset).

Entity. "Entity" shall mean any corporation (including any non-profit corporation), general partnership, limited partnership, limited liability partnership, joint venture, estate, trust, company (including any limited liability company or joint stock company), firm or other enterprise, association, organization or entity.

Escrow Shares. "Escrow Shares" shall mean the shares of Parent Common Stock deliverable to the escrow agent under the Escrow Agreement pursuant to Section 1.8(a).

Exchange Act. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.

Government Bid. "Government Bid" shall mean any quotation, bid or proposal submitted to any Governmental Body or any proposed prime contractor or higher-tier subcontractor of any Governmental Body.

Government Contract. "Government Contract" shall mean any prime contract, subcontract, letter contract, purchase order or delivery order executed or submitted to or on behalf of any Governmental Body or any prime contractor or higher-tier subcontractor, or under which any Governmental Body or any such prime contractor or subcontractor otherwise has or may acquire any right or interest.

Governmental Authorization. "Governmental Authorization" shall mean any: (a) permit, license, certificate, franchise, permission, clearance, registration, qualification or authorization issued, granted, given or otherwise made available by or under the authority of any Governmental Body or pursuant to any Legal Requirement; or (b) right under any Contract with any Governmental Body.

Governmental Body. "Governmental Body" shall mean any: (a) nation, state, commonwealth, province, territory, county, municipality, district or other jurisdiction of any nature; (b) federal, state, local, municipal, foreign or other government; or (c) governmental or quasi- governmental authority of any nature (including any governmental division, department, agency, commission, instrumentality, official, organization, unit, body or Entity and any court or other tribunal).

HSR Act. "HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.

Indemnitees. "Indemnitees" shall mean the following Persons: (a) Parent; (b) Parent's current and future affiliates (including Merger Sub and, following the Merger, the Company); (c) the respective Representatives of the Persons referred to in clauses "(a)" and "(b)" above; and (d) the respective successors and assigns of the Persons referred to in clauses "(a)", "(b)" and "(c)" above; provided, however, that the Company's stockholders shall not be deemed to be "Indemnitees."

Key Stockholders. "Key Stockholders" shall mean the following Persons: Kirk Cruikshank, James Dorrian, Buck French, David Schwab, Keith Miller, Sierra Ventures, GE Capital Equity Investments, Inc., Dave Mullin, Tim Vo, Bob Bear, Jeffrey Loomans, John Shap, Larry Warnock, James Hornung, Robert Hornung, Patricia Munter, Berkeley International Capital Limited and London Pacific Insurance Limited..

knowledge; best of knowledge. Information shall be deemed to be known to the "best of knowledge" or to the "knowledge" of the Company if that information is actually known or reasonably should have been known by any officer or director, in each case after due inquiry by such persons, or by any employee of the Company.

Legal Proceeding. "Legal Proceeding" shall mean any action, suit, litigation, arbitration, proceeding (including any civil, criminal, administrative, investigative or appellate proceeding), hearing, inquiry, audit, examination or investigation commenced, brought, conducted or heard by or before, or otherwise involving, any court or other Governmental Body or any arbitrator or arbitration panel.

Legal Requirement. "Legal Requirement" shall mean any federal, state, local, municipal, foreign or other law, statute, constitution, 9 regulation, ruling or requirement issued, enacted, adopted, promulgated, implemented or otherwise put into effect by or under the authority of any Governmental Body.

Material Adverse Effect. A violation or other matter will be deemed to have a "Material Adverse Effect" on an Acquired Corporation if such violation or other matter (considered together with all other matters that would constitute exceptions to the representations and warranties set forth in the Agreement or in the Company Closing Certificate but for the presence of "Material Adverse Effect" or other materiality qualifications, or any similar qualifications, in such representations and warranties) would have a material adverse effect on such Acquired Corporation's business, assets, liabilities, results of operations, financial performance or prospects. Notwithstanding the foregoing, a violation or other matter that has a Material Adverse Effect on the Subsidiary but which does not have a Material Adverse Effect on the Acquired Corporations taken as a whole shall not be deemed to have a Material Adverse Effect on the Subsidiary.

Merger Stockholder. "Merger Stockholder" shall mean each stockholder of Company that does not perfect its appraisal rights and is otherwise entitled to receive shares of Parent Common Stock pursuant to Section 1.5.

Person. "Person" shall mean any individual, Entity or Governmental Body.

Proprietary Asset. "Proprietary Asset" shall mean any: (a) patent, patent application, trademark (whether registered or unregistered), trademark application, trade name, fictitious business name, service mark (whether registered or unregistered), service mark application, copyright (whether registered or unregistered), copyright application, maskwork, maskwork application, trade secret, know-how, customer list, franchise, system, computer software, computer program, invention, design, blueprint, engineering drawing, proprietary product, technology, proprietary right or other intellectual property right or intangible asset; or (b) right to use or exploit any of the foregoing.

Pro Rata Allocation. "Pro Rata Allocation" shall mean, for any Indemnitor, the fraction resulting from the division of the number of shares of Company Stock held by such Indemnitor immediately prior to the Effective Time by the total number of shares of Company Stock outstanding immediately prior to the Effective Time.

Representatives. "Representatives" shall mean officers, directors, employees, agents, attorneys, accountants, advisors and representatives.

SEC. "SEC" shall mean the United States Securities and Exchange Commission.

Securities Act. "Securities Act" shall mean the Securities Act of 1933, as amended.

Subsidiary. "Subsidiary" shall have the meaning attributed to that term in Section 2.1.

Tax. "Tax" shall mean any tax (including any income tax, franchise tax, capital gains tax, gross receipts tax, value-added tax, surtax, excise tax, ad valorem tax, transfer tax, stamp tax, sales tax, use tax, property tax, business tax, withholding tax or payroll tax), levy, assessment, tariff, duty (including any customs duty), deficiency or fee, and any related charge or amount (including any fine, penalty or interest), imposed, assessed or collected by or under the authority of any Governmental Body.

Tax Return. "Tax Return" shall mean any return (including any information return), report, statement, declaration, estimate, schedule, notice, notification, form, election, certificate or other document or information filed with or submitted to, or required to be filed with or submitted to, any Governmental Body in connection with the determination, assessment, collection or payment of any Tax or in connection with the administration, implementation or enforcement of or compliance with any Legal Requirement relating to any Tax.

Transaction Documents. "Transaction Documents" shall mean the following documents collectively: the Affiliate Agreement, Voting Agreement, Release, Noncompetition Agreement and Escrow Agreement.