The Company excludes potentially dilutive securities from its diluted net income per share computation when either the exercise price of the securities exceeds the average fair value of the Company's common stock or the Company reported net losses because their effect would be anti-dilutive. For the three months ended March 31, 2000, the Company did not exclude any employee stock options from the earnings per share computation as the average fair value of the Company's common stock during such period exceeded their exercise prices. For the three months ended March 31, 2000, the Company excluded 6,432,000 shares relating to the convertible subordinated debentures from the earnings per share computation as the effect would be antdilutive. For the three months ended March 31, 1999, the Company excluded 32,760 employee stock options with a weighted average exercise price of $25.75 per share from the earnings per share computation as their exercise prices exceeded the fair value of the Company's common stock and, accordingly, their inclusion would have been anti-dilutive.

In March 1999, the Company entered into an $8,400,000 secured letter of credit with a bank. This letter of credit, which expires November 2000, collateralizes the Company's obligations to a third party for tenant improvement costs.

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

The Company's convertible subordinated debentures are seven-year term notes, bear interest at a rate of 5.50% and are convertible into approximately 6,432,000 shares of the Company's common stock at any time prior to maturity, at a conversion price of approximately $46.64 per share, subject to adjustment under certain conditions. The Company may redeem the notes, in whole or in part, at any time on or after September 15, 2002. The redemption price will range from $309,420,000 to $302,370,000 if the notes are redeemed between September 15, 2002 through September 14, 2006. Any redemption made on or after September 15, 2006 will be at $300,000,000. In addition, accrued interest to the redemption date will be paid by the Company in each redemption.

The fair value of the Company's convertible subordinated debentures was $797,250,000 at March 31, 2000, based on quoted market price.

On April 18, 2000, the Company announced an agreement to acquire OpenSite Technologies, Inc. ("OpenSite"), a market leader in Web-based dynamic commerce solutions. Under the terms of the agreement, each outstanding share of OpenSite common stock will be exchanged for approximately 0.13 newly issued shares of common stock of the Company. All outstanding stock options of OpenSite will be exchanged for the Company's stock options at the same exchange ratio. This will result in the issuance of approximately 3,900,000 additional shares of the Company, representing a current market value of $480,921,000 based on the closing price of the Company's stock on May 1, 2000.

The transaction will be accounted for as a pooling of interests. The acquisition is subject to the approval of OpenSite's shareholders and appropriate government agencies, as well as the satisfaction of certain customary closing conditions. The transaction is expected to close in the second calendar quarter of 2000.

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

Siebel eBusiness Applications are available in industry-specific versions designed for the pharmaceutical, healthcare, consumer goods, telecommunications, insurance, energy, apparel and footwear, automotive, technology, public sector, and finance markets. With best-of-class functionality of eBusiness software, Siebel eBusiness Applications enable organizations to create a single source of customer information that sales, service, and marketing professionals can use to tailor product and service offerings to meet each of their customer's unique needs. By using Siebel eBusiness Applications, organizations can develop new customer relationships, profitably serve existing customers, and integrate their systems with those of their partners, suppliers, and customers, regardless of location.

Software. License revenues increased to $190,912,000 for the three months ended March 31, 2000 from $93,432,000 for the three months ended March 31, 1999. License revenues as a percentage of total revenue were 62% and 66% in the first quarter of 2000 and 1999, respectively. License revenues increased in absolute dollars during this period as compared to the respective prior period due to an increase in the number of licenses of Siebel applications sold to new and existing customers and also due to licenses of new modules, released with the latest version of Siebel applications, sold to existing users of Siebel base applications. The increase in the number of licenses was primarily due to continued demand by new and existing customers for products in the Siebel applications family both in the United States and internationally. The Company expects that license revenues will continue to grow in absolute dollars, but will remain the same or decrease as a percentage of total revenues as the Company's maintenance and other services revenues continue to grow as a result of increases in the installed base of customers purchasing such services.

Professional Services, Maintenance and Other. Professional services, maintenance and other revenues increased to $118,527,000 for the three months ended March 31, 2000 from $48,039,000 for the three months ended March 31, 1999 and increased as a percentage of total revenues to 38% in the first quarter 2000 from 34% in the first quarter 1999. The increase in the absolute dollar amount was due to growth in the Company's sales and marketing training business, consulting business and growth in the installed base of customers on maintenance. First-year maintenance is typically sold with the related software license. Revenue related to such maintenance is deferred based on vendor-specific objective evidence of fair value and amortized over the term of the maintenance contract, typically 12 months. The Company expects that professional services, maintenance and other revenues will remain the same or increase as a percentage of total revenues due to increased maintenance revenues derived from the Company's growing installed base and due to the Company's expansion of its consulting and training organization to meet anticipated customer demands in connection with product implementation and sales training.

A relatively small number of customers account for a significant percentage of the Company's license revenues. For the three months ended March 31, 2000, sales to the Company's ten largest customers accounted for 36% of total license revenues. For 1999, 1998 and 1997, sales to the Company's ten largest customers accounted for 10%, 19% and 24% of total license revenues, respectively. The Company expects that licenses of its products to a limited number of customers will continue to account for a large percentage of revenue for the foreseeable future.

The Company markets its products in the United States through its direct sales force and internationally through its sales force and distributors, primarily in Japan, Latin America, South Africa and Asia. International revenues accounted for 36% and 30% of license revenues for the three months ended March 31, 2000 and 1999, respectively. The Company is increasing its international sales force and is seeking to establish distribution relationships with appropriate strategic partners and expects international revenues will continue to account for a substantial portion of total revenues in the future.

On January 6, 2000, the Company acquired Paragren Technologies, Inc. ("Paragren") in a purchase transaction valued at approximately $18,000,000 (see note 2). Concurrently, the Company licensed software to APAC Customer Services, Inc. ("APAC"), the former parent of Paragren. The Company recognized $540,000 of license revenue from the APAC transaction in the quarter ended March 31, 2000.

During the first quarter of 2000, the Company established a program whereby qualified startup companies can obtain Siebel eBusiness software in exchange for equity securities of the startup companies. The Company recognized $2,429,000 of license revenue during the quarter related to this program.

Software. Cost of software license revenues includes third party software royalties, product packaging, documentation and production. Cost of license revenues increased to $5,255,000 for the three months ended March 31, 2000 from $1,331,000 for the three months ended March 31, 1999 and as a percentage of total revenues was 2% and 1% for the three months ended March 31, 2000 and 1999, respectively. All costs incurred in the research and development of software products and enhancements to existing products have been expensed as incurred, and, as a result, cost of license revenues includes no amortization of capitalized software development costs. These costs are expected to remain the same or increase as a percentage of total revenues.

Professional Services, Maintenance and Other. Cost of professional services, maintenance and other revenues consists primarily of personnel, facilities and systems costs incurred in providing customer support. Cost of professional services, maintenance and other revenues increased to $69,521,000 for the three months ended March 31, 2000 from $25,804,000 for the three months ended March 31, 1999 and increased as a percentage of total revenues to 22% in the first quarter 2000 from 18% in the first quarter 1999. The increase in the absolute dollar amount reflects the effect of fixed costs resulting from the Company's expansion of its maintenance and support organization and growth in the Company's consulting business. The Company expects that professional services, maintenance and other costs will continue to increase in absolute dollar amount as the Company expands both its customer support organization to support a growing installed base and its consulting organization to meet anticipated customer demands in connection with product implementation and the training organization to support the growing needs of its customers. These costs are expected to remain the same or increase as a percentage of total revenues.

Product Development. Product development expenses include expenses associated with the development of new products, enhancements of existing products and quality assurance activities, and consist primarily of employee salaries, benefits, consulting costs and the cost of software development tools. Product development expenses increased to $22,468,000 for the three months ended March 31, 2000 from $17,032,000 for the three months ended March 31, 1999 and as a percentage of total revenues were 7% and 12% for the three months ended March 31, 2000 and 1999, respectively. The increase in the absolute dollar amount of product development expenses was primarily attributable to costs of additional personnel in the Company's product development operations. The Company anticipates that it will continue to devote substantial resources to product development. The Company expects product development expenses to increase in absolute dollar amount but remain at a similar percentage of total revenues as in the first three months of 2000. The Company considers technological feasibility of its software products to have been reached upon completion of a working model that has met certain performance criteria. The period between achievement of technological feasibility and general release of a software product is typically very short, and development costs incurred during that period have not been material. Accordingly, the Company has not capitalized any software development costs to date.

Sales and Marketing. Sales and marketing expenses consist primarily of salaries, commissions and bonuses earned by sales and marketing personnel, field office expenses, travel and entertainment and promotional expenses. Sales and marketing expenses increased to $126,676,000 for the three months ended March 31, 2000 from $54,793,000 for the three months ended March 31, 1999 and increased as a percentage of total revenues to 41% in the first quarter 2000 from 39% in the first quarter 1999. The increase in the dollar amount of sales and marketing expenses reflects primarily the hiring of additional sales and marketing personnel and costs associated with expanded promotional activities. The Company expects that sales and marketing expenses will continue to increase in absolute dollars as the Company continues to expand its sales and marketing efforts, establishes additional sales offices in the United States and internationally and increases its promotional activities. These expenses are expected to remain at a similar percentage of total revenues as the first three months of 2000.

General and Administrative. General and administrative expenses consist primarily of salaries and occupancy costs for administrative, executive and finance personnel. General and administrative expenses increased to $23,794,000 for the three months ended March 31, 2000 from $10,308,000 for the three months ended March 31, 1999 and as a percentage of total revenues were 8% and 7% for the three months ended March 31, 2000 and 1999, respectively. The increase in the absolute dollar amount of general and administrative expenses was primarily due to increased staffing and associated expenses necessary to manage and support the Company's increased scale of operations. The Company believes that its general and administrative expenses will continue to increase in absolute dollars as a result of the continued expansion of the Company's administrative staff and facilities to support growing operations. The Company anticipates that its general and administrative expenses as a percentage of total revenues should remain at a similar percentage as in the first three months of 2000.

Operating income increased to $61,725,000 for the three months ended March 31, 2000 from $32,203,000 for the three months ended March 31, 1999 and operating margin decreased to 20% in the first quarter 2000 from 23% in the first quarter 1999. This decrease in the operating margin was mainly due to personnel and hiring costs associated with increased hiring, primarily in the professional services, sales, and product development organizations in the first quarter of 2000.

Other income, net is primarily comprised of interest income earned on the Company's cash and cash equivalents and short-term investments for the three months ended March 31, 1999. For the three months ended March 31, 2000, other income, net also included interest expense on the convertible subordinated debentures, losses of an equity method investee, charitable contribution of marketable equity securities, and gain on sale of marketable equity securities.

For the three months ended March 31, 2000, Other income, net was comprised of the following:

    Interest income................................ $  9,973,000
    Interest expense...............................   (4,439,000)
    Losses of an equity method investee............   (2,531,000)
    Contribution of marketable equity securities...  (28,700,000)
    Gain on sale of marketable equity securities...   38,919,000
    Other, net.....................................     (334,000)
                                                    -------------
                                                    $ 12,888,000
                                                    =============

Income taxes are comprised primarily of federal and state taxes. The pro forma provision of income tax would not have been materially different from the income tax provision as presented if OnTarget (an S corporation for income tax reporting purposes) had been a C corporation for all periods presented. The provision for income taxes was $28,356,000 and $12,533,000 for the three months ended March 31, 2000 and March 31, 1999, respectively. The provision for income taxes as a percentage of pretax income was 38% and 36%, respectively. The Company expects its effective tax rate for the remainder of 2000 to be approximately 38%, excluding the effect of non-deductible costs such as merger-related expenses.

The Company had net income of $46,257,000 for the three months ended March 31, 2000 compared to $22,000,000 for the three months ended March 31, 1999. Diluted net income per share was $0.19 in the first quarter of 2000 and $0.10 in the comparable period in 1999. Net income as a percentage of total revenues was 15% and 16% for the three months ended March 31, 2000 and March 31, 1999, respectively

For the three months ended March 31, 2000, cash provided by operating activities of $147,925,000 was primarily due to net income, the tax benefit from exercise of stock options and increase in deferred revenue, partially offset by deferred income taxes, and gain on sale of marketable equity securities. For the three months ended March 31, 1999, cash used by operating activities of $5,633,000 was primarily due to net income, offset by an increase in accounts receivable and a decrease in accounts payable and accrued expenses.

Cash used in investing activities of $73,054,000 was primarily due to the purchases of Paragren Technologies, Inc., property and equipment and net purchase of short-term investments for the three months ended March 31, 2000. For the three months ended March 31, 1999, cash used in investing activities of $1,049,000 was primarily due to purchases of property and equipment, partially offset by sales and maturities of short-term investments.

For the three months ended March 31, 2000 and 1999, cash provided by financing activities from the issuance of common stock pursuant to the exercise of stock options was $28,264,000 and $11,220,000, respectively.

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

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

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

• Level of product and price competition;
  
• Length of our sales cycle and customer purchasing patterns;
  
• The size and timing of individual license transactions;
  
• Delay or deferral of customer implementations of our products;
  
• Success in expanding our customer support organization, direct sales force and indirect distribution channels;
  
• Timing of new product introductions and product enhancements;
  
• Appropriate mix of products and services sold;
  
• Levels of international sales;
  
• Activities of and acquisitions by competitors;
  
• Timing of new hires and the allocation of our resources;
  
• Changes in the economy and 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 adversely affect our business, financial condition and the market price of our common stock.

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

• The discretionary nature of our customer's 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 their 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 operating results could be materially and adversely affected. Although we have not experienced significant seasonal variations in operating results, such variations could develop in the future.

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 useful. You should not rely on these comparisons as indications of future performance. It is likely that our future quarterly operating results from time to time will not meet the expectations of market analysts or investors, which would likely have an adverse effect on the price of our common stock.

Our business strategy includes pursuing opportunities to grow our business, both 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 our growth 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, operating results and financial condition.

Failure to maintain existing strategic relationships with systems integrators, 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 a non-exclusive strategic relationship with Andersen Consulting, one of our largest stockholders. We have also entered into significant relationships with other third-party systems integrators such as IBM Global Services, PricewaterhouseCoopers and Deloitte Consulting. A significant portion of our revenues has historically been derived from customers for whom Andersen Consulting, or another systems integrator with which we have a significant relationship, have been engaged to provide system integration services. Any deterioration of our relationship with these significant third-party systems integrators could have a material adverse effect on our business, financial condition and results of operations. We also have relationships with IBM Corporation, Compaq Computer Corporation, Microsoft Corporation and Sun Microsystems, among others. Failure to maintain existing relationships, or to establish new relationships in the future, could have a material adverse effect on our business, results of operations and financial condition.

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 system integrators, or if these integrators do not have, or do not devote, the resources necessary to implement our products, our business, operating results and financial condition could be materially and adversely affected.

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 Internet will be a viable commercial marketplace or 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, 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, operating results and financial condition could be materially and adversely affected.

If the Web-based applications market fails to grow or grows more slowly than we currently anticipate, our business, operating results and financial condition could be materially and adversely affected. The market for Web-based application 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.

If existing customers have difficulty further 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 product concurrently.

The timing of the sales and implementation of our products and services is lengthy and not predictable with any degree of accuracy. You should not rely on prior sales and implementation cycles 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 substantial 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 (i) the size and complexity of the overall project and (ii) 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 and operations and cause our operating results to vary significantly from quarter to quarter.

Failure to expand our direct sales force or technical and customer support staff or to expand our distribution channels could materially and adversely affect our business, operating results and financial condition. We have expanded the distribution of our products in recent years. This expansion has placed new and increased demands on our direct sales force and technical and sales support staff. Our ability to achieve revenue growth in the future will depend, in part, on our success in recruiting and training sufficient direct sales, technical and customer support personnel. Although we invest significant resources to expand our direct sales force and our technical and customer support staff, there is only a limited number of qualified personnel in these areas. Therefore, we may not be able to expand our direct sales force and technical support staff as necessary to support our growing operations. In addition, such expansion may not result in increased revenues.

Failure to minimize channel conflicts could materially and adversely affect our business, operating results and financial condition. We have recently entered into a number of relationships with resellers in order to obtain 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 success depends on maintaining relationships with our existing customers. A relatively small number of customers have accounted for a significant percentage of our revenues. For the three months ended March 31, 2000 and year ended December 31, 1999, license revenues from our ten largest customers accounted for 36% and 10% respectively, of total license revenues. We expect that licenses of our products to a limited number of customers will continue to account for a significant percentage of revenue for the foreseeable future. The loss of a small number of customers or any reduction or delay in orders by any such customer, or failure to successfully market our products to new customers, could have a material adverse effect on our business, financial condition and results of operations.

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 the 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 the 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 and results of operations.

Our products target the eBusiness systems market. This market is highly competitive, rapidly changing and significantly affected by new product introductions. 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 to address this market. Many of our customers and potential customers have attempted to develop eBusiness systems in- house, either alone or with the help of systems integrators. We may not be able to compete successfully against such internal development efforts.

We rely on a number of systems consulting and systems integration firms for a substantial portion of implementation and other customer support 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.

A large number of personal, departmental and other products exist in the Siebel eBusiness applications market. Companies (products) such as Allegis (Allegis Sales Partner), Annuncio (Annuncio Live), Ariba (Ariba ORMS Application, Ariba Internet Business Exchange Service, Ariba Market Suite), Baan Co. (BaanFrontOffice, Baan E-Enterprise), Blue Martini (Blue Martini Customer Interaction), Brightware (Web Assistance, Email Assistance), BroadVision (One-to-One Enterprise, One-to-One), Broadbase Info. (CRMPerform), Calico Commerce (Calico eSales Configurator, Calico eSales Engine), Callidus Software, Inc. (TrueComp), CAS GmbH (Mapware, Groupware, Referenzen), Chordiant Software (Enterprise Business Center, Chordiant CCS), Clarify (ClearCallCenter, Clear Quality, Clear Telebusiness), Dendrite International (Dendrite Series 6, AIMS, Strategic Selling Guide), Epicor (Epicor eFrontOffice, Epicor eCommerce Suite, Epicor eIntelligence), E.piphany (E.4 System), FirePond (FirePond Application Suite), Firstwave Technologies (Firstwave eRM, eMarketing, eSales, eSupport), GoldMine Software (GoldMine), I2 Technologies (RYTHM), Kana Communications (Kana Connect, Kana Notify, Kana Realtime, Kana Response, Kana Classify, Kana Assist, Kana Forms), MarketFirst (MarketFirst 2.0), MarketSoft (eLeads), Niku (iNiku), Octane Software (Octane 2000), ONYX Software (Customer Center), Oracle (Oracle iMarketing, Oracle iStore, OracleiPayment, Oracle Telephony Manager, Oracle Customer Care. Oracle OpenTel), Pegasystems, Inc. (Pegasystems), Pivotal Software, Inc. (eRelationship 2000), Prime Resposne ([email protected]), Quintus Corp. (eContact), Relavis Corp. (Remedy@work), RTS, SalesLogix (CommerceLogix, SupportLogix, ACT!), SAP AG (mySAP.com™), Saratoga Systems, ServiceSoft (Web Advisor®, eCenter™, Knowledge Builder®, LiveContact™, E-mailContact™), Silknet Software Inc. (Silknet)(To be acquired by Kana Communications, Inc.), Trilogy (MultiChannel Commerce 2.0), Update Marketing (Marketing Manager®), Vantive Corp. (Vantive)(Acquired by PeopleSoft), Vignette (StoryServer, Syndication Server, Multi-Channel Server, Tools, Professional Services) are among the many firms in this market segment. Some of these competitors have longer operating histories, significantly greater financial, technical, marketing and other resources, significantly greater name recognition and a larger installed base of customers than 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) consolidation in the software industry and (iv) 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. If we cannot compete successfully against current and future competitors or overcome competitive pressures, our business, operating results and financial condition may be adversely affected.

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 products frequently contain errors or failures, especially when first introduced or when new versions are released. Although we conduct extensive product testing during product development, 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 errors or defects. Our products are intended for use in sales 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, operating results and financial condition.

If we fail to manage our growth effectively, our business, financial condition and results of operations could be materially and adversely affected. Our business has grown rapidly in recent years. This growth has placed a significant strain on our management systems and resources. To manage future growth, we must continue to (i) improve our financial and management controls, reporting systems and procedures on a timely basis and (ii) expand, train and manage our employee work force.

Our performance depends on the continued service of our key technical, sales and senior management personnel, particularly Thomas M. Siebel, our Chairman and Chief Executive Officer. None of our key employees has entered into an employment agreement with us. The loss of the services of one or more of our executive officers could have a material adverse effect on our business, operating results and financial condition.

We have substantial amounts of outstanding indebtedness, primarily consisting of our 5-1/2% convertible subordinated notes due September 15, 2006. As a result of this indebtedness, our principal and interest payment obligations are substantial. We may be unable to generate cash sufficient to pay the principal of, interest on and other amounts due in respect of our indebtedness when due. We also expect to add additional equipment loans and lease lines to finance capital expenditures and may obtain additional long-term debt, working capital lines of credit and lease lines. There can be no assurance that any financing arrangements will be available.

Our substantial leverage could have significant 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 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 money 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, operating results and financial condition.

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, operating results and financial condition.

Our revenues are primarily derived from large multi-national companies. To service the needs of these companies, we must provide worldwide product support services. We have expanded and intend to continue expanding, 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, operating results and financial condition 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 and results of operations. In situations where direct sales are denominated in foreign currency, any fluctuation in foreign currency or the exchange rate may adversely affect our business, financial condition and results of operations. We manage our foreign currency exchange rate risk by entering into contracts to sell foreign currency at the time a foreign currency receivable is generated. When the foreign currency receivable is collected, the contract is liquidated, thereby converting the foreign currency to US dollars and mitigating the exchange rate risk. In certain instances, we have not hedged foreign currency receivables 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 together beneficially owned a significant portion of the outstanding shares of common stock as of March 31, 2000. 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 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, announcements of technological innovations or new products by us or our competitors, general conditions in the software and computer industries and other events or factors. In addition, the stock market in general has experienced extreme price and volume fluctuations 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.

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. The preferred stock could be issued with voting, liquidation, dividend and other rights superior to those of the common stock. The rights of the holders of common stock will be subject to and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. The issuance of preferred stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could make it more difficult for a third party to acquire a majority of our outstanding voting stock. We have a classified Board of Directors. This and certain other provisions of our certificate of incorporation and certain provisions of our Bylaws and of Delaware law, could delay or make more difficult a merger, tender offer or proxy contest.

The tables below provide information about the Company's derivative financial instruments and financial instruments that are subject to market risk. These include foreign currency forward contracts used to hedge foreign currency receivables and intercompany balances, which are subject to exchange rate risk, cash equivalents and available-for-sale short-term investments, which are subject to interest rate risk.

The Company manages its foreign currency exchange rate risk by entering into contracts to sell foreign currency at the time a foreign currency receivable is generated. When the foreign currency receivable is collected, the contract is liquidated, thereby converting the foreign currency to US dollars and mitigating the exchange rate risk.

The following summarizes the Company's foreign currency forward contracts, all of which mature in 2000, by currency, as of March 31, 2000. Contract amounts are representative of the expected payments to be made under these instruments (in thousands):

                                                                    Fair
                                         Contract      Contract   Value at
                                          Amount        Amount    March 31,
                                     (Local Currency)    (US$)    2000 (US$)
                                     ----------------  ---------  ---------
German marks (contracts to pay
  DM/receive US$).................          DM  6,600  US$ 3,290   US$  81

 British pounds (contracts to pay
 (Pounds)/receive US$)............    (Pounds)  4,511  US$ 7,236   US$  67

Japanese yen (contracts to pay
 (Yen)/receive US$)...............    (Yen) 2,101,000  US$19,355   US$(576)

Euro (contracts to pay
  EUR/receive US$)................        EUR   6,179  US$ 5,726   US$ 150

Bristish pounds (contracts to pay
 (Pounds)/receive EUR)............    (Pounds)  5,126  US$ 8,460   US$(226)

The following summarizes the Company's short-term investments and the weighted average yields, as of March 31, 2000 (in thousands):

                                           Expected maturity date
                         -----------------------------------------------------
                                                                       There-
                           2000     2001     2002     2003     2004    after
                         -------- -------- -------- -------- -------- --------
US treasury securities..      --   $9,386   $7,902   $8,284   $6,272       --
Wtd. Avg. Yld...........             6.79%    6.80%    6.45%    6.66%

Municipal securities.... $41,766  $35,755  $36,217   $5,260       --       --
Wtd. Avg. Yld...........    4.32%    3.82%    4.60%    4.95%

Corporate bonds.........    $994  $35,299  $31,511   $3,486   $5,387   $1,296
Wtd. Avg. Yld...........    6.17%    6.94%    7.06%    7.37%    7.17%    7.45%

On March 31, 2000, the Company had an investment portfolio of fixed income securities, excluding those classified as cash and cash equivalents, of $228,815,000. These securities, like all fixed income instruments, are subject to interest rate risk and will fall in value if market interest rates increase. If market interest rates were to increase immediately and uniformly by 100 basis points from levels as of March 31, 2000, the fair value of the portfolio would decline by approximately $3,486,000.

SIEBEL SYSTEMS, INC.

SIGNATURES

Pursuant to the requirement of the Security Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	SIEBEL SYSTEMS, INC.

	(Registrant)

Dated: May 12, 2000

	By:	/s/ Howard H. Graham

	Howard H. Graham
	Senior Vice President Finance and Administration and Chief Financial Officer
	(Principal Financial Officer)

	By:	/s/ Paul J. Gifford

	Paul J. Gifford
	Vice President, Controller
	(Principal Accounting Officer)