10-K

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

FORM 10-K

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

For the fiscal year ended December 31, 2002

OR

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

For the transition period from ________to _________

Commission File Number: 0-20725

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

 

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

2207 Bridgepointe Parkway
San Mateo, CA     94404
(Address of principal executive offices, including zip code)

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

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

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

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

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

The aggregate market value of the voting stock held by non-affiliates of the registrant, based on the closing sale price of the Registrant's Common Stock on June 28, 2002, as reported on the Nasdaq National Market was approximately $6,172,781,000. Shares of Common Stock held by each current executive officer and director and by each person who is known by the registrant to own 5% or more of the outstanding Common Stock have been excluded from this computation in that such persons may be deemed to be affiliates of the Registrant. Share ownership information of certain persons known by the Registrant to own greater than 5% of the outstanding common stock for purposes of the preceding calculation is based solely on information on Schedule 13G filed with the Commission and is as of June 28, 2002. This determination of affiliate status is not a conclusive determination for other purposes.

The number of shares outstanding of the registrant's Common Stock, par value $0.001 per share, as of February 7, 2003, was 487,687,081.

TABLE OF CONTENTS

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

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

PART I

Item 1. Business

Overview

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

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

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

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

Products

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

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

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

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

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

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

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

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

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

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

Siebel Sales

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

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

Siebel Marketing

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

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

Siebel Service

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

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

Siebel Call Center

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

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

Siebel Web Service

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

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

Siebel Partner Relationship Management

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

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

Siebel Employee Relationship Management

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

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

Siebel Interactive Selling

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

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

Siebel Analytics

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

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

Siebel eBusiness Applications, MidMarket Edition

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

General Product Options

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

• Siebel Advanced Search: Siebel Advanced Search helps users to locate information contained in the corporate knowledge base. Siebel Advanced Search enhances the base Siebel Search capabilities by locating documents using term proximity, word stemming, advanced thesaurus, term inflection, fuzzy searching and other searching features.

• Siebel Anywhere: Siebel Anywhere distributes and installs upgrade kits for Siebel mobile clients. Siebel Anywhere can also be used to distribute or install upgrade kits to Siebel servers and distribute Siebel Repository File changes, client configuration changes and database changes.

• Siebel Remote Client: Siebel Remote Client enables true mobile computing by providing a comprehensive bi-directional exchange of information between laptops and corporate servers. Using Siebel Remote Client, mobile users can access Siebel eBusiness Applications while out of the office and later synchronize to upload local changes to the server.

• Siebel Data Quality: Siebel Data Quality addresses an organization's need for real-time and batch mode data quality processing. It enables customers to identify duplicate account, contact and prospect records by comparing account and contact names, postal addresses, email addresses and other fields that customers can define for themselves. Accordingly, it helps organizations ensure accurate, consistent and consolidated customer information.

• Siebel Data Quality Matching Server: The Siebel Data Quality Matching Server is a scalable and Unicode-enabled matching engine that can identify potential duplicate data among existing accounts, contacts and prospects in the Siebel transactional database.

• Siebel Dun & Bradstreet Integration Solution: The Siebel Dun & Bradstreet Integration Solution enables customers to access Dun & Bradstreet's marketing data, which covers more than 31 million organizations around the world, and Business and Credit Reports from within Siebel eBusiness Applications. The Siebel Dun & Bradstreet Integration Solution provides the ability to create more targeted marketing lists, supplies corporate linkage information and provides online access to selected Dun & Bradstreet reports.

• Siebel Briefings: Siebel Briefings is a knowledge management solution that enables employees and partners to more effectively acquire and retain customers. Sales, marketing and service professionals are provided with convenient access to relevant, critical business information about their accounts, opportunities, competitors and related markets.

• Siebel Reports Server: The Siebel Reports Server allows users and partners to schedule, run and distribute reports using an easy-to-use and intuitive user interface. Reports can be run in both batch and interactive modes.

• Siebel Smart Answer for Employees: Siebel Smart Answer for Employees leverages the natural language processing technology available in Siebel Smart Answer to interpret unstructured text and intelligently respond to inquiries with the appropriate answers. Siebel Smart Answer enables customer service representatives to respond to customer inquiries and service requests faster than they previously could, while still maintaining the personalized and professional dialog that customers expect.

• Siebel SmartScript: Siebel SmartScript (formerly SiebeleSmartScript) offers a workflow-based user interface that guides users through customer interactions. Siebel SmartScript integrates workflow logic with customer information to ensure users ask the right questions at the right time. This enables users to engage in high-quality interactions and more effectively sell products and services that augment previous purchases. Siebel SmartScript also reduces data entry errors and training time.

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

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

Product Development Expense

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

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

Professional Services

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

Implementation Services

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

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

Education and User Adoption Solutions

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

Technical Support

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

Marketing and Sales

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

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

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

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

Maintain and Extend Advanced Technology Position

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

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

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

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

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

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

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

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

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

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

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

Develop and Maintain Global Strategic Alliances

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

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

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

System Integrator Accenture LTD American Management Systems, Inc. BearingPoint, Inc. Cap Gemini Ernst & Young S.A. Deloitte Consulting IBM Corporation Lockheed Martin Corporation Siemens Business Services GmbH & Co. SYNAVANT, Inc. Unisys Corporation	Platform Fujitsu Siemens Computers B.V. Hewlett-Packard Compaq IBM Corporation Microsoft Corporation Pitney Bowes, Inc. Precision Research Corporation Sun Microsystems, Inc. Xerox Corporation
Software and Content Acxiom Corporation Alcatel SA Avaya, Inc. BEA Systems, Inc. BMC Software, Inc. BT plc Cisco Systems, Inc. Convergys Corporation D & B, Inc. IBM Corporation	Software and Content (Continued) Jacada, Inc. Mercury Interactive Corporation Parametric Technology Corp. Quest Software, Inc. SeeBeyond Technology Corporation SPSS Inc. TIBCO Software, Inc. VERITAS Software Corporation Vitria Technology, Inc. webMethods, Inc.

Support Successful Customer Implementations

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

Expand Global Capabilities

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

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

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

Competition

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

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

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

Internal Development

Many of our customers and potential customers have in the past attempted to develop sales, marketing, customer service and employee relationship information systems in-house, either alone or with the help of systems integrators. Internal information technology departments have staffed projects to build their own systems utilizing a variety of tools. In some cases, such internal development projects have been successful in satisfying the needs of an organization. To compete successfully, our products must conform to the customer's information technology standards, scale to meet the needs of large enterprises, operate globally and cost less than the result of an internal development effort. We may not be able to compete effectively against these internal development efforts.

Custom System Integration Projects

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

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

Other Competitors

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

Some of these competitors have longer operating histories; significantly greater financial, technical, marketing and other resources; significantly greater name recognition; and a larger installed base of customers than we do. In addition, many competitors have well-established relationships with our current and potential customers. As a result, these competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements or to devote greater resources to the development, promotion and sale of their products than we can.

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

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

Employees

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

Availability of this Report

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

Item 2. Properties

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

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

Item 3. Legal Proceedings

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

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

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

PART II

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

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

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

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

Item 6. Selected Financial Data

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

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

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

1. The Company completed a restructuring of its operations and an associated workforce reduction (the "Restructuring") and a tender offer for certain employee options (the "Option Repurchase") during 2002, which are discussed further in Notes 2 and 7 to our consolidated financial statements, respectively. Accordingly, operating income for 2002 has been reduced by $205.3 million related to the Restructuring and $54.9 million related to the Option Repurchase. On an after-tax basis, these charges reduced earnings for 2002 by an aggregate of $166.5 million.

2. In accordance with SFAS No. 142 "Goodwill and Other Intangible Assets" ("SFAS 142"), the Company ceased amortizing goodwill on January 1, 2002. Amortization of goodwill was not significant for any period presented in the above table. Please refer to Note 13 to the accompanying consolidated financial statements for a further discussion of the impact on Company's operations of ceasing amortization of goodwill.

3. Net income has been reduced by the accretion of OpenSite's mandatorily redeemable convertible preferred stock to determine net income available to common stockholders. The accounting for OpenSite's mandatorily redeemable convertible preferred stock required non-cash accretion to the then current fair value of the common stock into which the mandatorily redeemable convertible preferred stock was convertible. This resulted in a non-cash charge to accretion and offsetting credit to mandatorily redeemable convertible preferred stock for each of the years ended December 31, 1998, 1999 and 2000, the only periods in which the mandatorily redeemable convertible preferred stock was outstanding. The amount of accretion for a statement of operations period was dependent upon how much the fair value of OpenSite's common stock fluctuated during that period. In connection with our acquisition of OpenSite, the holders of the mandatorily redeemable convertible preferred stock converted their shares pursuant to its existing terms on a one-for-one basis into shares of OpenSite's common stock. Accordingly, we stopped recording accretion on the mandatorily redeemable convertible preferred stock on May 17, 2000, the date of acquisition.

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

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

Overview of the Company's Business

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

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

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

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

Overview of 2002 Results

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

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

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

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

• The Company completed a Restructuring of its operations in order to better align the Company's cost structure with its anticipated future revenues. The Company believes that the Restructuring will reduce its future operating costs and related cash requirements, thereby strengthening the Company's future operating performance. Please refer to "Restructuring" below and to Note 2 to the accompanying consolidated financial statements for an explanation and further discussion of the Restructuring.

• The Company repurchased 28.1 million employee stock options with exercise prices equal to or greater than $40.00 per share on September 30, 2002. The Company repurchased these options in order to: (i) improve employee morale by realigning the cash and equity components of its compensation programs; (ii) eliminate the distraction to its employees of significantly out-of-the-money stock options; and (iii) reduce the number of outstanding stock options relative to the number of shares outstanding, or "option overhang," thereby reducing future potential dilution to existing stockholders. Please refer to "Option Repurchase" below and to Note 7 to the accompanying consolidated financial statements for an explanation and further discussion of the repurchase of these stock options.

• The Company maintained the cost controls that it initiated in 2001 and, accordingly, reduced the discretionary portion of its cost structure to near minimal levels during 2002. Specifically, management continued to reduce advertising expenditures; maintained the Chief Executive Officer salary at one dollar per year; maintained the previously established 20% reductions in senior executive compensation; reduced bonuses for all employees, including officers; deferred merit increases until the third quarter of 2002; and reduced discretionary expenditures, such as travel and recruiting.

• The Company continued its requirement of obtaining competitive bids for its purchases, where appropriate, and required Chief Executive Officer approval for all significant purchases.

• To ensure that the Company maintains continuity of business operations under adverse circumstances, including a significant geopolitical dislocation or earthquake in the San Francisco Bay Area, the Company continued to strengthen its data communications and customer service infrastructure. In October 2002, the Company completed a redundant backup information technology infrastructure site in Salt Lake City, Utah, thereby strengthening its ability to provide high-quality customer service globally even in the event of a significant and sustained system outage at any of the Company's facilities.

• The Company continued its focus on customer satisfaction by leading a team of systems integrators and software vendors in a collaborative effort to reduce the cost of integrating software applications. Through this collaborative effort, the Company released UAN in the fourth quarter of 2002. UAN is designed to address one of the primary challenges currently facing the software applications industry: driving down the cost of application ownership and maintenance.

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

• Total expenses, excluding the cost of the Restructuring and the Option Repurchase, decreased by 15%, from $1,726.7 million in 2001 to $1,469.4 million in 2002.

• Cash and short-term investments increased by $504.9 million, or 30%, from $1,656.7 million as of December 31, 2001, to $2,161.6 million as of December 31, 2002, representing approximately 60% and 71% of total assets, respectively. During the periods of deteriorating global economic conditions of 2001 and 2002, the Company increased cash and short-term investments by $1,009.0 million, or 88%, primarily through cash flows from operations.

• Days sales outstanding decreased from 80 days and 73 days as of December 31, 2000 and 2001, respectively, to 63 days as of December 31, 2002.

• Cash flows from operations were $588.2 million and $433.2 million during 2001 and 2002, respectively.

• Working capital increased by 22%, from $1,584.4 million as of December 31, 2001, to $1,940.3 million as of December 31, 2002.

• Deferred revenue, which consists primarily of deferred maintenance revenue, increased by 12%, from $241.0 million as of December 31, 2001, to $270.6 million as of December 31, 2002.

• Stockholders' equity increased by 7%, from $1,836.1 million as of December 31, 2001, to $1,957.5 million as of December 31, 2002.

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

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

• Increase software license revenue from the Company's core customer relationship management products and verticals;


• Continue to increase market share and software license revenues in the Company's newest product lines: UAN, Siebel ERM, and Siebel Analytics;


• Increase the Company's customer base in key vertical markets, such as Life Sciences, Public Sector, Retail, and Travel and Transportation;


• Identify opportunities to expand product lines, both organically and through acquisition;


• Improve the execution within the Company's sales organization;


• Grow professional services, maintenance and other revenues;


• Commence new cost control initiatives to further reduce total cost per employee; and



• Expand operating margins.

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

Restructuring

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

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

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

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

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

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

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

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

Option Repurchase

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

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

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

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

Revenues

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Cost of Revenues and Gross Margin

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

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

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

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

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

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

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

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

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

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

Operating Expenses

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Operating Income (Loss) and Operating Margin

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

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

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

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

Other Income, Net

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

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

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

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

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

Income Taxes and Income Tax Benefit

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

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

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

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

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

Liquidity and Capital Resources

Overview

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

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

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

Commitments

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

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

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

Cash Flows

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

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

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

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

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

Adoption of Accounting Standards

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

Recent Accounting Pronouncements

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

Seasonality

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

Application of Critical Accounting Policies and Use of Estimates

Use of Estimates

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

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

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

Critical Accounting Policies

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

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

Revenue Recognition

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

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

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

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

• Evidence of an arrangement: The Company considers a non-cancelable agreement signed by the Company and the customer to be evidence of an arrangement.

• Delivery: Delivery is considered to occur when media containing the licensed programs is provided to a common carrier or, in the case of electronic delivery, the customer is given access to the licensed programs. The Company's typical end user license agreement does not include customer acceptance provisions.

• Fixed or determinable fee: The Company considers the fee to be fixed or determinable if the fee is not subject to refund or adjustment. If the arrangement fee is not fixed or determinable, the Company recognizes the revenue as amounts become due and payable.

• Collection is deemed probable: The Company conducts a credit review for all significant transactions at the time of the arrangement to determine the credit-worthiness of the customer. Collection is deemed probable if the Company expects that the customer will be able to pay amounts under the arrangement as payments become due. If the Company determines that collection is not probable, the Company defers the revenue and recognizes the revenue upon cash collection.

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

Restructuring-Related Expenses

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

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

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

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

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

Stock-Based Compensation

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

Option Repurchase

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

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

Provision for Doubtful Accounts

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

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

Acquired Intangible Assets

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

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

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

Impairment of Long-Lived Assets

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

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

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

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

Income Taxes

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

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

Pre-approval of Non-Audit Services

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

Employee Stock Options

Section I. Description of Plans

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

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

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

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

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

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

Option Repurchase

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

CEO Option Cancellation

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

2002 Grants and Forfeitures

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

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

2003 Anticipated Stock Option Grants

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

Section III. General Option Information

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

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

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

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

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

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

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

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

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

Section IV. Accounting for Stock-Based Compensation

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

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

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

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

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

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

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

Section V. Executive Stock-Based Compensation

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

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

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

1. Options vest at a rate of 5% each quarter after October 21, 2003, and have a term of ten years.

2. Based on an aggregate of 5.9 million shares subject to options granted to employees pursuant to the Company's 1996 and 1998 Plans during the year ended December 31, 2002, including grants to the Named Executive Officers.

3. Under all stock option plans, the stock option exercise price is equal to the fair market value at the date of grant.

4. The potential realizable value is calculated based on the term of the option at the time of grant (ten years). Stock price appreciation of 5% and 10% is assumed pursuant to rules promulgated by the SEC and does not represent the Company's prediction of its stock price performance.

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

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

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

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

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

1. Based on the fair market value of the Company's Common Stock on the exercise date, minus the exercise price, multiplied by the number of shares exercised.

2. Represents the total number of shares of the Company's common stock subject to stock options held by the Named Executive Officers as of December 31, 2002.

3. Based on the fair market value of the Company's Common Stock as of December 31, 2002 ($7.40 per share), minus the exercise price, multiplied by the number of shares underlying the options.

4. As discussed above, the Company cancelled 26.0 million stock options held by Mr. Siebel in January 2003 and as a result, Mr. Siebel has a total of 18.7 million stock options that remain outstanding. Of the 26.0 million stock options cancelled, 15.1 million were exercisable and 10.9 million were unexercisable. The "in-the-money" value of the stock options cancelled was $14.9 million as of December 31, 2002.

Section VI. Equity Compensation Plan Information

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

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

1. Includes 44,475,426 stock options available for future issuance under the 1996 Plan, which is used for grants to officers and directors. This amount also includes 928,616 shares available under Siebel Systems' Employee Stock Purchase Plan. As described further in Note 7 to the accompanying consolidated financial statements, at the request of our CEO, we cancelled 26.0 million of our CEO's stock options in January 2003. As a result of this cancellation, the number of stock options outstanding under the 1996 Plan decreased by 26.0 million and the number of stock options available for grant increased by like amount.

2. Represents shares available under the 1998 Plan, which is used for grants to employees other than officers and directors. Please refer to the summary of the 1998 Plan below for a further description of the 1998 Plan.

3. The Company has assumed certain stock options granted to former employees of acquired companies (the "Acquired Options"). All of the Acquired Options have been adjusted to give effect to the conversion under the terms of the agreements between the Company and the companies acquired. The Acquired Options generally become exercisable over a four-year period and expire ten years from the date of grant. Additional stock options will not be granted under any of the acquired companies' plans, and these plans have not been approved by the Company's stockholders.

Summary of the 1998 Equity Incentive Plan

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

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

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

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

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

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

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

Risk Factors

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

Our total revenue and operating results may fluctuate.

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

• Corporate and consumer confidence in the economy, evidenced, in part, by stock market levels;


• Changes in the domestic and international economic, business and political conditions;


• Economic conditions within the information technology industry;


• Level of product and price competition;


• Length of our sales cycle and customer licensing patterns;


• Size and timing of individual license transactions;


• Delay or deferral of customer implementations of our products;


• Success in expanding our Global Services Organization, direct sales force and indirect distribution channels;


• Timing of new product introductions and product enhancements;


• Appropriate mix of products licensed and services sold;


• Levels of international transactions;


• Activities of and acquisitions by competitors;


• Timing of new hires and the allocation of our resources;


• Increases in the cost of software and professional services;


• Changes in foreign currency exchange rates; and


• Our ability to develop and market new products and control costs.

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

Our quarterly operating results may fluctuate.

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

• Domestic and international economic, business and political conditions;


• Economic conditions within the information technology industry;


• The discretionary nature of our customers' purchase and budget cycles;


• The size and complexity of our license transactions;


• The potential delays in recognizing revenue from license transactions;


• The timing of new product releases;


• Seasonal variations in operating results; and


• Variations in the fiscal or quarterly cycles of our customers.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Our customers may not successfully implement our products.

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

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

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

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

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

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

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

Our distribution channels may create additional risks.

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

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

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

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

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

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

We operate in a competitive and rapidly changing market.

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

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

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

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

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

A large number of personal, departmental and other products exist in the eBusiness applications market. Our competitors include a number of companies that compete with us primarily within a particular product line (e.g., analytics, interactive selling, etc.) and/or the prospective customer's industry (e.g., life sciences, financial services, etc.). These companies include Amdocs Limited; CAS GmbH; Chordiant Software, Inc.; Dendrite International, Inc.; E.piphany, Inc.; FrontRange Solutions, Inc.; Interact Commerce Corporation; Kana Software, Inc.; ONYX Software Corporation; Pivotal Corporation; and Salesforce.com, Inc., among many others. In addition, our competitors include several companies, such as Oracle Corporation, PeopleSoft, Inc. and SAP AG, which compete in a majority of the Company's product lines. Some of these competitors have longer operating histories; significantly greater financial, technical, marketing and other resources; significantly greater name recognition; and a larger installed base of customers than we do. In addition, many competitors have well-established relationships with our current and potential customers. As a result, these competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements or to devote greater resources to the development, promotion and sale of their products than we can.

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

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

We may not be able to replace the functionality provided by the third-party software currently offered with our products if that software becomes obsolete or incompatible with future versions of our products or is not adequately maintained or updated. Portions of our products incorporate software that was developed and is maintained by third-party software developers. Although we believe there are other sources for these products, any significant interruption in the supply of these products could adversely impact our sales unless and until we can secure another source. We depend in part on these third parties' abilities to enhance their current products, to develop new products on a timely and cost-effective basis and to respond to emerging industry standards and other technological changes. The absence of or any significant delay in the replacement of functionality provided by third-party software in our products could materially and adversely affect our sales.

Software errors or defects in our products could reduce revenues.

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

We need to successfully integrate acquisitions.

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

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

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

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

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

The loss of key personnel could negatively affect our performance.

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

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

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

• Increasing our vulnerability to general adverse economic and industry conditions;


• Limiting our ability to obtain additional financing;


• Requiring the dedication of a substantial portion of our expected cash flow from operations to service our indebtedness, thereby reducing the amount of our expected cash flow available for other purposes, including capital expenditures;


• Limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we compete; and


• Placing us at a competitive disadvantage compared to less leveraged competitors and competitors that have better access to capital resources.

We may not be able to protect our proprietary information.

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

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

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

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

Our international operations involve unique risks.

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

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

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

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

Our stock price may continue to be volatile.

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

Provisions in our charter documents may prevent certain corporate actions.

Our Board of Directors is authorized to issue up to 2,000,000 shares of preferred stock and to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any further approval by our stockholders. One of these shares has been designated Series A1 Preferred Stock, which was issued in connection with the acquisition of Janna Systems Inc., and 100,000 shares have been designated as Series A2 Junior Participating Preferred Stock, which was authorized in connection with a stockholders' rights plan that we implemented in January 2003. Please refer to Notes 6 and 14 to the accompanying consolidated financial statements for a more detailed description of the Series A1 Preferred Stock and Series A2 Junior Participating Preferred Stock. Additional shares of preferred stock could be authorized or issued with voting, liquidation, dividend and other rights superior to those of the common stock.

The rights of the holders of common stock will be subject to and may be adversely affected by the rights of the holders of any preferred stock that may be issued in the future. The issuance of the Series A2 Junior Participating Preferred Stock or the authorization of additional classes of preferred stock by our Board of Directors in the future, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could make it more difficult for a third party to acquire a majority of our outstanding voting common stock. In addition, the following factors could also delay or make more difficult a merger, tender offer or proxy contest: (i) our classified Board of Directors; (ii) certain provisions of our certificate of incorporation; (iii) certain provisions of our bylaws; and (iv) certain provisions of Delaware law.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Item 8. Financial Statements and Supplementary Data

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

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

Not applicable.

PART III

Item 10. Directors and Executive Officers of the Registrant

(a) Executive Officers

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

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

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

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

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

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

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

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

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

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

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

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

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

(b) Directors

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

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

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

Directors Continuing in Office until the 2003 Annual Meeting of Stockholders

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

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

Directors Continuing in Office until the 2004 Annual Meeting of Stockholders

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

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

Directors Continuing in Office until the 2005 Annual Meeting of Stockholders

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

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

Section 16(A) Beneficial Ownership Reporting Compliance

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

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

Item 11. Executive Compensation

(a) Compensation of Executive Officers

Summary Compensation Table

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

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

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

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

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

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

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

1. Amounts set forth under "Bonus" for Mr. McDermott for both 2001 and 2002 represent sales commissions earned in accordance with our sales commission plans. Amounts set forth under "Bonus" for Mr. Chiarello for 2002 represent sales commissions earned in accordance with our sales commission plans.

2. In accordance with SEC rules, other annual compensation in the form of perquisites and other personal benefits has been omitted where the aggregate amount of such perquisites and other personal benefits constitutes less than the lower of $50,000 or 10% of the total annual salary and bonus for the Named Executive Officer for the fiscal year. During 2002, amounts set forth under "Other Annual Compensation" for Mr. Wahl relate to life insurance premiums paid by Siebel Systems totaling $45,150 and $8,485 in other perquisites. Amounts for Mr. McDermott relate to $189,646 for reimbursement of relocation expenses and $2,001 in other perquisites.

3. In October 2002, we granted 100,000 shares of restricted stock, with a fair value of $647,000 at the date of grant, to Mr. Chiarello for aggregate cash consideration of $100. The restricted stock vests over five years of service with Siebel Systems, with 20% vesting on September 4, 2003, and the remaining shares vesting 5% each quarter of service thereafter. We may repurchase any unvested shares of restricted stock at the time of termination at the lower of (i) the original purchase price of the restricted stock; or (ii) the fair value of our common stock. As of December 31, 2002, the fair value of the restricted stock granted to Mr. Chiarello was $740,000. Although we do not have any intention to pay dividends on our common stock at this time, should we declare any dividends on our common stock, Mr. Chiarello is entitled to such dividends, when and if paid.

4. Amounts set forth under "All Other Compensation" represent consideration paid to each Named Executive Officer who tendered stock options under the terms of the Option Repurchase. Please refer to the "Report of the Compensation Committee of the Board of Directors on Executive Compensation" below for a further description of the Option Repurchase.

5. As described further in Note 7 to the accompanying consolidated financial statements, at the request of our CEO, we cancelled 26.0 million of our CEO's stock options in January 2003. This cancellation included the options granted to Mr. Siebel in 2000 and 2001 and represented all stock options granted to our CEO since October 1998.

6. Mr. Goldman joined Siebel Systems in August 2000.

7. Mr. Chiarello joined Siebel Systems in September 2002 at an annual salary of $500,000.

8. Mr. McDermott joined Siebel Systems in June 2001 and left in September 2002.

Stock Option Grants in the Year Ended December 31, 2002

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

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

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

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

Employment, Severance and Change of Control Agreements

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

(b) Compensation of Directors

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

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

Compensation Committee Interlocks and Insider Participation

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

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

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

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

Compensation Philosophy

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

1. We pay base salaries that are generally competitive with other leading high technology companies with which we compete for personnel. To ensure that our salaries are sufficient to attract and retain highly qualified executives and other key employees, we regularly compare salaries with those of our competitors and set salary parameters based on this review;

2. We pay cash bonuses based on the achievement of specific operating goals and high levels of performance; and

3. We provide our executive officers and key employees with equity-based incentives pursuant to our 1996 Equity Incentive Plan, 1998 Equity Incentive Plan and Employee Stock Purchase Plan in order to motivate them to achieve our long-term goals and to align their interests with those of our non-employee stockholders.

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

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

1. In 2002, we adjusted our compensation structure to reduce the guidelines regarding the number of stock options issued to our employees.

2. In September 2002, we completed the Option Repurchase, under which approximately 28.1 million shares underlying employee stock options were cancelled in exchange for common stock or cash.

3. In January 2003, we cancelled approximately 26.0 million shares subject to stock options held by our Chairman and CEO, Thomas M. Siebel, at his request. These stock options represented all options that had been granted to Mr. Siebel during the past four years, including all options granted to him from October 1998 through October 2001 (the date of his last option grant).

Cash Compensation

Base Salary

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

Cash Bonuses

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

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

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

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

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

1. Our CEO's salary and bonus were maintained at a total of $1 for 2002;

2. The salaries of executives with the title of Senior Vice President and above were maintained at levels which had been reduced by 20% in April 2001; and

3. Bonuses for our executive management team were not paid for the first half of 2002.

Equity Compensation

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

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

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

Chief Executive Officer Compensation

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

Summary

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

Stock Options Repurchased

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

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

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

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

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

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

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

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

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

1. Named Executive Officers who participated in the Option Repurchase received, in exchange for the repurchase of the tendered stock options, a fixed amount of consideration equal to the number of shares underlying such tendered stock options, multiplied by $1.85.

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

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

Compensation Committee

Eric E. Schmidt
A. Michael Spence

Performance Measurement Comparison

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

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

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

1. Assumes that $100.00 was invested on December 31, 1997, in our common stock, after giving effect to a 2-for-1 split of our common stock in March 1998, November 1999 and September 2000, and at the closing sales price for our common stock on that date and that all dividends were reinvested. No cash dividends have been declared on our common stock. Stockholder returns over the indicated period should not be considered indicative of future stockholder returns.

2. Assumes that $100.00 was invested on December 31, 1997, in each index and that all dividends were reinvested. The Nasdaq Computer & Data Processing Index is calculated by the Center for Research in Securities Prices. The S&P 500 Index is calculated by Standard & Poor's, a division of the McGraw-Hill Companies, Inc. The JP Morgan H&Q Technology Index was calculated by Chase H&Q.

3. The JP Morgan H&Q Technology Index was terminated on March 28, 2001. It has been replaced with the Nasdaq Computer and Data Processing Index. A comparison of the total returns of both the JP Morgan H&Q Technology Index and the Nasdaq Computer and Data Processing Indexes for the applicable period is provided.

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

Item 12. Security Ownership of Certain Beneficial Owners and Management

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

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

_____________________________________

* Represents beneficial ownership of less than 1%.

1. Unless otherwise provided, the address for each of the beneficial owners listed is c/o Siebel Systems, Inc., 2207 Bridgepointe Parkway, San Mateo, CA 94404.

2. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission (the "SEC") and generally includes voting or investment power with respect to securities. Except as indicated by footnote, and subject to community property laws where applicable, the persons named in the table above have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them. Percentage of beneficial ownership is based on 486,427,813 shares of Common Stock and exchangeable shares outstanding as of December 31, 2002.

3. Includes 30,285,592 shares held as trustee under the Siebel Living Trust u/a/d 7/27/93; 2,349,904 shares held by Siebel Asset Management, L.P., of which Mr. Siebel is a general partner; 2,000,000 shares held by Siebel Asset Management III, L.P., of which Mr. Siebel is a general partner; and 1,600,000 shares held by Siebel Asset Management IV, L.P., of which Mr. Siebel is a general partner. Also includes 2,426,845 shares held by the Thomas and Stacey Siebel Foundation. Also includes 34,073,640 shares issuable upon exercise of outstanding stock options exercisable within 60 days of December 31, 2002. As described more fully in Note 7 to the accompanying consolidated financial statements, at the request of our CEO, we cancelled 25,950,000 of our CEO's stock options with exercise prices ranging from $4.91 to $59.81 per share in January 2003. Accordingly, Mr. Siebel's beneficial ownership percentage was reduced to 11.21% in January 2003.

4. Based solely on information contained on Schedule 13G filed with the SEC. Shares are held on behalf of TCW Business Unit, a group of direct and indirect subsidiaries of TCW Group, Inc. (collectively "TCW"). Includes 310,083 shares that would be derived from conversion of $7,230,000 million face amount of the Company's Convertible Subordinated Debentures, maturing September 15, 2006, and held indirectly by TCW and 390,900 shares that would be derived from conversion of $390,900 face amount of Morgan Stanley Dean Witter & Co. Medium Term Note PERQS Exchangeable Convertible Preferred Siebel Systems, Inc., held by TCW.

5. Includes 89,364 shares held by Patricia A. House Separate Property UTA 1/21/00 Patricia A. House TTEE. Also includes 6,597,151 shares issuable upon exercise of outstanding stock options exercisable within 60 days of December 31, 2002.

6. Includes 1,814,500 shares issuable upon exercise of outstanding stock options exercisable within 60 days of December 31, 2002.

7. Includes 5,684 shares held by Mr. Schmaier's minor children. Also includes 1,239,647 shares issuable upon exercise of outstanding stock options exercisable within 60 days of December 31, 2002.

8. Includes 20,034 shares held by the Goldman-Valeriote Family Trust and 8,070 shares held by Mr. Goldman's minor children. Also includes 922,500 shares issuable upon exercise of outstanding stock options exercisable within 60 days of December 31, 2002.

9. Includes 208 shares held by Dr. Schmidt's wife. Also includes 1,654,000 shares issuable upon exercise of outstanding stock options exercisable within 60 days of December 31, 2002.

10. Includes 206,000 shares held by A. Michael Spence, Trustee or Successor Trustee under The A. Michael Spence Revocable Trust u/a/d October 26, 1996, and 380,000 shares held by the Spence Family Investments LP. Also includes 1,800 shares held by A. Michael Spence TTEE by James Graham Spence Trust, 1,800 shares held by A. Michael Spence TTEE by Cathy B. Spence Irrevocable Trust and 1,800 shares held by A. Michael Spence TTEE by Marya W. Spence Irrevocable Trust. Also includes 472,000 shares issuable upon exercise of outstanding stock options exercisable within 60 days of December 31, 2002.

11. Includes 360,000 shares held by the Schwab Family Partners to which Mr. Schwab disclaims beneficial ownership and 18,000 shares held by Mr. Schwab's spouse. Also includes 541,600 shares issuable upon exercise of outstanding stock options exercisable within 60 days of December 31, 2002.

12. Includes 50,280 shares held by the Shaheen Revocable Trust. Also includes 2,284,000 shares issuable upon exercise of outstanding stock options exercisable within 60 days of December 31, 2002.

13. Includes 479,200 shares issuable upon exercise of outstanding stock options exercisable within 60 days of December 31, 2002.

14. Includes 19,000 shares issuable upon exercise of outstanding stock options exercisable within 60 days of December 31, 2002.

15. Includes 52,496,024 shares issuable upon exercise of stock options held by all executive officers and directors currently exercisable or exercisable within 60 days of December 31, 2002. As described more fully in Note 7 to the accompanying consolidated financial statements, at the request of our CEO, we cancelled 25,950,000 of our CEO's stock options with exercise prices ranging from $4.91 to $59.81 per share in January 2003. Accordingly, the beneficial ownership percentage of all of our officers and directors as a group was reduced to 15.75% in January 2003. See footnotes (3) through (14) above.

Equity Compensation Plan Information

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

Item 13. Certain Relationships and Related Transactions

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

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

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

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

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

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

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

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

Item 14. Controls and Procedures

Evaluation of Our Disclosure Controls and Internal Controls

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

CEO and CFO Certifications

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

Disclosure Controls and Internal Controls

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

Limitations on the Effectiveness of Controls

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

Scope of the Controls Evaluation

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

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

Conclusions

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

Changes in Internal Controls

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

PART IV

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

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

1. Financial Statements

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

2. Exhibits

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

(b) Reports on Form 8-K

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

EXHIBIT INDEX

Exhibit Number	Description of Document
2.1	Agreement and Plan of Merger and Reorganization dated April 5, 2000, among the Registrant, OS Acquisition Corp., OpenSite Technologies, Inc. and Alan Taetle as Stockholders' Agent. (1)
2.2	Agreement and Plan of Merger and Reorganization dated August 3, 2000, among the Registrant, Ocelot Acquisition Corp., OnLink Technologies, Inc. and Cornell P. French as Stockholders' Agent. (2)
2.3	Arrangement Agreement dated September 11, 2000, among the Registrant, certain indirectly wholly owned subsidiaries of the Registrant, and Janna Systems Inc. (3)
3.1	Amended and Restated Certificate of Incorporation of the Registrant, as amended to date. (4)
3.2	Amended and Restated Bylaws of the Registrant. (5)
4.1	Reference is made to Exhibit 3.1 and Exhibit 3.2.
4.2	Specimen Stock Certificate. (6)
4.3	Restated Investor Rights Agreement, dated December 1, 1995, between the Registrant and certain investors, as amended April 30, 1996 and June 14, 1996. (6)
4.4	Certificate of Designation of Series A1 Preferred Stock of the Registrant. (3)
4.5	Indenture between the Registrant, as Issuer, and Chase Manhattan Bank and Trust Company, National Association, as Trustee, dated September 15, 1999. (7)
4.6	Certificate of Designation of Series A2 Junior Participating Preferred Stock. (8)
4.7	Rights Agreement dated as of January 29, 2003, between Siebel Systems, Inc. and Mellon Investors Services LLC, as Rights Agent. (8)
4.8	Form of Rights Certificate. (8)
10.1	Registrant's 1996 Equity Incentive Plan, as amended. (5)
10.2	Registrant's Employee Stock Purchase Plan, as amended. (9)
10.3	Form of Indemnity Agreement entered into between the Registrant and its officers and directors. (6)
10.4	Registrant's Deferred Compensation Plan, dated January 10, 1997. (10)
10.5	Master Alliance Agreement, dated March 17, 1995, between the Registrant and Andersen Consulting LLP. (6)(11)
10.6	Assignment Agreement, dated September 20, 1995, by and between the Registrant and Thomas M. Siebel. (6)
10.7	Lease Agreement, dated June 4, 1996, by and between the Registrant and Crossroad Associates and Clocktower Associates. (6)
10.7.1	Amendments to Lease Agreement, by and between the Registrant and Crossroad Associates and Clocktower Associates. (12)
10.7.2	Seventeenth Amendment of Lease, dated February 5, 2003, by and between Registrant and Crossroads Associates and Clocktower Associates, and ancillary documents thereto. (5)
10.8	Lease Agreement, dated March 11, 1999, by and between the Registrant and Sobrato Interests III, as amended. (13)
10.8.1	First Amendment to Lease dated June 11, 1999 and Second Amendment to Lease dated July 31, 1999. (14)
10.9	Lease Agreement, dated March 11, 1999, by and between the Registrant and Sobrato Interests III, as amended. (13)
10.9.1	First Amendment to Lease dated June 11, 1999 and Second Amendment to Lease dated July 31, 1999. (14)
10.10	Lease Agreement, dated June 11, 1999, by and between the Registrant and Sobrato Interests III, as amended. (13)
10.10.1	First Amendment to Lease dated September 23, 2000. (14)
10.11	Lease Agreement, dated August 24, 1994, by and between the Registrant and Watergate Tower Associates. (13)
10.12	Lease Agreement, dated August 16, 1999, by and between the Registrant and Spieker Properties, L.P. (13)
10.12.1	Amendment Number One to Lease, dated October 26, 2000, and Amendment Number Two to Lease, dated June 29, 2001. (12)
10.13	Lease Amendment 10, dated April 8, 1999, by and between the Registrant and Spieker Properties, L.P. (13)
10.14	Lease Amendment 11, dated August 13, 1999, by and between the Registrant and Spieker Properties, L.P. (13)
10.15	Lease Amendment 12, dated October 28, 1999, by and between the Registrant and Spieker Properties, L.P. (13)
10.16	Office Lease Agreement, dated September 14, 2000, by and between the Registrant and Wilson Equity Office, LLC. (15)
10.16.1	First Amendment to Office Lease Agreement, dated December 21, 2001, and Second Amendment to Office Lease Agreement, dated September 25, 2002. (15)
10.17	Lease, dated December 29, 2000, by and between the Registrant and PW Acquisitions VIII, LLC. (5)
10.18	Registrant's 1998 Equity Incentive Plan, as amended. (5)
10.19	Form of Registrant's Restricted Stock Grant Notice. (5)
21.1	Subsidiaries of the Registrant. (5)
23.1	Independent Auditors' Consent. (5)
99.1	Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (5)

____________________________

1. Incorporated by reference to the Registrant's Current Report on Form 8-K filed on June 1, 2000.


2. Incorporated by reference to the Registrant's Current Report on Form 8-K filed on October 10, 2000.


3. Incorporated by reference to the Registrant's Current Report on Form 8-K filed on November 27, 2000.


4. Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001.


5. Filed herewith.


6. Incorporated by reference to the Registrant's Registration Statement on Form S-1 (No. 333-03751), as amended.


7. Incorporated by reference to the Registrant's Registration Statement on Form S-3 (No. 333-91777) filed on November 30, 1999.


8. Incorporated by reference to the Registrant's Current Report on Form 8-K filed on January 29, 2003.


9. Incorporated by reference to the Registrant's Registration Statement on Form S-8 (No. 333-07983), as amended.


10. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1996.


11. Confidential treatment has been granted with respect to portions of this exhibit.


12. Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.


13. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1999.


14. Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000.


15. Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2002.

INDEPENDENT AUDITORS' REPORT

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

We have audited the accompanying consolidated balance sheets of Siebel Systems, Inc. and subsidiaries (the "Company") as of December 31, 2001 and 2002, and the related consolidated statements of operations and comprehensive income, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 2002. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Siebel Systems, Inc. and subsidiaries as of December 31, 2001 and 2002, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. As discussed in Notes 1 and 13 to the consolidated financial statements, the Company changed its method of accounting for goodwill in 2002.

/s/ KPMG LLP

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

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

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

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

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

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

Liabilities and Stockholders' Equity

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

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

Commitments and contingencies

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

See accompanying notes to consolidated financial statements.

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

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

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

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

See accompanying notes to consolidated financial statements.

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

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

See accompanying notes to consolidated financial statements.

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

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

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

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

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

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

See accompanying notes to consolidated financial statements.

SIEBEL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies

The Company

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

Principles of Consolidation

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

Use of Estimates

The Company's consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires that the Company make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to revenue recognition, provision for doubtful accounts and sales returns, fair value of investments, fair value of acquired intangible assets and goodwill, useful lives of intangible assets and property and equipment, income taxes, restructuring obligations, and contingencies and litigation, among others. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ significantly from the estimates made by management with respect to these items and other items that require management's estimates.

Foreign Currency Translation

The Company considers the functional currency of its foreign subsidiaries to be the local currency, and accordingly, the foreign currency is 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 in accumulated other comprehensive income (loss). Gains or losses on foreign currency transactions are recognized in current operations and have not been significant to the Company's operating results in any period presented.

Fair Value of Financial Instruments

The fair value of the Company's cash, cash equivalents, short-term investments, accounts receivable and accounts payable approximate their respective carrying amounts. Based on the quoted market price of the convertible subordinated debentures, the fair value of the convertible subordinated debentures was $289,440,000 as of December 31, 2002. The fair value of the Company's derivative financial instruments (i.e., foreign exchange contracts) was $5,555,000 as of December 31, 2002.

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

The Company considers all highly liquid investments with an original maturity of 90 days or less at the date of purchase 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 the Company's investments in publicly traded companies in the high technology industry. 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 (loss). Realized gains and losses on available-for-sale securities are computed using the specific identification method.

The Company reviews the carrying value of its short-term investments and marketable equity securities, along with investments accounted for under the cost method, at the end of each reporting period to determine if any investments are impaired. This review includes an evaluation of historical and projected financial performance, expected cash needs and recent funding events. Other-than-temporary impairments are recognized in earnings if: (i) the market value of the investment is below its current carrying value for an extended period, which the Company generally defines as six to nine months; (ii) the issuer has experienced significant financial declines; or (iii) the issuer has experienced difficulties in raising capital to continue operations, among other factors.

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to a concentration of credit risk principally consist of short-term investments, trade accounts receivable and financial instruments used in foreign currency hedging activities. The Company primarily invests its excess cash in money market instruments, government securities, corporate bonds and asset-backed securities. The Company is exposed to credit risks related to the Company's short-term investments in the event of default or decrease in credit-worthiness of one of the issuers of the investments. 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 for any period presented, and the Company's customers, which are primarily in the high technology, telecommunications, financial services (including insurance), pharmaceutical, utilities and consumer packaged goods industries, are sufficiently diverse that the Company does not consider itself significantly exposed to concentrations of credit risk. The counterparties to agreements relating to the Company's foreign currency contracts are large, multinational financial institutions. The amounts subject to credit risk arising from the possible inability of counterparties to meet the terms of their contracts are generally limited to the amounts, if any, by which the counterparty's obligations exceed the obligations of the Company to that counterparty.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation and amortization. Capital lease amortization is included with depreciation expense, and the associated accumulated amortization of $434,000 and $9,025,000 as of December 31, 2001 and 2002, respectively, is included with accumulated depreciation in the accompanying consolidated financial statements. Depreciation and amortization are calculated using the straight-line method over the shorter of the estimated useful lives of the respective assets, generally two to five years, or the lease term, if applicable. 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. Cost and accumulated depreciation of assets sold or retired are removed from the respective property accounts, and the gain or loss is reflected in the consolidated statement of operations.

Intangible Assets and Goodwill

The Financial Accounting Standards Board ("FASB") issued SFAS No. 141 "Business Combinations" ("SFAS 141") and SFAS No. 142 "Goodwill and Other Intangible Assets" ("SFAS 142") in July 2001. SFAS 141 requires that all business combinations be accounted for using the purchase method, thereby prohibiting the pooling-of-interests method. SFAS 141 also specifies criteria for recognizing and reporting intangible assets apart from goodwill; however, assembled workforce must be recognized and reported in goodwill. SFAS 142 requires that intangible assets with an indefinite life should not be amortized until their life is determined to be finite, and all other intangible assets must be amortized over their useful life. SFAS 142 also requires that goodwill not be amortized but instead tested for impairment in accordance with the provisions of SFAS 142 at least annually and more frequently upon the occurrence of certain events (see "Impairment of Long-Lived Assets" below).

The Company adopted certain provisions of these pronouncements effective July 1, 2001, as required for goodwill and intangible assets acquired in purchase business combinations consummated after June 30, 2001. The Company adopted the remaining provisions of SFAS 141 and SFAS 142 effective January 1, 2002. There was not a cumulative transition adjustment upon adoption as of July 1, 2001 or January 1, 2002. SFAS 141 and SFAS 142 required the Company to perform the following as of January 1, 2002: (i) review goodwill and intangible assets for possible reclassifications; (ii) reassess the lives of intangible assets; and (iii) perform a transitional goodwill impairment test. The Company has reviewed the balances of goodwill and identifiable intangibles and determined that the Company does not have any amounts that are required to be reclassified from goodwill to identifiable intangibles, or vice versa. The Company has also reviewed the useful lives of its identifiable intangible assets and determined that the original estimated lives remain appropriate. The Company has completed the transitional goodwill impairment test and has determined that the Company did not have a transitional impairment of goodwill.

As required by SFAS 142, the Company has not amortized goodwill associated with acquisitions completed after June 30, 2001, for any period presented, and ceased amortization of goodwill associated with acquisitions completed prior to July 1, 2001, effective January 1, 2002. Prior to January 1, 2002, the Company amortized goodwill associated with the pre-July 1, 2001 acquisitions over three to five years using the straight-line method. Identifiable intangibles (acquired technology) are currently amortized over three years using the straight-line method. Please refer to Note 13 for further discussion of the Company's intangible assets and goodwill.

Impairment of Long-Lived Assets

The Company tests goodwill for impairment in accordance with SFAS 142. SFAS 142 requires that goodwill be tested for impairment at the "reporting unit" level ("Reporting Unit") at least annually and more frequently upon the occurrence of certain events, as defined by SFAS 142. Consistent with the Company's determination that it has only one reporting segment as defined in SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information," the Company has determined that it has only one Reporting Unit, specifically the license, implementation and support of its software applications. Goodwill is tested for impairment annually on July 1 in a two-step process. First, the Company determines if the carrying amount of its Reporting Unit exceeds the "fair value" of the Reporting Unit, which would indicate that goodwill may be impaired. If the Company determines that goodwill may be impaired, the Company compares the "implied fair value" of the goodwill, as defined by SFAS 142, to its carrying amount to determine if there is an impairment loss. The Company does not have any goodwill that it considers to be impaired.

On January 1, 2002, the Company adopted SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), which supersedes certain provisions of APB Opinion No. 30 "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" and supersedes SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." There was not a cumulative transition adjustment upon adoption. In accordance with SFAS 144, the Company evaluates long-lived assets, including intangible assets other than 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 Company's restructuring of its operations and associated workforce reduction completed during 2002, the Company abandoned certain long-lived assets, consisting primarily of furniture, fixtures and leasehold improvements. Please refer to Note 2 for further discussion of the impairment charge recorded during 2002. The Company does not have any additional long-lived assets it considers to be impaired as of December 31, 2002.

Stock-Based Compensation

The Company accounts for its employee stock-based compensation plans using the intrinsic value method, as prescribed by APB No. 25 "Accounting for Stock Issued to Employees" and interpretations thereof (collectively "APB 25"). Accordingly, the Company records deferred compensation costs related to its employee stock options when the current market price of the underlying stock exceeds the exercise price of each option on the date of grant. The Company records and measures deferred compensation for stock options granted to non-employees, other than members of the Company's Board of Directors, at their fair value. Deferred compensation is expensed on a straight-line basis over the vesting period of the related stock option. The Company did not grant any stock options at exercise prices below the fair market value of the Company's common stock on the date of grant during the years ended December 31, 2000, 2001 and 2002.

As of December 31, 2001 and 2002, the Company's deferred compensation balances primarily related to restricted stock granted in 2002, as discussed further in Note 7, and the remaining unamortized portion of compensation expense associated with stock options granted by acquired companies and converted under the terms of the agreements between the Company and the companies acquired. The Company is amortizing the deferred compensation on a straight-line basis over the respective vesting periods, which range from three to five years. The accompanying consolidated statement of operations reflects stock-based compensation expense of $11,491,000, $5,169,000 and $4,126,000 for the years ended December 31, 2000, 2001 and 2002, respectively.

An alternative method to the intrinsic value method of accounting for stock-based compensation is the fair value approach prescribed by SFAS No. 123 "Accounting for Stock-Based Compensation," as amended by SFAS No. 148 "Accounting for Stock-Based Compensation - Transition and Disclosure" (hereinafter collectively referred to as "SFAS 123"). If the Company followed the fair value approach, the Company would be required to record deferred compensation based on the fair value of the stock option at the date of grant. The fair value of the stock option is required to be computed using an option-pricing model, such as the Black-Scholes option valuation model, at the date of the stock option grant. The deferred compensation calculated under the fair value method would then be amortized over the respective vesting period of the stock option.

Summarized below are the pro forma effects on net income (loss) and net income (loss) per share data, if the Company had elected to use the fair value approach prescribed by SFAS 123 to account for its employee stock-based compensation plans (in thousands, except per share data):

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

 Diluted net income (loss) per share:                                                                                   
   As reported.................................................................... $    0.24  $     0.49  $     (0.08)
                                                                                   ========== =========== ============

   Pro forma giving effect to SFAS 123............................................ $   (0.39) $    (1.21) $     (2.27)
                                                                                   ========== =========== ============


 Basic net income (loss) per share:                                                                                     
   As reported.................................................................... $    0.29  $     0.56  $     (0.08)
                                                                                   ========== =========== ============

   Pro forma giving effect to SFAS 123............................................ $   (0.39) $    (1.21) $     (2.27)
                                                                                   ========== =========== ============

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

Consistent with the Company's accounting for deferred tax assets resulting from the exercise of employee stock options in the accompanying consolidated financial statements, the Company has not provided a tax benefit on the pro forma expense in the above table. Please refer to Note 9 for further discussion of the Company's accounting for deferred tax assets generated from the exercise of employee stock options.

The Company determined the assumptions to be used in computing the fair value of stock options or stock purchase rights as discussed in the remainder of this paragraph. The Company estimated the expected useful lives, giving consideration to the vesting and purchase periods, contractual lives, expected employee turnover, and the relationship between the exercise price and the fair market value of the Company's common stock, among other factors. The expected volatility was estimated giving consideration to the expected useful lives of the stock options, the Company's current expected growth rate, implied expected volatility in traded options for the Company's common stock, and recent volatility of the Company's common stock, among other factors. The risk-free rate is the U.S. Treasury bill rate for the relevant expected life. 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:

                                                                                          Year Ended December 31,
                                                                                    -----------------------------------
                                                                                       2000       2001        2002
                                                                                    ---------- ----------- ------------
 Risk-free interest rate..........................................................      6.12 %      3.83 %       1.99 %
 Expected life (in years).........................................................       3.4         3.4          3.4
 Expected volatility..............................................................        77 %        89 %         65 %

During 2000, 2001 and 2002, stock options with exercise prices equal to the market price of the Company's common stock at the grant date had weighted average fair values of $34.37, $16.15 and $9.77 per share for 2000, 2001 and 2002, respectively, as calculated using the Black-Scholes option valuation model. There were no grants in 2001 or 2002 at exercise prices below market price at the date of grant. Prior to their acquisition by the Company, certain acquired companies granted stock options at exercise prices below the market price of the acquired companies' common stock at the grant date. The weighted average fair value of employee stock options granted at exercise prices below market price at the grant date was $20.13 per share in 2000, as calculated using the Black-Scholes option valuation model.

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

                                                                                          Year Ended December 31,
                                                                                    -----------------------------------
                                                                                       2000       2001        2002
                                                                                    ---------- ----------- ------------
 Risk-free interest rate...........................................................     5.96 %      4.72 %       1.23 %
 Expected life (in years)..........................................................      0.5         0.5          0.5
 Expected volatility...............................................................       77 %        89 %         83 %

The weighted average estimated fair value of the common stock purchase rights granted under the Purchase Plan during 2000, 2001 and 2002 was $20.25, $22.60 and $7.43 per share, respectively, including the 15% discount from the quoted market price.

Derivative Instruments and Hedging Activities

On January 1, 2001, the Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). There was not a cumulative transition adjustment upon adoption on January 1, 2001. SFAS 133 establishes accounting and reporting standards for derivative instruments and hedging activities and requires that all derivatives be recognized as either assets or liabilities 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 foriegn-currency-denominated forecasted transaction. Derivatives or portions of derivatives that are not designated as hedging instruments are adjusted to fair value through operations in the period of change in their fair value.

The Company operates internationally and thus is exposed to potential adverse changes in currency exchange rates. The Company has entered into foreign exchange contracts to reduce its exposure to foreign currency rate changes on receivables, payables and intercompany balances denominated in a non-functional currency. The objective of these contracts is to neutralize the impact of currency exchange rate movements on the Company's operating results. These contracts require the Company to exchange currencies at rates agreed upon at the contract's inception. These contracts reduce the exposure to fluctuations in exchange rate movements because the gains and losses associated with foreign currency balances and transactions are generally offset with the gains and losses of the foreign exchange contracts. Because the impact of movements in currency exchange rates on forward contracts generally offsets the related impact on the underlying items being hedged, these financial instruments help alleviate the risk that might otherwise result from certain changes in currency exchange rates. The Company does not designate its foreign exchange forward contracts as accounting hedges and, accordingly, the Company adjusts these instruments to fair value through operations. The Company does not hold or issue financial instruments for speculative or trading purposes.

Revenue Recognition

Substantially all of the Company's revenues are derived from the license of the Company's software products and the related professional services and customer support (maintenance) services. The Company's standard end user license agreement provides for an initial fee for use of the Company's products in perpetuity based on the number of named users. The Company licenses its software in multiple element arrangements in which the customer purchases a combination of software, maintenance and/or professional services (i.e., training, implementation services, etc.).

The Company recognizes revenue using the residual method pursuant to the requirements of Statement of Position No. 97-2 "Software Revenue Recognition" ("SOP 97-2"), as amended by Statement of Position No. 98-9, "Software Revenue Recognition with Respect to Certain Arrangements." Under the residual method, revenue is recognized in a multiple element arrangement when Company-specific objective evidence of fair value exists for all of the undelivered elements in the arrangement, but does not exist for one of the delivered elements in the arrangement. The Company allocates revenue to each element in a multiple element arrangement based on its respective fair value, with the fair value determined by the price charged when that element is sold separately. The Company defers revenue for the fair value of its undelivered elements (e.g., professional services and maintenance) and recognizes revenue for the remainder of the arrangement fee attributable to the delivered elements (i.e., software product) when the basic criteria in SOP 97-2 have been met.

Under SOP 97-2, revenue attributable to an element in a customer arrangement is recognized when persuasive evidence of an arrangement exists and delivery has occurred, provided the fee is fixed or determinable, collectibility is probable and the arrangement does not require significant customization of the software. If at the outset of the customer arrangement, the Company determines that the arrangement fee is not fixed or determinable, the Company defers the revenue and recognizes the revenue when the arrangement fee becomes due and payable. If at the outset of the customer arrangement, the Company determines that collectibility is not probable, the Company defers the revenue and recognizes the revenue when payment is received. The Company recognizes revenue from resellers upon sell-through to the end customer.

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 substantially all arrangements are 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.

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

Concurrent and Nonmonetary Transactions

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

Prior to recognizing any revenue from a Concurrent Transaction, the Company ensures that: (i) the transaction meets its standard revenue recognition policies, as discussed above; (ii) the customer meets the Company's standard credit requirements; (iii) the transaction represents the culmination of the earnings process; and (iv) all goods or services purchased by the Company are necessary for its current operations and are expected to be placed into service shortly after purchase. If the Concurrent Transaction meets these requirements, the Company records the revenue at fair value, as defined by APB 29. The Company determines Fair Value based on a comparison of cash transactions for its software that are of similar size and on similar terms as the Concurrent Transaction or the Fair Value of the goods or services purchased by the Company, whichever is more readily determinable. During the years ended December 31, 2000, 2001 and 2002, the Company recognized $11,600,000, $76,400,000 and $50,571,000, respectively, of software license revenues from Concurrent Transactions. The Company did not have any Concurrent Transactions during the third and fourth quarters of 2002.

During 2000, the Company established a program whereby qualified start-up companies could obtain Siebel software in exchange for shares of their equity securities. Qualified start-up companies are generally companies that have received and are expected to continue to receive funding from top-tier venture capital firms, have passed a credit review consistent with other Siebel customers, and have a sound business model and experienced management team. The Company recognized approximately $13,100,000 and $1,000,000 of software license revenues related to this program during 2000 and 2001, respectively. The Company did not recognize any revenue from this program during 2002. During 2001, the Company also recognized approximately $2,900,000 of software license revenues from a publicly traded company with which it negotiated a strategic investment. The software license was separately negotiated and recorded at terms the Company considers to be arm's-length.

Cost of Revenues

Cost of software consists primarily of amortization of acquired technology, media, product packaging and shipping, 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 other global services personnel, including cost of services provided by third-party consultants engaged by the Company.

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.

Advertising

Advertising costs are expensed as incurred. Advertising expense is included in sales and marketing expense andamounted to $44,472,000, $31,800,000 and $16,080,000 in 2000, 2001 and 2002, respectively.

Provision for Doubtful Accounts

The Company initially records its provision for doubtful accounts and sales returns based on its historical experience and then adjusts this provision at the end of each reporting period based on a detailed assessment of its accounts receivable and related allowance.

Restructuring-Related Expenses

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

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

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

Inherent in the estimation of the costs related to the Company's restructuring efforts are assessments related to the most likely expected outcome of the significant actions to accomplish the restructuring. Changing business conditions may affect the assumptions related to the timing and extent of the Company's restructuring activities. The Company will review the status of restructuring activities on a quarterly basis and, if appropriate, record changes to its restructuring obligations in current operations based on management's most current estimates.

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, along with 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 are established. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled.

Net Income (Loss) Available per Common Share

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

For basic and diluted net income (loss) per share, the Company has reduced net income (loss) by the accretion of mandatorily redeemable convertible preferred stock to arrive at the net income (loss) available to common stockholders. See Note 6.

Reclassifications

Certain prior year amounts have been reclassified to conform to the current year presentation.

Recent Accounting Pronouncements

In June 2001, the FASB issued SFAS No. 143 "Accounting for Asset Retirement Obligations" ("SFAS 143"). SFAS 143 addresses the financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS 143 applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or normal use of the assets. SFAS 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The fair value of the liability is added to the carrying amount of the associated asset, and this additional carrying amount is expensed over the life of the asset. The Company is required to adopt SFAS 143 effective January 1, 2003. The Company does not expect the adoption of SFAS 143 to have a material effect on its consolidated financial position, results of operations or cash flows.

In July 2002, the FASB issued SFAS No. 146 "Accounting for Exit or Disposal Activities" ("SFAS 146"). SFAS 146 addresses the recognition, measurement and reporting of costs associated with exit and disposal activities (i.e., restructuring activities), including costs related to terminating a contract that is not a capital lease and termination benefits due to employees who are involuntarily terminated under the terms of a one-time benefit arrangement.

SFAS 146 supersedes EITF 94-3 and EITF 88-10 and therefore prohibits recognition of a liability based solely on an entity's commitment to a plan to exit an activity. SFAS 146 requires that: (i) liabilities associated with exit and disposal activities be measured at fair value and changes in the fair value of the liability at each reporting period be measured using an interest allocation approach; (ii) one-time termination benefits be expensed at the date the entity notifies the employee, unless the employee must provide future service, in which case the benefits are expensed ratably over the future service period; (iii) liabilities to terminate a contract be recorded at fair value when the contract is terminated; (iv) liabilities related to an existing operating lease/contract, unless terminated, be recorded at fair value, less estimated sublease income, and measured when the contract does not have any future economic benefit to the entity (i.e., the entity ceases to utilize the rights conveyed by the contract); and (v) all other costs related to an exit or disposal activity be expensed as incurred.

SFAS 146 is effective for exit or disposal activities initiated after December 31, 2002. Retroactive application of SFAS 146 is prohibited and, accordingly, liabilities recognized prior to the initial application of SFAS 146 must continue to be accounted for in accordance with EITF 94-3, EITF 88-10 or other applicable preexisting guidance. Accordingly, the Company will continue to account for its restructuring obligations recorded during 2002 in accordance with EITF 94-3, EITF 88-10 or other applicable preexisting guidance. The Company does not expect the adoption of SFAS 146 to have a material effect on its consolidated financial position, results of operations or cash flows.

In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("Interpretation 45"). Interpretation 45 elaborates on the existing disclosure requirements for most guarantees, including loan guarantees such as standby letters of credit, and provides new disclosure requirements regarding indemnification provisions, including indemnification provisions typically included in a software license arrangement. It also clarifies that at the time a guarantee is issued, the Company must recognize an initial liability for the fair value of the obligations it assumes under the guarantee and must disclose that information in its financial statements. The provisions related to recognizing a liability at inception of the guarantee do not apply to product warranties, indemnification provisions in the Company's software license arrangements, or to guarantees accounted for as derivatives. The initial recognition and measurement provisions apply on a prospective basis to guarantees issued or modified after December 31, 2002, and the disclosure requirements apply to guarantees outstanding as of December 31, 2002. The Company does not expect the adoption of Interpretation 45 to have a material effect on its consolidated financial position, results of operations or cash flows.

2. Restructuring

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

The Company recognized a total charge related to this Restructuring of $205,305,000, of which the Company recognized $109,383,000 in the third quarter of 2002 and $95,922,000 in the fourth quarter of 2002. Total remaining cash outlays under the Restructuring are expected to be $154,548,000, of which $42,703,000 is expected to be made in 2003. The Restructuring charge is comprised primarily of: (i) severance and associated employee termination costs related to the reduction of the Company's workforce in 2002; (ii) lease termination costs and other costs associated with permanently vacating certain facilities; and (iii) impairment costs related to certain long-lived assets that were abandoned in connection with the Company's consolidation of its facilities. The following table summarizes the Company's Restructuring-related expenses incurred during 2002 and the related liabilities as of December 31, 2002 (in thousands):

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

The remaining costs associated with permanently vacating facilities is primarily composed of net remaining lease obligations of $129,385,000 (gross lease obligations of $288,485,000 less estimated sublease income of $159,100,000), along with costs associated with demising and subleasing the vacated facilities of $21,228,000. The remaining costs associated with permanently vacating facilities will generally be paid over the remaining lease terms, ending at various dates through March 2022 or over a shorter period as the Company may negotiate with its lessors. See Note 5 for a summary of future lease commitments related to facilities that are part of the Restructuring. The lease commitments presented in Note 5 have not been reduced by estimated sublease income. The remaining costs associated with the reduction of the Company's workforce will be paid during 2003. The total Restructuring charge and related cash outlay are based on management's current estimates, which may change if further consolidations are required or if actual lease commitments or sublease income differ from amounts currently expected.

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

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

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

3. Financial Statement Details

Cash, 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. Cash and cash equivalents, short-term investments, and marketable securities consisted of the following as of December 31, 2001 and 2002 (in thousands):

   December 31, 2001:                                             Unrealized
                                                             ---------------------
                                                     Cost       Loss       Gain       Market
                                                 ----------- ---------- ---------- -----------
   Cash and cash equivalents:
     Cash....................................... $   35,006  $      --  $      --  $   35,006
     Certificates of deposit....................        250         --         --         250
     Money market funds.........................    708,755         --         --     708,755
     U.S. treasury and agency securities........      3,730         --         --       3,730
     Corporate notes............................     51,362        (13)        --      51,349
                                                 ----------- ---------- ---------- -----------
                                                 $  799,103  $     (13) $      --  $  799,090
                                                 =========== ========== ========== ===========
   Short-term investments:
     U.S. treasury and agency securities........ $  241,355  $    (169) $   3,475  $  244,661
     Corporate notes............................    412,405       (445)     7,214     419,174
     Asset-backed securities....................    191,997       (311)     2,044     193,730
                                                 ----------- ---------- ---------- -----------
                                                 $  845,757  $    (925) $  12,733  $  857,565
                                                 =========== ========== ========== ===========

   Marketable equity securities................. $    7,902  $      --  $     352  $    8,254
                                                 =========== ========== ========== ===========


   December 31, 2002:                                             Unrealized
                                                             ---------------------
                                                     Cost       Loss       Gain       Market
                                                 ----------- ---------- ---------- -----------
   Cash and cash equivalents:
     Cash....................................... $   70,515  $      --  $      --  $   70,515
     Certificates of deposit....................      4,360         --         --       4,360
     Money market funds.........................    502,392         --         --     502,392
     U.S. treasury and agency securities........     11,989         --         --      11,989
     Corporate notes............................     72,245         --          3      72,248
     Asset-backed securities....................      6,003         --          4       6,007
                                                 ----------- ---------- ---------- -----------
                                                 $  667,504  $      --  $       7  $  667,511
                                                 =========== ========== ========== ===========
   Short-term investments:
     U.S. treasury and agency securities........ $  733,362  $      (1) $   5,762  $  739,123
     Municipal securities.......................     15,455         --        114      15,569
     Corporate notes............................    567,519        (87)    10,066     577,498
     Asset-backed securities....................    158,923       (172)     3,152     161,903
                                                 ----------- ---------- ---------- -----------
                                                 $1,475,259  $    (260) $  19,094  $1,494,093
                                                 =========== ========== ========== ===========

   Marketable equity securities................. $    4,629  $     (19) $       3  $    4,613
                                                 =========== ========== ========== ===========

Short-term investments as of December 31, 2001, consisted of $249,126,000 of securities that mature in less than one year, $608,439,000 of securities that mature in one to five years and no securities that mature in over five years. Short-term investments as of December 31, 2002, consisted of $385,195,000 of securities that mature in less than one year, $1,108,898,000 of securities that mature in one to five years and no securities that mature in over five years.

Accounts Receivable, Net

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

                                                              December 31,
                                                         ----------------------
                                                            2001        2002
                                                         ---------- -----------  
Trade accounts receivable............................... $ 442,968  $  321,877
Less: allowance for doubtful accounts and sales returns.    46,671      46,113
                                                         ---------- -----------
                                                         $ 396,297  $  275,764
                                                         ========== ===========

Changes in the allowance for doubtful accounts and sales returns for the years ended December 31, 2000, 2001 and 2002, are as follows (in thousands):

                                     Balance at    Provision for                  Balance at
                                     Beginning   Doubtful Accounts                 End of
                                      of Year       and Returns     Deductions      Year
                                    -----------  -----------------  ------------ -----------
  Year ended December 31, 2000..... $   13,168   $        39,385    $     8,904  $   43,649
  Year ended December 31, 2001.....     43,649            26,403         23,381      46,671
  Year ended December 31, 2002.....     46,671            21,376         21,934      46,113

Property and Equipment, Net

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

                                                              December 31,
                                                         ----------------------
                                                            2001        2002
                                                         ---------- -----------  
Computers and equipment................................. $ 200,517  $  205,507
Furniture and fixtures..................................    91,000      84,184
Computer software.......................................    52,179      62,373
Computer equipment under capital lease..................     5,381      35,046
Corporate aircraft......................................     6,713       6,820
Buildings and land......................................       393         403
Leasehold improvements..................................   138,259     132,225
                                                         ---------- -----------
                                                           494,442     526,558
  Less: accumulated depreciation........................   141,200     253,534
                                                         ---------- -----------
                                                         $ 353,242  $  273,024
                                                         ========== ===========

Accrued Expenses

Accrued expenses consisted of the following (in thousands):

                                                              December 31,
                                                         ----------------------
                                                            2001        2002
                                                         ---------- -----------  
Accrued compensation.................................... $  82,728  $  100,398
Taxes...................................................   155,647     109,077
Other...................................................   111,907     108,539
                                                         ---------- -----------
                                                         $ 350,282  $  318,014
                                                         ========== ===========

Accumulated Other Comprehensive Income

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

                                                              December 31,
                                                         ----------------------
                                                            2001        2002
                                                         ---------- ----------- 
Foreign currency translation adjustments, net of
   taxes of ($785) and $10,554, respectively............ $  (1,281) $   17,219
Unrealized gains on securities, net of taxes of
   $4,692 and $7,363, respectively......................     7,455      11,462
                                                         ---------- -----------
                                                         $   6,174  $   28,681
                                                         ========== ===========

Other Income, Net

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

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

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

During 2001 and 2002, the Company wrote down certain of its marketable equity securities to fair value, as the decline in these investments was deemed to be "other-than-temporary." Net gains on marketable investments in the above table include other-than-temporary losses related to these investments of $2,439,000 and $1,955,000 for 2001 and 2002, respectively. In addition, the Company holds several minority interests, included in other assets, in companies having operations or technology in areas within its strategic focus. During 2001 and 2002, the Company wrote down certain of these cost-method investments as the decline in these investments was deemed to be other-than-temporary (i.e., write-down of cost-method investments in the table above). Total other-than-temporary impairments recognized in other income, net were $5,512,000 and $11,945,000 during the years ended December 31, 2001 and 2002, respectively. There were no other-than-temporary impairments during the year ended December 31, 2000.

4. Convertible Subordinated Debentures

As of December 31, 2001 and 2002, the Company had $300,000,000 of convertible subordinated debentures (the "Debentures") outstanding. The seven-year-term Debentures mature September 15, 2006, bear interest at a rate of 5.50% per annum, and are convertible at the option of the holder into an aggregate of approximately 12,867,000 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. In accordance with the terms of the Debentures, the Company has the right to redeem the notes, in whole or in part beginning September 15, 2002. The redemption amount will range from $309,420,000 to $302,370,000, if the Debentures are redeemed between September 15, 2002, and September 14, 2006. Redemptions after September 14, 2006, will be at $300,000,000. The Company will pay accrued interest through the redemption date. The Company is not subject to any restrictive covenants related to the Debentures.

5. Commitments and Contingencies

Letters of Credit

As of December 31, 2002, the Company had secured letters of credit with banks totaling approximately $10,140,000. These letters of credit, which expire between February 2003 and November 2015, collateralize the Company's lease obligations to various third parties.

Legal Actions

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

Indemnifications

The Company sells software licenses and services to its customers under contracts which the Company refers to as Software License and Service Agreements (each an "SLSA"). Each SLSA contains the relevant terms of the contractual arrangement with the customer, and generally includes certain provisions for indemnifying the customer against losses, expenses, and liabilities from damages that may be awarded against the customer in the event the Company's software is found to infringe upon a patent, copyright, trademark, or other proprietary right of a third party. The SLSA generally limits the scope of and remedies for such indemnification obligations in a variety of industry-standard respects, including but not limited to certain time- and geography-based scope limitations and a right to replace an infringing product.

The Company believes its internal development processes and other policies and practices limit its exposure related to the indemnification provisions of the SLSA. In addition, the Company requires its employees to sign a proprietary information and inventions agreement, which assigns the rights to its employees' development work to the Company. To date, the Company has not had to reimburse any of its customers for any losses related to these indemnification provisions and no material claims are outstanding as of December 31, 2002. For several reasons, including the lack of prior indemnification claims and the lack of a monetary liability limit for certain infringement cases under the SLSA, the Company cannot determine the maximum amount of potential future payments, if any, related to such indemnification provisions.

Employee Benefit Plan

The Company has a 401(k) plan that allows eligible U.S. employees to contribute up to 20% of their compensation, limited to $11,000 in 2002. 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.

Lease Obligations

During the year ended December 31, 2002, the Company entered into an equipment financing arrangement related to certain of the Company's computer equipment, whereby the Company received proceeds of $24,873,000. The Company has recorded this arrangement as a capital lease. The lease requires monthly payments of $589,000, which includes both principal and interest, through December 31, 2005.

As of December 31, 2002, the Company leased facilities and certain equipment under non-cancelable operating leases expiring between 2003 and 2022. The Company also leases certain assets, primarily computer equipment, under capital leases expiring between 2004 and 2005. Rent expense under operating leases for the years ended December 31, 2000, 2001 and 2002, was $72,871,000, $117,586,000 and $114,358,000, respectively.

Future minimum lease payments under both operating and capital leases as of December 31, 2002, are as follows (in thousands):

                                                                               Operating Leases
                                                                     --------------------------------------
                                                                        Leases
                                                           Capital      in the       All Other     Total
Year Ending December 31,                                   Leases    Restructuring    Leases     Operating
- -------------------------------------------------------- ----------  -------------  ----------  -----------
2003.................................................... $  11,486   $     37,789   $  88,389   $  126,178
2004....................................................    10,013         38,525      86,006      124,531
2005....................................................     6,479         34,534      82,383      116,917
2006....................................................        --         24,505      84,326      108,831
2007....................................................        --         22,687      80,806      103,493
2008, and thereafter....................................        --        130,445     524,692      655,137
                                                         ----------  -------------  ----------  -----------
     Total minimum lease payments.......................    27,978   $    288,485   $ 946,602   $1,235,087
                                                                     =============  ==========  ===========
     Amounts representing interest......................    (2,226)
                                                         ----------
     Present value of minimum lease payments............    25,752
     Less: capital lease obligations, short-term
        portion (included in accrued liabilities).......    10,178
                                                         ----------
     Capital lease obligations, long-term portion....... $  15,574
                                                         ==========

The lease commitments in the above table designated as "Leases in the Restructuring" include only the non-cancelable portion of lease commitments included in the Restructuring and, accordingly, have not been reduced by estimated sublease income. However, as required by EITF 88-10, the Company has reduced these lease commitments by estimated sublease income of $159,100,000 in determining the total Restructuring obligations of $154,548,000 recorded in the accompanying balance sheet as of December 31, 2002. Please refer to Note 2 for a further discussion of the Restructuring and the components of the related obligations.

6. Preferred Stock and Stockholders' Equity

Exchangeable Shares and Series A1 Preferred Stock

In connection with the acquisition of Janna Systems Inc. ("Janna") in November 2000, the Company issued certain Janna stockholders that were resident in Canada newly issued exchangeable shares (the "Exchangeable Shares") of a Canadian subsidiary of the Company that are currently exchangeable for the Company's common stock. Until November 30, 2005 (or earlier under certain circumstances), the Exchangeable Shares are exchangeable for the Company's common stock on a one-for-one basis at any time at the option of the holder. On November 30, 2005, any remaining outstanding Exchangeable Shares must convert on a one-for-one basis into the Company's common stock.

In connection with the acquisition of Janna, the Company issued one share of Series A1 Preferred Stock to Montreal Trust Company of Canada (the "Trustee"), as trustee on behalf of the holders of the Exchangeable Shares. The Series A1 Preferred Stock gives the holders of Exchangeable Shares the ability to vote on the same basis as the holders of the Company's common stock. The Trustee, as the holder of the Series A1 Preferred Stock, is entitled to a number of votes equal to the number of Exchangeable Shares outstanding.

Convertible Preferred Stock

During the year ended December 31, 2000, OnLink Technologies, Inc. ("OnLink") issued 697,000 shares of its Series C preferred stock for net proceeds of $19,975,000, resulting in an aggregate of 3,516,000 shares of its Series A, B and C convertible preferred stock outstanding. 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.

Mandatorily Redeemable Convertible Preferred Stock

Prior to the Company's acquisition of OpenSite Technologies, Inc. ("OpenSite"), OpenSite had issued an aggregate of 5,324,000 shares of its mandatorily redeemable convertible preferred stock (the "Redeemable Preferred Stock"), net of repurchases, in private placement transactions. In connection with the Company's acquisition of OpenSite, the holders of the Redeemable 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 Redeemable Preferred Stock, the holders of such stock had certain preferences over the holders of OpenSite's common stock, including liquidation preferences, dividend rights and redemption rights. In addition, the holders of the Redeemable Preferred Stock could require OpenSite to repurchase the Redeemable Preferred Stock at the then-current fair value of OpenSite's common stock, subject to certain restrictions. Accordingly, the Company recorded non-cash charges to stockholders' equity of $98,755,000 during the year ended December 31, 2000, to reflect the Redeemable Preferred Stock at its then-current redemption value. This charge to equity has 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 Redeemable Preferred Stock, the Company stopped recording the accretion on the Preferred Stock on May 17, 2000.

Warrants for Common Stock

In May 2000, OnLink issued approximately 109,200 warrants for shares of common stock in connection with license agreements entered into with a customer. The warrants had an exercise price of $21.52 per share and were fully vested and exercisable at the time of issuance. OnLink recorded the fair value of these warrants of $1,176,000 at the time of issuance based on the Black-Scholes valuation model, using a risk-free interest rate of 4.85%, a contract life of three years and a volatility factor of 71.0%. The value of these warrants was amortized as a reduction to revenues over the term of the contract, which ended in 2001.

Stock Issued for Services

During 2000, prior to its acquisition by the Company, OpenSite issued 34,690 shares of common stock valued at $1,921,000 to settle a management fee. The shares were issued in accordance with the terms of the related agreement.

7. Stock Options

Overview of the Company's Employee Stock Option and Purchase Plans

The 1996 Equity Incentive Plan, which amended and restated the Company's 1994 Stock Option Plan, the 1996 Supplemental Stock Option Plan and the 1998 Equity Incentive Plan (collectively, the "Plans"), provide for the issuance of up to an aggregate of 460,000,000 shares of common stock to employees, directors and consultants. The Plans provide for the issuance of incentive and non-statutory stock options, restricted stock purchase awards, stock bonuses and stock appreciation rights.

Under the Plans, the exercise price for incentive stock options must be at least 100% of the fair market value on the date of the grant. Stock options granted under the Plans generally expire in six to ten years; however, incentive stock options granted to an optionee who owns common stock representing more than 10% of the voting power of all classes of the Company's common stock expire in five years. Vesting periods are determined by the Board of Directors and generally provide for shares to vest ratably over five years.

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

The Plans and certain acquired companies' plans allow for the exercise of unvested stock options and the issuance of restricted stock. Shares of common stock issued to employees upon exercise of unvested stock options or grants of restricted stock are subject to repurchase by the Company at the lower of the original purchase price of the restricted stock or the fair value of the Company's common stock on the date of repurchase. The Company's ability to repurchase these shares expires at a rate equivalent to the vesting schedule of each stock option or share of restricted stock.

Option Repurchase

On August 29, 2002, the Company commenced an offer (the "Option Repurchase") to its employees to repurchase stock options with exercise prices equal to or greater than $40.00 per share ("Eligible Options"). Stock options to purchase an aggregate of 31,950,000 shares were eligible for tender at the commencement of the Option Repurchase, representing approximately 14% of the Company's outstanding stock options as of the commencement date. Members of the Company's Board of Directors were excluded from the Option Repurchase and, accordingly two individuals, the Company's Chairman and CEO and its Vice Chairman, Co-Founder and Vice President, Strategic Planning did not participate. The Company also excluded employees on a leave of absence (other than for medical, maternity, military, workers' compensation or other statutorily protected reasons) and employees who submitted a letter of resignation or received notice of termination prior to the termination of the offer period.

Eligible employees who participated in the Option Repurchase received, in exchange for the repurchase of tendered stock options, a fixed amount of consideration equal to the number of common shares underlying such tendered stock options, multiplied by $1.85. In accordance with terms of the Option Repurchase, employees who were due total consideration of $5,000 or less received the consideration (less applicable tax withholdings) in cash, and employees who were due more than $5,000 received the consideration (less applicable tax withholdings) in fully vested, non-forfeitable shares of the Company's common stock. The Company concluded that the consideration paid for the Eligible Options represented "substantial consideration" as required by Issue 39(f) of EITF Issue No. 00-23 "Issues Relating to Accounting for Stock Compensation Under APB Opinion No. 25 and FASB Interpretation No. 44," as the $1.85 per Eligible Option was at least the fair value for each Eligible Option, as determined using the Black-Scholes option-pricing model. In determining the fair value of the Eligible Options using the Black-Scholes option-pricing model, the Company used the following assumptions: (i) the expected remaining life was deemed to be the remaining term of the options, which ranged from approximately seven years to eight years; (ii) a volatility of 45.0% during the expected life; (iii) a risk-free interest rate of 4.0%; and (iv) no dividends. The repurchase amount of $1.85 offered by the Company for each Eligible Option was established at the commencement of the offer period and remained unchanged throughout the offer period.

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

On September 30, 2002, the offer period ended and the Company repurchased 28,057,000 Eligible Options for total consideration of $51,905,000, consisting of $31,471,000 of fully vested, non-forfeitable shares of the Company's common stock (5,473,000 shares) and $20,434,000 in cash. The number of fully vested, non-forfeitable shares of the Company's common stock issued was determined by dividing the total consideration due (less the amount of applicable tax withholdings) by the closing price of the Company's common stock on September 30, 2002, of $5.75 per share. The Company recorded a compensation charge of $54,879,000 related to the Option Repurchase, consisting of $51,905,000 related to the consideration paid and $2,974,000 of associated employer payroll taxes and other costs. The Company has allocated this expense to the respective categories within the accompanying consolidated statement of operations based on the individual employee's functional responsibility.

While the shares of common stock issued under the Option Repurchase are fully vested and non-forfeitable, a total of 4,114,000 shares of common stock are subject to a "holding period" of one to four years, depending on the number of Eligible Options available to be tendered. Holders of these 4,114,000 fully vested, non-forfeitable shares issued in the Option Repurchase are prohibited from selling, transferring, making a short sale, granting any option to purchase or entering into any hedging transaction with the same economic effect as the sale of such shares during the holding period. Accordingly, 1,947,000, 1,947,000, 142,000 and 78,000 fully vested, non-forfeitable shares of the Company's common stock will be released from the holding period on October 1, 2003, 2004, 2005 and 2006, respectively. The remaining 1,359,000 shares of common stock issued in the Option Repurchase were freely tradable at issuance.

CEO Option Cancellation

From October 29, 1998 through October 24, 2001, the Company's Chief Executive Officer (the "CEO") was granted 25,950,000 stock options with exercise prices ranging from $4.91 to $59.81 per share. The CEO has received no stock option grants since October 24, 2001, nor has the CEO received any bonus since the first quarter of 2001. In addition, at the request of the Company's CEO, his salary was reduced to one dollar per year in the first quarter of 2001. In June 2002, the Company's CEO notified the Board of Directors of his intent to cancel certain of his outstanding stock options in order to further reduce net dilution from stock options to the Company's stockholders. On December 11, 2002, the Company's Compensation and Audit Committees of the Board of Directors approved the cancellation of these 25,950,000 stock options. In January 2003, the 25,950,000 stock options were cancelled and are no longer outstanding.

The stock options cancelled had a weighted average exercise price of $34.63, with exercise prices ranging from $4.91 to $59.81 per share, and represented all stock options granted to the Company's CEO subsequent to October 29, 1998. The stock options cancelled had a fair value of $56,100,000, as determined by the Black-Scholes option-pricing model. In determining the fair value of these stock options, the Company used the following weighted-average assumptions: (i) an expected remaining life of six years; (ii) a volatility of 50.0% during the expected life; (iii) a risk-free interest rate of 3.4%; and (iv) no dividends. The approach used to develop these weighted-average assumptions is the same as discussed below in the Section "Stock-Based Compensation." Differences between average useful life and volatility assumptions for these stock options, as compared to assumptions disclosed elsewhere herein, primary relate to differences in the characteristics of the stock options being valued (primarily differences in the average exercise price of the related stock options).

The Company provided no compensation in exchange for the cancellation of the CEO's stock options, and no additional stock options will be granted to the CEO for a period of at least six months following the cancellation, nor will the CEO receive any salary, other than the one dollar per year currently being paid, or bonus for a period of at least six months following the cancellation.

As a result of the cancellation of the Company's CEO's options in January 2003, the Company must accelerate the amortization of the remaining deferred compensation related to the cancelled stock options in accordance with SFAS 123. Accordingly, the Company's SFAS 123 earnings disclosure in the notes to the consolidated financial statements for the year ended December 31, 2003, will include a footnote disclosure charge of approximately $250,000,000 related to the acceleration of deferred compensation for the unvested portion of the cancelled options (approximately 42% of the options were not vested at cancellation). This amount will be in addition to the SFAS 123 expense related to all of the Company's other stock options.

However, as the result of the cancellation of the CEO's options, the notes to the Company's annual consolidated financial statements for future periods will no longer reflect SFAS 123 amortization of compensation expense related to the cancelled stock options. Specifically, the SFAS 123 compensation expense for the years ended December 31, 2003, 2004 and 2005, will be reduced by approximately $100,000,000, $95,000,000 and $55,000,000, respectively.

Stock Options Outstanding

Combined plan activity for the years ended December 31, 2000, 2001 and 2002, is summarized as follows:

                                                                 Shares                    Wtd. Avg.
                                                               Available    Number of      Exercise
                                                               for Grant      Shares    Price per Share
                                                              ------------ ------------ --------------- 
   Balances, December 31, 1999............................... 119,860,363  173,544,982   $        7.61
     Additional shares authorized............................  43,600,971           --
     Options granted to employees............................ (35,444,515)  35,444,515   $       62.09
     Options granted to officers and directors............... (11,320,000)  11,320,000   $       55.49
     Options exercised.......................................          --  (29,497,843)  $        4.98
     Options forfeited/canceled upon termination.............  15,028,952  (15,028,952)  $       13.87
                                                              ------------ ------------ ---------------
   Balances, December 31, 2000............................... 131,725,771  175,782,702   $       21.59
     Additional shares authorized............................  77,998,826           --
     Options granted to employees............................ (94,402,370)  94,402,370   $       25.40
     Options granted to officers and directors............... (16,434,000)  16,434,000   $       31.05
     Options exercised.......................................          --  (20,597,487)  $        5.25
     Options forfeited/canceled upon termination.............  18,290,320  (18,817,823)  $       36.90
                                                              ------------ ------------ ---------------
   Balances, December 31, 2001............................... 117,178,547  247,203,762   $       23.81
     Issuance of restricted stock............................    (200,000)          --
     Options granted to employees............................  (5,667,300)   5,667,300   $       20.62
     Options granted to officers and directors...............    (220,000)     220,000   $        6.20
     Options exercised.......................................          --  (10,650,943)  $        5.97
     Options forfeited/canceled upon termination.............  28,012,567  (28,910,626)  $       32.84
     Options repurchased.....................................  22,203,279  (28,056,712)  $       62.81
                                                              ------------ ------------ ---------------
   Balances, December 31, 2002............................... 161,307,093  185,472,781   $       17.42
                                                              ============ ============   =============

The following table summarizes information about the Company's stock options outstanding as of December 31, 2002:

                                     Options Outstanding                   Options Exercisable
                         ---------------------------------------------  --------------------------
                                           Wtd. Avg.       Wtd. Avg.                    Wtd. Avg.
        Range of            Number         Remaining        Exercise       Number       Exercise
      Exercise Prices      of Shares     Life (Years)        Price       of Shares        Price
- ------------------------ -------------   -------------  --------------  ------------ -------------
       $0.01  -    7.39    63,968,804             4.6    $       3.58    52,374,819   $      3.45
       $7.40  -   15.00    16,641,120             6.4    $       9.99     9,623,037   $     10.03
      $15.01  -   25.00    69,401,171             8.4    $      18.86    24,187,222   $     20.62
      $25.01  -   40.00    15,476,003             7.9    $      33.24     5,103,604   $     33.84
      $40.01  -   60.00    18,434,198             7.4    $      48.64     8,443,562   $     47.00
      $60.01  -   80.00     1,329,910             7.1    $      71.37       277,414   $     69.02
      $80.01  -  109.05       221,575             5.4    $      93.61       108,602   $     91.81
- ------------------------ -------------   -------------  --------------  ------------ -------------
       $0.01  -  109.05   185,472,781             6.8    $      17.42   100,118,260   $     13.73
                         =============                                  ============

As of December 31, 2000 and 2001, the Company had 55,301,000 and 72,889,000 exercisable stock options outstanding, respectively, with weighted average exercise prices of $5.94 and $15.23 per share, respectively.

The above tables do not reflect the cancellation of 25,950,000 of the Company's CEO's stock options in January 2003. The stock options cancelled had a weighted average exercise price of $34.63 per share and ranged from $4.91 to $59.81 per share. As discussed above, the Company did not and will not provide any consideration to its CEO in exchange for the cancellation of these options.

Restricted Stock

During the year ended December 31, 2002, the Company issued a total of 200,000 shares of restricted stock to certain of its employees for nominal consideration. The Company has recorded deferred compensation of $1,447,000 related to this issuance of restricted stock, which will be expensed on a straight-line basis over the five-year vesting period. The Company may repurchase any unvested shares of the restricted stock at the lower of (i) the original purchase price of the restricted stock; or (ii) the fair value of the Company's common stock. The Company's right to repurchase the shares lapses over the vesting period of the restricted stock. The Company has not issued any other restricted stock purchase awards, stock bonuses or stock appreciation rights.

As of December 31, 2001 and December 31, 2002, the Company had a total of 271,000 and 255,000 shares, respectively, of its common stock outstanding that were subject to repurchase by the Company as a result of the early exercise of stock options or issuance of restricted stock. No compensation expense has resulted at the time of the repurchases of the Company's restricted shares since the consideration paid by the Company equaled the lower of: (i) the original purchase price of the restricted stock; or (ii) the fair value of the Company's common stock.

Employee Stock Purchase Plan

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. For the years ended December 31, 2000, 2001 and 2002, the Company issued 885,000, 1,470,000 and 3,109,000 shares, respectively, under the Purchase Plan with weighted average prices of $45.30, $32.85 and $9.45 per share, respectively. As of December 31, 2002, there were 929,000 shares available for future issuance under the Purchase Plan.

8. Net Income (Loss) per Share

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

                                                                                         Year Ended December 31,
                                                                                    ----------------------------------
                                                                                      2000        2001        2002
                                                                                    ---------  ----------  -----------  
Shares used in basic net income (loss) per share computation......................   423,067     457,031      475,617
Effect of dilutive potential common shares resulting from
   stock options and common stock warrants........................................    95,886      65,690           --
Effect of dilutive potential common shares resulting from
   common stock subject to repurchase.............................................       829         249           --
Effect of dilutive convertible preferred stock....................................     2,539          --           --
                                                                                    ---------  ----------  -----------
Shares used in diluted net income (loss) per share computation....................   522,321     522,970      475,617
                                                                                    =========  ==========  ===========

Shares used in the diluted net income (loss) per share computation in the above table include the dilutive impact of the Company's stock options. The impact of the Company's stock options on shares used for the diluted earnings per share computation is calculated based on the average share price of the Company's common stock for each period using the treasury stock method. Under the treasury stock method, the tax-effected proceeds that would be hypothetically received from the exercise of all stock options with exercise prices below the average share price of the Company's common stock are assumed to be used to repurchase shares of the Company's common stock. The dilutive impact of the Company's stock options was calculated using an average price of the Company's common stock of $75.74 and $36.52 per share for the years ended December 31, 2000 and 2001, respectively. Because the Company reported a net loss during the year ended December 31, 2002, the Company excluded the impact of all stock options in the computation of dilutive earnings per share, as their effect would be anti-dilutive.

The Company excludes all potentially dilutive securities from its diluted net income (loss) per share computation when 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):

                                                                                         Year Ended December 31,
                                                                                    ----------------------------------
                                                                                      2000        2001        2002
                                                                                    ---------  ----------  -----------  
Stock options excluded due to the exercise price exceeding the average
  fair value of the Company's common stock during the period......................    11,599      59,504       99,537
Weighted average stock options and restricted stock, calculated using
  the treasury stock method, that were excluded due to the Company
  reporting a net loss during the period..........................................        --          --       40,397
Weighted average shares issuable upon conversion of the convertible
  subordinated debentures.........................................................    12,867      12,867       12,867
Weighted average shares issuable upon conversion of the mandatorily
  redeemable convertible preferred stock..........................................     2,012          --           --
                                                                                    ---------  ----------  -----------
Total common stock equivalents excluded from diluted net income
  (loss) per share computation....................................................    26,478      72,371      152,801
                                                                                    =========  ==========  ===========

Under the treasury stock method, stock options with the exercise prices exceeding the average fair value of the Company's common stock during the period are excluded from the diluted earnings per share computation. These stock options had weighted average exercise prices of $89.82, $58.05 and $27.63 per share, respectively. In addition, as discussed above, stock options with exercise prices equal to or below the average fair value of the Company's common stock of $17.70 per share during 2002 were excluded from the diluted earnings per share computation because the Company reported a net loss during 2002.

9. Income Taxes

Income (loss) before tax expense (benefit) includes income from foreign operations of approximately $24,040,000, $145,469,000 and $26,113,000 for the years ended December 31, 2000, 2001 and 2002, respectively. The components of income tax expense (benefit) for the years ended December 31, 2000, 2001 and 2002, are as follows (in thousands):

                                                           December 31,
                                                 --------------------------------
                                                    2000       2001       2002
                                                 ---------- ---------- ----------
 Current:
   Federal...................................... $   9,168  $  48,626  $   9,322
   State........................................     5,384     19,047      1,772
   Foreign......................................    24,405     39,672     19,254
                                                 ---------- ---------- ----------
     Total current..............................    38,957    107,345     30,348
 Deferred:
   Federal......................................   (50,734)    13,493    (32,757)
   State........................................   (13,571)   (20,602)   (12,705)
   Foreign......................................     2,246     (4,527)    (4,969)
                                                 ---------- ---------- ----------
     Total deferred.............................   (62,059)   (11,636)   (50,431)

 Charge in lieu of taxes attributable
   to employer's stock option plans.............   185,613     53,800         --
                                                 ---------- ---------- ----------
     Total income tax expense (benefit)......... $ 162,511  $ 149,509  $ (20,083)
                                                 ========== ========== ==========

The differences between the income tax expense (benefit) computed at the federal statutory rate of 35% and the Company's actual income tax expense (benefit) for the years ended December 31, 2000, 2001 and 2002, are as follows:

                                                                        December 31,
                                                             --------------------------------
                                                                2000       2001       2002
                                                             ---------- ---------- ----------
  Expected income tax expense (benefit)....................      35.0 %     35.0 %    (35.0)%
  State income taxes (benefit), net of federal tax benefit.       4.7 %      4.4 %    (11.9)%
  Research and development credit..........................      (1.0)%     (1.3)%     (3.7)%
  Deferred compensation....................................       0.9 %      0.4 %      2.1 %
  Meals and entertainment..................................       0.7 %      0.5 %      3.5 %
  Foreign rate differential................................      (2.3)%     (3.0)%      7.4 %
  Other, net...............................................       4.3 %      1.0 %      1.6 %
                                                             ---------- ---------- ----------
    Total income taxes.....................................      42.3 %     37.0 %    (36.0)%
                                                             ========== ========== ==========

The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities as of December 31, 2001 and 2002, are as follows (in thousands):

                                                                December 31,
                                                            ---------------------
                                                               2001       2002
                                                            ---------- ----------
 Deferred tax assets:
   Allowance for doubtful accounts and returns............. $  15,747  $  13,823
   Accruals and reserves, not currently deducted
     for tax purposes......................................    11,179     66,444
   Credits and charitable contribution carryforwards.......    86,433    112,483
   Net operating loss carryforward.........................   506,781    555,035
   Depreciation and amortization...........................    52,725     44,521
   Other...................................................    13,231     12,219
                                                            ---------- ----------
     Deferred tax assets...................................   686,096    804,525
                                                            ---------- ----------
 Deferred tax liabilities:
   Unrealized gain on investments..........................    (4,692)    (4,470)
                                                            ---------- ----------
     Deferred tax liabilities..............................    (4,692)    (4,470)
                                                            ---------- ----------
 Valuation allowance.......................................  (570,548)  (660,826)
                                                            ---------- ----------

       Net deferred tax assets............................. $ 110,856  $ 139,229
                                                            ========== ==========

Deferred tax assets of approximately $661,000,000 at December 31, 2002, pertain to certain tax credits and net operating loss carryforwards resulting from the exercise of employee stock options. The Company has provided a valuation allowance on these deferred tax assets. The valuation allowance on these deferred tax assets will be reduced in the period in which the Company realizes a benefit on its tax return from a reduction of income taxes payable stemming from the utilization of these credits and losses. When realized, the tax benefit of these credits and losses will be accounted for as a credit to stockholders' equity rather than as a reduction of income tax expense.

As of December 31, 2002, the Company had federal and state net operating loss carryforwards of approximately $1,446,200,000 and $966,200,000, respectively, available to offset future taxable income. In addition, the Company had federal and state research and development credit carryforwards of $44,884,000 and $41,422,000, respectively, available to offset future tax liabilities. The Company's federal net operating loss ("NOL") carryforwards will begin to expire in 2011, if not utilized. The Company's state NOL carryforwards will begin to expire in 2004, if not utilized. The Company's federal research and development credit carryforward will begin to expire in 2011, if not utilized. The state research and development credit can be carried forward indefinitely.

The Company's U.S. Federal income tax returns and payroll tax returns for 1998, 1999 and 2000 are currently under examination by the Internal Revenue Service ("IRS"). To date, the IRS has not proposed any material adjustments to or assessments related to these returns. Should the IRS propose adjustments to the Company's U.S. Federal income tax returns as a result of its examination, the Company believes that it has made adequate provision in the financial statements for such adjustments, if any. The Company has not made any provision for potential assessments by the IRS related to its payroll tax returns in the accompanying financial statements, as the amount, if any, which the Company may have to pay is not currently estimable.

The Company provides United States income taxes on the earnings of foreign subsidiaries unless the subsidiaries' earnings are considered permanently reinvested outside the United States. As of December 31, 2002, the Company has unrecognized deferred tax liabilities of approximately $65,000,000 related to approximately $183,000,000 of cumulative net undistributed earnings of foreign subsidiaries. These earnings are considered permanently invested in operations outside the United States.

10. Related Party Transactions

A member of the Company's Board of Directors serves as an officer for one of the Company's customers. During the years ended December 31, 2001 and 2002, software license revenues from this customer totaled $707,000 and $1,531,000, respectively. There were not any significant related party transactions during the year ended December 31, 2000.

11. 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 industry-specific eBusiness software applications. Substantially all revenues result from the license of the Company's software products and related professional services and customer support (maintenance) services. The Company's chief operating decision-maker (i.e., chief executive officer) 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 reporting segment, specifically the license, implementation and support of its software. The Company does not prepare reports for, or measure the performance of, its individual software applications and, accordingly, the Company has not presented revenues or any other related financial information by individual software product.

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, 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 on any asset-based metrics. Therefore, geographic information is presented only for revenues and gross margin.

Total international revenues for the years ended December 31, 2000, 2001 and 2002 were $648,547,000, $838,143,000 and $619,198,000, respectively. International software license revenues for the years ended December 31, 2000, 2001 and 2002, were $441,717,000, $479,335,000 and $290,799,000, respectively. The Company's international software license revenues are principally in Europe and Asia Pacific. The following geographic information is presented for the years ended December 31, 2000, 2001 and 2002 (in thousands):

                            United                Asia    Canada and
                  Year      States     Europe   Pacific  Latin America     Totals
                 ------- ----------- --------- --------- -------------  -----------
   Revenues:       2000  $1,171,659  $466,405  $ 96,043  $     86,099   $1,820,206
                   2001   1,246,453   626,567   120,951        90,625    2,084,596
                   2002   1,016,109   459,985    89,429        69,784    1,635,307

   Gross margin:   2000  $  828,630  $371,515  $ 75,381  $     63,595   $1,339,121
                   2001     823,164   478,082    87,610        54,715    1,443,571
                   2002     648,937   322,083    56,884        45,597    1,073,501

No single customer has accounted for 10% or more of total revenues in 2000, 2001 or 2002.

12. Business Combinations

The Company did not complete any business combinations accounted for as pooling-of-interests during the years ended December 31, 2001 and 2002. During the year ended December 31, 2000, the Company completed the following transactions, each of which has been accounted for as a pooling-of-interests:

Janna Systems Inc.

On November 15, 2000, the Company acquired Janna Systems Inc. ("Janna"), a leading provider of eBusiness solutions for the financial services industry. Under the terms of the agreement, each outstanding Janna common share was exchanged for 0.4970 newly issued shares of the Company's common stock or, at the election of Janna stockholders resident in Canada, 0.4970 of newly issued exchangeable shares (the "Exchangeable Shares") of a Canadian subsidiary of the Company that are currently exchangeable for the Company's common stock. This resulted in the issuance of 9,385,000 shares of the Company's common stock to the former Janna stockholders (which number assumes that all of the Exchangeable Shares have been exchanged for the Company's common stock). In addition, all outstanding stock options of Janna 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. All share data in the Company's consolidated financial statements reflects the Exchangeable Shares as having been exchanged for shares of the Company's common stock as of the earliest date presented.

OnLink Technologies, Inc.

On October 2, 2000, the Company acquired OnLink, a provider of eCommerce software. Under the terms of the agreement, each outstanding share of OnLink common stock was exchanged for 0.3308 newly issued shares of common stock of the Company. This resulted in the issuance of 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.

OpenSite Technologies, Inc.

On May 17, 2000, the Company acquired OpenSite, a provider of dynamic commerce software. Under the terms of the agreement, each outstanding share of OpenSite common stock was exchanged for 0.2630 newly issued shares of common stock of the Company. This resulted in the issuance of 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.

In connection with the Company's acquisitions of Janna, OnLink and OpenSite, the Company expensed approximately $36,504,000 of direct merger-related expenses. These costs consisted of investment banker fees; compensation expense associated with the acceleration of stock options in accordance with their existing terms; integration charges related to duplicate facilities and equipment; legal, accounting and other professional fees; and other miscellaneous expenses. As of December 31, 2002, the Company had settled substantially all of these merger-related costs.

Each of the above transactions was accounted for as a pooling-of-interests and, accordingly, the financial position, results of operations and cash flows of each of the above companies 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. The following table presents the results of operations of each of the separate companies prior to their acquisition and the combined amounts for the period subsequent to acquisition during the year ended December 31, 2000, as presented in the accompanying consolidated financial statements of the Company (in thousands):

 Total revenues:                                         
   Siebel................................... $ 1,780,205
   OpenSite.................................       3,709
   OnLink...................................       8,183
   Janna....................................      28,109
                                             ------------
                                             $ 1,820,206
                                             ============

 Net income (loss):                                      
   Siebel................................... $   243,051
   OpenSite.................................      (6,310)
   OnLink...................................     (13,450)
   Janna....................................      (1,392)
                                             ------------
                                             $   221,899
                                             ============

There were no adjustments to conform accounting methods or to eliminate intercompany transactions.

13. Acquisitions

During the three years in the period ended December 31, 2002, the Company completed the following transactions, each of which has been accounted for as a purchase:

nQuire Software, Inc.

On November 19, 2001, the Company acquired all of the outstanding securities of nQuire Software, Inc. ("nQuire"), a provider of Internet-based business analytics software. The Company acquired nQuire in order to capitalize on the expertise of the nQuire management team in the analytics market and their ability to develop new products using the Company's existing technology and technology acquired in the acquisition.

The Company acquired nQuire for consideration of $59,722,000, consisting of 2,259,810 shares of the Company's common stock valued at $58,416,000 and stock options to existing employees of nQuire to purchase 56,108 shares of its common stock valued at $1,306,000. The number of shares to be issued was not determined until November 19, 2001, and, accordingly, the common stock was valued based on the closing market price of the Company's common stock on that date. The Company valued the stock options issued to the employees of nQuire based on the Black-Scholes valuation model, using a risk-free interest rate of 5.0%, the expected remaining life of the option and a volatility factor of 90.0%. The purchase price was allocated to tangible net assets, including net deferred tax assets of $5,318,000, other current assets of $1,258,000, property and equipment of $105,000, assumed current liabilities of $2,872,000 and deferred compensation related to unvested stock options and restricted common stock of $1,397,000. Based in part on an independent valuation study of nQuire, the Company determined that there was no purchased in-process research and development and that the only identifiable intangible asset not subsumed into goodwill (i.e., assembled workforce) was "acquired technology" valued at $7,500,000. The acquired technology is currently being amortized over its useful life of three years using the straight-line method. The excess of the purchase price over the fair value of the identifiable tangible and intangible net assets acquired of $47,016,000 was recorded as goodwill. This amount is not deductible for tax purposes.

As a result of nQuire meeting certain revenue and product delivery targets during 2001 and 2002, as defined in the merger agreement, the Company issued an additional 262,000 shares valued at $6,231,000 during 2002. The Company recorded $6,004,000 of this additional consideration as goodwill and $227,000 as compensation expense. As a result of nQuire meeting certain revenue targets for the year ended December 31, 2002, as defined in the merger agreement, the Company issued an additional 207,000 shares valued at $1,670,000 in February 2003. The Company recorded $1,608,000 of this additional consideration as goodwill and the remaining $62,000 as compensation expense. In the event that nQuire meets certain post-closing revenue and product delivery targets for the year ended December 31, 2003, as defined in the merger agreement, the Company could issue the shareholders of nQuire an additional 525,000 shares of the Company's common stock (the "nQuire Earnout"). The ultimate value of the nQuire Earnout depends upon the market value of the Company's common stock when paid. The Company will record approximately 96.0% of the nQuire Earnout, if paid, as goodwill and the remaining 4.0% of the nQuire Earnout, if paid, as compensation expense. The Company will record the compensation portion of the payments when the Company determines that it is probable that the Company will be obligated to pay such amounts, and the goodwill portion will be recorded when actually paid.

Sales.com, Inc.

In December 1999, the Company sold a controlling interest in the voting equity of Sales.com, Inc. ("Sales.com") to various outside investors. As a result of the sale of the controlling interest in Sales.com, the Company accounted for the investment in Sales.com using the equity method during the year ended December 31, 2000. As a result of recording the Company's portion of Sales.com's losses, the carrying value of the Company's investment in Sales.com had been reduced to zero as of December 31, 2000.

On January 12, 2001, the Company reacquired all of the outstanding securities of Sales.com for total consideration of $28,235,000, consisting of the issuance of 373,618 shares of the Company's common stock valued at $26,900,000 and the issuance of stock options to purchase 49,895 shares of its common stock to existing employees of Sales.com valued at $1,335,000. The Company valued the stock options issued to the employees of Sales.com based on the Black-Scholes valuation model, using a risk-free interest rate of 5.0%, the expected remaining life of the option and a volatility factor of 77.0%. The purchase price was allocated to tangible net assets, including cash of $11,550,000, other current assets of $1,178,000, property and equipment of $385,000 and assumed current liabilities of $888,000. The excess of the purchase price over the fair value of the tangible net assets acquired of $16,010,000 was allocated to acquired technology. This amount is currently being amortized over three years using the straight-line method.

Wind S.r.l.

On September 27, 2000 (the "Initial Purchase"), and September 28, 2001 (the "Final Purchase"), the Company acquired 81% and 19%, respectively, of the outstanding shares of Wind S.r.l. ("Wind") for net cash consideration of $3,257,000 and $928,500, respectively. The Initial Purchase price was allocated to tangible net assets, including current assets of $654,000, assumed current liabilities of $430,000 and property and equipment of $103,000. The excess of the Initial Purchase price over the fair value of the tangible net assets acquired of $2,930,000 and the Final Purchase price of $928,500 were both allocated to goodwill. Goodwill was amortized using a three-year life through January 1, 2002, at which time amortization ceased in accordance with SFAS 142. During the first quarters of 2001 and 2002, the Company paid additional consideration to Wind's stockholders of approximately $814,000 and $780,000, respectively, based on Wind meeting certain revenue targets, as defined in the merger agreement. The Company recorded this additional consideration as compensation expense.

MOHR Development, Inc.

On June 22, 2000, the Company acquired all of the outstanding securities of MOHR Development, Inc. ("MOHR") for net cash consideration of $7,905,000 and an obligation to pay an additional $3,000,000 (the "MOHR Obligation"). The Company paid the MOHR Obligation in two equal installments in January 2001 and 2002. The purchase price of $10,905,000 was allocated to tangible net assets, including current assets of $799,000, assumed current liabilities of $2,031,000 and property and equipment of $115,000. The excess of the purchase price over the fair value of the tangible net assets acquired of $12,022,000 was allocated to goodwill. Goodwill was amortized using a three-year life through January 1, 2002, at which time amortization ceased in accordance with SFAS 142.

As a result of meeting certain revenue targets, as defined in the merger agreement, the Company paid additional consideration of $1,372,000 to MOHR's stockholders in the first quarter of 2001, of which $310,000 was recorded as goodwill and $1,062,000 as compensation expense. In addition, the Company paid additional consideration of $500,000 to MOHR's stockholders in the first quarter of 2002 and is obligated to pay an additional $1,500,000 in 2003. The Company recorded the 2002 payment as goodwill and has accrued the 2003 obligation as compensation expense as of December 31, 2002. If certain individuals meet certain post-closing conditions, as defined in the merger agreement, the Company could pay additional cash consideration of $500,000 in 2003. The Company will record this additional consideration, if paid, as goodwill.

Paragren Technologies, Inc.

On January 14, 2000, the Company acquired all of the outstanding securities of Paragren Technologies, Inc. ("Paragren") for cash consideration of $18,050,000. The purchase price was allocated to tangible net assets, including current assets of $942,000, assumed current liabilities of $1,442,000 and property and equipment of $976,000. The excess of the purchase price over the fair value of the tangible net assets acquired of $17,574,000 was allocated to goodwill. As a result of meeting certain revenue targets, as defined in the merger agreement, the Company paid additional consideration of $1,756,000 to Paragren's stockholders during the first quarter of 2001. The Company recorded this additional consideration as goodwill. Goodwill was amortized using a three-year life through January 1, 2002, at which time amortization ceased in accordance with SFAS 142.

Each of the above transactions was accounted for by the purchase method of accounting and, accordingly, the operating results of each of the acquired companies have been included in the accompanying consolidated financial statements of the Company from the date of acquisition. Pro forma information giving effect to these acquisitions has not been presented since the pro forma information would not differ materially from the historical results of the Company.

Intangible assets acquired in connection with the above acquisitions consisted of the following (in thousands):

                                                               December 31,
                                                         -------------------------
                                                            2001          2002
                                                         ----------  -------------  
Acquired technology..................................... $  26,747   $     26,747
Less: accumulated amortization..........................     7,747         16,393
                                                         ----------  -------------
     Intangible assets, net............................. $  19,000   $     10,354
                                                         ==========  =============

As of December 31, 2002, future amortization expense related to the acquired technology is as follows (in thousands):

Year Ending December 31,
- -------------------------------                                    
2003.................................................... $   7,837
2004....................................................     2,517
                                                         ----------
     Total.............................................. $  10,354
                                                         ==========

The changes in the carrying amount of goodwill during the year ended December 31, 2002, were as follows:

Balance as of December 31, 2001......................... $  72,869
Earnout payments to the stockholders of
   acquired companies...................................     8,112
Foreign currency fluctuation............................       (32)
                                                         ----------
Balance as of December 31, 2002......................... $  80,949
                                                         ==========

Summarized below are the effects on net income (loss) and net income (loss) per share data, if the Company had followed the amortization provisions of SFAS 142 for the years ended December 31, 2000 and 2001 (in thousands, except per share amounts):

                                                                  December 31,
                                                       -----------------------------------
                                                           2000         2001       2002
                                                       ------------  ---------- ----------
Net income (loss) available to common stockholders:
   As reported........................................ $   123,144   $ 254,575  $ (35,704)
   Add: goodwill amortization, net of taxes...........       9,269      12,626         --
                                                       ------------  ---------- ----------
     Adjusted net income (loss)....................... $   132,413   $ 267,201  $ (35,704)
                                                       ============  ========== ==========

Diluted net income (loss) per share:
   As reported........................................ $      0.24   $    0.49  $   (0.08)
   Add: goodwill amortization, net of taxes...........        0.01        0.02         --
                                                       ------------  ---------- ----------
     Adjusted diluted net income (loss) per share..... $      0.25   $    0.51  $   (0.08)
                                                       ============  ========== ==========

Basic net income (loss) per share:
   As reported........................................ $      0.29   $    0.56  $   (0.08)
   Add: goodwill amortization, net of taxes...........        0.02        0.02         --
                                                       ------------  ---------- ----------
      Adjusted basic net income (loss) per share...... $      0.31   $    0.58  $   (0.08)
                                                       ============  ========== ==========

14. Subsequent Events

Stockholder Rights Plan

On January 23, 2003, the Company's Board of Directors approved the adoption of a Stockholder Rights Plan (the "Rights Plan") and the authorization of 100,000 shares of Series A2 junior participating preferred stock, par value $0.001 per share (the "Junior Preferred Stock"). The Rights Plan is intended as a means to guard against abusive takeover tactics and to provide for fair and equal treatment for all stockholders in the event that an unsolicited attempt is made to acquire the Company. Accordingly, the Rights Plan will have certain anti-takeover effects.

Under the terms of the Rights Plan, stockholders of record on February 13, 2003, received a dividend distribution of one preferred share purchase right (a "Right") for each outstanding share of the Company's common stock. The Rights trade with the Company's common stock and no separate Right certificates will be distributed until such time as the Rights become exercisable as described below. Each Right entitles the holder to purchase from the Company one ten-thousandth of a share of Junior Preferred Stock at a price of $70.00 per one ten-thousandth of a share (the "Purchase Price"), subject to adjustment. Each one ten-thousandth of a share of Junior Preferred Stock is designed to be the economic equivalent of one share of the Company's common stock. However, until a Right is exercised, the holder of the Right will have no rights as a stockholder of the Company, including without limitation, the right to vote or receive dividends.

The Rights are not exercisable until the earlier to occur of (i) the date of a public announcement that a person, entity or group of affiliated or associated persons have acquired beneficial ownership of 15% or more of the Company's outstanding common stock (an "Acquiring Person") except that Thomas M. Siebel, the Company's Chairman and CEO, and his affiliates may have greater beneficial ownership without becoming an "Acquiring Person"; or (ii) ten business days (or such later date as may be determined by action of the Board of Directors prior to such time as any person or entity becomes an Acquiring Person) following the commencement of, or announcement of an intention to commence, a tender offer or exchange offer, the consummation of which would result in any person or entity becoming an Acquiring Person (the earlier of such dates being called the "Distribution Date"). The Rights will expire on February 12, 2013 (the "Final Expiration Date"), unless the Rights are earlier redeemed or exchanged by the Company. The exercise of Rights for shares of Junior Preferred Stock is at all times subject to the availability of a sufficient number of authorized but unissued Junior Preferred Stock.

In the event that any person or group of affiliated or associated persons becomes an Acquiring Person, each holder of a Right, other than Rights beneficially owned by the Acquiring Person and its associates and affiliates (which will thereafter be void), will for a 60-day period have the right to receive upon exercise that number of shares of common stock having a market value of two times the exercise price of the Right. If such number of shares is not and cannot be authorized, the Company may issue Junior Preferred Stock, cash, property, stock or a combination thereof in exchange for the Rights.

At any time prior to the earliest of (i) such time as a person has become an Acquiring Person; or (ii) the Final Expiration Date, the Board of Directors of the Company may redeem the Rights in whole, but not in part, at a price of $0.001 per Right (the "Redemption Price"). Following the expiration of these periods, the Rights become non-redeemable. Immediately upon any redemption of the Rights, the ability to exercise the Rights will terminate and the holders of Rights will be entitled to receive only the Redemption Price. The terms of the Rights may be amended by the Board of Directors of the Company without the consent of the holders of the Rights, except that from and after such time as the Rights are distributed no such amendment may adversely affect the interest of the holders of the Rights, excluding the interests of an Acquiring Person.

The Rights will cause substantial dilution to a person or group that attempts to acquire the Company on terms not approved by the Company's Board of Directors. The Company does not expect the Rights to interfere with any merger or other business combination approved by the Board of Directors, as the Rights may be amended to permit such acquisition or redeemed by the Company at $0.001 per Right prior to the earliest of (i) the time that a person or group has acquired beneficial ownership of 15% or more of the Common Shares; or (ii) the Final Expiration Date.

Until the Rights become exercisable, the Rights will have no dilutive impact on the Company's earnings per share data. The Rights are protected by customary anti-dilution provisions.

Series A2 Junior Participating Preferred Stock

The Junior Preferred Stock purchasable upon exercise of the Rights will not be redeemable. In the event of liquidation, the holders of the Junior Preferred Stock would be entitled to a minimum preferential liquidation payment of $10,000 per share, but would be entitled to receive an aggregate payment equal to 10,000 times the payment made per share of common stock. Each share of Junior Preferred Stock will have 10,000 votes, voting together with the Company's common stock. If issued, the Junior Preferred Stock will also be entitled to preferential dividends, when and if declared by the Board of Directors. Finally, in the event of any merger, consolidation or other transaction in which shares of the Company's common stock are exchanged, each share of Junior Preferred Stock will be entitled to receive 10,000 times the amount of consideration received per share of common stock. The Junior Preferred Stock would rank junior to any other series of the Company's preferred stock.

15. Selected Quarterly Financial Data (unaudited)

The following table presents selected quarterly information for 2001 and 2002 (in thousands, except share data):

                                                       First     Second    Third     Fourth
                                                      quarter   quarter   quarter   quarter
                                                     --------- --------- --------- ---------
  2001:                                                                                      
  Total revenues.................................... $598,750  $560,152  $437,890  $487,804
  Gross margin (1)..................................  416,749   391,648   285,801   349,373
  Net income........................................   76,921    76,557    35,197    65,900
  Diluted net income per share......................     0.15      0.15      0.07      0.13
  Basic net income per share........................     0.17      0.17      0.08      0.14


  2002:                                                                                      
  Total revenues.................................... $477,847  $405,562  $357,162  $394,736
  Gross margin (1) (2)..............................  341,419   275,219   207,548   249,315
  Net income (loss) (3).............................   64,621    29,775   (92,078)  (38,022)
  Diluted net income (loss) per share (4)...........     0.12      0.06     (0.19)    (0.08)
  Basic net income (loss) per share (4).............     0.14      0.06     (0.19)    (0.08)

1. The Company's gross margin in the above table for all quarters presented has been conformed to the presentation for the year ended December 31, 2002. Specifically, the Company's gross margin reflects the reclassification of certain expenses related to its information technology support group from operating expenses to cost of professional services, maintenance and other revenues. These reclassifications did not impact previously reported revenues, operating income, net income or earnings per share data.

   These expense reclassifications reduced the Company's gross margin from the previously reported amounts by $4,965,000, $4,509,000, $3,809,000, and $4,354,000 for the periods ended March 31, June 30, September 30, and December 31, 2001, respectively. These expense reclassifications reduced the Company's gross margin from the previously reported amounts by $5,119,000, $5,742,000, $7,691,000, and $9,418,000 for the periods ended March 31, June 30, September 30, and December 31, 2002, respectively.

2. As further described in Note 7, during the third quarter of 2002, the Company recorded a compensation charge of $54,879,000 related to the Option Repurchase. The Company has allocated this expense to the respective categories within the accompanying consolidated statement of operations based on the individual option holder's functional responsibility. Accordingly, gross margin for the third quarter of 2002 has been reduced by $14,119,000 for expenses incurred related to the repurchase of stock options held by the Company's professional service and technical support personnel.

3. The Company completed the Restructuring and the Option Repurchase during 2002, which are discussed further in Notes 2 and 7, respectively. Included in operating expenses for the third quarter of 2002 is a charge of $109,383,000 related to the Restructuring and a compensation charge of $54,879,000 related to the Option Repurchase. On an after-tax basis, these charges reduced net income by $105,128,000 during the third quarter of 2002. Included in operating expenses for the fourth quarter of 2002 is a charge of $95,922,000 related to the Restructuring. On an after-tax basis, these charges reduced net income by $61,390,000 during the fourth quarter of 2002.

4. The Company's third and fourth quarter operating results have been reduced by after-tax charges of $105,128,000 and $61,390,000, respectively, related to the Restructuring and Option Repurchase. Accordingly, the Company's diluted and basic loss per share data both include $0.22 per share during the third quarter of 2002 and $0.13 per share during the fourth quarter of 2002 related to these charges.

SIGNATURES

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

SIEBEL SYSTEMS, INC.

Date: March 13, 2003
By: /s/ Kenneth A. Goldman
Kenneth A. Goldman
Senior Vice President, Finance and Administration and Chief Financial Officer

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each of the persons whose signature appears below hereby constitutes and appoints Thomas M. Siebel and Kenneth A. Goldman, each of them acting individually, as his or her attorney-in-fact, each with the full power of substitution, for him or her in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming our signatures as they may be signed by our said attorney-in-fact and any and all amendments to this Annual Report on Form 10-K.

Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed by the following persons in the capacities and on the dates indicated.

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

CERTIFICATIONS

I, Thomas M. Siebel, certify that:

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

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

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

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

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

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

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

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

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

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

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

Dated: March 13, 2003

By:  /s/ Thomas M. Siebel

Thomas M. Siebel

Chairman and CEO

I, Kenneth A. Goldman, certify that:

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

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

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

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

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

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

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

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

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

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

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

Dated: March 13, 2003

By:  /s/ Kenneth A. Goldman

Kenneth A. Goldman

Senior Vice President, Finance and
Administration and
Chief Financial Officer

EX-10.1

Exhibit 10.1

SIEBEL SYSTEMS, INC.

1996 EQUITY INCENTIVE PLAN

Adopted May 14, 1996
Approved By Shareholders May 14, 1996
Amended October 14, 1996
Amended January 10, 1997
Amended August 23, 1999
Amended November 15, 2002

Introduction.

In December 1994, the Board of Directors adopted the Siebel Systems, Inc. 1994 Stock Option Plan, which was later amended in February 1996. In February 1996, the Board of Directors adopted the Siebel Systems, Inc. 1996 Supplemental Stock Option Plan. On May 14, 1996, the Board of Directors amended and restated both of the above plans in the form of this 1996 Equity Incentive Plan. The Plan was amended on October 14, 1996 to increase the number of shares subject to the Plan. The Plan was amended on January 10, 1997 to conform to changes in Rule 16b-3. The Plan was again amended on August 23, 1999 to increase the number of shares subject to the Plan.

1. Purposes.

(a) The purpose of the Plan is to provide a means by which selected Employees and Directors of and Consultants to the Company and its Affiliates may be given an opportunity to benefit from increases in value of the stock of the Company through the granting of (i) Incentive Stock Options, (ii) Nonstatutory Stock Options, (iii) stock bonuses, (iv) rights to purchase restricted stock, and (v) stock appreciation rights, all as defined below.

(b) The Company, by means of the Plan, seeks to retain the services of persons who are now Employees or Directors of or Consultants to the Company or its Affiliates, to secure and retain the services of new Employees, Directors and Consultants, and to provide incentives for such persons to exert maximum efforts for the success of the Company and its Affiliates.

(c) The Company intends that the Stock Awards issued under the Plan shall, in the discretion of the Board or any Committee to which responsibility for administration of the Plan has been delegated pursuant to subsection 3(c), be either (i) Options granted pursuant to Section 6 hereof, including Incentive Stock Options and Nonstatutory Stock Options, (ii) stock bonuses or rights to purchase restricted stock granted pursuant to Section 7 hereof, or (iii) stock appreciation rights granted pursuant to Section 8 hereof. All Options shall be separately designated Incentive Stock Options or Nonstatutory Stock Options at the time of grant, and in such form as issued pursuant to Section 6, and a separate certificate or certificates will be issued for shares purchased on exercise of each type of Option.

2. Definitions.

(a) "Affiliate" means any parent corporation or subsidiary corporation, whether now or hereafter existing, as those terms are defined in Sections 424(e) and (f) respectively, of the Code.

(b) "Board" means the Board of Directors of the Company.

(c) "Code" means the Internal Revenue Code of 1986, as amended.

(d) "Committee" means a Committee appointed by the Board in accordance with subsection 3(c) of the Plan.

(e) "Company" means Siebel Systems, Inc., a Delaware corporation.

(f) "Concurrent Stock Appreciation Right" or "Concurrent Right" means a right granted pursuant to subsection 8(b)(2) of the Plan.

(g) "Consultant" means any person, including an advisor, engaged by the Company or an Affiliate to render consulting services and who is compensated for such services, provided that the term "Consultant" shall not include Directors who are paid only a director's fee by the Company or who are not compensated by the Company for their services as Directors.

(h) "Continuous Status as an Employee, Director or Consultant" means the employment or relationship as a Director or Consultant is not interrupted or terminated. The Board, in its sole discretion, may determine whether Continuous Status as an Employee, Director or Consultant shall be considered interrupted in the case of: (i) any leave of absence approved by the Board, including sick leave, military leave, or any other personal leave; or (ii) transfers between locations of the Company or between the Company, Affiliates or their successors.

(i) "Covered Employee" means the chief executive officer and the four (4) other highest compensated officers of the Company for whom total compensation is required to be reported to shareholders under the Exchange Act, as determined for purposes of Section 162(m) of the Code.

(j) "Director" means a member of the Board.

(k) "Employee" means any person, including Officers and Directors, employed by the Company or any Affiliate of the Company. Neither service as a Director nor payment of a director's fee by the Company shall be sufficient to constitute "employment" by the Company.

(l) "Exchange Act" means the Securities Exchange Act of 1934, as amended.

(m) "Fair Market Value" means, as of any date, the value of the common stock of the Company determined as follows:

(1) If the common stock is listed on any established stock exchange or a national market system, including without limitation the National Market of The Nasdaq Stock Market, the Fair Market Value of a share of common stock shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such system or exchange (or the exchange with the greatest volume of trading in common stock) on the last market trading day prior to the day of determination, as reported in the Wall Street Journal or such other source as the Board deems reliable;

(2) If the common stock is quoted on The Nasdaq Stock Market (but not on the National Market thereof) or is regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a share of common stock shall be the mean between the bid and asked prices for the common stock on the last market trading day prior to the day of determination, as reported in the Wall Street Journal or such other source as the Board deems reliable;

(3) In the absence of an established market for the common stock, the Fair Market Value shall be determined in good faith by the Board.

(n) "Incentive Stock Option" means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder.

(o) "Independent Stock Appreciation Right" or "Independent Right" means a right granted pursuant to subsection 8(b)(3) of the Plan.

(p) "Non-Employee Director" means a Director who either (i) is not a current Employee or Officer of the Company or its parent or subsidiary, does not receive compensation (directly or indirectly) from the Company or its parent or subsidiary for services rendered as a consultant or in any capacity other than as a Director (except for an amount as to which disclosure would not be required under Item 404(a) of Regulation S-K promulgated pursuant to the Securities Act of 1933 ("Regulation S-K"), does not possess an interest in any other transaction as to which disclosure would be required under Item 404(a) of Regulation S-K, and is not engaged in a business relationship as to which disclosure would be required under Item 404(b) of Regulation S-K; or (ii) is otherwise considered a "non-employee director" for purposes of Rule 16b-3.

(q) "Nonstatutory Stock Option" means an Option not intended to qualify as an Incentive Stock Option.

(r) "Officer" means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder.

(s) "Option" means a stock option granted pursuant to the Plan.

(t) "Option Agreement" means a written agreement between the Company and an Optionee evidencing the terms and conditions of an individual Option grant. Each Option Agreement shall be subject to the terms and conditions of the Plan.

(u) "Optionee" means an Employee, Director or Consultant who holds an outstanding Option.

(v) "Outside Director" means a Director who either (i) is not a current employee of the Company or an "affiliated corporation" (within the meaning of Treasury regulations promulgated under Section 162(m) of the Code), is not a former employee of the Company or an "affiliated corporation" receiving compensation for prior services (other than benefits under a tax qualified pension plan), was not an officer of the Company or an "affiliated corporation" at any time, and is not currently receiving direct or indirect remuneration from the Company or an "affiliated corporation" for services in any capacity other than as a Director, or (ii) is otherwise considered an "outside director" for purposes of Section 162(m) of the Code.

(w) "Plan" means this Siebel Systems, Inc. 1996 Equity Incentive Plan.

(x) "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any successor to Rule 16b-3, as in effect when discretion is being exercised with respect to the Plan.

(y) "Stock Appreciation Right" means any of the various types of rights which may be granted under Section 8 of the Plan.

(z) "Stock Award" means any right granted under the Plan, including any Option, any stock bonus, any right to purchase restricted stock, and any Stock Appreciation Right.

(aa) "Stock Award Agreement" means a written agreement between the Company and a holder of a Stock Award evidencing the terms and conditions of an individual Stock Award grant. Each Stock Award Agreement shall be subject to the terms and conditions of the Plan.

(bb) "Tandem Stock Appreciation Right" or "Tandem Right" means a right granted pursuant to subsection 8(b)(1) of the Plan.

3. Administration.

(a) The Plan shall be administered by the Board unless and until the Board delegates administration to a Committee, as provided in subsection 3(c).

(b) The Board shall have the power, subject to, and within the limitations of, the express provisions of the Plan:

(1) To determine from time to time which of the persons eligible under the Plan shall be granted Stock Awards; when and how each Stock Award shall be granted; whether a Stock Award will be an Incentive Stock Option, a Nonstatutory Stock Option, a stock bonus, a right to purchase restricted stock, a Stock Appreciation Right, or a combination of the foregoing; the provisions of each Stock Award granted (which need not be identical), including the time or times when a person shall be permitted to receive stock pursuant to a Stock Award; whether a person shall be permitted to receive stock upon exercise of an Independent Stock Appreciation Right; and the number of shares with respect to which a Stock Award shall be granted to each such person.

(2) To construe and interpret the Plan and Stock Awards granted under it, and to establish, amend and revoke rules and regulations for its administration. The Board, in the exercise of this power, may correct any defect, omission or inconsistency in the Plan or in any Stock Award Agreement, in a manner and to the extent it shall deem necessary or expedient to make the Plan fully effective.

(3) To amend the Plan or a Stock Award as provided in Section 14.

(4) Generally, to exercise such powers and to perform such acts as the Board deems necessary or expedient to promote the best interests of the Company which are not in conflict with the provisions of the Plan.

(c) The Board may delegate administration of the Plan to a committee or committees ("Committee") of one or more members of the Board. In the discretion of the Board, a Committee may consist solely of two or more Outside Directors, in accordance with Code Section 162(m), or solely of two or more Non-Employee Directors, in accordance with Rule 16(b)-3. If administration is delegated to a Committee, the Committee shall have, in connection with the administration of the Plan, the powers theretofore possessed by the Board (and references in this Plan to the Board shall thereafter be to the Committee), subject, however, to such resolutions, not inconsistent with the provisions of the Plan, as may be adopted from time to time by the Board. The Board may abolish the Committee at any time and revest in the Board the administration of the Plan.

(d) Any requirement that an administrator of the Plan be a Disinterested Person shall not apply if the Board or the Committee expressly declares that such requirement shall not apply. Any Disinterested Person shall otherwise comply with the requirements of Rule 16b-3.

4. Shares Subject to the Plan.

(a) Subject to the provisions of Section 13 relating to adjustments upon changes in stock, the stock that may be issued pursuant to Stock Awards shall not exceed in the aggregate fifty-five million (55,000,000) shares of the Company's common stock. If any Stock Award shall for any reason expire or otherwise terminate, in whole or in part, without having been exercised in full, the stock not acquired under such Stock Award shall revert to and again become available for issuance under the Plan. Shares subject to Stock Appreciation Rights exercised in accordance with Section 8 of the Plan shall not be available for subsequent issuance under the Plan.

(b) The stock subject to the Plan may be unissued shares or reacquired shares, bought on the market or otherwise.

5. Eligibility.

(a) Incentive Stock Options and Stock Appreciation Rights appurtenant thereto may be granted only to Employees. Stock Awards other than Incentive Stock Options and Stock Appreciation Rights appurtenant thereto may be granted only to Employees, Directors or Consultants.

(b) No person shall be eligible for the grant of an Incentive Stock Option if, at the time of grant, such person owns (or is deemed to own pursuant to Section 424(d) of the Code) stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or of any of its Affiliates unless the exercise price of such Option is at least one hundred ten percent (110%) of the Fair Market Value of such stock at the date of grant and the Option is not exercisable after the expiration of five (5) years from the date of grant, or in the case of a restricted stock purchase award, the purchase price is at least one hundred percent (100%) of the Fair Market Value of such stock at the date of grant.

(c) Subject to the provisions of Section 13 relating to adjustments upon changes in stock, following the expiration of the extended reliance period for compliance with the requirements of Code Section 162(m) set forth in Treasury Regulations Section 1.162-27(f)(2), no person shall be eligible to be granted Options covering more than two million (2,000,000) shares of the Company's common stock in any calendar year.

6. Option Provisions.

Each Option shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate. The provisions of separate Options need not be identical, but each Option shall include (through incorporation of provisions hereof by reference in the Option or otherwise) the substance of each of the following provisions:

(a) Term. No Option shall be exercisable after the expiration of ten (10) years from the date it was granted.

(b) Price. The exercise price of each Incentive Stock Option shall be not less than one hundred percent (100%) of the Fair Market Value of the stock subject to the Option on the date the Option is granted. Notwithstanding the foregoing, an Incentive Stock Option may be granted with an exercise price lower than that set forth in the preceding sentence if such Option is granted pursuant to an assumption or substitution for another option in a manner satisfying the provisions of Section 424(a) of the Code.

(c) Consideration. The purchase price of stock acquired pursuant to an Option shall be paid, to the extent permitted by applicable statutes and regulations, either (i) in cash at the time the Option is exercised, or (ii) at the discretion of the Board or the Committee, at the time of the grant of the Option, (A) by delivery to the Company of other common stock of the Company, (B) according to a deferred payment or other arrangement (which may include, without limiting the generality of the foregoing, the use of other common stock of the Company) with the person to whom the Option is granted or to whom the Option is transferred pursuant to subsection 6(d), or (C) in any other form of legal consideration that may be acceptable to the Board. In the case of any deferred payment arrangement, interest shall be payable at least annually and shall be charged at the minimum rate of interest necessary to avoid the treatment as interest, under any applicable provisions of the Code, of any amounts other than amounts stated to be interest under the deferred payment arrangement.

(d) Transferability. An Incentive Stock Option shall not be transferable except by will or by the laws of descent and distribution, and shall be exercisable during the lifetime of the person to whom the Incentive Stock Option is granted only by such person. A Nonstatutory Stock Option shall only be transferable by the Optionee upon such terms and conditions as are set forth in the Option Agreement for such Nonstatutory Stock Option, as the Board or the Committee shall determine in its discretion, except that each Nonstatutory Stock Option may be transferred to the spouse, children, lineal ancestors and lineal descendants of the Optionee (or to a trust created solely for the benefit of the Optionee and the foregoing persons) or to an organization exempt from taxation pursuant to Section 501(c)(3) of the Code or to which tax deductible charitable contributions may be made under Section 170 of the Code (excluding such organizations classified as private foundations under applicable regulations and rulings). The person to whom an Option is granted may, by delivering written notice to the Company, in a form satisfactory to the Company, designate a third party who, in the event of the death of the Optionee, shall thereafter be entitled to exercise the Option.

(e) Vesting. The total number of shares of stock subject to an Option may, but need not, be allotted in periodic installments (which may, but need not, be equal). The Option Agreement may provide that from time to time during each of such installment periods, the Option may become exercisable ("vest") with respect to some or all of the shares allotted to that period, and may be exercised with respect to some or all of the shares allotted to such period and/or any prior period as to which the Option became vested but was not fully exercised. The Option may be subject to such other terms and conditions on the time or times when it may be exercised (which may be based on performance or other criteria) as the Board may deem appropriate. The provisions of this subsection 6(e) are subject to any Option provisions governing the minimum number of shares as to which an Option may be exercised.

(f) Termination of Employment or Relationship as a Director or Consultant. In the event an Optionee's Continuous Status as an Employee, Director or Consultant terminates (other than upon the Optionee's death or disability), the Optionee may exercise his or her Option (to the extent that the Optionee was entitled to exercise it at the date of termination) but only within such period of time ending on the earlier of (i) the date three (3) months after the termination of the Optionee's Continuous Status as an Employee, Director or Consultant (or such longer or shorter period specified in the Option Agreement), or (ii) the expiration of the term of the Option as set forth in the Option Agreement. If, after termination, the Optionee does not exercise his or her Option within the time specified in the Option Agreement, the Option shall terminate, and the shares covered by such Option shall revert to and again become available for issuance under the Plan.

An Optionee's Option Agreement may also provide that if the exercise of the Option following the termination of the Optionee's Continuous Status as an Employee, Director, or Consultant (other than upon the Optionee's death or disability) would result in liability under Section 16(b) of the Exchange Act, then the Option shall terminate on the earlier of (i) the expiration of the term of the Option set forth in the Option Agreement, or (ii) the tenth (10th) day after the last date on which such exercise would result in such liability under Section 16(b) of the Exchange Act. Finally, an Optionee's Option Agreement may also provide that if the exercise of the Option following the termination of the Optionee's Continuous Status as an Employee, Director or Consultant (other than upon the Optionee's death or disability) would be prohibited at any time solely because the issuance of shares would violate the registration requirements under the Act, then the Option shall terminate on the earlier of (i) the expiration of the term of the Option set forth in the first paragraph of this subsection 6(f), or (ii) the expiration of a period of three (3) months after the termination of the Optionee's Continuous Status as an Employee, Director or Consultant during which the exercise of the Option would not be in violation of such registration requirements.

(g) Disability of Optionee. In the event an Optionee's Continuous Status as an Employee, Director or Consultant terminates as a result of the Optionee's disability, the Optionee may exercise his or her Option (to the extent that the Optionee was entitled to exercise it at the date of termination), but only within such period of time ending on the earlier of (i) the date twelve (12) months following such termination (or such longer or shorter period specified in the Option Agreement), or (ii) the expiration of the term of the Option as set forth in the Option Agreement. If, at the date of termination, the Optionee is not entitled to exercise his or her entire Option, the shares covered by the unexercisable portion of the Option shall revert to and again become available for issuance under the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified herein, the Option shall terminate, and the shares covered by such Option shall revert to and again become available for issuance under the Plan.

(h) Death of Optionee. In the event of the death of an Optionee during, or within a period specified in the Option after the termination of, the Optionee's Continuous Status as an Employee, Director or Consultant, the Option may be exercised (to the extent the Optionee was entitled to exercise the Option at the date of death) by the Optionee's estate, by a person who acquired the right to exercise the Option by bequest or inheritance or by a person designated to exercise the option upon the Optionee's death pursuant to subsection 6(d), but only within the period ending on the earlier of (i) the date twelve (12) months following the date of death (or such longer or shorter period specified in the Option Agreement), or (ii) the expiration of the term of such Option as set forth in the Option Agreement. If, at the time of death, the Optionee was not entitled to exercise his or her entire Option, the shares covered by the unexercisable portion of the Option shall revert to and again become available for issuance under the Plan. If, after death, the Option is not exercised within the time specified herein, the Option shall terminate, and the shares covered by such Option shall revert to and again become available for issuance under the Plan.

(i) Early Exercise. The Option may, but need not, include a provision whereby the Optionee may elect at any time while an Employee, Director or Consultant to exercise the Option as to any part or all of the shares subject to the Option prior to the full vesting of the Option. Any unvested shares so purchased may be subject to a repurchase right in favor of the Company or to any other restriction the Board determines to be appropriate.

(j) Re-Load Options. Without in any way limiting the authority of the Board or Committee to make or not to make grants of Options hereunder, the Board or Committee shall have the authority (but not an obligation) to include as part of any Option Agreement a provision entitling the Optionee to a further Option (a "Re-Load Option") in the event the Optionee exercises the Option evidenced by the Option agreement, in whole or in part, by surrendering other shares of common stock in accordance with this Plan and the terms and conditions of the Option Agreement. Any such Re-Load Option (i) shall be for a number of shares equal to the number of shares surrendered as part or all of the exercise price of such Option; (ii) shall have an expiration date which is the same as the expiration date of the Option the exercise of which gave rise to such Re-Load Option; and (iii) shall have an exercise price which is equal to one hundred percent (100%) of the Fair Market Value of the com mon stock subject to the Re-Load Option on the date of exercise of the original Option. Notwithstanding the foregoing, a Re-Load Option which is an Incentive Stock Option and which is granted to a 10% shareholder (as described in subsection 5(c)), shall have an exercise price which is equal to one hundred ten percent (110%) of the Fair Market Value of the stock subject to the Re-Load Option on the date of exercise of the original Option and shall have a term which is no longer than five (5) years.

Any such Re-Load Option may be an Incentive Stock Option or a Nonstatutory Stock Option, as the Board or Committee may designate at the time of the grant of the original Option; provided, however, that the designation of any Re-Load Option as an Incentive Stock Option shall be subject to the one hundred thousand dollar ($100,000) annual limitation on exercisability of Incentive Stock Options described in subsection 12(d) of the Plan and in Section 422(d) of the Code. There shall be no Re-Load Options on a Re-Load Option. Any such Re-Load Option shall be subject to the availability of sufficient shares under subsection 4(a) and shall be subject to such other terms and conditions as the Board or Committee may determine which are not inconsistent with the express provisions of the Plan regarding the terms of Options.

7. Terms of Stock Bonuses and Purchases of Restricted Stock.

Each stock bonus or restricted stock purchase agreement shall be in such form and shall contain such terms and conditions as the Board or the Committee shall deem appropriate. The terms and conditions of stock bonus or restricted stock purchase agreements may change from time to time, and the terms and conditions of separate agreements need not be identical, but each stock bonus or restricted stock purchase agreement shall include (through incorporation of provisions hereof by reference in the agreement or otherwise) the substance of each of the following provisions as appropriate:

(a) Purchase Price. The purchase price under each restricted stock purchase agreement shall be such amount as the Board or Committee shall determine and designate in such agreement but in no event shall the purchase price be less than eighty-five percent (85%) of the stock's Fair Market Value on the date such award is made. Notwithstanding the foregoing, the Board or the Committee may determine that eligible participants in the Plan may be awarded stock pursuant to a stock bonus agreement in consideration for past services actually rendered to the Company for its benefit.

(b) Transferability. No rights under a stock bonus or restricted stock purchase agreement shall be transferable except by will or the laws of descent and distribution or pursuant to a qualified domestic relations order satisfying the requirements of Rule 16b-3 and any administrative interpretations or pronouncements thereunder, so long as stock awarded under such agreement remains subject to the terms of the agreement.

(c) Consideration. The purchase price of stock acquired pursuant to a stock purchase agreement shall be paid either: (i) in cash at the time of purchase; (ii) at the discretion of the Board or the Committee, according to a deferred payment or other arrangement with the person to whom the stock is sold; or (iii) in any other form of legal consideration that may be acceptable to the Board or the Committee in its discretion. Notwithstanding the foregoing, the Board or the Committee to which administration of the Plan has been delegated may award stock pursuant to a stock bonus agreement in consideration for past services actually rendered to the Company or for its benefit.

(d) Vesting. Shares of stock sold or awarded under the Plan may, but need not, be subject to a repurchase option in favor of the Company in accordance with a vesting schedule to be determined by the Board or the Committee.

(e) Termination of Employment or Relationship as a Director or Consultant. In the event a Participant's Continuous Status as an Employee, Director or Consultant terminates, the Company may repurchase or otherwise reacquire any or all of the shares of stock held by that person which have not vested as of the date of termination under the terms of the stock bonus or restricted stock purchase agreement between the Company and such person.

8. Stock Appreciation Rights.

(a) The Board or Committee shall have full power and authority, exercisable in its sole discretion, to grant Stock Appreciation Rights under the Plan to Employees, Directors of and Consultants to the Company or its Affiliates. To exercise any outstanding Stock Appreciation Right, the holder must provide written notice of exercise to the Company in compliance with the provisions of the Stock Award Agreement evidencing such right. If a Stock Appreciation Right is granted to an individual who is at the time subject to Section 16(b) of the Exchange Act (a "Section 16(b) Insider"), the Stock Award Agreement of grant shall incorporate all the terms and conditions at the time necessary to assure that the subsequent exercise of such right shall qualify for the safe-harbor exemption from short-swing profit liability provided by Rule 16b-3 promulgated under the Exchange Act (or any successor rule or regulation). Except as provided in subsection 5(d), no limitation shall exist on th e aggregate amount of cash payments the Company may make under the Plan in connection with the exercise of a Stock Appreciation Right.

(b) Three types of Stock Appreciation Rights shall be authorized for issuance under the Plan:

(1) Tandem Stock Appreciation Rights. Tandem Stock Appreciation Rights will be granted appurtenant to an Option, and shall, except as specifically set forth in this Section 8, be subject to the same terms and conditions applicable to the particular Option grant to which it pertains. Tandem Stock Appreciation Rights will require the holder to elect between the exercise of the underlying Option for shares of stock and the surrender, in whole or in part, of such Option for an appreciation distribution. The appreciation distribution payable on the exercised Tandem Right shall be in cash (or, if so provided, in an equivalent number of shares of stock based on Fair Market Value on the date of the Option surrender) in an amount up to the excess of (A) the Fair Market Value (on the date of the Option surrender) of the number of shares of stock covered by that portion of the surrendered Option in which the Optionee is vested over (B) the aggregate exercise price payable for such vested s hares.

(2) Concurrent Stock Appreciation Rights. Concurrent Rights will be granted appurtenant to an Option and may apply to all or any portion of the shares of stock subject to the underlying Option and shall, except as specifically set forth in this Section 8, be subject to the same terms and conditions applicable to the particular Option grant to which it pertains. A Concurrent Right shall be exercised automatically at the same time the underlying Option is exercised with respect to the particular shares of stock to which the Concurrent Right pertains. The appreciation distribution payable on an exercised Concurrent Right shall be in cash (or, if so provided, in an equivalent number of shares of stock based on Fair Market Value on the date of the exercise of the Concurrent Right) in an amount equal to such portion as shall be determined by the Board or the Committee at the time of the grant of the excess of (A) the aggregate Fair Market Value (on the date of the exercise of the Conc urrent Right) of the vested shares of stock purchased under the underlying Option which have Concurrent Rights appurtenant to them over (B) the aggregate exercise price paid for such shares.

(3) Independent Stock Appreciation Rights. Independent Rights will be granted independently of any Option and shall, except as specifically set forth in this Section 8, be subject to the same terms and conditions applicable to Nonstatutory Stock Options as set forth in Section 6. They shall be denominated in share equivalents. The appreciation distribution payable on the exercised Independent Right shall be not greater than an amount equal to the excess of (A) the aggregate Fair Market Value (on the date of the exercise of the Independent Right) of a number of shares of Company stock equal to the number of share equivalents in which the holder is vested under such Independent Right, and with respect to which the holder is exercising the Independent Right on such date, over (B) the aggregate Fair Market Value (on the date of the grant of the Independent Right) of such number of shares of Company stock. The appreciation distribution payable on the exercised Independent Right shall be in cash or, if so provided, in an equivalent number of shares of stock based on Fair Market Value on the date of the exercise of the Independent Right.

9. Cancellation and Re-Grant of Options.

(a) The Board or the Committee shall have the authority to effect, at any time and from time to time, (i) the repricing of any outstanding Options and/or any Stock Appreciation Rights under the Plan and/or (ii) with the consent of any adversely affected holders of Options and/or Stock Appreciation Rights, the cancellation of any outstanding Options and/or any Stock Appreciation Rights under the Plan and the grant in substitution therefor of (A) new Options and/or Stock Appreciation Rights under the Plan covering the same or different numbers of shares of stock, but having an exercise price per share not less than: eighty-five percent (85%) of the Fair Market Value for a Nonstatutory Stock Option, one hundred percent (100%) of the Fair Market Value in the case of an Incentive Stock Option or, in the case of an Incentive Stock Option held by a 10% shareholder (as described in subsection 5(c)), not less than one hundred ten percent (110%) of the Fair Market Value per share of stock on the new grant date, (B) a stock bonus, (C) the right to acquire restricted stock, (D) cash and/or (E) other valuable consideration (as determined by the Board, in its sole discretion). Notwithstanding the foregoing, the Board or the Committee may grant an Option and/or Stock Appreciation Right with an exercise price lower than that set forth above if such Option and/or Stock Appreciation Right is granted as part of a transaction to which section 424(a) of the Code applies.

(b) Shares subject to an Option or Stock Appreciation Right canceled under this Section 9 shall continue to be counted against the maximum award of Options and Stock Appreciation Rights permitted to be granted pursuant to subsection 5(d) of the Plan. The repricing of an Option and/or Stock Appreciation Right under this Section 9, resulting in a reduction of the exercise price, shall be deemed to be a cancellation of the original Option and/or Stock Appreciation Right and the grant of a substitute Option and/or Stock Appreciation Right; in the event of such repricing, both the original and the substituted Options and Stock Appreciation Rights shall be counted against the maximum awards of Options and Stock Appreciation Rights permitted to be granted pursuant to subsection 5(d) of the Plan. The provisions of this subsection 9(b) shall be applicable only to the extent required by Section 162(m) of the Code.

10. Covenants of the Company.

(a) During the terms of the Stock Awards, the Company shall keep available at all times the number of shares of stock required to satisfy such Stock Awards.

(b) The Company shall seek to obtain from each regulatory commission or agency having jurisdiction over the Plan such authority as may be required to issue and sell shares of stock upon exercise of the Stock Award; provided, however, that this undertaking shall not require the Company to register under the Securities Act of 1933, as amended (the "Securities Act") either the Plan, any Stock Award or any stock issued or issuable pursuant to any such Stock Award. If, after reasonable efforts, the Company is unable to obtain from any such regulatory commission or agency the authority which counsel for the Company deems necessary for the lawful issuance and sale of stock under the Plan, the Company shall be relieved from any liability for failure to issue and sell stock upon exercise of such Stock Awards unless and until such authority is obtained.

11. Use of Proceeds from Stock.

Proceeds from the sale of stock pursuant to Stock Awards shall constitute general funds of the Company.

12. Miscellaneous.

(a) The Board shall have the power to accelerate the time at which a Stock Award may first be exercised or the time during which a Stock Award or any part thereof will vest pursuant to subsection 6(e), 7(d) or 8(b), notwithstanding the provisions in the Stock Award stating the time at which it may first be exercised or the time during which it will vest.

(b) Neither an Employee, Director or Consultant, nor any person to whom a Stock Award is transferred in accordance with the Plan, shall be deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares subject to such Stock Award unless and until such person has satisfied all requirements for exercise of the Stock Award pursuant to its terms.

(c) Nothing in the Plan or any instrument executed or Stock Award granted pursuant thereto shall confer upon any Employee, Director or Consultant or other holder of Stock Awards any right to continue in the employ of the Company or any Affiliate or to continue acting as a Director or Consultant, or shall affect the right of the Company or any Affiliate to terminate the employment of any Employee with or without notice and with or without cause, the right of the Company's Board of Directors and/or the Company's shareholders to remove any Director pursuant to the terms of the Company's Bylaws and the provisions of the Delaware General Corporation Law, or the right to terminate the relationship of any Consultant pursuant to the terms of such Consultant's agreement with the Company or Affiliate.

(d) To the extent that the aggregate Fair Market Value (determined at the time of grant) of stock with respect to which Incentive Stock Options are exercisable for the first time by any Optionee during any calendar year under all plans of the Company and its Affiliates exceeds one hundred thousand dollars ($100,000), the Options or portions thereof which exceed such limit (according to the order in which they were granted) shall be treated as Nonstatutory Stock Options.

(e) The Company may require any person to whom a Stock Award is granted, or any person to whom a Stock Award is transferred in accordance with the Plan, as a condition of exercising or acquiring stock under any Stock Award, (1) to give written assurances satisfactory to the Company as to such person's knowledge and experience in financial and business matters and/or to employ a purchaser representative reasonably satisfactory to the Company who is knowledgeable and experienced in financial and business matters, and that he or she is capable of evaluating, alone or together with the purchaser representative, the merits and risks of exercising the Stock Award; and (2) to give written assurances satisfactory to the Company stating that such person is acquiring the stock subject to the Stock Award for such person's own account and not with any present intention of selling or otherwise distributing the stock. The foregoing requirements, and any assurances given pursuant to such requirements , shall be inoperative if (i) the issuance of the shares upon the exercise or acquisition of stock under the Stock Award has been registered under a then currently effective registration statement under the Securities Act, or (ii) as to any particular requirement, a determination is made by counsel for the Company that such requirement need not be met in the circumstances under the then applicable securities laws. The Company may, upon advice of counsel to the Company, place legends on stock certificates issued under the Plan as such counsel deems necessary or appropriate in order to comply with applicable securities laws, including, but not limited to, legends restricting the transfer of the stock.

(f) To the extent provided by the terms of a Stock Award Agreement, the person to whom a Stock Award is granted may satisfy any federal, state or local tax withholding obligation relating to the exercise or acquisition of stock under a Stock Award by any of the following means or by a combination of such means: (1) tendering a cash payment; (2) authorizing the Company to withhold shares from the shares of the common stock otherwise issuable to the participant as a result of the exercise or acquisition of stock under the Stock Award; or (3) delivering to the Company owned and unencumbered shares of the common stock of the Company.

13. Adjustments Upon Changes in Stock.

(a) If any change is made in the stock subject to the Plan, or subject to any Stock Award, without the receipt of consideration by the Company (through merger, consolidation, reorganization, recapitalization, reincorporation, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or other transaction not involving the receipt of consideration by the Company), the Plan will be appropriately adjusted in the class(es) and maximum number of shares subject to the Plan pursuant to subsection 4(a) and the maximum number of shares subject to award to any person during any calendar year pursuant to subsection 5(c), and the outstanding Stock Awards will be appropriately adjusted in the class(es) and number of shares and price per share of stock subject to such outstanding Stock Awards. Such adjustments shall be made by the Board or the Committee, the determination of which shall be fina l, binding and conclusive. (The conversion of any convertible securities of the Company shall not be treated as a "transaction not involving the receipt of consideration by the Company".)

(b) In the event of: (1) a dissolution, liquidation or sale of substantially all of the assets of the Company; (2) a merger or consolidation in which the Company is not the surviving corporation; or (3) a reverse merger in which the Company is the surviving corporation but the shares of the Company's common stock outstanding immediately preceding the merger are converted by virtue of the merger into other property, whether in the form of securities, cash or otherwise, then to the extent permitted by applicable law: (i) any surviving corporation or an Affiliate of such surviving corporation shall assume any Stock Awards outstanding under the Plan or shall substitute similar Stock Awards for those outstanding under the Plan, or (ii) such Stock Awards shall continue in full force and effect. In the event any surviving corporation and its Affiliates refuse to assume or continue such Stock Awards, or to substitute similar options for those outstanding under the Plan, then, with respect to S tock Awards held by persons then performing services as Employees, Directors or Consultants, the time during which such Stock Awards may be exercised shall be accelerated and the Stock Awards terminated if not exercised prior to such event.

14. Amendment of the Plan and Stock Awards.

(a) The Board at any time, and from time to time, may amend the Plan. However, except as provided in Section 13 relating to adjustments upon changes in stock, no amendment shall be effective unless approved by the shareholders of the Company within twelve (12) months before or after the adoption of the amendment, where the amendment will:

(i) Increase the number of shares reserved for Stock Awards under the Plan;

(ii) Modify the requirements as to eligibility for participation in the Plan (to the extent such modification requires shareholder approval in order for the Plan to satisfy the requirements of Section 422 of the Code); or

(iii) Modify the Plan in any other way if such modification requires shareholder approval in order for the Plan to satisfy the requirements of Section 422 of the Code or to comply with the requirements of Rule 16b-3.

(b) The Board may in its sole discretion submit any other amendment to the Plan for shareholder approval, including, but not limited to, amendments to the Plan intended to satisfy the requirements of Section 162(m) of the Code and the regulations promulgated thereunder regarding the exclusion of performance-based compensation from the limit on corporate deductibility of compensation paid to certain executive officers.

(c) It is expressly contemplated that the Board may amend the Plan in any respect the Board deems necessary or advisable to provide eligible Employees, Directors or Consultants with the maximum benefits provided or to be provided under the provisions of the Code and the regulations promulgated thereunder relating to Incentive Stock Options and/or to bring the Plan and/or Incentive Stock Options granted under it into compliance therewith.

(d) Rights and obligations under any Stock Award granted before amendment of the Plan shall not be impaired by any amendment of the Plan unless (i) the Company requests the consent of the person to whom the Stock Award was granted and (ii) such person consents in writing.

(e) The Board at any time, and from time to time, may amend the terms of any one or more Stock Award; provided, however, that the rights and obligations under any Stock Award shall not be impaired by any such amendment unless (i) the Company requests the consent of the person to whom the Stock Award was granted and (ii) such person consents in writing.

15. Termination or Suspension of the Plan.

(a) The Board may suspend or terminate the Plan at any time. Unless sooner terminated, the Plan shall terminate ten (10) years from the date the Plan is adopted by the Board or approved by the shareholders of the Company, whichever is earlier. No Stock Awards may be granted under the Plan while the Plan is suspended or after it is terminated.

(b) Rights and obligations under any Stock Award granted while the Plan is in effect shall not be impaired by suspension or termination of the Plan, except with the consent of the person to whom the Stock Award was granted.

16. Effective Date of Plan.

The Plan shall become effective on the effective date of the registration statement with respect to the Company's initial public offering of shares of common stock, but no Stock Awards granted under the Plan shall be exercised unless and until the Plan has been approved by the shareholders of the Company, which approval shall be within twelve (12) months before or after the date the Plan is adopted by the Board.

EX-10.7.2

Exhibit 10.7.2

SEVENTEENTH AMENDMENT OF LEASE

This Seventeen Amendment of Lease ("Seventeenth Amendment") is made an entered into this 5^th day of February, 2003 by and between Crossroads Associates and Clocktower Associates (collectively, "Landlord"), and Siebel Systems, Inc. a Delaware Corporation ("Tenant").

RECITALS:

A. WHEREAS, Landlord and Tenant entered into a Lease dated June 4, 1996, which Lease was amended by the First through the Sixteenth Amendments of Lease (collectively the "Amendments"). The Amendments are summarized in the recitals to the Sixteenth Amendment of Lease, which recitals are incorporated herein by reference. The Lease and all of the Amendments are herein defined and referred to as the "Lease." Terms defined in the Lease shall have the same meanings in this Seventeenth Amendment unless another definition is set forth herein.

B. WHEREAS, Tenant has vacated but is still in possession of the portions of the Premises located on the 8^th and 9^th Floors of the Building located at 1825 South Grant Street, San Mateo, California (the "Building").

C. WHEREAS, if certain conditions specified in this Seventeenth Amendment are satisfied, then Landlord and Tenant wish to agree that, effective March 1, 2003, the Premises under the Lease shall no longer include the areas described on Exhibits A-1 and A-2 attached hereto (the "Relinquished Space") consisting of approximately 29,833 rentable square feet so that, commencing on such date, the total area of the Premises leased by the Tenant under the Lease shall be reduced to what the parties agree is 205,772 rentable square feet. The Relinquished Space consists of the following portions of the Premises currently leased by the Tenant under the Lease: (i) all of the Premises located on the 9^th Floor of the Building and comprising approximately 17,702 rentable square feet, and (ii) a portion of the Premises located on the 8^th Floor of the Building and comprising approximately 12,131 rentable square feet.

NOW, THEREFORE, in consideration of the foregoing and other good and valuable consideration, receipt of which is hereby acknowledged, Landlord and Tenant hereby enter into this Seventeenth Amendment and agree as follows:

1. CONDITIONS

This Seventeenth Amendment is conditioned upon and shall become effective only if each of the following conditions occurs on or before the date which is first written above: (i) Landlord elects, in its sole and absolute discretion, to enter into a lease for the Relinquished Space with Catholic Healthcare West, a California non-profit public benefit corporation (hereinafter "CHW), and (ii) Landlord and Tenant enter into the agreement entitled "Transaction Agreement" dated as of the date first above written, which Transaction Agreement contains certain provisions relating to the Relinquished Space; and (iii) each of the documents required to be executed and delivered pursuant to Paragraph 1 of the Transaction Agreement before the Transaction Agreement becomes effective (hereinafter the "Transaction Agreements") shall have been executed and delivered in the manner and by the parties specified in the Transaction Agreement. If any of the foregoing conditions is no t timely satisfied, this Seventeenth Amendment shall be null and void and of no force or effect between Landlord and Tenant, and Landlord shall have no liability to Tenant under or in connection with this Seventeenth Amendment and the Lease shall continue in full force and effect without the modifications set forth in this Seventeenth Amendment. Landlord has not made any representation or agreement that it will cause any of the foregoing conditions to occur, nor shall Landlord have any obligation to take or to refrain from taking any action which would cause any of the foregoing conditions to occur. If satisfaction or fulfillment of any of the foregoing conditions requires the agreement or consent of any third party, Landlord shall not have any liability to Tenant if such agreement or consent is not obtained.

2. RELINQUISHED SPACE

If the conditions set forth in Paragraph 1 above are timely satisfied, then the term of the Lease as applicable to the Relinquished Space shall expire on February 28, 2003 so that effective March 1, 2003 (the "Effective Date"), the Relinquished Space shall no longer be part of the Premises. The Effective Date shall occur only if the conditions set forth in Paragraph 1 above are timely satisfied. From and after the Effective Date, the term "Premises" as used in the Lease shall no longer include the Relinquished Space and no option or other right of Tenant under the Lease shall continue to apply to the Relinquished Space. Notwithstanding anything to the contrary in this Paragraph 2, Tenant shall remain liable for all obligations arising under the Lease with respect to its use and possession of the Relinquished Space prior to the Effective Date. Tenant agrees to vacate and surrender possession of the Relinquished Space to Landlord as of the Effective Date.

3. EFFECT ON BASIC RENT AND ADDITIONAL RENT

Commencing on the Effective Date, Tenant's Basic Rent and Additional Rent shall be reduced by the Basic Rent and Additional Rent payable immediately prior to the Effective Date for the Relinquished Space. Effective on the Effective Date, therefore, the Basic Rent and Additional Rent for the Premises shall be as shown on Exhibit B and such amounts shall continue to be subject to each of the provisions of the Lease which provide for escalation, change or other modification of the Basic Rent or Additional Rent, or both, computed as of the same times that they would have been computed had this Amendment not been executed.

4. RESTORATION

Subsequent to Tenant's lease of the Relinquished Space, Tenant made modifications to the Relinquished Space and by letter dated December 4, 2000, attached hereto as Exhibit C (the "December 4, Letter") agreed to certain restoration provisions. The parties agree that the restoration provisions contained in the December 4 Letter shall not apply to the Relinquished Space but shall continue to apply to the remainder of the Premises.

5. DEMISING WALL

Tenant has already vacated the Relinquished Space and the portion of the Premises on the 8^th Floor of the Building (the "Retained 8^th Floor Premises") which will remain part of the Premises after the Effective Date. Exhibit D, attached hereto indicates where the demising walls can be installed which would separate the Relinquished Space from the Retained 8^th Floor Premises. At present, there is no plan to install such demising walls since the Tenant is not currently using the Retained 8^th Floor Premises and CHW has agreed not to use them. At any time subsequent to October 31, 2009, and in the event the demising walls have not been installed, at its election, Landlord may install such demising walls. Tenant understands that the construction of the demising walls and any related demolition and construction will be disruptive and Tenant agrees that it shall have no claim against Landlord as a result of any such disruption. Tenant hereby agrees to pay, within thirty (30) days after request, all reasonable costs incurred by Landlord in connection with the design, permitting, construction and installation of such demising walls and any modifications to any Building systems or structures required in connection therewith including, without limitation, all costs incurred for the design, engineering, permitting and construction of any demising walls, exit doors, corridors, recircuiting of lighting, moving light fixtures, modifying HVAC ducts or HVAC controls, modifying firesprinklers, modifying the life safety systems, replacing floor and wall coverings and finishes and replacing and modifying any ceiling system, and any fire separation which may be required anywhere on the 8^th Floor as a result of the construction of any of the foregoing.

6. PARKING

Commencing on the Effective Date, Tenant's total parking allocation shall be reduced by 94 spaces.

7. NO BROKERS

Landlord and Tenant each represents to the other that it has not had any dealings with any real estate brokers, agents or finders in connection with the negotiation of this Seventeenth Amendment which has resulted in any obligation to pay a leasing commission or other compensation of any kind to such agent, broker or finder in connection herewith.

8. REPRESENTATIONS

Each party represents to the other that it has full power and authority to execute this Agreement. Tenant represents that it has not made any assignment, sublease, transfer, or conveyance of the Lease or any interest therein or in the Relinquished Space, and further represents that there is not, and will not hereafter be any claim, demand obligation, liability, action or cause of action by any other party respecting, relating to or arising out of the Relinquished Space, and agrees to indemnify, defend and hold harmless Landlord and its partners, agents and affiliates from and against all claims and liabilities arising from any of the same, including, without limitation, attorneys' fees and costs.

9. NO OFFER BY LANDLORD; FIRM OFFER BY TENANT

The submission and negotiation of this Seventeenth Amendment shall not be deemed an offer to enter the same by Landlord, but the solicitation of such an offer from Tenant. Tenant agrees that its execution of this Seventeenth Amendment constitutes a firm offer to enter the same which may not be withdrawn for a period of ten (10) days after delivery to Landlord. During such period and in reliance on the foregoing. Landlord may, at Landlord's option, proceed with such actions as it may deem necessary or appropriate, including without limitation, the negotiation and execution of the Transaction Documents, but no such actions shall be deemed an acceptance of Tenant's offer to enter into this Seventeenth Amendment and such acceptance shall be evidenced only by Landlord signing and delivering this Seventeenth Amendment to the Tenant.

10. ENTIRE UNDERSTANDING

This Seventeenth Amendment represents the entire understanding between the parties concerning the subject matter hereof, and there are no understandings or agreements between them relating to the Lease or the Premises or the Relinquished Space not set forth in writing and signed by the parties. No party has relied upon any representation, warranty or understanding not set forth herein or in the Transaction Documents, either oral or written, as an inducement to enter into this Seventeenth Amendment.

11. COUNTERPARTS

This Seventeenth Amendment may be executed in any number of counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same instrument.

12. LEASE IN FULL FORCE AND EFFECT

Except as herein modified the Lease shall remain in full force and effect.

IN WITNESS WHEREOF, the parties have signed this Seventeenth Amendment which for reference purposes shall be deemed to have been dated as of the date above written.

Owner: CROSSROADS ASSOCIATES By: /s/ Richard M. Jacobsen Name: Richard M. Jacobsen Title: Partner	TENANT: SIEBEL SYSTEMS, INC., a Delaware corporation By: /s/ Jeffrey T. Amann Title: Senior Vice President and General Counsel
CLOCKTOWER ASSOCIATES By: /s/ W. Gregory Osborn Title: Partner

Exhibit A-1

[Diagram of Relinquished Space]

Exhibit A-2

[Diagram of Relinquished Space]

Exhibit B

Time Period	Square Feet	Basic Rent	Additional Rent
February 1, 2003	235,605	$687,588.25	$195,482.00
March 1, 2003*	205,772	$590,887.10	$168,612.00

*March 1, 2003 and thereafter until adjusted per the terms of the Lease.

Exhibit C

Ms. Linda Jansen
Vice President, Real Estate and Facilities
SIEBEL SYSTEMS, INC.
2211 Bridgepointe Parkway
San Mateo, CA 94404

RE: Future Restoration
1825 South Grant Street
Suites 200/220, 280, 400/410, 500, 710, 800 and 900
San Mateo, CA

Dear Linda:

Subject to the provisions of Paragraphs  8 and 9 as outlined herein, Crossroads Associates and Clocktower Associates (Landlord) hereby consents to the remodel of the above referenced spaces. This approval is also subject to landlord receiving written approval from Alta Vista for the remodel as outlined herein, of Suites 200/220, 400/410 and 710, which Siebel Systems, Inc. is subleasing. The remodels as outlined in the drawings from the offices of Larrick Alan Hill are subject to all the terms and conditions of the Lease Agreements between Crossroads Associates and Clocktower Associates, Siebel Systems, Inc. and Alta Vista (Suites 200/220, 400/410 and 710). Per paragraph 9 of the Lease Agreements (Alterations and Additions) Landlord is to identify which items shall be subject to the restoration provisions of paragraph 8. The restoration required upon the expiration or sooner the termination of the Lease/Sublease will be as follows (areas to be restored are show in red on the attached floor plans):

1.	Suites 200/220 - Restore 22 offices, 1 Conference Room and the "false wall."
2.	Suite 280 - Complete restoration to the condition and configuration existing as of the commencement of Siebel's Lease for Suite 280, including the "false wall."
3.	Suite 400/410 - Except for the restored portion of the loop corridor, a complete restoration will be required to the condition and configuration existing (see Exhibit A) as of the commencement of Siebel's Sublease for Suite 400/410, including the "false wall." The offices throughout Suite 400/410 have glass walls with full height frameless glass. At such time as the restoration occurs, the glass offices will have to be re-installed.
4.	Suite 500 - Restore 12 offices and "false wall."
5.	Suite 710 - Complete restoration will be required to the condition and configuration existing (see Exhibit B) as of the commencement of Siebel's Sublease for Suite 710, including the "false wall." The offices throughout Suite 710 have glass walls with full height frameless glass. At such time as the restoration occurs, the glass offices will have to be re-installed.
6.	Suite 800 - Restore 14 offices and the "false wall."
7.	Suite 900 - Restore 23 offices, Conference Room and the "false wall."

In addition to restoring the rooms and offices as specified herein, Siebel will have to make all necessary mechanical, electrical, fire sprinkler, and all other modifications necessary to achieve the above restoration to render the restored areas completely functional and consistent in appearance with the rest of the Premises. In removing the "false wall" that runs along the interior corridor wall, new floor covering will have to be installed. Also the interior corridor will have to be painted to match the rest of the suite.

If any subsequent modifications are made, we will review the restoration requirements of said modifications at such time as they are proposed. If you have any questions on the foregoing please give me a call.

	Sincerely, /s/ Peter Klayman Peter Klayman
Acknowledged and Agreed: /s/ Linda Jansen SIEBEL SYSTEMS
cc: Mr. Greg Osborn, Crossroads Associates and Clockwise Associates Mr. Boyd Smith, Crossroads Associates and Clockwise Associates Mr. Richard Jacobsen, Crossroads Associates and Clockwise Associates Mr. Joe Gorman, WSI Construction

Exhibit D

[Diagram of Relinquished Space and Retained 8^th Floor Premises]

TRANSACTION AGREEMENT

THIS TRANSACTION AGREEMENT ("Agreement") is dated as of February, 2003, by and between Crossroads Associates and Clocktower Associates (collectively "Owner") and Siebel Systems, Inc. a Delaware corporation ("Siebel").

RECITALS

1. Owner and Siebel have entered into a Lease Agreement dated June 4, 1996 and a number of amendments thereto (as amended, the "Siebel Lease") for premises (the "Siebel Premises") located, in part, in the building located at 1825 South Grant Street, San Mateo, California (the "Building").
2. The parties wish to enter into an amendment to the Siebel Lease (the "Space Reduction Amendment"), in the form attached hereto as Exhibit A, to reduce the size of the Siebel Premises, effective March 1, 2003, by removing from the Siebel Premises an area in the Building (the "CHW Premises") containing approximately 29,833 square feet of rentable space.
3. Siebel expects to realize substantial cost savings, operational efficiencies and other benefits as a result of the execution and delivery of the Space Reduction Agreement.
4. Owner is willing to enter into the Space Reduction Amendment with Siebel provided that Owner and Catholic Healthcare West, a California non-profit public benefit corporation ("CHW") execute and deliver a Lease Agreement (the "CHW Lease"), in the form attached hereto as Exhibit B, under which CHW will lease the CHW Premises from Owner.
5. Since the CHW Lease will be with a tenant which presents significant risks for the Owner which Siebel does not present, including, without limitation, risks resulting from differences in CHW's industry and the economic and political factors now facing that industry, and because CHW will only agree to pay rent at a level which is lower than the rent which Siebel has been paying for the CHW Premises under the Siebel Lease, Siebel has agreed to execute and deliver to Owner a promissory note (the "Siebel Note"), in the form attached hereto as Exhibit C, in the original principal amount of $6,508,295.08, to compensate Owner, in part, for assuming the significant additional costs and risks of having CHW as a new tenant in the Building.
6. In addition, to induce Owner to enter into the CHW Lease, Siebel has agreed to guaranty payment, by CHW, of the Additional Rent, as defined in the CHW Lease, pursuant to the terms of a Guaranty of Payment of Additional Rent, in the form attached hereto as Exhibit D.
7. To induce Owner to accept the Siebel Note, Siebel will obtain, and deliver to Owner, an Irrevocable Letter of Credit (the "Siebel Note Letter of Credit"), in the form attached hereto as Exhibit E.
8. To induce Owner to accept the Guaranty of Payment of Additional Rent, Siebel will obtain, and deliver to Owner, an Irrevocable Letter of Credit (the "Guaranty Letter of Credit"), in the form attached hereto as Exhibit F.

AGREEMENT

NOW THEREFORE, in consideration of the mutual terms and conditions herein contained, and other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereby agree as follows:

1. Effective Date; Conditions to Effectiveness. This Agreement shall be effective on the date (the "Effective Date") when each of the following documents has been executed and delivered, without qualification, by each of the parties thereto: (i) the Space Reduction Amendment; (ii) the CHW Lease; (iii) the Guaranty of Payment of Additional Rent; (iv) the Siebel Note; (v) the Siebel Note Letter of Credit; and (vi) the Guaranty Letter of Credit. Owner has not made any representation or agreement that it will cause any of the foregoing conditions to occur, nor shall Owner have any obligation to take or to refrain from taking any action, which would cause any of the foregoing conditions to occur. If satisfaction or fulfillment of any of the foregoing conditions requires the agreement or consent of any third party, Owner shall not have any liability to Siebel if such consent is not given or obtained.
2. Provisions Applicable to Letters of Credit. The Siebel Note Letter of Credit and the Guaranty Letter of Credit are referred to collectively as the "Letters of Credit." The Siebel Note Letter of Credit shall be held by Owner as security for the faithful performance by Siebel of all the terms, covenants, and conditions of the Siebel Note, to be kept and performed by Siebel. The Guaranty Letter of Credit shall be held by Owner as security for the faithful performance by Siebel of all the terms, covenants, and conditions of the Guaranty of Payment of Additional Rent, to be kept and performed by Siebel. Siebel has no interest in either of the Letters of Credit or in the proceeds which are paid or payable thereunder. If Siebel defaults with respect to any provisions of the Siebel Note, Owner may, but shall not be required to, draw upon all or any portion of the Siebel Note Letter of Credit. If Siebel defaults with respect to any provisions of the Guaranty of Payment of Additional Rent, Owner may, but shall not be required to, draw upon all or any portion of the Guaranty Letter of Credit. The use, application or retention of either of the Letters of Credit, or any portion thereof, by Owner shall not (a) prevent Owner from exercising any other right or remedy provided by the Siebel Note or the Guaranty of Payment of Additional Rent, or by law, it being intended that Owner shall not first be required to proceed against the either of the Letters of Credit, nor (b) operate as a limitation on any recovery to which Owner may otherwise be entitled. Siebel acknowledges that Owner has the right to transfer or mortgage its interest in the Building or the project of which the Building is a part and in this Agreement and Siebel agrees that, in the event of any such transfer or mortgage, Owner shall have the right to transfer or assign the Letters of Credit to the transferee or mortgagee and, in the event of such transfer, Siebel shall look solely to such transferee or mortgagee for t he return of the Letters of Credit. Siebel acknowledges and agrees that each of the Letters of Credit constitutes a separate and independent contract between Owner and the issuing bank, that Siebel is not a third party beneficiary of such contract, and that Owner's claim under either of the Letters of Credit for the full amount due and owing thereunder shall not be, in any way, restricted, limited, altered or impaired by virtue of any provision of the Bankruptcy Code, including, but not limited to, Section 502(b)(6) of the Bankruptcy Code. If Siebel's obligations under the Siebel Note are satisfied in full by Siebel, Owner shall, upon the date of such satisfaction, return the Siebel Note and the Siebel Note Letter of Credit to Siebel. If Siebel's obligations under the Guaranty of Payment of Additional Rent are satisfied in full by Siebel, Owner shall, upon the date of such satisfaction, return the Guaranty of Payment of Additional Rent and the Guaranty Letter of Credit to Siebel. Siebel shall, within fif teen (15) days after notice from the Owner, replace the Letters of Credit with new Letters of Credit, issued by an Bank acceptable to the Owner, if the bank which has issued the Letters of Credit becomes insolvent or fails to have a least a "C" rating (or a rating of at least 70 on a scale of 1 to 99 or 100 with 99 or 100 being the highest) from the Sheshunoff Information Services or an equivalent rating service reasonably selected by Owner. If Siebel fails to do so, then such failure shall be deemed a default under the Siebel Note and under the Guaranty of Payment of Additional Rent and the Owner shall have the right, but not the obligation, to draw the full amount available under the Letters of Credit. Amounts drawn under either of the Letters of Credit shall be deemed to be Landlord's funds, Neither such funds nor the Letters of Credit shall be deemed to be security deposits under any lease or subject to the provisions of Section 1950.7 of the California Civil Code, which provisions are expres sly waived by Siebel, to the extent that they would otherwise apply.
3. Agreement Concerning the Siebel Note, the Guaranty and the Letters of Credit. The Siebel Note and the Guaranty of Payment of Additional Rent and the payments to be made under the Letters of Credit are separate from the Siebel Lease and from the CHW Lease. No payment under either of the Letters of Credit shall be deemed rent and no such payment shall be affected by any breach or default under the Siebel Lease or the CHW Lease or any action taken by Owner in connection therewith including without limitation, any modification or termination of any such lease and any mitigation of damages under any such lease.
4. Avoidance Immunity. Siebel acknowledges that Owner's entry into this Agreement is expressly conditioned upon Siebel's assurances that Siebel's performance of its obligations under this Agreement and under the Space Reduction Amendment, the Siebel Note, and the Guaranty of Payment of Additional Rent and the bank's performance under the Letters of Credit shall be immune from avoidance and/or recovery under sections 547 through 550 of Title 11 of the United States Code (the "Bankruptcy Code"). Owner and Siebel intend for this Agreement, the Space Reduction Amendment, the Siebel Note, the Guaranty of Payment of Additional Rent and the Letters of Credit to continue in operation and effect in the event an order for relief is entered in a United States Bankruptcy Court naming Siebel as a debtor in a bankruptcy proceeding under the Bankruptcy Code ("Insolvency Proceeding"). Siebel also agrees that: (i) it is the belief of Siebel that the economic and other terms o f this Agreement, the Space Reduction Amendment, the Siebel Note, the Guaranty of Payment of Additional Rent and the Letters of Credit are fair and reasonable in the context of prevailing market conditions; (2) Siebel's entry into this Agreement, the Space Reduction Amendment, the Siebel Note and the Guaranty of Payment of Additional Rent and Siebel's delivery of the Letters of Credit to the Owner and performance hereunder and thereunder represents a contemporaneous exchange of new value between Siebel and Owner such that the value received by Siebel under this Agreement, and the Space Reduction Amendment, the Siebel Note, the Guaranty of Payment of Additional Rent and the Letters of Credit, considering the fair market value of the Siebel Lease as it applies to the CHW Premises prior to the Space Reduction Amendment is equivalent to the value received by Owner hereunder and under the Space Reduction Amendment, the Siebel Note, the Guaranty of Payment of Additional Rent and the Letters of Credit; and (3) any attempt by Siebel, any trustee in bankruptcy acting on behalf of Siebel, or any other party, to in any manner hinder, impede, void, invalidate, reject, rescind, or nullify the provisions of this Agreement, the Space Reduction Amendment, the Siebel Note, the Guaranty of Payment of Additional Rent or the Letters of Credit in any Insolvency Proceeding ("Avoidance Action"), will be deemed to be bad faith per se and contrary to the purposes of bankruptcy or other applicable laws, will not be consistent with the exercise of sound business judgment or the best interests of Siebel or any bankruptcy estate of Siebel, and will, in and of itself, constitute cause for purposes of dismissal with prejudice of any such Avoidance Action.
5. Notices. All notices and other communications provided for under this Agreement shall be in writing and shall be personally delivered or sent by first class United States mail, by nationally recognized overnight courier such as Federal Express or DHL, or by telecopy or by other means of telecommunication, to the following addresses:

OWNER:
Crossroads Associates Clocktower Associates c/o Osborn Capital Management 1875 South Grant Street, Suite 100 San Mateo, CA 94402 Attn: W. Gregory Osborn Telephone: (650) 571-5436 Facsimile: (650) 571-6502	With copy to: Allen Matkins Leek Gamble & Mallory LLP 333 Bush Street, 17th Floor San Francisco, CA 94104 Attn: Lee F. Gotshall-Maxon Telephone: (415) 273-7423 Facsimile: (415) 837-1516
SIEBEL:
Siebel Systems, Inc. 2207 Bridgepointe Parkway San Mateo, CA 94494 Attn: VP of Real Estate and Facilities Telephone: (650) 477-5511 Facsimile: (650) 477-7232	With copy to: Siebel Systems, Inc. 2207 Bridgepointe Parkway San Mateo, CA 94494 Attn: General Counsel Telephone: (650) 477-5313 Facsimile: (650) 295-5118

or, as to each party, at such other address as shall be designated by such party in a written notice to the other party complying as to delivery with the terms of this Section 7. All such notices and communications shall be deemed received (i) if personally delivered, upon delivery; (ii) if sent by first class United States mail, following deposit in the mail with first class postage prepaid, upon receipt; (iii) if sent by courier service with next Business Day delivery charges prepaid, upon receipt; and (iv) if sent by telex, telecopy or similar form of telecommunications, upon receipt.

6. Successors. Except as herein otherwise provided, this Agreement shall be binding upon and inure to the benefit of the parties, and their respective legal representatives, heirs, executors, administrators, successors and assigns.
7. Severability of Provisions. Any provision herein which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions of this Agreement or affecting the validity or enforceability of such provision in any other jurisdiction.
8. Entire Agreement. This Agreement constitutes the entire agreement among the parties with respect to the subject matter contained herein and therein, and supersedes any prior agreements or understanding among the parties, whether written or oral.
9. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original and all of which together shall be deemed to constitute one and the same document.
10. Amendments, Etc. No amendment, modification, termination, or waiver of any provision of this Agreement shall in any event be effective unless the same shall be in writing and signed by the other party, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given.
11. Attorneys' Fees. Siebel shall pay, within five (5) days after request, all attorneys fees and costs incurred by Owner in connection with the preparation and negotiation of this Agreement. If an action or suit is brought by a party hereto against another party hereunder arising out of or related to this Agreement or any of the documents which are delivered in connection with this Agreement, the party in whose favor final judgment is entered shall be entitled to have and recover from the other party or parties all costs and expenses of suit, including reasonable attorneys' fees and costs of expert witnesses ("Costs"), all of which shall be deemed to have accrued upon the commencement of such action. Any judgment or order entered in such action shall contain a specific provision providing for the recovery of all Costs incurred in enforcing, perfecting and executing such judgment. For the purposes of this section, Costs shall include, without limitation, attorneys' fee s, costs and expenses incurred in the following: (i) post-judgment motions and appeals; (ii) contempt proceedings; (iii) garnishment, levy and debtor and third party examinations; (iv) discovery; and (v) bankruptcy litigation. Notwithstanding the foregoing, Owner shall recover from Siebel any and all Costs incurred in connection with any Avoidance Action.
12. Time is of the Essence. Time is of the essence of this Agreement and each provision hereof.
13. Interpretation. Should any provision of this Agreement require interpretation by a court of law, it is agreed by all of the parties hereto that the court interpreting or construing this Agreement shall not apply any presumption that the terms will be more strictly construed against one party by reason of the rule of construction that a document is to be construed more strictly against the party who by himself or through his agent prepared such document, it being agreed that the legal counsel and agents of all parties have participated in the preparation of this Agreement.

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.

EX-10.17

Exhibit 10.17

Table Of Contents

		Page
1.	PREMISES	4
2.	POSSESSION AND LEASE COMMENCEMENT	4
3.	TERM	5
4.	USE	5
5.	RULES AND REGULATIONS	8
6.	RENT	9
7.	OPERATING EXPENSES	9
8.	INSURANCE AND INDEMNIFICATION	15
9.	WAIVER OF SUBROGATION	18
10.	LANDLORD'S REPAIRS AND MAINTENANCE	18
11.	TENANT'S REPAIRS AND MAINTENANCE	19
12.	ALTERATIONS	19
13.	SIGNS	21
14.	INSPECTION/POSTING NOTICES	22
15.	SERVICES AND UTILITIES	22
16.	SUBORDINATION AND ATTORNMENT	24
17.	FINANCIAL STATEMENTS	25
18.	ESTOPPEL CERTIFICATE	25
19.	SECURITY DEPOSIT	26
20.	LIMITATION OF TENANT'S REMEDIES	26
21.	ASSIGNMENT AND SUBLETTING	27
22.	AUTHORITY	30
23.	CONDEMNATION	30
24.	CASUALTY DAMAGE	30
25.	HOLDING OVER	32
26.	DEFAULT	32
27.	LIENS	35
28.	INTENTIONALLY OMITTED	35
29.	TRANSFERS BY LANDLORD	35
30.	RIGHT OF LANDLORD TO PERFORM TENANT'S COVENANTS	36
31.	WAIVER	36
32.	NOTICES	36
33.	ATTORNEYS' FEES	37
34.	SUCCESSORS AND ASSIGNS	37
35.	FORCE MAJEURE	37
36.	SURRENDER OF PREMISES	37
37.	PARKING	38
38.	MISCELLANEOUS	39
39.	ADDITIONAL PROVISIONS	41
40.	JURY TRIAL WAIVER	45

BASIC LEASE INFORMATION
OFFICE NET

LEASE DATE:	December ___, 2000
TENANT:	SIEBEL SYSTEMS, INC., a Delaware corporation
TENANT'S NOTICE ADDRESS:	2207 Bridgepointe Parkway San Mateo, CA 94404 Attn: Vice President, Real Estate and Facilities
	With a copy to: 2207 Bridgepointe Parkway San Mateo, CA 94404 Attn: Vice President, Legal Affairs
TENANT'S BILLING ADDRESS:	2207 Bridgepointe Parkway San Mateo, CA 94404 Attn: Vice President, Real Estate and Facilities
TENANT CONTACT: Linda Jansen	PHONE NUMBER: (650) 477-5511 FAX NUMBER: (650) 477-7252
LANDLORD:	PW ACQUISITIONS VIII, LLC, a Delaware limited liability company
LANDLORD'S NOTICE ADDRESS:	c/o PaineWebber Incorporated 1285 Avenue of the Americas, 38th Floor New York, NY 10019 Attn: Mr. Terrence E. Fancher
	With a copy to: c/o PaineWebber Incorporated 1285 Avenue of the Americas, 38th Floor New York, NY 10019 Attn: Mr. John C. Tashjian
LANDLORD'S REMITTANCE ADDRESS:	c/o PaineWebber Incorporated 1285 Avenue of the Americas, 38th Floor New York, NY 10019 Attn: Mr. John C. Tashjian
Project Description:	A commercial project to be developed at the northeast corner of Franklin Drive and Saratoga Drive in San Mateo, California, to be known as "The Center @ Bay Meadows", which is currently anticipated to be approximately as depicted on Exhibit B-2.
Premises:	Approximately 126,060 rentable square feet constituting certain space within that certain four (4) story building (the "Building") to be constructed approximately in the location specified as "Building 2" on Exhibit B attached hereto, which space is described as all rentable square footage to be located on the second (2nd), third (3rd) and fourth (4th) floors of the Building, a portion of the ground floor of the Building and the elevator lobby within the parking structure serving the Project devoted to elevators exclusively serving the Premises, approximately as shown on Exhibit B- 1.
Permitted Use:	General office use and, subject to the provisions of Paragraph 39.C below, use as a training facility.
Occupancy Density:	One occupant per each two hundred (200) rentable square feet of the Premises.
Parking and Parking Charge:	Three (3) non-exclusive, unreserved parking spaces (to be located within the unreserved parking areas of the Project serving the Building) per each one thousand (1,000) rentable square feet in the Premises (rounded to the nearest whole number of parking spaces in the event the rentable area of the Premises is not evenly divisible by one thousand (1,000)) without charge during the Term, in accordance with Paragraph 37 below. Additionally, Landlord shall provide Tenant with twenty-five hundredths (0.25) designated visitor parking spaces per each one thousand (1,000) rentable square feet in the Premises (rounded to the nearest whole number of parking spaces in the event the rentable area of the Premises is not evenly divisible by one thousand (1,000)) without charge during the Term.
Scheduled Term Commencement Date:	May 1, 2002
Scheduled Length of Term:	One hundred forty-four (144) months
Scheduled Term Expiration Date:	April 30, 2014
Rent:
Base Rent:	$6.45 per month per rentable square foot in the Premises, subject to increase on each yearly anniversary of the Term Commencement Date occurring during the Term by three percent (3%) per annum, calculated on a cumulative and compounding basis
Estimated First Year Operating Expenses:	$0.95 per rentable square foot per month
Security Deposit:	See Paragraph 39.D below.
Tenant's Proportionate Share:
Of Building:	The percentage equal to the product of (a) 100, multiplied by (b) a fraction, the numerator of which is the total rentable square footage of the Premises and the denominator of which is the total rentable square footage of the Building
Of Project or Common Areas:	The percentage equal to the product of (a) 100, multiplied by (b) a fraction, the numerator of which is the total rentable square footage of the Premises and the denominator of which is the total rentable square footage of the Project
Brokers:
Landlord's Broker:	Cornish & Carey Commercial
Tenant's Broker:	Resource Real Estate Group, Inc.

The foregoing Basic Lease Information is incorporated into and made a part of this Lease. Each reference in this Lease to any of the Basic Lease Information shall mean the respective information above and shall be construed to incorporate all of the terms provided under the particular Lease paragraph pertaining to such information. In the event of any conflict between the Basic Lease Information and the Lease, the latter shall control.

LANDLORD	TENANT
PW ACQUISITIONS VIII, LLC a Delaware limited liability company	SIEBEL SYSTEMS, INC. a Delaware corporation
By: /s/ John C. Tashjian Print Name: John C. Tashjian Its: Vice President	By: /s/ Jeffrey T. Amann Print Name: Jeffrey T. Amann Its: Vice President, Legal Affairs
	By:________________________ Print Name:___________________ Its:__________________________

LEASE

THIS LEASE is made as of the ___ day of ________, 2000, by and between PW ACQUISITIONS VIII, LLC, a Delaware limited liability company (hereinafter called "Landlord"), and SIEBEL SYSTEMS, INC., a Delaware corporation (hereinafter called "Tenant").

1. PREMISES

Landlord leases to Tenant and Tenant leases from Landlord, upon the terms and conditions hereinafter set forth, those premises (the "Premises") described in the Basic Lease Information. The Premises shall be all or part of a building (the "Building") and of a project (the "Project"), which may consist of more than one building and additional facilities, as described in the Basic Lease Information. The Building and Project are each depicted on Exhibit B. Landlord and Tenant acknowledge that physical changes may occur from time to time in the Premises, Building or Project, and that the number of buildings and additional facilities which constitute the Project may change from time to time, which may result in an adjustment in Tenant's Proportionate Share, as defined in the Basic Lease Information.

2. POSSESSION AND LEASE COMMENCEMENT
1. Term Commencement Date. The term commencement date ("Term Commencement Date") shall be the earlier of the date on which:
1. Tenant commences occupancy of the Premises for purposes other than construction of Tenant's Work and installation of Tenant's furniture, trade fixtures and equipment;
2. One hundred twenty (120) days following the Substantial Completion `of the "Base Building Work" described in Exhibit C, other than the "GHJK Work" as described in Schedule 1 to Exhibit C; provided that such one hundred twenty (120) day period shall be subject to extension for any actual delays in Tenant's Substantial Completion of Tenant's Work resulting from Landlord Delays (as defined and more particularly set forth in Exhibit C) occurring following Landlord's Substantial Completion of the Base Building Work other than the GHJK Work.
2. Substantial Completion. For the purposes of the Lease, the Substantial Completion of the Base Building Work and delivery of possession of the Premises shall be deemed to occur on such date as Landlord delivers to Tenant a certification from the Base Building Work architect that the Base Building Work has been Substantially Completed in accordance herewith (subject to the provisions herein respecting completion of the GHJK Work following such Substantial Completion), provided that the GHJK Work is completed to such extent as is necessary to permit construction of the Tenant Work (including, without limitation, by making utilities available to the Building, by temporary facilities if necessary and by causing a manlift or one of the Building elevators to be operational as of the date of such Substantial Completion) so as not to delay or increase the expense of performance of the Tenant's Work. By the Term Commencement Date, all GHJK Work shall be completed to such extent as is necessary to permit Tenant to operate its business from the entire Premises and to utilize its parking spaces without material and adverse affect or cost resulting from the incomplete nature of the GHJK Work. Landlord shall diligently prosecute the Base Building Work to completion following such Substantial Completion, and the parties shall reasonably cooperate to avoid delay or increased costs to either party as a result of the completion of the Base Building Work concurrent with the performance of Tenant's Work. Following the delivery of possession of the Premises to Tenant pursuant hereto, Landlord shall cause the Base Building Work contractor to coordinate the scheduling and performance of the remaining Base Building Work with the Tenant's Work Contractor. Tenant shall not be liable for any Rent for the period prior to the Term Commencement Date (but without affecting any obligation of Tenant under any improvement agreement appended to this Lease).
3. Punch List. Substantial Completion shall have occurred notwithstanding Tenant's submission of a punchlist to Landlord, which Tenant shall submit, if at all, within five (5) business days after Landlord's delivery of' possession of the Premises to Tenant with the Base Building Work (other than the GHJK Work) Substantially Completed, or with respect to the GHJK Work, within five (5) business days following the Term Commencement Date. Landlord shall thereafter diligently prosecute the cure of any such properly identified punch list items.
4. Delay in Delivery. If for any reason (i) Landlord has not Substantially Completed the Base Building Work on the scheduled delivery date (which scheduled delivery date is the date which is one hundred twenty (120) days prior to the Scheduled Term Commencement Date), or (ii) due to Landlord's delay in such Substantial Completion of the Base Building Work or the GHJK Work, the Term Commencement Date does not occur by the Scheduled Term Commencement Date, Landlord shall not be subject to any liability therefor, nor shall Landlord be in default hereunder, nor shall such failure affect the validity of this Lease, and Tenant agrees to accept possession of the Premises at such time as the Base Building Work (but for the GHJK Work) has been Substantially Completed, which date shall then be used as the starting date for the calculation of the one hundred twenty (120) day period referenced in clause A(2) above of this Section 2. Notwithstanding the foregoing, if by November 1, 2001, as such date may be extended by force majeure delays as described in Paragraph 35 below and by delays caused by Tenant (such date, as so extended. is referred to herein as the "Outside Date"), Landlord has not commenced construction of the Building (which, for purposes hereof, shall mean commencement of foundation work for the Building) and is not diligently pursuing construction of the. Building to completion, then Tenant shall have the right to terminate this Lease by giving written notice to Landlord within thirty (30) days following the Outside Date, in the event of which termination, Landlord shall promptly refund to Tenant all prepaid rent and other amounts deposited with Landlord and Landlord shall surrender to Tenant any Letter of Credit delivered pursuant to Paragraph 39.D below, and the parties shall be relieved of all other obligations hereunder.
5. Disputes. In the event of any dispute as to whether there has been Substantial Completion of work performed or required to be performed by Landlord, such dispute shall be submitted to arbitration under Paragraph 39.B below.
6. Start-Up Letter. Upon the Term Commencement Date and following Landlord's request, Tenant shall promptly execute and return to Landlord a "Start-Up Letter" in which the parties shall acknowledge the agreed upon the Term Commencement Date, in accordance with the terms of this Lease, but either party's failure or refusal to enter into the "StartUp Letter" shall not negate Tenant's acceptance of the Premises or affect determination of the Term Commencement Date.
3. TERM

This Lease shall be effective and binding upon the parties from and after the date hereof, but the term of this Lease (the "Term") shall commence on the Term Commencement Date and continue in full force and effect for the number of months specified as the Length of Term in the Basic Lease Information or until this Lease is terminated as otherwise provided herein. If the Term Commencement Date is a date other than the first day of the calendar month, the Term shall be the number of months of the Length of Term in addition to the remainder of the calendar month following the Term Commencement Date.

4. USE
1. General. Tenant shall use the Premises for the permitted use specified in the Basic Lease Information ("Permitted Use") and for no other use or purpose. Tenant shall control Tenant's employees, agents, customers, visitors, invitees, licensees, contractors, assignees and subtenants (collectively, "Tenant's Parties") in such a manner that Tenant and Tenant's Parties cumulatively do not exceed the occupant density specified in the Basic Lease Information (the "Occupancy Density") or utilize more parking than is specified in the Basic Lease Information at any time. So long as Tenant is occupying the Premises, Tenant and Tenant's Parties shall have the "non-exclusive right to use, in common with other parties occupying the Building or Project, the parking areas (up to the number of non-exclusive parking spaces specified in the Basic Lease Information), driveways and other common areas of the Building and Project, subject to the terms of this Lease and such rules and regulations as Landlord may from time to time prescribe. Landlord reserves the right, without notice or liability to Tenant, and without the same constituting an actual or constructive eviction, to alter or modify the common areas from time to time, including the location and configuration thereof, and the amenities and facilities which Landlord may determine to provide from time to time, provided that any such alteration or modification of the common areas shall not materially and adversely interfere with Tenant's Permitted Use in accordance with this Lease or materially and adversely interfere with Tenant's access to the Premises.
2. Limitations. Tenant shall not permit any odors, smoke, dust, gas, substances, noise or vibrations to emanate from the Premises or from any portion of the common areas as a result of Tenant's or any Tenant's Party's use thereof, nor take any action which would constitute a nuisance or would disturb, obstruct or endanger any other tenants or occupants of the Building or Project or elsewhere, or interfere with their use of their respective premises or common areas. Storage outside the Premises of materials, vehicles or any other items is prohibited. Tenant shall not use or allow the Premises to be used for any immoral, improper or unlawful purpose, nor shall Tenant cause or maintain or permit any nuisance in, on or about the Premises. Tenant shall not commit or suffer the commission of any waste in, on or about the Premises. Tenant shall not allow any sale by auction upon the Premises, or place any loads upon the floors, walls or ceilings which could endanger the structure, or place any harmful substances in the drainage system of the Building or Project. No waste, materials or refuse shall be dumped upon or permitted to remain outside the Premises. Landlord shall not be responsible to Tenant for the noncompliance by any other tenant or occupant of the Building or Project with any of the above-referenced rules or any other terms or provisions of such tenant's or occupant's lease or other contract.
3. Compliance with Regulations. By entering the Premises, Tenant accepts the Premises in the condition existing as of the date of such entry, subject to Landlord's completion of all Base Building Work (including, without limitation, all punch list items with respect thereto) as provided in this Lease. Tenant shall at its sole cost and expense strictly comply with all existing or future applicable municipal, state and federal and other governmental statutes, rules, requirements, regulations, laws and ordinances, including zoning ordinances and regulations, and covenants, easements and restrictions of record governing and relating to the use, occupancy or possession of the Premises, to Tenant's use of the common areas, or to the use, storage, generation or disposal of Hazardous Materials (hereinafter defined) (collectively "Regulations"). Tenant shall at its sole cost and expense obtain any and all licenses or permits necessary for Tenant's use of the Premises. Tenant shall at its sole cost and expense promptly comply with the requirements of any board of fire underwriters or other similar body now or hereafter constituted. Tenant shall not do or permit anything to be done in, on, under or about the Project or bring or keep anything which will in any way increase the rate of any insurance upon the Premises, Building or Project or upon any contents therein or cause a cancellation of said insurance or otherwise affect said insurance in any manner. Tenant shall indemnify, defend (by counsel reasonably acceptable to Landlord), protect and hold Landlord harmless from and against any loss, cost, expense, damage, attorneys' fees or liability arising out of the failure of Tenant to comply with any Regulation. Tenant's obligations pursuant to the foregoing indemnity shall survive the expiration or earlier termination of this Lease. Except as provided in this Lease, Landlord shall be responsible for complying with Regulations pertaining to the common areas of the Project as of the completion of the Base Building Work (but without regard to the particular nature of Tenant's use or occupancy of the Premises or the Additional Tenant Work, the Tenant Improvements and/or Alterations made by or on behalf of Tenant) except to the extent arising out of (1) Tenant's particular occupancy or use (as opposed to mere occupancy) of the Premises or common areas, or (2) construction of any of the Additional Tenant Work, the Tenant Improvements and/or Alterations made by or on behalf of Tenant, whether by Landlord or otherwise, and performed after the Term Commencement Date, or (3) installation of any equipment, fixtures, furniture or other personal property in or about the Premises. Tenant shall have the sole responsibility for complying, at Tenant's cost, with any and all provisions of the Americans with Disabilities Act of 1990, as it has been and may later be amended ("ADA"), (i) with respect to the Premises (other than as to elements of the Base Building Work as of the completion thereof, but without regard to the particular nature of Tenant's use or occupancy of the Premises or the Additional Tenant Work, the Tenant Improvements and/or Alterations made by or on behalf of Tenant); and (ii) with respect to the common areas of the Project where in the case of this clause (ii) such compliance has been brought about by: (A) any Additional Tenant Work, Tenant Improvements and/or Alterations to the Premises or to the common areas made by or on behalf of Tenant, whether by Landlord or otherwise, and performed after the Substantial Completion of the Base Building Work; (B) requirements of Tenant's employees, or any changes to Tenant's use of the Premises; or (C) any architectural barriers caused by Tenant's installation of any equipment, fixtures, furniture, or other personal property in or about the Premises (items (i) and (h) collectively, "Tenant's ADA Responsibilities"). Tenant shall indemnify, defend and hold Landlord harmless from and against any and all claims, damages, or liabilities (including, without limitation, reasonable attorneys' fees and costs) arising directly or indirectly from Tenant's failure to satisfy any of Tenant's ADA Responsibilities. Landlord shall indemnify, defend and hold Tenant harmless from and against any and all claims, damages or liabilities (including, without limitation, reasonable attorneys' fees and costs) arising directly or indirectly from Landlord's failure to comply with any obligations of a landlord under the ADA, other than such claims, damages or liabilities (including, without limitation, reasonable attorneys' fees and costs) arising from Tenant's failure to satisfy any of Tenant's ADA Responsibilities; provided, however, that Landlord may treat costs of ADA compliance with respect to the common areas of the Project to the extent necessitated by Regulations or the ADA (or interpretations thereof) as coming into effect after the Substantial Completion of the Base Building Work as an Operating Expense in accordance with Paragraph 7 hereof. Landlord represents that, as of the date Landlord delivers possession of the Premises to Tenant, to Landlord's actual knowledge, the Base Building Work shall comply in all material respects with each of. (x) the ADA, and (y) Regulations, as the ADA and Regulations have each been interpreted or applied in San Mateo County and as each of the ADA and Regulations pertain to the Base Building Work (but without regard to the Additional Tenant Work, Tenant Improvements and/or Alterations to the Premises or to the common areas made by or on behalf of Tenant). Any costs incurred by Landlord to comply with ADA and Regulations solely as described in the foregoing sentence shall not be an Operating Expense as defined herein.
4. Hazardous Materials. As used in this Lease, "Hazardous Materials" shall include, but not be limited to, hazardous, toxic and radioactive materials and those substances defined as "hazardous substances," "hazardous materials," "hazardous wastes," "toxic substances," or other similar designations in any Regulation. Tenant shall not cause, or allow any of Tenant's Parties to cause, any Hazardous Materials to be handled, used, generated, stored, released or disposed of in, on, under or about the Premises, the Building or the Project or surrounding land or environment in violation of any Regulations. Tenant must obtain Landlord's written consent prior to the introduction of any Hazardous Materials onto the Project. Notwithstanding the foregoing, Tenant may handle, store, use and dispose of products containing small quantities of Hazardous Materials customary for "general office purposes" (such as toner for copiers) to the extent customary and necessary for the Permitted Use of the Premises; provided that Tenant shall always handle, store, use, and dispose of any such Hazardous Materials in a safe and lawful manner in compliance with all Regulations and never allow such Hazardous Materials to contaminate the Premises, Building, or Project or surrounding land or environment. Tenant shall immediately notify Landlord in writing of any Hazardous Materials' contamination of any portion of the Project of which Tenant becomes aware which has not been previously disclosed by Tenant to Landlord or by Landlord to Tenant, whether or not caused by Tenant. Landlord shall immediately notify Tenant in writing of any Hazardous Materials' contamination of any portion of the Project of which Landlord becomes aware which has not been previously disclosed by Landlord to Tenant or by Tenant to Landlord, whether or not caused by Landlord, to the extent such contamination poses a material threat of harm to persons at the Premises or common areas or of material adverse affect upon the operation of Tenant's business from the Premises. Landlord shall have the right at all reasonable times to inspect the Premises and to conduct tests and investigations to determine whether Tenant is in compliance with the foregoing provisions, the costs of all such inspections, tests and investigations to be borne by Landlord, unless Landlord reasonably believes that Tenant or any of the Tenant Parties has violated this Paragraph 4.D or any Regulation, in which event such costs shall be borne solely by Tenant. Tenant shall indemnify, defend (by counsel reasonably acceptable to Landlord), protect and hold Landlord harmless from and against any and all claims, liabilities, losses, costs, loss of rents, liens, damages, injuries or expenses (including reasonable attorneys' and consultants' fees and court costs), demands, causes of action, or judgments directly or indirectly arising out of or related to the use, generation, storage, release, or disposal of Hazardous Materials by Tenant or any of Tenant's Parties in, on, under or about the Premises, the Building or the Project or surrounding land or environment, which indemnity shall include, without limitation, damages for personal or bodily injury, property damage, damage to the environment or natural resources occurring on or off the Premises, losses attributable to diminution in value or adverse effects on marketability, the cost of any investigation, monitoring, government oversight, repair, removal, remediation, restoration, abatement, and disposal, and the preparation of any closure or other required plans, whether such action is required or necessary prior to or following the expiration or earlier termination of this Lease. Neither the consent by Landlord to the use, generation, storage, release or disposal of Hazardous Materials nor the strict compliance by Tenant with all laws pertaining to Hazardous Materials shall excuse Tenant from Tenant's obligation of indemnification pursuant to this Paragraph 4.D. Tenant's obligations pursuant to the foregoing indemnity shall survive the expiration or earlier termination of this Lease. Landlord shall indemnify, defend and hold Tenant harmless from and against any and all claims, judgments, damages, penalties, fines, costs, liabilities or losses, including without limitation reasonable attorneys' fees and costs arising out of any Hazardous Material in, on or about the Project or the Premises which was created, handled, placed, stored, used, transported or disposed of by Landlord or by Landlord's agents, employees or representatives, excluding, however, any Hazardous Material, whose presence was caused by Tenant or any Tenant's Parties. In the event Tenant or any Tenant Party violates this Paragraph 4.D. or in any way is not compliant with any Regulation concerning Hazardous Materials, and Tenant fails to immediately and adequately, as reasonably determined by Landlord, commence and prosecute a cure, Landlord has the option, but not the obligation, to immediately commence a cure on Tenant's behalf. Landlord may take such actions without any obligation and without releasing Tenant from any of Tenant's obligations. All sums so paid by Landlord and all incidental costs incurred by Landlord and interest thereon at the Applicable Interest Rate, from the date of payment by Landlord, shall be paid to Landlord on demand as Additional Rent.
5. RULES AND REGULATIONS

Tenant shall faithfully observe and comply with the building rules and regulations attached hereto as Exhibit A and any other reasonable rules and regulations and any modifications or additions thereto which Landlord may from time to time prescribe in writing for the purpose of maintaining the proper care, cleanliness, safety, traffic flow and general order of the Premises or the Building or Project, and provided that such reasonable rules and regulations shall not materially adversely affect Tenant's use of the Premises as provided hereunder or materially and adversely interfere with Tenant's access to the Premises. Landlord shall apply such rules and regulations in a nondiscriminatory manner. Tenant shall cause Tenant's Parties to comply with such rules and regulations. Landlord shall not be responsible to Tenant for the non-compliance by any other tenant or occupant of the Building or Project with any of such rules and regulations, any other tenant's or occupant's lease or any Regulations. In the event that a conflict exists between this Lease and Exhibit A, the terms of this Lease shall control.

6. RENT
1. Base Rent. Tenant shall pay to Landlord and Landlord shall receive, without notice or demand throughout the Term, Base Rent as specified in the Basic Lease Information, payable in monthly installments in advance on or before the first day of each calendar month, in lawful money of the United States, without deduction or offset whatsoever, at the Remittance Address specified in the Basic Lease Information or to such other place as Landlord may from time to time designate in writing. The amount of $813,087.00, as an estimate of Base Rent to be applied against payment of Base Rent for the first full month of the Term shall be paid by Tenant upon Tenant's execution of this Lease. If the obligation for payment of Base Rent commences on a day other than the first day of a month, then Base Rent shall be prorated and the prorated installment shall be paid on the first day of the calendar month next succeeding the Term Commencement Date. The Base Rent payable by Tenant hereunder is subject to adjustment as provided elsewhere in this Lease, as applicable. As used herein, the term "Base Rent" shall mean the Base Rent specified in the Basic Lease Information as it may be so adjusted from time to time.
2. Additional Rent. All monies other than Base Rent required to be paid by Tenant hereunder, including, but not limited to, Tenant's Proportionate Share of Operating Expenses, as specified in Paragraph 7 of this Lease, charges to be paid by Tenant under Paragraph 15, the interest and late charge described in Paragraphs 26.D. and E., and any monies spent by Landlord pursuant to Paragraph 30, shall be considered additional rent ("Additional Rent"). "Rent" shall mean Base Rent and Additional Rent.
7. OPERATING EXPENSES
1. Operating Expenses. In addition to the Base Rent required to be paid hereunder, Tenant shall pay as Additional Rent, Tenant's Proportionate Share of the Building and/or Project (as applicable), as defined in the Basic Lease Information, of Operating Expenses (defined below) in the manner set forth below. Tenant shall pay the applicable Tenant's Proportionate Share of each such Operating Expenses. Building Operating Expenses (which shall be paid by Tenant based upon Tenant's Proportionate Share of the Building) shall mean those items of Operating Expenses which are attributable solely to the Building. Project Operating Expenses (which shall be paid by Tenant based upon Tenant's Proportionate Share of the Project) shall mean those items of Operating Expenses which are attributable to the Project common areas or the Project as a whole (and which are not segregable on a building by building basis so that the amount thereof allocable to the Building alone could be included in Building Operating Expenses). Landlord and Tenant acknowledge that if the number of buildings which constitute the Project increases or decreases, or if physical changes are made to the Premises, Building or Project or the configuration of any thereof, Landlord will reasonably adjust Tenant's Proportionate Share of the Building or Project to reflect the change. Landlord's determination of Tenant's Proportionate Share of the Building and of the Project shall be conclusive so long as it is reasonably and consistently applied. Operating Expenses shall be reasonably allocated by Landlord to the tenants of the Building and the Project. Landlord shall have the right, from time to time, to equitably allocate some or all of the Operating Expenses for the Project among different portions or occupants of the Project (the "Cost Pools"), in Landlord's reasonable discretion. Such Cost Pools may include, but shall not be limited to, the office space tenants of a building of the Project or of the Project, and the retail space tenants of a building of the Project or of the Project. The Operating Expenses allocable to each such Cost Pool shall be allocated to such Cost Pool and charged to the tenants within such Cost Pool in an equitable manner. "Operating Expenses" shall mean all expenses and costs of every kind and nature which Landlord shall pay or become obligated to pay, because of or in connection with the ownership, management, maintenance, repair, preservation, replacement and operation of the Building or Project and its supporting facilities and such additional facilities now and in subsequent years as may be determined by Landlord to be necessary or desirable to the Building and/or Project (as determined in a reasonable manner) other than those expenses and costs which are specifically attributable to Tenant or which are expressly made the financial responsibility of Landlord pursuant to this Lease or of other tenants of the Building or Project pursuant to the terms of their respective leases (other than such other tenants' contributions to Operating Expenses). Operating Expenses shall include, but are not limited to, the following:
1. Taxes. All real property taxes and assessments, possessory interest taxes, sales taxes, personal property taxes, business or license taxes or fees, gross receipts taxes, service payments in lieu of such taxes or fees, annual or periodic license or use fees, excises, transit charges, and other impositions, general and special, ordinary and extraordinary, unforeseen as well as foreseen, of any kind (including fees "in-lieu" of any such tax or assessment) which are now or hereafter assessed, levied, charged, confirmed, or imposed by any public authority upon the Building or Project, its operations or the Rent (or any portion or component thereof), or any tax, assessment or fee imposed in substitution, partially or totally, of any of the above. Operating Expenses shall also include any taxes, assessments, reassessments, or other fees or impositions with respect to the development, leasing, management, maintenance, alteration, repair, use or occupancy of the Premises, Building or Project or any portion thereof, including, without limitation, by or for Tenant, and all increases therein or reassessments thereof whether the increases or reassessments result from increased rate and/or valuation (whether upon a transfer of the Building or Project or any portion thereof or any interest therein or for any other reason). Operating Expenses shall not include inheritance or estate taxes imposed upon or assessed against the interest of any person in the Project, or taxes computed upon the basis of the net income of any owners of any interest in the Project. If it shall not be lawful for Tenant to reimburse Landlord for all or any part of such taxes, the monthly rental payable to Landlord under this Lease shall be revised to net Landlord the same net rental after imposition of any such taxes by Landlord as would have been payable to Landlord prior to the payment of any such taxes.
2. Insurance. All insurance premiums and costs, including, but not limited to, any deductible amounts, premiums and other costs of insurance incurred by Landlord, including for the insurance coverage set forth in Paragraph 8.A. herein.
3. Common Area Maintenance.
1. Repairs, replacements, and general maintenance of and for the Building and Project and public and common areas and facilities of and comprising the Building and Project, including, but not limited to, the roof and roof membrane, windows, elevators, restrooms, conference rooms and/or health club facilities (provided that such conference rooms and/or health club facilities are made available to Tenant on a nonexclusive basis), lobbies, mezzanines. balconies, mechanical rooms, building exteriors, alarm systems, pest extermination, landscaped areas, parking and service areas, driveways, sidewalks, loading areas, fire sprinkler systems, sanitary and storm sewer lines, utility services, heating/ventilation/air conditioning systems, electrical, mechanical or other systems, telephone equipment and wiring servicing, plumbing, lighting, and any other items or areas which affect the operation or appearance of the Building or Project, which determination shall be at Landlord's discretion, except for: those items to the extent actually paid for by the proceeds of insurance; and those items attributable solely or jointly to specific tenants of the Building or Project.
2. Repairs, replacements, and general maintenance shall include, without limitation, the cost of any improvements made to or assets acquired for the Project or Building that in Landlord's discretion may reduce any other Operating Expenses, including present or future repair work, are reasonably necessary for the health and safety of the occupants of the Building or Project, or for the operation of the Building systems, services and equipment, or are required to comply with any Regulation, provided that to the extent the same constitute capital expenditures the cost of which exceed $1.00 per Rentable Square Foot of the Project or Building, as applicable, such costs or allocable portions thereof to be amortized over such reasonable period as Landlord shall determine, together with interest on the unamortized balance at the publicly announced "prime rate" charged by Wells Fargo Bank, N.A. (San Francisco) or its successor at the time such improvements or capital assets are constructed or acquired, plus two (2) percentage points, or in the absence of such prime rate, then at the U.S. Treasury six-month market note (or bond, if so designated) rate as published by any national financial publication selected by Landlord, plus four (4) percentage points, but in no event more than the maximum rate permitted by law, plus reasonable financing charges.
3. Payment under or for any easement, license, permit, operating agreement, declaration, restrictive covenant or instrument relating to the Building or Project (including, without limitation, amounts owing with respect to the maintenance and repair (but not acquisition or development) of the linear park adjacent to the Project).
4. All expenses and rental related to services and costs of supplies, materials and equipment used in operating, managing and maintaining the Premises, Building and Project, the equipment therein and the adjacent sidewalks, driveways, parking and service areas, including, without limitation, expenses related to service agreements regarding security, fire and other alarm systems, janitorial services, window cleaning, elevator maintenance, Building exterior maintenance, landscaping and expenses related to the administration, management and operation of the Project.
5. The cost of supplying any services and utilities which benefit all or a portion of the Premises, Building or Project, including without limitation services and utilities provided pursuant to Paragraph 15 hereof.
4. Other Operating Costs.
1. The amount paid or payable for all labor and/or wages and other payments including cost to Landlord of workers' compensation and disability insurance, payroll taxes, welfare and fringe benefits made to janitors, caretakers and other employees, contractors and subcontractors of Landlord (including the wages of any property manager) involved in the operation, maintenance and repair of the Project.
2. Legal expenses and the costs of audits by certified public accountants; provided, however, that legal expenses chargeable as Operating Expenses shall not include the cost of negotiating leases, collecting rents or evicting tenants, nor shall it include costs incurred in legal proceedings with or against any tenant or to enforce the provisions of any lease.
3. A management and accounting cost recovery fee equal to five percent (5%) of the sum of the Project's revenues.

If the rentable area of the Building and/or Project is not fully occupied during any fiscal year of the Term, then an adjustment shall be made in computing the Operating Expenses for such year so that Tenant pays an equitable portion of all variable items (e.g., utilities, janitorial services and other component expenses that are affected by variations in occupancy levels) of Operating Expenses, as reasonably determined by Landlord, as if one hundred percent (100%) of the rentable area of the Building and/or Project had been one hundred percent (100%) occupied for the entirety of such calendar year; provided, however, that in no event shall Landlord be entitled to collect in excess of one hundred percent (100%) of the total Operating Expenses from all of the tenants in the Building or Project, as the case may be.

Operating Expenses shall not include (1) the cost of providing tenant improvements, (2) other specific costs incurred for the account of, or payable by, specific tenants of the Building or Project (other than such other tenants' contributions to Operating Expenses), (3) expenses in connection with services which are not available to Tenant or which are separately payable by Tenant pursuant to the other provisions of this Lease, (4) the initial construction cost of the Building, (5) debt service on any mortgage or deed of trust recorded with respect to the Project other than pursuant to Paragraph 7.A(3)(b) above, or (6) any costs associated with providing valet service for tandem parking as described in Paragraph 37 below. Notwithstanding anything herein to the contrary, in any instance wherein Landlord, in Landlord's reasonable discretion, deems Tenant to be responsible for any amounts greater than Tenant's Proportionate Share, Landlord shall have the right to allocate costs in any equitable manner Landlord reasonably deems appropriate.

The above enumeration of services and facilities shall not be deemed to impose an obligation on Landlord to make available or provide such services or facilities except to the extent if any that Landlord has specifically agreed elsewhere in this Lease to make the same available or provide the same. Without limiting the generality of the foregoing, Tenant acknowledges and agrees that it shall be responsible for providing adequate security for its use of the Premises, the Building and the Project and that Landlord shall have no obligation or liability with respect thereto.

Notwithstanding anything in the definition of Operating Expenses in this Lease to the contrary, Operating Expenses shall not include the following, except to the extent specifically otherwise provided herein:

1. Any ground lease rental;
2. Costs of capital improvements, replacements or equipment and any depreciation or amortization expenses thereon, except as specifically set forth in the definition of Operating Expenses in Paragraph 7.A of the Lease;
3. Rentals for items (except when needed in connection with normal repairs and maintenance of permanent systems) which if purchased, rather than rented, would constitute a capital improvement which is specifically excluded in Subsection (ii) above (excluding, however, equipment not affixed to the Building or Project which is used in providing janitorial or similar services);
4. Costs incurred by Landlord for the repair of damage to the Building or Project, to the extent that Landlord is reimbursed by insurance proceeds;
5. Costs, including permit, license and inspection costs, incurred with respect to the installation of tenant or other occupant improvements made for tenants or other occupants in the Building or the Project or incurred in renovating or otherwise improving, decorating, painting or redecorating vacant space for or the premises of other tenants or other occupants of the Building;
6. Marketing costs, including leasing commissions, attorneys' fees in connection with the negotiation and preparation of letters, deal memos, letters of intent, leases, subleases and/or assignments, space planning costs, and other costs and expenses incurred in connection with lease, sublease and/or assignment negotiations and transactions with present or prospective tenants or other occupants of the Building or the Project;
7. Increased costs of performance incurred by Landlord due to the violation by Landlord of the terms and conditions of any lease of space in the Building or the Project;
8. Interest, principal, points and fees on debt or amortization payments on any mortgage or deed of trust or any other debt instrument encumbering the Building or Project or the land on which the Building or Project is situated;
9. Except for making repairs or keeping permanent systems in operation while repairs are being made, rentals and other related expenses incurred in leasing air conditioning systems, elevators or other equipment ordinarily considered to be of a capital nature, except equipment not affixed to the Building or Project which is used in providing janitorial or similar services;
10. Advertising and promotional expenditures (except for retail property promotions);
11. Costs incurred in correcting any non-compliance of the Base Building Work with applicable Regulations, the ADA, and disability, life, fire and safety codes in effect and applicable to the Base Building Work prior to the substantial completion of the Base Building Work;
12. Interest, fines or penalties incurred as a result of Landlord's failure to make payments when due unless such failure is commercially reasonable under the circumstances;
13. Costs arising from Landlord's charitable or political contributions;
14. Costs for acquisition of sculpture, paintings or other objects of art in common areas;
15. The depreciation of the Building and other real property structures in the Project;
16. Landlord's general corporate overhead and general administrative expenses not related to the operation of the Building or the Project, except as specifically set forth in Paragraph 7.A of this lease;
17. Any bad debt loss, rent loss or reserves for bad debts or rent loss, or reserves for equipment or capital replacement;
18. Costs to correct defects in construction and design, materials or workmanship in the Base Building Work or the Project;
19. Costs in connection with Landlord's express financial obligation to comply with Regulations (other than ADA) described in Paragraph 4 of this Lease;
20. Costs for senior executive wages, salaries or other compensation; and
21. Costs incurred by Landlord in connection with compliance with ADA and Regulations but only to the extent expressly excluded from Operating Expenses in Paragraph 4.C of this Lease.
2. Payment of Estimated Operating Expenses. "Estimated Operating Expenses" for any particular year shall mean Landlord's estimate of the Operating Expenses for such fiscal year made with respect to such fiscal year as hereinafter provided. Landlord shall have the right from time to time to revise its fiscal year and interim accounting periods so long as the periods as so revised are reconciled with prior periods in a reasonable manner. During the last month of each fiscal year during the Term, or as soon thereafter as practicable, Landlord shall give Tenant written notice of the Estimated Operating Expenses for the ensuing fiscal year. Tenant shall pay Tenant's Proportionate Share of the Estimated Operating Expenses with installments of Base Rent for the fiscal year to which the Estimated Operating Expenses applies in monthly installments on the first day of each calendar month during such year, in advance. Such payment shall be construed to be Additional Rent for all purposes hereunder. If at any time during the course of the fiscal year, Landlord determines that Operating Expenses are projected to vary from the then Estimated Operating Expenses by more than five percent (5%), Landlord may, by written notice to Tenant, revise the Estimated Operating Expenses for the balance of such fiscal year, and Tenant's monthly installments for the remainder of such year shall be adjusted so that by the end of such fiscal year Tenant has paid to Landlord Tenant's Proportionate Share of the revised Estimated Operating Expenses for such year, such revised installment amounts to be Additional Rent for all purposes hereunder. Within a reasonable time following Tenant's written request, but in no event more than one (1) time during any twelve (12) month period, Landlord shall deliver to Tenant a reasonably detailed statement which itemizes Landlord's calculation. Notwithstanding anything to the contrary contained in this Lease, the estimate of first year Operating Expenses set forth in the Basic Lease Information is an estimate only, does not constitute a representation or warranty by Landlord, and shall not in any manner limit the obligation of Tenant for payment of the full amount of Operating Expenses during the first year or any subsequent period of the Term.
3. Computation of Operating Expense Adjustment. "Operating Expense Adjustment" shall mean the difference between Estimated Operating Expenses and actual Operating Expenses for any fiscal year determined as hereinafter provided. Within one hundred twenty (120) days after the end of each fiscal year, or as soon thereafter as practicable, Landlord shall deliver to Tenant a statement of actual Operating Expenses for the fiscal year just ended, accompanied by a computation of Operating Expense Adjustment. If such statement shows that Tenant's payment based upon Estimated Operating Expenses is, less than Tenant's Proportionate Share of Operating Expenses, then Tenant shall pay to Landlord the difference within thirty (30) days after receipt of such statement, such payment to constitute Additional Rent for all purposes hereunder. If such statement shows that Tenant's payments of Estimated Operating Expenses exceed Tenant's Proportionate Share of Operating Expenses, then (provided that Tenant is not in default under this Lease) Landlord shall credit the difference to the next payment of Estimated Operating Expenses due from Tenant. If this Lease has been terminated or the Term hereof has expired prior to the date of such statement, then the Operating Expense Adjustment shall be paid by the appropriate party within thirty (30) days after the date of delivery of the statement. Should this Lease commence or terminate at any time other than the first day of the fiscal year, Tenant's Proportionate Share of the Operating Expense Adjustment shall be prorated based on a month of thirty (30) days and the number of calendar months during such fiscal year that this Lease is in effect. Notwithstanding anything to the contrary contained in this Paragraph 7, Landlord's failure to provide any notices or statements within the time periods specified in those paragraphs shall in no way excuse Tenant from its obligation to pay Tenant's Proportionate Share of Operating Expenses.
4. Net Lease. This shall be a triple net Lease and Base Rent shall be paid to Landlord absolutely net of all costs and expenses, except as specifically provided to the contrary in this Lease. The provisions for payment of Operating Expenses and the Operating Expense Adjustment are intended to pass on to Tenant and reimburse Landlord for all costs and expenses of the nature described in Paragraph 7.A. incurred in connection with the ownership, management, maintenance, repair, preservation, replacement and operation of the Building and/or Project and its supporting facilities and such additional facilities now and in subsequent years as may be determined by Landlord to be necessary or desirable to the Building and/or Project, subject to the express limitations on inclusion of certain items in Operating Expenses as provided in Paragraph 7.A above.
5. Tenant Audit. If Tenant shall dispute the amount set forth in any statement provided by Landlord under Paragraph 7.B. or 7.C. above, Tenant shall have the right, upon notice given not later than sixty (60) days following receipt of such statement and upon the condition that Tenant shall first deposit with Landlord the full amount in dispute, to cause Landlord's books and records with respect to Operating Expenses for such fiscal year to be audited by independent certified public accountants (who are not compensated on a contingency basis) selected by Tenant and subject to Landlord's reasonable right of approval. The Operating Expense Adjustment shall be appropriately adjusted on the basis of such audit. If such audit discloses a liability for a refund in excess of five percent (5%) of Tenant's Proportionate Share of the Operating Expenses previously reported, the cost of such audit shall be borne by Landlord; otherwise the cost of such audit shall be paid by Tenant within thirty (30) days following completion of the audit. If Tenant shall not request an audit in accordance with the provisions of this Paragraph 7.E. within sixty (60) days after receipt of Landlord's statement provided pursuant to Paragraph 7.B. or 7.C., such statement shall be final and binding for all purposes hereof. Tenant acknowledges and agrees that any information revealed in the above described audit may contain proprietary and sensitive information and that significant damage could result to Landlord if such information were disclosed to any party other than Tenant's auditors. Tenant shall not in any manner disclose, provide or make available any information revealed by the audit to any person or entity without Landlord's prior written consent, which consent may be withheld by Landlord in its sole and absolute discretion. The information disclosed by the audit will be used by Tenant solely for the purpose of evaluating Landlord's books and records in connection with this Paragraph 7.E.
8. INSURANCE AND INDEMNIFICATION
1. Landlord's Insurance. All insurance maintained by Landlord shall be for the sole benefit of Landlord and under Landlord's sole control. Landlord shall determine, in its sole discretion, the amount of any deductible under any policy maintained by Landlord.
1. Property Insurance. Landlord agrees to maintain property insurance insuring the Building (including the Additional Tenant Work but specifically excluding the Tenant Improvements), against damage or destruction due to risk including fire, vandalism, and malicious mischief in an amount not less than the replacement cost thereof, in the form and with deductibles and endorsements as selected by Landlord. At its election, Landlord may instead (but shall have no obligation to) obtain "All Risk" coverage, and may also obtain earthquake, pollution, and/or flood insurance in amounts selected by Landlord in its sole and absolute discretion consistent with customary industry standards for prudent risk management by owners of projects comparable to the Project in the vicinity of the Project.
2. Optional Insurance. Landlord, at Landlord's option, may also (but shall have no obligation to) carry (i) insurance against loss of rent, in an amount equal to the amount of Base Rent and Additional Rent that Landlord could be required to abate to all Building tenants in the event of condemnation or casualty damage for a period of twelve (12) months; and (ii) liability insurance and such other insurance as Landlord may deem prudent or advisable, in such amounts and on such terms as Landlord shall determine in its sole and absolute discretion consistent with customary industry standards for prudent risk management by owners of projects comparable to the Project in the vicinity of the Project. Landlord shall not be obligated to insure, and shall have no responsibility whatsoever for any damage to, any furniture, machinery, goods, inventory or supplies, or other personal property or fixtures which Tenant may keep or maintain in the Premises, or any leasehold improvements, additions or alterations within the Premises including, without limitation, the Tenant Improvements.
2. Tenant's Insurance. Tenant shall procure at Tenant's sole cost and expense and keep in effect from the date of this Lease and at all times until the end of the Term the following:
1. Property Insurance. Insurance on all personal property and fixtures of Tenant and all improvements, additions or alterations (excluding the Additional Tenant Work, which shall be insured by Landlord upon the completion thereof pursuant to Paragraph 8.A(1) above, but including, without limitation, the Tenant Improvements) made by or for Tenant to the Premises on an "All Risk" basis, insuring such property for the full replacement value of such property. Tenant shall also maintain insurance for all plate glass within or about the Premises. During the term of this Lease, the proceeds from any such policy or policies of insurance shall he used for the repair or replacement of the fixtures, equipment and improvements so insured.
2. Liability Insurance. Commercial General Liability insurance covering bodily injury and property damage liability occurring in or about the Premises or arising out of the use and occupancy of the Premises and the Project, and any part of either, and any areas adjacent thereto, and the business operated by Tenant or by any other occupant of the Premises. Such insurance shall include contractual liability insurance coverage insuring all of Tenant's indemnity obligations under this Lease. Such coverage shall have a minimum combined single limit of liability of at least Two Million Dollars ($2,000,000.00), and a minimum general aggregate limit of Five Million Dollars ($5,000,000.00), with an "Additional Insured - Managers or Lessors of Premises Endorsement"; provided that such liability insurance coverage may be provided by a combination of primary, excess and umbrella policies so long as the coverage afforded thereunder is not impaired as a result thereof. All such policies shall be written to apply to all bodily injury (including death), property damage or loss, personal and advertising injury and other covered loss, however occasioned, occurring during the policy term, shall be endorsed to add Landlord and any party holding an interest to which this Lease may he subordinated as an additional insured, and shall provide that such coverage shall be "primary" and non-contributing with any insurance maintained by Landlord, which shall be excess insurance only. Such coverage shall also contain endorsements including employees as additional insureds if not covered by Tenant's Commercial General Liability Insurance. All such insurance shall provide for the severability of interests of insureds; and shall be written on an "occurrence" basis, which shall afford coverage for all claims based on acts, omissions, injury and damage, which occurred or arose (or the onset of which occurred or arose) in whole or in part during the policy period.
3. Workers' Compensation and Employers' Liability Insurance. Workers' Compensation Insurance as required by any Regulation, and Employers' Liability Insurance in amounts not less than One Million Dollars ($1,000,000) each accident for bodily injury by accident; One Million Dollars ($1,000,000) policy limit for bodily injury by disease; and One Million Dollars ($1,000,000) each employee for bodily injury by disease.
4. Commercial Auto Liability Insurance. Commercial auto liability insurance with a combined limit of not less than One Million Dollars ($1,000,000) for bodily injury and property damage for each accident. Such insurance shall cover liability relating to any auto (including owned, hired and non-owned autos).
5. Alterations Requirements. In the event Tenant shall desire to perform any Alterations, Tenant shall deliver to Landlord, prior to commencing such Alterations (i) evidence satisfactory to Landlord that Tenant carries "Builder's Risk" insurance covering construction of such Alterations in an amount and form approved by Landlord, (ii) such other insurance as Landlord shall non-discriminatorily and reasonably require, and (iii) a lien and completion bond or other security in form and amount satisfactory to Landlord if the estimated cost of such Alterations exceeds $200,000.
6. General Insurance Requirements. All coverages described in this Paragraph 8.B. shall be endorsed to (i) provide Landlord with thirty (30) days' notice of cancellation or change in terms; and (ii) waive all rights of subrogation by the insurance carrier against Landlord. If at any time during the Term the amount or coverage of insurance which Tenant is required to carry under this Paragraph 8.B. is, in Landlord's reasonable judgment, less than the amount or type of insurance coverage typically carried by owners or tenants of properties located in the general area in which the Premises are located which are similar to and operated for similar purposes as the Premises or if Tenant's use of the Premises should change with or without Landlord's consent, Landlord shall have the right to require Tenant to increase the amount or change the types of insurance coverage required under this Paragraph 8.B. All insurance policies required to be carried by Tenant under this Lease shall be written by companies rated A X or better in "Best's Insurance Guide" and authorized to do business in the State of California. In any event deductible amounts under all insurance policies required to be carried by Tenant under this Lease shall not exceed One Hundred Thousand Dollars ($100,000.00) per occurrence, provided that Tenant maintains a tangible net worth of at least Two Hundred Fifty Million Dollars ($250,000,000.00) as reasonably determined by Landlord, or, if Tenant's tangible net worth is less than Two Hundred Fifty Million Dollars ($250,000,000.00), such deductible amounts shall not exceed Five Thousand Dollars ($5,000.00) per occurrence. Tenant shall deliver to Landlord on or before the Term Commencement Date, and thereafter at least thirty (30) days before the expiration dates of' the expired policies, certified copies of Tenant's insurance policies, or a certificate evidencing the same issued by the insurer thereunder; and, if Tenant shall fail to procure such insurance, or to deliver such policies or certificates, Landlord may, at Landlord's option and in addition to Landlord's other remedies in the event of a default by Tenant hereunder, procure the same for the account of Tenant, and the cost thereof shall be paid to Landlord as Additional Rent.
7. Self-insurance; Deductibles. All or any portion of the coverages Tenant is required to maintain under this Lease may be maintained under a program of Tenant self-insurance or under policies that include self-insured retentions or deductibles larger than those typically carried by similarly situated tenants. Before the Term Commencement Date, Tenant shall advise Landlord of the self-insurance program, specifying limits and amounts of umbrella coverage and self-insured retentions, or deductibles. Landlord is considered to consent to such self insurance program as long as it is effective and Tenant's tangible net worth and current net assets (as reported to Landlord on a quarterly basis and confirmed by audited financial statements prepared in accordance with generally accepted accounting principles) exceed Two Hundred Fifty Million Dollars ($250,000,000.00) and Fifty Million Dollars ($50,000,000.00), respectively.
3. Tenant's Indemnification. Tenant shall indemnify, defend by counsel reasonably acceptable to Landlord, protect and hold Landlord and each of its directors, officers, shareholders, partners, lenders, members, managers, contractors, affiliates and employees (collectively, "Landlord Indemnitees") harmless from and against any and all claims, liabilities, losses, costs, loss of rents, liens, damages, injuries or expenses, including reasonable attorneys' and consultants' fees and court costs, demands, causes of action, or judgments, directly or indirectly arising out of or related to: (1) claims of injury to or death of persons or damage to property occurring or resulting directly or indirectly from the use or occupancy of the Premises, Building or Project by Tenant or Tenant's Parties, or from activities or failures to act of Tenant or Tenant's Parties; (2) claims arising from work or labor performed, or for materials or supplies furnished to or at the request or for the account of Tenant in connection with performance of any work done for the account of Tenant within the Premises or Project; (3) claims arising from any breach or default on the part of Tenant in the performance of any covenant contained in this Lease; and (4) claims arising from the negligence or intentional acts or omissions of Tenant or Tenant's Parties. The foregoing indemnity by Tenant shall not be applicable to claims to the extent arising from the gross negligence or willful misconduct of Landlord. Landlord shall not be liable to Tenant and Tenant hereby waives all claims against Landlord for any injury to or death of, or damage to any person or property or business loss in or about the Premises, Building or Project by or from any cause whatsoever (other than Landlord's gross negligence or willful misconduct) and, without limiting the generality of the foregoing, whether caused by water leakage of any character from the roof, walls, basement or other portion of the Premises, Building or Project, or caused by gas, fire, oil or electricity in, on or about the Premises, Building or Project, acts of God or of third parties, or any matter outside of the reasonable control of Landlord. The provisions of this Paragraph shall survive the expiration or earlier termination of this Lease.
4. Indemnification. Landlord shall indemnify, defend by counsel reasonably acceptable to Tenant, protect and hold Tenant and each of its directors, officers, shareholders, partners, lenders, members, managers, contractors, affiliates and employees ("Tenant's Indemnitees") harmless from and against any and all claims, liabilities, losses, costs, damages, injuries or expenses, including reasonable attorneys' and consultants' fees and court costs, demands, causes of action, or judgments arising out of or relating to the gross negligence or willful misconduct of Landlord or Landlord's agents or employees. Notwithstanding the foregoing or anything to the contrary contained in this Lease, Landlord shall in no event be liable to Tenant and Tenant hereby waives all claims against Landlord for any injury or damage to any person or property in or about the Premises, Building or Project, including without limitation the common areas, whether caused by theft, fire, rain or water leakage of any character from the roof, walls, plumbing, sprinklers, pipes, basement or any other portion of the Premises, Building or Project, or caused by gas, fire, oil or electricity in, on or about the Premises, Building or Project, or from any other systems except in each case to the extent caused by the gross negligence or willful misconduct of Landlord, or by acts of God (including without limitation flood or earthquake), acts of a public enemy, riot, strike, insurrection, war, court order, requisition or order of governmental body or authority, or for any damage or inconvenience which may arise through repair, subject to and except as expressly otherwise provided in Paragraph 9 or 10 of this Lease. In addition, notwithstanding anything to the contrary contained in this Lease, Landlord shall in no event be liable under this Paragraph or under any other provision of this Lease for (i) injury to Tenant's business or any loss of income or profit therefrom or from consequential damages, or (ii) sums up to the amount of insurance proceeds received by Tenant. The foregoing indemnity by Landlord shall not be applicable to claims to the extent arising from the negligence or willful misconduct of Tenant or Tenant's Parties. The foregoing indemnity by Landlord shall survive the expiration or earlier termination of this Lease.
9. WAIVER OF SUBROGATION

Landlord and Tenant each waives any claim, loss or cost it might have against the other for any injury to or death of any person or persons, or damage to or theft, destruction, loss, or loss of use of any property (a "Loss"), to the extent the same is insured against (or is required to be insured against under the terms hereof) under any property damage insurance policy covering the Building, the Premises, Landlord's or Tenant's fixtures, personal property, leasehold improvements, or business, regardless of whether the negligence of the other party caused such Loss.

10. LANDLORD'S REPAIRS AND MAINTENANCE

Landlord, at its sole cost and expense and not as an Operating Expense, shall maintain in good repair, reasonable wear and tear excepted, the structural soundness of the (a) roof, (b) foundations, and (c) exterior walls of the Building. The term "exterior walls" as used herein shall not include windows, glass or plate glass, doors, special store fronts or office entries. Any damage caused by or repairs necessitated by any negligence or act of Tenant or Tenant's Parties may be repaired by Landlord at Landlord's option and Tenant's expense, subject to the waiver of subrogation set forth in Paragraph 9 above. Tenant shall immediately give Landlord written notice of any defect or need of repairs in such components of the Building for which Landlord is responsible, after which Landlord shall have a reasonable opportunity and the right to enter the Premises at all reasonable times to repair same. Landlord's liability with respect to any defects, repairs, or maintenance for which Landlord is responsible under any of the provisions of this Lease shall be limited to the cost of such repairs or maintenance, and there shall be no abatement of rent and no liability of Landlord by reason of any injury to or interference with Tenant's business arising from the making of repairs, alterations or improvements in or to any portion of the Premises, the Building or the Project or to fixtures, appurtenances or equipment in the Building, except as provided in Paragraph 24 or this Paragraph 10. In the event that Tenant's Permitted Use of the Premises is materially and adversely impaired as a result in defects in design or construction of the Base Building Work, Tenant's Rent shall abate but only to the extent Landlord receives rental abatement insurance proceeds allocable thereto. By taking possession of the Premises, Tenant accepts them as being suitable for the Permitted Use and Tenant's intended operations in the Premises, whether or not any notice of acceptance is given. Tenant agrees and acknowledges that, subject to the express covenants, representations and warranties of Landlord set forth in this Lease, the lease of the Premises pursuant hereto is on an "as is" basis, in that there are no express or implied covenants, representations or warranties by Landlord not expressly set forth in this Lease. Tenant hereby waives all common law and statutory rights or provisions inconsistent herewith, whether now or hereinafter in effect (including, without limitation, Sections 1941, 1941.1, and 1941.2 of the California Civil Code, as amended from time to time). Landlord shall use reasonable efforts to maintain the common areas of the Project in a manner consistent with the manner of maintenance of common areas in comparable commercial projects in the vicinity of the Project at all times during the Term with the cost thereof constituting an Operating Expense under Paragraph 7 (subject to the limitations on items which may be included in Operating Expenses as expressly set forth in Paragraph 7).

11. TENANT'S REPAIRS AND MAINTENANCE

Tenant shall at all times during the Term at Tenant's expense maintain all parts of the Premises and such portions of the Building as are within the exclusive control of Tenant (including, without limitation, all plate glass) in a first-class, good, clean and secure condition and promptly make all necessary repairs and replacements, as determined by Landlord, with materials and workmanship of the same or similar character, kind and as high a quality as the original, each as reasonably acceptable to Landlord. Notwithstanding anything to the contrary contained herein, but subject to the waiver of subrogation set forth in Paragraph 9 above), Tenant shall be responsible, at its expense, for the repair of any damage to the Premises or the Building or Project resulting from or caused by any negligence or act of Tenant or Tenant's Parties, which repair shall be made by Landlord or Tenant, in Landlord's discretion. The cost of any such repair incurred by Landlord shall be paid by Tenant to Landlord within thirty (30) days following demand, subject to the waiver of subrogation set forth in Paragraph 9 above.

12. ALTERATIONS
1. Tenant shall not make, or allow to be made, any alterations, physical additions, improvements or partitions, including without limitation the attachment of any fixtures or equipment, in, about or to the Premises ("Alterations") without obtaining the prior written consent of Landlord, which consent shall not be unreasonably withheld with respect to proposed Alterations which: (a) comply with all applicable Regulations; (b) are, in Landlord's reasonable opinion, compatible with the Building or the Project and its mechanical, plumbing, electrical, heating/ventilation/air conditioning systems, and will not cause the Building or Project or such systems to be required to be modified to comply with any Regulations (including, without limitation, the Americans With Disabilities Act); and (c) will not interfere with the use and occupancy of any other portion of the Building or Project by any other tenant or its invitees. The initial Tenant's Work, as defined in Exhibit C hereto, shall not be considered an "Alteration," as that term is defined above. Specifically, but without limiting the generality of the foregoing, Landlord shall have the right of written consent for all plans and specifications for the proposed Alterations, construction means and methods, all appropriate permits and licenses, any contractor or subcontractor to be employed on the work of Alterations, and the time for performance of such work, and may impose reasonable rules and regulations for contractors and subcontractors performing such work. Tenant shall also supply to Landlord any documents and information reasonably requested by Landlord in connection with Landlord's consideration of a request for approval hereunder. Notwithstanding the foregoing, Tenant shall have the right, without consent of, but upon at least ten (10) business days' prior written notice (as provided under Paragraph 12.B below) to, Landlord, to make non-structural, cosmetic Alterations within the interior of the Premises (and which are not visible from the outside of the Premises), which do not impair the value of the Building, and which cost, in the aggregate, less than Fifty Thousand Dollars ($50,000.00) in any twelve (12) month period during the Term of this Lease, provided that such Alterations shall nevertheless he subject to all of the remaining requirements of this Paragraph 12, including without limitation, subparagraphs (a) through (c) above and payment of the administration fee referred to in Paragraph 12.B below, other than the requirement of Landlord's prior consent. All Alterations shall be performed by duly licensed contractors or subcontractors reasonably acceptable to Landlord, proof of insurance shall be submitted to Landlord as required under Paragraph 8.B above, and Landlord reserves the right to impose reasonable rules and regulations for contractors and subcontractors. Tenant shall, if requested by Landlord, promptly furnish Landlord with complete as-built plans and specifications for any Alterations performed by Tenant to the Premises, at Tenant's sole cost and expense.
2. Tenant shall cause all Alterations to be accomplished in a first-class, good and workmanlike manner, and to comply with all applicable Regulations and Paragraph 27 hereof. Tenant shall at Tenant's sole expense, perform any additional work required under applicable Regulations due to the Alterations hereunder. No review or consent by Landlord of or to any proposed Alteration or additional work shall constitute a waiver of Tenant's obligations under this Paragraph 12, nor constitute any warranty or representation that the same complies with all applicable Regulations, for which Tenant shall at all times be solely responsible. Tenant shall reimburse Landlord for all reasonable costs which Landlord may incur in connection with granting approval to Tenant for any such Alterations, including any reasonable costs or expenses which Landlord may incur in electing to have outside architects and engineers review said plans and specifications, and shall pay Landlord an administration fee of five percent (5%) of the cost of the Alterations as Additional Rent hereunder. All such Alterations shall remain the property of Tenant until the expiration or earlier termination of this Lease, at which time they shall be and become the property of Landlord; provided, however, that Landlord may, at Landlord's option, require that Tenant, at Tenant's expense, remove any or all Alterations made by Tenant and restore the Premises by the expiration or earlier termination of this Lease, to their condition existing prior to the construction of any such Alterations. All such removals and restoration shall be accomplished in a first-class and good and workmanlike manner so as not to cause any damage to the Premises or Project whatsoever. In the alternative, at Landlord's election, Tenant shall pay to Landlord the reasonable cost of performing any such removal and restoration of Alterations which would otherwise be the responsibility of Tenant hereunder, such cost to include a reasonable charge for Landlord's overhead and profit as provided above, and such amount may be deducted from the Security Deposit or any other sums or amounts held by Landlord under this Lease. If Tenant fails to remove such Alterations or Tenant's trade fixtures or furniture or other personal property, Landlord may keep and use them or remove any of them and cause them to be stored or sold in accordance with applicable law, at Tenant's sole expense. In addition to and wholly apart from Tenant's obligation to pay Tenant's Proportionate Share of Operating Expenses, Tenant shall be responsible for and shall pay prior to delinquency any taxes or governmental service fees, possessory interest taxes, fees or charges in lieu of any such taxes, capital levies, or other charges imposed upon, levied with respect to or assessed against its fixtures or personal property, on the value of Alterations within the Premises, and on Tenant's interest pursuant to this Lease, or any increase in any of the foregoing based on such Alterations. To the extent that any such taxes are not separately assessed or billed to Tenant, Tenant shall pay the amount thereof as invoiced to Tenant by Landlord.
3. In compliance with Paragraph 27 hereof, at least ten (10) business days before beginning construction of any Alteration, Tenant shall give Landlord written notice of the expected commencement date of that construction to permit Landlord to post and record a notice of non-responsibility. Upon substantial completion of construction, if the law so provides, Tenant shall cause a timely notice of completion to be recorded in the office of the recorder of the county in which the Building is located. Within thirty (30) days following substantial completion of any Alteration, Tenant shall deliver two (2) complete sets of as-built drawings certified by Tenant and Tenant's contractor as being true and correct, which certification shall survive the expiration or termination of this Lease.
4. Notwithstanding anything to the contrary contained in Paragraph 12.A, at the time Landlord gives its consent for any Alterations requiring Landlord's consent pursuant thereto, Tenant shall also be notified whether or not Landlord will require that such Alterations be removed upon the expiration or earlier termination of this Lease. If Landlord fails to so notify Tenant, it shall be assumed that Landlord will not require their removal.
13. SIGNS
1. Tenant shall not place, install, affix, paint or maintain any signs, notices, graphics or banners whatsoever or any window decor which is visible in or from public view, the common areas or the exterior of the Premises or the Building, in or on any exterior window or window fronting upon any common areas or service area without Landlord's prior written approval which Landlord shall have the right to withhold in its absolute and sole discretion; provided that Tenant's name shall be included in any Building-standard door and directory signage, if any, in accordance with Landlord's Building signage program, including without limitation, payment by Tenant of any fee charged by Landlord for maintaining such signage, which fee shall constitute Additional Rent hereunder. Any installation of signs, notices, graphics or banners on or about the Premises or Project approved by Landlord shall be subject to any Regulations and to any other requirements imposed by Landlord. Tenant shall remove all such signs or graphics by the expiration or any earlier termination of this Lease. Such installations and removals shall be made in such manner as to avoid injury to or defacement of the Premises, Building or Project and any other improvements contained therein, and Tenant shall repair any injury or defacement including without limitation discoloration caused by such installation or removal.
2. Subject to Tenant's obtaining the approval of Landlord and all appropriate governmental authorities and Tenant's compliance with all Regulations and sign criteria to be developed by Landlord for the Project, and provided Tenant is not at the time of installation in default under this Lease, Tenant shall have the exclusive right to exterior Building "crown" signage (meaning signage identification on the Building facade above the highest windowline of the Building and below the top of the Building facade). The parties hereby acknowledge that plans and specifications for such Building "crown" signage have not been prepared or approved by the parties. However, subject to Tenant's obtaining the approval of all appropriate governmental authorities and Tenant's compliance with all Regulations with respect to such Building "crown" signage, Landlord shall reasonably cooperate with Tenant to reach agreement upon professionally designed and prepared Building "crown" signage reasonably acceptable to Tenant, and to consult with Tenant in terms of Building signage plans hereafter submitted to the City of San Mateo. Tenant shall be solely responsible for the cost of any Building modifications required to accommodate such Building "crown" signage Tenant shall be responsible for all costs incurred in connection with the fabrication, placement, operation, maintenance, repair and, upon termination of this Lease or at such time as Tenant's rights pursuant to this Paragraph cease, removal of such signage and repair of any damage caused by such removal. Such costs shall include, without limitation, all required permits and approvals. The insurance and indemnity provisions of this Lease shall apply with respect to all costs, losses and liabilities related in any way to such signage Prior to Tenant's fabrication of such signage Tenant shall submit to Landlord for Landlord's written approval, detailed drawings indicating, among other things, the layout, design, style, materials and color of such signage Landlord shall not be deemed to have approved the Tenant's sign plans, unless approved by Landlord in writing. Landlord shall approve or disapprove any proposed sign plans submitted to Landlord for Landlord's approval within five (5) business days after Landlord's receipt thereof. The placement, operation, maintenance, repair and removal of such signage shall be subject to such conditions as may be reasonably imposed by Landlord. The rights granted Tenant pursuant to this Paragraph shall be subject to Tenant's operating its business from not less than fifty percent (50%) of the Rentable Area within the original Premises, and such rights are personal to the original Tenant named in this Lease and shall not inure to the benefit of any assignee, subtenant or other transferee of Tenant's interest in this Lease or the Premises (other than an "Affiliate" of Tenant, as defined below).
14. INSPECTION/POSTING NOTICES

After reasonable notice, except in emergencies where no prior notice shall be required, Landlord and Landlord's agents and representatives, shall have the right to enter the Premises to inspect the same, to clean, to perform such work as may be permitted or required hereunder, to make repairs, improvements or alterations to the Premises, Building or Project or to other tenant spaces therein, to deal with emergencies, to post such notices as may be permitted or required by law to prevent the perfection of liens against Landlord's interest in the Project or to exhibit the Premises to prospective tenants, purchasers, encumbrancers or to others, or for any other purpose as Landlord may deem necessary or desirable; provided, however, that Landlord shall use reasonable efforts not to unreasonably interfere with Tenant's business operations. Tenant shall not be entitled to any abatement of Rent by reason of the exercise of any such right of entry. Tenant waives any claim for damages for any injury or inconvenience to or interference with Tenant's business, any loss of occupancy or quiet enjoyment of the Premises, and any other loss occasioned thereby. Landlord shall at all times have and retain a key with which to unlock all of the doors in, upon and about the Premises, excluding Tenant's vaults and safes or special security areas (designated in advance), and Landlord shall have the right to use any and all means which Landlord may deem necessary or proper to open said doors in an emergency, in order to obtain entry to any portion of the Premises, and any entry to the Premises or portions thereof obtained by Landlord by any of said means, or otherwise, shall not be construed to he a forcible or unlawful entry into, or a detainer of, the Premises, or an eviction, actual or constructive, of Tenant from the Premises or any portions thereof. At any time within six (6) months prior to the expiration of the Term or following any earlier termination of this Lease or agreement to terminate this Lease, Landlord shall have the right to erect on the Premises, Building and/or Project a suitable sign indicating that the Premises are available for lease.

15. SERVICES AND UTILITIES
1. Provided Tenant shall not be in default hereunder, and subject to the provisions elsewhere herein contained (including, without limitation, in Exhibit C hereto) and to the rules and regulations of the Building, Landlord shall furnish to the Premises during generally recognized business days (currently defined as 8 a.m. to 6 p.m.), to be determined by Landlord (but exclusive, in any event, of Saturdays, Sundays and legal holidays), water for lavatory and drinking purposes and electricity, heat and air conditioning as usually furnished or supplied for use of the Premises for reasonable and normal office use as of the date of the substantial completion of the Tenant's Work (but not including above-standard or continuous cooling for excessive heat-generating machines, excess lighting or equipment), janitorial services during the times and in the manner that such services are, in Landlord's judgment, customarily furnished in comparable office buildings in the immediate market area, and elevator service, which shall mean non-exclusive service either by non-attended automatic elevators or elevators with attendants, or both, at the option of Landlord. Upon Landlord's receipt of written request by Tenant, Landlord shall make available additional or after-hours electricity, heating or air conditioning to Tenant, and Tenant shall pay upon demand to Landlord a reasonable charge for such services as determined by Landlord and any other extraordinary operating costs that result from Tenant's use of the Premises. Tenant agrees to keep and cause to be kept closed all window covering when necessary because of the sun's position, and Tenant also agrees at all times to cooperate fully with Landlord and to abide by all of the regulations and requirements which Landlord may reasonably prescribe for the proper functioning and protection of electrical, heating, ventilating and air conditioning systems. Wherever heat-generating machines, excess lighting or equipment are used in the Premises which affect the temperature otherwise maintained by the air conditioning system, Landlord reserves the right to install supplementary air conditioning units in the Premises and the cost thereof, including the cost of installation and the cost of operation and maintenance thereof, shall be paid by Tenant to Landlord upon demand by Landlord.
2. Tenant shall not without written consent of Landlord use any apparatus, equipment or device in the Premises, including without limitation, computers, electronic data processing machines, copying machines, and other machines, using excess lighting or using electric current, water, or any other resource in excess of or which will in any way increase the amount of electricity, water, or any other resource being furnished or supplied for the use of the Premises for reasonable and normal office use, or which will require additions or alterations to or interfere with the Building power distribution systems; nor connect with electric current, except through existing electrical outlets in the Premises or water pipes, any apparatus, equipment or device for the purpose of using electrical current, water, or any other resource. If Tenant shall require water or electric current or any other resource in excess of that furnished or supplied for the use of the Premises for reasonable and normal office use as reasonably determined by Landlord, Tenant shall first procure the written consent of Landlord which Landlord may refuse, to the use thereof, and Landlord may cause a special meter to be installed in the Premises at Tenant's sole cost and expense so as to measure the amount of water, electric current or other resource consumed for any such other use. Tenant shall pay directly to Landlord upon demand as an addition to and separate from payment of Operating Expenses the cost of all such additional resources, energy, utility service and meters (and of installation, maintenance and repair thereof and of any additional circuits or other equipment necessary to furnish such additional resources, energy, utility or service). Landlord may add to the separate or metered charge a recovery of additional expense incurred in keeping account of the excess water, electric current or other resource so consumed. Following receipt of Tenant's request to do so, Landlord shall use good faith efforts to restore any service specifically to be provided under Paragraph 15 that becomes unavailable and which is in Landlord's reasonable control to restore; provided, however, that Landlord shall in no case be liable for any damages directly or indirectly resulting from nor shall the Rent or any monies owed Landlord under this Lease herein reserved be abated by reason of: (a) the installation, use or interruption of use of any equipment used in connection with the furnishing of any such utilities or services, or any change in the character or means of supplying or providing any such utilities or services or any supplier thereof, (b) (1) the failure to furnish or delay in furnishing any such utilities or services when such failure or delay is caused by acts of God or the elements, labor disturbances of any character, or any other accidents or any other reason whatsoever, or (2) because of any interruption of service due to Tenant's use of water, electric current or other resource in excess of that being supplied or furnished for the use of the Premises as of the date Tenant takes possession of the Premises; (c) the inadequacy, limitation, curtailment, rationing or restriction on use of water, electricity, gas or any other form of energy or any other service or utility whatsoever serving the Premises or Project, whether by Regulation or otherwise; or (d) the partial or total unavailability of any such utilities or services to the Premises or the Building or the diminution in the quality or quantity thereof, whether by Regulation or otherwise; or (e) any interruption in Tenant's business operations as a result of any such occurrence; nor shall any such occurrence constitute an actual or constructive eviction of Tenant or a breach of an implied warranty by Landlord. Notwithstanding the foregoing, if Tenant is prevented from using, and does not use, all or part of the Premises (the "Affected Area") as a result of a Essential Services Interruption Event, as defined below, if this Essential Services Interruption Event continues for three (3) consecutive business days after Landlord's receipt of notice from Tenant of the Essential Services Interruption Event (the "Eligibility Period"), the Rent payable under this Lease shall be abated after the expiration of the Eligibility Period for such time that Tenant continues to be prevented from using, and does not use, the Affected Area in the proportion that the rentable area of the Affected Area bears to the total rentable area of the Premises, but only to the extent Landlord actually receives rental loss insurance proceeds allocable thereto. If, however, Tenant reoccupies any portion of the Premises during this period, the Rent allocable to this reoccupied portion (based on the proportion that the rentable area of the reoccupied portion of the Premises bears to the total rentable area of the Premises) shall be payable by Tenant from the date on which Tenant reoccupies this portion of the Premises. An "Essential Services Interruption Event" shall mean the failure of or interruption in essential services required to be supplied by Landlord to the Premises during ordinary business hours of generally recognized business days which occurs solely as a result of an event described in clause (a), (b), (c) or (d) above. In the event of a stoppage or interruption of services, Landlord shall diligently attempt to resume such services as promptly as practicable. Landlord shall further have no obligation to protect or preserve any apparatus, equipment or device installed by Tenant in the Premises, including without limitation by providing additional heating or air conditioning. Landlord shall be entitled to cooperate voluntarily and in a reasonable manner with the efforts of national, state or local governmental agencies or utility suppliers in reducing energy or other resource consumption. The obligation to make services available hereunder shall be subject to the limitations of any such voluntary, reasonable program. In addition, Landlord reserves the right to select or to change the supplier or provider of any such utility or service from time to time provided Tenant's service is not interrupted as a result thereof. Tenant shall have no right to contract with or otherwise obtain any electrical or other such service for or with respect to the Premises or Tenant's operations therein from any supplier or provider of any such service. Tenant shall cooperate with Landlord and any supplier or provider of such services designated by Landlord from time to time to facilitate the delivery of such services to Tenant at the Premises and to tile Building and Project, including without limitation allowing Landlord and Landlord's suppliers or providers, and their respective agents and contractors, reasonable access to the Premises for the purpose of installing, maintaining, repairing, replacing or upgrading such service or any equipment or machinery associated therewith.
3. Tenant shall pay, upon demand, for all utilities furnished to the Premises, or if not separately billed to or metered to Tenant, Tenant's Proportionate Share of all charges jointly serving the Project or Common Areas, as applicable, in accordance with Paragraph 7. All sums payable under this Paragraph 15 shall constitute Additional Rent hereunder.
16. SUBORDINATION AND ATTORNMENT
1. Except as otherwise provided herein, this Lease shall be and is hereby declared to be subject and subordinate at all times to: (a) all around leases or underlying leases which may now exist or hereafter be executed affecting the Premises and/or the land upon which the Premises and Project are situated, or both; and (b) any mortgage or deed of trust which may now exist or be placed upon the Building, the Project and/or the land upon which the Premises or the Project are situated, or said ground leases or underlying leases, or Landlord's interest or estate in any of said items which is specified as security. Notwithstanding the foregoing, Landlord shall have the right to subordinate or cause to be subordinated any such ground leases or underlying leases or any such liens to this Lease. If any ground lease or underlying lease terminates for any reason or any mortgage or deed of trust is foreclosed or a conveyance in lieu of foreclosure is made for any reason, Tenant shall, notwithstanding any subordination, attorn to and become the Tenant of the successor in interest to Landlord provided that Tenant shall not he disturbed in its possession under this Lease by such successor in interest so long as Tenant is not in default under this Lease beyond any applicable cure period. Within ten (10) days after request by Landlord, Tenant shall execute and deliver any additional documents evidencing Tenant's attornment or the subordination of this Lease with respect to any such ground leases or underlying leases or any such mortgage or deed of trust, in the form reasonably requested by Landlord or by any ground landlord, mortgagee, or beneficiary under a deed of trust, subject to such nondisturbance requirement. Notwithstanding the foregoing, it shall be a condition precedent to Tenant's obligation to hereafter attorn to or subordinate this Lease to the rights of any trust deed beneficiary, mortgagee or ground lessor, that Landlord shall secure from such beneficiary, mortgagee or ground lessor a written agreement of subordination, attornment and non-disturbance in form reasonably designated by such beneficiary, mortgagee or ground lessor (a "SNDA") which would provide, without limitation, that so long as Tenant is not in default hereunder beyond any applicable cure period, Tenant may remain in possession of the Premises pursuant to the terms hereof and without any diminution of Tenant's rights should Landlord become in default with respect to such deed of trust, mortgage or ground lease or should the Premises become the subject of any action to foreclose any mortgage or to dispossess Landlord. Such SNDA would provide, among other things, that the new owner following any foreclosure, sale or conveyance shall not be (i) liable for any act or omission of any prior landlord or with respect to events occurring prior to acquisition of ownership; (ii) subject to any offsets or defenses which Tenant might have against any prior landlord; (iii) bound by prepayment of more than one (1) month's Rent; or (iv) liable to Tenant for any security deposit not actually received by such new owner. Each ground landlord, mortgagee, or beneficiary under a deed of trust shall be an express third party beneficiary of the provisions of this Paragraph 16 and any other provisions of this Lease that are for the benefit of such party.
2. Tenant covenants and agrees that in the event that any proceedings are brought for the foreclosure of any mortgage or deed of trust, or if any ground or master lease is terminated, it shall attorn, without any deductions or set-offs whatsoever, to the purchaser upon any such foreclosure sale or deed in lieu thereof, or to the lessor of such ground or master lease, as the case may be, if so requested to do so by such purchaser or lessor, and to recognize such purchaser or lessor as "Landlord" under this Lease. If requested, Tenant shall enter into a new lease with that successor on the same terms and conditions as are contained in this Lease (for the unexpired portion of the Term then remaining).
17. FINANCIAL STATEMENTS

At the request of Landlord from time to time and not more often than one time in any twelve (12) month period, Tenant shall provide to Landlord Tenant's and any guarantor's current financial statements or other information discussing financial worth of Tenant and any guarantor, which Landlord shall use solely for purposes of this Lease and in connection with the ownership, management, financing and disposition of the Project. Tenant's publicly available financial information shall satisfy the above requirements unless Landlord has reasonable belief that Tenant's financial condition or credit rating have declined to a level which is unacceptable to Landlord. Other than disclosure (a) to Landlord's employees, agents, consultants and representatives, (b) any lender, investor or purchaser of the Project, (c) as required by Regulations or (d) in connection with enforcement of Landlord's rights under this Lease, such financial statements shall be kept confidential by Landlord. Landlord shall give written notice to any person or entity receiving Tenant's financial statements pursuant to clause (a) or (b) above of the confidential nature of such financial statements and shall request that such financial statements be maintained by such person or entity as confidential.

18. ESTOPPEL CERTIFICATE

Tenant agrees from time to time, within ten (10) days after request of Landlord, to deliver to Landlord, or Landlord's designee, an estoppel certificate stating that this Lease is in full force and effect, that this Lease has not been modified (or stating all modifications, written or oral, to this Lease), the date to which Rent has been paid, the unexpired portion of this Lease, that there are no current defaults by Landlord or Tenant under this Lease (or specifying any such defaults), that the leasehold estate granted by this Lease is the sole interest of Tenant in the Premises and/or the land at which the Premises are situated, and such other matters pertaining to this Lease as may be reasonably requested by Landlord or any mortgagee, beneficiary, purchaser or prospective purchaser of the Building or Projector any interest therein. Tenant agrees that if Tenant fails to execute and deliver such certificate within such ten (10) day period, Landlord may execute and deliver such certificate on Tenant's behalf and that the information and statements contained in such certificate shall be binding on Tenant. Landlord and Tenant intend that any statement delivered pursuant to this Paragraph may be relied upon by Landlord, any mortgagee, beneficiary, purchaser or prospective purchaser of the Building or Project or any interest therein. The parties agree that Tenant's obligation to furnish such estoppel certificates in a timely fashion is a material inducement for Landlord's execution of this Lease, and shall be an event of default (without any cure period that might be provided under Paragraph 26.A(3) of this Lease) if Tenant fails to fully comply or makes any material misstatement in any such certificate. Landlord agrees from time to time. within ten (10) days after request of Tenant, to deliver to Tenant, or Tenant's designee, an estoppel certificate stating that this Lease is in full force and effect, that this Lease has not been modified (or stating all modifications, written or oral, to this Lease), the date to which Rent has been paid, the unexpired portion of this Lease, and that, to Landlord's actual knowledge, there are no current defaults by Tenant under this Lease (or specifying any such defaults of which Landlord has actual knowledge).

19. SECURITY DEPOSIT

Tenant agrees to deposit with Landlord, a security deposit as stated in Paragraph 39.D below (the "Security Deposit"), which sum shall be held and owned by Landlord, without obligation to pay interest, as security for the performance of Tenant's covenants and obligations under this Lease. The Security Deposit is not an advance rental deposit or a measure of damages incurred by Landlord in case of Tenant's default. Upon the occurrence of any event of default by Tenant, Landlord may from time to time, without prejudice to any other remedy provided herein or by law, use such fund as a credit to the extent necessary to credit against any arrears of Rent or other payments due to Landlord hereunder, and any other damage, injury, expense or liability caused by such event of default, and Tenant shall pay to Landlord, on demand, the amount so applied in order to restore the Security Deposit to its original amount. Although the Security Deposit shall be deemed the property of Landlord, any remaining balance of such deposit shall be returned by Landlord to Tenant at such time after termination of this Lease that all of Tenant's obligations under this Lease have been fulfilled, reduced by such amounts as may be required by Landlord to remedy defaults on the part of Tenant in the payment of Rent or other obligations of Tenant under this Lease, to repair damage to the Premises, Building or Project caused by Tenant or any Tenant's Parties and to clean the Premises. Landlord may use and commingle the Security Deposit with other funds of Landlord. Tenant hereby waives the provisions of Section 1950.7 of the California Civil Code, and all other provisions of any Regulations, now or hereinafter in force, which restricts the amount or types of claim that a landlord may make upon a security deposit or imposes upon a landlord (or its successors) any obligation with respect to the handling or return of security deposits.

20. LIMITATION OF TENANT'S REMEDIES

The obligations and liability of Landlord to Tenant for any default by Landlord under the terms of this Lease are not personal obligations of Landlord or of the individual or other partners of Landlord or its or their partners, directors, officers, or shareholders, and Tenant agrees to look solely to Landlord's interest in the Project for the recovery of any amount from Landlord, and shall not look to other assets of Landlord nor seek recourse against the assets of the individual or other partners of Landlord or its or their partners, directors, officers or shareholders. Any lien obtained to enforce any such judgment and any levy of execution thereon shall be subject and subordinate to any lien, mortgage or deed of trust on the Project. Under no circumstances shall Tenant have the right to offset against or recoup Rent or other payments due and to become due to Landlord hereunder except as expressly provided in this Lease, which Rent and other payments shall be absolutely due and payable hereunder in accordance with the terms hereof. Notwithstanding anything to the contrary contained in this Lease, except in the event of an unauthorized holding over by Tenant in the Premises following the expiration of the Term or earlier termination of this Lease (in which event the provisions of this sentence shall not be applicable for the benefit of Tenant), in no case shall either party be liable to the other for any lost profits, damage to business, or any form of special, indirect or consequential damage on account of any breach of this Lease or otherwise, notwithstanding anything to the contrary contained in this Lease.

21. ASSIGNMENT AND SUBLETTING
1.  
   1. General. This Lease has been negotiated to be and is granted as an accommodation to Tenant. Accordingly, this Lease is personal to Tenant and any Permitted Transferee(s), and Tenant's rights granted hereunder do not include the right to assign this Lease or sublease the Premises, or to receive any excess, either in installments or lump sum, over the Rent which is expressly reserved by Landlord as hereinafter provided, except as otherwise expressly hereinafter provided. Tenant shall not assign or pledge this Lease or sublet the Premises or any part thereof, whether voluntarily or by operation of law, or permit the use or occupancy of the Premises or any part thereof by anyone other than Tenant, or suffer or permit any such assignment, pledge, subleasing or occupancy, without Landlord's prior written consent except as provided herein. If Tenant desires to assign this Lease or sublet any or all of the Premises, Tenant shall give Landlord written notice (the "Transfer Notice") at least thirty (30) days prior to the anticipated effective date of the proposed assignment or sublease, which shall contain all of the information reasonably requested by Landlord to address Landlord's decision criteria specified hereinafter. Landlord shall then have a period of thirty (30) days following receipt of the Transfer Notice to notify Tenant in writing that Landlord elects, in its reasonable discretion: (i) to terminate this Lease as to the space so affected as of the date so requested by Tenant, provided that in the case of a subletting, Landlord may not so elect to terminate this Lease in the case of a subletting for a period (inclusive of option terms granted to the subtenant under the sublease) of (1) not more than five (5) years as to a subletting during the initial six (6) years of the Lease Term, or (11) not more than three (3) years or such lesser period as then remains in the Lease Term as to a subletting following the initial six (6) years of the Lease Term, and provided, that in consideration of such election to terminate, on or before the termination effective date, Landlord shall pay to Tenant the "Recapture Amount" (as hereinafter defined); (ii) to consent to the proposed assignment or sublease, subject, however, to Landlord's prior written consent of the proposed assignee or subtenant and of any related documents or agreements associated with the assignment or sublease; or (iii) to withhold its consent to the proposed assignment or sublease in accordance with this Paragraph 21. Consent to any assignment or subletting shall not constitute consent to any subsequent transaction to which this Paragraph 21 applies. Notwithstanding anything to the contrary contained herein, in the event Landlord so elects pursuant to clause (i) above to terminate this Lease as to the space so affected, Tenant shall have the right to nullify such termination by agreeing, in written notice delivered to Landlord within ten (10) days following Tenant's receipt of Landlord's notice so electing to terminate, to withdraw the applicable Transfer Notice and Tenant's request for the applicable assignment or subletting specified therein. As used herein, the "Recapture Amount" shall mean the unamortized cost, as of the effective date of such early termination of this Lease (based on monthly straight-line amortization over the initial one hundred forty-four (144) month Term of this Lease) of the sum of (x) the Additional Tenant Work, and (y) up to the initial $20.00 per square foot of Premises Rentable Area of the Tenant Improvements, as such costs are evidenced by the "Evidence of Lien-Free Completion of Tenant's Work" (as defined in Exhibit C attached hereto).
   2. Conditions of Landlord's Consent. Without limiting the other instances in which it may be reasonable for Landlord to withhold Landlord's consent to an assignment or subletting, Landlord and Tenant acknowledge that it shall be reasonable for Landlord to withhold Landlord's consent in the following instances: if the proposed assignee does not agree to be bound by and assume in writing the obligations of Tenant under this Lease in form and substance satisfactory to Landlord; the use of the Premises by such proposed assignee or subtenant would not be a Permitted Use or would violate any exclusivity or other arrangement which Landlord has with any other tenant or occupant or any Regulation or would increase the Occupancy Density or Parking Density of the Building or Project, or would otherwise result in an undesirable tenant mix for the Project as reasonably determined by Landlord; the proposed assignee or subtenant is not of sound financial condition as determined by Landlord in Landlord's reasonable discretion; the proposed assignee or subtenant is a governmental agency; the proposed assignee or subtenant does not have a good reputation as a tenant of property or a good business reputation; the proposed assignee or subtenant (or an affiliate of such assignee or subtenant) is a person with whom Landlord is negotiating to lease space in the Project or is a present tenant of the Project and Landlord or an affiliate of Landlord has space available or will have space available in the Building or Project which space satisfies the material requirements of such present tenant with respect to its needs for additional space, including the approximate square footage, the approximately timing of the leasehold estate and the nature of the existing improvements or the ability to construct such improvements; the assignment or subletting would entail any Alterations which would lessen the value of the leasehold improvements in the Premises or use of any Hazardous Materials or other noxious use or use which may disturb other tenants of the Project; or Tenant is in default of any obligation of Tenant under this Lease, or Tenant has defaulted under this Lease on three (3) or more occasions during the twelve (12) months preceding the date that Tenant shall request consent. Failure by or refusal of Landlord to consent to a proposed assignee or subtenant shall not cause a termination of this Lease. Upon a termination under Paragraph 21.A(1)(i), Landlord may lease the Premises to any party, including parties with whom Tenant has negotiated an assignment or sublease, without incurring any liability to Tenant. At the sole option of Landlord, a surrender and termination of this Lease, shall operate as an assignment to Landlord of some or all subleases or subtenancies. Landlord shall exercise this option by giving notice of that assignment to such subtenants on or before the effective date of the surrender and termination. In connection with each request for assignment or subletting, and regardless of whether Landlord consents to such request, Tenant shall pay to Landlord Landlord's standard fee for approving such requests, as well as all costs incurred by Landlord or any mortgagee or ground lessor in approving each such request and effecting any such transfer, including, without limitation, reasonable attorneys' fees.
   3. Permitted Transfers. An "Affiliate" means any entity that (i) controls, is controlled by, or is under common control with Tenant, (ii) results from the transfer of all or substantially all of Tenant's assets or stock, or (iii) results from the merger or consolidation of Tenant with another entity. "Control" means the direct or indirect ownership of more than fifty percent (50%) of the voting securities of an entity or possession of the right to vote more than fifty percent (50%) of the voting interest in the ordinary direction of the entity's affairs. Notwithstanding anything to the contrary contained in this Lease, Landlord's consent is not required for and Landlord's recapture rights and right to share in bonus rent shall not apply to any assignment of this Lease or sublease or other occupancy agreement of all or a portion of the Premises to an Affiliate so long as the following conditions are met: (a) at least ten (10) business days before any such assignment or sublease, Landlord receives written notice of such assignment or sublease (as well as any documents or information reasonably requested by Landlord regarding the proposed intended transfer and the transferee), unless such disclosure is prohibited by applicable law, in which event Tenant shall provide notice and such other documents as soon as is reasonably practicable and to the extent and in accordance with applicable laws; (b) Tenant is not then in default under this Lease; (c) if the transfer is an assignment or any other transfer to an Affiliate other than a sublease, the intended assignee assumes in writing all of Tenant's obligations under this Lease relating to the Premises in form satisfactory to Landlord or, if the transfer is a sublease, the intended sublessee accepts the sublease in form satisfactory to Landlord; (d) the intended transferee has a tangible net worth, as evidenced by financial statements delivered to Landlord and certified by an independent certified public accountant in accordance with generally accepted accounting principles that are consistently applied, at least equal to the tangible net worth of Tenant as of the execution of this Lease; (e) the Premises shall continue to be operated solely for the use specified in the Basic Lease Information; and (f) Tenant shall pay to Landlord Landlord's standard fee for approving assignments and subleases (which fee shall not exceed one thousand dollars ($1,000.00)) and all costs reasonably incurred by Landlord or any mortgagee or ground lessor for such assignment or subletting, including, without limitation, reasonable attorneys' fees. No transfer to an Affiliate in accordance with this subparagraph shall relieve Tenant named herein of any obligation under this Lease or alter the primary liability of Tenant named herein for the payment of Rent or for the performance of any other obligation to be performed by Tenant, including the obligations contained in Paragraph 25 with respect to any Affiliate. Each such transfer to an Affiliate shall be a "Permitted Transfer" and the transferee of each Permitted Transfer shall be a "Permitted Transferee."
2. Bonus Rent. Any Rent or other consideration realized by Tenant under any such sublease or assignment in excess of the Rent payable hereunder, after (i) amortization of a reasonable brokerage commission and reasonable attorneys' fees and improvement costs incurred by Tenant solely in connection with such sublease or assignment (and except to the extent paid for or reimbursed by Landlord) and (ii) Tenant's recovery from such excess Rent or consideration paid by such subtenant or assignee of the then unamortized cost (based on monthly straight-line amortization over the initial one hundred forty- four (144) month Term of this Lease) of the sum of (x) the Additional Tenant Work plus (y) the initial $20.00 per square foot of Premises Rentable Area of the Tenant Improvements, as evidenced by the "Evidence of Lien-Free Completion of Tenant's Work" (as defined in Exhibit C attached hereto), shall be divided and paid, fifty percent (50%) to Tenant, fifty percent (50%) to Landlord, except in connection with a Permitted Transfer. In any subletting or assignment undertaken by Tenant, Tenant shall diligently seek to obtain a sublease reflecting fair market rent for comparable space (including, but not limited to, sublease space) available for leasing in the geographical area in which the Building is located.
3. Corporation. If Tenant is a corporation, a transfer of corporate shares by sale, assignment, bequest, inheritance, operation of law or other disposition (including such a transfer to or by a receiver or trustee in federal or state bankruptcy, insolvency or other proceedings) resulting in a change in the present control of such corporation or any of its parent corporations by the person or persons owning a majority of said corporate shares, shall constitute an assignment for purposes of this Lease. Notwithstanding anything to the contrary in this Lease, the transfer of outstanding capital stock or other listed equity interests, or the purchase of outstanding capital stock or other listed equity interests, or the purchase of equity interests issued in an initial public offering of stock through the "over-the-counter" market or any recognized national or international securities exchange shall not be included in determining whether control has been transferred.
4. Unincorporated Entity. If Tenant is a partnership, joint venture, unincorporated limited liability company or other unincorporated business form, a transfer of the interest of persons, firms or entities responsible for managerial control of Tenant by sale, assignment, bequest, inheritance, operation of law or other disposition, so as to result in a change in the present control of said entity and/or of the underlying beneficial interests of said entity and/or a change in the identity of the persons responsible for the general credit obligations of said entity shall constitute an assignment for all purposes of this Lease.
5. Liability. No assignment or subletting by Tenant, permitted or otherwise, shall relieve Tenant of any obligation under this Lease or any guarantor of this Lease of any liability under its guaranty or alter the primary liability of the Tenant named herein for the payment of Rent or for the performance of any other obligations to be performed by Tenant, including obligations contained in Paragraph 25 with respect to any assignee or subtenant. Landlord, at its option, may collect rent or other amounts or any portion thereof directly from any assignee, subtenant, or other occupant of the Premises, permitted or otherwise, and apply the net rent collected to the Rent payable hereunder, but no such collection shall be deemed to be a waiver of this Paragraph 21, or the acceptance of the assignee, subtenant or occupant as tenant, or a release of Tenant from (he further performance by Tenant of the obligations of Tenant under this Lease or of any guarantor. Any assignment or subletting which conflicts with the provisions hereof shall be void.
22. AUTHORITY

Landlord, and the person or persons, if any, signing on behalf of Landlord, jointly and severally, represent and warrant that Landlord has full right and authority to enter into this Lease and to perform all of Landlord's obligations hereunder and that all persons signing this Lease on its behalf are authorized to do. Tenant and the person or persons, if any, signing on behalf of Tenant, jointly and severally represent and warrant that Tenant has full right and authority to enter into this Lease, and to perform all of Tenant's obligations hereunder, and that all persons signing this Lease on its behalf are authorized to do so.

23. CONDEMNATION
1. Condemnation Resulting in Termination. If the whole or any substantial part of the Premises should be taken or condemned for any public use under any Regulation, or by right of eminent domain, or by private purchase in lieu thereof (a "Taking"), and the taking would prevent or materially interfere with the Permitted Use of the Premises, either party shall have the right to terminate this Lease at its option upon written notice within 30 days of such Taking. If any material portion of the Building is subject to a Taking or if any material portion of the Project unrelated to the Building is subject to a Taking and such Taking has a material adverse effect on the Building or occupancy of the Building, Landlord may terminate this Lease at its option upon written notice within 30 days of such Taking. In either of such events, the Rent shall be abated during the unexpired portion of this Lease, effective when the physical Taking of said Premises shall have occurred.
2. Condemnation Not Resulting in Termination. If a portion of the Project of which the Premises are a part is subject to a Taking, and the Taking prevents or materially interferes with the Permitted Use of the Premises, and this Lease is not terminated as provided in Paragraph 23.A. above, the Rent payable hereunder during the unexpired portion of this Lease shall be reduced, beginning on the date when the physical Taking shall have occurred, to such amount determined by Landlord as may be fair and reasonable under all of the circumstances, but only after giving Landlord credit for all sums received or to be received by Tenant by the condemning authority. Notwithstanding anything to the contrary contained in this Paragraph, if the temporary use or occupancy of any part of the Premises shall be taken or appropriated under power of eminent domain during the Term, this Lease shall be and remain unaffected by such Taking or appropriation and Tenant shall continue to pay in full all Rent payable hereunder by Tenant during the Term; in the event of any such temporary appropriation or taking, Tenant shall be entitled to receive that portion of any award which represents compensation for the use of or occupancy of the Premises during the unexpired Term.
3. Award. Landlord shall be entitled to (and Tenant hereby absolutely and irrevocably assigns to Landlord) any and all payment, income, rent, award or any interest therein whatsoever which may be paid or made in connection with such Taking or conveyance and Tenant shall have no claim against Landlord or otherwise for any sums paid by virtue of such proceedings, whether or not attributable to the value of any unexpired portion of this Lease, except as expressly provided in this Lease.
4. Waiver of CCP§1265.130. Each party waives the provisions of California Civil Code Procedure Section 1265.130 or any amendment thereto or successor statute allowing either party to petition the superior court to terminate this Lease as a result of a partial taking.
24. CASUALTY DAMAGE
1. General. If the Premises or Building should be damaged or destroyed by fire, tornado, earthquake or other casualty (collectively, "Casualty"), Tenant shall give immediate written notice thereof to Landlord. Within ninety (90) days after Landlord's receipt of such notice, Landlord shall notify Tenant (such notice is referred to herein as "Landlord's Casualty Response Notice") whether in Landlord's estimation material restoration of the Premises can reasonably be made within one hundred eighty (180) days from the date of Landlord's Casualty Response Notice (or, if longer, such longer time as is estimated for the completion of such restoration). Landlord's determination shall be binding on Tenant.
2. Within 180 Days. If the Premises or Building should be damaged by Casualty to such extent that material restoration can in Landlord's estimation be reasonably completed within one hundred eighty (180) days from the date of Landlord's Casualty Response Notice, this Lease shall not terminate. Provided that insurance proceeds are received by Landlord to fully repair the damage, Landlord shall proceed to rebuild and repair the Premises and Building diligently and in the manner determined by Landlord, except that Landlord shall not be required to rebuild, repair or replace any part of any Alterations which may have been placed on or about the Premises or that were paid for by Tenant. If the Premises are untenantable in whole or in part following such damage, the Rent payable hereunder during the period in which they are untenantable shall be abated proportionately, but only to the extent of rental abatement insurance proceeds received by Landlord during the time and to the extent the Premises are unfit for occupancy.
3. Greater than 180 Days. If the Premises or Building should be damaged by Casualty to such extent that rebuilding or repairs cannot in Landlord's estimation be reasonably completed within one hundred eighty (180) days after the date of Landlord's Casualty Response Notice, then Landlord shall have the option of either: (1) terminating this Lease effective upon the date of the occurrence of such damage, in which event the Rent shall be abated during the unexpired portion of this Lease; or (2) electing to rebuild or repair the Premises diligently and in the manner determined by Landlord. Landlord shall notify Tenant of its election within ninety (90) days after Landlord's receipt of notice of the damage or destruction. Notwithstanding the above, Landlord shall not be required to rebuild, repair or replace any part of any Alterations which may have been placed, on or about the Premises or that were paid for by Tenant. If the Premises are untenantable in whole or in part following such damage, the Rent payable hereunder during the period in which they are untenantable shall be abated proportionately, but only to the extent of rental abatement insurance proceeds received by Landlord during the time and to the extent the Premises are unfit for occupancy.
4. Tenant's Termination Right. If Landlord's Casualty Response Notice estimates that the rebuilding or repairs to the applicable Casualty cannot in Landlord's reasonable estimation be reasonably completed within two hundred seventy (270) days after the date of Landlord's Casualty Response Notice, then Tenant shall have the option of terminating this Lease by delivery of written notice of Tenant's election to terminate to Landlord (which termination shall be effective upon the date of Landlord's receipt of such notice, but subject to the provisions of this Paragraph 24 respecting Tenant's abatement rights following the occurrence of such casualty, as applicable), within thirty (30) days following Tenant's receipt of notice of Landlord's Casualty Response Notice.
5. Tenant's Fault. Notwithstanding anything herein to the contrary, if the Premises or any other portion of the Building are damaged by Casualty resulting from the fault, negligence, or breach of this Lease by Tenant or any of Tenant's Parties, Base Rent and Additional Rent shall not be diminished during the repair of such damage and Tenant shall be liable to Landlord for the cost and expense of the repair and restoration of the Building caused thereby to the extent such cost and expense is not covered by insurance proceeds or waived hereunder.
6. Insurance Proceeds. Notwithstanding anything herein to the contrary, if the Premises or Building are damaged or destroyed and are not fully covered by the insurance proceeds received by Landlord or if the holder of any indebtedness secured by a mortgage or deed of trust covering the Premises requires that the insurance proceeds be applied to such indebtedness, then in either case Landlord shall have the right to terminate this Lease by delivering written notice of termination to Tenant within ninety (90) days after the date of notice to Landlord that said damage or destruction is not fully covered by insurance or such requirement is made by any such holder, as the case may be, whereupon this Lease shall terminate.
7. Waiver. This Paragraph 24 shall be Tenant's sole and exclusive remedy in the event of damage or destruction to the Premises or the Building. As a material inducement to Landlord entering into this Lease, Tenant hereby waives any rights it may have under Sections 1932, 1933(4), 1941 or 1942 of the Civil Code of California or any amendments thereto or successor statutes with respect to any destruction of the Premises, Landlord's obligation for tenantability of the Premises and Tenant's right to make repairs and deduct the expenses of such repairs, or under any similar law, statute or ordinance now or hereafter in effect.
8. Tenant's Personal Property. In the event of any damage or destruction of the Premises or the Building, under no circumstances shall Landlord be required to repair any injury or damage to, or make any repairs to or replacements of, Tenant's personal property.
25. HOLDING OVER

Unless Landlord expressly consents in writing to Tenant's holding over, Tenant shall be unlawfully and illegally in possession of the Premises, whether or not Landlord accepts any rent from Tenant or any other person while Tenant remains in possession of the Premises without Landlord's written consent. If Tenant shall retain possession of the Premises or any portion thereof without Landlord's consent following the expiration of this Lease or sooner termination for any reason, then Tenant shall pay to Landlord for each day of such retention the amount of any damages suffered by Landlord due to Tenant's holding over, plus the greater of the following: (i) one-hundred fifty percent (150%) of the amount of daily rental plus Operating Expenses as of the last month prior to the date of expiration or earlier termination, or (ii) the fair rental value of the Premises as reasonably determined by Landlord. Tenant shall also indemnify, defend, protect and hold Landlord harmless from any loss, liability or cost, including consequential and incidental damages and reasonable attorneys' fees, incurred by Landlord resulting from delay by Tenant in surrendering the Premises, including, without limitation, any claims made by the succeeding tenant founded on such delay. Acceptance of Rent by Landlord following expiration or earlier termination of this Lease, or following demand by Landlord for possession of the Premises, shall not constitute a renewal of this Lease, and nothing contained in this Paragraph 25 shall waive Landlord's right of reentry or any other right. Additionally, if upon expiration or earlier termination of this Lease, or following demand by Landlord for possession of the Premises, Tenant has not fulfilled its obligation with respect to repairs and cleanup of the Premises or any other Tenant obligations as set forth in this Lease, then Landlord shall have the right to perform any such obligations as it deems necessary at Tenant's sole cost and expense, and any time required by Landlord to complete such obligations shall be considered a period of holding over and the terms of this Paragraph 25 shall apply. The provisions of this Paragraph 25 shall survive any expiration or earlier termination of this Lease.

26. DEFAULT
1. Events of Default. The occurrence of any of the following shall constitute an event of default on the part of Tenant:
1. Abandonment. Abandonment of the Premises for a continuous period in excess of five (5) days. Tenant waives any right to notice Tenant may have under Section 1951.3 of the Civil Code of the State of California, the terms of this Paragraph 26.A. being deemed such notice to Tenant as required by said Section 1951.3.
2. Nonpayment of Rent. Failure to pay any installment of Rent or any other amount due and payable hereunder upon the date when said payment is due, such failure continuing for three (3) business days after written notice of such failure, as to which time is of the essence. Such notice shall replace rather than supplement any statutory notice required under Code of Civil Procedure Section 1161 or any similar or successor statute.
3. Other Obligations. Failure to perform any obligation, agreement or covenant under this Lease other than those matters specified in subparagraphs (1) and (2) of this Paragraph 26.A., and in Paragraphs 8, 16, 18, 25 and 27, such failure continuing for fifteen (15) days after written notice of such failure, as to which time is of the essence, provided that if more than fifteen (15) days is reasonably required for the completion of the cure of such failure, then Tenant shall not be deemed to be in default hereunder so long as such cure is promptly commenced within such fifteen (15) day period and thereafter diligently and continuously prosecuted to completion but in no event later than within ninety (90) days following Tenant's receipt of such notice.
4. General Assignment. A general assignment by Tenant or any guarantor for the benefit of creditors.
5. Bankruptcy. The filing of any voluntary petition in bankruptcy by Tenant or any guarantor, or the filing of an involuntary petition by Tenant's or any guarantor's creditors, which involuntary petition remains undischarged for a period of thirty (30) days. If under applicable law, the trustee in bankruptcy or Tenant or any guarantor has the right to affirm this Lease and continue to perform the obligations of Tenant or any guarantor hereunder, such trustee Tenant or any guarantor shall, in such time period as may be permitted by the bankruptcy court having jurisdiction, cure all defaults of Tenant hereunder outstanding as of the date of the affirmance of this Lease and provide to Landlord such adequate assurances as may he necessary to ensure Landlord of the continued performance of Tenant's or any guarantor's obligations under this Lease or guaranty.
6. Receivership. The employment of a receiver to take possession of substantially all of Tenant's or any guarantor's assets or Tenant's leasehold of the Premises, if such appointment remains undismissed or undischarged for a period of fifteen (15) days after the order therefor.
7. Attachment. The attachment, execution or other judicial seizure of all or substantially all of Tenant's or any guarantor's assets or Tenant's leasehold of the Premises, if such attachment or other seizure remains undismissed or undischarged for a period of fifteen (15) days after the levy thereof.
8. Insolvency. The admission by Tenant or any guarantor in writing of its inability to pay its debts as they become due.
2. Remedies Upon Default.
1. Termination. In the event of the occurrence of any event of default, Landlord shall have the right to give a written termination notice to Tenant, and on the date specified in such notice, Tenant's right to possession shall terminate, and this Lease shall terminate unless on or before such date all Rent in arrears and all costs and expenses incurred by or on behalf of Landlord hereunder shall have been paid by Tenant and all other events of default of this Lease by Tenant at the time existing shall have been fully remedied to the satisfaction of Landlord. At any time after such termination, Landlord may recover possession of the Premises or any part thereof and expel and remove therefrom Tenant and any other person occupying the same, including any subtenant or subtenants notwithstanding Landlord's consent to any sublease, by any lawful means, and again repossess and enjoy the Premises without prejudice to any of the remedies that Landlord may have under this Lease, or at law or equity by any reason of Tenant's default or of such termination. Landlord hereby reserves the right, but shall not have the obligation, to recognize the continued possession of any subtenant. The delivery or surrender to Landlord by or on behalf of Tenant of keys, entry codes, or other means to bypass security at the Premises shall not terminate this Lease.
2. Continuation After Default. Even though an event of default may have occurred, this Lease shall continue in effect for so long as Landlord does not terminate Tenant's right to possession under Paragraph 26.B(1) hereof. Landlord shall have the remedy described in California Civil Code Section 1951.4 ("Landlord may continue this Lease in effect after Tenant's breach and abandonment and recover Rent as it becomes due, if Tenant has the right to sublet or assign, subject only to reasonable limitations"), or any successor code section. Accordingly, if Landlord does not elect to terminate this Lease on account of any event of default by Tenant, Landlord may enforce all of Landlord's rights and remedies under this Lease, including the right to recover Rent as it becomes due. Acts of maintenance, preservation or efforts to lease the Premises or the appointment of a receiver under application of Landlord to protect Landlord's interest under this Lease or other entry by Landlord upon the Premises shall not constitute an election to terminate Tenant's right to possession.
3. Requirement for Security Deposit. If Tenant is in default under Paragraph 26.A.(2) hereof and such default remains uncured for ten (10) days after such occurrence or such default occurs more than three times in any twelve (12) month period, Landlord may require that Tenant provide a Security Deposit in an amount equal to three (3) times the current month's Rent at the time of the most recent default.
3. Damages Upon Termination. Should Landlord terminate this Lease pursuant to the provisions of Paragraph 26.B(1) hereof, Landlord shall have the rights and remedies of a Landlord provided by Section 1951.2 of the Civil Code of the State of California, or any successor code sections. Upon such termination, in addition to any other rights and remedies to which Landlord may be entitled under applicable law or at equity, Landlord shall be entitled to recover from Tenant: (1) the worth at the time of award of the unpaid Rent and other amounts which had been earned at the time of termination, (2) the worth at the time of award of the amount by which the unpaid Rent and other amounts that would have been earned after the date of termination until the time of award exceeds the amount of such Rent loss that Tenant proves could have been reasonably avoided; (3) the worth at the time of award of the amount by which the unpaid Rent and other amounts for the balance of the Term after the time of award exceeds the amount of such Rent loss that the Tenant proves could be reasonably avoided; and (4) any other amount and court costs necessary to compensate Landlord for all detriment proximately caused by Tenant's failure to perform Tenant's obligations under this Lease or which, in the ordinary course of things, would be likely to result therefrom. The "worth at the time of award" as used in (1) and (2) above shall be computed at the Applicable Interest Rate (defined below). The "worth at the time of award" as used in (3) above shall be computed by discounting such amount at the Federal Discount Rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%). If this Lease provides for any periods during the Term during which Tenant is not required to pay Base Rent or if Tenant otherwise receives a Rent concession, then upon the occurrence of an event of default, Tenant shall owe to Landlord the full amount of such Base Rent or value of such Rent concession, plus interest at the Applicable Interest Rate, calculated from the date that such Base Rent or Rent concession would have been payable.
4. Late Charge. In addition to its other remedies, and the right to recover all other costs and expenses incurred by Landlord as a result of any late payment by Tenant, Landlord shall have the right without notice or demand to add to the amount of any payment required to be made by Tenant hereunder, and which is not paid and received by Landlord on or before the third (3rd) business day of each calendar month, an amount equal to five percent (5%) of the delinquency for each month or portion thereof that the delinquency remains outstanding to compensate Landlord for the loss of the use of the amount not paid and the administrative costs caused by the delinquency, the parties agreeing that Landlord's damage by virtue of such delinquencies would be extremely difficult and impracticable to compute and the amount stated herein represents a reasonable estimate thereof. Any waiver by Landlord of any late charges or failure to claim the same shall not constitute a waiver of other late charges or any other remedies available to Landlord.
5. Interest. Interest shall accrue on all sums not paid when due hereunder at the lesser of eighteen percent (18%) per annum or the maximum interest rate allowed by law ("Applicable Interest Rate") from the due date until paid.
6. Remedies Cumulative. All of the rights, privileges and elections or remedies of the parties are cumulative and not alternative, to the extent permitted by law and except as otherwise provided in this Lease (including, without limitation, in Paragraph 20 above).
7. Replacement of Statutory Notice Requirements. When this Lease requires service of a notice, that notice shall replace rather than supplement any equivalent or similar statutory notice, including any notice required by California Code of Civil Procedure Section 1161 or any similar or successor statute. When a statute requires service of a notice in a particular manner, service of that notice (or a similar notice required by this Lease) in the manner required by this Paragraph 26 shall replace and satisfy the statutory service-of-notice procedures, including those required by California Code of Civil Procedure Section 1162 or any similar or successor statute.
27. LIENS

Tenant shall at all times keep the Premises and the Project free from liens arising out of or related to work or services performed, materials or supplies furnished or obligations incurred by or on behalf of Tenant or in connection with work made, suffered or done by or on behalf of Tenant in or on the Premises or Project. If Tenant shall not, within fifteen (15) days following the imposition of any such lien, cause the same to be released of record by payment or posting of a proper bond, Landlord shall have, in addition to all other remedies provided herein and by law, the right, but not the obligation, to cause the same to be released by such means as Landlord shall deem proper, including payment of the claim giving rise to such lien. All sums paid by Landlord on behalf of Tenant and all expenses incurred by Landlord in connection therefor shall be payable to Landlord by Tenant on demand with interest at the Applicable Interest Rate as Additional Rent. Landlord shall have the right at all times to post and keep posted on the Premises any notices permitted or required by law, or which Landlord shall deem proper, for the protection of Landlord, the Premises, the Project and any other party having an interest therein, from mechanics' and materialmen's liens, and Tenant shall give Landlord not less than ten (10) business days prior written notice of the commencement of any work in the Premises or Project which could lawfully give rise to a claim for mechanics' or materialmen's liens to permit Landlord to post and record a timely notice of non-responsibility, as Landlord may elect to proceed or as the law may from time to time provide, for which purpose, if Landlord shall so determine, Landlord may enter the Premises. Tenant shall not remove any such notice posted by Landlord without Landlord's consent, and in any event not before completion of the work which could lawfully give rise to a claim for mechanics' or materialmen's liens.

28. INTENTIONALLY OMITTED
29. TRANSFERS BY LANDLORD

In the event of a sale or conveyance by Landlord of the Building or a foreclosure by any creditor of Landlord, the same shall operate to release Landlord from any liability upon any of the covenants or conditions, express Or implied, herein contained in favor of Tenant, to the extent required to be performed after the passing of title to Landlord's successor-in-interest. In such event, Tenant agrees to look solely to the responsibility of the successor-in-interest of Landlord under this Lease with respect to the performance of the covenants and duties of "Landlord" to be performed after the passing of title to Landlord's successor-in-interest. This Lease shall not be affected by any such sale and Tenant agrees to attorn to the purchaser or assignee. Landlord's successor(s)-in-interest shall not have liability to Tenant with respect to the failure to perform any of the obligations of "Landlord," to the extent required to be performed prior to the date such successor(s)-in-interest became the owner of the Building.

30. RIGHT OF LANDLORD TO PERFORM TENANT'S COVENANTS

All covenants and agreements to be performed by Tenant under any of the terms of this Lease shall be performed by Tenant at Tenant's sole cost and expense and without any abatement of Rent. If Tenant shall fail to pay any sum of money, other than Base Rent, required to be paid by Tenant hereunder or shall fail to perform any other act on Tenant's part to be performed hereunder, including Tenant's obligations under Paragraph 11 hereof, and such failure shall continue for fifteen (15) days after notice thereof by Landlord, in addition to the other rights and remedies of Landlord, Landlord may make any such payment and perform any such act on Tenant's part. In the case of an emergency, no prior notification by Landlord shall be required. Landlord may take such actions without any obligation and without releasing Tenant from any of Tenant's obligations. All sums so paid by Landlord and all incidental costs incurred by Landlord and interest thereon at the Applicable Interest Rate, from the date of payment by Landlord, shall be paid to Landlord on demand as Additional Rent.

31. WAIVER

If either Landlord or Tenant waives the performance of any term, covenant or condition contained in this Lease, such waiver shall not be deemed to be a waiver of any subsequent breach of the same or any other term, covenant or condition contained herein, or constitute a course of dealing contrary to the expressed terms of this Lease. The acceptance of Rent by Landlord (including, without limitation, through any "lockbox") shall not constitute a waiver of any preceding breach by Tenant of any term, covenant or condition of this Lease, regardless of Landlord's knowledge of such preceding breach at the time Landlord accepted such Rent. Failure by Landlord to enforce any of the terms, covenants or conditions of this Lease for any length of time shall not be deemed to waive or decrease the right of Landlord to insist thereafter upon strict performance by Tenant. Waiver by Landlord of any term, covenant or condition contained in this Lease may only be made by a written document signed by Landlord, based upon full knowledge of the circumstances.

32. NOTICES

Each provision of this Lease or of any applicable governmental laws, ordinances, regulations and other requirements with reference to sending, mailing, or delivery of any notice or the making of any payment by Landlord or Tenant to the other shall be deemed to be complied with when and if the following steps are taken:

1. Rent. All Rent and other payments required to be made by Tenant to Landlord hereunder shall be payable to Landlord at Landlord's Remittance Address set forth in the Basic Lease Information, or at such other address as Landlord may specify from time to time by written notice delivered in accordance herewith. Tenant's obligation to pay Rent and any other amounts to Landlord under the terms of this Lease shall not be deemed satisfied until such Rent and other amounts have been actually received by Landlord.
2. Other. All notices, demands, consents and approvals which may or are required to be given by either party to the other hereunder shall be in writing and either personally delivered, sent by commercial overnight courier, mailed, certified or registered, postage prepaid or sent by facsimile with confirmed receipt (and with an original sent by commercial overnight courier), and in each case addressed to the party to be notified at the Notice Address for such party as specified in the Basic Lease Information or to such other place as the party to be notified may from time to time designate by at least fifteen (15) days notice to the notifying party. Notices shall be deemed served upon receipt or refusal to accept delivery. Tenant appoints as its agent to receive the service of all default notices and notice of commencement of unlawful detainer proceedings the person in charge of or apparently in charge of occupying the Premises at the time, and, if there is no such person, then such service may be made by attaching the same on the main entrance of the Premises.
3. Required Notices. Tenant shall immediately notify Landlord in writing of any notice of a violation or a potential or alleged violation of any Regulation that relates to the Premises or the Project, or of any inquiry, investigation, enforcement or other action that is instituted or threatened by any governmental or regulatory agency against Tenant or any other occupant of the Premises, or any claim that is instituted or threatened by any third party that relates to the Premises or the Project.
33. ATTORNEYS' FEES

If Landlord places the enforcement of this Lease, or any part thereof, or the collection of any Rent due, or to become due hereunder, or recovery of possession of the Premises in the hands of an attorney, Tenant shall pay to Landlord, upon demand, Landlord's reasonable attorneys' fees and court costs, whether incurred without trial, at trial, appeal or review. In any action which Landlord or Tenant brings to enforce its respective rights hereunder, the unsuccessful party shall pay all costs incurred by the prevailing party including reasonable attorneys' fees, to he fixed by the court, and said costs and attorneys' fees shall be a part of the judgment in said action.

34. SUCCESSORS AND ASSIGNS

This Lease shall be binding upon and inure to the benefit of Landlord, its successors and assigns, and shall be binding upon and inure to the benefit of Tenant, its successors, and to the extent assignment is approved by Landlord as provided hereunder, Tenant's assigns.

35. FORCE MAJEURE

If performance by a party of any portion of this Lease is made impossible by any prevention, delay, or stoppage caused by strikes, lockouts, labor disputes, acts of God, inability to obtain services, labor, or materials or reasonable substitutes for those items, government actions, civil commotions, fire or other casualty, or other causes beyond the reasonable control of the party obligated to perform, performance by that party for a period equal to the period of that prevention, delay, or stoppage is excused. Tenant's obligation to pay Rent, however, is not excused by this Paragraph 35.

36. SURRENDER OF PREMISES

Tenant shall, upon expiration or sooner termination of this Lease, surrender the Premises to Landlord in as good a condition as existed on the date Tenant originally took possession thereof, ordinary wear and tear excepted, provided that ordinary wear and tear shall not include repair and clean up items. Repair and clean up items shall include replacement of damaged or missing ceiling or floor tiles, window coverings or cover plates, removal of any Tenant-introduced markings, and repair of all holes and gaps, as well as the removal requirements contained in this Lease, all to the reasonable satisfaction of Landlord. Tenant shall remove all of its debris from the Project. At or before the time of surrender, Tenant shall comply with the terms of Paragraph 12.A. hereof with respect to Alterations to the Premises and all other matters addressed in such Paragraph. If the Premises are not so surrendered at the expiration or sooner termination of this Lease, the provisions of Paragraph 25 hereof shall apply. All keys to the Premises or any part thereof shall be surrendered to Landlord upon expiration or sooner termination of the Term. Tenant shall give written notice to Landlord at least thirty (30) days prior to vacating the Premises and shall meet with Landlord for a joint inspection of the Premises at the time of vacating, but nothing contained herein shall be construed as an extension of the Term or as a consent by Landlord to any holding over by Tenant. In the event of Tenant's failure to participate in such joint inspection, Landlord's inspection at or after Tenant's vacating the Premises shall conclusively be deemed correct for purposes of determining Tenant's responsibility for repairs and restoration.

37. PARKING

So long as Tenant is occupying the Premises, Tenant and Tenant's Parties shall have the right to use up to the number of non-exclusive parking spaces specified in the Basic Lease Information with such non-exclusive parking spaces being on an unreserved, nonexclusive, first come, first served basis, for use by passenger-size automobiles, in the parking areas in the Project designated from time to time by Landlord for use in common by tenants of the Project. The parking rights granted under this Paragraph 37 are personal to Tenant and are not transferable except to any assignee of Tenant's interest in this Lease or subtenant of, or other person granted a right to use, the Premises, in accordance with the provisions of this Lease.

Tenant may request additional parking spaces from time to time and if Landlord in its sole discretion agrees to make such additional spaces available for use by Tenant, such spaces shall be provided on a month-to- month unreserved and nonexclusive basis (unless otherwise agreed in writing by Landlord), and subject to such parking charges as Landlord shall determine, and shall otherwise be subject to such terms and conditions as Landlord may require.

Tenant shall at all times comply and shall cause all Tenant's Parties and visitors to comply with all Regulations and any rules and regulations established from time to time by Landlord relating to parking at the Project, including any keycard, sticker or other identification or entrance system, and hours of operation, as applicable.

Landlord shall have no liability for any damage to property or other items located in the parking areas of the Project, nor for any personal injuries or death arising out of the use of parking areas in the Project by Tenant or any Tenant's Parties. Without limiting the foregoing, if Landlord arranges for the parking areas to be operated by an independent contractor not affiliated with Landlord, Tenant acknowledges that Landlord shall have no liability for claims arising through acts or omissions of such independent contractor. In all events, Tenant agrees to look first to its insurance carrier and to require that Tenant's Parties look first to their respective insurance carriers for payment of any losses sustained in connection with any use of the parking areas.

Landlord reserves the right to assign specific spaces, and to reserve spaces for visitors, small cars, disabled persons or for other tenants or guests, and Tenant shall not park and shall not allow Tenant's Parties to park in any such assigned or reserved spaces. Tenant's parking shall be within those portions of the non-exclusive, unreserved parking areas as may be provided by Landlord from time to time for the purpose of parking motor vehicles for the Building, provided that such parking may be provided by tandem or stacked parking (which may be for two (2) or three (3) cars), provided that an attendant is available to coordinate such parking. Tenant may validate visitor parking by such method as Landlord may approve, at the validation rate from time to time generally applicable to visitor parking. Landlord also reserves the right to alter, modify, relocate or close all or any portion of the parking areas in order to make repairs or perform maintenance service, or to restripe or renovate the parking areas, or if required by casualty, condemnation, act of God, Regulations or for any other reason deemed reasonable by Landlord, provided that Tenant suffers no diminution in the number of unreserved parking spaces granted under this Lease and Tenant's designated parking is located within one-eighth (1/8th) of a mile of the entrance to the Building.

Tenant shall not be required to pay any charges for the parking to which Tenant is entitled as set forth in the Basic Lease Information (whether provided by stacked, tandem and/or valet serviced parking). However, to the extent Tenant obtains any additional parking for which a charge is applicable, Tenant shall pay to Landlord (or Landlord's parking contractor, if so directed in writing by Landlord), as Additional Rent hereunder, the monthly charges established from time to time by Landlord for such parking, on thirty (30) days prior notice. Such parking charges shall be payable in advance with Tenant's payment of Basic Rent. No deductions from the monthly parking charge shall be made for days or months during which the Tenant does not use any of the parking spaces entitled to be used by Tenant.

38. MISCELLANEOUS
1. General. The term "Tenant" or any pronoun used in place thereof shall indicate and include the masculine or feminine, the singular or plural number, individuals, firms or corporations, and their respective successors, executors, administrators and permitted assigns, according to the context hereof.
2. Time. Time is of the essence regarding this Lease and all of its provisions.
3. Choice of Law. This Lease shall in all respects be governed by the laws of the State or California.
4. Entire Agreement. This Lease, together with its Exhibits, addenda and attachments and the Basic Lease Information, contains all the agreements of the parties hereto and supersedes any previous negotiations. There have been no representations made by the Landlord or understandings made between the parties other than those set forth in this Lease and its Exhibits, addenda and attachments and the Basic Lease Information.
5. Modification. This Lease may not be modified except by a written instrument signed by the parties hereto. Subject to Tenant's one-time right to re-measure the Premises as set forth in Paragraph 39.A below, Tenant accepts the area of the Premises as specified in the Basic Lease Information as the approximate area of the Premises for all purposes under this Lease, and acknowledges and agrees that no other definition of the area (rentable, usable or otherwise) of the Premises shall apply. Except as expressly otherwise provided herein, Tenant shall in no event be entitled to a recalculation of the square footage of the Premises, rentable, usable or otherwise, and no recalculation, if made, irrespective of its purpose, shall reduce Tenant's obligations under this Lease in any manner, including without limitation the amount of Base Rent payable by Tenant or Tenant's Proportionate Share of the Building and of the Project.
6. Severability. If, for any reason whatsoever, any of the provisions hereof shall be unenforceable or ineffective, all of the other provisions shall be and remain in full force and effect.
7. Recordation. Tenant shall not record this Lease or a short form memorandum hereof.
8. Examination of Lease. Submission of this Lease to Tenant does not constitute an option or offer to lease and this Lease is not effective otherwise until execution and delivery by both Landlord and Tenant.
9. Accord and Satisfaction. No payment by Tenant of a lesser amount than the total Rent due nor any endorsement on any check or letter accompanying any check or payment of Rent shall be deemed an accord and satisfaction of full payment of Rent, and Landlord may accept such payment without prejudice to Landlord's right to recover the balance of such Rent or to pursue other remedies. All offers by or on behalf of Tenant of accord and satisfaction are hereby rejected in advance.
10. Easements. Landlord may grant easements on the Project and dedicate for public use portions of the Project without Tenant's consent; provided that no such grant or dedication shall materially interfere with Tenant's Permitted Use of the Premises. Upon Landlord's request, Tenant shall execute, acknowledge and deliver to Landlord documents, instruments, maps and plats necessary to effectuate Tenant's covenants hereunder.
11. Drafting and Determination Presumption. The parties acknowledge that this Lease has been agreed to by both the parties, that both Landlord and Tenant have consulted with attorneys with respect to the terms of' this Lease and that no presumption shall be created against Landlord because Landlord drafted this Lease. Except as otherwise specifically set forth in this Lease, with respect to any consent, determination or estimation of Landlord required or allowed in this Lease or requested of Landlord, Landlord's consent, determination or estimation shall be given or made solely by Landlord in Landlord's good faith opinion, whether or not objectively reasonable. If Landlord fails to respond to any request for its consent within the time period, if any, specified in this Lease, Landlord shall be deemed to have disapproved such request.
12. Exhibits. The Basic Lease Information, and the Exhibits, addenda and attachments attached hereto are hereby incorporated herein by this reference and made a part of this Lease as though fully set forth herein.
13. No Light, Air or View Easement. Any diminution or shutting off of light, air or view by any structure which may be erected on lands adjacent to or in the vicinity of the Building shall in no way affect this Lease or impose any liability on Landlord.
14. No Third Party Benefit. This Lease is a contract between Landlord and Tenant and nothing herein is intended to create any third party benefit.
15. Quiet Enjoyment. Upon payment by Tenant of the Rent, and upon the observance and performance of all of the other covenants, terms and conditions on Tenant's part to be observed and performed, Tenant shall peaceably and quietly hold and enjoy the Premises for the term hereby demised without hindrance or interruption by Landlord or any other person or persons lawfully or equitably claiming by, through or under Landlord, subject, nevertheless, to all of the other terms and conditions of this Lease. Landlord shall not be liable for any hindrance, interruption, interference or disturbance by other tenants or third persons, nor shall Tenant be released from any obligations under this Lease because of such hindrance, interruption, interference or disturbance.
16. Counterparts. This Lease may be executed in any number of counterparts, each of which shall be deemed an original.
17. Multiple Parties. If more than one person or entity is named herein as Tenant, such multiple parties shall have joint and several responsibility to comply with the terms of this Lease.
18. Prorations. Any Rent or other amounts payable to Landlord by Tenant hereunder for any fractional month shall be prorated based on a month of 30 days. As used herein, the term "fiscal year" shall mean the calendar year or such other fiscal year as Landlord may deem appropriate.
19. Authority. If either party is a corporation, partnership or limited liability company, each individual executing this Lease on behalf of said entity represents and warrants that he/she is duly authorized to execute and deliver this Lease on behalf of said entity in accordance with a duly adopted resolution of the board of directors or other authorizing body of said entity or in accordance with the bylaws or other governing documents of said entity, that that this Lease is binding upon said entity in accordance with its terms. Further, either party shall, within thirty (30) days after request by the other following execution of this Lease, deliver to the other party a copy of a resolution of the board of directors or other authorizing body of said entity authorizing or ratifying the execution and delivery of this Lease.
20. Mortgagee Protection. Tenant agrees to give any mortgagee(s) and/or trust deed holders whose name and address have been previously furnished by Tenant, by registered mail, a copy of any notice of default served upon Landlord. Tenant further agrees that if Landlord shall have failed to cure such default within the time provided for in this Lease (if any) then the mortgagees or trust deed holder(s) shall have an additional thirty (30) days within which to cure such default or, if such default cannot be cured within such thirty (30) days, then such additional time as may be necessary if, within such thirty (30) days, such Mortgagee or trust deed holder has commenced and is pursuing the remedies necessary to cure such default (including, but not limited to, commencement of foreclosure proceedings, if necessary to effect such cure), in which event this Lease shall not be terminated while such remedies are being pursued.
21. Brokerage Commission. Landlord shall pay a brokerage commission to Landlord's Broker in accordance with a separate agreement between Landlord and Landlord's Broker. Landlord shall have no further or separate obligation for payment of any commissions or fees to any other broker or finder. Tenant warrants to Landlord that Tenant's sole contact with Landlord or with the Premises in connection with this transaction has been directly with Landlord, Landlord's Broker and Tenant's Broker, and that no other broker or finder can properly claim a right to a commission or a finder's fee based upon contacts between the claimant and Tenant. Any commissions or fees payable to Tenant's Broker with respect to this transaction shall be paid by Landlord's Broker or Tenant, and Landlord shall have no obligation with respect thereto, Subject to the foregoing, Tenant agrees to indemnify and hold Landlord harmless from any claims or liability, including reasonable attorneys' fees, in connection with a claim by any person for a real estate broker's commission, finder's fee or other compensation based upon any statement, representation or agreement of Tenant, and Landlord agrees to indemnify and hold Tenant harmless from any such claims or liability, including reasonable attorneys' fees, based upon any statement, representation or agreement of Landlord.
39. ADDITIONAL PROVISIONS
1. Measurement of Premises. The parties hereby agree that the actual rentable areas of the Premises, the Building and the Project are intended to be determined by Landlord's architect in accordance with the rentable standards set forth in ANSI/BOMA Z65.1-1996. as promulgated by the Building Owners and Managers Association ("BOMA Standard"), which measurement standard shall include areas for management and servicing the Building and other areas used in common within the Building. Landlord's architect shall calculate and certify in writing to Landlord and Tenant the rentable square footage of the Premises. If Landlord's architect determines that the rentable square footage of the Premises is different from that stated in this Lease, Rent that is based on rentable square footage (including, without limitation, Tenant's Proportionate Share of the Building, common areas and Project) shall be recalculated in accordance with that determination. On the recalculation of Rent as provided herein, at Landlord's option, the parties shall execute an amendment to this Lease stating the recalculated Rent. Tenant shall have a one-time right, exercisable within twenty (20) business days after substantial completion of Tenant's Work to remeasure the Premises and the Building. Tenant shall complete the remeasurement within ten (10) business days after expiration of such twenty (20) business day period. In the event such remeasurement of the Premises and the Building by Tenant, within the time period specified above, demonstrates to Landlord's reasonable satisfaction that the rentable square footage measurement prepared by Landlord produces a square footage number in excess of or lower than the square footage number which would have resulted had the BOMA Standard been properly applied, certain items and concepts addressed in this Lease with respect to the Premises, Base Rent, Tenant's Proportionate Share, and all other matters related to the measurement of the Building and the Premises shall be adjusted effective as of the Term Commencement Date, to reflect the actual number of rentable square feet, as properly remeasured under the BOMA Standard. Tenant shall have no further right to remeasure the Premises or the Building. In the event that Landlord and Tenant are unable to agree upon the measurement of the Premises or the Building within a reasonable period of time, the arbitration process described in Paragraph 39.B below shall apply. Within thirty (30) days after Landlord delivers to Tenant final construction drawings for the Base Building Work, Tenant shall review such plans to determine whether such plans indicate that the square footage calculation reflected in the Basic Lease Information and Exhibit B is in conformance with the BOMA Standard. If Landlord makes any modification to the Building from as set forth on the those certain "50% Complete" set of construction drawings prepared by Gensler dated November 29, 2000, which increases Building Common Area but does not result in an increase in usable area of the Premises (as both such terms are defined in accordance with the BOMA Standard), then the rentable square footage of the Premises shall not be increased as a result of the addition of such Building Common Area. By way of example and without limitation, if Landlord encloses any mechanical or equipment area on the roof of the Building, such additional enclosed space shall not be included in Building Common Area for purposes of calculating the rentable square footage of the Premises.
2. Arbitration of Disputes.
1. The parties agree that any and all disputes, claims or controversies arising out of or relating to Paragraph 2 and/or Paragraph 39.A of this Lease, except matters entitled to "fast-track" adjudication, that are not resolved by their mutual agreement shall be submitted to final and binding arbitration before JAMS/ENDISPUTE, or its successor, pursuant to the United States Arbitration Act, 9 U.S.C. Sec. I et seq. Either party may commence the arbitration process called for in this Paragraph 39.B by filing a written demand for arbitration with JAMS/ENDISPUTE with a copy to the other party. The arbitration will be conducted in the County in which the Premises is located and in accordance with the provisions of JAMS/ENDISPUTE's Streamlined Arbitration Rules and Procedures in effect at the time of filing the demand for arbitration. The parties will cooperate with JAMS/ENDISPUTE and with one another in selecting an arbitrator from JAMS/ENDISPUTE's panel of neutrals, and in scheduling the arbitration proceedings. The parties covenant that they will participate in the proceedings in good faith, and that they will share equally in its costs, including, without limitation, the arbitrator's fees, provided that each party shall bear its own attorneys' fees in connection with any arbitration. The provisions of this Paragraph may be enforced by any Court of competent jurisdiction, and, in the event that the arbitration process continues through and including a final determination of liability in accordance with this provision, the prevailing party shall be entitled to an award of all costs, fees and expenses, including reasonable attorneys' fees, to be paid by the party against whom enforcement is ordered.
2. NOTICE: By initialing the space below you are agreeing to have all disputes, claims or controversies arising out Of Or relating to Paragraph 2 and/or Paragraph 39.A of the Lease, except matters entitled to "fast-track" adjudication, decided by neutral arbitration, and you are giving up any rights you might possess to have those matters litigated in a court or jury trial. By initialing in the space below you are giving up your judicial rights to discovery and appeal except to the extent that they are specifically provided for under this Paragraph 39.B. If you refuse to submit to arbitration after agreeing to this provision, you may be compelled to arbitrate under federal or state law. Your agreement to this arbitration provision is voluntary.

We have read and understand the foregoing and agree to submission of all disputes, claims or controversies arising out of or related to Paragraph 2 and/or Paragraph 39.A of this Lease, except for issues arising in connection with matters entitled to "fast-track" adjudication, to neutral arbitration in accordance with this Paragraph 39.B.

/s/ J.T.	/s/ J.A.
Landlord	Tenant

3. Training Use. Landlord acknowledges and agrees that Tenant may elect to use the Premises. in whole or in part, for training purposes, including holding training sessions during which the number of people within the Premises may exceed the occupancy Density set forth herein. Landlord hereby consents to such use including occupancy in excess of the Occupancy Density in connection therewith; provided that Tenant, at Tenant's expense, constructs or modifies the Additional Tenant Work and Tenant Improvements to accommodate such use in compliance with applicable Regulations (and in accordance with the provisions of this Lease governing such construction or modification by Tenant). Further, upon the expiration of the Term or earlier termination of this Lease, Tenant, at Landlord's option (exercised by written notice delivered to Tenant not later than ninety (90) days prior to the expiration of the Lease Term), shall be required to restore those areas of the Premises improved for use other than general office use and/or those areas not in compliance with Schedules 1, 2 and/or 3 of Exhibit C attached hereto to the following condition: remove all partitions, plumbing, any restroom facilities in their entirety (including, without limitation, mechanical, electrical and plumbing work specific to such restroom facilities) other than such restrooms as are customary (in terms of size and amenities) for first class general office use consistent with such Schedules 1, 2 and/or 3 of Exhibit C, floor covering, all telecommunications cabling, cabinetry, case work, kitchen fixtures and equipment (including, without limitation, any exhaust systems installed in connection with such kitchen); repair and patch concrete floor to smooth, level surface where removals have been made pursuant to the foregoing; terminate partitions adjacent to removed items in a workmanlike manner (with patching and matching as appropriate consistent with first class general office use improvements; and repair (with patching and matching as appropriate consistent with first class general office use improvements) the ceiling grid and tiles to provide for a continuous .grid and tiles that meet all applicable Regulations and the Standards as applicable to open office space. Tenant shall not be required to modify the HVAC system, fire sprinklers or electrical system of the Premises other than as expressly required pursuant to the foregoing provisions hereof.
4. Letter of Credit.
1. Delivery of Letter of Credit. In lieu of depositing a security deposit with Landlord, Tenant shall, within ninety (90) days following execution of this Lease, deliver to Landlord and cause to be in effect during the Lease Term (for so long as the same is required hereunder) an unconditional, irrevocable letter of credit ("LOC") in an amount equal to $28.00 per rentable square foot in the Premises (the "LOC Amount") having an initial term of not less than one (1) year and thereafter renewing automatically from year to year. The LOC shall be in a form acceptable to Landlord and shall be issued by an LOC bank selected by Tenant and acceptable to Landlord. Without limiting the generality of the foregoing, the LOC must permit one or more transfers of the LOC by Landlord in connection with any sale, assignment, mortgage, encumbrance or other transfer or disposition ("Transfer") of the Project, the Building or this Lease. No fee or other consideration may be charged by the LOC bank in connection with such Transfer (or, if any such fee is charged, then such fee shall be paid by Landlord). An LOC bank is a bank that accepts deposits. maintains accounts, has a local office that will negotiate a letter of credit, has a credit rating and financial condition reasonably acceptable to Landlord, and the deposits of which are insured by the Federal Deposit Insurance Corporation. Tenant shall pay all costs, expenses, points and/or fees incurred by Tenant in obtaining the LOC. The LOC shall not be mortgaged, assigned or encumbered in any manner whatsoever by Tenant. Tenant acknowledges that Landlord has the right to transfer or mortgage its interest in the Project, the Building and in this Lease and Tenant agrees that in the event of any such transfer or mortgage, Landlord shall have the right to transfer or assign the LOC and/or the LOC Security Deposit (as defined below) to the transferee or mortgagee, and in the event of such transfer, Tenant shall look solely to such transferee or mortgagee for the return of the LOC and/or the LOC Security Deposit.
2. Replacement of Letter of Credit. Tenant may, from time to time, replace any existing LOC with a new LOC if the new LOC (a) becomes effective at least thirty (30) days before expiration of the LOC that it replaces; (b) is in the required LOC amount; (c) is issued by an LOC bank acceptable to Landlord; and (d) otherwise complies with the requirements of this Paragraph 39.D.
3. Landlord's Right to Draw on Letter of Credit. Landlord shall hold the LOC as security for the performance of Tenant's obligations under this Lease. If, after notice and failure to cure within any applicable period provided in this Lease, Tenant defaults on any provision of this Lease. Landlord may, without prejudice to or limitation of any other remedy it has, draw all or any portion of the LOC necessary to (a) pay Rent or other sums in default; (b) pay or reimburse Landlord for any amount that Landlord may spend or become obligated to spend in exercising Landlord's rights under Paragraph 30 (Right of Landlord to Perform Tenant's Covenant); and/or (c) compensate Landlord for any expense, loss, liability, or damage that Landlord may suffer because of Tenant's default. If Tenant fails to renew or replace the LOC at least thirty (30) days before its expiration, Landlord may, without prejudice to any other remedy it has, draw on the entire amount of the LOC.
4. LOC Security Deposit. Any amount of the LOC that is drawn on by Landlord but not applied by Landlord shall be held by Landlord as a security deposit (the "LOC Security Deposit") in accordance with Paragraph 19 of this Lease.
5. Restoration of Letter of Credit and LOC Security Deposit. If Landlord draws on any portion of the LOC and/or applies all or any portion of such draw, Tenant shall, within five (5) business days after demand by Landlord, either (a) deposit cash with Landlord in an amount that, when added to the amount remaining under the LOC and the amount of any LOC Security Deposit, shall equal the LOC Amount then required under this Paragraph 39.D; or (b) reinstate the LOC to the full LOC Amount.
6. Return of LOC. Notwithstanding anything to the contrary contained herein, Tenant shall not be required to maintain the LOC following Tenant's delivery to Landlord of the "Evidence of Lien-Free Completion of Tenant's Work" (as defined in Exhibit C attached hereto. Within thirty (30) days following Landlord's receipt of the Evidence of Lien- Free Completion of Tenant's Work, Landlord shall return to Tenant the LOC (to the extent not previously drawn by Landlord in accordance herewith) and any proceeds therefrom to the extent not previously applied by Landlord in accordance herewith.
5. Notice of Intent to Sell. If at any time during the Lease Term, Landlord determines to market and sell the Building, either separately or as part of the Project, and whether such sale would be a transfer or ground lease of Landlord's interest in the Building or of a controlling interest in Landlord if all or significantly all of Landlord's assets is the Project, then prior to actively marketing the Building, then Landlord shall provide Tenant with not less than thirty (30) days prior written notice of the same (the "Marketing Notice"); provided that if prior to Landlord's delivery of a Marketing Notice to Tenant, Landlord receives an unsolicited offer which Landlord desires to accept or further negotiate, then Landlord shall provide Tenant with a Marketing Notice promptly following receipt of such offer and shall not accept such offer or further negotiate for the conveyance of the Building until the expiration of the thirty (30) day period following Tenant's receipt of such Marketing Notice. Such notice requirement shall not apply with respect to any financing agreements (including foreclosures, trustees sale or deeds in lieu of foreclosure), sale-leaseback transactions, or any sale or transfer to an entity affiliated with Landlord. Further Landlord shall not be required to deliver such notice if at the time such notice would be delivered, Tenant is in default beyond the applicable notice and cure period. Notwithstanding anything to the contrary contained in this Lease, the parties hereby agree and acknowledge that Tenant's right to receive the Marketing Notice under this Paragraph 39.E is for Tenant's convenience only and nothing in this Paragraph 39.E or elsewhere in this Lease shall be deemed to grant any right or option to Tenant to acquire any interest in the Premises, Building, Project or Landlord (other than the leasehold interest granted to Tenant under this Lease, as tenant, during the Term of this Lease).
40. JURY TRIAL WAIVER

EACH PARTY HERETO (WHICH INCLUDES ANY ASSIGNEE, SUCCESSOR HEIR OR PERSONAL REPRESENTATIVE OF A PARTY) SHALL NOT SEEK A JURY TRIAL, HEREBY WAIVES TRIAL BY JURY, AND HEREBY FURTHER WAIVES ANY OBJECTION TO VENUE IN THE COUNTY IN WHICH THE BUILDING IS LOCATED, AND AGREES AND CONSENTS TO PERSONAL JURISDICTION OF THE COURTS OF THE STATE IN WHICH THE PROPERTY IS LOCATED, IN ANY ACTION OR PROCEEDING OR COUNTERCLAIM BROUGHT BY ANY PARTY HERETO AGAINST THE OTHER ON ANY MATTER WHATSOEVER ARISING OUT OF OR IN ANY WAY CONNECTED WITH THIS LEASE, THE RELATIONSHIP OF LANDLORD AND TENANT, TENANT'S USE OR OCCUPANCY OF THE PREMISES, OR ANY CLAIM OF INJURY OR DAMAGE, OR THE ENFORCEMENT OF ANY REMEDY UNDER ANY STATUTE, EMERGENCY OR OTHERWISE, WHETHER ANY OF THE FOREGOING IS BASED ON THIS LEASE OR ON TORT LAW. EACH PARTY REPRESENTS THAT IT HAS HAD THE OPPORTUNITY TO CONSULT WITH LEGAL COUNSEL CONCERNING THE EFFECT OF THIS PARAGRAPH 40. THE PROVISIONS OF THIS PARAGRAPH 40 SHALL SURVIVE THE EXPIRATION OR EARLIER TERMINATION OF THIS LEASE.

IN WITNESS WHEREOF, the parties hereto have executed this Lease as of the day and the year first above written.

LANDLORD:

PW ACQUISITIONS VIII, LLC
A Delaware limited liability company

By: /s/ John C. Tashjian
(Print Name and Title)

By: John C. Tashjian, Vice President
(Print Name and Title)

Date: December 29, 2000

TENANT:

SIEBEL SYSTEMS, INC., a Delaware Corporation

By: /s/ Jeffrey T. Amann
(Print Name and Title)

By: Jeffrey T. Amann, Vice President, Legal Affairs
(Print Name and Title)

Date: December ___, 2000

EXHIBIT A
Rules and Regulations

In the event of any inconsistency between the provisions of the body of the Lease of which this Exhibit is a part and the provisions of this Exhibit, the provisions of the body of the Lease of which this Exhibit is a part shall govern.

1. Driveways, sidewalks, halls, passages, exits, entrances, elevators, escalators and stairways shall not be obstructed by tenants or used by tenants for any purpose other than for ingress to and egress from their respective premises. The driveways, sidewalks, halls, passages, exits, entrances, elevators and stairways are not for the use of the general public and Landlord shall in all cases retain the right to control and prevent access thereto by all persons whose presence, in the judgment of Landlord, shall be prejudicial to the safety, character, reputation and interests of the Building, the Project and its tenants, provided that nothing herein contained shall be construed to prevent such access to persons with whom any tenant normally deals in the ordinary course of such tenant's business unless such persons are engaged in illegal activities. No tenant, and no employees or invitees of any tenant, shall go upon the roof of any Building, except as authorized by Landlord. No tenant, and no employees or invitees of any tenant shall move any common area furniture without Landlord's consent.

2. No sign, placard, banner, picture, name, advertisement or notice, visible from the exterior of the Premises or the Building or the common areas of the Building shall be inscribed, painted, affixed, installed or otherwise displayed by Tenant either on its Premises or any part of the Building or Project without the prior written consent of Landlord in Landlord's sole and absolute discretion. Landlord shall have the right to remove any such sign, placard, banner, picture, name, advertisement, or notice without notice to and at the expense of Tenant, which were installed or displayed in violation of this rule. If Landlord shall have given such consent to Tenant at any time, whether before or after the execution of Tenant's Lease, such consent shall in no way operate as a waiver or release of any of the provisions hereof or of the Lease, and shall be deemed to relate only to the particular sign, placard, banner, picture, name, advertisement or notice so consented to by Landlord and shall not be construed as dispensing with the necessity of obtaining the specific Written consent of Landlord with respect to any other such sign, placard, banner, picture, name, advertisement or notice. All approved signs or lettering on doors and walls shall be printed, painted, affixed or inscribed at the expense of Tenant by a person or vendor approved by Landlord and shall be removed by Tenant at the time of vacancy at Tenant's expense.

3. The directory of the Project will be provided exclusively for the display of the name and location of tenants only.

4. No curtains, draperies, blinds, shutters, shades, screens or other coverings, awnings, hangings or decorations shall be attached to, hung or placed in, or used in connection with, any window or door on the Premises without the prior written consent of Landlord. In any event with the prior written consent of Landlord, all such items shall be installed inboard of Landlord's standard window covering and shall in no way be visible from the exterior of the Building. All electrical ceiling fixtures hung in offices or spaces along the perimeter of the Building must be fluorescent or of a quality, type, design, and bulb color approved by Landlord. No articles shall be placed or kept on the window sills so as to be visible from the exterior of the Building. No articles shall be placed against glass partitions or doors which Landlord considers unsightly from outside Tenant's Premises.

5. Landlord reserves the right to exclude from the Building and the Project, between the hours of 6 p.m. and 8 a.m. and at all hours on Saturdays, Sundays and legal holidays, all persons who are not tenants or their accompanied guests in the Building. Each tenant shall be responsible for all persons for whom it allows to enter the Building or the Project and shall be liable to Landlord for all acts of such persons. Landlord and its agents shall not be liable for damages for any error concerning the admission to, or exclusion from, the Building or the Project of any person. During the continuance of any invasion, mob, riot, public excitement or other circumstance rendering such action advisable in Landlord's opinion, Landlord reserves the right (but shall not be obligated) to prevent access to the Building and the Project during the continuance of that event by any means it considers appropriate for the safety of tenants and protection of the Building, property in the Building and the Project.

6. All cleaning and janitorial services for the Building and the Premises shall be provided exclusively through Landlord. Except with the written consent of Landlord, no person or persons other than those approved by Landlord shall be permitted to enter the Building for the purpose of cleaning the same. Tenant shall not cause any unnecessary labor by reason of Tenant's carelessness or indifference in the preservation of good order and cleanliness of its Premises. Landlord shall in no way be responsible to Tenant for any loss of property on the Premises, however occurring, or for any damage done to Tenant's property by the janitor or any other employee or any other person.

7. Tenant shall see that all doors of its Premises are closed and securely locked and must observe strict care and caution that all water faucets or water apparatus, coffee pots or other heat-generating devices are entirely shut off before Tenant or its employees leave the Premises, and that all utilities shall likewise be carefully shut off, so as to prevent waste or damage. Tenant shall be responsible for any damage or injuries sustained by other tenants or occupants of the Building or Project or by Landlord for noncompliance with this rule. On multiple-tenancy floors, all tenants shall keep the door or doors to the Building corridors closed at all times except for ingress and egress.

8. Tenant shall not use any method of heating or air- conditioning other than that supplied by Landlord. As more specifically provided in Tenant's lease of the Premises, Tenant shall not waste electricity, water or air-conditioning and agrees to cooperate fully with Landlord to assure the most effective operation of the Building's heating and air-conditioning, and shall refrain from attempting to adjust any controls other than room thermostats installed for Tenant's use.

9. Landlord will furnish Tenant free of charge with two keys to each door in the Premises. Landlord may make a reasonable charge for any additional keys, and Tenant shall not make or have made additional keys. Tenant shall not alter any lock or access device or install a new or additional lock or access device or bolt on any door of its Premises, without the prior written consent of Landlord. If Landlord shall give its consent, Tenant shall in each case furnish Landlord with a key for any such lock. Tenant, upon the termination of its tenancy, shall deliver to Landlord the keys for all doors which have been furnished to Tenant, and in the event of loss of any keys so furnished, shall pay Landlord therefor.

10. The restrooms, toilets, urinals, wash bowls and other apparatus shall not be used for any purpose other than that for which they were constructed and no foreign substance of any kind whatsoever shall be thrown into them. The expense of any breakage, stoppage, or damage resulting from violation of this rule shall be borne by the tenant who, or whose employees or invitees, shall have caused the breakage, stoppage, or damage.

11. Except as expressly permitted by the Lease, Tenant shall not use or keep in or on the Premises, the Building or the Project any kerosene, gasoline, or inflammable or combustible fluid or material.

12. Tenant shall not use, keep or permit to be used or kept in its Premises any foul or noxious gas or substance. Tenant shall not allow the Premises to be occupied or used in a manner offensive or objectionable to Landlord or other occupants of the Building by reason of noise, odors and/or vibrations or interfere in any way with other tenants or those having business therein, nor shall any animals or birds be brought or kept in or about the Premises, the Building, or the Project.

13. No cooking shall be done or permitted by any tenant on the Premises, except that use by the tenant of Underwriters' Laboratory (UL) approved equipment, refrigerators and microwave ovens may be used in the Premises for the preparation of coffee, tea, hot chocolate and similar beverages, storing and heating food for tenants and their employees shall be permitted. All uses must be in accordance with all applicable federal, state and city laws, codes, ordinances, rules and regulations and the Lease.

14. Except with the prior written consent of Landlord, Tenant shall not sell, or permit the sale, at retail, of newspapers, magazines, periodicals, theater tickets or any other goods or merchandise in or on the Premises, nor shall Tenant carry on, or permit or allow any employee or other person to carry on, the business of stenography, typewriting or any similar business in or from the Premises for the service or accommodation of occupants of any other portion of the Building, nor shall the Premises be used for the storage of merchandise or for manufacturing of any kind, or the business of a public barber shop, beauty parlor, nor shall the Premises be used for any illegal, improper, immoral or objectionable purpose, or any business or activity other than that specifically provided for in such Tenant's Lease. Tenant shall not accept hairstyling, barbering, shoeshine, nail, massage or similar services in the Premises or common areas except as authorized by Landlord.

15. If Tenant requires telegraphic, telephonic, telecommunications, data processing, burglar alarm or similar services, it shall first obtain, and comply with, Landlord's instructions in their installation. The cost of purchasing, installation and maintenance of such services shall be borne solely by Tenant.

16. Landlord will direct electricians as to where and how telephone, telegraph and electrical wires are to be introduced or installed. No boring or cutting for wires will be allowed without the prior written consent of Landlord. The location of burglar alarms, telephones, call boxes and other office equipment affixed to the Premises shall be subject to the prior written approval of Landlord.

17. Except as may be expressly permitted by the Lease, Tenant shall not install any radio or television antenna, satellite dish, loudspeaker or any other device on the exterior walls or the roof of the Building, without Landlord's prior written consent, which may be granted or withheld in Landlord's sole and absolute discretion. Tenant shall not interfere with radio or television broadcasting or reception from or in the Building, the Project or elsewhere.

18. Tenant shall not mark, or drive nails, screws or drill into the partitions, woodwork or drywall or in any way deface the Premises or any part thereof without Landlord's consent. Tenant may install nails and screws in areas of the Premises that have been identified for those purposes to Landlord by Tenant at the time those walls or partitions were installed in the Premises. Tenant shall not lay linoleum, tile, carpet or any other floor covering so that the same shall be affixed to the floor of its Premises in any manner except as approved in writing by Landlord. The expense of repairing any damage resulting from a violation of this rule or the removal of any floor covering shall be borne by the tenant by whom, or by whose contractors, employees or invitees, the damage shall have been caused.

19. Unless Tenant is the only tenant in the Building, no furniture, freight, equipment, materials, supplies, packages, merchandise or other property will be received in the Building or carried up or down the elevators except between such hours and in such elevators as shall be designated by Landlord. Tenant shall not place a load upon any floor of its Premises which exceeds the load per square foot which such floor was designed to carry or which is allowed by law. Landlord shall have the right to prescribe the weight, size and position of all safes, furniture or other heavy equipment brought into the Building. Safes or other heavy objects shall, if considered necessary by Landlord, stand on wood strips of such thickness as determined by Landlord to be necessary to properly distribute the weight thereof. Landlord will not be responsible for loss of or damage to any such safe, equipment or property from any cause, and all damage done to the Building by moving or maintaining any such safe, equipment or other property shall be repaired at the expense of Tenant. Business machines and mechanical equipment belonging to Tenant which cause noise or vibration that may be transmitted to the structure of the Building or to any space therein to such a degree as to be objectionable to Landlord or to any tenants in the Building shall be placed and maintained by Tenant, at Tenant's expense, on vibration eliminators or other devices sufficient to eliminate noise or vibration. The persons employed to move such equipment in or out of the Building must be acceptable to Landlord.

20. Intentionally omitted.

21. There shall not be used in any space, or in the public areas of the Project either by Tenant or others, any hand trucks except those equipped with rubber tires and side guards or such other material handling equipment as Landlord may approve. Tenants using hand trucks shall he required to use the freight elevator, or such elevator as Landlord shall designate. No other vehicles of any kind shall be brought by Tenant into or kept in or about its Premises.

22. Each tenant shall store all its trash and garbage within the interior of the Premises. Tenant shall not place in the trash boxes or receptacles any personal trash or any material that may not or cannot be disposed of in the ordinary and customary manner of removing and disposing of trash and garbage in the city, without violation of any law or ordinance governing such disposal. All trash, garbage and refuse disposal shall be made only through entry-ways and elevators provided for such purposes and at such times as Landlord shall designate. If the Building has implemented a building-wide recycling program for tenants, Tenant shall use good faith efforts to participate in said program.

23. Canvassing, soliciting, distribution of handbills or any other written material and peddling in the Building and the Project are prohibited and each tenant shall cooperate to prevent the same. No tenant shall make room-to-room solicitation of business from other tenants in the Building or the Project, without the prior written consent of Landlord.

24. Landlord shall have the right, exercisable without notice and without liability to any tenant, to change the name and address of the Building and the Project, provided however, Landlord shall reimburse Tenant for Tenant's reasonable out-of-pocket costs (e.g., replacement of current stock of stationary and business cards) resulting from any change in the address of the Building Unless such change was governmentally required.

25. Landlord reserves the right to exclude or expel from the Project any person who, in Landlord's judgment, is under the influence of alcohol or drugs or who commits any act in violation of any of these Rules and Regulations.

26. Without the prior written consent of Landlord, Tenant shall not use the name of the Building or the Project or any photograph or other likeness of the Building or the Project in connection with, or in promoting or advertising, Tenant's business except that Tenant may include the Building's or Project's name in Tenant's address.

27. Tenant shall comply with all safety, fire protection and evacuation procedures and regulations established by Landlord or any governmental agency.

28. Tenant assumes any and all responsibility for protecting its Premises from theft, robbery and pilferage, which includes keeping doors locked and other means of entry to the Premises closed.

29. The requirements of Tenant will be attended to only upon appropriate application at the office of tile Building by an authorized individual. Employees of Landlord shall not perform any work or do anything outside of their regular duties unless under special instructions from Landlord, and no employees of Landlord will admit any person (tenant or otherwise) to any office without specific instructions from Landlord.

30. Landlord reserves the right to designate the use of the parking spaces on the Project. Tenant or Tenant's guests shall park between designated parking lines only, and shall not occupy two parking spaces with one car. Parking spaces shall be for passenger vehicles only; no boats, trucks, trailers, recreational vehicles or other types of vehicles may be parked in the parking areas (except that trucks may be loaded and unloaded in designated loading areas). Vehicles in violation of the above shall be subject to tow-away, at vehicle owner's expense. Vehicles parked on the Project overnight without prior written consent of the Landlord shall be deemed abandoned and shall be subject to tow-away at vehicle owner's expense. No tenant of the Building shall park in visitor or reserved parking areas (other than areas reserved for exclusive parking by such tenant). Any tenant found parking in such designated visitor or reserved parking areas (other than areas reserved for exclusive parking by such tenant) or unauthorized areas shall be subject to tow-away at vehicle owner's expense. The parking areas shall not be used to provide car wash, oil changes, detailing, automotive repair or other services unless otherwise approved or furnished by Landlord. Tenant will from time to time, upon the request of Landlord, supply Landlord with a list of license plate numbers of vehicles owned or operated by its employees or agents.

31. No smoking of any kind shall be permitted anywhere within the Building, including, without limitation, the Premises and those areas immediately adjacent to the entrances and exits to the Building, or any other area as Landlord elects. Smoking in the Project is only permitted in smoking areas identified by Landlord, which may be relocated from time to time.

32. If the Building furnishes common area conferences rooms for tenant usage, Landlord shall have the right to control each tenant's usage of the conference rooms, including limiting tenant usage so that the rooms are equally available to all tenants in the Building. Any common area amenities or facilities shall he provided from time to time at Landlord's discretion.

33. Tenant shall not swap or exchange building keys or cardkeys with other employees or tenants in the Building or the Project.

34. Tenant shall be responsible for the observance of all of the foregoing Rules and Regulations by Tenant's employees, agents, clients, customers, invitees and guests.

35. These Rules and Regulations are in addition to, and shall not be construed to in any way modify, alter or amend, in whole or in part, the terms, covenants, agreements and conditions of any lease of any Premises in the Project.

36. Landlord may waive any one or more of these Rules and Regulations for the benefit of any particular tenant or tenants, but no such waiver by Landlord shall be construed as a waiver of such Rules and Regulations in favor of any other tenant or tenants, nor prevent Landlord from thereafter enforcing any such Rules and Regulations against any or all tenants of the Building.

37. Landlord reserves the right to make such other and reasonable rules and regulations as in its judgment may from time to time be needed for safety and security, for care and cleanliness of the Building and the Project and for the preservation of good order therein. Tenant agrees to abide by all such Rules and Regulations herein stated and any additional rules and regulations which are adopted.

EXHIBIT B

SITE PLAN

EXHIBIT B

[DIAGRAM OF BUILDING 2]

EXHIBIT B-1

[DIAGRAM OF PREMISES]

EXHIBIT B-2

[DIAGRAM OF "THE CENTER @ BAY MEADOWS"]

EXHIBIT C

LEASE IMPROVEMENT AGREEMENT

This Lease Improvement Agreement ("Improvement Agreement") sets forth the terms and conditions relating to construction of certain "Additional Tenant Work" (as defined below) and [he initial tenant improvements in the Premises to be approved as provided below (the "Tenant Improvements"). The Additional Tenant Work and the Tenant Improvements are collectively referred to herein as the "Tenant's Work". Initially capitalized terms used but not otherwise defined herein shall have the meanings set forth in the Lease (the "Lease") to which this Improvement Agreement is attached and forms a part.

1. Base Building Work. The "Base Building Work" described on Schedule 1 attached to this Exhibit C and incorporated herein by this reference will be performed by Landlord at Landlord's sole cost and expense. The parties hereby approve the proposed locations of certain elements of Tenant's Work affecting the Base Building Work as set forth in those certain "50% Complete" set of construction drawings for Tenant's Work prepared by Gensler dated November 29, 2000.
2. Additional Tenant Work.
1. The "Additional Tenant Work" (as hereinafter defined) will be performed by Tenant, at Tenant's sole cost and expense, concurrently with the construction of the Tenant Improvements. As used herein, the "Additional Tenant Work" shall mean such base, core and shell work as is customarily included within a first-class general office building on an unoccupied basis exclusive of construction of tenant improvements (other than items included within the Base Building Work pursuant hereto), as reasonably determined by Landlord. The Additional Tenant Work shall include, without limitation, the items described on Schedule 2 attached to this Exhibit C and incorporated herein by this reference.
3. Plans and Specifications.
1. Tenant shall retain the services of an architect or space planner reasonably approved in advance by Landlord (the "Space Planner") to prepare a detailed space plan (the "Space Plan") mutually satisfactory to Landlord and Tenant for the construction of the Tenant's Work. No later than forty-five (45) days following Landlord's delivery to Tenant of a final set of plans sufficient for issuance of a building permit for the Base Building Work, Tenant shall submit the Space Plan to Landlord for Landlord's approval. All necessary revisions to the Space Plan shall be made within twenty (20) days after Landlord's response thereto. This procedure shall be repeated until Landlord ultimately approves the Space Plan.
2. Based on the approved Space Plan, Tenant shall cause the Space Planner to prepare plans, specifications and working drawings in sufficient detail to allow for application for building permits for the Tenant's Work, which shall be mutually satisfactory to Landlord and Tenant (collectively, the "Permit Plans"). Tenant shall diligently pursue the preparation of the Permit Plans. Tenant shall submit the Permit Plans to Landlord for Landlord's approval no later than six (6) months prior to the date Landlord estimates it will have substantially completed the Base Building Work. All necessary revisions to the Permit Plans shall be made within twenty (20) days after Landlord's response thereto. This procedure shall be repeated until Landlord ultimately approves the Permit Plans. Tenant shall he responsible for obtaining all governmental approvals to the full extent necessary for the construction and installation of the Tenant's Work and for Tenant's occupancy of the Premises, in compliance with all applicable Regulations. Within a reasonable period of time after Tenant's and Landlord's approval of the Permit Plans, Tenant shall cause the Contractor to proceed to secure a building permit. Promptly following Tenant's receipt of such building permit for Tenant's Work, approval of the Construction Documents by Landlord and Tenant (as hereinafter provided) and the Substantial Completion of the Base Building Work, Tenant shall cause the Contractor to commence construction of the Tenant's Work.
3. Within a reasonable period of time following Landlord's approval of the Permit Plans, Tenant shall cause the Space Planner to prepare and submit to Landlord for its review and approval detailed plans, specifications and working drawings for the construction of the Tenant's Work, which shall include the estimated cost of the Tenant's Work and be in sufficient detail to allow bidding and construction of the Tenant's Work (collectively, the "Construction Documents"). Tenant shall diligently pursue the preparation of the Construction Documents. All necessary revisions to the Construction Documents shall be made within twenty (20) days after Landlord's response thereto. This procedure shall be repeated until Landlord ultimately approves the Construction Documents. As used in the Lease of which this Exhibit is a part, the "Plans" shall mean, collectively, the approved Permit Plans and the approved Construction Documents.
4. Tenant shall be responsible for ensuring that the Plans are compatible with the design, construction and equipment of the Building, comply with applicable Regulations and the Standards (defined below), and contain ail such information as may be required to show locations, types and requirements for all heat loads, people loads, floor loads, power and plumbing, regular and special HVAC needs, telephone communications, telephone and electrical outlets, lighting, light fixtures and related power, and electrical and telephone switches, B.T.U. calculations, electrical requirements and special receptacle requirements. The Plans shall also include mechanical, electrical, plumbing, structural and engineering drawings mutually satisfactory to Landlord and Tenant which shall be prepared for Tenant by (a) as to structural engineering work, Landlord's Base Building Work structural engineers (provided that the rates charges for such services shall be commercially reasonable for the work performed and if such rates are not commercially reasonable, then the engineers preparing such drawings shall be licensed engineers reasonably experienced in comparable projects, as designated by Tenant subject to Landlord's prior written approval, which approval shall not be unreasonably withheld), (b) as to the fire protection and plumbing engineering work, Southland, (c) as to electrical engineering work, Schwartz and Lindheim, and (d) as to HVAC engineering work, CMI (provided, however, that to the extent Tenant desires to obtain engineering services for fire protection, plumbing, electrical and/or HVAC work other than from the service providers specified above, then the engineers preparing such drawings shall be licensed engineers reasonably experienced in comparable projects, as designated by Tenant subject to Landlord's prior written approval, which approval shall not be unreasonably withheld). Notwithstanding Landlord's review and approval of the Space Plan and the Plans and any revisions thereto, Landlord shall have no responsibility or liability whatsoever for any errors or omissions contained in the Space Plan or Plans or any revisions thereto, or to verify dimensions or conditions, or for the quality, design or compliance with applicable Regulations of any improvements described therein or constructed in accordance therewith. Tenant hereby waives all claims against Landlord relating to, or arising out of the design or construction of, the Tenant's Work.
5. Landlord's criteria for approvals shall be based on reasonable criteria established from time to time by Landlord, but, without limiting the generality of the foregoing and by way of example only, Landlord will be deemed to have acted reasonably if Landlord's disapproval is predicated upon (i) effect on the structural integrity of the Building, (ii) non-compliance with applicable laws, codes and regulations, (iii) incompatibility with the Base Building Work plans, (iv) failure to use materials required by or otherwise comply with Schedule 2 pertaining to the Additional Tenant Work and/or Schedule 3 pertaining to Standards, or (vi) effect on the exterior of the Building or any of the Building's common areas. Landlord shall not be deemed to have approved the Space Plan, the Plans, or any proposed revisions thereto, unless approved by Landlord in writing. Landlord shall approve or disapprove any Space Plan, Plans or proposed revisions thereto submitted to Landlord for Landlord's approval within twenty (20) calendar days after Landlord's receipt thereof. If Landlord has not approved in writing any Space Plan, Plans, or proposed revisions thereto submitted to Landlord within twenty (20) calendar days after Landlord's receipt thereof, Landlord shall be deemed to have disapproved the same.
4. Specifications for Standard Tenant's Work.
1. Specifications and quantities of standard building components which will comprise and be used in the construction of the Tenant Work ("Standards") are set forth in Schedule 2 and Schedule 3 to this Exhibit C. As used herein, "Standards" or "Building Standards" shall mean the standards for a particular item selected from time to time by Landlord for the Building, including those set forth on Schedule 2 and Schedule 3 of this Exhibit C, or such other standards of equal or better quality as may be mutually agreed between Landlord and Tenant in Writing. No deviations from the Standards are permitted without the prior approval of Landlord.
2. The Tenant Improvements to be performed at Tenant's sole cost pursuant hereto shall include all improvements required for Tenant's occupancy of the Premises not included within the Base Building Work and the Additional Tenant Work.
3. The Additional Tenant Work shall be deemed to be the property of Landlord upon the completion thereof. All Tenant Improvements shall be deemed to be the property of Tenant until the expiration of the initial twelve (12) year Term or earlier termination of the Lease, at which time such Tenant Improvements (other than Tenant's trade fixtures, furniture and equipment) shall be and become the property of Landlord; provided however, Tenant shall not have the right to remove, demolish or alter any such Tenant Improvements other than in strict accordance with Paragraph 12 of the Lease of which this Exhibit is a part.
5. Tenant's Work Costs.
1. The cost of the Tenant's Work (collectively, the "Tenant's Work Costs") shall be paid for by Tenant, which Tenant's Work Costs shall include, without limitation, the cost of: Standards; space plans and studies; architectural and engineering fees; permits, approvals and other governmental fees; labor, material, equipment and supplies; construction fees and other amounts payable to contractors or subcontractors; taxes; off-site improvements (if any are required in connection with the Tenant's Work); preparation of the Premises for construction of the Tenant's Work; taxes; filing and recording fees; premiums for insurance and bonds; attorneys' fees; financing costs; and all other costs expended or to be expended in the construction of the Tenant's Work; and an administration fee (the "Administration Fee") payable to Landlord in an amount equal to three and one-half percent (3.5%) of the total of the Tenant's Work Costs other than such Administration Fee and soft costs such as design, architectural and engineering fees. The Administration Fee shall be payable by Tenant to Landlord on a monthly basis during the course of performance of the Tenant's Work.
2. Prior to Tenant's execution of the construction contract and general conditions (the "Contract") with the Contractor (as hereinafter defined) for performance of the Tenant's Work, Tenant shall submit the Contract and the names of the subcontractors for major trades and major materials suppliers for construction of the Tenant's Work, to Landlord for informational purposes. Prior to the commencement of the construction of the Tenant's Work, and after Tenant has accepted all bids for the Tenant's Work, Tenant shall provide Landlord with a detailed breakdown, by trade, of the estimated Tenant's Work Costs (collectively, the "Estimated Tenant's Work Costs") and a construction budget based upon such Estimated Tenant's Work Costs (collectively, the "Tenant's Work Budget"). Tenant shall be solely responsible for payment of all Tenant's Work Costs. If Tenant requests any change(s) in the Plans after approval of the Estimated Tenant's Work Costs and any such requested changes are approved by Landlord, Tenant shall be responsible for any increased Tenant's Work Costs resulting therefrom.
3. Within thirty (30) days following the completion of the Tenant's Work, Tenant shall deliver to Landlord (a) copies of signed-off permits and stamped set of Plans evidencing governmental approval of the completion of the Tenant's Work, (b) properly executed unconditional final mechanics lien releases in compliance with both California Civil Code Section 3262(d)(4) from all of Tenant's Agents for labor rendered and materials delivered to the Premises in connection with the Tenant's Work, (c) a reasonably detailed breakdown of the actual final Tenant's Work Costs (which shall include a separate breakdown for the components thereof relating to the Additional Tenant Work), and (d) a certificate of completion of Tenant's Work, in form reasonably acceptable to Landlord. The items referenced in the foregoing clauses (a), (b), (c) and (d) are collectively referred to in the Lease of which this Exhibit is a part as the "Evidence of Lien-Free Completion of Tenant's Work".
6. Construction of Tenant's Work.
1. Tenant shall retain as the general contractor for performance of the Tenant's Work (such general contractor is referred to in this Exhibit as the "Contractor") a licensed general contractor, reasonably experienced in the performance of comparable work on comparable buildings in the San Mateo area, who shall be subject to Landlord's prior written approval (which approval shall not be unreasonably withheld). The Contractor shall construct the Tenant's Work in conformance with the approved Plans.
2. The subcontractors performing the Tenant's Work shall be reasonably qualified and experienced subcontractors. Landlord hereby requires the use of Landlord's specified subcontractor for any roofing subtrade work. In addition, the parties hereby pre-approve the following subcontractors: (a) Southland for fire protection and plumbing subtrade work, (b) Schwartz and Lindheirn for electrical subtrade work, and (c) CMI for HVAC subtrade work. As used in this Exhibit, the term "Tenant's Agents" shall mean the Contractor and all subcontractors, laborers, materialmen, and suppliers used in the construction of the Tenant's Work, and the term "Major Agents" shall mean only the Contractor and any subcontractor or supplier with a contract price in excess of $30,000.00.
3. Without limiting the provisions of Paragraph 35 of the Lease (but subject to the provisions of Paragraph 2 of the Lease), Landlord shall not be liable for any direct or indirect damages suffered by Tenant as a result of delays in construction beyond Landlord's reasonable control, including, but not limited to, delays due to strikes or unavailability of materials or labor, or delays caused by Tenant (including delays by the Space Planner, the contractor or anyone else performing services on behalf of Landlord or Tenant).
4. All work to be performed on the Premises by Tenant or Tenant's Agents shall be subject to the following conditions:
1. Such work shall proceed upon Landlord's written approval of public liability and property damage insurance carried by Tenant's Contractor, and shall further be subject to the provisions of Paragraph 27 of the Lease.
2. All work shall be done in conformity with a valid building permit when required, a copy of which shall be furnished to Landlord before such work is commenced, and in any case, all such work shall be performed in a good and workmanlike and first-class manner, and in accordance with all applicable Regulations and the requirements and standards of any insurance underwriting board, inspection bureau or insurance carrier insuring the Premises pursuant to the Lease. Notwithstanding any failure by Landlord to object to any such work, Landlord shall have no responsibility for Tenant's failure to comply with all applicable Regulations. Tenant shall be responsible for ensuring that construction and installation of the Tenant's Work will not affect the structural integrity or waterproofing integrity of the Building.
3. If required by Landlord or any lender of Landlord, by notice delivered to Tenant prior to Landlord's approval of the Permit Plans, all work by the Contractor and its Major Agents shall be done with union labor in accordance with all union labor agreements applicable to the trades being employed. The foregoing shall not apply to vendors or suppliers engaged directly by Tenant, such as cabling contractors and furniture installers.
4. Landlord or Landlord's agents shall have the right to inspect the construction of tile Tenant's Work by Tenant during the progress thereof. If Landlord shall give notice of faulty construction or any other deviation from the approved Space Plan or Plans, Tenant shall cause Contractor to make corrections promptly. However, neither the privilege herein granted to Landlord to make such inspections, nor the making of such inspections by Landlord, shall operate as a waiver of any right of Landlord to require good and workmanlike construction and improvements erected in accordance with the approved Space Plan or Plans.
5. Tenant shall cause Tenant's Agents to complete the Tenant's Work as soon as commercially reasonable following Landlord's delivery of possession of the Premises to Tenant, provided the foregoing shall not impose any duty on Tenant to incur overtime charges.
6. Tenant's construction of the Tenant's Work shall comply with the following: (i) the Tenant's Work shall be constructed in strict accordance with the approved Space Plan or Plans; (ii) Tenant shall cause the Contractor to submit schedules of all work relating to the Tenant's Work to Landlord for informational purposes promptly following the approval of the Plans; and (iii) Tenant shall abide by all reasonable and non-discriminatorily enforced rules made by Landlord with respect to the use of freight, loading dock, and service elevators, storage of materials and/or coordination of work with other work then being performed at the Project.
7. Without limiting Landlord's obligation upon the Substantial Completion of the Base Building Work to provide an operational manlift at the Premises or to cause one of the Building elevators to be operational, Tenant or Tenant's Agents shall arrange for necessary utility, hoisting and elevator service with Landlord's contractor and shall pay such reasonable charges for such services as may be charged by Tenant's or Landlord's contractor.
8. Tenant's entry to the Premises for any purpose, including, without limitation, inspection or performance of Tenant construction by Tenant's Agents, prior to the date Tenant's obligation to pay rent commences shall be subject to all the terms and conditions of the Lease except the payment of Rent. Tenant's entry shall mean entry by Tenant, its officers, contractors, licensees, agents, servants, employees, guests, invitees, or visitors.
9. Tenant shall promptly reimburse Landlord upon demand for any reasonable expense actually incurred by the Landlord by reason of faulty work done by Tenant or Tenant's Agents.
10. Tenant hereby agrees to indemnify, defend and hold Landlord, its directors, officers, members, employees and agents harmless with respect to any and all costs, losses, damages, injuries and liabilities (including reasonable attorneys' fees) relating in any way to any act or omission of Tenant or Tenant's Agents, or anyone directly or indirectly employed by any of them, in connection with the Tenant's Work and/or any breach of Tenant's obligations under this Exhibit, or in connection with Tenant's non- payment of any amount arising out of tile Tenant's Work. Such indemnity by Tenant, as set forth above, shall also apply with respect to any and all costs, losses, damages, injuries, and liabilities related in any way to Landlord's performance or any ministerial acts reasonably necessary (i) to permit Tenant to complete the Tenant's Work, and (ii) to enable Tenant to obtain any building permit or certificate of occupancy for the Premises.
11. Each of Tenant's Major Agents shall guarantee, in accordance with customary construction guarantees and limitations, to Tenant and for the benefit of Landlord that the portion of the Tenant's Work for which it is responsible shall be free from any defects in workmanship and materials for a period of not less than one (1) year from the date of completion thereof, and each of Tenant's Major Agents shall be responsible for the replacement or repair, without additional charge, of all work done or furnished in accordance with its contract that shall become defective within one (1) year after the completion of the work performed by such Major Agent. All such warranties or guarantees as to materials or workmanship of or with respect to the Additional Tenant Work shall be contained in the construction contract or subcontract and shall be written such that such guarantees or warranties shall more to the benefit of both Landlord and Tenant, as their respective interests may appear, and can be directly enforced by either. Tenant covenants to give to Landlord any assignment or other assurances which may be necessary to effect such rights of direct enforcement.
12. Tenant shall provide Landlord with at least ten (10) days prior written notice of any construction of the Tenant's Work to allow Landlord to post notices of non-responsibility.
13. Commencing upon the execution of the Lease, Tenant shall hold regular meetings at a reasonable time with the Space Planner and the Contractor (or, until the Contractor is retained, Tenant's construction manager) regarding the progress of the preparation of the Plans and the construction of the Tenant's Work, which meetings shall be held at a location designated by Tenant, and Landlord and/or its agents shall receive prior notice of, and shall have the right to attend, all such meetings, and upon Landlord's request, certain of Tenant's Agents shall attend such meetings. During such meetings, Tenant and its Space Planner shall also provide any comments which they may have to the drawings for the Base Building Work so as to allow the parties to endeavor to cooperate in good faith on coordination between the Base Building Work and Tenant's Work
7. Insurance Requirements.
1. All of Tenant's Major Agents shall carry worker's compensation insurance covering all of their respective employees, and shall also carry public liability insurance, including property damage, in form and with companies as are required to be carried by Tenant as set forth in Paragraph 8B(6) of the Lease and with limits in the amount required under Paragraph 8B(2) of the Lease.
2. Tenant shall carry "Builder's All Risk" insurance in an amount approved by Landlord covering the construction of the Tenant's Work, and such other insurance as Landlord may require. Such insurance shall be in amounts and shall include such extended coverage endorsements as may be reasonably required by Landlord including, but not limited to, the requirement that all of Tenant's Agents shall carry excess liability and Products and Completed Operation coverage insurance, each in amounts not less than $500,000 per incident, $1,000,000 in aggregate, and in form and with companies as are required to be carried by Tenant as set forth in Paragraph 8 of the Lease.
3. Certificates for all insurance carried pursuant to this Exhibit must comply with the requirements of Paragraph 8 of the Lease and shall be delivered to Landlord before the commencement of construction of the Tenant's Work and before the Contractor's equipment is moved onto the site. In the event the Tenant's Work is damaged by any cause during the course of the construction thereof, Tenant shall immediately repair the same at Tenant's sole cost and expense. Tenant's Agents shall maintain all of the foregoing insurance coverage in force until the Tenant's Work is fully completed and accepted by Landlord, except for any Product and Completed Operation Coverage insurance required by Landlord, which is to be maintained for ten (10) years following completion of the work and acceptance by Landlord and Tenant. All policies carried under this Paragraph 7 shall insure Landlord and Tenant, as their interests may appear, as well as Tenant's Agents. All insurance maintained by Tenant's Agents shall preclude subrogation claims by the insurer against anyone insured thereunder. Such insurance shall provide that it is primary insurance as respects the owner and that any other insurance maintained by owner is excess and noncontributing with the insurance required hereunder.
8. Completion Date.
1. The term "Landlord Delays," as such term may be used in this Exhibit, shall mean any delays in the completion of the Tenant's Work which are due to any act or omission of Landlord, its agents or contractors. Landlord Delays shall include, but shall not be limited to: (i) delays in the giving of authorizations or approvals by Landlord when required of Landlord hereunder beyond the period provided for herein for Landlord's response to such requests for authorizations or approvals (or, if no time period is expressly so provided for herein, then beyond a reasonable period of time for Landlord to consider and respond to the applicable request for authorization or approval), (ii) delays due to the acts or failures to act, of Landlord, its agents or contractors, where such acts or failures to act delay the completion of the Tenant's Work, (iii) delays due to the interference of Landlord, its agents or contractors with the completion of the Tenant Work or the failure or refusal of any party to permit Tenant, its agents and contractors, access to and use of the Building or any Building facilities or services, including elevators and loading docks, which access and use are necessary to complete the Tenant's Work, and (iv) delays due to Landlord's failure to allow Tenant sufficient access to tile Building and/or the Premises during Tenant's move into the Premises. The parties hereby agree that Landlord Delays shall not include delays in Landlord's delivery of possession of the Premises to Tenant and/or the Substantial Completion of the Base Building Work (since such delays in delivery of possession shall, by definition, delay the commencement of Tenant's 120-day build-out period). No Landlord Delays shall be deemed to have occurred unless Tenant has provided notice, in compliance with the Lease, to Landlord specifying that a delay shall be deemed to have occurred because of actions, inactions or circumstances specified in the notice in reasonable detail. If such actions, inactions or circumstances are not cured by Landlord within one (1) business day after receipt of such notice ("Count Date"), and if such actions, inaction or circumstances otherwise qualify as a Landlord Delay, then a Landlord Delay shall be deemed to have occurred commencing as of the Count Date.
2. Within ten (10) days after completion of construction of the Tenant's Work, Tenant shall cause a Notice of Completion to be recorded in the office of the Recorder of the county in which the Building is located in accordance with Section 3093 of the Civil Code of the State of California or any successor statute, and shall furnish a copy thereof to Landlord upon such recordation. If Tenant fails to do so, Landlord may execute and file the same on behalf of Tenant as Tenant's agent for such purpose, at Tenant's sole cost and expense. At the conclusion of construction, (i) Tenant shall cause the Space Planner and the Contractor (i) to update the approved working drawings as necessary to reflect all changes made to the approved working drawings during the course of construction, (ii) to certify to the best of their knowledge that the "record-set" of as-built drawings are true and correct, which certification shall survive the expiration or termination of the Lease, and (c) to deliver to Landlord two (2) sets of copies of such record set of drawings within ninety (90) days following issuance of a certificate of occupancy for the Premises, and (iii) Tenant shall deliver to Landlord a copy of all warranties, guarantees, and operating manuals and information relating to the improvements, equipment, and systems in the Premises.
3. A default under this Exhibit shall constitute a default under the Lease, and the parties shall be entitled to all rights and remedies under the Lease in the event of a default hereunder by the other party (notwithstanding that the Term thereof has not commenced).
4. Except for the Base Building Work to be constructed by Landlord pursuant to this Exhibit, Tenant shall accept the Premises upon delivery of possession by Landlord in its then existing "as-is" condition.

SCHEDULE 1
TO EXHIBIT C

BASE BUILDING WORK

Base Building Work shall include the following:

A. Four (4) story, steel frame shell of approximately 140,450 rentable square feet in Building 2. Frame will be fireproofed and include perimeter skin and roof in place with all plans subject to final approval by the City of San Mateo.

B. Floor Levels 1-4 shall be hard trowel, smooth concrete level (not to exceed 1/4" per 10") ready for installation of floor covering excluding standard floor preparation and waterproofing.

C. Floor loading: live load: slab and upper floors shall be designed to support a live load of eighty (80) pounds per gross square foot and a partition load of twenty (20) pounds per square foot for a total of one hundred (100) pounds per gross square foot.

D. Unfinished base building exit stairs in compliance with the Americans with Disabilities Act of 1990 (the "ADA").

E. Roof. Built up roof system and roof drainage system.

F. Exterior Walls: Exposed metal studs without insulation or drywall including completed window assembly with painted metal window frames. All exterior doors will be fitted with code compliant exit hardware with electric locks (not electric strikes or magnetic locks) as required to accommodate the Tenant's card reader security system

G. Electrical/Utilities: All utilities (including telecommunications, electrical, water, sanitary sewer) shall be stubbed to Building exterior. Service will be provided to the building main electrical room located in the garage, under Building 2. Service will originate at underground PG&E transformer vault located on Park Place. Conduits from vault to electrical room will be sized to accommodate a 3000A service. Landlord will provide a meter center service to the first floor retail spaces and garage loads. It is the responsibility of the Tenant to provide its own temporary power. Landlord shall provide separate gas metering for the Building and the Premises.

H. Three (3) base building 3,500 lb. elevators without cab finishes. Landlord shall make one of three elevators available for Tenant's temporary use for use for construction traffic and material handling. At the time Landlord makes available to Tenant the temporary use of the elevator, Landlord shall remove the manlift(s) at exterior of building. Landlord shall obtain State and other required certifications of the elevators within 120 days of substantially completing the Base Building Work - provided Tenant completes all cab work and other work in a timely fashion so as not to hold up the certification process. Notwithstanding any other provisions set forth in this Lease, the Term Commencement Date shall not be deemed to have occurred until Landlord has obtained such elevator certifications from applicable governmental authorities (except to the extent that the failure to obtain such certifications is the result of any failure by Tenant to complete Tenant's Work).

I. Base building fire sprinklers (right hazard distribution), main floor shut off valves and primary loop at each floor.

J. Parking: Non-exclusive parking located under "Building 1", "Building 2" and "Building 3" as designated by Landlord and adjacent surface parking.

K. Site landscaping, hardscape, storm and area drainage systems and exterior lighting.

By way of example only and without limitation, the Base Building Work shall not include (i) sprinklers beyond those required for Base Building Work permit, (ii) window coverings, (iii) fire alarms or security systems, (iv) interior walls including all lobbies and restrooms, (v) HVAC systems, (vi) plumbing systems, (vii) electrical, telephone, telecommunications or janitorial closets, (viii) building cabling, or (ix) roof screens.

SCHEDULE 2
TO EXHIBIT C

ADDITIONAL TENANT WORK

The Additional Tenant Work shall include, without limitation, the following:

1.0 INTERIOR MATERIALS AND FINISHES

1.1 Partitions

a. Ground Floor and Typical Floors: Provide sheetrock walls (rating as req'd. by code) at all electrical, telecom, toilet rooms, riser shafts. and furring to conceal structural elements.

b. Ground Floor Lobby: Provide one hour rated sheetrock walls. Glass partitions at ground floor lobby allowed, but must meet 1 hr. fire rating requirement. Wired glass not acceptable.

c. Basement Garage: CMU at basement utility rooms to be provided as a part of Base Building Work by Landlord. Finish @ Utility Rms in basement by Tenant.

d. Basement Elevator Lobby: CMU @ basement elevator lobby by Landlord as a part of the Base Building Work. Finish to be provided by Tenant.

e. Stairwell Enclosures: Landlord to provide stud framing and the inside layers of sheetrock as a part of the Base Building Work. Tenant to provide outside layers of sheetrock. Stairwell paint finish by Tenant.

Note: Elevator shaft walls by Landlord as a part of the Base Building Work. Additional layers of sheetrock, or other finish treatment by Tenant.

1.2 Doors and Frames

a. Doors and frames for typical office floor core areas, exit stairs, toilet rooms, mechanical and electrical rooms shall be full height x 1 3/4 inch thick solid core doors with hardwood veneer. Frames will be full height factory finish RACCO or equal.

b. Lower level service areas and areas concealed from public view will have painted hollow doors and frames.

c. Lobby level doors and frames in the curtain wall system shall be .,,]ass or metal to match adjacent base building doors.

d. Doors will be fire rated to meet code requirements.

1.3 Hardware

a. All hardware to be satin stainless finish.

b. Surface mounted closers will be used only for doors in service areas.

c. Pivot hinges will be used for doors in lobbies; all other doors will have butt hinges.

d. Overhead hold opens, double door closing co-ordinators, buffers, stops, kick-plates and armour-plates will be used as necessary.

1.4 Painting

a. In areas required to be painted, walls and ceilings will be finished with 2 eggshell finish coats on 1 undercoat.

2.0 INTERIOR FINISHES IN PUBLIC SPACES

General Note: The ground floor lobby configuration is as shown on the attached plan.

2.1 Ground Floor Lobby

a. Floor Finish: Stone (min. 2 cm thickness.)

b. Wall Finish: Wood (see section 06400), 50% minimum coverage.

c. Ceilings: Sheetrock. Vary ceiling heights along length and across width of public lobby to support design concept. Subject to Landlord approval.

d. Lighting: The lobby shall be illuminated by decorative lighting fixtures, and/or recessed down lights and concealed indirect sources, as typically found in Class A office buildings, subject to Landlord approval.

e. Tenant Doors and Frames: See 1.2.c above.

f. Guard Desk: To be clad in wood or stone, consistent with lobby design. Equipment to be concealed. Subject to Landlord approval.

2.2 Typical Floor Elevator Lobby

a. Floor Finish: Carpet

b. Wall Finish: Paint

c. Ceilings: Sheetrock or Plaster. Vary ceiling heights along length and across width of public lobby to support design concept. Subject to Landlord approval.

d. Lighting: The typical floor elevator lobbies shall be illuminated by decorative lighting fixtures, and/or recessed down lights and concealed indirect sources, as typically found in Class A office buildings, subject to Landlord approval.

e. Elevator Lobby Doors and Frames: Match Tenant Improvements.

3.0 TOILETS

3.1 Handicapped provisions shall comply with the ADA.

3.2 Walls shall be finished with 2"x2" matt finished ceramic tile. Floors to 4"x4" satin glazed tile at wet walls with vinyl wall covering at remaining walls.

3.3 Ceilings shall be painted sheetrock with recessed lighting.

3.4 Floor mounted, painted steel toilet partitions and doors shall be provided, SanyMetal or equal.

3.5 Accessories shall be by Bobrick, Contura series or approved equal:

a. continuous mirror above vanity with concealed securing or stainless steel continuous moulding

b. soap dispenser

c. combination paper towel dispensers and large capacity waste bins

d. double toilet roll holders

e. coat hooks

f. recessed tampon/sanitary towel dispensers in area outside enclosed toilet (women's toilet)

3.6 Lavatory Countertops: Granite with minimum 11/2" front lip, 4" back splash/side splash

4.0 FINISHES IN SERVICE AREAS

4.1 Exit Enclosures

a. Stair flights and landing will be painted metal with concrete treads.

b. Walls will be painted masonry or sheet rock.

c. Handrails and balustrades will be painted tubular steel with welded joints ground smooth and installed to meet ADA requirements.

d. Lighting will be wall mounted fluorescent fixtures at main and intermediate landings.

4.2 Electrical and Telephone Rooms

a. Floors will be sealed concrete.

b. Walls will be painted sheetrock.

4.3 Janitors' Closets

a. Provide a minimum of one at ground floor.

b. Additional to be provided at tenant's option.

c. Location as shown on plan.

5.0 ELEVATOR CAB FINISHES

5.1 Interior Ceiling Height: 10'-0"

5.2 Front Panel: Satin Finished Stainless Steel (Buttons on both sides)

5.3 Side and Rear Wall Panels: Cherry veneer or vinyl wallcovering with stainless trim

5.4 Ceiling: Satin Finished Stainless Steel

5.5 Lighting: Recessed incandescent downlights, or indirect cove light (subject to Landlord approval)

6.0 FIRE SPRINKLER SYSTEM

6.1 Work Included: The Tenant shall design and furnish all labor, materials, tools, equipment, services, and transportation necessary for, or reasonably incidental to, the construction and completion in working order of the fire protection work, including, but not limited to, the following:

a. Provide a complete overhead automatic wet fire sprinkler system for Building 2 including connections to fire sprinkler mains with branch outlet stub-outs at 15'-0" on centers.

b. Repair of all damage done to premises as a result of this installation and removal of all debris left by those engaged in this installation.

6.2 Intentionally omitted.

6.3 General Design Requirements

a. The automatic wet fire sprinkler system shall be designed and installed in accordance with NFPA 13, California Code of Regulations, Local Code and San Mateo Fire Marshal Requirements, and as specified hereinafter.

b. Engineering calculations and construction drawings shall be prepared and signed by a competent registered mechanical engineer regularly employed in the fire protection design field.

c. Coordination with architect, engineering consultants, site utilities, and other trades.

d. Water Data: 72 PSI static, 52 PSI residual with 840 GPM flow measured at East Hillsdale Boulevard's first fire hydrant. Contractor shall verify this data during bid time, and make necessary allowances as required.

7.0 PLUMBING

7.1 The Tenant shall design and construct a complete and operative plumbing systems including all labor, materials, tools, equipment, services, and transportation necessary for, or reasonably incidental to, the construction and completion in working order of the plumbing work, including, but not limited to, the following:

a. Soil, waste, and vent piping system including grease interceptors, connection to sanitary waste line stubout at the garage ceiling, and vent stub-outs through the roof.

b. Condensate drains for air conditioning.

c. Domestic hot and cold water piping system including water heaters, pipe sterilization, hot water circulating pumps, insulation, and connection to exterior line stub-outs.

d. Furnishing and installation of plumbing fixtures and trim.

e. Natural gas piping system including connections to PG&E gas meters located in the parking garage central gas meter room and connections to equipment furnished in another section of work.

f. Intentionally omitted.

g. Hangers, anchors, sleeves, metal supports, and channels as required for work under this section including sound isolators where indicated.

h. Rough-in and final utility connections to equipment furnished and installed under other sections.

i. Piping and valve identification.

j. Testing, adjusting of completed work, inspections, and instructions.

k. Repair of all damage done to premises as a result of this installation and removal of all debris left by those engaged in this installation.

1. Shop drawings, submittals, as-built drawings and operating and maintenance manuals.

m. Permits and connection fees.

n. All rigging hoisting, transportation and associated work necessary for placement of all equipment in the final location as shown.

7.2 General Design Requirements:

a. The plumbing systems shall be designed and installed in accordance with the Uniform Plumbing Code, California Code of Regulations, and Local Code Requirements; and as specified hereinafter.

b. Engineering calculations and construction drawings shall be prepared and signed by a competent registered mechanical engineer regularly employed in the plumbing design field. The calculations shall be based on the latest recommendations of ASPE Guide and ASHRAE Handbook, and the Design Criteria specified hereinafter.

c. Coordination with architect, engineering consultants, site utilities, and other trades.

7.3 Sanitary Waste and Vent System:

a. Plumbing fixtures shall be drained by gravity through soil and waste piping and connected to sanitary sewer stub-outs shown on civil drawings.

b. Plumbing vents within 50'-0" of each other shall be collected and combined into one (1) vent thru roof to minimize roof penetrations. No additional roof penetrations are allowed without Landlord's approval.

c. Provide a minimum of 2% slope for sanitary sewer lines.

d. Provide Floor Drains at each Toilet Room.

7.4 Domestic Hot and Cold Water Systems:

a. Water pressure shall be limited to a maximum of 65 psi and a minimum of 35 psi with duplex pressure reducing valves.

b. Water piping shall be sized to limit the maximum flow velocity as follows:

i. 2 inch and under: 4 feet/sec.

ii. 2-1/2 inch and larger: 6 feet/sec.

c. Provide 105 F hot water for lavatories, sinks, janitor sinks and sinks. Hot water shall be provided with gas-fired type hot water heaters located in the mechanical roof enclosure.

d. Provide a circulating hot water system with circulating pumps, aquaslat and timeclock controls. Plumbing fixtures requiring hot water shall be within 5'-0" of circulation loop, exception janitor sinks.

e. All domestic hot water supply and return piping shall be- insulated.

f. Provide hot and cold shut-off valves for each toilet room. For the large Men's and Women's toilet, provide shut-off valves for each group of lavatories and urinals/waterclosets.

g. Provide cooling tower and boiler make-up water including shut-off valves and backflow preventers.

h. Provide hose bibbs in each toilet room.

i. Provide complete piping of all hot and cold water system, relief valve and equipment drains into nearest floor sink or drain.

7.5 Gas System:

a. Contractor shall connect to the gas meter and shall provide a complete functioning natural gas piping system for the boilers, and other gas-fired equipment.

b. The piping distribution system will be sized in accordance with Plumbing Code.

c. Provide gas shut-off valve for each building gas main inside the gas meter room.

8.0 ELECTRICAL SERVICE

8.1 Electrical Distribution Equipment: Tenant shall provide switchgear for service to Building 2. Switchgear shall be served from 3000A bus stubs in Owner provided equipment.

8.2 Main Switchgear:

a. Main breaker shall be provided with shunt-trip control. Provide a key switch per San Mateo City requirements for control of the shunt- trip breaker. Locate key switch per San Mateo City direction.

b. Equipment:

i. Provide main switchboard with fixed mounted insulated case or molded case circuit breakers.

ii. Provide ground fault protection.

iii. Provide utility metering as required. Coordinate work with PG&E.

8.3 Electrical Risers - Lighting and Receptacle Loads: Provide two electrical risers sized to support the following minimum requirements (use total square footage when calculating W/SF): a. Lighting: 1.5 W/SF b. Receptacle Power (120/208V): 3.5 W/SF

8.4 Mechanical & Elevator Equipment: Provide feeders to roof sized sufficiently to serve all mechanical and elevator equipment. Feeder shall be a minimum 1200A at 277/480V.

8.5 Transformers: a. Rating: Provide two 75 kVA transformers per floor. b. Transformers shall be K13 rated.

8.6 Panels: All panels shall be provided with the following:

a. Door-in-door construction.

b. Copper bus.

c. 120/208V panels shall be provided with transient voltage surge suppressors.

8.7 General Interior Electrical Fit-Up Requirements:

a. Lighting Circuitry and Control:

i. Provide single pole toggle switches per Title 24 requirements for all enclosed areas, i.e. toilets, electrical rooms, mechanical rooms, etc.

ii. Route all corridor and lobby lighting circuits through lighting control panels.

b. Other Miscellaneous:

i. Provide 20 amp 120V. circuit to each drinking fountain.

8.8 Fire Alarm System Requirements:

a. Preface: Provide an addressable fire alarm system with devices as described below.

b. Manual Pull Stations: Provide manual pull stations at each exit and at each stairwell door on all floors.

c. Sprinkler System: Provide monitor modules as follows:

i. PIV.

ii. For valve monitor and flow switches.

d. Ceiling Smoke Detectors:

i. One per elevator lobby per level: Provide one control module per elevator lobby and connect to door hold open/release devices.

ii. In addition to the elevator lobbies, provide smoke detectors in all electrical rooms & telecom rooms.

e. Duct Smoke Detectors: Provide duct smoke in fans as required by code.

f. Horn/Strobes: Provide horn/strobes in corridors, elevator & main lobbies, bathrooms, etc to comply with applicable codes.

8.9 Building Lighting & Outlets

a. General: Provide lighting and receptacles in all spaces, core/shell areas and Tenant Improvements areas. Lighting and receptacles in core/shell spaces shall be provided as described below:

Area	Lighting	Duplex
Stairwells	4' surface mounted floor wrap with 2 T8 lamps
Elect Rms	4' or 8' fluor strip with 4' T8 lamps	1
Toilets	Per Tenant Improvements design	1 GFI
Corridors	Fluor downlights, 2x2 or 2x4 fixtures	30' on center
Telecom Rms	4' or 8' fluor strip with 4' T8 lamps	2
Janitor	Surface drum with compact fluor lamps	1 GFI
Elev machine rms	4' or 8' fluor strip with 4' T8 lamps & wire guards	2 GFI
Exits	LED edge-lit

b. Roof:

i. Provide twin head incandescent floodlight fixtures and weatherproof receptacles in mechanical spaces. Provide light switch at roof access for control.

9.0 THE FOLLOWING HVAC WORK SHALL BE PROVIDED BY OFFICE TENANT:

EX-10.18

Exhibit 10.18

SIEBEL SYSTEMS, INC.
AMENDED AND RESTATED

1998 EQUITY INCENTIVE PLAN
Adopted October 28, 1998
Amended April 19, 1999
Amended December 8, 2000
Amended April 17, 2001
Amended and Restated October 18, 2001
Amended November 15, 2002

1. Purposes.
1. The purpose of the Plan is to provide a means by which selected Employees of and Consultants to the Company, and its Affiliates, may be given an opportunity to benefit from increases in value of the stock of the Company through the granting of (i) Nonstatutory Stock Options, (ii) stock bonuses, and (iii) rights to purchase restricted stock, all as defined below.
2. The Company, by means of the Plan, seeks to retain the services of persons (other than Directors and Employees serving as Officers of the Company or its Affiliates) who are now Employees of or Consultants to the Company or its Affiliates, to secure and retain the services of new Employees and Consultants, and to provide incentives for such persons to exert maximum efforts for the success of the Company and its Affiliates.
3. The Company intends that the Stock Awards issued under the Plan shall, in the discretion of the Board or any Committee to which responsibility for administration of the Plan has been delegated pursuant to subsection 3(c), be either (i) Nonstatutory Stock Options granted pursuant to Section 6 hereof, or (ii) stock bonuses or rights to purchase restricted stock granted pursuant to Section 7 hereof.
2. Definitions.
1. "Affiliate" means any parent corporation or subsidiary corporation, whether now or hereafter existing, as those terms are defined in Rule 405 of Regulation C promulgated under the federal Securities Act of 1933.
2. "Board" means the Board of Directors of the Company.
3. "Code" means the Internal Revenue Code of 1986, as amended.
4. "Committee" means a Committee appointed by the Board in accordance with subsection 3(c) of the Plan.
5. "Company" means Siebel Systems, Inc., a Delaware corporation.
6. "Consultant" means any person, including an advisor, engaged by the Company or an Affiliate of the Company to render consulting services and who is compensated for such services, provided that the term "Consultant" shall not include those persons who render services as a Director.
7. "Continuous Status as an Employee or Consultant" means that the service of an individual to the Company, whether as an Employee or Consultant, is not interrupted or terminated. The Board, in its sole discretion, may determine whether Continuous Status as an Employee or Consultant shall be considered interrupted in the case of: (i) any leave of absence approved by the Board, including sick leave, military leave, or any other personal leave; or (ii) transfers between locations of the Company or between the Company, Affiliates or their successors.
8. "Director" means a member of the Board.
9. "Disability" means permanent and total disability as defined in Section 22(e)(3) of the Code.
10. "Employee" means any person employed by the Company or any Affiliate of the Company. Neither service as a Director nor payment of a director's fee by the Company shall be sufficient to constitute "employment" by the Company.
11. "Exchange Act" means the Securities Exchange Act of 1934, as amended.
12. "Fair Market Value" means, as of any date, the value of the common stock of the Company, determined as follows:
1. If the common stock is listed on any established stock exchange or traded on the Nasdaq National Market or the Nasdaq SmallCap Market, the Fair Market Value of a share of common stock shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or market (or the exchange or market with the greatest volume of trading in the Company's common stock) on the last market trading day prior to the day of determination, as reported in The Wall Street Journal or such other source as the Board deems reliable.
2. In the absence of such markets for the common stock, the Fair Market Value shall be determined in good faith by the Board.
13. "Nonstatutory Stock Option" means an Option not intended to qualify as an incentive stock option pursuant to Section 422 of the Code and the regulations promulgated thereunder.
14. "Officer" means a person who is an officer of the Company within the meaning of Rule 4460(i)(1)(A) of the Rules of the National Association of Securities Dealers, Inc.
15. "Option" means a stock option granted pursuant to the Plan.
16. "Option Agreement" means a written agreement between the Company and an Optionee evidencing the terms and conditions of an individual Option grant. Each Option Agreement shall be subject to the terms and conditions of the Plan.
17. "Optionee" means an Employee or Consultant who holds an outstanding Option.
18. "Plan" means this 1998 Equity Incentive Plan.
19. "Stock Award" means any right granted under the Plan, including any Option, any stock bonus and any right to purchase restricted stock.
20. "Stock Award Agreement" means a written agreement between the Company and a holder of a Stock Award evidencing the terms and conditions of an individual Stock Award grant. Each Stock Award Agreement shall be subject to the terms and conditions of the Plan.
3. Administration.
1. The Plan shall be administered by the Board unless and until the Board delegates administration to a Committee, as provided in subsection 3(c).
2. The Board shall have the power, subject to, and within the limitations of, the express provisions of the Plan:
1. To determine from time to time which of the persons eligible under the Plan shall be granted Stock Awards; when and how each Stock Award shall be granted; whether a Stock Award will be a Nonstatutory Stock Option, a stock bonus, a right to purchase restricted stock, or a combination of the foregoing; the provisions of each Stock Award granted (which need not be identical), including the time or times when a person shall be permitted to receive stock pursuant to a Stock Award; and the number of shares with respect to which a Stock Award shall be granted to each such person.
2. To construe and interpret the Plan and Stock Awards granted under it, and to establish, amend and revoke rules and regulations for its administration. The Board, in the exercise of this power, may correct any defect, omission or inconsistency in the Plan or in any Stock Award Agreement, in a manner and to the extent it shall deem necessary or expedient to make the Plan fully effective.
3. To amend the Plan or a Stock Award as provided in Section 11.
4. To effect, at any time and from time to time, with the consent of any adversely affected Optionee, (1) the reduction of the exercise price of any outstanding Option under the Plan to the then Fair Market Value and/or (2) the cancellation of any outstanding Option under the Plan and the grant in substitution therefore of (A) a new Option under the Plan covering the same or a different number of shares of Common Stock, (B) a stock bonus, (C) the right to acquire restricted stock, (D) cash and/or (E) other valuable consideration (as determined by the Board, in its sole discretion).
5. Generally, to exercise such powers and to perform such acts as the Board deems necessary or expedient to promote the best interests of the Company which are not in conflict with the provisions of the Plan.
3. The Board may delegate administration of the Plan to a committee composed of one or more members of the Board (the "Committee"). If administration is delegated to a Committee, the Committee shall have, in connection with the administration of the Plan, the powers theretofore possessed by the Board (and references in this Plan to the Board shall thereafter be to the Committee), subject, however, to such resolutions, not inconsistent with the provisions of the Plan, as may be adopted from time to time by the Board. The Board may abolish the Committee at any time and revest in the Board the administration of the Plan.
4. Shares Subject to the Plan.
   1. Subject to the provisions of Section 11 relating to adjustments upon changes in stock, the number of shares of stock that may be issued pursuant to Stock Awards shall not exceed in the aggregate two hundred forty million (240,000,000) shares of the Company's common stock. If any Stock Award shall for any reason expire or otherwise terminate, in whole or in part, without having been exercised in full, the stock not acquired under such Stock Award shall revert to and again become available for issuance under the Plan.
   2. The stock subject to the Plan may be unissued shares or reacquired shares, bought on the market or otherwise.
5. Eligibility.

Stock Awards may be granted only to Employees or Consultants who are not (i) Officers (other than vice presidents of the Company), (ii) Directors, or (iii) then subject to Section 16 of the Exchange Act. Provided however, that the aggregate number of shares made subject to Stock Awards granted to eligible Officers cannot exceed the number necessary to preserve the treatment of the Plan as a "broadly based" plan within the meaning of Rule 4460(i)(1)(A) of the Rules of the National Association of Securities Dealers, Inc.

6. Option Provisions.

Each Option shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate. The provisions of separate Options need not be identical, but each Option shall include (through incorporation of provisions hereof by reference in the Option or otherwise) the substance of each of the following provisions:

1. Term. No Option shall be exercisable after the expiration of ten (10) years from the date it was granted.
2. Price. The exercise price of each Nonstatutory Stock Option shall be not less than eighty-five percent (85%) of the Fair Market Value of the stock subject to the Option on the date the Option is granted.
3. Consideration. The purchase price of stock acquired pursuant to an Option shall be paid, to the extent permitted by applicable statutes and regulations, either (i) in cash at the time the Option is exercised, or (ii) at the discretion of the Board or the Committee, at the time of the grant of the Option, (A) by delivery to the Company of other common stock of the Company, (B) according to a deferred payment arrangement, except that payment of the common stock's "par value" (as defined in the Delaware General Corporation Law) shall not be made by deferred payment or other arrangement (which may include, without limiting the generality of the foregoing, the use of other common stock of the Company) with the person to whom the Option is granted or to whom the Option is transferred pursuant to subsection 6(d), or (C) in any other form of legal consideration that may be acceptable to the Board.

In the case of any deferred payment arrangement, interest shall be payable at least annually and shall be charged at the minimum rate of interest necessary to avoid the treatment as interest, under any applicable provisions of the Code, of any amounts other than amounts stated to be interest under the deferred payment arrangement.

4. Transferability. An Option shall not be transferable except by will or by the laws of descent and distribution (and shall be exercisable during the lifetime of the person to whom the Option is granted only by such person) unless the applicable Option Agreement expressly provides for other transferability. Notwithstanding the foregoing, the person to whom the Option is granted may, by delivering written notice to the Company, in a form satisfactory to the Company, designate a third party who, in the event of the death of the Optionee, shall thereafter be entitled to exercise the Option.
5. Vesting. The total number of shares of stock subject to an Option may, but need not, be allotted in periodic installments (which may, but need not, be equal). The Option Agreement may provide that from time to time during each of such installment periods, the Option may become exercisable ("vest") with respect to some or all of the shares allotted to that period, and may be exercised with respect to some or all of the shares allotted to such period and/or any prior period as to which the Option became vested but was not fully exercised. The Option may be subject to such other terms and conditions on the time or times when it may be exercised (which may be based on performance or other criteria) as the Board may deem appropriate. The vesting provisions of individual Options may vary. The provisions of this subsection 6(e) are subject to any Option provisions governing the minimum number of shares as to which an Option may be exercised.
6. Termination of Employment or Consulting Relationship. In the event an Optionee's Continuous Status as an Employee or Consultant terminates (other than upon the Optionee's death or disability), the Optionee may exercise his or her Option (to the extent that the Optionee was entitled to exercise it as of the date of termination, unless the Option Agreement expressly provides that the Option may become exercisable for additional shares after the date of termination) but only within such period of time ending on the earlier of (i) the date three (3) months following the termination of the Optionee's Continuous Status as an Employee or Consultant (or such longer or shorter period specified in the Option Agreement), or (ii) the expiration of the term of the Option as set forth in the Option Agreement. If, after termination, the Optionee does not exercise his or her Option within the time specified in the Option Agreement, the Option shall terminate, and the shares covered by such Op tion shall revert to and again become available for issuance under the Plan.

An Optionee's Option Agreement may also provide that if the exercise of the Option following the termination of the Optionee's Continuous Status as an Employee or Consultant (other than upon the Optionee's death or disability) would result in liability under Section 16(b) of the Exchange Act, then the Option shall terminate on the earlier of (i) the expiration of the term of the Option set forth in the Option Agreement, or (ii) the tenth (10th) day after the last date on which such exercise would result in such liability under Section 16(b) of the Exchange Act. Finally, an Optionee's Option Agreement may also provide that if the exercise of the Option following the termination of the Optionee's Continuous Status as an Employee or Consultant (other than upon the Optionee's death or disability) would be prohibited at any time solely because the issuance of shares would violate the registration requirements under the Act, then the Option shall terminate on the earlier of (i) the expiration o f the term of the Option set forth in the first paragraph of this subsection 6(f), or (ii) the expiration of a period of three (3) months after the termination of the Optionee's Continuous Status as an Employee or Consultant during which the exercise of the Option would not be in violation of such registration requirements.

7. Disability of Optionee. In the event an Optionee's Continuous Status as an Employee or Consultant terminates as a result of the Optionee's Disability, the Optionee may exercise his or her Option (to the extent that the Optionee was entitled to exercise it as of the date of termination, unless the Option Agreement expressly provides that the Option may become exercisable for additional shares after the date of termination), but only within such period of time ending on the earlier of (i) the date six (6) months following such termination (or such longer or shorter period specified in the Option Agreement), or (ii) the expiration of the term of the Option as set forth in the Option Agreement. If, after termination, the Optionee does not exercise his or her Option within the time specified herein, the Option shall terminate, and the shares covered by such Option shall revert to and again become available for issuance under the Plan.
8. Death of Optionee. In the event of the death of an Optionee during, or within a period specified in the Option Agreement after the termination of, the Optionee's Continuous Status as an Employee or Consultant, the Option may be exercised (to the extent the Optionee was entitled to exercise the Option as of the date of death) by the Optionee's estate, by a person who acquired the right to exercise the Option by bequest or inheritance, but only within the period ending on the earlier of (i) the date twelve (12) months following the date of death (or such longer or shorter period specified in the Option Agreement), or (ii) the expiration of the term of such Option as set forth in the Option Agreement. If, at the time of death, the Optionee was not entitled to exercise his or her entire Option, the shares covered by the unexercisable portion of the Option shall revert to and again become available for issuance under the Plan. If, after death, the Option is not exercised within th e time specified herein, the Option shall terminate, and the shares covered by such Option shall revert to and again become available for issuance under the Plan.
7. Terms of Stock Bonuses and Purchases of Restricted Stock.

Each stock bonus or restricted stock purchase agreement shall be in such form and shall contain such terms and conditions as the Board or the Committee shall deem appropriate. The terms and conditions of stock bonus or restricted stock purchase agreements may change from time to time, and the terms and conditions of separate agreements need not be identical, but each stock bonus or restricted stock purchase agreement shall include (through incorporation of provisions hereof by reference in the agreement or otherwise) the substance of each of the following provisions as appropriate:

1. Purchase Price. The purchase price under each restricted stock purchase agreement shall be such amount as the Board or Committee shall determine and designate in such agreement, but in no event shall the purchase price be less than eighty-five percent (85%) of the stock's Fair Market Value on the date such award is made. Notwithstanding the foregoing, the Board or the Committee may determine that eligible participants in the Plan may be awarded stock pursuant to a stock bonus agreement in consideration for past services actually rendered to the Company or for its benefit.
2. Transferability. No rights under a stock bonus or restricted stock purchase agreement shall be transferable except by will or the laws of descent and distribution, unless the applicable Stock Award Agreement expressly provides for other transferability.
3. Consideration. The purchase price of stock acquired pursuant to a stock purchase agreement shall be paid either: (i) in cash at the time of purchase; (ii) at the discretion of the Board or the Committee, according to a deferred payment or other arrangement, except that payment of the common stock's "par value" (as defined in the Delaware General Corporation Law) shall not be made by deferred payment or other arrangement (which may include, without limiting the generality of the foregoing, the use of other common stock of the Company) with the person to whom the stock is sold; or (iii) in any other form of legal consideration that may be acceptable to the Board or the Committee in its discretion. Notwithstanding the foregoing, the Board or the Committee to which administration of the Plan has been delegated may award stock pursuant to a stock bonus agreement in consideration for past services actually rendered to the Company or for its benefit.
4. Vesting. Shares of stock sold or awarded under the Plan may, but need not, be subject to a repurchase option in favor of the Company in accordance with a vesting schedule to be determined by the Board or the Committee.
5. Termination of Employment or Consulting Relationship. In the event a participant's Continuous Status as an Employee or Consultant terminates, the Company may repurchase or otherwise reacquire, subject to the limitations described in subsection 7(d), any or all of the shares of stock held by that person which have not vested as of the date of termination under the terms of the stock bonus or restricted stock purchase agreement between the Company and such person.
8. Covenants of the Company.
1. During the terms of the Stock Awards, the Company shall keep available at all times the number of shares of stock required to satisfy such Stock Awards.
2. The Company shall seek to obtain from each regulatory commission or agency having jurisdiction over the Plan such authority as may be required to issue and sell shares of stock upon exercise of the Stock Award; provided, however, that this undertaking shall not require the Company to register under the Securities Act of 1933, as amended (the "Securities Act") either the Plan, any Stock Award or any stock issued or issuable pursuant to any such Stock Award. If, after reasonable efforts, the Company is unable to obtain from any such regulatory commission or agency the authority which counsel for the Company deems necessary for the lawful issuance and sale of stock under the Plan, the Company shall be relieved from any liability for failure to issue and sell stock upon exercise of such Stock Awards unless and until such authority is obtained.
9. Use of Proceeds from Stock.

Proceeds from the sale of stock pursuant to Stock Awards shall constitute general funds of the Company.

10. Miscellaneous.
1. The Board shall have the power to accelerate the time at which a Stock Award may first be exercised or the time during which a Stock Award or any part thereof will vest pursuant to subsection 6(e) or 7(d), notwithstanding the provisions in the Stock Award stating the time at which it may first be exercised or the time during which it will vest.
2. Neither an Employee or Consultant, nor any person to whom a Stock Award is transferred under subsection 6(d) or 7(b) shall be deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares subject to such Stock Award unless and until such person has satisfied all requirements for exercise of the Stock Award pursuant to its terms.
3. Nothing in the Plan or any instrument executed or Stock Award granted pursuant thereto shall confer upon any Employee, Consultant or other holder of Stock Awards any right to continue in the employ of the Company or any Affiliate (or to continue acting as a Consultant) or shall affect the right of the Company or any Affiliate to terminate the employment of any Employee with or without cause, or to terminate the relationship of any Consultant in accordance with the terms of that Consultant's agreement with the Company or Affiliate to which such Consultant is providing services.
4. Securities Law Compliance. The Company may require any person to whom a Stock Award is granted, or any person to whom a Stock Award is transferred pursuant to subsection 6(d) or 7(b), as a condition of exercising or acquiring stock under any Stock Award, (1) to give written assurances satisfactory to the Company as to such person's knowledge and experience in financial and business matters and/or to employ a purchaser representative reasonably satisfactory to the Company who is knowledgeable and experienced in financial and business matters, and that he or she is capable of evaluating, alone or together with the purchaser representative, the merits and risks of exercising the Stock Award; and (2) to give written assurances satisfactory to the Company stating that such person is acquiring the stock subject to the Stock Award for such person's own account and not with any present intention of selling or otherwise distributing the stock. The foregoing requirements, and any assura nces given pursuant to such requirements, shall be inoperative if (i) the issuance of the shares upon the exercise or acquisition of stock under the Stock Award has been registered under a then currently effective registration statement under the Securities Act, or (ii) as to any particular requirement, a determination is made by counsel for the Company that such requirement need not be met in the circumstances under the then applicable securities laws. The Company may require the holder of the Stock Award to provide such other representations, written assurances or information which the Company shall determine is necessary, desirable or appropriate to comply with applicable securities and other laws as a condition of granting a Stock Award to such person or permitting the holder of the Stock Award to exercise the Stock Award. The Company may, upon advice of counsel to the Company, place legends on stock certificates issued under the Plan as such counsel deems necessary or appropriate in order to comply wi th applicable securities laws, including, but not limited to, legends restricting the transfer of the stock.
5. Withholding. To the extent provided by the terms of a Stock Award Agreement, the person to whom a Stock Award is granted may satisfy any federal, state or local tax withholding obligation relating to the exercise or acquisition of stock under a Stock Award by any of the following means or by a combination of such means: (1) tendering a cash payment; (2) authorizing the Company to withhold shares from the shares of the common stock otherwise issuable to the participant as a result of the exercise or acquisition of stock under the Stock Award; or (3) delivering to the Company owned and unencumbered shares of the common stock of the Company.
11. Adjustments Upon Changes in Stock.
1. If any change is made in the stock subject to the Plan, or subject to any Stock Award, without the receipt of consideration by the Company (through merger, consolidation, reorganization, recapitalization, reincorporation, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or other transaction not involving the receipt of consideration by the Company), the Plan will be appropriately adjusted in the class(es) and the maximum number of shares subject to the Plan pursuant to subsection 4(a), and the outstanding Stock Awards will be appropriately adjusted in the class(es) and number of shares and price per share of stock subject to such outstanding Stock Awards. Such adjustments shall be made by the Board or the Committee, the determination of which shall be final, binding and conclusive. (The conversion of any convertible securities of the Company shall not be treated as a & quot;transaction not involving the receipt of consideration by the Company.")
2. In the event of: (1) a dissolution, liquidation or sale of all or substantially all of the assets of the Company; (2) a merger or consolidation in which the Company is not the surviving corporation; (3) a reverse merger in which the Company is the surviving corporation but the shares of the Company's common stock outstanding immediately preceding the merger are converted by virtue of the merger into other property, whether in the form of securities, cash or otherwise, then to the extent permitted by applicable law: (i) any surviving corporation or an Affiliate of such surviving corporation shall assume any Stock Awards outstanding under the Plan or shall substitute similar Stock Awards for those outstanding under the Plan, or (ii) such Stock Awards shall continue in full force and effect. In the event any surviving corporation and its Affiliates refuse to assume or continue such Stock Awards, or to substitute similar Stock Awards for those outstanding under the Plan, then, wi th respect to Stock Awards held by persons then performing services as Employees or Consultants, the time during which such Stock Awards may be exercised shall be accelerated and the Stock Awards terminated if not exercised prior to such event.
12. Amendment of the Plan and Stock Awards.
1. The Board at any time, and from time to time, may amend the Plan.
2. The Board, in its sole discretion, may submit the Plan and/or any amendment to the Plan for stockholder approval.
3. It is expressly contemplated that the Board may amend the Plan in any respect the Board deems necessary or advisable to provide those eligible with the maximum benefits provided or to be provided under the provisions of the Code and the regulations promulgated thereunder.
4. Rights and obligations under any Stock Award granted before amendment of the Plan shall not be impaired by any amendment of the Plan unless (i) the Company requests the consent of the person to whom the Stock Award was granted and (ii) such person consents in writing.
5. The Board at any time, and from time to time, may amend the terms of any one or more Stock Award; provided, however, that the rights and obligations under any Stock Award shall not be impaired by any such amendment unless (i) the Company requests the consent of the person to whom the Stock Award was granted and (ii) such person consents in writing.
13. Termination or Suspension of the Plan.
1. The Board may suspend or terminate the Plan at any time. No Stock Awards may be granted under the Plan while the Plan is suspended or after it is terminated.
2. Rights and obligations under any Stock Award granted while the Plan is in effect shall not be impaired by suspension or termination of the Plan, except with the written consent of the person to whom the Stock Award was granted.
14. Effective Date of Plan.

The Plan shall become effective on October 28, 1998.

EX-10.19

Exhibit 10.19

Siebel Systems, Inc.

Restricted Stock Grant Notice
([1996/1998] Equity Incentive Plan)

Siebel Systems, Inc. (the "Company"), pursuant to its [1996/1998] Equity Incentive Plan (the "Plan"), hereby grants to Participant the right to purchase the number of shares of the Company's Common Stock set forth below ("Award"). This Award is subject to all of the terms and conditions as set forth herein and in the Restricted Stock Agreement, the Plan, the form of Assignment Separate from Certificate and the form of Joint Escrow Instructions, all of which are attached hereto and incorporated herein in their entirety.

Participant:
Date of Grant:
Vesting Commencement Date:
Number of Shares Subject to Award:
Purchase Price per Share:
Total Purchase Price:
Vesting Schedule:
Payment:	As described in the Restricted Stock Agreement, par value for the shares must be paid in cash or check.

Additional Terms/Acknowledgements: The undersigned Participant acknowledges receipt of, and understands and agrees to, this Grant Notice, the Restricted Stock Agreement and the Plan. Participant further acknowledges that as of the Date of Grant, this Grant Notice, the Restricted Stock Agreement and the Plan set forth the entire understanding between Participant and the Company regarding the acquisition of stock in the Company and supersede all prior oral and written agreements on that subject, with the exception of other awards previously granted and delivered to Participant under the Plan.

Siebel Systems, Inc. By: ___________________________________ Signature	Participant: By: ___________________________________ Signature
Title: ___________________________________	Date: ____________________________________
Date: ____________________________________

Attachments:

Attachment I:	Restricted Stock Agreement
Attachment II:	[1996/1998] Equity Incentive Plan
Attachment III:	Form of Assignment Separate from Certificate
Attachment IV:	Form of Joint Escrow Instructions

ATTACHMENT I

Siebel Systems, Inc.

[1996/1998] Equity Incentive Plan

Restricted Stock Agreement

Siebel Systems, Inc. (the "Company") wishes to issue to you, and you wish to acquire, shares of Common Stock from the Company, pursuant to the provisions of the Company's [1996/1998] Equity Incentive Plan (the "Plan").

Therefore, pursuant to the terms of the Restricted Stock Grant Notice ("Grant Notice") and this Restricted Stock Agreement ("Agreement") (collectively, the "Award"), the Company grants you the right to acquire the number of shares of Common Stock indicated in the Grant Notice. Defined terms not explicitly defined in this Agreement but defined in the Plan shall have the same definitions as in the Plan.

The details of your Award are as follows:

1. Agreement to Purchase. You hereby agree to purchase from the Company, and the Company hereby agrees to sell to you, the aggregate number of shares of Common Stock specified in your Grant Notice at the specified Purchase Price per Share. You may not purchase less than the aggregate number of shares specified in the Grant Notice.
2. Payment. Payment of the Total Purchase Price shall be made as follows:

Cash or check................................. $__________

3. Closing. The purchase and sale of the shares shall be consummated as follows:
1. You may purchase the shares by delivering the cash for the Total Purchase Price referenced in your Grant Notice to the Secretary of the Company, or to such other person as the Company may designate, during regular business hours, on the date you execute the Grant Notice (or at such other time and place as you and the Company may mutually agree upon in writing) (the "Closing Date"), along with such additional documents as the Company may then require.
2. You agree to execute three (3) copies of the Assignment Separate From Certificate (with date and number of shares blank) substantially in the form attached to the Grant Notice as Attachment III and to execute Joint Escrow Instructions substantially in the form attached to the Grant Notice as Attachment IV and to deliver the same in accordance with Section 8 below.
4. Vesting. Subject to the limitations contained herein, the shares you purchase will vest as provided in your Grant Notice, provided that vesting will cease upon the termination of your Continuous Status as an Employee, Director or Consultant.
5. Securities Law Compliance. Notwithstanding anything to the contrary contained herein, you may not purchase any shares of Common Stock under your Award unless the shares of Common Stock issuable upon such purchase are then registered under the Securities Act or, if such shares of Common Stock are not then so registered, the Company has determined that such purchase and issuance would be exempt from the registration requirements of the Securities Act. The purchase of shares under your Award also must comply with other applicable laws and regulations governing your Award, and you may purchase such shares if the Company determines that such purchase would not be in material compliance with such laws and regulations.
6. Right of Reacquisition. In the event of the termination of your Continuous Status as an Employee, Director or Consultant, the Company shall have a right to reacquire (the "Reacquisition Rights") the shares you received pursuant to your Award that have not yet vested in accordance with the Vesting Schedule on the Grant Notice ("Unvested Shares"). The Company shall simultaneously with termination of your Continuous Status as an Employee, Director or Consultant automatically reacquire all of the Unvested Shares for the lesser of (a) the original purchase price of the Unvested Shares and (b) the fair value of the Unvested Shares on the date your Continuous Status as an Employee, Director or Consultant terminates, unless the Company agrees to waive its reacquisition right as to some or all of the Unvested Shares. Any such waiver shall be exercised by the Company by written notice to you or your representative (with a copy to the Escrow Agent) within ninety (90) days after the termination of your Continuous Status as an Employee, Director or Consultant, and the Escrow Agent may then release to you the number of Unvested Shares not being reacquired by the Company. If the Company does not waive its reacquisition right as to all of the Unvested Shares, then upon such termination of your Continuous Status as an Employee, Director or Consultant, the Escrow Agent shall transfer to the Company the number of shares the Company is reacquiring.
7. Corporate Transactions. In the event of a corporate transaction pursuant to Section 11(b) of the Plan, the Reacquisition Right may be assigned by the Company to the successor of the Company (or such successor's parent company), if any, in connection with such corporate transaction. To the extent the Reacquisition Right remains in effect following such corporate transaction, it shall apply to the new capital stock or other property received in exchange for the Common Stock in consummation of the corporate transaction, but only to the extent the Common Stock was at the time covered by such right.
8. Escrow of Unvested Common Stock. As security for your faithful performance of the terms of this Agreement and to insure the availability for delivery of your Common Stock upon execution of the Reacquisition Right herein provided for, you agree, on the Closing Date, to deliver to and deposit with Secretary of the Company or the Secretary's designee ("Escrow Agent"), as Escrow Agent in this transaction, three (3) stock assignments duly endorsed (with date and number of shares left blank) in the form attached to the Grant Notice as Attachment III. Said documents are to be held by the Escrow Agent and delivered by said Escrow Agent pursuant to the Joint Escrow Instructions of you and the Company set forth in Attachment IV to the Grant Notice, which instructions also shall be delivered to the Escrow Agent on the Closing Date.
9. Rights as Stockholder. Subject to the provisions of this Agreement, you shall exercise all rights and privileges of a stockholder of the Company with respect to the shares deposited in escrow. You shall be deemed to be the holder of the shares for purposes of receiving any dividends that may be paid with respect to such shares and for purposes of exercising any voting rights relating to such shares, even if some or all of the shares have not yet vested and been released from the Company's Reacquisition Right.
10. Limitations on Transfer. In addition to any other limitation on transfer created by applicable securities laws, you shall not sell, assign, hypothecate, donate, encumber or otherwise dispose of any interest in the Common Stock while the Common Stock is subject to the Reacquisition Right. After any Common Stock has been released from the Reacquisition Right, you shall not sell, assign, hypothecate, donate, encumber or otherwise dispose of any interest in the Common Stock except in compliance with the provisions herein and applicable securities laws.
11. Restrictive Legends. The shares issued under your Award shall be endorsed with appropriate legends determined by the Company.
12. Transferability. Only you may purchase the shares subject to your Award. The right to purchase such shares is not transferable except by will or by the laws of descent and distribution and shall be exercisable during your lifetime only by you. Once you have purchased the shares subject to this Award, you may transfer or assign your rights and obligations under your Award with the prior written consent of the Company.
13. Award not a Service Contract. Your Award is not an employment or service contract, and nothing in your Award shall be deemed to create in any way whatsoever any obligation on your part to continue in the employ of the Company or an Affiliate, or of the Company or an Affiliate to continue your employment. In addition, nothing in your Award shall obligate the Company or an Affiliate, their respective stockholders, Boards of Directors, Officers or Employees to continue any relationship that you may have as an Employee, Director or Consultant for the Company or an Affiliate.
14. Withholding Obligations.
1. At the time your Award is granted, or at any time thereafter as requested by the Company, you hereby authorize withholding from payroll and any other amounts payable to you, and otherwise agree to make adequate provision for, any sums required to satisfy the federal, state, local and foreign tax withholding obligations of the Company or an Affiliate, if any, which arise in connection with your Award.
2. Unless the tax withholding obligations of the Company or any Affiliate are satisfied, the Company shall have no obligation to issue a certificate for such shares or release such shares from any escrow provided for herein.
15. Tax Consequences. The acquisition and vesting of the shares of Common Stock purchased pursuant to your Award may have adverse tax consequences to you that may be mitigated by filing an election under Section 83(b) of the Code. Such election must be filed within thirty (30) days after the date your purchase the shares pursuant to your Award. YOU ACKNOWLEDGE THAT IT IS YOUR RESPONSIBILITY, AND NOT THE COMPANY'S, TO FILE A TIMELY ELECTION UNDER CODE SECTION 83(B), EVEN IF YOU REQUEST THE COMPANY TO MAKE THE FILING ON YOUR BEHALF.
16. Notices. Any notices provided for in your Award or the Plan shall be given in writing and shall be deemed effectively given upon receipt or, in the case of notices delivered by mail by the Company to you, five (5) days after deposit in the United States mail, postage prepaid, addressed to you at the last address you provided to the Company.
17. Miscellaneous.
1. The rights and obligations of the Company under your Award shall be transferable to any one or more persons or entities, and all covenants and agreements hereunder shall inure to the benefit of, and be enforceable by the Company's successors and assigns.
2. You agree upon request to execute any further documents or instruments necessary or desirable in the sole determination of the Company to carry out the purposes or intent of your Award.
3. You acknowledge and agree that you have reviewed your Award in its entirety, have had an opportunity to obtain the advice of counsel prior to executing and accepting your Award and fully understand all provisions of your Award.
18. Governing Plan Document. Your Award is subject to all the provisions of the Plan, the provisions of which are hereby made a part of your Award, and is further subject to all interpretations, amendments, rules and regulations which may from time to time be promulgated and adopted pursuant to the Plan. In the event of any conflict between the provisions of your Award and those of the Plan, the provisions of the Plan shall control.

ATTACHMENT II

[1996/1998] Equity Incentive Plan

ATTACHMENT III

ASSIGNMENT SEPARATE FROM CERTIFICATE

For Value Received and pursuant to that certain Restricted Stock Grant Notice and Restricted Stock Agreement (the "Award"), _____________ hereby sells, assigns and transfers unto Siebel Systems, Inc., a Delaware corporation ("Assignee") ________________________ (__________) shares of the Common Stock of the Assignee, standing in the undersigned's name on the books of said corporation represented by Certificate No. _____ herewith and do hereby irrevocably constitute and appoint the Company's Secretary as attorney-in-fact to transfer the said stock on the books of the within named Company with full power of substitution in the premises. This Assignment may be used only in accordance with and subject to the terms and conditions of the Award, in connection with the reacquisition of shares of Common Stock of the Corporation issued to the undersigned pursuant to the Award, and only to the extent that such shares remain subject to the Corporation's Reac quisition Right under the Award.

Dated:
	Signature: ________________, Recipient

[Instruction: Please do not fill in any blanks other than the signature line. The purpose of this Assignment is to enable execution of the Company's Reacquisition Right set forth in the Award without requiring additional signatures on your part.]

ATTACHMENT IV

JOINT ESCROW INSTRUCTIONS

Date

Secretary
Siebel Systems, Inc.
2207 Bridgepointe Parkway
San Mateo, CA 94404

Dear Sir/Madam:

As Escrow Agent for both Siebel Systems, Inc., a Delaware corporation (the "Company"), and the undersigned recipient of stock of the Company ("Recipient"), you are hereby authorized and directed to hold the certificate or certificates evidencing the shares of the Company's Common Stock granted under the Award and the documents delivered to you pursuant to the terms of that certain Restricted Stock Grant Notice (the "Grant Notice"), dated _______________, 20___ to which a copy of these Joint Escrow Instructions is attached as Attachment IV, and pursuant to the terms of that certain Restricted Stock Agreement ("Agreement"), which is Attachment I to the Grant Notice, in accordance with the following instructions:

1. In the event Recipient ceases to render services to the Company or an affiliate of the Company during the vesting period set forth in the Grant Notice, the Company or its assignee will give to Recipient and you a written notice specifying that the shares of stock shall be transferred to the Company. Recipient and the Company hereby irrevocably authorize and direct you to close the transaction contemplated by such notice in accordance with the terms of said notice.

2. At the closing you are directed (a) to date any stock assignments necessary for the transfer in question, (b) to fill in the number of shares being transferred, and (c) to deliver same, together with the certificate evidencing the shares of stock to be transferred, to the Company.

3. Recipient irrevocably authorizes the Company to deposit with you any certificates evidencing shares of stock to be held by you hereunder and any additions and substitutions to said shares as specified in the Grant Notice. Recipient does hereby irrevocably constitute and appoint you as Recipient's attorney-in-fact and agent for the term of this escrow to execute with respect to such securities and other property all documents of assignment and/or transfer and all stock certificates necessary or appropriate to make all securities negotiable and complete any transaction herein contemplated.

4. This escrow shall terminate upon vesting of the shares or upon the earlier return of the shares to the Company.

5. If at the time of termination of this escrow you should have in your possession any documents, securities, or other property belonging to Recipient, you shall deliver all of same to any pledgee entitled thereto or, if none, to Recipient and shall be discharged of all further obligations hereunder.

6. Your duties hereunder may be altered, amended, modified or revoked only by a writing signed by all of the parties hereto.

7. You shall be obligated only for the performance of such duties as are specifically set forth herein and may rely and shall be protected in relying or refraining from acting on any instrument reasonably believed by you to be genuine and to have been signed or presented by the proper party or parties or their assignees. You shall not be personally liable for any act you may do or omit to do hereunder as Escrow Agent or as attorney-in-fact for Recipient while acting in good faith and any act done or omitted by you pursuant to the advice of your own attorneys shall be conclusive evidence of such good faith.

8. You are hereby expressly authorized to disregard any and all warnings given by any of the parties hereto or by any other person or corporation, excepting only orders or process of courts of law, and are hereby expressly authorized to comply with and obey orders, judgments or decrees of any court. In case you obey or comply with any such order, judgment or decree of any court, you shall not be liable to any of the parties hereto or to any other person, firm or corporation by reason of such compliance, notwithstanding any such order, judgment or decree being subsequently reversed, modified, annulled, set aside, vacated or found to have been entered without jurisdiction.

9. You shall not be liable in any respect on account of the identity, authority or rights of the parties executing or delivering or purporting to execute or deliver the Grant Notice or any documents or papers deposited or called for hereunder.

10. You shall not be liable for the outlawing of any rights under any statute of limitations with respect to these Joint Escrow Instructions or any documents deposited with you.

11. You shall be entitled to employ such legal counsel, including but not limited to Cooley Godward LLP, and other experts as you may deem necessary properly to advise you in connection with your obligations hereunder, may rely upon the advice of such counsel, and may pay such counsel reasonable compensation therefor.

12. Your responsibilities as Escrow Agent hereunder shall terminate if you shall cease to be an employee of the Company or if you shall resign by written notice to each party. In the event of any such termination, the Company may appoint any officer or assistant officer of the Company as successor Escrow Agent and Recipient hereby confirms the appointment of such successor or successors as his attorney-in-fact and agent to the full extent of your appointment.

13. If you reasonably require other or further instruments in connection with these Joint Escrow Instructions or obligations in respect hereto, the necessary parties hereto shall join in furnishing such instruments.

14. It is understood and agreed that should any dispute arise with respect to the delivery and/or ownership or right of possession of the securities, you may (but are not obligated to) retain in your possession without liability to anyone all or any part of said securities until such dispute shall have been settled either by mutual written agreement of the parties concerned or by a final order, decree or judgment of a court of competent jurisdiction after the time for appeal has expired and no appeal has been perfected, but you shall be under no duty whatsoever to institute or defend any such proceedings.

15. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or upon deposit in any United States Post Box, by registered or certified mail with postage and fees prepaid, addressed to each of the other parties hereunto entitled at the following addresses, or at such other addresses as a party may designate by ten (10) days' written notice to each of the other parties hereto:

Company:	Siebel Systems, Inc. 2207 Bridgepointe Parkway San Mateo, California 94404 Attn: Senior Vice President and General Counsel
Recipient:	Insert Recipient's Name Insert Address Insert Address
Escrow Agent:	Siebel Systems, Inc. 2207 Bridgepointe Parkway San Mateo, California 94404 Attn: Secretary

16. By signing these Joint Escrow Instructions you become a party hereto only for the purpose of said Joint Escrow Instructions; you do not become a party to the Grant Notice.

17. This instrument shall be binding upon and inure to the benefit of the parties hereto, and their respective successors and permitted assigns. It is understood and agreed that references to "you" or "your" herein refer to the original Escrow Agent and to any and all successor Escrow Agents. It is understood and agreed that the Company may at any time or from time to time assign its rights under the Grant Notice and these Joint Escrow Instructions in whole or in part.

Very truly yours,

	Siebel Systems, Inc. By: Print Name: Title:
	Recipient By: Print Name: Title:
Escrow Agent: By: Print Name: Title:

EX-21.1

Exhibit 21.1

SIEBEL SYSTEMS, INC.
SUBSIDIARIES

Subsidiary	Country or State of Incorporation
Domestic
Siebel America Fund, Inc.	California
Siebel Scholars Foundation	California
MOHR Development, Inc.	Connecticut
InterActive WorkPlace, Inc.	Delaware
Jaguar Delaware Sub, Inc.	Delaware
Janna Systems (US) Inc.	Delaware
nQuire Software, Inc.	Delaware
OnLink Technologies, LLC	Delaware
OpenSite Technologies, LLC	Delaware
Paragren Technologies, Inc.	Delaware
Sales.com, Inc.	Delaware
Scopus Technology, LLC	Delaware
Siebel Helpline.com, Inc.	Delaware
Siebel Systems Holdings, LLC	Delaware
Siebel Systems International LLC	Delaware
Siebel Systems International LP	Delaware
SiebelNet, Inc.	Delaware
OnTarget (US) Inc.	Georgia
OnTarget, LLC	Georgia
Trillium Research, Inc.	Georgia
RogersGrant Acquisition Corp.	Massachusetts
Nomadic Systems, Inc.	New Jersey
The 20-20 Group, Ltd.	Ohio
The Sales Consultancy, Inc.	Texas
International
Siebel Systems Argentina S.R.L.	Argentina
Siebel Systems Australia Pty Ltd.	Australia
Siebel Systems Osterreich GmbH	Austria
Siebel Systems Belgium SPRL	Belgium
Siebel Systems Brasil Ltda	Brazil
Siebel Janna Arrangement, Inc.	Canada
Siebel Systems Canada, Limited.	Canada
Comercial Siebel Systems Chile Limitada	Chile
Siebel Systems Hong Kong Ltd.	China
Siebel Systems Colombia Ltda	Columbia
Siebel Systems Danmark ApS	Denmark
Siebel Systems Suomi Oy	Finland
Siebel Systems France SAS	France
Siebel Systems Deutschland GmbH	Germany
Siebel Systems Magyarorszäg Kft	Hungary
Siebel Systems EMEA Limited	Ireland
Siebel Systems Ireland Holdings, Limited	Ireland
Siebel Systems Isle of Man, Limited	Isle of Man
Siebel Systems Israel Software Ltd.	Israel
Siebel Systems Italia Consulting S.r.l.	Italy
Siebel Systems Italia S.r.l.	Italy
Siebel Systems Japan K.K.	Japan
Siebel Systems (Jersey) Limited	Jersey
Siebel Systems Malaysia Sdn.Bhd.	Malaysia
Siebel Systems de Mexico S de R.L. de C.V.	Mexico
Siebel Systems Australia Pty Ltd.	New Zealand
Siebel Systems Norge A.S.	Norway
Janna Nova Scotia Sub Company	Nova Scotia
Siebel Systems Siebel Systems Polska Sp. z o.o	Poland
Siebel Systems Portugal Solucoes De Informacao	Portugual
Siebel Systems Singapore Pte Ltd.	Singapore
Siebel Systems South Africa (Proprietary) Limited	South Africa
Siebel Systems Korea Limited	South Korea
Siebel Systems Espana S.L.	Spain
Siebel Systems Sverige AB	Sweden
OnTarget, S.A.	Switzerland
Siebel Systems Schweiz GmbH	Switzerland
Siebel Systems Ceska Republika s.r.o.	The Czech Republic
Do-Holding B.V.	The Netherlands
Do-Opleidingstechnologie B.V.	The Netherlands
Siebel Systems Benelux B.V.	The Netherlands
Siebel Systems Yazilimi Hizmelteri Sirketi	Turkey
OnLink Europe Ltd.	United Kingdom
OpenSite Europe Limited	United Kingdom
OnTarget UK Ltd.	United Kingdom
Siebel Systems UK Ltd.	United Kingdom
Corporate Training Systems Limited	United Kingdom & Wales

EX-23.1

Exhibit 23.1

Independent Auditors' Consent

The Board of Directors

Siebel Systems, Inc.:

We consent to incorporation by reference in the registration statements on Forms S-3 (Nos. 333-47062, 333-68041 and 333-91777) and Forms S-8 (Nos. 333-07983, 333-22763, 333-40437, 333-53369, 333-72969, 333-85007, 333- 94243, 333-41792, 333-49986, 333-51018, 333-52998, 333-55406, 333-59526, 333- 72218 and 333-75052) of Siebel Systems, Inc. of our report dated January 20, 2003, except as to Note 14, which is as of February 13, 2003, relating to the consolidated balance sheets of Siebel Systems, Inc. and subsidiaries as of December 31, 2001 and 2002, and the related consolidated statements of operations and comprehensive income, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 2002, which report appears in the December 31, 2002 annual report on Form 10-K of Siebel Systems, Inc. Our report refers to a change in the method of accounting for goodwill.

/s/ KPMG LLP

Mountain View, California
March 13, 2003

EX-99.1

Exhibit 99.1

Certification Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002

Pursuant to the requirement set forth in Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350, as adopted), Thomas M. Siebel, Chairman and CEO of Siebel Systems, Inc. (the "Company"), and Kenneth A. Goldman, Senior Vice President, Finance and Administration and Chief Financial Officer of the Company, each hereby certify that, to the best of their knowledge:

1. The Company's Annual Report on Form 10-K for the year ended December 31, 2002, to which this Certification is attached as Exhibit 99.1 (the "Periodic Report"), fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934, and

2. The information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operation of the Company.

In Witness Whereof, the undersigned have set their hands hereto as of the 14^th day of March, 2003.

/s/ Thomas M. Siebel
Thomas M. Siebel
Chairman and CEO
(Principal Executive Officer)

/s/ Kenneth A. Goldman
Kenneth A. Goldman
Senior Vice President, Finance and
Administration and Chief Financial Officer
(Principal Financial Officer)